What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-05-06 compared with 2020-11-06 · 407 added, 605 removed, 679 unchanged (60% of the section changed)

4 unchanged sentences

(In thousands, except number of shares)

SEPTEMBER 30,

Interest-bearing deposits in other financial institutions

2 unchanged sentences

Mortgage loans held for sale

Loans receivable, net of allowance for loan losses of $ 54,238 - September 2020;

$ 40,294 - December 2019

Loans receivable, net of allowance for credit losses of $ 67,702 – March 2021;

net of allowance for loan losses of $ 55,743 - December 2020

Interest receivable

13 unchanged sentences

Accrued expenses and other liabilities

Current and deferred income taxes

Liability for unfunded commitments

Total Liabilities

Commitments and Contingencies

Stockholders' Equity:

2 unchanged sentences

authorized 1,000,000 shares;

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

issued and outstanding March 2021 and December 2020 - - 0 - shares

Common stock, $ .01 par value;

authorized 20,000,000 shares;

issued and outstanding September 2020 – 13,880,570 shares;

issued and outstanding March 2021 – 13,693,644 shares;

December 2020 – 13,752,605 shares

10 unchanged sentences

THREE MONTHS ENDED

SEPTEMBER 30,

INTEREST INCOME

7 unchanged sentences

NET INTEREST INCOME

PROVISION FOR LOAN LOSSES

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

PROVISION FOR CREDIT LOSSES ON LOANS

PROVISION (CREDIT) FOR UNFUNDED COMMITMENTS

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES AND PROVISION (CREDIT) FOR UNFUNDED COMMITMENTS

NON-INTEREST INCOME

23 unchanged sentences

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

NINE MONTHS ENDED

SEPTEMBER 30,

INTEREST INCOME

Investment securities and other

TOTAL INTEREST INCOME

INTEREST EXPENSE

Short-term borrowings and repurchase agreements

Subordinated debentures issued to capital trust

Subordinated notes

TOTAL INTEREST EXPENSE

NET INTEREST INCOME

PROVISION FOR LOAN LOSSES

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

NON-INTEREST INCOME

Service charges, debit card and ATM fees

Net gains on loan sales

Late charges and fees on loans

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

Loss on derivative interest rate products

TOTAL NON-INTEREST INCOME

NON-INTEREST EXPENSE

Salaries and employee benefits

Net occupancy and equipment expense

Office supplies and printing

Legal, audit and other professional fees

Expense on other real estate and repossessions

Partnership tax credit investment amortization

Acquired deposit intangible asset amortization

Other operating expenses

TOTAL NON-INTEREST EXPENSE

INCOME BEFORE INCOME TAXES

PROVISION FOR INCOME TAXES

NET INCOME AND NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

Basic Earnings Per Common Share

Diluted Earnings Per Common Share

Dividends Declared Per Common Share

See Notes to Consolidated Financial Statements

GREAT SOUTHERN BANCORP, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

THREE MONTHS ENDED

SEPTEMBER 30,

(In thousands, except per share data)

THREE MONTHS ENDED MARCH 31,

Unrealized appreciation (depreciation) on available-for-sale securities, net of taxes (credit) of $( 4,109 ) and $ 3,411 , for 2021 and 2020, respectively

2 unchanged sentences

Comprehensive Income

NINE MONTHS ENDED

SEPTEMBER 30,

Unrealized appreciation on available-for-sale securities, net of taxes of $ 4,482 and $ 3,732 , for 2020 and 2019, respectively

Reclassification adjustment for gains included in net income, net of taxes (credit) of

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

Change in fair value of cash flow hedge, net of taxes of $ 3,519 and $ 5,549 , for 2020 and 2019, respectively

Amortization of realized gain on termination of cash flow hedge, net of taxes (credit) of $( 1,075 ) and $ 0 , for 2020 and 2019, respectively

Comprehensive Income

See Notes to Consolidated Financial Statements

3 unchanged sentences

(In thousands, except per share data)

THREE MONTHS ENDED SEPTEMBER 30, 2019

Comprehensive

Paid-in Capital

Income (Loss)

Balance, June 30, 2019

Stock issued under Stock Option

Common dividends declared,

$0.34 per share

Other comprehensive gain

Reclassification of treasury stock

per Maryland law

Balance, September 30, 2019

THREE MONTHS ENDED SEPTEMBER 30, 2020

Comprehensive

Paid-in Capital

Income (Loss)

Balance, June 30, 2020

Stock issued under Stock Option

Common dividends declared,

$0.34 per share

Other comprehensive loss

Purchase of the Company’s common stock

Reclassification of treasury stock

per Maryland law

Balance, September 30, 2020

See Notes to Consolidated Financial Statements

NINE MONTHS ENDED SEPTEMBER 30, 2019

THREE MONTHS ENDED MARCH 31, 2020

Comprehensive

2 unchanged sentences

Balance, January 1, 2020

Stock issued under Stock Option

Common dividends declared,

$1.39 per share

Purchase of the Company’s common stock

Stock issued under Stock Option Plan

Common dividends declared, $ 1.34 per share

Other comprehensive gain

Reclassification of treasury stock

per Maryland law

Balance, September 30, 2019

NINE MONTHS ENDED SEPTEMBER 30, 2020

Purchase of the Company’s common stock

Reclassification of treasury stock per Maryland law

Balance, March 31, 2020

THREE MONTHS ENDED MARCH 31, 2021

Comprehensive

2 unchanged sentences

Balance, January 1, 2021

Stock issued under Stock Option

Common dividends declared,

$2.02 per share

Other comprehensive gain

Impact of ASU 2016-13 adoption

Stock issued under Stock Option Plan

Common dividends declared, $ 0.34 per share

Other comprehensive loss

Purchase of the Company’s common stock

Reclassification of treasury stock

per Maryland law

Balance, September 30, 2020

Reclassification of treasury stock per Maryland law

Balance, March 31, 2021

See Notes to Consolidated Financial Statements

3 unchanged sentences

(In thousands)

NINE MONTHS ENDED

SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

CASH FLOWS FROM OPERATING ACTIVITIES

3 unchanged sentences

Compensation expense for stock option grants

Provision for loan losses

Provision for credit losses on loans

Provision (credit) for unfunded commitments

Net gains on loan sales

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

Net (gains) losses on sale of premises and equipment

1 unchanged sentence

Accretion of deferred income, premiums, discounts and other

Loss on derivative interest rate products

Loss (gain) on derivative interest rate products

Deferred income taxes

12 unchanged sentences

Proceeds from termination of interest rate derivative

Proceeds from sales of available-for-sale securities

Proceeds from maturities and calls of available-for-sale securities

1 unchanged sentence

Purchase of available-for-sale securities

Redemption of Federal Home Loan Bank stock and change in

other interest-earning assets

Redemption of Federal Home Loan Bank stock and change in other interest-earning assets

Net cash used in investing activities

4 unchanged sentences

Advances from borrowers for taxes and insurance

Proceeds from issuance of subordinated notes

Dividends paid

2 unchanged sentences

Net cash provided by financing activities

INCREASES (DECREASES) IN CASH AND CASH EQUIVALENTS

INCREASES IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

6 unchanged sentences

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 “Company” or “Great Southern”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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.

Operating results for the three months ended March 31, 2021 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, 2020, has been derived from the audited consolidated statement of financial condition of the Company as of that date.

2 unchanged sentences

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

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

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (the “SEC”).

NATURE OF OPERATIONS AND OPERATING SEGMENTS

9 unchanged sentences

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued Accounting Standards Update (ASU) No.

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (ASU) No.

2016-13, Financial Instruments – Credit Losses (Topic 326) .

1 unchanged sentence

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 affects entities holding financial assets and net investments in leases that are not accounted for at fair value through net income.

The Update affects 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

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.

During March 2020, pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and guidance from the SEC and FASB, we elected to delay adoption of the new accounting standard under the Update that is referred to as the current expected credit loss (“CECL”) methodology.

In December 2020, additional legislation was enacted that amended certain provisions of the CARES Act.

One of the provisions that was affected by this new legislation allowed for the election to further delay the adoption of the CECL accounting standard to January 1, 2022.

An adoption date of January 1, 2021, was also an acceptable option and we elected January 1, 2021 as our adoption date for the CECL standard.

As a result, our 2020 financial statements were prepared under the existing incurred loss methodology standard for accounting for loan losses.

The adoption of the CECL model during the first quarter of 2021 required us to recognize a one-time cumulative adjustment to our allowance for credit 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 increased the balance of our allowance for credit losses related to outstanding loans by $ 11.6 million and created a liability for potential losses related to the unfunded portion of our loans and commitments of $ 8.7 million.

The after-tax effect of these adjustments decreased our retained earnings by $ 14.2 million.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting .

ASU 2020-04 provides relief for companies preparing for discontinuation of interest rates such as the London Interbank Offered Rate (“LIBOR”).

LIBOR is a benchmark interest rate referenced in a variety of agreements that are used by numerous entities.

After 2021, certain LIBOR rates may no longer be published.

As a result, LIBOR could be discontinued as a reference rate.

Other interest rates used globally could also be discontinued for similar reasons.

ASU 2020-04 provides optional expedients and exceptions to contracts, hedging relationships and other transactions affected by reference rate reform.

The main provisions for contract modifications include optional relief by allowing the modification as a continuation of the existing contract without additional analysis and other optional expedients regarding embedded features.

Optional expedients for hedge accounting permits changes to critical terms of hedging relationships and to the designated benchmark interest rate in a fair value hedge and also provides relief for assessing hedge effectiveness for cash flow hedges.

Companies are able to apply ASU 2020-04 immediately;

however, the guidance will only be available for a limited time (generally through December 31, 2022).

The application of ASU 2020-04 has not had, and is not expected to have, a material impact on the Company’s consolidated financial statements.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848):

ASU 2021-01 clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

ASU 2021-01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

ASU 2021-01 was effective upon issuance and generally can be applied through December 31, 2022.

ASU 2021-01 has not had, and is not expected to have, a material impact on the Company’s consolidated financial statements.

EARNINGS PER SHARE

Three Months Ended September 30,

(In Thousands, Except Per Share Data)

Average common shares outstanding

Net income and net income available to common stockholders

Per common share amount

Average common shares outstanding

Net effect of dilutive stock options – based on the treasury

stock method using average market price

Diluted common shares

Net income and net income available to common stockholders

Per common share amount

Nine Months Ended September 30,

Three Months Ended March 31,

(In Thousands, Except Per Share Data)

3 unchanged sentences

Average common shares outstanding

Net effect of dilutive stock options – based on the treasury

stock method using average market price

Net effect of dilutive stock options – based on the treasury stock method using average market price

Diluted common shares

1 unchanged sentence

Per common share amount

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.

Options outstanding at March 31, 2021 and 2020, to purchase 352,488 and 568,551 shares of common stock, respectively, were not included in the computation of diluted earnings per common share for each of the three month periods because the exercise prices of such options were greater than the average market prices of the common stock for the three months ended March 31, 2021 and 2020, respectively.

INVESTMENT SECURITIES

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

September 30, 2020

March 31, 2021

(In Thousands)

11 unchanged sentences

Small Business Administration securities

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

The amortized cost and fair value of available-for-sale securities at March 31, 2021, by contractual maturity, are shown below.

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

5 unchanged sentences

Securities not due on a single maturity date

There were no securities classified as held to maturity at September 30, 2020 or December 31, 2019.

There were no securities classified as held to maturity at March 31, 2021 or December 31, 2020.

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.

Total fair value of these investments at March 31, 2021 and December 31, 2020, was approximately $ 134.5 million and $ 24.2 million, respectively, which is approximately 29.4 % and 5.8 % 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.

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

March 31, 2021

Less than 12 Months

4 unchanged sentences

Agency collateralized mortgage obligations

States and political subdivisions

States and political subdivisions securities

December 31, 2020

6 unchanged sentences

Small Business Administration securities

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.

States and political subdivisions securities

There were no sales of available-for-sale securities during the three months ended March 31, 2021 or March 31, 2020.

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.

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.

Allowance for Credit Losses Beginning January 1, 2021, the Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments .

All of the mortgage-backed, collateralized mortgage, and SBA securities held by the Company are issued by U.S.

government-sponsored entities and agencies.

These securities are either explicitly or implicitly guaranteed by the U.S.

government, are highly rated by major rating agencies and have a long history of no credit losses.

Likewise, the Company has not experienced historical losses on these types of securities.

Accordingly, no allowance for credit losses has been recorded for these securities.

Regarding securities issued by state and political subdivisions, management considers the following when evaluating these securities:

(i) current issuer bond ratings, (ii) historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) updated financial information of the issuer, (v) internal forecasts and (vi) whether such securities provide insurance or other credit enhancement or are pre-refunded by the issuers.

These securities are highly rated by major rating agencies and have a long history of no credit losses.

Likewise, the Company has not experienced historical losses on these types of securities.

Accordingly, no allowance for credit losses has been recorded for these securities.

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

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)

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

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)

Provision for income taxes

Total reclassifications out of accumulated

other comprehensive income

LOANS AND ALLOWANCE FOR LOAN LOSSES

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

September 30,

There were no amounts reclassified from accumulated other comprehensive income during the three months ended March 31, 2021 and 2020.

LOANS AND ALLOWANCE FOR CREDIT LOSSES

The Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , effective January 1, 2021.

The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables.

It also applies to off-balance sheet credit exposures not accounted for as insurance, including loan commitments, standby letters of credits, financial guarantees, and other similar instruments.

The Company adopted ASC 326 using the modified retrospective method for loans and off-balance sheet credit exposures.

The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses of $ 11.6 million.

This adjustment brought the balance of the allowance for credit losses to $ 67.3 million as of January 1, 2021.

In addition, the Company recorded an $ 8.7 million liability for unfunded commitments as of January 1, 2021.

The after-tax effect decreased retained earnings by $ 14.2 million.

The adjustment was based upon the Company’s analysis of current conditions, assumptions and economic forecasts at January 1, 2021.

The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (PCD) that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30.

In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption.

On January 1, 2021, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $ 1.9 million of the allowance for credit losses.

Results for reporting periods after December 31, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

Under the incurred loss model, the Company delayed recognition of losses until it was probable that a loss was incurred.

The allowance for loan losses was established as losses were estimated to have occurred through a provision for loan losses charged to earnings.

Loan losses were charged against the allowance when management believed the uncollectability of a loan balance was confirmed.

The allowance for loan losses was evaluated on a regular basis by management and was based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.

The allowance consisted of allocated and general components.

The allocated component relates to loans that are classified as impaired.

For loans classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

The general component covers non-classified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process.

Results for reporting periods after December 31, 2020 include loans acquired and accounted for under ASC 310-30 net of discount within the loan classes, while for reporting periods prior to January 1, 2021 the loans acquired and accounted for under ASC 310-30 are separate.

Beginning on January 1, 2021, the allowance for credit losses is measured using an average historical loss model which incorporates relevant information about past events (including historical credit loss experience on loans with similar risk characteristics), current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the loans.

The allowance for credit losses is measured on a collective (pool) basis.

Loans are aggregated into pools based on similar risk characteristics including borrower type, collateral and repayment types and expected credit loss patterns.

Loans that do not share similar risk characteristics, primarily classified and/or TDR loans with a balance greater than or equal to $ 100,000 , are evaluated on an individual basis.

For loans evaluated for credit losses on a collective basis, average historical loss rates are calculated for each pool using the Company’s historical net charge-offs (combined charge-offs and recoveries by observable historical reporting period) and outstanding loan balances during a lookback period.

Lookback periods can be different based on the individual pool and represent management’s credit expectations for the pool of loans over the remaining contractual life.

In certain loan pools, if the Company’s own historical loss rate is not reflective of the loss expectations, the historical loss rate is augmented by industry and peer data.

The calculated average net charge-off rate is then adjusted for current conditions and reasonable and supportable forecasts.

These adjustments increase or decrease the average historical loss rate to reflect expectations of future losses given economic forecasts of key macroeconomic variables including, but not limited to, unemployment rate, GDP, disposable income and market volatility.

The adjustments are based on results from various regression models projecting the impact of the macroeconomic variables to loss rates.

The forecast is used for a reasonable and supportable period before reverting to historical averages using a straight-line method.

The forecast-adjusted loss rate is applied to the amortized cost of loans over the remaining contractual lives, adjusted for expected prepayments.

The contractual term excludes expected extensions, renewals and modifications unless there is a reasonable expectation that a troubled debt restructuring will be executed.

Additionally, the allowance for credit losses considers other qualitative factors not included in historical loss rates or macroeconomic forecasts such as changes in portfolio composition, underwriting practices, or significant unique events or conditions.

ASU 2016-13 requires an allowance for off balance sheet credit exposures;

unfunded lines of credit, undisbursed portions of loans, written residential and commercial commitments, and letters of credit.

To determine the amount needed for allowance purposes, a utilization rate is determined either by the model or internally for each pool.

Our loss model calculates the reserve on unfunded commitments based upon the utilization rate multiplied by the average loss rate factors in each pool with unfunded and committed balances.

The liability for unfunded lending commitments utilizes the same model as the allowance for credit losses on loans;

however, the liability for unfunded lending commitments incorporates assumptions for the portion of unfunded commitments that are expected to be funded.

Classes of loans at March 31, 2021 and December 31, 2020 were as follows:

(In Thousands)

14 unchanged sentences

Undisbursed portion of loans in process

Allowance for loan losses

Allowance for credit losses

Deferred loan fees and gains, net

Weighted average interest rate

Classes of loans by aging were as follows:

September 30, 2020

(1) Loans acquired and accounted for under ASC 310-30 of $ 91.9 million have been included in the totals by loan class as of March 31, 2021.

At the date of CECL adoption, the Company did not reassess whether purchased credit impaired loans met the criteria of purchased credit deteriorated loans.

The following tables present the classes of loans by aging.

Loans acquired and accounted for under ASC 310-30 of $91.9 million have been included in the totals by loan class as of March 31, 2021.

March 31, 2021

> 90 Days Past

Still Accruing

(In Thousands)

One- to four-family

residential construction

One- to four-family residential construction

Subdivision construction

1 unchanged sentence

Commercial construction

Owner occupied one- to four-

family residential

Non-owner occupied one-

to four- family residential

Owner occupied one- to four-family residential

Non-owner occupied one- to four-family residential

Commercial real estate

5 unchanged sentences

Home equity lines of credit

Loans acquired and accounted

for under ASC 310-30,

net of discounts

Less loans acquired an accountedd

for under ASC 310-30,

net of discounts

FDIC-acquired loans

December 31, 2020

> 90 Days Past

Still Accruing

(In Thousands)

One- to four-family

residential construction

One- to four-family residential construction

Subdivision construction

1 unchanged sentence

Commercial construction

Owner occupied one- to four-

family residential

Non-owner occupied one-

to four- family residential

Owner occupied one- to four-family residential

Non-owner occupied one- to four-family residential

Commercial real estate

5 unchanged sentences

Home equity lines of credit

Loans acquired and accounted

for under ASC 310-30,

net of discounts

Less loans acquired and

accounted for under

ASC 310-30, net of discounts

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

September 30,

Loans acquired and accounted for under ASC 310-30, net of discounts

Loans are placed on nonaccrual status at 90 days past due and interest is considered a loss unless the loan is well secured and in the process of collection.

Payments received on nonaccrual loans are applied to principal until the loans are returned to accrual status.

Loans are returned to accrual status when all payments contractually due are brought current, payment performance is sustained for a period of time, generally six months, and future payments are reasonably assured.

With the exception of consumer loans, charge-offs on loans are recorded when available information indicates a loan is not fully collectible and the loss is reasonably quantifiable.

Consumer loans are charged-off at specified delinquency dates consistent with regulatory guidelines.

Non-accruing loans as of December 31, 2020 shown below exclude $ 3.8 million in loans acquired and accounted for under ASC 310-30, while the non-accruing loans as of March 31, 2021 include $ 3.6 million in the loans acquired through various FDIC-assisted transactions in the loan classes listed.

(In Thousands)

12 unchanged sentences

Home equity lines of credit

The following table presents the activity in the allowance for loan losses by portfolio segment for the three 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:

Total non-accruing loans

FDIC-acquired loans

Total non-accruing loans net of FDIC-acquired loans

No interest income was recorded on these loans for the three months ended March 31, 2021 and 2020, respectively.

Nonaccrual loans for which there is no related allowance for credit losses as of March 31, 2021 had an amortized cost of $ 3.5 million.

These loans are individually assessed and do not hold an allowance due to being adequately collateralized under the collateral-dependent valuation method.

A collateral-dependent loan is a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Company’s assessment as of the reporting date.

Collateral-dependent loans are identified by either a classified risk rating or TDR status and a loan balance equal to or greater than $ 100,000 , including, but not limited to, any loan in process of foreclosure or repossession.

The following table presents the activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2021.

On January 1, 2021, the Company adopted the CECL methodology, which added $ 11.6 million to the total Allowance for Credit Loss, which included $ 1.9 million remaining discount on loans that were previously accounted for as purchased credit impaired.

Under the CECL methodology, the Company recorded a $ 300,000 provision for credit losses on loans during the three months ended

March 31, 2021, compared to a $ 3.9 million provision for loan losses in the three months ended March 31, 2020, under the incurred loss method.

One- to Four-

1 unchanged sentence

(In Thousands)

Allowance for loan losses

Balance, July 1, 2020

Provision (benefit) charged

Losses charged off

Balance, September 30, 2020

Allowance for credit losses

Balance, December 31, 2020

CECL adoption

Balance, January 1, 2021

Provision (benefit) charged

Provision charged to expense

Losses charged off

Balance, September 30, 2020

Ending balance:

Individually evaluated for

Collectively evaluated for

Loans acquired and accounted

for under ASC310-30

Individually evaluated for

Collectively evaluated for

Loans acquired and accounted

for under ASC310-30

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.

Balance, March 31, 2021

The following table presents the activity in the allowance for unfunded commitments by portfolio segment for the three months ended March 31, 2021.

On January 1, 2021, the Company adopted the CECL methodology, which created an $ 8.7 million allowance for unfunded commitments.

Under the CECL methodology, the Company recorded a $ 674,000 benefit for unfunded loan commitments during the three months ended March 31, 2021.

One- to Four-

1 unchanged sentence

(In Thousands)

Allowance for loan losses

Balance July 1, 2019

Provision (benefit) charged

Losses charged off

Balance September 30, 2019

Allowance for unfunded commitments

Balance, December 31, 2020

CECL adoption

Balance, January 1, 2021

Provision (benefit) charged

Provision (benefit) charged to expense

Balance, March 31, 2021

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2020, prepared using the previous GAAP incurred loss method prior to the adoption of ASU 2016-13.

One- to Four-

Residential and

(In Thousands)

Balance January 1, 2020

Provision (benefit) charged to expense

Losses charged off

Balance September 30, 2019

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

Balance March 31, 2020

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, 2020, prepared using the previous GAAP incurred loss method prior to the adoption of ASU 2016-13.

One- to Four-

2 unchanged sentences

Allowance for loan losses

Individually evaluated

for impairment

Collectively evaluated

for impairment

Loans acquired and

accounted for under

Individually evaluated

for impairment

Collectively evaluated

for impairment

Loans acquired and

accounted for under

The portfolio segments used in the preceding three tables correspond to the loan classes used in all other tables in Note 6 as follows:

Individually evaluated for impairment

Collectively evaluated for impairment

Loans acquired and accounted for under ASC 310-30

Individually evaluated for impairment

Collectively evaluated for impairment

Loans acquired and accounted for under ASC 310-30

The portfolio segments used in the preceding 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.

4 unchanged sentences

● 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.

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

September 30, 2020

(In Thousands)

One- to four-family residential construction

Subdivision construction

Land development

Commercial construction

Owner occupied one- to four-family residential

Non-owner occupied one- to four-family residential

Commercial real estate

Other residential

Commercial business

Industrial revenue bonds

Consumer auto

Consumer other

Home equity lines of credit

Three Months Ended

September 30, 2020

Nine Months Ended

September 30, 2020

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of March 31, 2021:

March 31, 2021

(In Thousands)

12 unchanged sentences

Home equity lines of credit

The following table presents information pertaining to impaired loans as of December 31, 2020, in accordance with previous GAAP prior to the adoption of ASU 2016-13.

due from the borrower in accordance with the contractual terms of the loan.

At or for the Year Ended December 31, 2020

13 unchanged sentences

Home equity lines of credit

September 30, 2019

(In Thousands)

One- to four-family residential construction

Subdivision construction

Land development

Commercial construction

Owner occupied one- to four-family residential

Non-owner occupied one- to four-family residential

Commercial real estate

Other residential

Commercial business

Industrial revenue bonds

Consumer auto

Consumer other

Home equity lines of credit

Three Months Ended

September 30, 2019

Nine Months Ended

September 30, 2019

At or for the Three Months Ended March 31, 2020

(In Thousands)

12 unchanged sentences

Home equity lines of credit

At September 30, 2020, $ 4.6 million of impaired loans had specific valuation allowances totaling $ 746 ,000.

At December 31, 2020, $ 4.8 million of impaired loans had specific valuation allowances totaling $ 713,000 .

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

Interest Only

Troubled debt restructurings (“TDRs”) by class is presented below as of March 31, 2021 and December 31, 2020.

The December 31, 2020 table excludes $ 1.7 million of FDIC-acquired loans accounted for under ASC 310-30, while the March 31, 2021 table includes the loans acquired through various FDIC-assisted transactions in the loan classes listed.

March 31, 2021

Accruing TDR Loans

Non-accruing TDR Loans

Total TDR Loans

(In Thousands)

Construction and land development

One- to four-family residential

Other residential

Commercial real estate

Commercial business

Three Months Ended September 30, 2019

Interest Only

December 31, 2020

Troubled Debt

(In Thousands)

Nine Months Ended September 30, 2020

Commercial real estate

One- to four-family residential

Other residential

The following tables present newly restructured loans, which were considered TDRs, during the three months ended March 31, 2021 and 2020, respectively, by type of modification:

Three Months Ended March 31, 2021

Interest Only

(In Thousands)

One- to four-family residential

Commercial Real Estate

Commercial business

Nine Months Ended September 30, 2019

Three Months Ended March 31, 2020

Interest Only

(In Thousands)

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.

One- to four-family residential

At March 31, 2021, of the $ 4 .0 million in TDRs, $ 3.3 million were classified as substandard using the Company’s internal grading system, which is described below.

The Company had no TDRs that were modified in the previous 12 months and subsequently defaulted during the three months ended March 31, 2021.

At December 31, 2020, of the $ 3.3 million in TDRs, $ 1.6 million were classified as substandard using the Company’s internal grading system.

The Company had no TDRs that were modified in the previous 12 months and subsequently defaulted during the year ended December 31, 2020.

During the three months ended March 31, 2021, there were four loans designated as TDRs, totaling $ 27,000 , which 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

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

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

In addition to the above loans considered TDRs, at March 31, 2021, the Company had remaining 19 modified commercial loans with an aggregate principal balance outstanding of $ 141 million and 92 modified consumer and mortgage loans with an aggregate principal balance outstanding of $ 5 million.

At March 31, 2021, the largest total modified loans by collateral type were in the following categories:

hotel/motel - $ 69 million;

healthcare - $ 28 million;

retail - $ 22 million;

multifamily - $ 11 million.

At December 31, 2020, the Company had remaining 65 modified commercial loans with an aggregate principal balance outstanding of $ 233 million and 581 modified consumer and mortgage loans with an aggregate principal balance outstanding of $ 18 million.

The loan modifications are within the guidance provided by the CARES Act and subsequent legislation, the federal banking regulatory agencies, the SEC and the FASB;

therefore, they are not considered troubled debt restructurings.

A portion of the loans modified at March 31, 2021, may be further modified, and new loans may be modified, within the guidance provided by the CARES Act (and subsequent legislation enacted in December 2020), the federal banking regulatory agencies, the SEC and the FASB if a more severe or lengthier deterioration in economic conditions occurs in future periods.

The Company utilizes an internal risk rating system comprised of a series of grades to categorize loans according to perceived risk associated with the expectation of debt repayment.

The analysis of the borrower’s ability to repay considers specific information, including but not limited to current financial information, historical payment experience, industry information, collateral levels and collateral types.

A risk rating is assigned at loan origination and then monitored throughout the contractual term for possible risk rating changes.

Satisfactory loans range from Excellent to Moderate Risk, but generally are loans supported by strong recent financial statements.

Character and capacity of individuals or company are strong, including reasonable project performance, good industry experience, liquidity and/or net worth of individuals or company.

Probability of financial deterioration seems unlikely.

Repayment is expected from approved sources over a reasonable period of time.

Watch loans are identified when the borrower has capacity to perform according to terms;

however, elements of uncertainty exist.

Margins of debt service coverage may be narrow, historical patterns of financial performance may be erratic, collateral margins may be diminished and the borrower may be a new and/or thinly capitalized company.

Some management weakness may also exist, the borrowers may have somewhat limited access to other financial institutions, and that ability may diminish in difficult economic times.

Special Mention loans have weaknesses that deserve management’s close attention.

If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects or the Bank's credit position at some future date.

It is a transitional grade that is closely monitored for improvement or deterioration.

The Substandard rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists.

Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment.

Doubtful loans have 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, highly questionable and improbable.

Loans considered loss are uncollectable and no longer included as an asset.

All loans are analyzed for risk rating updates regularly.

For larger loans, rating assessments may be more frequent if relevant information is obtained earlier through debt covenant monitoring or overall relationship management.

Smaller loans are monitored as identified by the loan officer based on the risk profile of the individual borrower or if the loan becomes past due related to credit issues.

Loans rated Watch, Special Mention, Substandard or Doubtful are subject to quarterly review and monitoring processes.

In addition to the regular monitoring performed by the lending personnel and credit committees, loans are subject to review by the credit review department, which verifies the appropriateness of the risk ratings for the loans chosen as part of its risk-based review plan.

The following tables present a summary of loans by risk category and past due status separated by origination and loan class as of March 31, 2021.

The March 31, 2021 table was prepared using the CECL methodology and includes $ 91.9 million in FDIC-assisted acquired loans included in the loan class categories.

The remaining accretable discount of $ 1.3 million has not been included in this table.

See Note 7 for further discussion of the FDIC-acquired loans and related discount.

The December 31, 2020 table was prepared using the previous GAAP incurred loss methodology prior to the adoption of ASU 2016-13.

The $ 98.6 million in FDIC-assisted acquired loans are shown as a total, not within the loan class categories.

Term Loans by Origination Year

(In Thousands)

One- to four-family residential

One- to four-family residential construction

Satisfactory (1‑4)

Special Mention (6)

Classified (7‑9)

Subdivision construction

Land development

Commercial construction

Owner occupied one- to four-

family residential

Non-owner occupied one- to four-

family residential

Commercial real estate

Satisfactory (1‑4)

Special Mention (6)

Classified (7‑9)

Land development construction

Satisfactory (1‑4)

Special Mention (6)

Classified (7‑9)

Other Construction

Satisfactory (1‑4)

Special Mention (6)

Classified (7‑9)

One- to four-family residential

Satisfactory (1‑4)

Special Mention (6)

Classified (7‑9)

Other residential

Satisfactory (1‑4)

Special Mention (6)

Classified (7‑9)

Commercial real estate

Satisfactory (1‑4)

Special Mention (6)

Classified (7‑9)

Commercial business

Industrial revenue bonds

Consumer auto

Consumer other

Home equity lines of credit

Loans acquired and accounted

for under ASC 310-30,

net of discounts

Satisfactory (1‑4)

Special Mention (6)

Classified (7‑9)

Satisfactory (1‑4)

Special Mention (6)

Classified (7‑9)

Satisfactory (1‑4)

Special Mention (6)

Classified (7‑9)

December 31, 2020

(In Thousands)

One- to four-family residential

One- to four-family residential construction

Subdivision construction

1 unchanged sentence

Commercial construction

Owner occupied one- to-four-

family residential

Non-owner occupied one- to-

four-family residential

Owner occupied one- to-four-family residential

Non-owner occupied one- to-four-family residential

Commercial real estate

5 unchanged sentences

Home equity lines of credit

Loans acquired and accounted

for under ASC 310-30,

net of discounts

Loans acquired and accounted for under ASC 310‑30, net of discounts

FDIC-ASSISTED ACQUIRED LOANS

14 unchanged sentences

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

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

The following table presents the balances of the acquired loans related to the various FDIC-assisted transactions at March 31, 2021 and December 31, 2020.

(In Thousands)

September 30, 2020

March 31, 2021

Gross loans receivable

Balance of accretable discount

due to change in expected losses

Net carrying value to loans receivable

Expected loss remaining

Balance of accretable discount due to change in expected losses

Net carrying value of loans receivable

December 31, 2020

Gross loans receivable

Balance of accretable discount

due to change in expected losses

Net carrying value to loans receivable

Balance of accretable discount due to change in expected losses

Expected loss remaining

Net carrying value of loans receivable

Fair Value and Expected Cash Flows .

7 unchanged sentences

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

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.

As of March 31, 2021, the remaining accretable yield adjustment that will affect interest income is $ 1.3 million.

Of the remaining adjustments affecting interest income, we expect to recognize approximately $ 900,000 of interest income during the remainder of 2021.

As of January 1, 2021, we adopted the new accounting standard related to accounting for credit losses.

With the adoption of this standard, there will be no further reclassification of discounts from non-accretable to accretable.

All adjustments made prior to January 1, 2021 will continue to be accreted to interest income.

The impact to income of adjustments on the Company’s financial results is shown below:

1 unchanged sentence

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)

Net impact to pre-tax income

Net impact net of taxes

Impact to diluted earnings per share

Nine Months Ended

September 30, 2020

September 30, 2019

March 31, 2021

March 31, 2020

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

4 unchanged sentences

Impact to diluted earnings per share

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

(In Thousands)

Balance, July 1, 2020

Change in expected accretable yield (1)

Balance, September 30, 2020

Balance, July 1, 2019

Change in expected accretable yield (1)

Balance, September 30, 2019

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

The amounts also include changes in expected accretion of the loan pools for TeamBank, Vantus Bank, Sun Security Bank, InterBank and Valley Bank for the three months ended 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.

(In Thousands)

Balance, January 1, 2020

Change in expected accretable yield (1)

Balance, September 30, 2020

Balance, January 1, 2019

Change in expected accretable yield (1)

Balance, September 30, 2019

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

The amounts also include changes in expected accretion of the loan pools for TeamBank, Vantus Bank, Sun Security Bank, InterBank and Valley Bank for the 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.

OTHER REAL ESTATE OWNED AND REPOSSESSIONS

Major classifications of other real estate owned were as follows:

September 30,

(In Thousands)

8 unchanged sentences

Commercial business

Foreclosed assets acquired through FDIC-assisted

transactions, net of discounts

Foreclosed assets acquired through FDIC-assisted transactions, net of discounts

Foreclosed assets held for sale and repossessions, net

1 unchanged sentence

Other real estate owned and repossessions

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.

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.

At March 31, 2021 other real estate owned not acquired through foreclosure included five properties, all of which were branch locations that were closed and held for sale.

One property that was held for sale at March 31, 2021 was under contract for sale.

The sale was completed in April 2021, with no additional loss to the Company.

At December 31, 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 March 31, 2021, residential mortgage loans totaling $ 220,000 were in the process of foreclosure, $ 161,000 of which were acquired loans related to FDIC-assisted transactions.

Pursuant to Section 4022 of the 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.

This provision was subsequently extended through June 30, 2021.

At December 31, 2020, residential mortgage loans totaling $ 602,000 were in the process of foreclosure, $ 518,000 million of which were acquired loans related to FDIC-assisted transactions.

Expenses applicable to other real estate owned and repossessions included the following:

Three Months Ended

September 30,

(In Thousands)

2 unchanged sentences

Operating expenses, net of rental income

Nine Months Ended

September 30,

(In Thousands)

Net gains on sales of other real estate owned and repossessions

Valuation write-downs

Operating expenses, net of rental income

PREMISES AND EQUIPMENT

Major classifications of premises and equipment, stated at cost, were as follows:

September 30,

(In Thousands)

4 unchanged sentences

The Company adopted ASU 2016-02, Leases (Topic 842) , on January 1, 2019, using the modified retrospective transition approach whereby comparative periods were not restated.

The Company also elected certain relief options under the ASU, including the option not to recognize right of use asset and lease liabilities that arise

from short-term leases (leases with terms of twelve months or less).

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 Company also elected certain relief options under the ASU, including the option not to recognize right of use asset and lease liabilities that arise from short-term leases (leases with terms of twelve months or less).

Adoption of this ASU resulted in the Company initially recognizing a right of use asset and corresponding lease liability of $ 9.5 million as of January 1, 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.

As of March 31, 2021, the lease right of use asset value was $ 8.3 million and the corresponding lease liability was $ 8.5 million.

As of December 31, 2020, the lease right of use asset value was $ 8.5 million and the corresponding lease liability was $ 8.7 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.

11 unchanged sentences

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 variable portion of these lease payments is not material and the total lease expense related to ATMs for the three months ended March 31, 2021 and 2020 was $ 66,000 and $ 62,000 , 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.

8 unchanged sentences

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

Operating leases liability

Statement of Income

Operating lease costs classified as occupancy and equipment expense

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

Supplemental Cash Flow Information

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

Operating cash flows from operating leases

At or For the Nine Months Ended

September 30, 2020

September 30, 2019

March 31, 2021

March 31, 2020

(In Thousands)

8 unchanged sentences

Operating cash flows from operating leases

Right of use assets obtained in exchange for lease obligations:

Operating leases

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):

For the three months ended March 31, 2021 and 2020, lease expense was $ 374,000 and $ 385,000 , respectively.

At March 31, 2021, future expected lease payments for leases with terms exceeding one year were as follows (In Thousands):

Future lease payments expected

4 unchanged sentences

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.

September 30,

In the three months ended March 31, 2021 and 2020, income recognized from these lessor agreements was $ 291,000 and $ 299,000 , respectively, and was included in occupancy and equipment expense.

(In Thousands)

3 unchanged sentences

2.00 % - 2.99 %

3.00% - 3.99%

4.00% - 4.99%

3.00 % and above

Total time deposits (weighted average rate 0.83 % and 1.00 %)

Non-interest-bearing demand deposits

Interest-bearing demand and savings deposits

(Weighted average rate 0.29% and 0.55%)

Interest-bearing demand and savings deposits (Weighted average rate 0.19 % and 0.22 %)

Total Deposits

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 .

At March 31, 2021 and December 31, 2020, there were no outstanding term advances from the Federal Home Loan Bank of Des Moines (FHLBank advances).

There were no overnight funds from the Federal Home Loan Bank of Des Moines as of March 31, 2021 or December 31, 2020.

SECURITIES SOLD UNDER REVERSE REPURCHASE AGREEMENTS AND SHORT-TERM BORROWINGS

September 30,

March 31, 2021

December 31, 2020

(In Thousands)

1 unchanged sentence

Other interest-bearing liabilities

Overnight borrowings from the Federal Home Loan Bank

Securities sold under reverse repurchase agreements

4 unchanged sentences

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 .

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

September 30, 2020

March 31, 2021

December 31, 2020

12 unchanged sentences

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.

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 during the three months ended March 31, 2021 and 2020, totaled $ 183,000 and $ 110,000 , 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 5.92 %.

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

September 30, 2020

At March 31, 2021 and December 31, 2020, subordinated notes are summarized as follows:

March 31, 2021

December 31, 2020

3 unchanged sentences

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

Three Months Ended September 30,

Tax at statutory rate

Nontaxable interest and dividends

Nine Months Ended September 30,

Three Months Ended March 31,

Tax at statutory rate

Nontaxable interest and dividends

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

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.

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

As a result, federal tax years through December 31, 2016 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.

The Company does not currently expect significant adjustments to its financial statements from these state examinations.

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

12 unchanged sentences

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

2 unchanged sentences

(In Thousands)

September 30, 2020

March 31, 2021

Agency mortgage-backed securities

Agency collateralized mortgage obligations

States and political subdivisions

States and political subdivisions securities

Small Business Administration securities

4 unchanged sentences

Agency collateralized mortgage obligations

States and political subdivisions

States and political subdivisions securities

Small Business Administration securities

1 unchanged sentence

Interest rate derivative liability

The following is a description of inputs and valuation methodologies used for assets recorded at fair value on a recurring basis and recognized in the accompanying statements of financial condition at 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.

The following is a description of inputs and valuation methodologies used for assets recorded at fair value on a recurring basis and recognized in the accompanying statements of financial condition at March 31, 2021 and December 31, 2020, as well as the general classification of such assets pursuant to the valuation hierarchy.

There have been no significant changes in the valuation techniques during the three-month period ended March 31, 2021.

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

6 unchanged sentences

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.

There were no recurring Level 3 securities at March 31, 2021 or December 31, 2020.

Interest Rate Derivatives.

1 unchanged sentence

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:

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2021 and December 31, 2020:

Fair Value Measurements Using

2 unchanged sentences

(In Thousands)

September 30, 2020

Impaired loans

March 31, 2021

Foreclosed assets held for sale

10 unchanged sentences

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.

At March 31, 2021 and December 31, 2020, 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

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).

Prior to January 1, 2021, a loan was considered to be impaired when it was probable that all of the principal and interest due may not be collected according to its contractual terms.

Generally, when a loan was considered impaired, the amount of reserve required under FASB ASC 310, Receivables , was measured based on the fair value of the underlying collateral.

The Company made 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 was 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 included 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 subject property based on current market expectations, and other relevant factors.

All appraised values were 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 reviewed all collateral dependent impaired loans on a loan-by-loan basis to determine whether updated appraisals were necessary based on loan performance, collateral type and guarantor support.

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

These appraisals were 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 were typically discounted 10 - 40 %.

The policy described above was the same for all types of collateral dependent impaired loans.

Subsequent to December 31, 2020, these loans are no longer considered impaired.

The Company records collateral-dependent loans as Nonrecurring Level 3.

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

Foreclosed Assets Held for Sale.

2 unchanged sentences

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.

The foreclosed assets represented in the table above have been re-measured during the three months ended March 31, 2021 or the year ended December 31, 2020, subsequent to their initial transfer to foreclosed assets.

Fair Value of Financial Instruments

20 unchanged sentences

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

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 fair value of 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.

1 unchanged sentence

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

Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the

Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

March 31, 2021

December 31, 2020

3 unchanged sentences

Mortgage loans held for sale

Loans, net of allowance for loan losses

Loans, net of allowance for credit losses

Interest receivable

Investment in FHLBank stock and

other interest-earning assets

Investment in FHLBank stock and other interest-earning assets

Financial liabilities

3 unchanged sentences

Interest payable

Unrecognized financial instruments

(net of contractual value)

Unrecognized financial instruments (net of contractual value)

Commitments to originate loans

19 unchanged sentences

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.

The aggregate notional amount of the two remaining Valley swaps was $ 559,000 at March 31, 2021.

At March 31, 2021, excluding the Valley Bank swaps, the Company had 18 interest rate swaps totaling $ 139.3 million in notional amount with commercial customers, and 18 interest rate swaps with the same aggregate notional

amount with third parties related to its program.

In addition, the Company has four participation loans purchased totaling $ 27.6 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, 2020, excluding the Valley Bank swaps, the Company had 19 interest rate swaps totaling $ 142.8 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.

During the three months ended March 31, 2021 and 2020, the Company recognized net gains of $ 474,000 and net losses of $ 407,000 , respectively, in noninterest income related to changes in the fair value of these swaps.

Cash Flow Hedges

6 unchanged sentences

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 Company recorded loan interest income of $ 2.0 million and $ 1.6 million on this interest rate swap during the three months ended March 31, 2021 and 2020, 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.

During each of the three months ended March 31, 2021 and 2020, 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 on that date.

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

to record loan interest income related to this swap transaction of approximately $2.0 million, based on the termination value of the swap.

This $ 45.9 million, less the accrued interest portion and net of deferred income taxes, was 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 has the effect of reducing Accumulated Other Comprehensive Income and increasing Net Interest Income and Retained Earnings over the period.

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

The Company currently expects to have an amount of eligible variable rate loans to continue to accrete this interest income in future periods.

If this expectation changes and the amount of eligible variable rate loans decreases significantly, the Company may be required to recognize this interest income more rapidly.

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:

Consolidated Statements

September 30,

of Financial Condition

(In Thousands)

Derivatives designated as hedging instruments

Interest rate swap

Prepaid expenses and other assets

Total derivatives designated as hedging instruments

Derivatives not designated as hedging instruments

5 unchanged sentences

Interest rate products

Accrued expenses and other

Accrued expenses and other liabilities

Total derivatives not designated as hedging instruments

2 unchanged sentences

Recognized in AOCI

Three Months Ended September 30,

Cash Flow Hedges

(In Thousands)

Interest rate swap, net of income taxes

Amount of Gain (Loss)

Recognized in AOCI

Nine Months Ended September 30,

Three Months Ended March 31,

Cash Flow Hedges

1 unchanged sentence

Interest rate swap, net of income taxes

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

Three Months Ended September 30,

Cash Flow Hedges

(In Thousands)

Interest rate swap

Nine Months Ended September 30,

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

Three Months Ended March 31,

Cash Flow Hedges

6 unchanged sentences

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

At 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.

At March 31, 2021, the termination value of derivatives with our derivative dealer counterparties (related to loan level swaps with commercial lending customers) in an overall net asset position, which included accrued interest but excluded any adjustment for nonperformance risk, related to these agreements was $ 375,000 .

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.

At March 31, 2021, 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 totaling $ 1.5 million to the derivative counterparties to satisfy the loan level agreements.

At March 31, 2021, 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 $ 1.4 million to the Company to satisfy the loan level agreements.

If the Company had breached any of these provisions at March 31, 2021 or December 31, 2020, it could have been required to settle its obligations under the agreements at the termination value.

At December 31, 2020, the termination value of derivatives with our derivative dealer counterparties (related to loan level swaps with commercial lending customers) in a net liability position, which included accrued interest but excluded any adjustment for nonperformance risk, related to these agreements was $ 391,000 .

Additionally, 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 of $ 5.3 million to the derivative counterparties to satisfy the loan level agreements.

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

What changed 10-Q

Item 1. Financial Statements