GREAT SOUTHERN BANCORP, INC. 10-Q

ITEM 1. FINANCIAL STATEMENTS. GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands, except number of shares) SEPTEMBER 30, DECEMBER 31, 2020 2019 (Unaudited) ASSETS Cash $ 91,098 $ 99,299 Interest-bearing deposits in other financial institutions 247,168 120,856 Cash and cash equivalents 338,266 220,155 Available-for-sale securities 445,940 374,175 Mortgage loans held for sale 23,973 9,242 Loans receivable, net of allowance for loan losses of $ 54,238 - September 2020; $ 40,294 - December 2019 4,413,764 4,153,982 Interest receivable 14,139 13,530 Prepaid expenses and other assets 44,671 74,984 Other real estate owned and repossessions, net 3,007 5,525 Premises and equipment, net 140,502 141,908 Goodwill and other intangible assets 7,232 8,098 Federal Home Loan Bank stock and other interest-earning assets 11,036 13,473 Current and deferred income taxes 480 - Total Assets $ 5,443,010 $ 5,015,072 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 4,443,757 $ 3,960,106 Securities sold under reverse repurchase agreements with customers 155,042 84,167 Short-term borrowings and other interest-bearing liabilities 1,218 228,157 Subordinated debentures issued to capital trust 25,774 25,774 Subordinated notes 148,217 74,276 Accrued interest payable 2,859 4,250 Advances from borrowers for taxes and insurance 11,841 7,484 Accrued expenses and other liabilities 29,659 24,904 Current and deferred income taxes - 2,888 Total Liabilities 4,818,367 4,412,006 Commitments and Contingencies - - Stockholders' Equity: Capital stock Serial preferred stock - $ 0.01 par value; authorized 1,000,000 shares; issued and outstanding September 2020 and December 2019 - - 0 - shares - - Common stock, $ 0.01 par value; authorized 20,000,000 shares; issued and outstanding September 2020 – 13,880,570 shares; December 2019 - 14,261,052 shares 139 143 Additional paid-in capital 34,539 33,510 Retained earnings 534,331 537,167 Accumulated other comprehensive income 55,634 32,246 Total Stockholders' Equity 624,643 603,066 Total Liabilities and Stockholders' Equity $ 5,443,010 $ 5,015,072 See Notes to Consolidated Financial Statements 2 GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) THREE MONTHS ENDED SEPTEMBER 30, 2020 2019 (Unaudited) INTEREST INCOME Loans $ 50,476 $ 57,226 Investment securities and other 3,123 2,961 TOTAL INTEREST INCOME 53,599 60,187 INTEREST EXPENSE Deposits 7,094 11,792 Short-term borrowings and repurchase agreements 8 1,123 Subordinated debentures issued to capital trust 128 253 Subordinated notes 2,201 1,095 TOTAL INTEREST EXPENSE 9,431 14,263 NET INTEREST INCOME 44,168 45,924 PROVISION FOR LOAN LOSSES 4,500 1,950 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 39,668 43,974 NON-INTEREST INCOME Commissions 318 173 Service charges, debit card and ATM fees 4,692 5,619 Net gains on loan sales 2,878 1,021 Late charges and fees on loans 352 364 Gain (loss) on derivative interest rate products 89 ( 101 ) Other income 1,137 1,579 TOTAL NON-INTEREST INCOME 9,466 8,655 NON-INTEREST EXPENSE Salaries and employee benefits 18,701 15,827 Net occupancy and equipment expense 7,147 6,613 Postage 748 792 Insurance 753 339 Advertising 757 794 Office supplies and printing 271 258 Telephone 987 904 Legal, audit and other professional fees 582 681 Expense on other real estate and repossessions 199 603 Partnership tax credit investment amortization - 91 Acquired deposit intangible asset amortization 289 289 Other operating expenses 1,554 1,534 TOTAL NON-INTEREST EXPENSE 31,988 28,725 INCOME BEFORE INCOME TAXES 17,146 23,904 PROVISION FOR INCOME TAXES 3,692 4,172 NET INCOME AND NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 13,454 $ 19,732 Basic Earnings Per Common Share $ 0.96 $ 1.39 Diluted Earnings Per Common Share $ 0.96 $ 1.38 Dividends Declared Per Common Share $ 0.34 $ 0.34 See Notes to Consolidated Financial Statements 3 GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) NINE MONTHS ENDED SEPTEMBER 30, 2020 2019 (Unaudited) INTEREST INCOME Loans $ 155,453 $ 167,552 Investment securities and other 9,631 8,715 TOTAL INTEREST INCOME 165,084 176,267 INTEREST EXPENSE Deposits 26,712 33,844 Short-term borrowings and repurchase agreements 667 2,904 Subordinated debentures issued to capital trust 511 787 Subordinated notes 4,633 3,283 TOTAL INTEREST EXPENSE 32,523 40,818 NET INTEREST INCOME 132,561 135,449 PROVISION FOR LOAN LOSSES 14,371 5,500 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 118,190 129,949 NON-INTEREST INCOME Commissions 760 670 Service charges, debit card and ATM fees 13,590 15,887 Net gains on loan sales 5,308 1,645 Late charges and fees on loans 1,175 1,066 Net realized gains on sales of available-for-sale securities 78 10 Loss on derivative interest rate products ( 424 ) ( 169 ) Other income 4,606 4,154 TOTAL NON-INTEREST INCOME 25,093 23,263 NON-INTEREST EXPENSE Salaries and employee benefits 53,699 46,895 Net occupancy and equipment expense 20,619 19,462 Postage 2,294 2,342 Insurance 1,668 1,667 Advertising 1,814 2,162 Office supplies and printing 806 743 Telephone 2,904 2,645 Legal, audit and other professional fees 1,844 2,023 Expense on other real estate and repossessions 946 1,642 Partnership tax credit investment amortization - 274 Acquired deposit intangible asset amortization 866 902 Other operating expenses 4,691 4,845 TOTAL NON-INTEREST EXPENSE 92,151 85,602 INCOME BEFORE INCOME TAXES 51,132 67,610 PROVISION FOR INCOME TAXES 9,607 11,890 NET INCOME AND NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 41,525 $ 55,720 Basic Earnings Per Common Share $ 2.94 $ 3.93 Diluted Earnings Per Common Share $ 2.93 $ 3.90 Dividends Declared Per Common Share $ 2.02 $ 1.73 See Notes to Consolidated Financial Statements 4 GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) THREE MONTHS ENDED SEPTEMBER 30, 2020 2019 (Unaudited) Net Income $ 13,454 $ 19,732 Unrealized appreciation (depreciation) on available-for-sale securities, net of taxes (credit) of $( 531 ) and $ 1,315 , for 2020 and 2019, respectively ( 1,796 ) 4,452 Change in fair value of cash flow hedge, net of taxes of $ 0 and $ 1,318 , for 2020 and 2019, respectively - 4,461 Amortization of realized gain on termination of cash flow hedge, net of taxes (credit) of $ 467 and $ 0 , for 2020 and 2019, respectively ( 1,581 ) - Comprehensive Income $ 10,077 $ 28,645 NINE MONTHS ENDED SEPTEMBER 30, 2020 2019 (Unaudited) Net Income $ 41,525 $ 55,720 Unrealized appreciation on available-for-sale securities, net of taxes of $ 4,482 and $ 3,732 , for 2020 and 2019, respectively 15,177 12,642 Reclassification adjustment for gains included in net income, net of taxes (credit) of $ 18 and $ 2 , for 2020 and 2019, respectively ( 60 ) ( 8 ) Change in fair value of cash flow hedge, net of taxes of $ 3,519 and $ 5,549 , for 2020 and 2019, respectively 11,914 18,789 Amortization of realized gain on termination of cash flow hedge, net of taxes (credit) of $( 1,075 ) and $ 0 , for 2020 and 2019, respectively ( 3,643 ) - Comprehensive Income $ 64,913 $ 87,143 See Notes to Consolidated Financial Statements 5 GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands, except per share data) THREE MONTHS ENDED SEPTEMBER 30, 2019 Accumulated Other Common Additional Retained Comprehensive Treasury Stock Paid-in Capital Earnings Income (Loss) Stock Total (Unaudited) Balance, June 30, 2019 $ 142 $ 31,603 $ 508,427 $ 32,137 $ - $ 572,309 Net income - - 19,732 - - 19,732 Stock issued under Stock Option Plan - 482 - - 167 649 Common dividends declared, - - ( 4,833 ) - - ( 4,833 ) $0.34 per share Other comprehensive gain - - - 8,913 - 8,913 Reclassification of treasury stock per Maryland law - - 167 - ( 167 ) - Balance, September 30, 2019 $ 142 $ 32,085 $ 523,493 $ 41,050 $ - $ 596,770 THREE MONTHS ENDED SEPTEMBER 30, 2020 Accumulated Other Common Additional Retained Comprehensive Treasury Stock Paid-in Capital Earnings Income (Loss) Stock Total (Unaudited) Balance, June 30, 2020 $ 141 $ 34,230 $ 533,346 $ 59,011 $ - $ 626,728 Net income - - 13,454 - - 13,454 Stock issued under Stock Option Plan - 309 - - 37 346 Common dividends declared, - - ( 4,790 ) - - ( 4,790 ) $0.34 per share Other comprehensive loss - - - ( 3,377 ) - ( 3,377 ) Purchase of the Company’s common stock - - - - ( 7,718 ) ( 7,718 ) Reclassification of treasury stock per Maryland law ( 2 ) - ( 7,679 ) - 7,681 - Balance, September 30, 2020 $ 139 $ 34,539 $ 534,331 $ 55,634 $ - $ 624,643 See Notes to Consolidated Financial Statements 6 NINE MONTHS ENDED SEPTEMBER 30, 2019 Accumulated Other Common Additional Retained Comprehensive Treasury Stock Paid-in Capital Earnings Income (Loss) Stock Total (Unaudited) Balance, January 1, 2019 $ 142 $ 30,121 $ 492,087 $ 9,627 $ - $ 531,977 Net income - - 55,720 - - 55,720 Stock issued under Stock Option Plan - 1,964 - - 1,059 3,023 Common dividends declared, - - ( 24,524 ) - - ( 24,524 ) $1.39 per share Purchase of the Company’s common stock - - - - ( 849 ) ( 849 ) Other comprehensive gain - - - 31,423 - 31,423 Reclassification of treasury stock per Maryland law - - 210 - ( 210 ) - Balance, September 30, 2019 $ 142 $ 32,085 $ 523,493 $ 41,050 $ - $ 596,770 NINE MONTHS ENDED SEPTEMBER 30, 2020 Accumulated Other Common Additional Retained Comprehensive Treasury Stock Paid-in Capital Earnings Income (Loss) Stock Total (Unaudited) Balance, January 1, 2020 $ 143 $ 33,510 $ 537,167 $ 32,246 $ - $ 603,066 Net income - - 41,525 - - 41,525 Stock issued under Stock Option Plan - 1,029 - - 133 1,162 Common dividends declared, - - ( 28,631 ) - - ( 28,631 ) $2.02 per share Other comprehensive gain - - - 23,388 - 23,388 Purchase of the Company’s common stock - - - - ( 15,867 ) ( 15,867 ) Reclassification of treasury stock per Maryland law ( 4 ) - ( 15,730 ) - 15,734 - Balance, September 30, 2020 $ 139 $ 34,539 $ 534,331 $ 55,634 $ - $ 624,643 See Notes to Consolidated Financial Statements 7 GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) NINE MONTHS ENDED SEPTEMBER 30, 2020 2019 (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 41,525 $ 55,720 Proceeds from sales of loans held for sale 220,910 81,403 Originations of loans held for sale ( 228,836 ) ( 88,864 ) Items not requiring (providing) cash: Depreciation 7,478 7,076 Amortization 1,344 1,566 Compensation expense for stock option grants 837 667 Provision for loan losses 14,371 5,500 Net gains on loan sales ( 5,308 ) ( 1,645 ) Net realized gains on sales of available-for-sale securities ( 78 ) ( 10 ) Net (gains) losses on sale of premises and equipment 19 ( 24 ) Net losses on sale/write-down of other real estate owned and repossessions 31 205 Accretion of deferred income, premiums, discounts and other ( 4,076 ) ( 2,949 ) Loss on derivative interest rate products 424 169 Deferred income taxes ( 12,400 ) ( 193 ) Changes in: Interest receivable ( 984 ) ( 253 ) Prepaid expenses and other assets 311 ( 1,940 ) Accrued expenses and other liabilities ( 1,912 ) 3,333 Income taxes refundable/payable 2,124 4,414 Net cash provided by operating activities 35,780 64,175 CASH FLOWS FROM INVESTING ACTIVITIES Net change in loans ( 268,313 ) ( 123,401 ) Purchase of loans ( 3,675 ) ( 57,545 ) Purchase of premises and equipment ( 6,609 ) ( 8,274 ) Proceeds from sale of premises and equipment 527 172 Proceeds from sale of other real estate owned and repossessions 3,461 12,867 Capitalized costs on other real estate owned ( 126 ) ( 93 ) Proceeds from termination of interest rate derivative 45,864 - Proceeds from sales of available-for-sale securities 19,236 28,057 Proceeds from maturities and calls of available-for-sale securities 26,940 13,370 Principal reductions on mortgage-backed securities 19,650 12,788 Purchase of available-for-sale securities ( 118,296 ) ( 143,151 ) Redemption of Federal Home Loan Bank stock and change in other interest-earning assets 2,437 673 Net cash used in investing activities ( 278,904 ) ( 264,537 ) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in certificates of deposit ( 210,626 ) 136,194 Net increase in checking and savings deposits 694,288 73,995 Net decrease in short-term borrowings ( 156,064 ) ( 4,293 ) Advances from borrowers for taxes and insurance 4,357 5,313 Proceeds from issuance of subordinated notes 73,513 - Dividends paid ( 28,691 ) ( 24,219 ) Purchase of the Company’s common stock ( 15,867 ) ( 849 ) Stock options exercised 325 2,356 Net cash provided by financing activities 361,235 188,497 INCREASES (DECREASES) IN CASH AND CASH EQUIVALENTS 118,111 ( 11,865 ) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 220,155 202,742 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 338,266 $ 190,877 See Notes to Consolidated Financial Statements 8 GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements of Great Southern Bancorp, Inc. (the "Company" or "Great Southern") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The financial statements presented herein reflect all adjustments which are, in the opinion of management, necessary to fairly present the financial condition, results of operations, changes in stockholders’ equity and cash flows of the Company as of the dates and for the periods presented. Those adjustments consist only of normal recurring adjustments. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the full year. The consolidated statement of financial condition of the Company as of December 31, 2019, has been derived from the audited consolidated statement of financial condition of the Company as of that date. Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on net income. Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission. NOTE 2: NATURE OF OPERATIONS AND OPERATING SEGMENTS The Company operates as a one-bank holding company. The Company’s business primarily consists of the operations of Great Southern Bank (the “Bank”), which provides a full range of financial services to customers primarily located in Missouri, Iowa, Kansas, Minnesota, Nebraska and Arkansas. The Bank also originates commercial loans from lending offices in Atlanta, Ga., Chicago, Ill., Dallas, Texas, Denver, Colo., Omaha, Neb. and Tulsa, Okla. The Company and the Bank are subject to regulation by certain federal and state agencies and undergo periodic examinations by those regulatory agencies. The Company’s banking operation is its only reportable segment. The banking operation is principally engaged in the business of originating residential and commercial real estate loans, construction loans, commercial business loans and consumer loans and funding these loans by attracting deposits from the general public, accepting brokered deposits and borrowing from the Federal Home Loan Bank and others. The operating results of this segment are regularly reviewed by management to make decisions about resource allocations and to assess performance. Selected information is not presented separately for the Company’s reportable segment, as there is no material difference between that information and the corresponding information in the consolidated financial statements. NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS In June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326). The Update amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. This Update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Update was set to be effective for the Company on January 1, 2020. During March 2020, pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and guidance from the Securities and Exchange Commission (the “SEC”) and the Financial 9 Accounting Standards Board (the “FASB”), we elected to delay adoption of the new accounting standard related to accounting for credit losses (“CECL”). Our third quarter and year-to-date financial statements are prepared under the existing incurred loss methodology standard for accounting for loan losses. The adoption of the CECL model during the fourth quarter of 2020 will require us to recognize a one-time cumulative adjustment to our allowance for loan losses and a liability for potential losses related to the unfunded portion of our loans and commitments in order to fully transition from the incurred loss model to the CECL model. Upon initial adoption, we expect to increase the balance of our allowance for credit losses in a range of $11 million to $14 million and create a liability for potential losses related to the unfunded portion of our loans and commitments in a range of $7 million to $10 million. The after-tax effect of this is expected to result in a decrease in our retained earnings of $14 million to $18 million. Further, we have analyzed the impact on our financial statements at and for the nine months ended September 30, 2020 as if we had adopted the CECL accounting standard on January 1, 2020. In addition to the impact from the initial adoption above, under CECL we would expect to further increase the balance of our allowance for credit losses in a range of $-0- to $3 million through a corresponding increase in provision for credit losses during the nine months ended September 30, 2020. This is in addition to the $14.4 million of provision expense already recorded under the incurred loss method during the nine months ended September 30, 2020. The liability for potential losses related to the unfunded portion of our loans and commitments would be expected to have no material change during the nine months ended September 30, 2020. These estimates are subject to change as material assumptions are refined and model validations are completed. In January 2017, the FASB issued ASU No. 2017-04, Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment (Topic 350). To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test should be performed by comparing the fair value of a reporting unit with its carrying amount and an impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update are required for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The impact of adopting this new guidance during the quarter ended March 31, 2020 did not have a material impact on the Company’s consolidated financial statements. At September 30, 2020, the Company performed its annual review of goodwill and intangibles, 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. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this update remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 is effective for periods beginning after December 15, 2019. The impact of adopting this new guidance during the quarter ended March 31, 2020 did not have a material impact on the Company’s consolidated financial statements. 10 NOTE 4: EARNINGS PER SHARE Three Months Ended September 30, 2020 2019 (In Thousands, Except Per Share Data) Basic: Average common shares outstanding 14,053 14,210 Net income and net income available to common stockholders $ 13,454 $ 19,732 Per common share amount $ 0.96 $ 1.39 Diluted: Average common shares outstanding 14,053 14,210 Net effect of dilutive stock options – based on the treasury stock method using average market price 32 107 Diluted common shares 14,085 14,317 Net income and net income available to common stockholders $ 13,454 $ 19,732 Per common share amount $ 0.96 $ 1.38 Nine Months Ended September 30, 2020 2019 (In Thousands, Except Per Share Data) Basic: Average common shares outstanding 14,119 14,187 Net income and net income available to common stockholders $ 41,525 $ 55,720 Per common share amount $ 2.94 $ 3.93 Diluted: Average common shares outstanding 14,119 14,187 Net effect of dilutive stock options – based on the treasury stock method using average market price 46 110 Diluted common shares 14,165 14,297 Net income and net income available to common stockholders $ 41,525 $ 55,720 Per common share amount $ 2.93 $ 3.90 Options outstanding at September 30, 2020 and 2019, to purchase 654,369 and 328,275 shares of common stock, respectively, were not included in the computation of diluted earnings per common share for the three month periods then ended because the exercise prices of such options were greater than the average market prices of the common stock for the three months ended September 30, 2020 and 2019, respectively. Options outstanding at September 30, 2020 and 2019, to purchase 650,869 and 318,275 shares of common stock, respectively, were not included in the computation of diluted earnings per common share for the nine month periods then ended because the exercise prices of such options were greater than the average market prices of the common stock for the nine months ended September 30, 2020 and 2019, respectively. 11 NOTE 5: INVESTMENT SECURITIES The amortized cost and fair values of securities classified as available-for-sale were as follows: September 30, 2020 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In Thousands) AVAILABLE-FOR-SALE SECURITIES: Agency mortgage-backed securities $ 152,068 $ 19,402 $ 12 $ 171,458 Agency collateralized mortgage obligations 176,077 9,273 259 185,091 States and political subdivisions 65,821 1,959 97 67,683 Small Business Administration securities 20,677 1,031 - 21,708 $ 414,643 $ 31,665 $ 368 $ 445,940 December 31, 2019 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In Thousands) AVAILABLE-FOR-SALE SECURITIES: Agency mortgage-backed securities $ 156,591 $ 8,716 $ 265 $ 165,042 Agency collateralized mortgage obligations 149,980 2,891 921 151,950 States and political subdivisions 33,757 1,368 - 35,125 Small Business Administration securities 22,132 - 74 22,058 $ 362,460 $ 12,975 $ 1,260 $ 374,175 The amortized cost and fair value of available-for-sale securities at September 30, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Fair Cost Value (In Thousands) One year or less $ - $ - After one through five years - - After five through ten years 10,388 11,064 After ten years 55,433 56,619 Securities not due on a single maturity date 348,822 378,257 $ 414,643 $ 445,940 There were no securities classified as held to maturity at September 30, 2020 or December 31, 2019. Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at September 30, 2020 and December 31, 2019, was approximately $ 33.9 million and $ 116.2 million, respectively, which is approximately 7.6 % and 31.1 % of the Company’s available-for-sale investment portfolio, respectively. Based on an evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes any declines in fair value for these debt securities are temporary. 12 The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2020 and December 31, 2019: September 30, 2020 Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Losses Value Losses Value Losses (In Thousands) Agency mortgage-backed securities $ 11,140 $ ( 12 ) $ - $ - $ 11,140 $ ( 12 ) Agency collateralized mortgage obligations 12,849 ( 259 ) - - 12,849 ( 259 ) States and political subdivisions 9,929 ( 97 ) - - 9,929 ( 97 ) $ 33,918 $ ( 368 ) $ - $ - $ 33,918 $ ( 368 ) December 31, 2019 Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Losses Value Losses Value Losses (In Thousands) Agency mortgage-backed securities $ - $ - $ 24,762 $ ( 265 ) $ 24,762 $ ( 265 ) Agency collateralized mortgage obligations 69,372 ( 921 ) - - 69,372 ( 921 ) Small Business Administration securities 22,058 ( 74 ) - - 22,058 ( 74 ) $ 91,430 $ ( 995 ) $ 24,762 $ ( 265 ) $ 116,192 $ ( 1,260 ) There were no sales of available-for-sale securities during the three months ended September 30, 2020. Gross gains of $ 78 ,000 resulting from sales of available-for-sale securities were realized during the nine months ended September 30, 2020. There were no sales of available-for-sale securities during the three months ended September 30, 2020. Gross gains of $ 226 ,000 and gross losses of $ 216 ,000 resulting from sales of available-for-sale securities were realized during the nine months ended September 30, 2019. Gains and losses on sales of securities are determined on the specific-identification method. Other-than-temporary Impairment. Upon acquisition of a security, the Company decides whether it is within the scope of the accounting guidance for beneficial interests in securitized financial assets or will be evaluated for impairment under the accounting guidance for investments in debt and equity securities. The Company does not have, and does not currently expect to have, securities within the scope of the accounting guidance for beneficial interests. For securities where the security is not a beneficial interest in securitized financial assets, the Company uses the debt and equity securities impairment model. The Company periodically evaluates each investment security in an unrealized loss position to determine whether an other-than-temporary impairment has occurred. The Company considers the length of time a security has been in an unrealized loss position, the relative amount of the unrealized loss compared to the carrying value of the security, the type of security and other factors. If certain criteria are met, the Company performs additional review and evaluation using observable market values or various inputs in economic models to determine if an unrealized loss is other-than-temporary. The Company uses quoted market prices for marketable equity securities and uses broker pricing quotes based on observable inputs for equity investments that are not traded on a stock exchange. For non-agency collateralized mortgage obligations, to determine if the unrealized loss is other than temporary, the Company projects total estimated defaults of the underlying assets (mortgages) and multiplies that calculated amount by an estimate of realizable value upon sale in the marketplace (severity) in order to determine the projected collateral loss. The Company also evaluates any current credit enhancement underlying these securities to determine the impact on cash flows. If the Company determines that a given security position will be subject to a write-down or loss, the Company records the expected credit loss as a charge to earnings. 13 During the three and nine months ended September 30, 2020, no securities were determined to have impairment that had become other-than-temporary. Credit Losses Recognized on Investments. During the three and nine months ended September 30, 2020 and 2019, respectively, there were no debt securities that had experienced fair value deterioration due to credit losses, as well as due to other market factors, but are not otherwise other-than-temporarily impaired. Amounts Reclassified Out of Accumulated Other Comprehensive Income. Amounts reclassified from accumulated other comprehensive income and the affected line items in the statements of income during the three and nine months ended September 30, 2020 and 2019, are shown below. Amounts Reclassified from Accumulated Other Comprehensive Income Three Months Ended September 30, Affected Line Item in the 2020 2019 Statements of Income (In Thousands) Net realized gains on sales of Unrealized gains on available-for- sale securities $ - $ - available-for-sale securities (Total reclassified amount before tax) Income Taxes - - Provision for income taxes Total reclassifications out of accumulated other comprehensive income $ - $ - Amounts Reclassified from Accumulated Other Comprehensive Income Nine Months Ended September 30, Affected Line Item in the 2020 2019 Statements of Income (In Thousands) Net realized gains on sales of Unrealized gains on available-for- sale securities $ 78 $ 10 available-for-sale securities (Total reclassified amount before tax) Income Taxes ( 18 ) ( 2 ) Provision for income taxes Total reclassifications out of accumulated other comprehensive income $ 60 $ 8 14 NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES Classes of loans at September 30, 2020 and December 31, 2019 were as follows: September 30, December 31, 2020 2019 (In Thousands) One- to four-family residential construction $ 38,503 $ 33,963 Subdivision construction 10,466 16,088 Land development 40,224 40,431 Commercial construction 1,206,342 1,322,861 Owner occupied one- to four-family residential 478,113 387,016 Non-owner occupied one- to four-family residential 117,699 120,343 Commercial real estate 1,536,443 1,494,172 Other residential 1,018,359 866,006 Commercial business 439,199 313,209 Industrial revenue bonds 14,165 13,189 Consumer auto 99,284 151,854 Consumer other 41,333 46,720 Home equity lines of credit 114,357 118,988 Loans acquired and accounted for under ASC 310-30, net of discounts 106,128 127,206 5,260,615 5,052,046 Undisbursed portion of loans in process ( 782,865 ) ( 850,666 ) Allowance for loan losses ( 54,238 ) ( 40,294 ) Deferred loan fees and gains, net ( 9,748 ) ( 7,104 ) $ 4,413,764 $ 4,153,982 Weighted average interest rate 4.28 % 4.97 % 15 Classes of loans by aging were as follows: September 30, 2020 Total Loans Total > 90 Days 30-59 Days 60-89 Days 90+ Days Total Loans Past Due and Past Due Past Due Past Due Past Due Current Receivable Still Accruing (In Thousands) One- to four-family residential construction $ 79 $ - $ - $ 79 $ 38,424 $ 38,503 $ - Subdivision construction - - - - 10,466 10,466 - Land development 236 39 - 275 39,949 40,224 - Commercial construction - - - - 1,206,342 1,206,342 - Owner occupied one- to four- family residential 336 195 1,922 2,453 475,660 478,113 - Non-owner occupied one- to four- family residential - - 238 238 117,461 117,699 - Commercial real estate 100 - 701 801 1,535,642 1,536,443 - Other residential - - - - 1,018,359 1,018,359 - Commercial business - - 140 140 439,059 439,199 - Industrial revenue bonds - - - - 14,165 14,165 - Consumer auto 384 45 267 696 98,588 99,284 - Consumer other 177 6 112 295 41,038 41,333 - Home equity lines of credit 109 129 457 695 113,662 114,357 - Loans acquired and accounted for under ASC 310-30, net of discounts 331 348 3,966 4,645 101,483 106,128 - 1,752 762 7,803 10,317 5,250,298 5,260,615 - Less loans acquired an accountedd for under ASC 310-30, net of discounts 331 348 3,966 4,645 101,483 106,128 - Total $ 1,421 $ 414 $ 3,837 $ 5,672 $ 5,148,815 $ 5,154,487 $ - December 31, 2019 Total Loans Total > 90 Days 30-59 Days 60-89 Days 90+ Days Total Loans Past Due and Past Due Past Due Past Due Past Due Current Receivable Still Accruing (In Thousands) One- to four-family residential construction $ - $ - $ - $ - $ 33,963 $ 33,963 $ - Subdivision construction - - - - 16,088 16,088 - Land development - 27 - 27 40,404 40,431 - Commercial construction 15,085 - - 15,085 1,307,776 1,322,861 - Owner occupied one- to four- family residential 1,453 1,631 1,198 4,282 382,734 387,016 - Non-owner occupied one- to four- family residential 152 - 181 333 120,010 120,343 - Commercial real estate 549 119 632 1,300 1,492,872 1,494,172 - Other residential 376 - - 376 865,630 866,006 - Commercial business 60 - 1,235 1,295 311,914 313,209 - Industrial revenue bonds - - - - 13,189 13,189 - Consumer auto 1,101 259 558 1,918 149,936 151,854 - Consumer other 278 233 198 709 46,011 46,720 - Home equity lines of credit 296 - 517 813 118,175 118,988 - Loans acquired and accounted for under ASC 310-30, net of discounts 2,177 709 6,191 9,077 118,129 127,206 - 21,527 2,978 10,710 35,215 5,016,831 5,052,046 - Less loans acquired and accounted for under ASC 310-30, net of discounts 2,177 709 6,191 9,077 118,129 127,206 - Total $ 19,350 $ 2,269 $ 4,519 $ 26,138 $ 4,898,702 $ 4,924,840 $ - 16 Non-accruing loans (excluding FDIC-assisted acquired loans, net of discount) are summarized as follows: September 30, December 31, 2020 2019 (In Thousands) One- to four-family residential construction $ - $ - Subdivision construction - - Land development - - Commercial construction - - Owner occupied one- to four-family residential 1,922 1,198 Non-owner occupied one- to four-family residential 238 181 Commercial real estate 701 632 Other residential - - Commercial business 140 1,235 Industrial revenue bonds - - Consumer auto 267 558 Consumer other 112 198 Home equity lines of credit 457 517 Total $ 3,837 $ 4,519 17 The following table presents the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2020. Also presented are the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2020: One- to Four- Family Residential and Other Commercial Commercial Commercial Construction Residential Real Estate Construction Business Consumer Total (In Thousands) Allowance for loan losses Balance, July 1, 2020 $ 4,492 $ 9,064 $ 28,905 $ 2,793 $ 1,817 $ 2,730 $ 49,801 Provision (benefit) charged to expense ( 127 ) ( 344 ) 3,686 1,222 55 8 4,500 Losses charged off - - - - ( 1 ) ( 685 ) ( 686 ) Recoveries 67 11 2 12 35 496 623 Balance, September 30, 2020 $ 4,432 $ 8,731 $ 32,593 $ 4,027 $ 1,906 $ 2,549 $ 54,238 Balance, January 1, 2020 $ 4,339 $ 5,153 $ 24,334 $ 3,076 $ 1,355 $ 2,037 $ 40,294 Provision (benefit) charged to expense 17 3,401 8,217 918 424 1,394 14,371 Losses charged off ( 40 ) - - ( 1 ) ( 10 ) ( 2,538 ) ( 2,589 ) Recoveries 116 177 42 34 137 1,656 2,162 Balance, September 30, 2020 $ 4,432 $ 8,731 $ 32,593 $ 4,027 $ 1,906 $ 2,549 $ 54,238 Ending balance: Individually evaluated for impairment $ 79 $ - $ 466 $ - $ 15 $ 186 $ 746 Collectively evaluated for impairment $ 4,288 $ 8,642 $ 31,756 $ 3,865 $ 1,849 $ 2,351 $ 52,751 Loans acquired and accounted for under ASC310-30 $ 65 $ 89 $ 371 $ 162 $ 42 $ 12 $ 741 Loans Individually evaluated for impairment $ 3,603 $ - $ 3,056 $ - $ 197 $ 1,909 $ 8,765 Collectively evaluated for impairment $ 641,178 $ 1,018,359 $ 1,533,387 $ 1,246,566 $ 453,167 $ 253,065 $ 5,145,722 Loans acquired and accounted for under ASC310-30 $ 61,226 $ 6,167 $ 26,493 $ 2,818 $ 2,390 $ 7,034 $ 106,128 The following table presents the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2019. One- to Four- Family Residential and Other Commercial Commercial Commercial Construction Residential Real Estate Construction Business Consumer Total (In Thousands) Allowance for loan losses Balance July 1, 2019 $ 3,803 $ 3,753 $ 22,367 $ 3,479 $ 1,678 $ 4,174 $ 39,254 Provision (benefit) charged to expense ( 232 ) 566 2,246 ( 571 ) ( 341 ) 282 1,950 Losses charged off ( 1 ) - - ( 46 ) ( 211 ) ( 1,419 ) ( 1,677 ) Recoveries 61 - 13 20 100 685 879 Balance September 30, 2019 $ 3,631 $ 4,319 $ 24,626 $ 2,882 $ 1,226 $ 3,722 $ 40,406 Balance January 1, 2019 $ 3,122 $ 4,713 $ 19,803 $ 3,105 $ 1,568 $ 6,098 $ 38,409 Provision (benefit) charged to expense 931 ( 394 ) 4,791 3 ( 431 ) 600 5,500 Losses charged off ( 518 ) - ( 7 ) ( 266 ) ( 310 ) ( 5,324 ) ( 6,425 ) Recoveries 96 - 39 40 399 2,348 2,922 Balance September 30, 2019 $ 3,631 $ 4,319 $ 24,626 $ 2,882 $ 1,226 $ 3,722 $ 40,406 18 The following table presents the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2019: One- to Four- Family Residential and Other Commercial Commercial Commercial Construction Residential Real Estate Construction Business Consumer Total (In Thousands) Allowance for loan losses Individually evaluated for impairment $ 198 $ - $ 517 $ - $ 13 $ 201 $ 929 Collectively evaluated for impairment $ 3,973 $ 5,101 $ 23,570 $ 2,940 $ 1,306 $ 1,814 $ 38,704 Loans acquired and accounted for under ASC 310-30 $ 168 $ 52 $ 247 $ 136 $ 36 $ 22 $ 661 Loans Individually evaluated for impairment $ 2,960 $ - $ 4,020 $ - $ 1,286 $ 2,001 $ 10,267 Collectively evaluated for impairment $ 554,450 $ 866,006 $ 1,490,152 $ 1,363,292 $ 325,112 $ 315,561 $ 4,914,573 Loans acquired and accounted for under ASC 310-30 $ 74,562 $ 5,334 $ 29,158 $ 3,606 $ 3,356 $ 11,190 $ 127,206 The portfolio segments used in the preceding three tables correspond to the loan classes used in all other tables in Note 6 as follows: · The one- to four-family residential and construction segment includes the one- to four-family residential construction, subdivision construction, owner occupied one- to four-family residential and non-owner occupied one- to four-family residential classes · The other residential segment corresponds to the other residential class · The commercial real estate segment includes the commercial real estate and industrial revenue bonds classes · The commercial construction segment includes the land development and commercial construction classes · The commercial business segment corresponds to the commercial business class · The consumer segment includes the consumer auto, consumer other and home equity lines of credit classes A loan is considered impaired, in accordance with the impairment accounting guidance (FASB ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include not only nonperforming loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. 19 Impaired loans (excluding FDIC-assisted loans, net of discount), are summarized as follows: September 30, 2020 Unpaid Recorded Principal Specific Balance Balance Allowance (In Thousands) One- to four-family residential construction $ - $ - $ - Subdivision construction 22 22 - Land development - - - Commercial construction - - - Owner occupied one- to four-family residential 3,342 3,460 78 Non-owner occupied one- to four-family residential 238 238 - Commercial real estate 3,056 3,056 466 Other residential - - - Commercial business 197 210 15 Industrial revenue bonds - - - Consumer auto 1,024 1,040 166 Consumer other 333 355 17 Home equity lines of credit 553 558 4 Total $ 8,765 $ 8,939 $ 746 Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020 Average Average Investment Interest Investment Interest in Impaired Income in Impaired Income Loans Recognized Loans Recognized (In Thousands) One- to four-family residential construction $ - $ - $ - $ - Subdivision construction 22 - 147 3 Land development - - - - Commercial construction - - - - Owner occupied one- to four-family residential 3,146 44 2,850 124 Non-owner occupied one- to four-family residential 267 - 372 11 Commercial real estate 3,829 30 3,946 97 Other residential - - - - Commercial business 538 5 1,008 30 Industrial revenue bonds - - - - Consumer auto 889 37 945 77 Consumer other 293 17 281 33 Home equity lines of credit 528 7 535 26 Total $ 9,512 $ 140 $ 10,084 $ 401 20 At or for the Year Ended December 31, 2019 Average Unpaid Investment Interest Recorded Principal Specific in Impaired Income Balance Balance Allowance Loans Recognized (In Thousands) One- to four-family residential construction $ - $ - $ - $ - $ - Subdivision construction 251 251 96 277 9 Land development - - - 328 101 Commercial construction - - - - - Owner occupied one- to four- family residential 2,300 2,423 82 2,598 131 Non-owner occupied one- to four-family residential 409 574 20 954 43 Commercial real estate 4,020 4,049 517 4,940 264 Other residential - - - - - Commercial business 1,286 1,771 13 1,517 81 Industrial revenue bonds - - - - - Consumer auto 1,117 1,334 181 1,128 125 Consumer other 356 485 16 383 48 Home equity lines of credit 528 548 4 362 37 Total $ 10,267 $ 11,435 $ 929 $ 12,487 $ 839 September 30, 2019 Unpaid Recorded Principal Specific Balance Balance Allowance (In Thousands) One- to four-family residential construction $ - $ - $ - Subdivision construction 256 256 98 Land development 83 83 - Commercial construction - - - Owner occupied one- to four-family residential 2,055 2,312 105 Non-owner occupied one- to four-family residential 795 980 21 Commercial real estate 4,286 4,312 569 Other residential - - - Commercial business 1,299 1,766 14 Industrial revenue bonds - - - Consumer auto 840 1,083 107 Consumer other 340 517 16 Home equity lines of credit 541 563 4 Total $ 10,495 $ 11,872 $ 934 21 Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019 Average Average Investment Interest Investment Interest in Impaired Income in Impaired Income Loans Recognized Loans Recognized (In Thousands) One- to four-family residential construction $ - $ - $ - $ - Subdivision construction 269 2 285 7 Land development 83 2 428 101 Commercial construction - - - - Owner occupied one- to four-family residential 2,042 23 2,745 80 Non-owner occupied one- to four-family residential 687 14 1,093 32 Commercial real estate 4,427 62 5,217 198 Other residential - - - - Commercial business 1,370 7 1,590 65 Industrial revenue bonds - - - - Consumer auto 883 21 1,121 64 Consumer other 331 12 399 34 Home equity lines of credit 447 13 318 30 Total $ 10,539 $ 156 $ 13,196 $ 611 At September 30, 2020, $ 4.6 million of impaired loans had specific valuation allowances totaling $ 746 ,000. At December 31, 2019, $ 5.2 million of impaired loans had specific valuation allowances totaling $ 929 ,000. Included in certain loan categories in the impaired loans are troubled debt restructurings that were classified as impaired. Troubled debt restructurings are loans that are modified by granting concessions to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. The types of concessions made are factored into the estimation of the allowance for loan losses for troubled debt restructurings primarily using a discounted cash flow or collateral adequacy approach. The following tables present newly restructured loans, which were considered troubled debt restructurings, during the three and nine months ended September 30, 2020 and 2019, respectively, by type of modification: Three Months Ended September 30, 2020 Total Interest Only Term Combination Modification (In Thousands) One- to four-family residential - - 647 647 Commercial real estate - - 559 559 Commercial business - - 22 22 Consumer - - 1,771 1,771 $ - $ - $ 2,999 $ 2,999 Three Months Ended September 30, 2019 Total Interest Only Term Combination Modification (In Thousands) Consumer $ - $ - $ - $ - 22 Nine Months Ended September 30, 2020 Total Interest Only Term Combination Modification (In Thousands) One- to four-family residential $ - $ - $ 777 $ 777 Commercial real estate - - 559 559 Commercial business - - 22 22 Consumer - 16 1,847 1,863 $ - $ 16 $ 3,205 $ 3,221 Nine Months Ended September 30, 2019 Total Interest Only Term Combination Modification (In Thousands) Consumer $ - $ 73 $ - $ 73 At September 30, 2020, the Company had $ 3.7 million of loans that were modified in troubled debt restructurings and impaired, as follows: $ 22 ,000 of construction and land development loans, $ 1.7 million of one- to four-family residential mortgage loans, $ 1.2 million of commercial real estate loans, $ 140 ,000 of commercial business loans and $ 680 ,000 of consumer loans. Of the total troubled debt restructurings at September 30, 2020, $ 1.9 million were accruing interest and $ 1.8 million were non-accrual assets. Of the $3.7 million in troubled debt restructurings, $ 2.4 million were classified as substandard using the Company’s internal grading system, which is described below. The Company had no troubled debt restructurings which were modified in the previous 12 months and subsequently defaulted during the nine months ended September 30, 2020. When loans modified as troubled debt restructurings have subsequent payment defaults, the defaults are factored into the determination of the allowance for loan losses to ensure specific valuation allowances reflect amounts considered uncollectible. At December 31, 2019, the Company had $ 1.9 million of loans that were modified in troubled debt restructurings and impaired, as follows: $ 251 ,000 of construction and land development loans, $ 768 ,000 of single family residential mortgage loans, $ 412 ,000 of commercial real estate loans, $ 156 ,000 of commercial business loans and $ 343 ,000 of consumer loans. Of the total troubled debt restructurings at December 31, 2019, $ 1.4 million were accruing interest and $ 562 ,000 were non-accrual assets and classified as substandard using the Company’s internal grading system. The Company had no troubled debt restructurings which were modified in the previous 12 months and subsequently defaulted during the year ended December 31, 2019. During the three and nine months ended September 30, 2020, one $ 155 ,000 one- to- four family loan designated as a troubled debt restructuring met the criteria for placement back on accrual status. The criteria are generally a minimum of six months of consistent and timely payment performance under original or modified terms. During the three and nine months ended September 30, 2019, $ 0 and $ 63 ,000 of loans, respectively, all of which consisted of consumer loans, designated as troubled debt restructurings met the criteria for placement back on accrual status. At September 30, 2020, the Company 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 CARES Act, the federal banking regulatory agencies, the Securities and Exchange Commission and the Financial Accounting Standards Board; therefore, they are not considered troubled debt restructurings or classified assets for regulatory purposes. 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. Special mention loans possess potential weaknesses that deserve management’s 23 close attention but do not expose the Bank to a degree of risk that warrants substandard classification. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if certain deficiencies are not corrected. Doubtful loans are those having all the weaknesses inherent to those classified Substandard with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans not meeting any of the criteria previously described are considered satisfactory. The FDIC-assisted acquired loans are evaluated using this internal grading system. These loans are accounted for in pools. Minimal adverse classification in these acquired loan pools was identified as of September 30, 2020 and December 31, 2019, respectively. See Note 7 for further discussion of the acquired loan pools and the termination of the loss sharing agreements. The Company evaluates the loan risk internal grading system definitions and allowance for loan loss methodology on an ongoing basis. The general component of the allowance for loan losses is affected by several factors, including, but not limited to, average historical losses, average life of the loans, current composition of the loan portfolio, current and expected economic conditions, collateral values and internal risk ratings. Management considers all these factors in determining the adequacy of the Company’s allowance for loan losses. In early 2018, we expanded our loan risk rating system to allow for further segregation of satisfactory credits. No significant changes were made to the allowance for loan loss methodology during the year ended December 31, 2019 or the nine months ended September 30, 2020. However, the deterioration of economic conditions that occurred in the nine months ended September 30, 2020 and was expected to continue thereafter was a significant factor in the determination of the allowance for loan losses. The loan grading system is presented by loan class below: September 30, 2020 Special Satisfactory Watch Mention Substandard Doubtful Total (In Thousands) One- to four-family residential construction $ 37,303 $ 1,200 $ - $ - $ - $ 38,503 Subdivision construction 10,444 - - 22 - 10,466 Land development 40,224 - - - - 40,224 Commercial construction 1,206,342 - - - - 1,206,342 Owner occupied one- to four- family residential 475,479 - - 2,634 - 478,113 Non-owner occupied one- to four- family residential 117,141 321 - 237 - 117,699 Commercial real estate 1,480,891 52,496 - 3,056 - 1,536,443 Other residential 1,018,359 - - - - 1,018,359 Commercial business 428,800 10,258 - 141 - 439,199 Industrial revenue bonds 14,165 - - - - 14,165 Consumer auto 98,659 18 - 607 - 99,284 Consumer other 41,003 86 - 244 - 41,333 Home equity lines of credit 113,793 40 - 524 - 114,357 Loans acquired and accounted for under ASC 310-30, net of discounts 106,117 - - 11 - 106,128 Total $ 5,188,720 $ 64,419 $ - $ 7,476 $ - $ 5,260,615 24 December 31, 2019 Special Satisfactory Watch Mention Substandard Doubtful Total (In Thousands) One- to four-family residential construction $ 33,963 $ - $ - $ - $ - $ 33,963 Subdivision construction 16,061 27 - - - 16,088 Land development 40,431 - - - - 40,431 Commercial construction 1,322,861 - - - - 1,322,861 Owner occupied one- to-four- family residential 385,001 26 - 1,989 - 387,016 Non-owner occupied one- to- four-family residential 119,743 419 - 181 - 120,343 Commercial real estate 1,458,400 32,063 - 3,709 - 1,494,172 Other residential 866,006 - - - - 866,006 Commercial business 307,322 4,651 - 1,236 - 313,209 Industrial revenue bonds 13,189 - - - - 13,189 Consumer auto 150,874 47 - 933 - 151,854 Consumer other 46,294 92 - 334 - 46,720 Home equity lines of credit 118,428 43 - 517 - 118,988 Loans acquired and accounted for under ASC 310-30, net of discounts 127,192 - - 14 - 127,206 Total $ 5,005,765 $ 37,368 $ - $ 8,913 $ - $ 5,052,046 NOTE 7: FDIC-ASSISTED ACQUIRED LOANS On March 20, 2009, Great Southern Bank entered into a purchase and assumption agreement with loss share with the Federal Deposit Insurance Corporation (FDIC) to assume all of the deposits (excluding brokered deposits) and acquire certain assets of TeamBank, N.A., a full service commercial bank headquartered in Paola, Kansas. The related loss sharing agreement was terminated early, effective April 26, 2016, by mutual agreement of Great Southern Bank and the FDIC. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded. On September 4, 2009, Great Southern Bank entered into a purchase and assumption agreement with loss share with the FDIC to assume all of the deposits and acquire certain assets of Vantus Bank, a full service thrift headquartered in Sioux City, Iowa. The related loss sharing agreement was terminated early, effective April 26, 2016, by mutual agreement of Great Southern Bank and the FDIC. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded. On October 7, 2011, Great Southern Bank entered into a purchase and assumption agreement with loss share with the FDIC to assume all of the deposits and acquire certain assets of Sun Security Bank, a full service bank headquartered in Ellington, Missouri. The related loss sharing agreement was terminated early, effective April 26, 2016, by mutual agreement of Great Southern Bank and the FDIC. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded. On April 27, 2012, Great Southern Bank entered into a purchase and assumption agreement with loss share with the FDIC to assume all of the deposits and acquire certain assets of Inter Savings Bank, FSB (“InterBank”), a full service bank headquartered in Maple Grove, Minnesota. The related loss sharing agreement was terminated early, effective June 9, 2017, by mutual agreement of Great Southern Bank and the FDIC. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded. 25 On June 20, 2014, Great Southern Bank entered into a purchase and assumption agreement with the FDIC to purchase a substantial portion of the loans and investment securities, as well as certain other assets, and assume all of the deposits, as well as certain other liabilities, of Valley Bank, a full-service bank headquartered in Moline, Illinois, with significant operations in Iowa. This transaction did not include a loss sharing agreement. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded. The following table presents the balances of the acquired loans related to the various FDIC-assisted transactions at September 30, 2020 and December 31, 2019. Sun Security TeamBank Vantus Bank Bank InterBank Valley Bank (In Thousands) September 30, 2020 Gross loans receivable $ 6,019 $ 8,502 $ 14,479 $ 49,483 $ 32,435 Balance of accretable discount due to change in expected losses ( 108 ) ( 40 ) ( 212 ) ( 1,761 ) ( 815 ) Net carrying value to loans receivable ( 5,882 ) ( 8,449 ) ( 14,163 ) ( 46,722 ) ( 30,913 ) Expected loss remaining $ 29 $ 13 $ 104 $ 1,000 $ 707 December 31, 2019 Gross loans receivable $ 7,304 $ 9,899 $ 17,906 $ 60,430 $ 41,032 Balance of accretable discount due to change in expected losses ( 159 ) ( 89 ) ( 374 ) ( 5,143 ) ( 1,803 ) Net carrying value to loans receivable ( 7,118 ) ( 9,797 ) ( 17,392 ) ( 54,442 ) ( 38,452 ) Expected loss remaining $ 27 $ 13 $ 140 $ 845 $ 777 Fair Value and Expected Cash Flows . At the time of these acquisitions, the Company determined the fair value of the loan portfolios based on several assumptions. Factors considered in the valuations were projected cash flows for the loans, type of loan and related collateral, classification status, fixed or variable interest rate, term of loan, current discount rates and whether or not the loan was amortizing. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. Management also estimated the amount of credit losses that were expected to be realized for the loan portfolios. The discounted cash flow approach was used to value each pool of loans. For non-performing loans, fair value was estimated by calculating the present value of the recoverable cash flows using a discount rate based on comparable corporate bond rates. The amount of the estimated cash flows expected to be received from the acquired loan pools in excess of the fair values recorded for the loan pools is referred to as the accretable yield. The accretable yield is recognized as interest income over the estimated lives of the loans. The Company continues to evaluate the fair value of the loans including cash flows expected to be collected. Increases in the Company’s cash flow expectations are recognized as increases to the accretable yield while decreases are recognized as impairments through the allowance for loan losses. During the three months ended September 30, 2020 and 2019, improvements in expected cash flows (reclassification of discounts from non-accretable to accretable) related to the acquired loan portfolios resulted in adjustments of $ 0 and $ 5.1 million, respectively, to the accretable yield to be spread over the estimated remaining lives of the loans on a level-yield basis. During the nine months ended September 30, 2020 and 2019, improvements in expected cash flows (reclassification of discounts from non-accretable to accretable) related to the acquired loan portfolios resulted in adjustments of $ 0 and $ 10.4 million, respectively, to the accretable yield to be spread over the estimated remaining lives of the loans on a level-yield basis. Because the balance of these adjustments to accretable yield will be recognized generally over the remaining lives of the loan pools, they will impact future periods as well. As of September 30, 2020, the remaining accretable yield 26 adjustment that will affect interest income is $ 2.9 million. Of the remaining adjustments affecting interest income, we expect to recognize $ 932 ,000 of interest income during the three months ending December 31, 2020. The impact to income of adjustments on the Company’s financial results is shown below: Three Months Ended Three Months Ended September 30, 2020 September 30, 2019 (In Thousands, Except Per Share Data and Basis Points Data) Impact on net interest income/ net interest margin (in basis points) $ 1,229 9 bps $ 2,251 20 bps Net impact to pre-tax income $ 1,229 $ 2,251 Net impact net of taxes $ 949 $ 1,738 Impact to diluted earnings per share $ 0.07 $ 0.12 Nine Months Ended Nine Months Ended September 30, 2020 September 30, 2019 (In Thousands, Except Per Share Data and Basis Points Data) Impact on net interest income/ net interest margin (in basis points) $ 4,632 12 bps $ 5,162 15 bps Net impact to pre-tax income $ 4,632 $ 5,162 Net impact net of taxes $ 3,576 $ 3,985 Impact to diluted earnings per share $ 0.25 $ 0.28 Changes in the accretable yield for acquired loan pools were as follows for the three and nine months ended September 30, 2020 and 2019: Sun Security TeamBank Vantus Bank Bank InterBank Valley Bank (In Thousands) Balance, July 1, 2020 $ 918 $ 954 $ 1,893 $ 5,252 $ 4,123 Accretion ( 94 ) ( 238 ) ( 238 ) ( 1,599 ) ( 658 ) Change in expected accretable yield (1) 178 88 79 808 92 Balance, September 30, 2020 $ 1,002 $ 804 $ 1,734 $ 4,461 $ 3,557 Balance, July 1, 2019 $ 1,350 $ 1,227 $ 1,859 $ 8,465 $ 5,544 Accretion ( 196 ) ( 259 ) ( 414 ) ( 2,371 ) ( 1,257 ) Change in expected accretable yield (1) ( 9 ) 305 872 2,840 1,565 Balance, September 30, 2019 $ 1,145 $ 1,273 $ 2,317 $ 8,934 $ 5,852 (1) Represents increases (decreases) in estimated cash flows expected to be received from the acquired loan pools, partially due to lower estimated credit losses. The amounts also include changes in expected accretion of the loan pools for TeamBank, Vantus Bank, Sun Security Bank, InterBank and Valley Bank for the three months ended September 30, 2020, totaling $178,000, $88,000, $79,000, $808,000 and $92,000, respectively, and for the three months ended September 30, 2019, totaling $(21,000), $132,000, $565,000, $(644,000) and $482,000, respectively. 27 Sun Security TeamBank Vantus Bank Bank InterBank Valley Bank (In Thousands) Balance, January 1, 2020 $ 1,157 $ 1,123 $ 1,948 $ 8,277 $ 4,578 Accretion ( 334 ) ( 657 ) ( 831 ) ( 5,563 ) ( 2,398 ) Change in expected accretable yield (1) 179 338 617 1,747 1,377 Balance, September 30, 2020 $ 1,002 $ 804 $ 1,734 $ 4,461 $ 3,557 Balance, January 1, 2019 $ 1,356 $ 1,432 $ 2,242 $ 4,994 $ 3,063 Accretion ( 811 ) ( 738 ) ( 1,195 ) ( 6,350 ) ( 3,243 ) Change in expected accretable yield (1) 600 579 1,270 10,290 6,032 Balance, September 30, 2019 $ 1,145 $ 1,273 $ 2,317 $ 8,934 $ 5,852 (1) Represents increases (decreases) in estimated cash flows expected to be received from the acquired loan pools, partially due to lower estimated credit losses. The amounts also include changes in expected accretion of the loan pools for TeamBank, Vantus Bank, Sun Security Bank, InterBank and Valley Bank for the nine months ended September 30, 2020, totaling $179,000, $338,000, $617,000, $1.7 million and $1.4 million, respectively, and for the nine months ended September 30, 2019, totaling $526,000, $406,000, $812,000, $4.0 million and $2.7 million, respectively. NOTE 8: OTHER REAL ESTATE OWNED AND REPOSSESSIONS Major classifications of other real estate owned were as follows: September 30, December 31, 2020 2019 (In Thousands) Foreclosed assets held for sale and repossessions One- to four-family construction $ - $ - Subdivision construction 350 689 Land development 1,075 1,816 Commercial construction - - One- to four-family residential - 601 Other residential - - Commercial real estate - - Commercial business - - Consumer 196 545 1,621 3,651 Foreclosed assets acquired through FDIC-assisted transactions, net of discounts 446 1,003 Foreclosed assets held for sale and repossessions, net 2,067 4,654 Other real estate owned not acquired through foreclosure 940 871 Other real estate owned and repossessions $ 3,007 $ 5,525 At September 30, 2020 other real estate owned not acquired through foreclosure included seven properties, all of which were branch locations that were closed and held for sale. At December 31, 2019, other real estate owned not acquired through foreclosure included six properties, all of which were branch locations that were closed and held for sale. 28 At September 30, 2020, residential mortgage loans totaling $ 787 ,000 were in the process of foreclosure, $ 657 ,000 of which were acquired loans. Pursuant to Section 4022 of the recently-enacted CARES Act, the Company has suspended all foreclosure proceedings. Under this provision, no mortgage servicer of any federally-backed mortgage loan is permitted to initiate any foreclosure process, whether judicial or non-judicial, move for a foreclosure judgment or order of sale, or execute a foreclosure- related eviction or foreclosure sale for a 60-day period, beginning March 18, 2020. This provision was subsequently extended through the end of 2020. At December 31, 2019, residential mortgage loans totaling $ 1.6 million were in the process of foreclosure, $ 1.4 million of which were acquired loans. Expenses applicable to other real estate owned and repossessions included the following: Three Months Ended September 30, 2020 2019 (In Thousands) Net gains on sales of other real estate owned and repossessions $ ( 348 ) $ ( 250 ) Valuation write-downs 269 280 Operating expenses, net of rental income 278 573 $ 199 $ 603 Nine Months Ended September 30, 2020 2019 (In Thousands) Net gains on sales of other real estate owned and repossessions $ ( 450 ) $ ( 659 ) Valuation write-downs 482 724 Operating expenses, net of rental income 914 1,577 $ 946 $ 1,642 NOTE 9: PREMISES AND EQUIPMENT Major classifications of premises and equipment, stated at cost, were as follows: September 30, December 31, 2020 2019 (In Thousands) Land $ 40,621 $ 40,632 Buildings and improvements 99,553 96,959 Furniture, fixtures and equipment 58,700 56,986 Operating leases right of use asset 8,758 8,668 207,632 203,245 Less accumulated depreciation 67,130 61,337 $ 140,502 $ 141,908 Leases. The Company adopted ASU 2016-02, Leases (Topic 842) , on January 1, 2019, using the modified retrospective transition approach whereby comparative periods were not restated. The Company also elected certain relief options under the ASU, including the option not to recognize right of use asset and lease liabilities that arise 29 from short-term leases (leases with terms of twelve months or less). Adoption of this ASU resulted in the Company initially recognizing a right of use asset and corresponding lease liability of $ 9.5 million during the three months ended March 31, 2019. The amount of the right of use asset and corresponding lease liability will fluctuate based on the Company’s lease terminations, new leases and lease modifications and renewals. As of September 30, 2020, the lease right to use asset value was $ 8.8 million and the corresponding lease liability was $ 8.9 million. All of our leases are classified as operating leases (as they were prior to January 1, 2019), and therefore were previously not recognized on the Company’s consolidated statements of financial condition. With the adoption of ASU 2016-02, these operating leases are now included as a right of use asset in the premises and equipment line item on the Company’s consolidated statements of financial condition. The corresponding lease liability is included in the accrued expenses and other liabilities line item on the Company’s consolidated statements of financial condition. Because these leases are classified as operating leases, the adoption of the new standard did not have a material effect on lease expense on the Company’s consolidated statements of income. ASU 2016-02 provides a number of optional practical expedients in transition. The Company has elected the “package of practical expedients,” which permits the Company not to reassess under the new standard the prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the use of the hindsight, a practical expedient which permits the use of information available after lease inception to determine the lease term via the knowledge of renewal options exercised not available as of the lease’s inception. The practical expedient pertaining to land easements is not applicable to the Company. ASU 2016-02 also requires certain other accounting elections. The Company elected the short-term lease recognition exemption for all leases that qualify, meaning those with terms under twelve months. Right of use assets or lease liabilities are not to be recognized for short-term leases. The Company also elected the practical expedient to not separate lease and non-lease components for all leases. The Company’s short-term leases related to offsite ATMs have both fixed and variable lease payment components, based on the number of transactions at the various ATMs. The variable portion of these lease payments is not material and the total lease expense related to ATMs for the three months ended September 30, 2020 and 2019 was $ 76 ,000 and $ 71 ,000, respectively. The total lease expense related to ATMs for the nine months ended September 30, 2020 and 2019, was $ 202 ,000 and $ 221 ,000, respectively. The calculated amounts of the right of use assets and lease liabilities in the table below are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew the extended term in the calculation of the right of use asset and lease liability. Regarding the discount rate, the ASU requires the use of the rate implicit in the lease at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the right of use asset and lease liability. Regarding the discount rate, the ASU requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception over a similar term. The discount rate utilized was the FHLBank borrowing rate for the term corresponding to the expected term of the lease. The remaining expected lease terms range from 2.8 years to 18.4 years with a weighted-average lease term of 9.5 years . The weighted-average discount rate was 3.24 %. 30 At or For the Three Months Ended September 30, 2020 September 30, 2019 (In Thousands) Statement of Financial Condition Operating leases right of use asset $ 8,758 $ 8,888 Operating leases liability $ 8,869 $ 8,952 Statement of Income Operating lease costs classified as occupancy and equipment expense $ 397 $ 344 (includes short-term lease costs and amortization of right of use asset) Supplemental Cash Flow Information Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 391 $ 326 At or For the Nine Months Ended September 30, 2020 September 30, 2019 (In Thousands) Statement of Financial Condition Operating leases right of use asset $ 8,758 $ 8,888 Operating leases liability $ 8,869 $ 8,952 Statement of Income Operating lease costs classified as occupancy and equipment expense $ 1,182 $ 1,092 (includes short-term lease costs and amortization of right of use asset) Supplemental Cash Flow Information Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 1,149 $ 1,028 Right of use assets obtained in exchange for lease obligations: Operating leases $ 972 $ 9,538 For the three months ended September 30, 2020 and 2019, lease expense was $ 397 ,000 and $ 344 ,000, respectively. For the nine months ended September 30, 2020 and 2019, lease expense was $ 1.2 million and $ 1.1 million, respectively. At September 30, 2020, future expected lease payments for leases with terms exceeding one year were as follows (In Thousands): 2020 $ 267 2021 1,118 2022 1,116 2023 1,088 2024 1,005 2025 979 Thereafter 4,926 Future lease payments expected 10,499 Less interest portion of lease payments ( 1,630 ) Lease liability $ 8,869 The Company does not sublease any of its leased facilities; however, it does lease to other third parties portions of facilities that it owns. In terms of being the lessor in these circumstances, all of these lease agreements are classified as operating leases. In the three months ended September 30, 2020 and 2019, income recognized from these lessor agreements was $ 294 ,000 and $ 289 ,000, respectively, and was included in occupancy and equipment expense. In the nine months ended September 30, 2020 and 2019, income recognized from these lessor agreements was $ 864 ,000 and $ 849 ,000, respectively, and was included in occupancy and equipment expense. 31 NOTE 10: DEPOSITS September 30, December 31, 2020 2019 (In Thousands) Time Deposits: 0.00% - 0.99% $ 649,949 $ 122,649 1.00% - 1.99% 657,893 523,816 2.00% - 2.99% 183,472 1,053,914 3.00% - 3.99% 18,733 19,849 4.00% - 4.99% 425 881 Total time deposits (weighted average rate 1.19% and 2.09%) 1,510,472 1,721,109 Non-interest-bearing demand deposits 881,298 687,068 Interest-bearing demand and savings deposits (Weighted average rate 0.29% and 0.55%) 2,051,987 1,551,929 Total Deposits $ 4,443,757 $ 3,960,106 NOTE 11: ADVANCES FROM FEDERAL HOME LOAN BANK At September 30, 2020 and December 31, 2019, there were no outstanding term advances from the Federal Home Loan Bank of Des Moines (FHLBank advances). There were overnight funds from the Federal Home Loan Bank of Des Moines as of December 31, 2019, which are included below in Note 12 . NOTE 12: SECURITIES SOLD UNDER REVERSE REPURCHASE AGREEMENTS AND SHORT-TERM BORROWINGS September 30, 2020 December 31, 2019 (In Thousands) Notes payable – Community Development Equity Funds $ 1,218 $ 1,267 Other interest-bearing liabilities - 30,890 Overnight borrowings from the Federal Home Loan Bank - 196,000 Securities sold under reverse repurchase agreements 155,042 84,167 $ 156,260 $ 312,324 The Bank enters into sales of securities under agreements to repurchase (reverse repurchase agreements). Reverse repurchase agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the statements of financial condition. The dollar amount of securities underlying the agreements remains in the asset accounts. Securities underlying the agreements are being held by the Bank during the agreement period. All agreements are written on a term of one month or less. At December 31, 2019, other interest-bearing liabilities consisted of cash collateral held by the Company to satisfy minimum collateral posting thresholds with its derivative dealer counterparties representing the termination value of derivatives, which at such time were in a net asset position. Under the collateral agreements between the parties, either party may choose to provide cash or securities to satisfy its collateral requirements. Effective March 2, 2020, the Company and its swap counterparty mutually agreed to terminate the Company’s interest rate swap eliminating the cash collateral held. For additional information, see “Cash Flow Hedges” in Note 16 . 32 The following table represents the Company’s securities sold under reverse repurchase agreements, by collateral type and remaining contractual maturity. September 30, 2020 December 31, 2019 Overnight and Overnight and Continuous Continuous (In Thousands) Mortgage-backed securities – GNMA, FNMA, FHLMC $ 155,042 $ 84,167 NOTE 13: SUBORDINATED NOTES On August 8, 2016, the Company completed the public offering and sale of $75.0 million of its subordinated notes. The notes are due August 15, 2026, and have a fixed interest rate of 5.25% until August 15, 2021, at which time the rate becomes floating at a rate equal to three-month LIBOR plus 4.087%. The Company may call the notes at par beginning on August 15, 2021, and on any scheduled interest payment date thereafter. The notes were sold at par, resulting in net proceeds, after underwriting discounts and commissions, legal, accounting and other professional fees, of approximately $ 73.5 million. Total debt issuance costs of approximately $ 1.5 million were deferred and are being amortized over the expected life of the notes, which is five years. On June 10, 2020, the Company completed the public offering and sale of $75.0 million of its subordinated notes. The notes are due June 15, 2030, and have a fixed interest rate of 5.50% until June 15, 2025, at which time the rate becomes floating at a rate expected to be equal to three-month term Secured Overnight Financing Rate (SOFR) plus 5.325%. The Company may call the notes at par beginning on June 15, 2025, and on any scheduled interest payment date thereafter. The notes were sold at par, resulting in net proceeds, after underwriting discounts and commissions, legal, accounting and other professional fees, of approximately $ 73.5 million. Total debt issuance costs of approximately $ 1.5 million were deferred and are being amortized over the expected life of the notes, which is five years. Amortization of the debt issuance costs during the three and nine months ended September 30, 2020, totaled $ 186 ,000 and $ 428 ,000, respectively. Amortization of the debt issuance costs during the three and nine months ended September 30, 2019, totaled $ 109 ,000 and $ 326 ,000, respectively. Amortization of the debt issuance costs is included in interest expense on subordinated notes in the consolidated statements of income, resulting in an imputed interest rate of 5.85 %. At September 30, 2020 and December 31, 2019, subordinated notes are summarized as follows: September 30, 2020 December 31, 2019 (In Thousands) Subordinated notes $ 150,000 $ 75,000 Less: unamortized debt issuance costs 1,783 724 $ 148,217 $ 74,276 33 NOTE 14: INCOME TAXES Reconciliations of the Company’s effective tax rates to the statutory corporate tax rates were as follows: Three Months Ended September 30, 2020 2019 Tax at statutory rate 21.0 % 21.0 % Nontaxable interest and dividends ( 0.6 ) ( 0.5 ) Tax credits ( 3.8 ) ( 3.9 ) State taxes 5.0 1.0 Other ( 0.1 ) ( 0.1 ) 21.5 % 17.5 % Nine Months Ended September 30, 2020 2019 Tax at statutory rate 21.0 % 21.0 % Nontaxable interest and dividends ( 0.5 ) ( 0.5 ) Tax credits ( 3.9 ) ( 4.2 ) State taxes 1.6 1.2 Other 0.6 0.1 18.8 % 17.6 % The Company and its consolidated subsidiaries have not been audited recently by the Internal Revenue Service (IRS), except as described here. The Company, through one of its subsidiaries, is a partner in two partnerships which were under IRS examination for 2006 and 2007. As a result, the Company’s 2006 and subsequent tax years remained open for examination. The examinations of these partnerships were completed during 2019. The completion of these examinations did not result in significant changes to the Company’s tax positions. As a result, federal tax years through December 31, 2015 are now closed. The Company is currently under State of Missouri income and franchise tax examinations for its 2014 and 2015 tax years. The Company does not currently expect significant adjustments to its financial statements from this state examination. NOTE 15: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: · Quoted prices in active markets for identical assets or liabilities (Level 1): Inputs that are quoted unadjusted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An active market for the asset is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. · Other observable inputs (Level 2): Inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity including quoted prices for similar assets, quoted prices for securities in inactive markets and inputs derived principally from or corroborated by observable market data by correlation or other means. 34 · Significant unobservable inputs (Level 3): Inputs that reflect assumptions of a source independent of the reporting entity or the reporting entity's own assumptions that are supported by little or no market activity or observable inputs. Financial instruments are broken down by recurring or nonrecurring measurement status. Recurring assets are initially measured at fair value and are required to be remeasured at fair value in the financial statements at each reporting date. Assets measured on a nonrecurring basis are assets that, due to an event or circumstance, were required to be remeasured at fair value after initial recognition in the financial statements at some time during the reporting period. The Company considers transfers between the levels of the hierarchy to be recognized at the end of related reporting periods. From December 31, 2019 to September 30, 2020, no assets for which fair value is measured on a recurring basis transferred between any levels of the hierarchy. Recurring Measurements The following table presents the fair value measurements of assets recognized in the accompanying statements of financial condition measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fell at September 30, 2020 and December 31, 2019: Fair value measurements using Quoted prices in active markets Other Significant for identical observable unobservable assets inputs inputs Fair value (Level 1) (Level 2) (Level 3) (In Thousands) September 30, 2020 Agency mortgage-backed securities $ 171,458 $ - $ 171,458 $ - Agency collateralized mortgage obligations 185,091 - 185,091 - States and political subdivisions 67,683 - 67,683 - Small Business Administration securities 21,708 - 21,708 - Interest rate derivative asset 6,193 - 6,193 - Interest rate derivative liability ( 6,744 ) - ( 6,744 ) - December 31, 2019 Agency mortgage-backed securities $ 165,042 $ - $ 165,042 $ - Agency collateralized mortgage obligations 151,950 - 151,950 - States and political subdivisions 35,125 - 35,125 - Small Business Administration securities 22,058 - 22,058 - Interest rate derivative asset 31,476 - 31,476 - Interest rate derivative liability ( 1,547 ) - ( 1,547 ) - The following is a description of inputs and valuation methodologies used for assets recorded at fair value on a recurring basis and recognized in the accompanying statements of financial condition at September 30, 2020 and December 31, 2019, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the nine-month period ended September 30, 2020. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. Available-for-Sale Securities. Investment securities available for sale are recorded at fair value on a recurring basis. The fair values used by the Company are obtained from an independent pricing service, which represent either quoted market prices for the identical asset or fair values determined by pricing models, or other model-based valuation techniques, that consider observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems. Recurring Level 2 securities include U.S. 35 government agency securities, mortgage-backed securities, state and municipal bonds and certain other investments. Inputs used for valuing Level 2 securities include observable data that may include dealer quotes, benchmark yields, market spreads, live trading levels and market consensus prepayment speeds, among other things. Additional inputs include indicative values derived from the independent pricing service’s proprietary computerized models. There were no recurring Level 3 securities at September 30, 2020 or December 31, 2019. Interest Rate Derivatives. The fair value is estimated using forward-looking interest rate curves and is determined using observable market rates and, therefore, are classified within Level 2 of the valuation hierarchy. Nonrecurring Measurements The following tables present the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2020 and December 31, 2019: Fair Value Measurements Using Quoted prices in active markets Other Significant for identical observable unobservable assets inputs inputs Fair value (Level 1) (Level 2) (Level 3) (In Thousands) September 30, 2020 Impaired loans $ 3,447 $ - $ - $ 3,447 Foreclosed assets held for sale $ 1,507 $ - $ - $ 1,507 December 31, 2019 Impaired loans $ 635 $ - $ - $ 635 Foreclosed assets held for sale $ 1,112 $ - $ - $ 1,112 The following is a description of valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying statements of financial condition, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. Loans Held for Sale. Mortgage loans held for sale are recorded at the lower of carrying value or fair value. The fair value of mortgage loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies mortgage loans held for sale as Nonrecurring Level 2. Write-downs to fair value typically do not occur as the Company generally enters into commitments to sell individual mortgage loans at the time the loan is originated to reduce market risk. The Company typically does not have commercial loans held for sale. At September 30, 2020 and December 31, 2019, the aggregate fair value of mortgage loans held for sale exceeded their cost. Accordingly, no mortgage loans held for sale were marked down and reported at fair value. Impaired Loans. A loan is considered to be impaired when it is probable that all of the principal and interest due may not be collected according to its contractual terms. Generally, when a loan is considered impaired, the amount of reserve required under FASB ASC 310, Receivables , is measured based on the fair value of the underlying collateral. The Company makes such measurements on all material loans deemed impaired using the fair value of the collateral for collateral dependent loans. The fair value of collateral used by the Company is determined by obtaining an observable market price or by obtaining an appraised value from an independent, licensed or certified appraiser, using observable market data. This data includes information such as selling price of similar properties and capitalization rates of similar properties sold within the market, expected future cash flows or earnings of the 36 subject property based on current market expectations, and other relevant factors. All appraised values are adjusted for market-related trends based on the Company’s experience in sales and other appraisals of similar property types as well as estimated selling costs. Each quarter, management reviews all collateral dependent impaired loans on a loan-by-loan basis to determine whether updated appraisals are necessary based on loan performance, collateral type and guarantor support. At times, the Company measures the fair value of collateral dependent impaired loans using appraisals with dates more than one year prior to the date of review. These appraisals are discounted by applying current, observable market data about similar property types such as sales contracts, estimations of value by individuals familiar with the market, other appraisals, sales or collateral assessments based on current market activity until updated appraisals are obtained. Depending on the length of time since an appraisal was performed and the data provided through our reviews, these appraisals are typically discounted 10-40%. The policy described above is the same for all types of collateral dependent impaired loans. The Company records impaired loans as Nonrecurring Level 3. If a loan’s fair value as estimated by the Company is less than its carrying value, the Company either records a charge-off of the portion of the loan that exceeds the fair value or establishes a reserve within the allowance for loan losses specific to the loan. Loans for which such charge-offs or reserves were recorded during the nine months ended September 30, 2020 or the year ended December 31, 2019, are shown in the table above (net of reserves). Foreclosed Assets Held for Sale. Foreclosed assets held for sale are initially recorded at fair value less estimated cost to sell at the date of foreclosure. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell. Foreclosed assets held for sale are classified within Level 3 of the fair value hierarchy. The foreclosed assets represented in the table above have been re-measured during the nine months ended September 30, 2020 or the year ended December 31, 2019, subsequent to their initial transfer to foreclosed assets. Fair Value of Financial Instruments The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying statements of financial condition at amounts other than fair value. Cash and Cash Equivalents and Federal Home Loan Bank Stock. The carrying amount approximates fair value. Loans and Interest Receivable. The fair value of loans is estimated on an exit price basis incorporating contractual cash flows, prepayments, discount spreads, credit losses and liquidity premiums. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest receivable approximates its fair value. Deposits and Accrued Interest Payable. The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date, i.e., their carrying amounts. The fair value of fixed maturity certificates of deposit is estimated through a discounted cash flow calculation using the average advances yield curve from 11 districts of the FHLB for the as of date. The carrying amount of accrued interest payable approximates its fair value. Short-Term Borrowings. The carrying amount approximates fair value. Subordinated Debentures Issued to Capital Trusts. The subordinated debentures have floating rates that reset quarterly. The carrying amount of these debentures approximates their fair value. Subordinated Notes. The fair values used by the Company are obtained from independent sources and are derived from quoted market prices of the Company’s subordinated notes and quoted market prices of other subordinated debt instruments with similar characteristics. Commitments to Originate Loans, Letters of Credit and Lines of Credit. The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of 37 letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The following table presents estimated fair values of the Company’s financial instruments not recorded at fair value on the statements of financial condition. The fair values of certain of these instruments were calculated by discounting expected cash flows, which method involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate. September 30, 2020 December 31, 2019 Carrying Fair Hierarchy Carrying Fair Hierarchy Amount Value Level Amount Value Level (In Thousands) Financial assets Cash and cash equivalents $ 338,266 $ 338,266 1 $ 220,155 $ 220,155 1 Mortgage loans held for sale 23,973 23,973 2 9,242 9,242 2 Loans, net of allowance for loan losses 4,413,764 4,422,175 3 4,153,982 4,129,984 3 Interest receivable 14,139 14,139 3 13,530 13,530 3 Investment in FHLBank stock and other interest-earning assets 11,036 11,036 3 13,473 13,473 3 Financial liabilities Deposits 4,443,757 4,454,083 3 3,960,106 3,963,875 3 Short-term borrowings 156,260 156,260 3 312,324 312,324 3 Subordinated debentures 25,774 25,774 3 25,774 25,774 3 Subordinated notes 148,217 153,844 2 74,276 76,875 2 Interest payable 2,859 2,859 3 4,250 4,250 3 Unrecognized financial instruments (net of contractual value) Commitments to originate loans - - 3 - - 3 Letters of credit 61 61 3 109 109 3 Lines of credit - - 3 - - 3 NOTE 16: DERIVATIVES AND HEDGING ACTIVITIES Risk Management Objective of Using Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its assets and liabilities. In the normal course of business, the Company may use derivative financial instruments (primarily interest rate swaps) from time to time to assist in its interest rate risk management. The Company has interest rate derivatives that result from a service provided to certain qualifying loan customers that are not used to manage interest rate risk in the Company’s assets or liabilities and are not designated in a qualifying hedging relationship. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions. In addition, the Company has interest rate derivatives that are designated in a qualified hedging relationship. 38 Nondesignated Hedges The Company has interest rate swaps that are not designated as qualifying hedging relationships. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain loan customers, which the Company began offering during 2011. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As part of the Valley Bank FDIC-assisted acquisition, the Company acquired seven loans with related interest rate swaps. Valley’s swap program differed from the Company’s in that Valley did not have back to back swaps with the customer and a counterparty. Five of the seven acquired loans with interest rate swaps have paid off. The aggregate notional amount of the two remaining Valley swaps was $609,000 at September 30, 2020. At September 30, 2020, excluding the Valley Bank swaps, the Company had 19 interest rate swaps totaling $115.6 million in notional amount with commercial customers, and 19 interest rate swaps with the same aggregate notional amount with third parties related to its program. In addition, the Company has four participation loans purchased totaling $27.8 million, in which the lead institution has an interest rate swap with its customer and the economics of the counterparty swap are passed along to the Company through the loan participation. At December 31, 2019, excluding the Valley Bank swaps, the Company had 19 interest rate swaps totaling $96.0 million in notional amount with commercial customers, and 19 interest rate swaps with the same notional amount with third parties related to its program. During the three months ended September 30, 2020 and 2019, the Company recognized net gains of $89,000 and net losses of $101,000, respectively, in noninterest income related to changes in the fair value of these swaps. During the nine months ended September 30, 2020 and 2019, the Company recognized net losses of $424,000 and $169,000, respectively, in noninterest income related to changes in the fair value of these swaps. Cash Flow Hedges Interest Rate Swap . As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flows due to interest rate fluctuations, 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. The notional amount of the swap was $400 million with a termination date of October 6, 2025. Under the terms of the swap, the Company received a fixed rate of interest of 3.018% and paid a floating rate of interest equal to one-month USD-LIBOR. 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 of interest exceeded one-month USD-LIBOR, the Company received net interest settlements which were recorded as loan interest income. If USD-LIBOR exceeded the fixed rate of interest in future periods, the Company was required to pay net settlements to the counterparty and recorded those net payments as a reduction of interest income on loans. The Company recorded loan interest income of $ 2.0 million and $ 801 ,000 on this interest rate swap during the three months ended September 30, 2020 and 2019, respectively. The Company recorded loan interest income of $ 5.6 million and $ 1.9 million on this interest rate swap during the nine months ended September 30, 2020 and 2019, respectively. The effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affected earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. During each of the three and nine months ended September 30, 2020 and 2019, the Company recognized no noninterest income related to changes in the fair value of this derivative. On March 2, 2020, the Company and its swap counterparty mutually agreed to terminate the swap, effective immediately. The Company received a payment of $ 45.9 million, including accrued but unpaid interest, from its swap counterparty as a result of this termination. This $45.9 million, less the accrued interest portion and net of deferred income taxes, is reflected in the Company’s stockholders’ equity as Accumulated Other Comprehensive Income and a portion of it is being accreted to interest income on loans monthly through the original contractual termination date of October 6, 2025. This will have the effect of reducing Accumulated Other Comprehensive Income and increasing Net Interest Income and Retained Earnings over the period. In each quarterly period, commencing with the quarter ended June 30, 2020, until the original contract termination date, the Company expects 39 to record loan interest income related to this swap transaction of approximately $2.0 million, based on the termination value of the swap. The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Financial Condition: Location in Fair Value Consolidated Statements September 30, December 31, of Financial Condition 2020 2019 (In Thousands) Derivatives designated as hedging instruments Interest rate swap Prepaid expenses and other assets $ - $ 30,056 Total derivatives designated as hedging instruments $ - $ 30,056 Derivatives not designated as hedging instruments Asset Derivatives Interest rate products Prepaid expenses and other assets $ 6,193 $ 1,420 Total derivatives not designated as hedging instruments $ 6,193 $ 1,420 Liability Derivatives Interest rate products Accrued expenses and other liabilities $ 6,744 $ 1,547 Total derivatives not designated as hedging instruments $ 6,744 $ 1,547 The following table presents the effect of cash flow hedge accounting on the statements of comprehensive income: Amount of Gain (Loss) Recognized in AOCI Three Months Ended September 30, Cash Flow Hedges 2020 2019 (In Thousands) Interest rate swap, net of income taxes $ ( 1,581 ) $ 4,461 Amount of Gain (Loss) Recognized in AOCI Nine Months Ended September 30, Cash Flow Hedges 2020 2019 (In Thousands) Interest rate swap, net of income taxes $ 8,271 $ 18,789 40 The following table presents the effect of cash flow hedge accounting on the statements of income: Three Months Ended September 30, Cash Flow Hedges 2020 2019 Interest Interest Interest Interest Income Expense Income Expense (In Thousands) Interest rate swap $ 2,047 $ - $ 801 $ - Nine Months Ended September 30, Cash Flow Hedges 2020 2019 Interest Interest Interest Interest Income Expense Income Expense (In Thousands) Interest rate swap $ 5,629 $ - $ 1,881 $ - Agreements with Derivative Counterparties The Company has agreements with its derivative counterparties. If the Company defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. If the Bank fails to maintain its status as a well-capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. Similarly, the Company could be required to settle its obligations under certain of its agreements if certain regulatory events occurred, such as the issuance of a formal directive, or if the Company’s credit rating is downgraded below a specified level. At September 30, 2020, the termination value of derivatives with our derivative dealer counterparties (related to loan level swaps with commercial lending customers) in a net liability position, which included accrued interest but excluded any adjustment for nonperformance risk, related to these agreements was $ 6.7 million. The Company has minimum collateral posting thresholds with its derivative dealer counterparties. At September 30, 2020, the Company’s activity with two of its derivative counterparties met the level at which the minimum collateral posting thresholds take effect (collateral to be given by the Company) and the Company had posted collateral totaling $ 6.7 million to the derivative counterparties to satisfy the loan level agreements. If the Company had breached any of these provisions at September 30, 2020 or December 31, 2019, it could have been required to settle its obligations under the agreements at the termination value. At December 31, 2019, the termination value of derivatives with our derivative dealer counterparties (related to loan level swaps with commercial lending customers) in a net liability position, which included accrued interest but excluded any adjustment for nonperformance risk, related to these agreements was $ 1.1 million. In addition, as of December 31, 2019, the termination value of derivatives with our derivative dealer counterparty (related to the balance sheet hedge commenced in October 2018) in a net asset position, which included accrued interest but excluded any adjustment for nonperformance risk, related to these agreements was $ 30.1 million. The Company has minimum collateral posting thresholds with its derivative dealer counterparties. At December 31, 2019, the Company’s activity with one of its derivative counterparties met the level at which the minimum collateral posting thresholds take effect (collateral to be received by the Company) and the derivative counterparties had posted collateral of $ 30.9 million to the Company to satisfy the balance sheet hedge agreement. Additionally, the Company’s activity with one of its derivative counterparties met the level at which the minimum collateral posting thresholds take effect (collateral to be given by the Company) and the Company had posted collateral of $1.1 million to the derivative counterparties to satisfy the loan level agreements. If the Company had breached any of these provisions at December 31, 2019, it could have been required to settle its obligations under the agreements at the termination value. 41