What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 461 added, 465 removed, 644 unchanged (59% of the section changed)

65 unchanged sentences

The Company determined initial fair value accounting estimates of the acquired assets and assumed liabilities in accordance with FASB ASC 805, Business Combinations .

However, the amount that the Company realizes on its acquired loan assets could differ materially from the carrying value reflected in its financial statements, based upon the timing of collections on the acquired loans in future periods.

Because of the loss sharing agreements with the FDIC on certain of these assets, the

Company did not expect to incur any significant losses related to these assets.

However, the amount that the Company realizes on its acquired loan assets could differ

materially from the carrying value reflected in its financial statements, based upon the timing of collections on the acquired loans in future periods.

Because of the loss sharing agreements with the FDIC on certain of these assets, the Company did not expect to incur any significant losses related to these assets.

Subsequent to the initial valuation, the Company continued to monitor identified loan pools for changes in estimated cash flows projected for the loan pools, anticipated credit losses and changes in the accretable yield.

5 unchanged sentences

The Company defines reporting units as a level below each of its operating segments for which there is discrete financial information that is regularly reviewed.

As of June 30, 2020, the Company had one reporting unit to which goodwill has been allocated – the Bank.

As of September 30, 2020, the Company had one reporting unit to which goodwill has been allocated – the Bank.

If the fair value of a reporting unit exceeds its carrying value, then no impairment is recorded.

1 unchanged sentence

Intangible assets that are not amortized must be tested for impairment at least annually by comparing the fair values of those assets to their carrying values.

At June 30, 2020, goodwill consisted of $5.4 million at the Bank reporting unit, which included goodwill of $4.2 million that was recorded during 2016 related to the acquisition of 12 branches from Fifth Third Bank.

At September 30, 2020, goodwill consisted of $5.4 million at the Bank reporting unit, which included goodwill of $4.2 million that was recorded during 2016 related to the acquisition of 12 branches from Fifth Third Bank.

Other identifiable intangible assets that are subject to amortization are amortized on a straight-line basis over a period of seven years.

At June 30, 2020, the amortizable intangible assets consisted of core deposit intangibles of $2.1 million, which are reflected in the table below.

At September 30, 2020, the amortizable intangible assets consisted of core deposit intangibles of $1.8 million, which are reflected in the table below.

These amortizable intangible assets are reviewed for impairment if circumstances indicate their value may not be recoverable based on a comparison of fair value.

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.

While the Company believes no impairment of its goodwill or other intangible assets existed at June 30, 2020, different conditions or assumptions used to measure fair value of reporting units, or changes in cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the outcome of the Company’s impairment evaluation in the future.

Our regular annual impairment assessment occurs in the third quarter of each year.

At September 30, 2020, the Company performed this annual review, including consideration of the current circumstances brought about by the COVID-19 pandemic and its effect on the valuation of the Company and other bank holding companies.

The Company concluded that no impairment of its goodwill and intangible assets had occurred at September 30, 2020.

While the Company believes no impairment of its goodwill or other intangible assets existed at September 30, 2020, different conditions or assumptions used to measure fair value of reporting units, or changes in cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the outcome of the Company’s impairment evaluation in the future.

A summary of goodwill and intangible assets is as follows:

September 30,

(In Thousands)

4 unchanged sentences

Current Economic Conditions

Changes in economic conditions could cause the values of assets and liabilities recorded in the financial statements to change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses, or capital that could negatively impact the Company’s ability to meet regulatory capital requirements and maintain sufficient liquidity.

Changes in economic conditions could cause the value of assets and liabilities recorded in the financial statements to change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses, or capital that could negatively impact the Company’s ability to meet regulatory capital requirements and maintain sufficient liquidity.

Following the housing and mortgage crisis and correction beginning in mid-2007, the United States entered an economic downturn.

Unemployment rose from 4.7% in November 2007 to peak at 10.0% in October 2009.

Subsequently, economic conditions improved considerably, as indicated by higher consumer confidence levels, increased economic activity and low unemployment levels.

The US economy continued to operate at historically strong levels until the impact of COVID-19 began to take its toll in March 2020.

While the severity and extent of the COVID-19 pandemic on the global, national and regional economies is still uncertain, it will most likely have a detrimental impact on the performance of our loan portfolio.

Short-term modifications to loan terms to help our customers navigate through the current situation were made in accordance with guidance from the banking regulatory authorities.

Since that time, economic conditions improved considerably, as indicated by higher consumer confidence levels, increased economic activity and low unemployment levels.

economy continued to operate at historically strong levels until the impact of the COVID-19 pandemic in March 2020.

While the severity and extent of the COVID-19 pandemic on the global, national and regional economies is still uncertain, it will most likely have a temporary detrimental impact on the performance of our loan portfolio.

Short-term modifications on loan terms to help our customers navigate through the current pandemic situation were made in accordance with guidance from the banking regulatory authorities.

These modifications did not result in these loans being classified as troubled debt restructurings, potential problem loans or non-performing loans.

Among the more severely impacted industries in our portfolio are retail, motels/hotels and restaurants.

In June 2020, the national unemployment rate declined to 11.1%, down from 13.3% in May 2020.

Improvements in the labor market during the month of June reflected the continued resumption of economic activity that had been curtailed in March and April due to the COVID-19 pandemic and efforts to contain it.

Employment nationally in leisure and hospitality increased by 2.1 million, mainly in food services and drinking places.

Notable job gains also occurred in retail trade, education and health services, other services, manufacturing, and professional and business services.

Unemployment rates will likely remain volatile and dependent upon the degree to which the COVID-19 pandemic is contained.

The unemployment rate for the Midwest, where the Company conducts most of its business, increased from 4.1% in March 2020 to 11% in June 2020.

Unemployment rates for June 2020 in the other states where the Company conducts business were Arkansas at 8.0%, Colorado at 10.5%, Georgia at 7.6%, Illinois at 14.6%, Iowa at 8.0%, Kansas at 7.5%, Minnesota at 8.6%, Missouri at 7.9%, Nebraska at 6.7%, Oklahoma at 6.6%, and Texas at 8.6%.

Of the metropolitan areas in which the Company does business, the largest year-over-year employment decreases occurred in the Chicago area with a decrease of 466,800 jobs, ending with an unemployment rate in June 2020 of 15.6%, the highest among the metropolitan areas in which the Company does business.

Denver had the second highest unemployment rate at 11.1% in the Company’s metropolitan footprint.

While all of the areas in the Company’s metropolitan footprint had an increase in unemployment due to the ongoing pandemic, other than Chicago and Denver, their unemployment rates for June 2020 were below the national unemployment rate of 11.1%.

Sales of newly built single-family homes for June 2020 were at a seasonally adjusted annual rate of 776,000 according to U.S.

Census Bureau and the Department of Housing and Urban Development (“HUD”) estimates.

This is 13.8% above the revised May 2020 rate of 682,000, and 6.9% above the June 2019 rate of 726,000.

The median sales price of new houses sold in June 2020 was $329,200 up slightly from $310,400 a year earlier.

The June 2020 average sales price of $384,700 was up slightly from $368,600 a year ago.

The inventory of new homes for sale at the end of June 2020 would support 4.7 months’ supply at the current sales pace, down from 6.3 months in June 2019.

Existing-home sales rebounded at a record pace in June 2020, showing strong signs of a market turnaround after three straight months of sales declines caused by the ongoing pandemic, according to the National Association of Realtors (NAR).

Each of the four major regions achieved month-over month growth, with the West experiencing the greatest sales recovery.

Existing-home sales jumped 20.7% in June 2020 from May 2020;

however, sales for June 2020 were down 11.3% from June 2019, according to NAR.

Total existing home sales reached a seasonally adjusted rate of 4.72 million in June 2020.

Total housing inventory at the end of June 2020 was at 1.57 million, up 1.3% from May 2020, but down 18.2% from June 2019.

This marks 13 straight months of year-over-year declines.

It will take 4.0 months to move the current level of inventory at the current sales pace.

It takes approximately 24 days for a home to go from listing to a contract in the current housing market, equal to 27 days, or 0.3 months, from a year ago.

The median existing home price for all housing types in June 2020 was $295,300, up 3.5% from a year ago.

This price increase marks the 100th straight month of year-over-year gains.

The Midwest region had the smallest price gain of the four regions with a median existing home sale price for June 2020 of $236,900, which is a 3.2% increase from a year ago.

First-time buyers nationally accounted for 35% of sales in June 2020, up from 34% in May and about equal to 35% in June 2019.

According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage increased to 3.16% in June 2020, down from 3.23% in May 2020.

The average commitment rate for all of 2019 was 3.94 percent, down from 4.54 percent for 2018.

The effects of the COVID-19 pandemic on real estate markets are already appearing in CoStar's multifamily data with daily asking rents for apartment units declining since March 11, 2020 – just as the prime leasing season began to unfold.

More severely impacted industries in our portfolio include retail, motel/hotel and restaurants.

As of September 2020, the national unemployment rate declined by a 0.5 percentage point over the month to 7.9%, but was 4.4 points higher than in September 2019.

Improvements in the labor market reflect the continued resumption of economic activity that had been curtailed due to the COVID-19 pandemic and efforts to contain it.

During September, more significant job gains occurred in leisure and hospitality, retail trade, health care and social assistance, and professional and business services.

Employment in government declined over the month, mainly in state and local government education.

Unemployment rates will be volatile and dependent upon the containment of the COVID-19 virus.

The unemployment rate for the Midwest, where the Company conducts most of its business, decreased from 11.0% in June 2020 to 7.2% in September 2020.

Unemployment rates for September 2020 were Arkansas at 7.3%, Colorado at 6.4%, Georgia at 6.4%, Illinois at 10.2%, Iowa at 4.7%, Kansas at 5.9%, Minnesota at 6.0%, Missouri at 4.9%, Nebraska at 3.5%, Oklahoma at 5.3%, and Texas at 8.3%.

Since August 2019, the Chicago area had a decrease of 366,600 jobs, ending with an unemployment rate of 11.5% as of September 2020 making them the highest unemployment rate among the metropolitan areas in which the Company does business.

While all of the company’s metropolitan areas had an increase in unemployment due to the ongoing pandemic, other than Chicago, the remaining areas are equal to or below the National unemployment rate of 7.9%.

Sales of newly built single-family homes for September 2020 were at a seasonally adjusted annual rate of 959,000 according to U.S.

Census Bureau and the Department of Housing and Urban Development estimates.

This is 3.5% below the revised August 2020 rate of 994,000, but is 32.1 percent above the September 2019 estimate of 726,000.

The median sales price of new houses sold in September 2020 was $326,800 up from $299,400 a year earlier.

The September 2020 average sales price of $405,400 was up slightly from $362,700 a year ago.

The inventory of new homes for sale at the end of September would support 3.6 months’ supply at the current sales pace, down from 5.5 months in September 2019.

Existing-home sales grew for the fourth consecutive month in September, showing strong signs of a market turnaround after three straight months of sales declines caused by the ongoing pandemic, according to the National Association of Realtors (NAR).

For four straight months, home sales have grown in every region compared to the previous month.

Existing-home sales grew 7.1% in the Midwest to an annual rate of 1.5 million in September 2020 up 19.8% from a year ago.

Total existing home sales reached a seasonally adjusted rate of 6.5 million in September 2020.

Total housing inventory at the end of September 2020 totaled 1.47 million units, down 1.3% from August and down 1.82 million, or 19.2%, from the previous year period.

Unsold inventory sits at a 2.7 months’ supply at the current sale pace, down from 3.0 months in August and down from 4.0 months in September 2019.

The median existing home price for all housing types in September 2020 was $311,800, up 14.8% from a year ago.

This price increase marks the 103rd straight month of year-over-year gains.

Median home prices increased at double-digit rates in each of the four major regions from one year ago.

The median price in the Midwest was $243,100, a 14.8% increase from September 2019.

First-time buyers accounted for 31% of sales in September, down from 33% in both August 2020 and September 2019.

According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage dropped to 2.88%, down from 3.13% in June 2020.

The average commitment rate for all of 2019 was 3.94%, down slightly from 4.54% for 2018.

The effects of the COVID-19 pandemic on real estate markets appeared in CoStar's multifamily data with daily asking rents for apartment units declining since March 11, just as the prime leasing season began to unfold.

After flattening in May, rents began to rebound in June as cities nationwide worked to reopen their economies and the national job market continued to show signs of recovering.

A $2 trillion+ federal stimulus package included direct cash payments to renter households of around $85 billion, which helped mitigate the impact on the apartment sector.

Fannie Mae, Freddie Mac, and HUD all announced prohibitions on evictions in all GSE-financed communities, and the National Multifamily Housing Council (NMHC) has published guidelines to its members to avoid evictions and delay rent hikes.

The long-term outlook for apartment demand may be affected by changes in attitudes regarding working from home and changes in personal circumstances such as divorces, marriages, and births.

As of the end of June 2020, national apartment vacancy rates had increased slightly to 6.8% while our market areas reflected the following vacancy levels:

However, U.S apartment rents have trended lower since July, led by ongoing declines in downtown rents.

During the pandemic, changes in attitudes regarding working from home have changed with renters seeking more space and affordability;

rents for two-bedroom units have held up better, while studios have experienced the worst losses.

Net absorption surged to more than 100,000 units in the third quarter, indicating pent-up demand for new apartments still exists.

With the stimulus package behind us and eviction leniency periods ending, unemployment will continue to determine the long-term outlook for apartment demand.

As of the end of September 2020, national apartment vacancy rates stood at 6.8% while our market areas reflected the following vacancy levels:

Springfield, Mo.

2 unchanged sentences

Commercial Real Estate Other Than Housing

The full impact of the COVID-19 pandemic on the U.S.

office sector remains unclear, but per CoStar, a steep decline in leasing and transaction volume is expected to continue beyond the second quarter of 2020.

Demand for U.S.

office space ended the first quarter of 2020 in positive territory, though it was the lowest quarterly total since 2011 and much of the positive absorption occurred prior to March 2020.

That positive absorption reversed sharply in the second quarter of 2020, with demand posting the largest negative total since mid-2009.

Annual rent growth has been slowing over the past couple of quarters, but remained positive in the first quarter of 2020.

Even before the disruption caused by the COVID-19, the trend of slowing growth was expected to continue in 2020 and beyond.

The retail sector of commercial real estate remains one of the most vulnerable to the impact of COVID-19.

Gradual store re-openings throughout the nation and the relaxation of social distancing restrictions has modestly lifted consumer confidence and given hope for stabilization in the industry.

However, increasing infection rates throughout many Southern states threaten the continued path to stability, creating additional uncertainty for retailers already struggling with reduced revenues and limited liquidity.

Decline in sales in apparel, department stores, retail shops and restaurants, those sectors believed to be among the most hurt by the pandemic, will affect malls, strip centers and outlet centers by subsequent increases in vacancies.

The full impact of the coronavirus outbreak on the U.S.

Office sector remains unclear, but per CoStar, demand for office space declined steeply in the third quarter, tripling the losses posted in the second quarter.

As the pandemic continues to flare in areas, many companies have extended work from home protocols till mid-2021.

Co-Star’s baseline forecast calls for office-using employment totals to return to pre-pandemic levels by the end of 2022, and continue to moderately accelerate from there.

Annual rent growth has been slowing over the past several quarters and was flat in the third quarter.

Even before the disruption caused by the pandemic, the trend of slowing growth was expected to continue in 2020 and lingering through 2021.

The retail sector of commercial real estate remains one of the most vulnerable to the impact of the COVID-19 pandemic.

Gradual store re-openings throughout the nation and the relaxation of social distancing restrictions has modestly lifted consumer confidence and given hope for stabilization in the industry throughout the remainder of 2020.

However, increasing infection rates throughout many mid-western and Southern states threat the continued path to stability producing additional certainty for retailers already struggling with reduced revenues and limited liquidity.

Decline in sales of soft-good department stores, retail shops and restaurants, those believed to be the most hurt by the pandemic, will affect malls, strip centers and outlet centers by subsequent increase in vacancies.

The wave of retail bankruptcies is expected to continue;

however, tenants with essential-oriented offerings have thus far weathered the storm and arisen as a modest source of positive demand.

Though the industrial sector may fare best among commercial real estate sectors, its operating fundamentals will not fully escape the negative impacts of COVID-19.

Though the industrial sector may fare best among commercial real estate sectors, its operating fundamentals will not fully escape the negative impacts of the COVID-19 recession.

Dampened aggregate demand and reduced export growth along with disrupted and curtailed supply chains present a headwind for port markets and industrial distribution operators.

1 unchanged sentence

Negative factors in the industry are countered somewhat with the increased activity of large tenant groups including Amazon, third party logistics providers and larger retailers.

Under CoStar’s Base Case forecast, the moderation in demand, taking into consideration a considerable development pipeline, may result in a vacancy rate in the mid 6% range, which is still well below the peak of 10.6% reached during the Great Recession of 2007 to 2009.

The degree to which the commercial real estate sector will suffer is yet unknown, as the path and progression of the pandemic, and the economy's response to measures taken to control the spread of the virus remains fluid.

Under CoStar’s base case forecast, the moderation in demand, taking into consideration a considerable development pipeline, may result in a vacancy rate in the mid 6% range, which is still well below the peak of 10.6% reached during the Great Recession.

The degree to which the commercial real estate sector suffers is yet unknown, as the path and progression of the pandemic, and the economy's response to such measures taken remains fluid.

In addition to forced and voluntary store closures, many retailers will struggle amid near-total loss of foot traffic, declining consumer sentiment, lost wages and restrained consumer spending activity.

Our management will continue to monitor regional, national, and global economic indicators such as unemployment, GDP, housing starts and prices, and commercial real estate occupancy, absorption and rental rates, as these could significantly affect customers in each of our market areas.

Our management will continue to monitor regional, national, and global economic indicators such as unemployment, GDP, housing starts and prices, commercial real estate occupancy, absorption and rental rates, as these could significantly affect customers in each of our market areas.

COVID-19 Impact to Our Business and Response

2 unchanged sentences

Centers for Disease Control and Prevention (CDC) guidelines, as well as directives from federal, state and local officials, are being closely followed to make informed operational decisions.

In January 2020, the Company activated its long-established Pandemic Response Plan.

This plan promotes the health and safety of the Company’s constituents and specifies responsive actions to support continuous service for customers.

A summary of the Company’s major COVID-19 responses and actions are highlighted below.

1 unchanged sentence

During this unprecedented time, the Company is working diligently with its nearly 1,200 associates to enforce CDC-advised health, hygiene and social distancing practices.

Approximately 50% of non-frontline associates are currently working from home.

A significant number of non-frontline associates continue to work from home.

Teams in nearly every operational department have been split, with part of each team working at an off-site disaster recovery facility to promote social distancing and to avoid service disruptions.

4 unchanged sentences

The Company’s Employee Assistance Program (EAP) was enhanced at no cost to associates and family members seeking counseling services for mental health and emotional support needs.

As a token of appreciation for our employees’ dedication over the past several months, and to help support some of the needs of our associates, in August 2020, the Company again rewarded all full-time and part-time associates with special pre-tax bonuses of $1,000 and $600, respectively.

This August bonus and related benefits expense totaled $1.1 million.

This is the second such bonus paid by the Company in response to the COVID-19 pandemic;

the first (also totaling $1.1 million) was approved in March 2020.

Great Southern Communities :

To support local COVID-19 relief efforts, in March 2020, Great Southern committed up to $300,000 to Feeding America food banks, local United Way agencies and other nonprofit organizations to address food insecurity and support critical health and human services.

Throughout the second quarter of 2020, these funds were distributed to agencies serving Great Southern local markets across its 11-state franchise.

Throughout 2020, we have continued to support local COVID-19 relief efforts through contributions to food banks, local United Way agencies and other nonprofit organizations to address food insecurity and support critical health and human services.

Many of our employees also volunteer their time to serve various agencies and charitable organizations in their communities.

Great Southern Customers :

During the COVID-19 pandemic, taking care of customers and providing uninterrupted access to services are top priorities.

Taking care of customers and providing uninterrupted access to services are top priorities.

As always, customers can conduct their banking business using the banking center network, online and mobile banking services, ATMs, Telephone Banking, and online account opening services.

1 unchanged sentence

If customer lobbies are closed in a market area, then drive-thru service and in-person service by appointment are available.

The COVID-19 pandemic is causing a growing number of customers to experience financial uncertainty and hardships.

The Company has been reaching out to customers and is strongly encouraging customers to call for assistance.

Certain account maintenance and service fees are being waived or refunded for depository customers.

Payment relief options and loan modifications for consumer and commercial loan customers are available on a case-by-case basis.

See Loan Modifications below for further details of loan modifications to date.

The Company has been actively utilizing the CARES Act stimulus package to assist consumers and businesses.

The CARES Act made available Small Business Administration (SBA) lending programs that offer relief for small businesses, including the Paycheck Protection Program (PPP).

Great Southern is participating in the PPP, which provides emergency financial support to small businesses (primarily those with less than 500 employees) by offering federally guaranteed loans through the SBA.

These loans may be eligible for forgiveness contingent upon how the loan proceeds are used by the borrower.

Through June 30, 2020, Great Southern has originated nearly 1,600 PPP loans totaling approximately $120 million.

As a resource to customers, a COVID-19 information center has been made available on the Company’s website, www.GreatSouthernBank.com .

2 unchanged sentences

The magnitude of the impact on the Company of the COVID-19 pandemic is not yet fully known, and will depend on the length and severity of the economic downturn brought on by the pandemic.

The Company expects that the COVID-19 pandemic will impact our business in future periods in one or more of the following ways, among others.

The Company expects that the COVID-19 pandemic will continue to impact our business in future periods in one or more of the following ways, among others.

Each of these factors could, individually or collectively, result in reduced net income in future periods.

1 unchanged sentence

· Certain fees for deposit and loan products may be waived or reduced

· Point-of-sale fee income may decline due to a decrease in spending by our debit card customers as they deal with “Stay at Home” requirements and other restrictions and may be adversely affected by reductions in their personal income and job losses

· Non-interest expenses may increase to deal with the effects of the COVID-19 pandemic, including cleaning costs, supplies, equipment and other items

· Banking center lobbies have now reopened, but could be closed again if the pandemic situation worsens

· Point-of-sale fee income may decline due to a decrease in spending by our debit card customers as they deal with state and local government requirements and other restrictions and may be adversely affected by reductions in their personal income and job losses

· Non-interest expenses may increase as we continue to deal with the effects of the COVID-19 pandemic, including cleaning costs, supplies, equipment and other items

· Banking center lobbies are open, but could be closed again if the pandemic situation worsens

· Additional loan modifications may occur and borrowers may default on their loans, which may necessitate further increases to the allowance for loan losses

1 unchanged sentence

Paycheck Protection Program Loans

As noted above, Great Southern is actively participating in the PPP through the SBA .

Great Southern is actively participating in the Paycheck Protection Program (PPP) through the Small Business Administration (SBA) .

The PPP has been met with very high demand throughout the country, resulting in a second round of funding through an amendment to the CARES Act.

As of June 30, 2020, we originated approximately 1,600 PPP loans totaling approximately $120 million.

As of September 30, 2020, we originated approximately 1,600 PPP loans totaling approximately $121 million.

Great Southern has received $4.7 million in fees from the SBA for originating these loans based on the amount of each loan.

The fees, net of origination costs, will be deferred in accordance with standard accounting practices and will be accreted to interest income on loans over the contractual life of each loan.

These loans generally have a contractual maturity of two years from origination date, but may be repaid or forgiven (by the SBA).

These loans generally have a contractual maturity of two years from origination date, but may be repaid or forgiven (by the SBA) sooner.

If these loans are repaid or forgiven prior to their contractual maturity date, the remaining deferred fee for such loan will be accreted to interest income on loans immediately.

We expect a high percentage of these net deferred fees will accrete to interest income in the remainder of 2020.

We expect a high percentage of these net deferred fees will accrete to interest income in the fourth quarter of 2020 and the first quarter of 2021.

In the three months ended September 30, 2020, Great Southern recorded approximately $440,000 of these net deferred fees in interest income on loans.

Loan Modifications

Through June 30, 2020, we have modified 431 commercial loans with an aggregate principal balance outstanding of $931 million and 1,702 consumer and mortgage loans with an aggregate principal balance outstanding of $80 million.

The loan modifications are within the guidance provided by the CARES Act, the federal banking regulatory agencies, the Securities and Exchange Commission and the Financial Accounting Standards Board;

At September 30, 2020, we had remaining 88 modified commercial loans with an aggregate principal balance outstanding of $379 million and 407 modified consumer and mortgage loans with an aggregate principal balance outstanding of $17 million.

The loan modifications are within the guidance provided by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the federal banking regulatory agencies, the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB);

therefore, they are not considered troubled debt restructurings or classified assets for regulatory purposes.

The modified loans are in the following categories (dollars in millions):

At September 30, 2020, the modified loans were in the following categories (dollars in millions):

Collateral Type

Interest Only

Full Payment Deferral

Weighted Average Loan to Value

Warehouse/Other

3 unchanged sentences

Total Consumer

During July 1 through September 30, 2020, loans with an aggregate principal balance outstanding of $724 million were scheduled to return to their normal payment status.

Based on discussions with the borrowers, we expect a large portion of these loans to return to normal payments status by the end of August 2020;

however, a more severe or lengthier deterioration in economic conditions could change this outlook.

A portion of these loans may be further modified within the guidance provided by the CARES Act, the federal banking regulatory agencies, the Securities and Exchange Commission and the Financial Accounting Standards Board.

During the three months ended September 30, 2020, loans with an aggregate principal balance outstanding of $602 million completed the modification period and returned to their normal payment schedule.

Of the loans modified at June 30, 2020, $55.8 million in payments were received on these loans during the three months ended September 30, 2020.

A portion of the loans modified at September 30, 2020 may be further modified, and new loans may be modified, within the guidance provided by the CARES Act, the federal banking regulatory agencies, the SEC and the FASB if a more severe or lengthier deterioration in economic conditions occurs in future periods.

The Company has escalated monitoring activities related to the modified loans and has also increased review and monitoring activities for certain sectors of the loan portfolio which may be currently most impacted by the COVID-19 pandemic.

The retail portfolio had an outstanding balance of $418 million at June 30, 2020, which was 10% of the total loan portfolio.

The retail portfolio had an outstanding balance of $388 million at September 30, 2020, which was 11% of the total loan portfolio.

It is a very granular portfolio, with an average loan size of $1.6 million.

Most loans are under $5 million, with 28% of the outstanding balance of the retail portfolio represented by loans in excess of $10 million.

At June 30, 2020, the weighted average loan-to-value ratio of this portfolio was 64%.

The hotel/motel portfolio had an outstanding balance of $187 million at June 30, 2020, which was 4% of the total loan portfolio.

At September 30, 2020, the weighted average loan-to-value ratio of this portfolio was 61%.

The hotel/motel portfolio had an outstanding balance of $196 million at September 30, 2020, which was 5% of the total loan portfolio.

The average loan size is $4.3 million, with the 20 largest loans comprising approximately 90% of the portfolio.

1 unchanged sentence

Approximately 92% of the portfolio operates under the flag of major hotel chains.

At June 30, 2020, the weighted average loan-to-value ratio of this portfolio was 59%.

The restaurant portfolio had an outstanding balance of $73 million at June 30, 2020, which was 2% of the total loan portfolio.

At September 30, 2020, the weighted average loan-to-value ratio of this portfolio was 56%.

The restaurant portfolio had an outstanding balance of $72 million at September 30, 2020, which was 2% of the total loan portfolio.

It is a very granular portfolio, with the majority of the restaurants operating in Missouri, Illinois, Iowa and Minnesota.

The majority of these loans are to franchisees of top-tier quick service brands with national scale that have had the ability to stay open with delivery and drive-through service throughout the course of the pandemic.

At June 30, 2020, the weighted average loan-to-value ratio of this portfolio was 63%.

Total loans outstanding (excluding FDIC-assisted acquired loans, net of discount) in the following categories at June 30, 2020, were as follows (dollars in millions):

At September 30, 2020, the weighted average loan-to-value ratio of this portfolio was 59%.

Total loans outstanding (excluding FDIC-assisted acquired loans, net of discount) in the following categories at September 30, 2020, were as follows (dollars in millions):

Collateral Type

1 unchanged sentence

Collateral Type

Percentage of

Loans Modified To

Collateral Type

of Loans of This

Weighted Average

Loan to Value of

Loans in This

Percentage of Loans Modified To Total Loans

Collateral Type

of Loans of This Collateral

Weighted Average Loan to Value of Loans in This Collateral Type

Warehouse/Other

4 unchanged sentences

(1) The Commercial Business outstanding loan balance excludes PPP loans of $121.1 million.

The profitability of the Company and, more specifically, the profitability of its primary subsidiary, the Bank, depend primarily on its net interest income, as well as provisions for loan losses and the level of non-interest income and non-interest expense.

The profitability of the Company and, more specifically, the profitability of its primary subsidiary, the Bank, depend primarily on net interest income, as well as provisions for loan losses and the level of non-interest income and non-interest expense.

Net interest income is the difference between the interest income the Bank earns on its loans and investment portfolios, and the interest it pays on interest-bearing liabilities, which consists mainly of interest paid on deposits and borrowings.

1 unchanged sentence

When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.

Great Southern's total assets increased $551.6 million, or 11.0%, from $5.02 billion at December 31, 2019, to $5.57 billion at June 30, 2020.

Full details of the current period changes in total assets are provided in the “Comparison of Financial Condition at June 30, 2020 and December 31, 2019” section of this Quarterly Report on Form 10-Q.

Net outstanding loans increased $245.7 million, or 5.9%, from $4.15 billion at December 31, 2019, to $4.40 billion at June 30, 2020.

Great Southern's total assets increased $427.9 million, or 8.5%, from $5.02 billion at December 31, 2019, to $5.44 billion at September 30, 2020.

Full details of the current period changes in total assets are provided in the “Comparison of Financial Condition at September 30, 2020 and December 31, 2019” section of this Quarterly Report on Form 10-Q.

Net outstanding loans increased $259.8 million, or 6.3%, from $4.15 billion at December 31, 2019, to $4.41 billion at September 30, 2020.

The net increase in loans reflects reductions of $21.1 million in the FDIC-assisted acquired loan portfolios.

This increase was primarily in other residential (multi-family) loans, commercial business loans, one- to four-family residential loans and commercial real estate loans.

Approximately 61% of the one- to- four-family residential loan originations in the nine months ended September 30, 2020 were refinanced loans.

These increases were partially offset by decreases in construction loans and consumer auto loans.

The increases were primarily due to loan growth in our existing banking center network and our commercial loan production offices, and included approximately $121 million of PPP loans.

Excluding FDIC-assisted acquired loans and mortgage loans held for sale, total gross loans increased $241.0 million, or 4.9%, from December 31, 2019 to June 30, 2020.

Excluding FDIC-assisted acquired loans and mortgage loans held for sale, total gross loans increased $229.6 million, or 4.7%, from December 31, 2019 to September 30, 2020.

As loan demand is affected by a variety of factors, including general economic conditions, and because of the competition we face and our focus on pricing discipline and credit quality, no assurances can be made regarding our future loan growth.

1 unchanged sentence

The Company's strategy continues to be focused on maintaining credit risk and interest rate risk at appropriate levels.

Recent loan growth has occurred in several loan types, primarily commercial real estate loans, other residential (multi-family) loans and one- to four-family residential mortgage loans and in most of Great Southern’s primary lending locations, including Springfield, St.

Recent loan growth has occurred in several loan types, primarily other residential (multi-family) loans, one- to four-family residential mortgage loans and commercial business loans and in most of Great Southern’s primary lending locations, including Springfield, St.

Louis, Kansas City, Des Moines and Minneapolis, as well as our loan production offices in Atlanta, Chicago, Dallas, Denver, Omaha and Tulsa.

17 unchanged sentences

We consider these lending practices to be consistent with or more conservative than what we believe to be the norm for banks our size.

At June 30, 2020 and December 31, 2019, none of our owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination.

At both June 30, 2020 and December 31, 2019, an estimated 0.6% of total non-owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination.

At June 30, 2020, troubled debt restructurings totaled $861,000, or 0.02% of total loans, down $1.1 million from $1.9 million, or 0.05% of total loans, at December 31, 2019.

At September 30, 2020 and December 31, 2019, none of our owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination.

At both September 30, 2020 and December 31, 2019, an estimated 0.6% of total non-owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination.

At September 30, 2020, troubled debt restructurings totaled $3.7 million, or 0.08% of total loans, an increase of $1.8 million from $1.9 million, or 0.05% of total loans, at December 31, 2019.

Concessions granted to borrowers experiencing financial difficulties may include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

For troubled debt restructurings occurring during the six months ended June 30, 2020, seven loans totaling $156,000 were restructured into multiple new loans.

For troubled debt restructurings occurring during the nine months ended September 30, 2020, six loans totaling $149,000 were restructured into multiple new loans.

For troubled debt restructurings occurring during the year ended December 31, 2019, five loans totaling $34,000 were restructured into multiple new loans.

6 unchanged sentences

Acquired loans are described in Note 7 of the Notes to Consolidated Financial Statements contained in this report.

For acquired loan pools, the Company may allocate, and at June 30, 2020, has allocated, a portion of its allowance for loan losses related to these loan pools in a manner similar to how it allocates its allowance for loan losses to those loans which are collectively evaluated for impairment.

For acquired loan pools, the Company may allocate, and at September 30, 2020, has allocated, a portion of its allowance for loan losses related to these loan pools in a manner similar to how it allocates its allowance for loan losses to those loans which are collectively evaluated for impairment.

The level of non-performing loans and foreclosed assets affects our net interest income and net income.

2 unchanged sentences

Available-for-sale Securities.

In the six months ended June 30, 2020, available-for-sale securities increased $72.7 million, or 19.4%, from $374.2 million at December 31, 2019, to $446.9 million at June 30, 2020.

In the nine months ended September 30, 2020, available-for-sale securities increased $71.7 million, or 19.2%, from $374.2 million at December 31, 2019, to $445.9 million at September 30, 2020.

The increase was primarily due to the purchase of FNMA and GNMA fixed-rate multi-family mortgage-backed securities and collateralized mortgage obligations and short-term municipal securities, partially offset by calls of municipal securities and normal monthly payments received related to the portfolio of mortgage-backed securities.

2 unchanged sentences

The Company then utilizes these deposit funds, along with FHLBank advances and other borrowings, to meet loan demand or otherwise fund its activities.

In the six months ended June 30, 2020, total deposit balances increased $552.1 million, or 13.9%.

T ransaction account balances increased $566.0 million to $2.81 billion at June 30, 2020 , while retail certificates of deposit decreased $50.1 million, to $1.30 billion at June 30, 2020 .

In the nine months ended September 30, 2020, total deposit balances increased $483.7 million, or 12.2%.

T ransaction account balances increased $694.3 million, or 31.0%, to $2.93 billion at September 30, 2020 , while retail certificates of deposit decreased $81.8 million, or 6.1%, to $1.27 billion at September 30, 2020 .

The increases in transaction accounts were primarily a result of increased customers in the CDARS reciprocal program, money market accounts and NOW deposit accounts.

Retail certificates of deposit decreased due to a decrease in retail certificates generated through the banking center network, partially offset by increases in customer deposits in the CDARS reciprocal program.

Customer deposits at June 30, 2020 and December 31, 2019, totaling $51.6 million and $35.3 million, respectively, were part of the CDARS program, which allows customers to maintain balances in an insured manner that would otherwise exceed the FDIC deposit insurance limit.

Brokered deposits, including CDARS program purchased funds, were $407.8 million at June 30, 2020 , an increase of $36.1 million from $371.7 million at December 31, 2019.

Customer deposits at September 30, 2020 and December 31, 2019, totaling $56.1 million and $35.3 million, respectively, were part of the CDARS program, which allows customers to maintain balances in an insured manner that would otherwise exceed the FDIC deposit insurance limit.

Brokered deposits, including CDARS program purchased funds, were $242.9 million at September 30, 2020 , a decrease of $128.8 million from $371.7 million at December 31, 2019.

The brokered deposits were allowed to mature without replacement as other deposit categories increased.

Our deposit balances may fluctuate depending on customer preferences and our relative need for funding.

10 unchanged sentences

Federal Home Loan Bank Advances and Short-Term Borrowings.

The Company had no Federal Home Loan Bank advances outstanding at both June 30, 2020 and December 31, 2019.

At June 30, 2020, there were also no overnight borrowings from the FHLBank.

The Company had no Federal Home Loan Bank advances outstanding at September 30, 2020 or December 31, 2019.

At September 30, 2020, there were also no overnight borrowings from the FHLBank.

At December 31, 2019, there were no borrowings from the FHLBank other than overnight advances, which are included in the short term borrowings category.

Short term borrowings and other interest-bearing liabilities decreased $226.9 million from $228.2 million at December 31, 2019 to $1.3 million at June 30, 2020.

The short term borrowings included overnight FHLBank borrowings of $-0- and $196.0 million at June 30, 2020 and December 31, 2019, respectively.

Short term borrowings and other interest-bearing liabilities decreased $227.0 million from $228.2 million at December 31, 2019 to $1.2 million at September 30, 2020.

The short term borrowings included overnight FHLBank borrowings of $-0- and $196.0 million at September 30, 2020 and December 31, 2019, respectively.

The Company utilizes both overnight borrowings and short-term FHLBank advances depending on relative interest rates.

Securities sold under reverse repurchase agreements with customers.

Securities sold under reverse repurchase agreements with customers increased $107.5 million from $84.2 million at December 31, 2019 to $191.6 million at June 30, 2020 .

Securities sold under reverse repurchase agreements with customers increased $70.8 million from $84.2 million at December 31, 2019 to $155.0 million at September 30, 2020 .

These balances fluctuate over time based on customer demand for this product.

1 unchanged sentence

Subordinated notes.

Subordinated notes increased $73.8 million from $74.2 million at December 31, 2019 to $148.0 million at June 30, 2020 .

Subordinated notes increased $74.0 million from $74.2 million at December 31, 2019 to $148.2 million at September 30, 2020 .

The Company issued $75.0 million of subordinated notes in June 2020, receiving net proceeds of $73.5 million.

15 unchanged sentences

In response to the COVID-19 pandemic, the FRB decreased interest rates on two occasions in March 2020, a 0.50% decrease on March 3 and a 1.00% decrease on March 16.

At June 30, 2020, the Federal Funds rate stood at 0.25%.

A substantial portion of Great Southern’s loan portfolio ($2.09 billion at June 30 , 2020 ) is tied to the one-month or three-month LIBOR index and will be subject to adjustment at least once within 90 days after June 30, 2020 .

At September 30, 2020, the Federal Funds rate stood at 0.25%.

A substantial portion of Great Southern’s loan portfolio ($2.10 billion at September 30 , 2020 ) is tied to the one-month or three-month LIBOR index and will be subject to adjustment at least once within 90 days after September 30, 2020 .

Of these loans, $2.08 billion had interest rate floors.

Great Southern also has a portfolio of loans ($227 million at June 30, 2020 ) tied to a "prime rate"

Great Southern also has a portfolio of loans ($256 million at September 30, 2020 ) tied to a "prime rate"

of interest and will adjust immediately with changes to the “prime rate” of interest.

4 unchanged sentences

Conversely, interest rate increases would normally result in increased interest rates on our LIBOR-based and prime-based loans.

As of June 30, 2020 , Great Southern's interest rate risk models indicate that, generally, rising interest rates are expected to have a positive impact on the Company's net interest income, while declining interest rates are expected to have a negative impact on net interest income.

As of September 30, 2020 , Great Southern's interest rate risk models indicate that, generally, rising interest rates are expected to have a positive impact on the Company's net interest income,

while declining interest rates are expected to have a negative impact on net interest income.

We model various interest rate scenarios for rising and falling rates, including both parallel and non-parallel shifts in rates.

The results of our modeling indicate that net

interest income is not likely to be significantly affected either positively or negatively in the first twelve months following a rate change, regardless of any changes in interest rates, because our portfolios are relatively well-matched in a twelve-month horizon.

The results of our modeling indicate that net interest income is not likely to be significantly affected either positively or negatively in the first twelve months following a rate change, regardless of any changes in interest rates, because our portfolios are relatively well-matched in a twelve-month horizon.

In a situation where market interest rates decrease significantly in a short period of time, as they did in March 2020, our net interest margin decrease may be more pronounced in the very near term (first one to three months), due to fairly rapid decreases in LIBOR interest rates.

In the subsequent months we expect that the net interest margin would stabilize and begin to improve, as renewal interest rates on maturing time deposits are expected to decrease compared to the current rates paid on those products.

During the latter half of 2019 and the six months ended June 30, 2020, we did experience some compression of our net interest margin percentage due to 2.25% of Federal Fund rate cuts over that time period.

During the latter half of 2019 and the nine months ended September 30, 2020, we did experience some compression of our net interest margin percentage due to 2.25% of Federal Fund rate cuts during the nine month period of July 2019 through March 2020.

Margin compression primarily resulted from generally slower changing average interest rates on deposits and borrowings and lower yields on loans and other interest-earning assets.

8 unchanged sentences

Operating expenses consist primarily of salaries and employee benefits, occupancy-related expenses, expenses related to foreclosed assets, postage, FDIC deposit insurance, advertising and public relations, telephone, professional fees, office expenses and other general operating expenses.

Details of the current period changes in non-interest income and non-interest expense are provided in the “Results of Operations and Comparison for the Three and Six Months Ended June 30, 2020 and 2019” section of this report.

Details of the current period changes in non-interest income and non-interest expense are provided in the “Results of Operations and Comparison for the Three and Nine Months Ended September 30, 2020 and 2019” section of this report.

Effect of Federal Laws and Regulations

4 unchanged sentences

The Dodd-Frank Act implemented far-reaching changes across the financial regulatory landscape.

Certain aspects of the Dodd-Frank Act have been affected by the recently Economic Growth Act, as defined and discussed below under “-Economic Growth Act.”

Certain aspects of the Dodd-Frank Act have been affected by the more recently enacted Economic Growth Act, as defined and discussed below under “-Economic Growth Act.”

Capital Rules.

10 unchanged sentences

In addition to the minimum capital ratios, the rules include a capital conservation buffer, under which a banking organization must have CET1 more than 2.5% above each of its minimum risk-based capital ratios in order to avoid restrictions on paying dividends, repurchasing shares, and paying certain discretionary bonuses.

The capital conservation buffer requirement began phasing in on January 1, 2016 when a buffer greater

than 0.625% of risk-weighted assets was required, which amount increased an equal amount each year until the buffer requirement of greater than 2.5% of risk-weighted assets became fully implemented on January 1, 2019.

The capital conservation buffer requirement began phasing in on January 1, 2016 when a buffer greater than 0.625% of risk-weighted assets was required, which amount increased an equal amount each year until the buffer requirement of greater than 2.5% of risk-weighted assets became fully implemented on January 1, 2019.

Effective January 1, 2015, these rules also revised the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels show signs of weakness.

12 unchanged sentences

In addition, the Economic Growth Act includes regulatory relief in the areas of examination cycles, call reports, mortgage disclosures and risk weights for certain high-risk commercial real estate loans.

It is difficult at this time to predict when or how any new standards under the Economic Growth Act will ultimately be applied to us or what specific impact the Economic Growth Act and the forthcoming implementing rules and regulations will have on us.

Business Initiatives

The banking center network continues to evolve.

In early April 2020, the Company was notified by its landlord that the Great Southern banking centers located inside the Hy-Vee stores at 2900 Devils Glen Rd in Bettendorf, Iowa, and 2351 W.

in Davenport, Iowa, must permanently cease operations due to store infrastructure changes.

These offices have been closed to the public since late March 2020 due to the COVID-19 pandemic.

Bank customers were previously informed and the Hy-Vee banking centers were permanently closed on July 21, 2020, with customer accounts transferring to nearby offices.

Great Southern now operates three banking centers in the Quad Cities market area – two in Davenport and one in Bettendorf.

During the second quarter 2020, remodeling of the downtown office at 1900 Main in Parsons, Kansas, continued, which includes the addition of drive-thru banking lanes.

Remodeling is expected to be completed in mid-August, whereupon the nearby drive-thru facility will be consolidated into the downtown office, leaving one location serving the Parsons market.

In June 2020, the Company completed the public offering and sale of $75 million of its 5.50% Fixed-to-Floating Rate Subordinated Notes due June 15, 2030.

The Notes were sold at par, resulting in net proceeds, after

underwriting discounts, commissions and other expenses, of approximately $73.5 million.

The Notes are intended to qualify as Tier 2 capital for regulatory purposes.

The Company intends to use the net proceeds of the offering for general corporate purposes, which may include repayment or redemption of outstanding indebtedness, the payment of dividends, providing capital to support its organic growth or growth through strategic acquisitions, capital expenditures, financing investments, repurchasing shares of its common stock and for investments in the Bank as regulatory capital.

On June 17, 2020, the Company announced that Douglas Marrs, Vice President and Director of Operations of the Bank and Secretary of the Company, intends to retire in June 2021.

Marrs is primarily responsible for general bank operations and facilities management.

He announced his intention to retire well in advance to assure an orderly leadership transition over the next year.

With more than 40 years in the banking industry, Mr.

Marrs joined Great Southern in 1996.

He has been an integral part of the Bank’s growth and success for the last 24 years.

During that time period, the Bank has grown from approximately $700 million in assets with operations primarily in the southwest Missouri region, to approximately $5.6 billion in assets and offices in 11 states, as of June 30, 2020.

Great Southern Bank has been recognized as part of Forbes’ annual list of the World’s Best Banks 2020.

Great Southern was ranked as the sixth best bank in the United States.

The World’s Best Banks list is comprised of the financial institutions that differentiate their services and build trustworthy relationships with their customers.

450 banks around the world are featured on the list, which was announced online on May 14, 2020, and can currently be viewed on the Forbes website.

The study involved 40,000 bank customers from 23 countries to rate banks they are involved with on general satisfaction and key attributes like trust, fees, digital services and financial advice.

Comparison of Financial Condition at June 30, 2020 and December 31, 2019

During the six months ended June 30, 2020, the Company’s total assets increased by $551.6 million to $5.57 billion.

The increase was primarily attributable to an increase in loans receivable, available-for-sale investment securities, and cash equivalents.

Cash and cash equivalents were $473.6 million at June 30, 2020, an increase of $253.4 million, or 115.1%, from $220.2 million at December 31, 2019.

The Company’s banking center network continues to evolve.

In August 2020, remodeling of the downtown office at 1900 Main in Parsons, Kansas, was completed, which included the addition of drive-thru banking lanes.

With this completion, the nearby drive-thru facility was consolidated into the downtown office, leaving one location serving the Parsons market.

In the Joplin, Missouri, market, the Company purchased a banking facility in the fourth quarter of 2019 vacated by another financial institution, which included a contractual black-out period ending in April 2021.

A third party vendor has been engaged by the Company to redesign this facility as a “bank of the future” prototype to incorporate evolving customer preferences.

Variations of this prototype design may be utilized in other select banking centers in the Company’s footprint in the future.

The Company expects the new office in Joplin to be completed in the second quarter of 2021, whereupon the nearby leased banking center at 1710 E.

32nd Street will be consolidated into this new office.

There are two banking centers currently serving the Joplin market.

The Company’s Board of Directors recently approved a new stock repurchase program, which will succeed the existing repurchase program (authorized in April 2018) following the repurchase of the remaining approximately 75,111 available shares under the existing program.

The new stock repurchase program authorizes the repurchase, from time to time, of up to one million additional shares of the Company’s common stock.

Comparison of Financial Condition at September 30, 2020 and December 31, 2019

During the nine months ended September 30, 2020, the Company’s total assets increased by $427.9 million to $5.44 billion.

The increase was primarily attributable to increases in loans receivable, available-for-sale investment securities, and cash equivalents.

Cash and cash equivalents were $338.3 million at September 30, 2020, an increase of $118.1 million, or 53.6%, from $220.2 million at December 31, 2019.

This increase was primarily related to excess funds held at the Federal Reserve Bank after repayment of FHLBank overnight borrowings.

The additional funds were primarily the result of increases in deposits.

The Company's available-for-sale securities increased $71.7 million, or 19.2%, compared to December 31, 2019.

The increase was primarily due to the purchase of FNMA and GNMA fixed-rate multi-family mortgage-backed securities and short-term municipal securities, partially offset by calls of municipal securities and normal monthly payments received related to the portfolio of mortgage-backed securities.

The available-for-sale securities portfolio was 8.0% and 7.5% of total assets at June 30, 2020 and December 31, 2019, respectively.

Net loans increased $245.7 million from December 31, 2019, to $4.40 billion at June 30, 2020.

Excluding FDIC-assisted acquired loans and mortgage loans held for sale, total gross loans (including the undisbursed portion of loans) increased $241.0 million, or 4.9%, from December 31, 2019 to June 30, 2020.

The available-for-sale securities portfolio was 8.2% and 7.5% of total assets at September 30, 2020 and December 31, 2019, respectively.

Net loans increased $259.8 million from December 31, 2019, to $4.41 billion at September 30, 2020.

Excluding FDIC-assisted acquired loans and mortgage loans held for sale, total gross loans (including the undisbursed portion of loans) increased $229.6 million, or 4.7%, from December 31, 2019 to September 30, 2020.

This increase was primarily in other residential (multi-family) loans ($152.4 million), commercial business loans ($126.0 million), and one- to four-family residential loans ($88.5 million).

These increases were partially offset by decreases in construction loans ($117.8 million) and consumer auto loans ($52.6 million).

Total liabilities increased $527.9 million, from $4.41 billion at December 31, 2019 to $4.94 billion at June 30 , 2020 .

The increase was primarily attributable to an increase in deposits, securities sold under reverse repurchase agreements and subordinated notes, primarily offset by a decrease in short term borrowings.

Total deposits increased $552.1 million, or 13.9%, to $4.51 billion at June 30, 2020.

T ransaction account balances increased $566.0 million to $2.81 billion at June 30, 2020 , while retail certificates of deposit decreased $50.1 million compared to December 31, 2019, to $1.30 billion at June 30, 2020 .

Total liabilities increased $406.4 million, from $4.41 billion at December 31, 2019 to $4.82 billion at September 30 , 2020 .

The increase was primarily attributable to an increase in deposits, securities sold under reverse repurchase agreements and subordinated notes, partially offset by a decrease in short term borrowings.

Total deposits increased $483.7 million, or 12.2%, to $4.44 billion at September 30, 2020.

T ransaction account balances increased $694.3 million to $2.93 billion at September 30, 2020 , while retail certificates of deposit decreased $81.8 million compared to December 31, 2019, to $1.27 billion at September 30, 2020 .

The increase in transaction accounts was primarily a result of increases in NOW deposit accounts, money market accounts and Insured Cash Sweep (ICS) reciprocal accounts.

Retail certificates of deposit decreased due to a net decrease in retail certificates generated through the banking center network, partially offset by increases in customer deposits in the CDARS reciprocal program.

Customer deposits at June 30 , 2020 and December 31, 2019 totaling $51.6 million and $35.3 million,

respectively, were part of the CDARS program, which allows customers to maintain balances in an insured manner that would otherwise exceed the FDIC deposit insurance limit.

Brokered deposits, including CDARS program purchased funds, were $407.8 million at June 30, 2020 , an increase of $36.1 million from $371.7 million at December 31, 2019.

The Company had no FHLBank advances outstanding at both June 30, 2020 and December 31, 2019.

Customer deposits at September 30 , 2020 and December 31, 2019 totaling $56.1 million and $35.3 million, respectively, were part of the CDARS program, which allows customers to maintain balances in an insured manner that would otherwise exceed the FDIC deposit insurance limit.

Brokered deposits, including CDARS program purchased funds, were $242.9 million at September 30, 2020 , a decrease of $128.8 million from $371.7 million at December 31, 2019.

The brokered deposits were allowed to mature without replacement as other deposit categories increased.

The Company had no FHLBank advances outstanding at September 30, 2020 or December 31, 2019.

At December 31, 2019, there were no borrowings from the FHLBank other than overnight advances, which are included in the short term borrowings category.

There were no borrowings from FHLBank outstanding at June 30, 2020.

Short term borrowings and other interest-bearing liabilities decreased $226.9 million from $228.2 million at December 31, 2019 to $1.3 million at June 30 , 2020 .

Short term borrowings at June 30, 2020 and December 31, 2019, included overnight FHLBank borrowings of $-0- million and $196.0 million, respectively.

There were no borrowings from the FHLBank outstanding at September 30, 2020.

Short term borrowings and other interest-bearing liabilities decreased $227.0 million from $228.2 million at December 31, 2019 to $1.2 million at September 30 , 2020 .

There were no short term borrowings at September 30, 2020 and $196.0 million in short term borrowings included in overnight FHLBank borrowings at December 31, 2019.

The Company utilizes both overnight borrowings and short term FHLBank advances depending on relative interest rates.

Securities sold under reverse repurchase agreements with customers increased $107.5 million from $84.2 million at December 31, 2019 to $191.6 million at June 30, 2020 .

Securities sold under reverse repurchase agreements with customers increased $70.8 million from $84.2 million at December 31, 2019 to $155.0 million at September 30, 2020 .

These balances fluctuate over time based on customer demand for this product.

Subordinated notes increased $73.8 million from $74.2 million at December 31, 2019 to $148.0 million at June 30, 2020 .

Subordinated notes increased $74.0 million from $74.2 million at December 31, 2019 to $148.2 million at September 30, 2020 .

The Company issued $75.0 million of subordinated notes in June 2020, receiving net proceeds of $73.5 million.

Total stockholders' equity increased $23.6 million from $603.1 million at December 31, 2019 to $626.7 million at June 30, 2020.

The Company recorded net income of $28.1 million for the six months ended June 30, 2020.

Total stockholders' equity increased $21.5 million from $603.1 million at December 31, 2019 to $624.6 million at September 30, 2020.

The Company recorded net income of $41.5 million for the nine months ended September 30, 2020.

Accumulated other comprehensive income increased $23.4 million due to increases in the fair value of available-for-sale investment securities and the termination value of the cash flow hedge.

In addition, total stockholders’ equity increased $817,000 due to stock option exercises.

In addition, total stockholders’ equity increased $1.2 million due to stock option exercises.

These increases were partially offset by dividends declared on common stock of $28.6 million and repurchases of the Company’s common stock totaling $15.9 million.

Results of Operations and Comparison for the Three and Six Months Ended June 30, 2020 and 2019

Net income was $13.2 million for the three months ended June 30, 2020 compared to $18.4 million for the three months ended June 30, 2019.

This decrease of $5.2 million, or 28.1%, was primarily due to an increase in provision for loan losses of $4.4 million, or 275.0%, a decrease in net interest income of $1.5 million or 3.3%, and an increase in noninterest expense of $966,000, or 3.4%, partially offset by an increase in noninterest income of $1.1 million, or 15.4%, and a decrease in income tax expense of $556,000, or 14.9%.

Net income was $28.1 million for the six months ended June 30, 2020 compared to $36.0 million for the six months ended June 30, 2019.

Results of Operations and Comparison for the Three and Nine Months Ended September 30, 2020 and 2019

Net income was $13.5 million for the three months ended September 30, 2020 compared to $19.7 million for the three months ended September 30, 2019.

This decrease of $6.3 million, or 31.8%, was primarily due to an increase in noninterest expense of $3.3 million, or 11.4%, an increase in provision for loan losses of $2.6 million, or 130.8%, and a decrease in net interest income of $1.8 million or 3.8%, partially offset by an increase in noninterest income of $811,000, or 9.4%, and a decrease in income tax expense of $480,000, or 11.5%.

Net income was $41.5 million for the nine months ended September 30, 2020 compared to $55.7 million for the nine months ended September 30, 2019.

This decrease of $14.2 million, or 25.5%, was primarily due to an increase in provision for loan losses of $8.9 million, or 161.3%, an increase in noninterest expense of $6.5 million, or 7.7%, and a decrease in net interest income of $2.9 million, or 2.1%, partially offset by a decrease in income tax expense of $2.3 million, or 19.2%, and an increase in noninterest income of $1.8 million, or 7.9%.

Total Interest Income

Total interest income decreased $4.7 million, or 8.0%, during the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Total interest income decreased $6.6 million, or 10.9%, during the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

The decrease was due to a $6.8 million decrease in interest income on loans, partially offset by an increase in interest income on investments and other interest-earning assets of $162,000.

Interest income on loans decreased for the three months ended June 30, 2020 compared to the same period in 2019, due to lower average rates of interest on loans, partially offset by higher average balances.

Interest income from investment securities and other interest-earning assets increased during the three months ended June 30, 2020 compared to the same period in 2019 primarily due to higher average balances of investment securities and other interest-earning assets, significantly offset by lower average rates of interest.

Total interest income decreased $4.6 million, or 4.0%, during the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Interest income on loans decreased for the three months ended September 30, 2020 compared to the same period in 2019, due to lower average rates of interest on loans, partially offset by higher average balances.

Interest income from investment securities and other interest-earning assets increased during the three months ended September 30, 2020 compared to the same period in 2019 primarily due to higher average balances of investment securities and other interest-earning assets, partially offset by lower average rates of interest.

Total interest income decreased $11.2 million, or 6.3%, during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

The decrease was due to a $12.1 million decrease in interest income on loans, partially offset by a $916,000 increase in interest income on investments and other interest-earning assets.

Interest income on loans decreased for the six months ended June 30, 2020 compared to the same period in 2019, due to lower average rates of interest on loans, partially offset by higher average balances.

Interest income from investment securities and other interest-earning assets increased during the six months ended June 30, 2020 compared to the same period in 2019 primarily due to higher average balances of investment securities and other interest-earning assets, significantly offset by lower average rates of interest.

Interest income on loans decreased for the nine months ended September 30, 2020 compared to the same period in 2019, due to lower average rates of interest on loans, partially offset by higher average balances.

Interest income from investment securities and other interest-earning assets increased during the nine months ended September 30, 2020 compared to the same period in 2019 primarily due to higher average balances of investment securities and other interest-earning assets, partially offset by lower average rates of interest.

Interest Income – Loans

During the three months ended June 30, 2020 compared to the three months ended June 30, 2019, interest income on loans decreased $8.2 million as a result of lower average interest rates on loans.

The average yield on loans decreased from 5.40% during the three months ended June 30, 2019, to 4.64% during the three months ended June 30, 2020.

During the three months ended September 30, 2020 compared to the three months ended September 30, 2019, interest income on loans decreased $10.7 million as a result of lower average interest rates on loans.

The average yield on loans decreased from 5.41% during the three months ended September 30, 2019, to 4.46% during the three months ended September 30, 2020.

This decrease was primarily due to decreased yields in most loan categories as a result of decreased LIBOR and Federal Funds interest rates.

In addition in the 2020 period, the Company originated $121 million of PPP loans, which have a much lower yield compared to the overall loan portfolio.

Interest income on loans increased $3.3 million as the result of higher average loan balances, which increased from $4.14 billion during the three months ended June 30, 2019, to $4.40 billion during the three months ended June 30, 2020.

The higher average balances were primarily due to organic loan growth in commercial business loans (including the PPP loans), other residential (multi-family), and one- to four-family residential loans, partially offset by decreases in outstanding construction and consumer loans.

During the six months ended June 30, 2020 compared to the six months ended June 30, 2019, interest income on loans decreased $10.8 million as a result of lower average interest rates on loans.

The average yield on loans decreased from 5.41% during the six months ended June 30, 2019, to 4.89% during the six months ended June 30, 2020.

This decrease was primarily due to decreased yields in most loan categories as a result of decreased LIBOR and Federal Funds interest rates during the six months ended June 30, 2020.

This decrease also includes PPP loans, which have a much lower yields compared to the overall loan portfolio.

Interest income on loans increased $5.4 million as the result of higher average loan balances, which increased from $4.11 billion during the six months ended June 30, 2019, to $4.31 billion during the six months ended June 30, 2020.

Interest income on loans increased $4.0 million as the result of higher average loan balances, which increased from $4.20 billion during the three months ended September 30, 2019, to $4.51 billion during the three months ended September 30, 2020.

On an on-going basis, the Company has estimated the cash flows expected to be collected from the acquired loan pools.

During the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, interest income on loans decreased $21.5 million as a result of lower average interest rates on loans.

The average yield on loans decreased from 5.41% during the nine months ended September 30, 2019, to 4.74% during the nine months ended September 30, 2020.

This decrease was primarily due to decreased yields in most loan categories as a result of decreased LIBOR and Federal Funds interest rates during the nine months ended September 30, 2020.

This decrease also includes PPP loans, which have a much lower yield compared to the overall loan portfolio.

Interest income on loans increased $9.4 million as the result of higher average loan balances, which increased from $4.14 billion during the nine months ended September 30, 2019, to $4.38 billion during the nine months ended September 30, 2020.

The higher average balances were primarily due to organic growth in commercial business loans (including the PPP loans), other residential (multi-family) loans, and one- to four-family residential loans, partially offset by decreases in outstanding construction and consumer loans.

On an on-going basis, the Company has estimated the cash flows expected to be collected from acquired loan pools.

For each of the loan portfolios acquired, the cash flow estimates have increased, based on the payment histories and the collection of certain loans, thereby reducing loss expectations of certain loan pools, resulting in adjustments to be spread on a level-yield basis over the remaining expected lives of the loan pools.

For the three months ended June 30, 2020 and 2019, the adjustments increased interest income by $1.5 million and $1.4 million, respectively.

For the six months ended June 30, 2020 and 2019, the adjustments increased interest income by $3.4 million and $2.9 million, respectively.

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

Apart from the yield accretion, the average yield on loans was 4.50% during the three months ended June 30, 2020, compared to 5.27% during the three months ended June 30, 2019, as a result of lower current market rates on adjustable rate loans and new loans originated during the year.

Apart from the yield accretion, the average yield on loans was 4.73% during the six months ended June 30, 2020, compared to 5.27% during the six months ended June 30, 2019.

For the three months ended September 30, 2020 and 2019, the adjustments increased interest income by $1.2 million and $2.3 million, respectively.

For the nine months ended September 30, 2020 and 2019, the adjustments increased interest income by $4.6 million and $5.2 million, respectively.

As of September 30, 2020, the remaining accretable yield adjustment that will affect interest income was $2.9 million.

Of the remaining adjustments affecting interest income, we expect to recognize $932,000 of interest income during the fourth quarter of 2020.

Apart from the yield accretion, the average yield on loans was 4.35% during the three months ended September 30, 2020, compared to 5.20% during the three months ended September 30, 2019, as a result of lower current market rates on adjustable rate loans and new loans originated during the year.

Apart from the yield accretion, the average yield on loans was 4.60% during the nine months ended September 30, 2020, compared to 5.24% during the nine months ended September 30, 2019.

In October 2018, the Company entered into an interest rate swap transaction as part of its ongoing interest rate management strategies to hedge the risk of its floating rate loans.

2 unchanged sentences

The floating rate reset monthly and net settlements of interest due to/from the counterparty also occurred monthly.

To the extent

that the fixed rate exceeded one-month USD-LIBOR, the Company received net interest settlements, which were recorded as interest income on loans.

To the extent that the fixed rate exceeded one-month USD-LIBOR, the Company received net interest settlements, which were recorded as interest income on loans.

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

The Company recorded interest income related to the swap of $2.0 million and $3.6 million, respectively, in the three and six months ended June 30, 2020.

The Company recorded interest income related to the swap of $568,000 and $1.1 million, respectively, in the three and six months ended June 30, 2019.

The Company recorded interest income related to the swap of $2.0 million and $5.6 million, respectively, in the three and nine months ended September 30, 2020.

The Company recorded loan interest income related to this swap transaction of $801,000 and $1.9 million, respectively, in the three and nine months ended September 30, 2019.

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

2 unchanged sentences

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

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

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 values of the swap.

Interest Income – Investments and Other Interest-earning Assets

Interest income on investments increased $667,000 in the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Interest income increased $893,000 as a result of an increase in average balances from $309.2 million during the three months ended June 30, 2019, to $433.4 million during the three months ended June 30, 2020.

Interest income on investments increased $526,000 in the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Interest income increased $736,000 as a result of an increase in average balances from $342.3 million during the three months ended September 30, 2019, to $449.4 million during the three months ended September 30, 2020.

Average balances of securities increased primarily due to purchases of agency multi-family mortgage-backed securities which have a fixed rate of interest with expected lives of six to twelve years.

These purchased securities fit with the Company’s current asset/liability management strategies.

Interest income decreased $226,000 as a result of lower average interest rates from 3.13% during the three months ended June 30, 2019, to 2.86% during the three month period ended June 30, 2020.

Interest income on investments increased in the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Interest income increased $1.8 million as a result of an increase in average balances from $293.9 million during the six months ended June 30, 2019, to $409.2 million during the six months ended June 30, 2020.

Interest income decreased $210,000 as a result of lower average interest rates from 2.94% during the three months ended September 30, 2019, to 2.71% during the three month period ended September 30, 2020.

Interest income on investments increased $2.0 million in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

Interest income increased $2.5 million as a result of an increase in average balances from $310.2 million during the nine months ended September 30, 2019, to $422.7 million during the nine months ended September 30, 2020.

Average balances of securities increased primarily due to purchases of agency multi-family mortgage-backed securities which have a fixed rate of interest with expected lives of six to twelve years.

As noted above, these purchased securities fit with the Company’s current asset/liability management strategies.

Interest income decreased $261,000 as a result of lower average interest rates from 3.20% during the six months ended June 30, 2019, to 3.03% during the six month period ended June 30, 2020.

Interest income on other interest-earning assets decreased $456,000 in the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Interest income decreased $875,000, primarily as a result of the decrease in average interest rates to 0.10% during the three months ended June 30, 2020 compared to 2.45% during the three months ended June 30, 2019.

Interest income decreased $459,000 as a result of lower average interest rates from 3.10% during the nine months ended September 30, 2019, to 2.92% during the nine month period ended September 30, 2020.

Interest income on other interest-earning assets decreased $364,000 in the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Interest income decreased $685,000, primarily as a result of the decrease in average interest rates to 0.09% during the three months ended September 30, 2020 compared to 2.13% during the three months ended September 30, 2019.

Market interest rates earned on balances held at the Federal Reserve Bank were significantly lower in the 2020 period due to significant reductions in the federal funds rate of interest.

Partially offsetting this decrease, interest income increased $419,000, primarily as a result of the increase in average balances from $88.0 million during the three months ended June 30, 2019, to $321.4 million during the three months ended June 30, 2020.

Excess liquidity, after repayments of FHLBank borrowings, was maintained at the Federal Reserve Bank as a result of the significant increase in deposits during the six months ended June 30, 2020.

Interest income on other interest-earning assets decreased $746,000 in the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Interest income decreased $1.4 million, primarily as a result of the decrease in average interest rates to 0.33% during the six months ended June 30, 2020 compared to 2.41% during the six months ended June 30, 2019.

Partially offsetting this decrease, interest income increased $321,000, primarily as a result of the increase in average balances from $79.3 million during the three months ended September 30, 2019, to $270.5 million during the three months ended September 30, 2020.

Excess liquidity, after repayment of FHLBank borrowings, was maintained at the Federal Reserve Bank as a result of the significant increase in deposits during the three months ended September 30, 2020.

Interest income on other interest-earning assets decreased $1.1 million in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

Interest income decreased $2.1 million, primarily as a result of the decrease in average interest rates to 0.24% during the nine months ended September 30, 2020 compared to 2.32% during the nine months ended September 30, 2019.

Market interest rates earned on balances held at the Federal Reserve Bank were significantly lower in the 2020 period due to significant reductions in the federal funds rate of interest.

Partially offsetting this decrease, interest income increased $672,000, primarily as a result of the increase in average balances from $91.2 million during the six months ended June 30, 2019, to $205.8 million during the six months ended June 30, 2020.

Partially offsetting this decrease, interest income increased $1.0 million, primarily as a result of the increase in average balances from $87.2 million during the nine months ended September 30, 2019, to $227.5 million during the nine months ended September 30, 2020.

Total Interest Expense

Total interest expense decreased $3.2 million, or 23.5%, during the three months ended June 30, 2020, when compared with the three months ended June 30, 2019, due to a decrease in interest expense on deposits of $2.5 million, or 21.9%, a decrease in interest expense on short-term borrowings and repurchase agreements of $849,000, or 98.8%, and a decrease in interest expense on subordinated debentures issued to capital trust of $100,000, or 37.5%, partially offset by an increase in interest expense on subordinated notes of $244,000, or 22.3%.

Total interest expense decreased $3.5 million, or 13.0%, during the six months ended June 30, 2020, when compared with the six months ended June 30, 2019, due to a decrease in interest expense on deposits of $2.4 million, or 11.0%, a decrease in interest expense on short-term borrowings and repurchase agreements of $1.1 million, or 63.0%, and a decrease in interest expense on subordinated debentures issued to capital trust of $151,000, or 28.3%, partially offset by an increase in interest expense on subordinated notes of $243,000, or 11.1%.

Total interest expense decreased $4.8 million, or 33.9%, during the three months ended September 30, 2020, when compared with the three months ended September 30, 2019, due to a decrease in interest expense on deposits of $4.7 million, or 39.8%, a decrease in interest expense on short-term borrowings and repurchase agreements of $1.1 million, or 99.3%, and a decrease in interest expense on subordinated debentures issued to capital trust of $125,000, or 49.4%, partially offset by an increase in interest expense on subordinated notes of $1.1 million, or 101.0%.

Total interest expense decreased $8.3 million, or 20.3%, during the nine months ended September 30, 2020, when compared with the nine months ended September 30, 2019, due to a decrease in interest expense on deposits of $7.1 million, or 21.1%, a decrease in interest expense on short-term borrowings and repurchase agreements of $2.2 million, or 77.0%, and a decrease in interest expense on subordinated debentures issued to capital trust of $276,000, or 35.1%, partially offset by an increase in interest expense on subordinated notes of $1.4 million, or 41.1%.

Interest Expense – Deposits

Interest expense on demand deposits decreased $453,000 due to average rates of interest that decreased from 0.52% in the three months ended June 30, 2019 to 0.41% in the three months ended June 30, 2020.

Partially offsetting this decrease, interest expense on demand deposits increased $385,000, due to an increase in average balances from $1.50 billion during the three months ended June 30, 2019 to $1.84 billion during the three months ended June 30, 2020.

Interest expense on demand deposits decreased $893,000 due to average rates of interest that decreased from 0.54% in the three months ended September 30, 2019 to 0.33% in the three months ended September 30, 2020.

Partially offsetting this decrease, interest expense on demand deposits increased $513,000, due to an increase in average balances from $1.50 billion during the three months ended September 30, 2019 to $1.96 billion during the three months ended September 30, 2020.

The Company experienced increased balances in ICS reciprocal balances, money market accounts and certain types of NOW accounts.

Interest expense on demand deposits increased $533,000 due to an increase in average balances from $1.49 billion for the six months ended June 30, 2019 to $1.71 billion for the six months ended June 30, 2020.

Partially offsetting this increase, interest expense on demand deposits decreased $247,000 due to average rates of interest that decreased from 0.50% in the six months ended June 30, 2019 compared to 0.47% in the six months ended June 30, 2020.

Interest expense on time deposits decreased $2.8 million as a result of a decrease in average rates of interest from 2.23% during the three months ended June 30, 2019, to 1.61% during the three months ended June 30, 2020.

Interest expense on time deposits increased $300,000 due to an increase in average balances of time deposits from $1.73 billion during the three months ended June 30, 2019 to $1.79 billion in the three months ended June 30, 2020.

Interest expense on demand deposits decreased $1.1 million due to average rates of interest that decreased from 0.51% in the nine months ended September 30, 2019 to 0.42% in the nine months ended September 30, 2020.

Partially offsetting this decrease, interest expense on demand deposits increased $1.0 million due to an increase in average balances from $1.49 billion for the nine months ended September 30, 2019 to $1.79 billion for the nine months ended September 30, 2020.

The Company experienced increased balances in ICS reciprocal balances, money market accounts and certain types of NOW accounts.

Interest expense on time deposits decreased $3.7 million as a result of a decrease in average rates of interest from 2.24% during the three months ended September 30, 2019, to 1.35% during the three months ended September 30, 2020.

Interest expense on time deposits decreased $668,000 due to a decrease in average balances of time deposits from $1.73 billion during the three months ended September 30, 2019 to $1.60 billion in the three months ended September 30, 2020.

A large portion of the Company’s certificate of deposit portfolio matures within six to eighteen months and therefore reprices fairly quickly;

this is consistent with the portfolio over the past several years.

Older certificates of deposit that renewed or were replaced with new deposits generally resulted in the Company paying a lower rate of interest due to market interest rate decreases during the latter portion of 2019 and through the first half of 2020.

In the three months ended June 30, 2020, the increase in average balances of time deposits was a result of increases in both retail customer time deposits obtained through on-line channels and brokered deposits, which were mainly added in the three months ended March 31, 2020 .

Interest expense on time deposits decreased $3.2 million as a result of a decrease in average rates of interest from 2.17% during the six months ended June 30, 2019, to 1.80% during the six months ended June 30, 2020.

Interest expense on time deposits increased $514,000 due to an increase in average balances of time deposits from $1.70 billion during the six months ended June 30, 2019 to $1.75 billion in the six months ended June 30, 2020.

In the three months ended September 30, 2020, the decrease in average balances of time deposits was a result of decreases in both retail customer time deposits obtained through on-line channels and decreases in brokered deposits, primarily those added through the CDARS program purchased funds .

Interest expense on time deposits decreased $6.9 million as a result of a decrease in average rates of interest from 2.20% during the nine months ended September 30, 2019, to 1.66% during the nine months ended September 30, 2020.

Interest expense on time deposits decreased $168,000 due to a decrease in average balances of time deposits from $1.71 billion during the nine months ended September 30, 2019 to $1.70 billion in the nine months ended September 30, 2020.

A large portion of the Company’s certificate of deposit portfolio matures within six to eighteen months and therefore reprices fairly quickly;

1 unchanged sentence

In the six months ended June 30, 2020, the increase in average balances of time deposits was a result of increases in retail customer time deposits obtained through on-line channels and increases in brokered deposits including those added through the CDARS program purchased funds .

In the nine months ended September 30, 2020, the decrease in average balances of time deposits was a result of decreases in both retail customer time deposits obtained through on-line channels and decreases in brokered deposits, primarily those added through the CDARS program purchased funds .

Interest Expense – FHLBank Advances, Short-term Borrowings and Repurchase Agreements, Subordinated Debentures Issued to Capital Trusts and Subordinated Notes

FHLBank advances were not utilized during the three months ended June 30, 2020 and 2019.

Overnight borrowings from the FHLBank were utilized during the three and six months ended June 30, 2019 and are included in short-term borrowings.

Interest expense on short-term borrowings and repurchase agreements decreased $632,000 due to a decrease in average rates from 1.41% in the three months ended June 30, 2019 to 0.03% in the three months ended June 30, 2020.

FHLBank advances were not utilized during the three and nine months ended September 30, 2020 and 2019.

Overnight borrowings from the FHLBank were utilized during the three and nine months ended September 30, 2019 and are included in short-term borrowings.

Interest expense on short-term borrowings and repurchase agreements decreased $766,000 due to a decrease in average rates from 1.54% in the three months ended September 30, 2019 to 0.02% in the three months ended September 30, 2020.

The decrease was due to a decrease in market interest rates during the period and the lower interest rate charged on overnight FHLBank borrowings.

Interest expense on short-term borrowings and repurchase agreements also decreased $217,000 due to a decrease in average balances from $244.6 million during the three months ended June 30, 2019 to $162.3 million during the three months ended June 30, 2020, which was primarily due to changes in the Company’s funding needs and the mix of funding, which can fluctuate.

Interest expense on short-term borrowings and repurchase agreements decreased $886,000 due to a decrease in average rates from 1.43% in the six months ended June 30, 2019 to 0.62% in the six months ended June 30, 2020.

Interest expense on short-term borrowings and repurchase agreements also decreased $349,000 due to a decrease in average balances from $289.2 million during the three months ended September 30, 2019 to $159.4 million during the three months ended September 30, 2020, which was primarily due to changes in the Company’s funding needs and the mix of funding, which can fluctuate.

Overnight borrowings from the FHLBank were not utilized during the three months ended September 30, 2020.

Interest expense on short-term borrowings and repurchase agreements decreased $1.6 million due to a decrease in average rates from 1.47% in the nine months ended September 30, 2019 to 0.46% in the nine months ended September 30, 2020.

The decrease was due to a decrease in market interest rates during the period and the lower interest rate charged on overnight FHLBank borrowings.

Interest expense on short-term borrowings and repurchase agreements also decreased $235,000 due to a decrease in average balances from $251.3 million during the six months ended June 30, 2019 to $213.7 million during the six months ended June 30, 2020, which was primarily due to changes in the Company’s funding needs and the mix of funding, which can fluctuate.

During the three months ended June 30, 2020, compared to the three months ended June 30, 2019, interest expense on subordinated debentures issued to capital trusts decreased $100,000 due to lower average interest rates.

The average interest rate was 4.16% in the three months ended June 30, 2019 compared to 2.60% in the three months ended June 30, 2020.

The subordinated debentures are variable-rate debentures which bear interest at an average rate of three-month LIBOR plus 1.60%, adjusting quarterly, which was 2.29% at June 30, 2020.

Interest expense on short-term borrowings and repurchase agreements also decreased $612,000 due to a decrease in average balances from $264.1 million during the nine months ended September 30, 2019 to $195.5 million during the nine months ended September 30, 2020, which was primarily due to changes in the Company’s funding needs and the mix of funding, which can fluctuate.

Overnight borrowings from the FHLBank were utilized much less often during the nine months ended September 30, 2020.

During the three months ended September 30, 2020, compared to the three months ended September 30, 2019, interest expense on subordinated debentures issued to capital trusts decreased $125,000 due to lower average interest rates.

The average interest rate was 3.90% in the three months ended September 30, 2019 compared to 1.98% in the three months ended September 30, 2020.

The subordinated debentures are variable-rate debentures which bear interest at an average rate of three-month LIBOR plus 1.60%, adjusting quarterly, which was 1.85% at September 30, 2020.

There was no change in the average balance of the subordinated debentures between the 2019 and the 2020 periods.

During the six months ended June 30, 2020, compared to the six months ended June 30, 2019, interest expense on subordinated debentures issued to capital trusts decreased $151,000 due to lower average interest rates.

The average interest rate was 4.18% in the six months ended June 30, 2019 compared to 2.99% in the six months ended June 30, 2020.

During the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, interest expense on subordinated debentures issued to capital trusts decreased $276,000 due to lower average interest rates.

The average interest rate was 4.08% in the nine months ended September 30, 2019 compared to 2.65% in the nine months ended September 30, 2020.

There was no change in the average balance of the subordinated debentures between the 2019 and the 2020 periods.

4 unchanged sentences

In both cases, these issuance costs are amortized over the expected life of the notes, which is five years from the issuance date, and therefore impact the overall interest expense on the notes.

During the three months ended June 30, 2020, compared to the three months ended June 30, 2019, interest expense on subordinated notes increased $244,000 primarily due to the higher average balances due to the issuance of new notes in the three months ended June 30, 2020.

The increase of $243,000 in the six-month period was for the same reason as stated for the three-month period.

During the three months ended September 30, 2020, compared to the three months ended September 30, 2019, interest expense on subordinated notes increased $1.1 million primarily due to the higher average balances due to the issuance of new notes in the three months ended June 30, 2020.

The increase of $1.3 million in the nine-month period was for the same reason as stated for the three-month period.

Net Interest Income

Net interest income for the three months ended June 30, 2020 decreased $1.4 million to $43.5 million compared to $44.9 million for the three months ended June 30, 2019.

Net interest margin was 3.39% in the three months ended June 30, 2020, compared to 3.97% in the three months ended June 30, 2019, a decrease of 58 basis points, or 14.6%.

Net interest income for the three months ended September 30, 2020 decreased $1.7 million to $44.2 million compared to $45.9 million for the three months ended September 30, 2019.

Net interest margin was 3.36% in the three months ended September 30, 2020, compared to 3.95% in the three months ended September 30, 2019, a decrease of 59 basis points, or 14.9%.

In both three month periods, the Company’s net interest income and margin were positively impacted by the increases in expected cash flows from the FDIC-assisted acquired loan pools and the resulting increase to accretable yield, which were previously discussed in Note 7 of the Notes to Consolidated Financial Statements.

The positive impact of these changes in the three months ended June 30, 2020 and 2019 were increases in interest income of $1.5 million and $1.4 million, respectively, and increases in net interest margin of 12 basis points and 12 basis points, respectively.

Excluding the positive impact of the additional yield accretion, in the three months ended June 30,

2020, net interest margin decreased 58 basis points when compared to the year-ago three month period.

The positive impact of these changes in the three months ended September 30, 2020 and 2019 were increases in interest income of $1.2 million and $2.3 million, respectively, and increases in net interest margin of 9 basis points and 20 basis points, respectively.

Excluding the positive impact of the additional yield accretion, in the three months ended September 30, 2020, net interest margin decreased 48 basis points when compared to the year-ago three month period.

The decrease was partially due to lower market interest rates, which caused lower LIBOR interest rates and generally resulted in lower yields on loans and other interest-earning assets.

The margin decrease also resulted from an increase in average interest-earning assets that were primarily at rates that were much lower than the current portfolio rates.

Increases included $260 million in loans ($120 million of which were PPP loans), $230 million of interest-earning cash equivalents and $125 million of investment securities.

In addition, the subordinated notes issued in June 2020 reduced net interest income by approximately $244,000 in the second quarter of 2020.

Net interest income for the six months ended June 30, 2020 decreased $1.1 million to $88.4 million compared to $89.5 million for the six months ended June 30, 2019.

Net interest margin was 3.61% in the six months ended June 30, 2020, compared to 4.02% in the six months ended June 30, 2019, a decrease of 41 basis points, or 10.2%.

In both six month periods, the Company’s net interest income and margin were positively impacted by the increases in expected cash flows from the FDIC-assisted acquired loan pools and the resulting increase to accretable yield, which were previously discussed in Note 7 of the Notes to Consolidated Financial Statements.

The positive impact of these changes in the six months ended June 30, 2020 and 2019 were increases in interest income of $3.4 million and $2.9 million, respectively, and increases in net interest margin of 14 basis points and 13 basis points, respectively.

Excluding the positive impact of the additional yield accretion, in the six months ended June 30, 2020, net interest margin decreased 42 basis points when compared to the year-ago six month period.

The margin decrease also resulted from an increase in interest-earning assets that were primarily at rates that were much lower than the then-current portfolio rates.

Increases included $311 million in average loan balances ($120 million of which were PPP loans), $191 million in average interest-earning cash equivalents balances and $107 million in average investment securities balances.

In addition, the subordinated notes issued in June 2020 reduced net interest income by approximately $1.1 million in the third quarter of 2020.

Net interest income for the nine months ended September 30, 2020 decreased $2.9 million to $132.6 million compared to $135.5 million for the nine months ended September 30, 2019.

Net interest margin was 3.52% in the nine months ended September 30, 2020, compared to 3.99% in the nine months ended September 30, 2019, a decrease of 47 basis points, or 11.8%.

In both nine month periods, the Company’s net interest income and margin were positively impacted by the increases in expected cash flows from the FDIC-assisted acquired loan pools and the resulting increase to accretable yield, which were previously discussed in Note 7 of the Notes to Consolidated Financial Statements.

The positive impact of these changes in the nine months ended September 30, 2020 and 2019 were increases in interest income of $4.6 million and $5.2 million, respectively, and increases in net interest margin of 12 basis points and 15 basis points, respectively.

Excluding the positive impact of the additional yield accretion, in the nine months ended September 30, 2020, net interest margin decreased 44 basis points when compared to the year-ago nine month period.

The decrease was partially due to lower market interest rates, which caused lower LIBOR interest rates and generally resulted in lower yields on loans and other interest-earning assets.

The margin decrease also resulted from an increase in average interest-earning assets that were primarily at rates that were much lower than the current portfolio rates, as described above.

The Company's overall average interest rate spread decreased 52 basis points, or 14.3%, from 3.64% during the three months ended June 30, 2019 to 3.12% during the three months ended June 30, 2020.

The margin decrease also resulted from an increase in average interest-earning assets that were primarily at rates that were much lower than the then-current portfolio rates, as described above.

The Company's overall average interest rate spread decreased 49 basis points, or 13.6%, from 3.61% during the three months ended September 30, 2019 to 3.12% during the three months ended September 30, 2020.

The decrease was due to a 109 basis point decrease in the weighted average yield on interest-earning assets, partially offset by a 60 basis point decrease in the weighted average rate paid on interest-bearing liabilities.

In comparing the two periods, the yield on loans decreased 95 basis points, the yield on investment securities decreased 23 basis points and the yield on other interest-earning assets decreased 204 basis points.

The rate paid on deposits decreased 44 basis points, the rate paid on short-term borrowings and repurchase agreements decreased 138 basis points, the rate paid on subordinated debentures issued to capital trusts decreased 156 basis points, and the rate paid on subordinated notes increased six basis points.

The Company's overall average interest rate spread decreased 37 basis points, or 10.0%, from 3.69% during the six months ended June 30, 2019 to 3.32% during the six months ended June 30, 2020.

The decrease was due to a 66 basis point decrease in the weighted average yield on interest-earning assets, partially offset by a 29 basis point decrease in the weighted average rate paid on interest-bearing liabilities.

The rate paid on deposits decreased 66 basis points, the rate paid on short-term borrowings and repurchase agreements decreased 152 basis points, the rate paid on subordinated debentures issued to capital trusts decreased 192 basis points, and the rate paid on subordinated notes increased five basis points.

The Company's overall average interest rate spread decreased 42 basis points, or 11.5%, from 3.66% during the nine months ended September 30, 2019 to 3.24% during the nine months ended September 30, 2020.

The decrease was due to an 81 basis point decrease in the weighted average yield on interest-earning assets, partially offset by a 39 basis point decrease in the weighted average rate paid on interest-bearing liabilities.

In comparing the two periods, the yield on loans decreased 67 basis points, the yield on investment securities decreased 18 basis points and the yield on other interest-earning assets decreased 208 basis points.

The rate paid on deposits decreased 25 basis points, the rate paid on short-term borrowings and repurchase agreements decreased 81 basis points, the rate paid on subordinated debentures issued to capital trusts decreased 119 basis points, and the rate paid on subordinated notes decreased one basis point.

The rate paid on deposits decreased 39 basis points, the rate paid on short-term borrowings and repurchase agreements decreased 101 basis points, the rate paid on subordinated debentures issued to capital trusts decreased 143 basis points, and the rate paid on subordinated notes increased one basis point.

For additional information on net interest income components, refer to the "Average Balances, Interest Rates and Yields"

1 unchanged sentence

Provision for Loan Losses and Allowance for Loan Losses

In the first quarter of 2020, pursuant to the recently-enacted CARES Act and guidance from the SEC and FASB, we elected to delay adoption of the new accounting standard (CECL) related to accounting for credit losses.

Our financial statements for the three and six months ended June 30, 2020, are prepared under the existing incurred loss methodology standard for accounting for loan losses.

In the first quarter of 2020, pursuant to the CARES Act and guidance from the SEC and FASB, we elected to delay adoption of the new accounting standard (CECL) related to accounting for credit losses.

Our financial statements for the three and nine months ended September 30, 2020, are prepared under the existing incurred loss methodology standard for accounting for loan losses.

Management records a provision for loan losses in an amount it believes is sufficient to result in an allowance for loan losses that will cover current net charge-offs as well as risks believed to be inherent in the loan portfolio of the Bank.

The amount of provision charged against current income is based on several factors, including, but not limited to, past loss experience, current portfolio mix, actual and potential losses identified in the loan portfolio, economic

conditions, and internal as well as external reviews.

The levels of non-performing assets, potential problem loans, loan loss provisions and net charge-offs fluctuate from period to period and are difficult to predict.

3 unchanged sentences

Management determines which loans are potentially uncollectible, or represent a greater risk of loss, and makes additional provisions to expense, if necessary, to maintain the allowance at a satisfactory level.

The provision for loan losses for the three months ended June 30, 2020 was $6.0 million compared with $1.6 million for the three months ended June 30, 2019.

The provision for loan losses for the six months ended June 30, 2020 was $9.9 million compared with $3.6 million for the six months ended June 30, 2019.

Total net charge-offs were $127,000 and $997,000 for the three months ended June 30, 2020 and 2019, respectively.

During the three months ended June 30, 2020, $115,000 of the $127,000 of net charge-offs were in the consumer category.

Total net charge-offs were $365,000 and $2.7 million for the six months ended June 30, 2020 and 2019, respectively.

During the six months ended June 30, 2020, $382,000 of the $365,000 of net charge-offs were in the consumer category.

The provision for loan losses for the three months ended September 30, 2020 was $4.5 million compared with $2.0 million for the three months ended September 30, 2019.

The provision for loan losses for the nine months ended September 30, 2020 was $14.4 million compared with $5.5 million for the nine months ended September 30, 2019.

Total net charge-offs were $63,000 and $798,000 for the three months ended September 30, 2020 and 2019, respectively.

During the three months ended September 30, 2020, a substantial portion of the net charge-offs were in the consumer category.

Total net charge-offs were $427,000 and $3.5 million for the nine months ended September 30, 2020 and 2019, respectively.

During the nine months ended September 30, 2020, a substantial portion of net charge-offs were in the consumer category.

The Company experienced net recoveries in some of the other loan categories.

We have seen and expect to continue to see rapid reductions in the automobile loan outstanding balance as we determined in February 2019 to cease providing indirect lending services to automobile dealerships.

At June 30, 2020, indirect automobile loans totaled approximately $74 million.

We have seen and expect to continue to see rapid reductions in the outstanding automobile loan balance as we determined in February 2019 to cease providing indirect lending services to automobile dealerships.

At September 30, 2020, indirect automobile loans totaled approximately $60 million.

We expect this balance will be largely paid off in the next two years.

General market conditions and unique circumstances related to individual borrowers and projects contributed to the level of provisions and charge-offs.

General market conditions and unique circumstances related to specific industries and individual projects contributed to the level of provisions and charge-offs.

Collateral and repayment evaluations of all assets categorized as potential problem loans, non-performing loans or foreclosed assets were completed with corresponding charge-offs or reserve allocations made as appropriate.

3 unchanged sentences

Review of the acquired loan portfolio also includes review of financial information, collateral valuations and customer interaction to determine if additional reserves are warranted.

The Bank’s allowance for loan losses as a percentage of total loans, excluding FDIC-assisted acquired loans, was 1.14% and 1.00% at June 30, 2020 and December 31, 2019, respectively.

Management considers the allowance for loan losses adequate to cover losses inherent in the Bank’s loan portfolio at June 30, 2020, based on recent reviews of the Bank’s loan portfolio and current economic conditions.

The Bank’s allowance for loan losses as a percentage of total loans, excluding FDIC-assisted acquired loans, was 1.24% and 1.00% at September 30, 2020 and December 31, 2019, respectively.

Management considers the allowance for loan losses adequate to cover losses inherent in the Bank’s loan portfolio at September 30, 2020, based on recent reviews of the Bank’s loan portfolio and current economic conditions.

If economic conditions were to deteriorate further or management’s assessment of the loan portfolio were to change, it is expected that additional loan loss provisions would be required, thereby adversely affecting the Company’s future results of operations and financial condition.

5 unchanged sentences

As a result of changes in balances and composition of the loan portfolio, changes in economic and market conditions and other factors specific to a borrower’s circumstances, the level of non-performing assets will fluctuate.

Non-performing assets, excluding all FDIC-assisted acquired assets, at June 30, 2020 were $7.6 million, a decrease of $542,000 from $8.2 million at December 31, 2019.

Non-performing assets, excluding all FDIC-assisted acquired assets, as a percentage of total assets were 0.14% at June 30, 2020 and 0.16% at December 31, 2019.

Compared to December 31, 2019, non-performing loans increased $770,000 to $5.3 million at June 30, 2020, and foreclosed assets decreased $1.3 million to $2.3 million at June 30, 2020.

Non-performing one- to four-family residential loans comprised $2.4 million, or 45.2%, of the total non-performing loans at June 30, 2020, an increase of $911,000 from December 31, 2019.

Non-performing commercial business loans comprised $1.2 million, or 22.3%, of the total non-performing loans at June 30, 2020, a decrease of $53,000 from December 31, 2019.

Non-performing consumer loans comprised $1.0 million, or 18.8%, of the total non-performing loans at June 30, 2020, a decrease of $183,000 from December 31, 2019.

Non-performing commercial real estate loans comprised $727,000, or 13.7%, of the total non-performing loans at June 30, 2020, an increase of $95,000 from December 31, 2019.

Non-performing assets, excluding all FDIC-assisted acquired assets, at September 30, 2020 were $5.5 million, a decrease of $2.7 million from $8.2 million at December 31, 2019.

Non-performing assets, excluding all FDIC-assisted acquired assets, as a percentage of total assets were 0.10% at September 30, 2020 and 0.16% at December 31, 2019.

Compared to December 31, 2019, non-performing loans decreased $682,000 to $3.8 million at September 30, 2020, and foreclosed assets decreased $2.0 million to $1.6 million at September 30, 2020.

Non-performing one- to four-family residential loans comprised $2.2 million, or 56.3%, of the total non-performing loans at September 30, 2020, an increase of $683,000 from December 31, 2019.

Non-performing consumer loans comprised $836,000, or 21.8%, of the total non-performing loans at September 30, 2020, a decrease of $339,000 from December 31, 2019.

Non-performing commercial real estate loans comprised $701,000, or 18.3%, of the total non-performing loans at September 30, 2020, an increase of $69,000 from December 31, 2019.

Non-performing commercial business loans comprised $140,000, or 3.6%, of the total non-performing loans at September 30, 2020, a decrease of $1.1 million from December 31, 2019.

Non-performing Loans.

Activity in the non-performing loans category during the six months ended June 30, 2020 was as follows:

Activity in the non-performing loans category during the nine months ended September 30, 2020 was as follows:

Repossessions

1 unchanged sentence

One- to four-family

Subdivision construction

Land development

Commercial construction

One- to four-family

Other residential

Commercial real

Commercial real estate

Commercial business

At June 30, 2020, the non-performing commercial business category included three loans, none of which were added during 2020.

The largest relationship in this category, which was added during 2018, totaled $1.0 million, or 87.5% of the total category.

This relationship is collateralized by an assignment of an interest in a real estate project.

The non-performing one- to four-family residential category included 35 loans, 13 of which were added during the six months ended June 30, 2020.

At September 30, 2020, the non-performing one- to four-family residential category included 29 loans, 12 of which were added during 2020.

The largest relationship in the category totaled $276,000, or 12.8% of the total category.

The non-performing commercial real estate category included three loans, one of which was added during the six months ended June 30, 2020.

The non-performing commercial real estate category included three loans, one of which was added during 2020.

The largest relationship in the category totaled $511,000, or 73.0% of the total category, and is primarily related to a multi-tenant building in Arkansas.

The non-performing consumer category included 94 loans, 24 of which were added during the six months ended June 30, 2020, and the majority of which are indirect used automobile loans.

The non-performing commercial business category included two loans, neither of which was added during 2020.

The previous largest relationship in this category, which was added during 2018 and totaled $1.0 million, paid off during the three months ended September 30, 2020.

The non-performing consumer category included 77 loans, 23 of which were added in 2020, and the majority of which are indirect and used automobile loans.

Potential Problem Loans.

Compared to December 31, 2019, potential problem loans decreased $387,000, or 8.8%, to $4.0 million at June 30, 2020.

This decrease was primarily due to payments of $377,000 on potential problem loans, $119,000 in loans transferred to non-performing loans, $52,000 in loans transferred to foreclosed assets and repossessions, and $70,000 in loan write-downs, partially offset by $231,000 in loans added to potential problem loans.

Compared to December 31, 2019, potential problem loans decreased $753,000, or 17.2%, to $3.6 million at September 30, 2020.

This decrease was primarily due to payments of $1.6 million on potential problem loans, $119,000 in loans transferred to non-performing loans, $59,000 in loans transferred to foreclosed assets and repossessions, and $102,000 in loan write-downs, partially offset by $1.1 million in loans added to potential problem loans.

Potential problem loans are loans which management has identified through routine internal review procedures as having possible credit problems that may cause the borrowers difficulty in complying with the current repayment terms.

2 unchanged sentences

As noted, we experienced an increased level of loan modifications in late March through June 2020;

however loan modifications were much lower at September 30, 2020 compared to June 30, 2020.

In accordance with the CARES Act and guidance from the banking regulatory agencies, we made certain short-term modifications to loan terms to help our customers navigate through the current pandemic situation.

2 unchanged sentences

Further actions on our part, including additions to the allowance for loan losses, could result.

Activity in the potential problem loans categories during the six months ended June 30, 2020, was as follows:

Activity in the potential problem loans categories during the nine months ended September 30, 2020, was as follows:

Repossessions

4 unchanged sentences

Other residential

Commercial real

At June 30, 2020, the commercial real estate category of potential problem loans included two loans, neither of which was added during 2020.

Commercial real estate

Commercial business

At September 30, 2020, the commercial real estate category of potential problem loans included two loans, one of which was added during the three months ended September 30, 2020.

The largest relationship in this category (added during 2018), which totaled $1.8 million, or 76.3% of the total category, is collateralized by a mixed use commercial retail building.

Payments were current on this relationship at June 30, 2020.

The other relationship in the category (added during 2019), which totaled $1.1 million, or 38.4% of the total category, is collateralized by a commercial retail building.

Payments were also current on this relationship at June 30, 2020.

The one- to four-family residential category of potential problem loans included 14 loans, none of which were added during the six months ended June 30, 2020.

The consumer category of potential problem loans included 56 loans, 22 of which were added during the six months ended June 30, 2020.

The other relationship in the category (previously mentioned, added this quarter), which totaled $559,000, or 23.7% of the total category, is collateralized by a restaurant building.

Payments were current on both relationships at September 30, 2020.

The previous other relationship in this category, which was added during 2019 and totaled $1.1 million, paid off during the quarter ended September 30, 2020.

The one- to four-family residential category of potential problem loans included 17 loans.

The consumer category of potential problem loans included 58 loans, the majority of which are indirect and used automobile loans.

Other Real Estate Owned and Repossessions.

Of the total $4.4 million of other real estate owned and repossessions at June 30, 2020, $1.2 million represents the fair value of foreclosed and repossessed assets related to loans acquired in FDIC-assisted transactions and $860,000 represents properties which were not acquired through foreclosure.

Of the total $3.0 million of other real estate owned and repossessions at September 30, 2020, $446,000 represents the fair value of foreclosed and repossessed assets related to loans acquired in FDIC-assisted transactions and $940,000 represents properties which were not acquired through foreclosure.

The foreclosed and other assets acquired in the FDIC-assisted transactions and the properties not acquired through foreclosure are not included in the following table and discussion of other real estate owned and repossessions.

Activity in other real estate owned and repossessions during the six months ended June 30, 2020, was as follows:

Activity in other real estate owned and repossessions during the nine months ended September 30, 2020, was as follows:

(In Thousands)

7 unchanged sentences

Commercial business

At June 30, 2020, the land development category of foreclosed assets included three properties, the largest of which was located in the Branson, Mo.

At September 30, 2020, the land development category of foreclosed assets included two properties, the largest of which was located in the Branson, Mo.

area and had a balance of $675,000, or 62.8% of the total category.

Of the total dollar amount in the land development category of foreclosed assets, 60.2% was located in the Branson, Mo.

area, including the largest property previously mentioned.

The other property, which totaled 37.2% of the total category, was located in the Lake of the Ozarks, Mo.

A portion of a land development property located in the Branson, Mo.

5 unchanged sentences

area was sold during the three months ended June 30, 2020, which reduced the foreclosed assets balance by $260,000.

The one- to four-family residential category of foreclosed assets included one property in Springfield, Mo and had a balance of $291,000.

A one- to four-family residential property located in Lake Ozark, Mo.

was sold during the three months ended March 31, 2020 for $380,000, resulting in a gain of $70,000.

Both one- to four-family residential properties of foreclosed assets sold in 2020.

One sold during the three months ended March 31, 2020 for $380,000, resulting in a gain of $70,000 and the other sold during the three months ended September 30, 2020 for $419,000, resulting in a gain of $128,000.

The amount of additions and sales in the consumer category are due to the volume of repossessions of automobiles, which generally are subject to a shorter repossession process.

1 unchanged sentence

The level of delinquencies and repossessions in indirect and used automobile loans generally decreased in 2018 through 2020.

Loans Classified “Watch”

The Company reviews the credit quality of its loan portfolio using an internal grading system that classifies loans as “Satisfactory,” “Watch,” “Special Mention,” “Substandard” and “Doubtful.” Loans classified as “Watch” are being monitored because of indications of potential weaknesses or deficiencies that may require future classification as special mention or substandard.

In the nine months ended September 30, 2020, loans classified as “Watch” increased $27.0 million, from $37.4 million at December 31, 2019 to $64.4 million at September 30, 2020.

This increase was primarily due to the addition of two unrelated loan relationships involving five total loans.

One relationship totaled $15.5 million and was collateralized by a shopping center project.

The other relationship totaled $10.9 million and was collateralized by multiple indoor recreational facilities.

See Note 6 for further discussion of the Company’s loan grading system.

Non-interest Income

For the three months ended June 30, 2020, non-interest income increased $1.1 million to $8.3 million when compared to the three months ended June 30, 2019, primarily as a result of the following items:

For the three months ended September 30, 2020, non-interest income increased $811,000 to $9.5 million when compared to the three months ended September 30, 2019, primarily as a result of the following items:

Net gains on loan sales :

1 unchanged sentence

The increase was due to an increase in originations of fixed-rate loans during the 2020 period compared to the 2019 period.

Approximately 59.0% of the one- to- four-family residential loan originations in the three months ended September 30, 2020 were refinanced loans.

Fixed rate single-family mortgage loans originated are generally subsequently sold in the secondary market.

Other income :

Other income increased $667,000 compared to the prior year period.

In the 2020 period, the Company recognized approximately $823,000 of fee income related to newly-originated interest rate swaps in the Company’s back-to-back swap program with loan customers and swap counterparties.

Service charges and ATM fees :

Service charges and ATM fees decreased $1.2 million compared to the prior year period.

Service charges, debit card and ATM fees :

Service charges, debit card and ATM fees decreased $927,000 compared to the prior year period.

This decrease was primarily due to a decrease in overdraft and insufficient funds fees on customer accounts.

This was due to both a reduction in usage by customers and a decision near the end of the first quarter of 2020 to waive certain fees for customers in response to the COVID-19 pandemic, with the effects of that decision felt primarily during the three months ended June 30, 2020.

For the six months ended June 30, 2020, non-interest income increased $1.0 million to $15.6 million when compared to the six months ended June 30, 2019, primarily as a result of the following items:

This was due to both a reduction in usage by customers and a decision near the end of the first quarter of 2020 to waive (through August 31, 2020) certain fees for customers in response to the COVID-19 pandemic.

The effects of that decision were felt during the second and third quarters of 2020.

In addition, the Company recorded less in debit card and ATM fees due to a reduction in debit card and ATM usage between the periods.

We also saw a temporary decrease during the three months ended September 30, 2020, in our interchange income due to an adjustment by a vendor in one of their pricing models.

Though a resolution was found and the income reestablished, negotiations continue to solidify longer term interchange stability.

Other income :

Other income decreased $442,000 compared to the prior year period.

In the 2019 period, the Company recognized approximately $510,000 in income related to origination of interest rate swaps in the Company’s back-to-back swap program with loan customers and swap counterparties.

For the nine months ended September 30, 2020, non-interest income increased $1.8 million to $25.1 million when compared to the nine months ended September 30, 2019, primarily as a result of the following items:

Net gains on loan sales :

1 unchanged sentence

The increase was due to an increase in originations of fixed-rate loans during the 2020 period compared to the 2019 period.

Approximately 61.2% of the one- to- four-family residential loan originations in the nine months ended September 30, 2020 were refinanced loans.

As noted above, fixed rate single-family mortgage loans originated are generally subsequently sold in the secondary market.

1 unchanged sentence

Other income increased $452,000 compared to the prior year period.

In the 2020 period, the Company recognized approximately $1.3 million of fee income related to newly-originated interest rate swaps in the Company’s back-to-back swap program with loan customers and swap counterparties.

The Company also recognized approximately $441,000 in income related to the exit of certain tax credit partnerships during the six months ended June 30, 2020.

In the 2020 period, the Company recognized approximately $658,000 of additional fee income related to newly-originated interest rate swaps in the Company’s back-to-back swap program with loan customers and swap counterparties when compared to the 2019 period.

The Company also recognized approximately $541,000 in income related to the exit of certain tax credit partnerships during the nine months ended September 30, 2020.

In the 2019 period, the Company recognized gains totaling $677,000 from the sale of, or recovery of, receivables and assets that were acquired several years prior in FDIC-assisted transactions, with no similar sales or recoveries in the current period.

Service charges and ATM fees :

Service charges and ATM fees decreased $1.4 million compared to the prior year period.

Service charges, debit card and ATM fees :

Service charges, debit card and ATM fees decreased $2.3 million compared to the prior year period.

This decrease was primarily due to a decrease in overdraft and insufficient funds fees on customer accounts.

As noted above, a decision to waive certain fees for customers was made in response to the COVID-19 pandemic during the first quarter 2020 and customer usage decreased in the 2020 period.

Also during the first quarter of 2020, $200,000 in additional expenses netted into ATM fee income during the conversion to a new debit card processing system.

As noted above, a decision to waive (through August 31, 2020) certain fees for customers was made in response to the COVID-19 pandemic.

In addition, the Company recorded less in debit card and ATM fees due to a reduction in debit card and ATM usage between the periods.

Also, during the first quarter of 2020, $200,000 in additional expenses were netted against ATM fee income due to the conversion to a new debit card processing system.

We also saw a temporary decrease during the three months ended September 30, 2020, in our interchange income due to an adjustment by a vendor in one of their pricing models.

Though a resolution was found and the income reestablished, negotiations continue to solidify longer term interchange stability.

Gain (loss) on derivative interest rate products :

The net loss on derivative interest rate products increased $255,000 compared to the net loss in the prior year period.

In the 2020 period, the Company recognized a $514,000 decrease in the net fair value related to interest rate swaps in the Company’s back-to-back swap program with loan customers and swap counterparties.

As market interest rates fall this generally decreases the net fair value of these back-to-back swaps.

In the 2020 period, the Company recognized a $424,000 decrease in the net fair value related to interest rate swaps in the Company’s back-to-back swap program with loan customers and swap counterparties compared to a $169,000 decrease in the 2019 period.

As market interest rates fall this generally decreases the net fair value of

these back-to-back swaps.

This is a non-cash item as there was no required settlement of this amount between the Company and its swap counterparties.

Non-interest Expense

For the three months ended June 30, 2020, non-interest expense increased $966,000 to $29.3 million when compared to the three months ended June 30, 2019, primarily as a result of the following items:

For the three months ended September 30, 2020, non-interest expense increased $3.3 million to $32.0 million when compared to the three months ended September 30, 2019, primarily as a result of the following items:

Salaries and employee benefits :

Salaries and employee benefits increased $2.9 million from the prior year period.

The increase was primarily due to annual employee compensation merit increases and increased incentives in lending and operations areas.

Approximately half of the compensation increase was in the mortgage division where we have added staff and variable compensation increased due to significant increases in new mortgage loan originations, much of which is sold in the secondary market as noted above

The increase was partially due to annual employee compensation merit increases and increased incentives in the mortgage division, where we have added staff and variable compensation increased due to significant increases in new mortgage loan originations, much of which is sold in the secondary market as noted above.

Additionally, in August 2020, the Company paid a special cash bonus to all employees totaling $1.1 million in response to the ongoing impacts of the COVID-19 pandemic.

Net occupancy expense :

1 unchanged sentence

This was primarily related to increased depreciation on new ATM/ITMs and ATM operating software upgrades implemented during the fourth quarter of 2019.

Also included in net occupancy expense for the 2020 quarter are COVID-19-related expenses for various items such as cleaning services, equipment, costs to set up remote work sites and other items.

Advertising :

Advertising expense decreased $405,000 compared to the prior year period.

This decrease was primarily due to activities related to sponsorship agreements being halted as a result of the COVID-19 pandemic.

Other operating expenses :

Other operating expenses decreased $187,000 from the prior year period.

This decrease was primarily due to travel restrictions during the 2020 period.

Total travel and entertainment for the three months ended June 30, 2020 was $77,000 compared to $462,000 during the prior year period.

This decrease was partially offset with small increases in other expense categories.

In response to the COVID-19 pandemic, the Company made contributions of $48,000 during the current year period to various organizations that assist the communities the Company serves.

Insurance expense decreased $128,000 compared to the prior year period.

This decrease was primarily due to a decrease in FDIC deposit insurance premiums.

The Bank had a credit with the FDIC for a portion of premiums previously paid to the deposit insurance fund.

The remaining credit offset a portion of the deposit insurance premium due for the three months ended June 30, 2020.

For the six months ended June 30, 2020, non-interest expense increased $3.3 million to $60.2 million when compared to the six months ended June 30, 2019, primarily as a result of the following items:

Also included in net occupancy expense for the 2020 quarter are COVID-19-related expenses for various items such as cleaning services, equipment, costs of remote work sites and other items.

Insurance expense increased $414,000 compared to the prior year period.

This increase was primarily due to an increase in FDIC deposit insurance premiums.

In the 2019 period, the Bank had a credit with the FDIC for a portion of premiums previously paid to the deposit insurance fund.

The deposit insurance fund balance was sufficient to cause no premium to be due for the three months ended September 30, 2019.

Expense on other real estate owned and repossessions :

Expense on other real estate owned and repossessions decreased $404,000 compared to the prior year period primarily due to sales of other assets and higher expenses related to certain foreclosed assets during the prior year period.

During the 2019 period, expenses related to certain foreclosed assets totaled approximately $572,000, while expenses in the 2020 period totaled approximately $278,000.

For the nine months ended September 30, 2020, non-interest expense increased $6.5 million to $92.2 million when compared to the nine months ended September 30, 2019, primarily as a result of the following items:

Salaries and employee benefits :

Salaries and employee benefits increased $3.9 million in the six months ended June 30, 2020 compared to the prior year period.

The increase was primarily due to annual employee compensation merit increases and increased incentives in lending, including mortgage lending activities as noted above, and operations areas.

Salaries and employee benefits increased $6.8 million in the nine months ended September 30, 2020 compared to the prior year period.

The increase was partially due to annual employee compensation merit increases and increased incentives in lending, including mortgage lending activities as noted above, and operations areas.

Additionally, in March 2020, the Company approved a special cash bonus to all employees totaling $1.1 million in response to the COVID-19 pandemic.

In August 2020, the Company paid a second special cash bonus to all employees totaling $1.1 million in response to the pandemic.

Net occupancy expense :

Net occupancy expense increased $623,000 in the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Net occupancy expense increased $1.2 million in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

This was primarily related to increased depreciation on new ATM/ITMs and ATM operating software upgrades implemented during the fourth quarter of 2019.

Also included in net occupancy expense for the 2020 period are COVID-19-related expenses for various items such as cleaning services, equipment, costs to set up remote work sites and other items.

Insurance expense decreased $412,000 compared to the prior year period.

This decrease was primarily due to a decrease in FDIC deposit insurance premiums.

The Bank had a credit with the FDIC for a portion of premiums previously paid to the deposit insurance fund leaving no premium being due for the three months ended March 31, 2020.

The remaining credit mostly offset the deposit insurance premium due during the three months ended June 30, 2020.

Also included in net occupancy expense for the 2020 period are COVID-19-related expenses for various items such as cleaning services, equipment, costs to set up and operate remote work sites and other items.

Advertising :

4 unchanged sentences

During the 2019 period, valuation write-downs of certain foreclosed assets totaled approximately $724,000, while valuation write-downs in the 2020 period totaled approximately $481,000.

The Company’s efficiency ratio for the three months ended June 30, 2020, was 56.75% compared to 54.50% for the same period in 2019.

The efficiency ratio for the six months ended June 30, 2020, was 57.84% compared to 54.62% for the same period in 2019.

The higher efficiency ratio in the 2020 three and six month periods were primarily due to an increase in non-interest expense.

Despite this increase in non-interest expense, the Company’s ratio of non-interest expense to average assets was 2.17% and 2.32% for the three and six months ended June 30, 2020, respectively, compared to 2.35% and 2.38% for the three and six months ended June 30, 2019, respectively.

The decreases in the current three and six month ratios were primarily due to an increase in average assets in the 2020 periods compared to the 2019 periods.

Average assets for the three months ended June 30, 2020, increased $581.6 million, or 12.1%, from the three months ended June 30, 2019, primarily due to increases in loans receivable, investment securities and interest bearing cash balances at the Federal Reserve Bank.

Average assets for the six months ended June 30, 2020, increased $410.2 million, or 8.6%, from the six months ended June 30, 2019, primarily due to increases in loans receivable, investment securities and interest bearing cash balances at the Federal Reserve Bank.

The Company’s efficiency ratio for the three months ended September 30, 2020, was 59.64% compared to 52.63% for the same period in 2019.

The efficiency ratio for the nine months ended September 30, 2020, was 58.45% compared to 53.94% for the same period in 2019.

The higher efficiency ratio in the 2020 three and nine month periods were primarily due to an

increase in non-interest expense, along with a small decrease in total revenue.

Despite this increase in non-interest expense, the Company’s ratio of non-interest expense to average assets was 2.34% and 2.33% for the three and nine months ended September 30, 2020, respectively, compared to 2.34% and 2.37% for the three and nine months ended September 30, 2019, respectively.

The decrease in the current nine month ratio was primarily due to an increase in average assets in the 2020 period compared to the 2019 period, generally offset by the increase in non-interest expense.

Average assets for the three months ended September 30, 2020, increased $552.9 million, or 11.3%, from the three months ended September 30, 2019, primarily due to increases in loans receivable, investment securities and interest bearing cash balances at the Federal Reserve Bank.

Average assets for the nine months ended September 30, 2020, increased $457.9 million, or 9.5%, from the nine months ended September 30, 2019, primarily due to increases in loans receivable, investment securities and interest bearing cash balances at the Federal Reserve Bank.

Provision for Income Taxes

For the three months ended June 30, 2020 and 2019, the Company's effective tax rate was 19.3% and 16.8%, respectively.

For the six months ended June 30, 2020 and 2019, the Company's effective tax rate was 17.4% and 17.7%, respectively.

These effective rates were lower than the statutory federal tax rate of 21%, due primarily to the utilization of certain investment tax credits and to tax-exempt investments and tax-exempt loans, which reduced the Company’s effective tax rate.

For the three months ended September 30, 2020 and 2019, the Company's effective tax rate was 21.5% and 17.5%, respectively.

For the nine months ended September 30, 2020 and 2019, the Company's effective tax rate was 18.8% and 17.6%, respectively.

Except for the three months ended September 30, 2020, these effective rates were lower than the statutory federal tax rate of 21%, due primarily to the utilization of certain investment tax credits and to tax-exempt investments and tax-exempt loans, which reduced the Company’s effective tax rate.

The Company’s effective tax rate may fluctuate in future periods as it is impacted by the level and timing of the Company’s utilization of tax credits and the level of tax-exempt investments and loans and the overall level of pre-tax income.

The Company's effective income tax rate is currently expected to remain below the statutory rate due primarily to the factors noted above.

The Company currently expects its effective tax rate (combined federal and state) to be approximately 16.0% to 17.5% for the full year of 2020 and in future years.

The Company's effective income tax rate is currently generally expected to remain below the statutory rate due primarily to the factors noted above.

In 2020, the Company’s state income tax expenses have been higher than normal in various states due to the recognition of income for tax purposes related to the gain recognized on the termination of the interest rate swap.

State tax expense estimates have evolved throughout the year as taxable income and apportionment between states has been analyzed.

The Company currently expects its effective tax rate (combined federal and state) to be approximately 18.5% to 19.5% for the full year of 2020 and 17.5% to 18.5% in future years.

Average Balances, Interest Rates and Yields

3 unchanged sentences

Interest income on loans includes the amortization of net loan fees which were deferred in accordance with accounting standards.

Net fees included in interest income were $1.5 million and $1.0 million for the three months ended June 30, 2020 and 2019, respectively.

Net fees included in interest income were $2.6 million and $2.1 million for the six months ended June 30, 2020 and 2019, respectively.

Net fees included in interest income were $1.7 million and $1.0 million for the three months ended September 30, 2020 and 2019, respectively.

Net fees included in interest income were $4.4 million and $3.1 million for the nine months ended September 30, 2020 and 2019, respectively.

Tax-exempt income was not calculated on a tax equivalent basis.

The table does not reflect any effect of income taxes.

September 30,

Three Months Ended

June 30, 2020

September 30, 2020

Three Months Ended

June 30, 2019

September 30, 2019

(Dollars in Thousands)

1 unchanged sentence

Loans receivable:

One- to four-family

One- to four-family residential

Other residential

10 unchanged sentences

Interest-bearing liabilities:

Interest-bearing demand

Interest-bearing demand and savings

Time deposits

1 unchanged sentence

Short-term borrowings,

repurchase agreements

and other interest-bearing

repurchase agreements and

other interest-bearing

Subordinated debentures

1 unchanged sentence

Subordinated notes

Total interest-bearing

Non-interest-bearing

Total interest-bearing liabilities

Non-interest-bearing liabilities:

Demand deposits

2 unchanged sentences

Stockholders’ equity

Total liabilities and

stockholders’ equity

Total liabilities and stockholders’ equity

Net interest income:

1 unchanged sentence

Net interest margin*

Average interest-earning

assets to average interest-

bearing liabilities

Average interest-earning assets

to average interest- bearing

Defined as the Company’s net interest income divided by total average interest-earning assets.

Of the total average balances of investment securities, average tax-exempt investment securities were $64.0 million and $43.5 million for the three months ended June 30, 2020 and 2019, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $20.0 million and $21.0 million for the three months ended June 30, 2020 and 2019, respectively.

Interest income on tax-exempt assets included in this table was $538,000 and $614,000 for the three months ended June 30, 2020 and 2019, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $493,000 and $553,000 for the three months ended June 30, 2020 and 2019, respectively.

The yield on loans at June 30, 2020 does not include the impact of the accretable yield (income) on loans acquired in the FDIC-assisted transactions.

See “Net Interest Income” for a discussion of the effect on results of operations for the three months ended June 30, 2020.

Six Months Ended

June 30, 2020

Six Months Ended

June 30, 2019

Of the total average balances of investment securities, average tax-exempt investment securities were $67.8 million and $39.6 million for the three months ended September 30, 2020 and 2019, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $19.8 million and $20.5 million for the three months ended September 30, 2020 and 2019, respectively.

Interest income on tax-exempt assets included in this table was $570,000 and $660,000 for the three months ended September 30, 2020 and 2019, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $537,000 and $601,000 for the three months ended September 30, 2020 and 2019, respectively.

The yield on loans at September 30, 2020 does not include the impact of the accretable yield (income) on loans acquired in the FDIC-assisted transactions.

See “Net Interest Income” for a discussion of the effect on results of operations for the three months ended September 30, 2020.

September 30,

Nine Months Ended

September 30, 2020

Nine Months Ended

September 30, 2019

(Dollars in Thousands)

1 unchanged sentence

Loans receivable:

One- to four-family

One- to four-family residential

Other residential

10 unchanged sentences

Interest-bearing liabilities:

Interest-bearing demand

Interest-bearing demand and

Time deposits

Total deposits

Short-term borrowings,

repurchase agreements

and other interest-bearing

Short-term borrowings, repurchase

agreements and other interest-

bearing liabilities

Subordinated debentures

1 unchanged sentence

Subordinated notes

Total interest-bearing

Non-interest-bearing

Total interest-bearing liabilities

Non-interest-bearing liabilities:

Demand deposits

2 unchanged sentences

Stockholders’ equity

Total liabilities and

stockholders’ equity

Total liabilities and stockholders’

Net interest income:

1 unchanged sentence

Net interest margin*

Average interest-earning

assets to average interest-

bearing liabilities

Average interest-earning assets

to average interest-bearing

Defined as the Company’s net interest income divided by total average interest-earning assets.

Of the total average balances of investment securities, average tax-exempt investment securities were $48.3 million and $45.7 million for the six months ended June 30, 2020 and 2019, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $20.7 million and $21.4 million for the six months ended June 30, 2020 and 2019, respectively.

Interest income on tax-exempt assets included in this table was $1.1 million and $1.2 million for the six months ended June 30, 2020 and 2019, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $971,000 and $1.1 million for the six months ended June 30, 2020 and 2019, respectively.

The yield on loans at June 30, 2020 does not include the impact of the accretable yield (income) on loans acquired in the FDIC-assisted transactions.

See “Net Interest Income” for a discussion of the effect on results of operations for the six months ended June 30, 2020.

Of the total average balances of investment securities, average tax-exempt investment securities were $54.8 million and $43.6 million for the nine months ended September 30, 2020 and 2019, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $20.4 million and $21.1 million for the nine months ended September, 2020 and 2019, respectively.

Interest income on tax-exempt assets included in this table was $1.6 million and $1.9 million for the nine months ended September 30, 2020 and 2019, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $1.5 million and $1.7 million for the nine months ended September 30, 2020 and 2019, respectively.

The yield on loans at September 30, 2020 does not include the impact of the accretable yield (income) on loans acquired in the FDIC-assisted transactions.

See “Net Interest Income” for a discussion of the effect on results of operations for the nine months ended September 30, 2020.

Rate/Volume Analysis

3 unchanged sentences

Tax-exempt income was not calculated on a tax equivalent basis.

Three Months Ended June 30,

Three Months Ended September 30,

Increase (Decrease)

14 unchanged sentences

Net interest income

Six Months Ended June 30,

Nine Months Ended September 30,

Increase (Decrease)

15 unchanged sentences

Liquidity is a measure of the Company's ability to generate sufficient cash to meet present and future financial obligations in a timely manner through either the sale or maturity of existing assets or the acquisition of additional funds through liability management.

These obligations include the credit needs of customers, funding deposit

withdrawals, and the day-to-day operations of the Company.

These obligations include the credit needs of customers, funding deposit withdrawals, and the day-to-day operations of the Company.

Liquid assets include cash, interest-bearing deposits with financial institutions and certain investment securities and loans.

As a result of the Company’s management of the ability to generate liquidity primarily through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its borrowers’ credit needs.

At June 30, 2020, the Company had commitments of approximately $186.7 million to fund loan originations, $1.12 billion of unused lines of credit and unadvanced loans, and $16.6 million of outstanding letters of credit.

At September 30, 2020, the Company had commitments of approximately $145.3 million to fund loan originations, $1.09 billion of unused lines of credit and unadvanced loans, and $17.9 million of outstanding letters of credit.

Loan commitments and the unfunded portion of loans at the dates indicated were as follows (in thousands):

September 30,

Closed non-construction loans with unused

14 unchanged sentences

The Company has from time to time chosen not to pay rates on deposits as high as the rates paid by certain of its competitors and, when believed to be appropriate, supplements deposits with less expensive alternative sources of funds.

At June 30, 2020, the Company had these available secured lines and on-balance sheet liquidity:

At September 30, 2020, the Company had these available secured lines and on-balance sheet liquidity:

Federal Home Loan Bank line

7 unchanged sentences

Statements of Cash Flows.

During both the six months ended June 30, 2020 and 2019, the Company had positive cash flows from operating activities, negative cash flows from investing activities and positive cash flows from financing activities.

During both the nine months ended September 30, 2020 and 2019, the Company had positive cash flows from operating activities, negative cash flows from investing activities and positive cash flows from financing activities.

Cash flows from operating activities for the periods covered by the Statements of Cash Flows have been primarily related to changes in accrued and deferred assets, credits and other liabilities, the provision for loan losses, depreciation and amortization, realized gains on sales of loans and the amortization of deferred loan origination fees and discounts (premiums) on loans and investments, all of which are non-cash or non-operating adjustments to operating cash flows.

Net income adjusted for non-cash and non-operating items and the origination and sale of loans held for sale were the primary source of cash flows from operating activities.

Operating activities provided cash flows of $35.4 million and $39.2 million during the six months ended June 30, 2020 and 2019, respectively.

During the six months ended June 30, 2020, investing activities used cash of $259.5 million, primarily due to the net origination of loans, the purchase of investment securities and the purchase of equipment, partially offset by cash proceeds from the termination of interest rate derivatives, the sale of other real estate owned and payments received on investment securities.

Investing activities in the 2019 period used cash of $180.3 million, primarily due to the

purchase of loans and the net origination of loans, the purchase of investment securities and the purchase of equipment, partially offset by the sale of other real estate owned, the sale of investment securities and payments received on investment securities.

Net income adjusted for non-cash and non-operating items and the origination and sale of

loans held for sale were the primary source of cash flows from operating activities.

Operating activities provided cash flows of $35.8 million and $64.2 million during the nine months ended September 30, 2020 and 2019, respectively.

During the nine months ended September 30, 2020, investing activities used cash of $278.9 million, primarily due to the net origination of loans, the purchase of investment securities and the purchase of equipment, partially offset by cash proceeds from the termination of interest rate derivatives, the sale of other real estate owned and payments received on investment securities.

Investing activities in the 2019 period used cash of $264.5 million, primarily due to the purchase of loans and the net origination of loans, the purchase of investment securities and the purchase of equipment, partially offset by the sale of other real estate owned, the sale of investment securities and payments received on investment securities.

Changes in cash flows from financing activities during the periods covered by the Statements of Cash Flows are due to changes in deposits after interest credited, changes in FHLBank advances and changes in short-term borrowings, as well as advances from borrowers for taxes and insurance, dividend payments to stockholders, purchases of the Company’s common stock and the exercise of common stock options.

Financing activities provided cash of $477.6 million and $119.7 million during the six months ended June 30, 2020 and 2019, respectively.

In the 2020 six-month period, financing activities provided cash primarily as a result of net increases in checking account balances, partially offset by decreases in short-term borrowings, dividends paid to stockholders and the purchase of the Company’s common stock.

Financing activities provided cash of $361.2 million and $188.5 million during the nine months ended September 30, 2020 and 2019, respectively.

In the 2020 nine-month period, financing activities provided cash primarily as a result of net increases in checking account balances, partially offset by decreases in short-term borrowings, decreases in time deposits, dividends paid to stockholders and the purchase of the Company’s common stock.

Also in the 2020 period, cash was provided by the issuance of subordinated notes.

In the 2019 six-month period, financing activities provided cash primarily as a result of net increases in checking account balances and certificates of deposit, partially offset by decreases in short-term borrowings and dividends paid to stockholders.

In the 2019 nine-month period, financing activities provided cash primarily as a result of net increases in checking account balances and certificates of deposit, partially offset by decreases in short-term borrowings and dividends paid to stockholders.

Capital Resources

Management continuously reviews the capital position of the Company and the Bank to ensure compliance with minimum regulatory requirements, as well as to explore ways to increase capital either by retained earnings or other means.

At June 30, 2020, the Company's total stockholders' equity and common stockholders’ equity were each $626.7 million, or 11.3% of total assets, equivalent to a book value of $44.50 per common share.

At September 30, 2020, the Company's total stockholders' equity and common stockholders’ equity were each $624.6 million, or 11.5% of total assets, equivalent to a book value of $45.00 per common share.

As of December 31, 2019, total stockholders’ equity and common stockholders’ equity were each $603.1 million, or 12.0% of total assets, equivalent to a book value of $42.29 per common share.

At June 30, 2020, the Company’s tangible common equity to tangible assets ratio was 11.1%, compared to 11.9% at December 31, 2019 (See Non-GAAP Financial Measures below).

Included in stockholders’ equity at June 30, 2020 and December 31, 2019, were unrealized gains (net of taxes) on the Company’s available-for-sale investment securities totaling $26.0 million and $9.0 million, respectively.

At September 30, 2020, the Company’s tangible common equity to tangible assets ratio was 11.4%, compared to 11.9% at December 31, 2019 (See Non-GAAP Financial Measures below).

Included in stockholders’ equity at September 30, 2020 and December 31, 2019, were unrealized gains (net of taxes) on the Company’s available-for-sale investment securities totaling $24.1 million and $9.0 million, respectively.

This increase in unrealized gains primarily resulted from lower market interest rates, which increased the fair value of the investment securities.

Also included in stockholders’ equity at June 30, 2020, were realized gains (net of taxes) on the Company’s cash flow hedge (interest rate swap), which was terminated in March 2020, totaling $33.1 million.

Also included in stockholders’ equity at September 30, 2020, were realized gains (net of taxes) on the Company’s cash flow hedge (interest rate swap), which was terminated in March 2020, totaling $31.5 million.

This amount, plus associated deferred taxes, is expected to be accreted to interest income over the remaining term of the original interest rate swap contract, which was to end in October 2025.

At June 30, 2020, the remaining pre-tax amount to be recorded in interest income was $42.8 million.

At September 30, 2020, the remaining pre-tax amount to be recorded in interest income was $40.8 million.

The net effect on total stockholders’ equity over time will be no impact as the reduction of this realized gain will be offset by an increase in retained earnings (as the interest income flows through pre-tax income).

3 unchanged sentences

To be considered "well capitalized,"

banks must have a minimum common equity Tier 1 capital ratio of 6.50%, a minimum Tier 1 risk-based capital ratio of 8.00%, a minimum total risk-based capital ratio of 10.00%, and a minimum Tier 1 leverage ratio of 5.00%.

On June 30, 2020, the Bank's common equity Tier 1 capital ratio was 13.1%, its Tier 1 capital ratio was 13.1%, its total capital ratio was 14.2% and its Tier 1 leverage ratio was 11.5%.

As a result, as of June 30, 2020, the Bank was well capitalized, with capital ratios in excess of those required to qualify as such.

banks must have a minimum common equity Tier 1 capital ratio of

6.50%, a minimum Tier 1 risk-based capital ratio of 8.00%, a minimum total risk-based capital ratio of 10.00%, and a minimum Tier 1 leverage ratio of 5.00%.

On September 30, 2020, the Bank's common equity Tier 1 capital ratio was 13.3%, its Tier 1 capital ratio was 13.3%, its total capital ratio was 14.4% and its Tier 1 leverage ratio was 11.5%.

As a result, as of September 30, 2020, the Bank was well capitalized, with capital ratios in excess of those required to qualify as such.

On December 31, 2019, the Bank's common equity Tier 1 capital ratio was 13.1%, its Tier 1 capital ratio was 13.1%, its total capital ratio was 14.0% and its Tier 1 leverage ratio was 12.3%.

1 unchanged sentence

The FRB has established capital regulations for bank holding companies that generally parallel the capital regulations for banks.

On June 30, 2020, the Company's common equity Tier 1 capital ratio was 12.5%, its Tier 1 capital ratio was 13.0%, its total capital ratio was 17.2% and its Tier 1 leverage ratio was 11.4%.

On September 30, 2020, the Company's common equity Tier 1 capital ratio was 11.9%, its Tier 1 capital ratio was 12.4%, its total capital ratio was 16.7% and its Tier 1 leverage ratio was 10.7%.

To be considered well capitalized, a bank holding company must have a Tier 1 risk-based capital ratio of at least 6.00% and a total risk-based capital ratio of at least 10.00%.

As of June 30, 2020, the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such.

As of September 30, 2020, the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such.

On December 31, 2019, the Company's common equity Tier 1 capital ratio was 12.0%, its Tier 1 capital ratio was 12.5%, its total capital ratio was 15.0% and its Tier 1 leverage ratio was 11.8%.

6 unchanged sentences

Business--Government Supervision and Regulation-Capital” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

During the three months ended June 30, 2020, the Company declared common stock cash dividends of $0.34 per share, or 37% of net income per diluted common share for that three month period, and paid common stock cash dividends of $0.34 per share (which was declared in March 2020).

During the three months ended June 30, 2019, the Company declared a common stock cash dividend of $0.32 per share, or 25% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.32 per share (which was declared in March 2019).

During the six months ended June 30, 2020, the Company declared common stock cash dividends of $1.68 per share, or 85% of net income per diluted common share for that six month period, and paid common stock cash dividends of $1.68 per share ($0.34 of which was declared in December 2019).

The total dividends declared during the six months ended June 30, 2020, consisted of regular cash dividends of $0.68 per share and a special cash dividend of $1.00 per share.

During the six months ended June 30, 2019, the Company declared common stock cash dividends of $1.39 per share, or 55% of net income per diluted common share for that six month period, and paid a common stock cash dividend of $1.39 per share.

The total dividends declared during the six months ended June 30, 2019, consisted of regular cash dividends of $0.64 per share and a special cash dividend of $0.75 per share.

During the three months ended September 30, 2020, the Company declared a common stock cash dividend of $0.34 per share, or 35% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.34 per share (which was declared in June 2020).

During the three months ended September 30, 2019, the Company declared a common stock cash dividend of $0.34 per share, or 25% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.32 per share (which was declared in June 2019).

During the nine months ended September 30, 2020, the Company declared common stock cash dividends of $2.02 per share, or 69% of net income per diluted common share for that nine month period, and paid common stock cash dividends of $2.02 per share ($0.34 of which was declared in December 2019).

The total dividends declared during the nine months ended September 30, 2020, consisted of regular cash dividends of $1.02 per share and a special cash dividend of $1.00 per share.

During the nine months ended September 30, 2019, the Company declared common stock cash dividends of $1.73 per share, or 44% of net income per diluted common share for that nine month period, and paid common stock cash dividends of $1.71 per share.

The total dividends declared during the nine months ended September 30, 2019, consisted of regular cash dividends of $0.98 per share and a special cash dividend of $0.75 per share.

The Board of Directors meets regularly to consider the level and the timing of dividend payments.

The $0.34 per share dividend declared but unpaid as of June 30, 2020, was paid to stockholders in July 2020.

The $0.34 per share dividend declared but unpaid as of September 30, 2020, was paid to stockholders on October 13, 2020.

Common Stock Repurchases and Issuances .

The Company has been in various buy-back programs since May 1990.

During the three months ended June 30, 2020, the Company issued 600 shares of stock at an average price of $23.19 per share to cover stock option exercises and did not repurchase any shares of its common stock.

During the three months ended June 30, 2019, the Company issued 30,858 shares of stock at an average price of $28.50 per share to cover stock option exercises and did not repurchase any shares of its common stock.

During the six months ended June 30, 2020, the Company issued 7,075 shares of stock at an average price of $36.36 per share to cover stock option exercises and repurchased 183,707 shares of its common stock at an average price of $44.36 per share.

During the six months ended June 30, 2019, the Company issued 66,458 shares of stock at an average price of $29.06 per share to cover stock option exercises and repurchased 16,040 shares of its common stock at an average price of $52.93 per share.

During the three months ended September 30, 2020, the Company issued 2,550 shares of stock at an average price of $26.53 per share to cover stock option exercises and repurchased 206,400 shares of its common stock at an average price of $37.39 per share.

During the three months ended September 30, 2019, the Company issued 12,438 shares of stock at an average price of $34.28 per share to cover stock option exercises and did not repurchase any

shares of its common stock.

During the nine months ended September 30, 2020, the Company issued 9,625 shares of stock at an average price of $33.76 per share to cover stock option exercises and repurchased 390,107 shares of its common stock at an average price of $40.67 per share.

During the nine months ended September 30, 2019, the Company issued 78,896 shares of stock at an average price of $29.89 per share to cover stock option exercises and repurchased 16,040 shares of its common stock at an average price of $52.93 per share.

On April 18, 2018, the Company's Board of Directors authorized management to repurchase up to 500,000 shares of the Company's outstanding common stock, under a program of open market purchases or privately negotiated transactions.

The program does not have an expiration date.

Management has historically utilized stock buy-back programs from time to time as long as management believed that repurchasing the stock would contribute to the

overall growth of shareholder value.

Management has historically utilized stock buy-back programs from time to time as long as management believed that repurchasing the stock would contribute to the overall growth of shareholder value.

The number of shares of stock that will be repurchased at any particular time and the prices that will be paid are subject to many factors, several of which are outside of the control of the Company.

The primary factors, however, are the number of shares available in the market from sellers at any given time, the price of the stock within the market as determined by the market and the projected impact on the Company’s earnings per share and capital.

As of June 30, 2020, there were 282,771 shares still available to be repurchased under the program.

As of September 30, 2020, there were 76,311 shares still available to be repurchased under the program.

On October 21, 2020, the Company’s Board of Directors authorized management to repurchase up to one million additional shares of the Company’s common stock under a program of open market purchases or privately negotiated transactions.

The program does not have an expiration date, and will take effect after the Company completes the repurchase of the shares remaining under the 2018 stock repurchase program.

Non-GAAP Financial Measures

8 unchanged sentences

Ratio of Tangible Common Equity to Tangible Assets

September 30,

(Dollars in Thousands)

7 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 2. Management’s Discussion and Analysis