Forward-looking Statements
When used in this Quarterly Report and in other documents filed or furnished byGreat Southern Bancorp, Inc. (the "Company") with theSecurities and Exchange Commission (the "SEC"), in the Company's press releases or other public or stockholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "may," "might," "could," "should," "will likely result," "are expected to," "will continue," "is anticipated," "believe," "estimate," "project," "intends" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements also include, but are not limited to, statements regarding plans, objectives, expectations or consequences of announced transactions, known trends and statements about future performance, operations, products and services of the Company. The Company's ability to predict results or the actual effects of future plans or strategies is inherently uncertain, and the Company's actual results could differ materially from those contained in the forward-looking statements. The novel coronavirus disease, or COVID-19, pandemic is adversely affecting the Company, its customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on the Company's business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including further increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect the Company's revenues and the values of its assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to, COVID-19, could affect the Company in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to: (i) expected revenues, cost savings, earnings accretion, synergies and other benefits from the Company's merger and acquisition activities might not be realized within the anticipated time frames or at all, and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected; (ii) changes in economic conditions, either nationally or in the Company's market areas; (iii) fluctuations in interest rates; (iv) the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses; (v) the possibility of other-than-temporary impairments of securities held in the Company's securities portfolio; (vi) the Company's ability to access cost-effective funding; (vii) fluctuations in real estate values and both residential and commercial real estate market conditions; (viii) the ability to adapt successfully to technological changes to meet customers' needs and developments in the marketplace; (ix) the possibility that security measures implemented might not be sufficient to mitigate the risk of a cyber-attack or cyber theft, and that such security measures might not protect against systems failures or interruptions; (x) legislative or regulatory changes that adversely affect the Company's business, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and its implementing regulations, the overdraft protection regulations and customers' responses thereto and the Tax Cut and Jobs Act; (xi) changes in accounting policies and practices or accounting standards, including Accounting Standards Update 2016-13, Credit Losses (Topic 326), "Measurement of Credit Losses on Financial Instruments," commonly referenced as the Current Expected Credit Loss model, which, upon adoption, is expected to result in an increase in the Company's allowance for credit losses; (xii) monetary and fiscal policies of theFederal Reserve Board and theU.S. Government and other governmental initiatives affecting the financial services industry; (xiii) results of examinations of the Company andGreat Southern Bank by their regulators, including the possibility that the regulators may, among other things, require the Company to limit its business activities, change its business mix, increase its allowance for loan losses, write-down assets or increase its capital levels, or affect its ability to borrow funds or maintain or increase deposits, which could adversely affect its liquidity and earnings; (xiv) costs and effects of litigation, including settlements and judgments; (xv) competition; (xvi) uncertainty regarding the future of LIBOR; and (xvii) natural disasters, war, terrorist activities or civil unrest and their effects on economic and business environments in which the Company operates. The Company wishes to advise readers that the factors listed above and other risks described from time to time in documents filed or furnished by the Company with theSEC could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. -------------------------------------------------------------------------------- 41
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The Company does not undertake-and specifically declines any obligation- to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform to accounting principles generally accepted inthe United States of America and general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
Allowance for Loan Losses and Valuation of Foreclosed Assets
The Company believes that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining an allowance level believed by management to be sufficient to absorb estimated loan losses. Management's determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates of, among other things, expected default probabilities, loss once loans default, expected commitment usage, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses, and general amounts for historical loss experience. The process also considers economic conditions, uncertainties in estimating losses and inherent risks in the loan portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required which would adversely impact earnings in future periods. In addition, the Bank's regulators could require additional provisions for loan losses as part of their examination process. See Note 6 "Loans and Allowance for Loan Losses" included in Item 1 for additional information regarding the allowance for loan losses. Inherent in this process is the evaluation of individual significant credit relationships. From time to time certain credit relationships may deteriorate due to payment performance, cash flow of the borrower, value of collateral, or other factors. In these instances, management may revise its loss estimates and assumptions for these specific credits due to changing circumstances. In some cases, additional losses may be realized; in other instances, the factors that led to the deterioration may improve or the credit may be refinanced elsewhere and allocated allowances may be released from the particular credit. The Company uses a three-year average of historical losses for the general component of the allowance for loan loss calculation. No significant changes were made to management's overall methodology for evaluating the allowance for loan losses during the periods presented in the financial statements of this report. In addition, the Company considers that the determination of the valuations of foreclosed assets held for sale involves a high degree of judgment and complexity. The carrying value of foreclosed assets reflects management's best estimate of the amount to be realized from the sales of the assets. While the estimate is generally based on a valuation by an independent appraiser or recent sales of similar properties, the amount that the Company realizes from the sales of the assets could differ materially from the carrying value reflected in the financial statements, resulting in losses that could adversely impact earnings in future periods.
Carrying Value of Loans Acquired in FDIC-Assisted Transactions
The Company considers that the determination of the carrying value of loans acquired in theFDIC -assisted transactions involves a high degree of judgment and complexity. The carrying value of the acquired loans reflects management's best ongoing estimates of the amounts to be realized on these assets. The Company determined initial fair value accounting estimates of the acquired assets and assumed liabilities in accordance with FASB ASC 805, Business Combinations. However, the amount that the Company realizes on its acquired loan assets could differ materially from the carrying value reflected in its financial statements, based upon the timing of collections on the acquired loans in future periods. Because of the loss sharing agreements with theFDIC on certain of these assets, the -------------------------------------------------------------------------------- 42
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Company did not expect to incur any significant losses related to these assets.
Subsequent to the initial valuation, the Company continued to monitor identified loan pools for changes in estimated cash flows projected for the loan pools, anticipated credit losses and changes in the accretable yield. Analysis of these variables requires significant estimates and a high degree of judgment. See Note 7 "FDIC-Assisted Acquired Loans" included in Item 1 for additional information regarding the TeamBank,Vantus Bank ,Sun Security Bank ,InterBank and Valley Bank FDIC-assisted transactions.
Goodwill and intangible assets that have indefinite useful lives are subject to an impairment test at least annually and more frequently if circumstances indicate their value may not be recoverable.Goodwill is tested for impairment using a process that estimates the fair value of each of the Company's reporting units compared with its carrying value. The Company defines reporting units as a level below each of its operating segments for which there is discrete financial information that is regularly reviewed. As ofJune 30, 2020 , the Company had one reporting unit to which goodwill has been allocated - the Bank. If the fair value of a reporting unit exceeds its carrying value, then no impairment is recorded. If the carrying value exceeds the fair value of a reporting unit, further testing is completed comparing the implied fair value of the reporting unit's goodwill to its carrying value to measure the amount of impairment, if any. Intangible assets that are not amortized must be tested for impairment at least annually by comparing the fair values of those assets to their carrying values. AtJune 30, 2020 , goodwill consisted of$5.4 million at the Bank reporting unit, which included goodwill of$4.2 million that was recorded during 2016 related to the acquisition of 12 branches fromFifth Third Bank . Other identifiable intangible assets that are subject to amortization are amortized on a straight-line basis over a period of seven years. AtJune 30, 2020 , the amortizable intangible assets consisted of core deposit intangibles of$2.1 million , which are reflected in the table below. These amortizable intangible assets are reviewed for impairment if circumstances indicate their value may not be recoverable based on a comparison of fair value. AtJune 30, 2020 , the Company evaluated the current circumstances brought about by the COVID-19 pandemic and its effect on the valuation of the Company and other bank holding companies and determined that no triggering event had occurred requiring an evaluation of goodwill or other intangible asset impairment. While the Company believes no impairment of its goodwill or other intangible assets existed atJune 30, 2020 , different conditions or assumptions used to measure fair value of reporting units, or changes in cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the outcome of the Company's impairment evaluation in the future.
A summary of goodwill and intangible assets is as follows:
June 30, December 31, 2020 2019 (In Thousands) Goodwill - Branch acquisitions$ 5,396 $ 5,396 Deposit intangibles Boulevard Bank 92 153 Valley Bank 400 600 Fifth Third Bank 1,633 1,949 2,125 2,702$ 7,521 $ 8,098 Current Economic Conditions Changes in economic conditions could cause the values of assets and liabilities recorded in the financial statements to change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses, or capital that could negatively impact the Company's ability to meet regulatory capital requirements and maintain sufficient liquidity. Following the housing and mortgage crisis and correction beginning in mid-2007,the United States entered an economic downturn. Unemployment rose from 4.7% inNovember 2007 to peak at 10.0% inOctober 2009 . -------------------------------------------------------------------------------- 43
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Subsequently, economic conditions improved considerably, as indicated by higher consumer confidence levels, increased economic activity and low unemployment levels. The US economy continued to operate at historically strong levels until the impact of COVID-19 began to take its toll inMarch 2020 . While the severity and extent of the COVID-19 pandemic on the global, national and regional economies is still uncertain, it will most likely have a detrimental impact on the performance of our loan portfolio. Short-term modifications to loan terms to help our customers navigate through the current situation were made in accordance with guidance from the banking regulatory authorities. These modifications did not result in these loans being classified as troubled debt restructurings, potential problem loans or non-performing loans. Among the more severely impacted industries in our portfolio are retail, motels/hotels and restaurants. InJune 2020 , the national unemployment rate declined to 11.1%, down from 13.3% inMay 2020 . Improvements in the labor market during the month of June reflected the continued resumption of economic activity that had been curtailed in March and April due to the COVID-19 pandemic and efforts to contain it. Employment nationally in leisure and hospitality increased by 2.1 million, mainly in food services and drinking places. Notable job gains also occurred in retail trade, education and health services, other services, manufacturing, and professional and business services. Unemployment rates will likely remain volatile and dependent upon the degree to which the COVID-19 pandemic is contained. The unemployment rate for the Midwest, where the Company conducts most of its business, increased from 4.1% inMarch 2020 to 11% inJune 2020 . Unemployment rates forJune 2020 in the other states where the Company conducts business wereArkansas at 8.0%,Colorado at 10.5%,Georgia at 7.6%,Illinois at 14.6%,Iowa at 8.0%,Kansas at 7.5%,Minnesota at 8.6%,Missouri at 7.9%,Nebraska at 6.7%,Oklahoma at 6.6%, andTexas at 8.6%. Of the metropolitan areas in which the Company does business, the largest year-over-year employment decreases occurred in theChicago area with a decrease of 466,800 jobs, ending with an unemployment rate inJune 2020 of 15.6%, the highest among the metropolitan areas in which the Company does business.Denver had the second highest unemployment rate at 11.1% in the Company's metropolitan footprint. While all of the areas in the Company's metropolitan footprint had an increase in unemployment due to the ongoing pandemic, other thanChicago andDenver , their unemployment rates forJune 2020 were below the national unemployment rate of 11.1%.
Housing
Sales of newly built single-family homes forJune 2020 were at a seasonally adjusted annual rate of 776,000 according toU.S. Census Bureau and theDepartment of Housing and Urban Development ("HUD") estimates. This is 13.8% above the revisedMay 2020 rate of 682,000, and 6.9% above theJune 2019 rate of 726,000. The median sales price of new houses sold inJune 2020 was$329,200 up slightly from$310,400 a year earlier. TheJune 2020 average sales price of$384,700 was up slightly from$368,600 a year ago. The inventory of new homes for sale at the end ofJune 2020 would support 4.7 months' supply at the current sales pace, down from 6.3 months inJune 2019 . Existing-home sales rebounded at a record pace inJune 2020 , showing strong signs of a market turnaround after three straight months of sales declines caused by the ongoing pandemic, according to theNational Association of Realtors (NAR). Each of the four major regions achieved month-over month growth, with the West experiencing the greatest sales recovery. Existing-home sales jumped 20.7% inJune 2020 fromMay 2020 ; however, sales forJune 2020 were down 11.3% fromJune 2019 , according to NAR. Total existing home sales reached a seasonally adjusted rate of 4.72 million inJune 2020 . Total housing inventory at the end ofJune 2020 was at 1.57 million, up 1.3% fromMay 2020 , but down 18.2% fromJune 2019 . Thismarks 13 straight months of year-over-year declines. It will take 4.0 months to move the current level of inventory at the current sales pace. It takes approximately 24 days for a home to go from listing to a contract in the current housing market, equal to 27 days, or 0.3 months, from a year ago. The median existing home price for all housing types inJune 2020 was$295,300 , up 3.5% from a year ago. This price increase marks the 100th straight month of year-over-year gains. The Midwest region had the smallest price gain of the four regions with a median existing home sale price forJune 2020 of$236,900 , which is a 3.2% increase from a year ago. First-time buyers nationally accounted for 35% of sales inJune 2020 , up from 34% in May and about equal to 35% inJune 2019 . -------------------------------------------------------------------------------- 44
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According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage increased to 3.16% inJune 2020 , down from 3.23% inMay 2020 . The average commitment rate for all of 2019 was 3.94 percent, down from 4.54 percent for 2018. The effects of the COVID-19 pandemic on real estate markets are already appearing in CoStar's multifamily data with daily asking rents for apartment units declining sinceMarch 11, 2020 - just as the prime leasing season began to unfold. After flattening inMay 2020 , rents began to rebound inJune 2020 as cities nationwide worked to reopen their economies and the national job market continued to show signs of recovering. A$2 trillion+ federal stimulus package included direct cash payments to renter households of around$85 billion , which helped mitigate the impact on the apartment sector. Fannie Mae, Freddie Mac, and HUD all announced prohibitions on evictions in all GSE-financed communities, and theNational Multifamily Housing Council (NMHC) has published guidelines to its members to avoid evictions and delay rent hikes. The long-term outlook for apartment demand may be affected by changes in attitudes regarding working from home and changes in personal circumstances such as divorces, marriages, and births. As of the end ofJune 2020 , national apartment vacancy rates had increased slightly to 6.8% while our market areas reflected the following vacancy levels:Springfield, Mo. at 5.0%,St. Louis at 9.2%,Kansas City at 7.6%,Minneapolis at 5.5%,Tulsa, Okla. at 7.9%,Dallas-Fort Worth at 8.4%,Chicago at 7.0%,Atlanta at 8.9% andDenver at 8.1%.
The full impact of the COVID-19 pandemic on theU.S. office sector remains unclear, but per CoStar, a steep decline in leasing and transaction volume is expected to continue beyond the second quarter of 2020. Demand forU.S. office space ended the first quarter of 2020 in positive territory, though it was the lowest quarterly total since 2011 and much of the positive absorption occurred prior toMarch 2020 . That positive absorption reversed sharply in the second quarter of 2020, with demand posting the largest negative total since mid-2009.
Annual rent growth has been slowing over the past couple of quarters, but remained positive in the first quarter of 2020. Even before the disruption caused by the COVID-19, the trend of slowing growth was expected to continue in 2020 and beyond.
The retail sector of commercial real estate remains one of the most vulnerable to the impact of COVID-19. Gradual store re-openings throughout the nation and the relaxation of social distancing restrictions has modestly lifted consumer confidence and given hope for stabilization in the industry. However, increasing infection rates throughout many Southern states threaten the continued path to stability, creating additional uncertainty for retailers already struggling with reduced revenues and limited liquidity. Decline in sales in apparel, department stores, retail shops and restaurants, those sectors believed to be among the most hurt by the pandemic, will affect malls, strip centers and outlet centers by subsequent increases in vacancies. The wave of retail bankruptcies is expected to continue; however, tenants with essential-oriented offerings have thus far weathered the storm and arisen as a modest source of positive demand. Though the industrial sector may fare best among commercial real estate sectors, its operating fundamentals will not fully escape the negative impacts of COVID-19. Dampened aggregate demand and reduced export growth along with disrupted and curtailed supply chains present a headwind for port markets and industrial distribution operators. Meanwhile, labor shortages arising from mandatory construction suspensions place further pressure on industrial operators, distributors and manufacturers. Negative factors in the industry are countered somewhat with the increased activity of large tenant groups including Amazon, third party logistics providers and larger retailers. Under CoStar's Base Case forecast, the moderation in demand, taking into consideration a considerable development pipeline, may result in a vacancy rate in the mid 6% range, which is still well below the peak of 10.6% reached during the Great Recession of 2007 to 2009. The degree to which the commercial real estate sector will suffer is yet unknown, as the path and progression of the pandemic, and the economy's response to measures taken to control the spread of the virus remains fluid. In addition to forced and voluntary store closures, many retailers will struggle amid near-total loss of foot traffic, declining consumer sentiment, lost wages and restrained consumer spending activity. -------------------------------------------------------------------------------- 45
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Our management will continue to monitor regional, national, and global economic indicators such as unemployment, GDP, housing starts and prices, and commercial real estate occupancy, absorption and rental rates, as these could significantly affect customers in each of our market areas.
COVID-19 Impact to Our Business and Response
Great Southern is actively monitoring and responding to the effects of the rapidly-changing COVID-19 pandemic. As always, the health, safety and well-being of our customers, associates and communities are the Company's top priorities.Centers for Disease Control and Prevention (CDC ) guidelines, as well as directives from federal, state and local officials, are being closely followed to make informed operational decisions. InJanuary 2020 , the Company activated its long-established Pandemic Response Plan. This plan promotes the health and safety of the Company's constituents and specifies responsive actions to support continuous service for customers. A summary of the Company's major COVID-19 responses and actions are highlighted below.Great Southern Associates : During this unprecedented time, the Company is working diligently with its nearly 1,200 associates to enforceCDC -advised health, hygiene and social distancing practices. Approximately 50% of non-frontline associates are currently working from home. Teams in nearly every operational department have been split, with part of each team working at an off-site disaster recovery facility to promote social distancing and to avoid service disruptions. To date, there have been no service disruptions or reductions in staffing. Paid time off and other benefits were enhanced and implemented to support Great Southern associates. Part-time associates were awarded paid sick benefits for the first time. Any full-time or part-time associate will receive full pay if placed under a restrictive quarantine due to COVID-19 infection or direct exposure to an infected individual. The Company'sEmployee Assistance Program (EAP) was enhanced at no cost to associates and family members seeking counseling services for mental health and emotional support needs. Great Southern Communities: To support local COVID-19 relief efforts, inMarch 2020 , Great Southern committed up to$300,000 toFeeding America food banks, localUnited Way agencies and other nonprofit organizations to address food insecurity and support critical health and human services. Throughout the second quarter of 2020, these funds were distributed to agencies serving Great Southern local markets across its 11-state franchise. Great Southern Customers: During the COVID-19 pandemic, taking care of customers and providing uninterrupted access to services are top priorities. As always, customers can conduct their banking business using the banking center network, online and mobile banking services, ATMs, Telephone Banking, and online account opening services. As health conditions in local markets dictate, Great Southern banking center lobbies are open following strict social distancing guidance from theCDC and local government officials. If customer lobbies are closed in a market area, then drive-thru service and in-person service by appointment are available. The COVID-19 pandemic is causing a growing number of customers to experience financial uncertainty and hardships. The Company has been reaching out to customers and is strongly encouraging customers to call for assistance. Certain account maintenance and service fees are being waived or refunded for depository customers. Payment relief options and loan modifications for consumer and commercial loan customers are available on a case-by-case basis. See Loan Modifications below for further details of loan modifications to date. The Company has been actively utilizing the CARES Act stimulus package to assist consumers and businesses. The CARES Act made availableSmall Business Administration (SBA) lending programs that offer relief for small businesses, including the Paycheck Protection Program (PPP). Great Southern is participating in the PPP, which provides emergency financial support to small businesses (primarily those with less than 500 employees) by offering federally guaranteed loans through the SBA. These loans may be eligible for forgiveness contingent upon how the loan proceeds are used by the borrower. ThroughJune 30, 2020 , Great Southern has originated nearly 1,600 PPP loans totaling approximately$120 million .
As a resource to customers, a COVID-19 information center has been made available on the Company's website, www.GreatSouthernBank.com. General information about the Company's pandemic response, how to receive assistance, and how to avoid COVID-19 scams and fraud are included.
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Impacts to Our Business Going Forward: The magnitude of the impact on the Company of the COVID-19 pandemic is not yet fully known, and will depend on the length and severity of the economic downturn brought on by the pandemic. The Company expects that the COVID-19 pandemic will impact our business in future periods in one or more of the following ways, among others. Each of these factors could, individually or collectively, result in reduced net income in future periods.
·Significantly lower market interest rates will have a negative impact on our variable rate loans indexed to LIBOR and prime
·Certain fees for deposit and loan products may be waived or reduced
·Point-of-sale fee income may decline due to a decrease in spending by our debit card customers as they deal with "Stay at Home" requirements and other restrictions and may be adversely affected by reductions in their personal income and job losses
·Non-interest expenses may increase to deal with the effects of the COVID-19 pandemic, including cleaning costs, supplies, equipment and other items
·Banking center lobbies have now reopened, but could be closed again if the pandemic situation worsens
·Additional loan modifications may occur and borrowers may default on their loans, which may necessitate further increases to the allowance for loan losses
·The contraction in economic activity may reduce demand for our loans and for our other products and services
Paycheck Protection Program Loans
As noted above, Great Southern is actively participating in the PPP through the SBA. The PPP has been met with very high demand throughout the country, resulting in a second round of funding through an amendment to the CARES Act.
As ofJune 30, 2020 , we originated approximately 1,600 PPP loans totaling approximately$120 million . Great Southern has received$4.7 million in fees from the SBA for originating these loans based on the amount of each loan. The fees, net of origination costs, will be deferred in accordance with standard accounting practices and will be accreted to interest income on loans over the contractual life of each loan. These loans generally have a contractual maturity of two years from origination date, but may be repaid or forgiven (by the SBA). If these loans are repaid or forgiven prior to their contractual maturity date, the remaining deferred fee for such loan will be accreted to interest income on loans immediately. We expect a high percentage of these net deferred fees will accrete to interest income in the remainder of 2020. Loan Modifications ThroughJune 30, 2020 , we have modified 431 commercial loans with an aggregate principal balance outstanding of$931 million and 1,702 consumer and mortgage loans with an aggregate principal balance outstanding of$80 million . The loan modifications are within the guidance provided by the CARES Act, the federal banking regulatory agencies, theSecurities and Exchange Commission and theFinancial Accounting Standards Board ; therefore, they are not considered troubled debt restructurings or classified assets for regulatory purposes. The modified loans are in the following categories (dollars in millions): -------------------------------------------------------------------------------- 47
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Interest Interest Full Full Weighted # of Interest Only Only Payment Payment Average Loans $ of Loans Only 4-6 7-12 Deferral Deferral Loan to Collateral Type Modified Modified 3 Months Months Months 3 Months 6 Months Value
Retail 103$ 261.3 $ 239.0 $ 4.3 $ 8.9 $ 5.6 $ 3.5 65% Multifamily 52 190.5 166.1 24.4 - - - 69% Healthcare 24 143.1 96.5 11.3 - - 35.3 64% Hotel/Motel 23 129.8 88.4 - - 10.2 31.2 65% Office 40 80.4 77.4 - 0.3 - 2.7 56% Warehouse/Other 45 54.3 38.7 0.3 7.8 0.3 7.2 55% Restaurants 36 36.9 20.6 - - 1.8 14.5 61% Commercial Business 92 27.9 14.3 2.0 5.5 - 6.1 Land 16 6.7 4.3 - 1.0 - 1.4 Total Commercial 431 930.9 745.3 42.3 23.5 17.9 101.9 Residential Mortgage 273 62.5 24.2 1.5 - 36.8 - 70% Consumer 1,429 17.4 - - - 17.4 - Total Consumer 1,702 79.9 24.2 1.5 - 54.2 - Total 2,133$ 1,010.8 $ 769.5 $ 43.8 $ 23.5 $ 72.1 $ 101.9 DuringJuly 1 through September 30, 2020 , loans with an aggregate principal balance outstanding of$724 million were scheduled to return to their normal payment status. Based on discussions with the borrowers, we expect a large portion of these loans to return to normal payments status by the end ofAugust 2020 ; however, a more severe or lengthier deterioration in economic conditions could change this outlook. A portion of these loans may be further modified within the guidance provided by the CARES Act, the federal banking regulatory agencies, theSecurities and Exchange Commission and theFinancial Accounting Standards Board . The Company has escalated monitoring activities related to the modified loans and has also increased review and monitoring activities for certain sectors of the loan portfolio which may be currently most impacted by the COVID-19 pandemic. The retail portfolio had an outstanding balance of$418 million atJune 30, 2020 , which was 10% of the total loan portfolio. It is a very granular portfolio, with an average loan size of$1.4 million . Most loans are under$5 million , with 26% of the outstanding balance of the retail portfolio represented by loans in excess of$10 million . AtJune 30, 2020 , the weighted average loan-to-value ratio of this portfolio was 64%. The hotel/motel portfolio had an outstanding balance of$187 million atJune 30, 2020 , which was 4% of the total loan portfolio. The average loan size is$4.3 million , with the 20 largest loans comprising approximately 90% of the portfolio. These properties are well-diversified geographically, mainly throughout the Midwest, with most being limited-service properties.
Approximately 90% of the portfolio operates under the flag of major hotel
chains. At
The restaurant portfolio had an outstanding balance of$73 million atJune 30, 2020 , which was 2% of the total loan portfolio. It is a very granular portfolio, with the majority of the restaurants operating inMissouri ,Illinois ,Iowa andMinnesota . The majority of these loans are to franchisees of top-tier quick service brands with national scale that have had the ability to stay open with delivery and drive-through service throughout the course of the pandemic.
At
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Total loans outstanding (excludingFDIC -assisted acquired loans, net of discount) in the following categories atJune 30, 2020 , were as follows (dollars in millions): Percentage Weighted of Percentage Average Loans of Loans Loan to Modified To of This Value of Outstanding Total Loans Percentage Collateral Loans in Balance of of This of Loans Type to This Loans of This Collateral Modified To Total Collateral
Collateral Type Collateral Type Type Total Loans Loans
Type Retail $ 418.4 62% 6% 10% 64% Healthcare 294.3 49% 3% 7% 63% Hotel/Motel 187.3 69% 3% 4% 59% Multifamily 991.9 19% 4% 23% 73% Office 256.8 31% 2% 6% 61% Warehouse/Other 263.4 21% 1% 6% 60% Commercial Business(1) 247.9 11% 1% 6% Restaurants 73.2 50% 1% 2% 63% Land 38.6 17% <1% 1% Total Commercial 2,771.8 34% 21% 63% Residential Mortgage 602.2 10% 1% 14% 71% Consumer 273.1 6% <1% 6% Total Consumer 875.3 9% 2% 20% Total $ 3,647.1 28% 23% 83%
(1) The Commercial Business outstanding loan balance excludes PPP loans of
General The profitability of the Company and, more specifically, the profitability of its primary subsidiary, the Bank, depend primarily on its net interest income, as well as provisions for loan losses and the level of non-interest income and non-interest expense. Net interest income is the difference between the interest income the Bank earns on its loans and investment portfolios, and the interest it pays on interest-bearing liabilities, which consists mainly of interest paid on deposits and borrowings. Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on these balances. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. Great Southern's total assets increased$551.6 million , or 11.0%, from$5.02 billion atDecember 31, 2019 , to$5.57 billion atJune 30, 2020 . Full details of the current period changes in total assets are provided in the "Comparison of Financial Condition atJune 30, 2020 andDecember 31, 2019 " section of this Quarterly Report on Form 10-Q. Loans. Net outstanding loans increased$245.7 million , or 5.9%, from$4.15 billion atDecember 31, 2019 , to$4.40 billion atJune 30, 2020 . The net increase in loans reflects reductions of$16.5 million in theFDIC -assisted acquired loan portfolios. This increase was primarily in other residential (multi-family) loans, commercial business loans, one- to four-family residential loans and commercial real estate loans. These increases were partially offset by decreases in construction loans and consumer auto loans. The increases were primarily due to loan growth in our existing banking center network and our commercial loan production offices, and included approximately$120 million of PPP loans. ExcludingFDIC -assisted acquired loans and mortgage loans held for sale, total gross loans increased$241.0 million , or 4.9%, fromDecember 31, 2019 toJune 30, 2020 . As loan demand is affected by a variety of factors, including general economic conditions, and because of the competition we face and our focus on pricing discipline and credit quality, no assurances can be made regarding our future loan growth. We expect minimal loan growth for the foreseeable future due to deteriorating economic conditions resulting from the COVID-19 pandemic. The Company's strategy continues to be focused on maintaining credit risk and interest rate risk at appropriate levels. -------------------------------------------------------------------------------- 49
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Recent loan growth has occurred in several loan types, primarily commercial real estate loans, other residential (multi-family) loans and one- to four-family residential mortgage loans and in most of Great Southern's primary lending locations, includingSpringfield ,St. Louis ,Kansas City ,Des Moines andMinneapolis , as well as our loan production offices inAtlanta ,Chicago ,Dallas ,Denver ,Omaha andTulsa . Certain minimum underwriting standards and monitoring help assure the Company's portfolio quality. Great Southern's loan committee reviews and approves all new loan originations in excess of lender approval authorities. Generally, the Company considers commercial construction, consumer, and commercial real estate loans to involve a higher degree of risk compared to some other types of loans, such as first mortgage loans on one- to four-family, owner-occupied residential properties. For commercial real estate, commercial business and construction loans, the credits are subject to an analysis of the borrower's and guarantor's financial condition, credit history, verification of liquid assets, collateral, market analysis and repayment ability. It has been, and continues to be, Great Southern's practice to verify information from potential borrowers regarding assets, income or payment ability and credit ratings as applicable and as required by the authority approving the loan. To minimize construction risk, projects are monitored as construction draws are requested by comparison to budget and with progress verified through property inspections. The geographic and product diversity of collateral, equity requirements and limitations on speculative construction projects help to mitigate overall risk in these loans. Underwriting standards for all loans also include loan-to-value ratio limitations, which vary depending on collateral type, debt service coverage ratios or debt payment to income ratio guidelines, where applicable, credit histories, use of guaranties and other recommended terms relating to equity requirements, amortization, and maturity. Consumer loans are primarily secured by new and used motor vehicles and these loans are also subject to certain minimum underwriting standards to assure portfolio quality. While Great Southern's consumer underwriting and pricing standards have been fairly consistent in recent years, the Company tightened its underwriting guidelines on automobile lending beginning in the latter part of 2016. Management took this step in an effort to improve credit quality in the portfolio and reduce delinquencies and charge-offs. The underwriting standards employed by Great Southern for consumer loans include a determination of the applicant's payment history on other debts, credit scores, employment history and an assessment of ability to meet existing obligations and payments on the proposed loan. In 2019, the Company discontinued indirect auto loan originations. See "Item 1. Business - Lending Activities - General, -Commercial Real Estate and Construction Lending, and - Consumer Lending" in the Company'sDecember 31, 2019 Annual Report on Form 10-K. While our policy allows us to lend up to 95% of the appraised value on one-to four-family residential properties, originations of loans with loan-to-value ratios at that level are minimal. Private mortgage insurance is typically required for loan amounts above the 80% level. Few exceptions occur and would be based on analyses which determined minimal transactional risk to be involved. We consider these lending practices to be consistent with or more conservative than what we believe to be the norm for banks our size. AtJune 30, 2020 andDecember 31, 2019 , none of our owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination. At bothJune 30, 2020 andDecember 31, 2019 , an estimated 0.6% of total non-owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination. AtJune 30, 2020 , troubled debt restructurings totaled$861,000 , or 0.02% of total loans, down$1.1 million from$1.9 million , or 0.05% of total loans, atDecember 31, 2019 . Concessions granted to borrowers experiencing financial difficulties may include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. For troubled debt restructurings occurring during the six months endedJune 30, 2020 , seven loans totaling$156,000 were restructured into multiple new loans. For troubled debt restructurings occurring during the year endedDecember 31, 2019 , five loans totaling$34,000 were restructured into multiple new loans. For further information on troubled debt restructurings, see Note 6 of the Notes to Consolidated Financial Statements contained in this report. In accordance with the CARES Act and guidance from the banking regulatory agencies, we made certain short-term modifications to loan terms to help our customers navigate through the current pandemic situation. Although loan modifications were made, they did not result in these loans being classified as troubled debt restructurings, potential problem loans or non-performing loans. If more severe or lengthier negative impacts of the COVID-19 pandemic occur or the effects of the SBA loan programs and other loan and stimulus programs do not enable companies and individuals to completely recover financially, this could result in longer-term modifications, which may be deemed to be troubled debt restructurings, additional potential problem loans and/or additional non-performing loans. -------------------------------------------------------------------------------- 50
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Loans that were acquired throughFDIC -assisted transactions, which are accounted for in pools, are currently included in the analysis and estimation of the allowance for loan losses. If expected cash flows to be received on any given pool of loans decreases from previous estimates, then a determination is made as to whether the loan pool should be charged down or the allowance for loan losses should be increased (through a provision for loan losses). Acquired loans are described in Note 7 of the Notes to Consolidated Financial Statements contained in this report. For acquired loan pools, the Company may allocate, and atJune 30, 2020 , has allocated, a portion of its allowance for loan losses related to these loan pools in a manner similar to how it allocates its allowance for loan losses to those loans which are collectively evaluated for impairment. The level of non-performing loans and foreclosed assets affects our net interest income and net income. We generally do not accrue interest income on these loans and do not recognize interest income until the loans are repaid or interest payments have been made for a period of time sufficient to provide evidence of performance on the loans. Generally, the higher the level of non-performing assets, the greater the negative impact on interest income and net income.Available-for-sale Securities . In the six months endedJune 30, 2020 , available-for-sale securities increased$72.7 million , or 19.4%, from$374.2 million atDecember 31, 2019 , to$446.9 million atJune 30, 2020 . The increase was primarily due to the purchase ofFNMA and GNMA fixed-rate multi-family mortgage-backed securities and collateralized mortgage obligations and short-term municipal securities, partially offset by calls of municipal securities and normal monthly payments received related to the portfolio of mortgage-backed securities. The Company used increased deposits to fund this increase in investment securities. Deposits. The Company attracts deposit accounts through its retail branch network, correspondent banking and corporate services areas, and brokered deposits. The Company then utilizes these deposit funds, along with FHLBank advances and other borrowings, to meet loan demand or otherwise fund its activities. In the six months endedJune 30, 2020 , total deposit balances increased$552.1 million , or 13.9%. Transaction account balances increased$566.0 million to$2.81 billion atJune 30, 2020 , while retail certificates of deposit decreased$50.1 million , to$1.30 billion atJune 30, 2020 . The increases in transaction accounts were primarily a result of increased customers in the CDARS reciprocal program, money market accounts and NOW deposit accounts. Retail certificates of deposit decreased due to a decrease in retail certificates generated through the banking center network, partially offset by increases in customer deposits in the CDARS reciprocal program. Customer deposits atJune 30, 2020 andDecember 31, 2019 , totaling$51.6 million and$35.3 million , respectively, were part of the CDARS program, which allows customers to maintain balances in an insured manner that would otherwise exceed theFDIC deposit insurance limit. Brokered deposits, including CDARS program purchased funds, were$407.8 million atJune 30, 2020 , an increase of$36.1 million from$371.7 million atDecember 31, 2019 . Our deposit balances may fluctuate depending on customer preferences and our relative need for funding. We do not consider our retail certificates of deposit to be guaranteed long-term funding because customers can withdraw their funds at any time with minimal interest penalty. When loan demand trends upward, we can increase rates paid on deposits to attract more deposits and utilize brokered deposits to provide additional funding. The level of competition for deposits in our markets is high. It is our goal to gain deposit market share, particularly checking accounts, in our branch footprint. To accomplish this goal, increasing rates to attract deposits may be necessary, which could negatively impact the Company's net interest margin. Our ability to fund growth in future periods may also depend on our ability to continue to access brokered deposits and FHLBank advances. In times when our loan demand has outpaced our generation of new deposits, we have utilized brokered deposits and FHLBank advances to fund these loans. These funding sources have been attractive to us because we can create either fixed or variable rate funding, as desired, which more closely matches the interest rate nature of much of our loan portfolio. It also gives us greater flexibility in increasing or decreasing the duration of our funding. While we do not currently anticipate that our ability to access these sources will be reduced or eliminated in future periods, if this should happen, the limitation on our ability to fund additional loans could have a material adverse effect on our business, financial condition and results of operations. -------------------------------------------------------------------------------- 51
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Federal Home Loan Bank Advances and Short-Term Borrowings. The Company had noFederal Home Loan Bank advances outstanding at bothJune 30, 2020 andDecember 31, 2019 . AtJune 30, 2020 , there were also no overnight borrowings from the FHLBank. AtDecember 31, 2019 , there were no borrowings from the FHLBank other than overnight advances, which are included in the short term borrowings category. Short term borrowings and other interest-bearing liabilities decreased$226.9 million from$228.2 million atDecember 31, 2019 to$1.3 million atJune 30, 2020 . The short term borrowings included overnight FHLBank borrowings of$-0 - and$196.0 million atJune 30, 2020 andDecember 31, 2019 , respectively. The Company utilizes both overnight borrowings and short-term FHLBank advances depending on relative interest rates. Securities sold under reverse repurchase agreements with customers. Securities sold under reverse repurchase agreements with customers increased$107.5 million from$84.2 million atDecember 31, 2019 to$191.6 million atJune 30, 2020 .
These balances fluctuate over time based on customer demand for this product. A large portion of this increase is related to two customers who placed additional funds in these account types.
Subordinated notes. Subordinated notes increased$73.8 million from$74.2 million atDecember 31, 2019 to$148.0 million atJune 30, 2020 . The Company issued$75.0 million of subordinated notes inJune 2020 , receiving net proceeds of$73.5 million . Net Interest Income and Interest Rate Risk Management. Our net interest income may be affected positively or negatively by changes in market interest rates. A large portion of our loan portfolio is tied to one-month LIBOR, three-month LIBOR or the "prime rate" and adjusts immediately or shortly after the index rate adjusts (subject to the effect of contractual interest rate floors on some of the loans, which are discussed below). We monitor our sensitivity to interest rate changes on an ongoing basis (see "Item 3. Quantitative and Qualitative Disclosures About Market Risk"). In addition, our net interest income has been impacted by changes in the cash flows expected to be received from acquired loan pools. As described in Note 7 of the Notes to the Consolidated Financial Statements contained in this report, the Company's evaluation of cash flows expected to be received from acquired loan pools has been on-going and increases in cash flow expectations have been recognized as increases in accretable yield through interest income. Decreases in cash flow expectations have been recognized as impairments through the allowance for loan losses. The current level and shape of the interest rate yield curve poses challenges for interest rate risk management. Prior to its increase of 0.25% onDecember 16, 2015 , the FRB had last changed interest rates onDecember 16, 2008 . This was the first rate increase sinceSeptember 29, 2006 . The FRB also implemented rate change increases of 0.25% on eight additional occasions beginningDecember 14, 2016 and throughDecember 31, 2018 , with the Federal Funds rate reaching as high as 2.50%. AfterDecember 2018 , the FRB paused its rate increases and, in July, September andOctober 2019 , implemented rate change decreases of 0.25% on each of those occasions. AtDecember 31, 2019 , the Federal Funds rate stood at 1.75%. In response to the COVID-19 pandemic the FRB decreased interest rates on two occasions inMarch 2020 , a 0.50% decrease onMarch 3 and a 1.00% decrease onMarch 16 . AtJune 30, 2020 , the Federal Funds rate stood at 0.25%. A substantial portion of Great Southern's loan portfolio ($2.09 billion atJune 30, 2020 ) is tied to the one-month or three-month LIBOR index and will be subject to adjustment at least once within 90 days afterJune 30, 2020 . Of these loans,$1.97 billion had interest rate floors. Great Southern also has a portfolio of loans ($227 million atJune 30, 2020 ) tied to a "prime rate" of interest and will adjust immediately with changes to the "prime rate" of interest. A rate cut by the FRB generally would have an anticipated immediate negative impact on the Company's net interest income due to the large total balance of loans tied to the one-month or three-month LIBOR index and will be subject to adjustment at least once within 90 days or loans which generally adjust immediately as the Federal Funds rate adjusts. Interest rate floors may at least partially mitigate the negative impact of interest rate decreases. Loans at their floor rates are, however, subject to the risk that borrowers will seek to refinance elsewhere at the lower market rate. Because the Federal Funds rate is again very low, there may also be a negative impact on the Company's net interest income due to the Company's inability to significantly lower its funding costs in the current competitive rate environment, although interest rates on assets may decline further. Conversely, interest rate increases would normally result in increased interest rates on our LIBOR-based and prime-based loans. As ofJune 30, 2020 , Great Southern's interest rate risk models indicate that, generally, rising interest rates are expected to have a positive impact on the Company's net interest income, while declining interest rates are expected to have a negative impact on net interest income. We model various interest rate scenarios for rising and falling rates, including both parallel and non-parallel shifts in rates. The results of our modeling indicate that net -------------------------------------------------------------------------------- 52
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interest income is not likely to be significantly affected either positively or negatively in the first twelve months following a rate change, regardless of any changes in interest rates, because our portfolios are relatively well-matched in a twelve-month horizon. In a situation where market interest rates decrease significantly in a short period of time, as they did inMarch 2020 , our net interest margin decrease may be more pronounced in the very near term (first one to three months), due to fairly rapid decreases in LIBOR interest rates. In the subsequent months we expect that the net interest margin would stabilize and begin to improve, as renewal interest rates on maturing time deposits are expected to decrease compared to the current rates paid on those products. During the latter half of 2019 and the six months endedJune 30, 2020 , we did experience some compression of our net interest margin percentage due to 2.25% ofFederal Fund rate cuts over that time period. Margin compression primarily resulted from generally slower changing average interest rates on deposits and borrowings and lower yields on loans and other interest-earning assets. LIBOR interest rates have recently decreased, putting pressure on loan yields, and strong pricing competition for loans and deposits remains in most of our markets. For further discussion of the processes used to manage our exposure to interest rate risk, see "Item 3. Quantitative and Qualitative Disclosures About Market Risk - How We Measure the Risks to Us Associated with Interest Rate Changes." Non-Interest Income and Non-Interest (Operating) Expenses. The Company's profitability is also affected by the level of its non-interest income and operating expenses. Non-interest income consists primarily of service charges and ATM fees, late charges and prepayment fees on loans, gains on sales of loans and available-for-sale investments and other general operating income. Non-interest income may also be affected by the Company's interest rate derivative activities, if the Company chooses to implement derivatives. See Note 16 "Derivatives and Hedging Activities" in the Notes to Consolidated Financial Statements included in this report. Operating expenses consist primarily of salaries and employee benefits, occupancy-related expenses, expenses related to foreclosed assets, postage,FDIC deposit insurance, advertising and public relations, telephone, professional fees, office expenses and other general operating expenses. Details of the current period changes in non-interest income and non-interest expense are provided in the "Results of Operations and Comparison for the Three and Six Months EndedJune 30, 2020 and 2019" section of this report.
Effect of Federal Laws and Regulations
General. Federal legislation and regulation significantly affect the operations of the Company and the Bank, and have increased competition among commercial banks, savings institutions, mortgage banking enterprises and other financial institutions. In particular, the capital requirements and operations of regulated banking organizations such as the Company and the Bank have been and will be subject to changes in applicable statutes and regulations from time to time, which changes could, under certain circumstances, adversely affect the Company or the Bank. Dodd-Frank Act. In 2010, sweeping financial regulatory reform legislation entitled the "Dodd-Frank Wall Street Reform and Consumer Protection Act" (the "Dodd-Frank Act") was signed into law. The Dodd-Frank Act implemented far-reaching changes across the financial regulatory landscape. Certain aspects of the Dodd-Frank Act have been affected by the recently Economic Growth Act, as defined and discussed below under "-Economic Growth Act." Capital Rules. The federal banking agencies have adopted regulatory capital rules that substantially amend the risk-based capital rules applicable to the Bank and the Company. The rules implement the "Basel III" regulatory capital reforms and changes required by the Dodd-Frank Act. "Basel III" refers to various documents released by theBasel Committee on Banking Supervision . For the Company and the Bank, the general effective date of the rules wasJanuary 1, 2015 , and, for certain provisions, various phase-in periods and later effective dates apply. The chief features of these rules are summarized below. The rules refine the definitions of what constitutes regulatory capital and add a new regulatory capital element, common equity Tier 1 capital. The minimum capital ratios are (i) a common equity Tier 1 ("CET1") risk-based capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6%; (iii) a total risk-based capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. In addition to the minimum capital ratios, the rules include a capital conservation buffer, under which a banking organization must have CET1 more than 2.5% above each of its minimum risk-based capital ratios in order to avoid restrictions on paying dividends, repurchasing shares, and paying certain discretionary bonuses. The capital conservation buffer requirement began phasing in onJanuary 1, 2016 when a buffer greater -------------------------------------------------------------------------------- 53
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than 0.625% of risk-weighted assets was required, which amount increased an
equal amount each year until the buffer requirement of greater than 2.5% of
risk-weighted assets became fully implemented on
EffectiveJanuary 1, 2015 , these rules also revised the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels show signs of weakness. Under the revised prompt corrective action requirements, insured depository institutions are required to meet the following in order to qualify as "well capitalized:" (i) a common equity Tier 1 risk-based capital ratio of at least 6.5%, (ii) a Tier 1 risk-based capital ratio of at least 8%, (iii) a total risk-based capital ratio of at least 10% and (iv) a Tier 1 leverage ratio of 5%, and must not be subject to an order, agreement or directive mandating a specific capital level. Economic Growth Act. InMay 2018 , the Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Economic Growth Act"), was enacted to modify or eliminate certain financial reform rules and regulations, including some implemented under the Dodd-Frank Act. While the Economic Growth Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than$10 billion and for large banks with assets of more than$50 billion . Many of these amendments could result in meaningful regulatory changes. The Economic Growth Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than$10 billion by instructing the federal banking regulators to establish a single "Community Bank Leverage Ratio" of between 8 and 10 percent. Any qualifying depository institution or its holding company that exceeds the "Community Bank Leverage Ratio" will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the new ratio will be considered "well-capitalized" under the prompt corrective action rules. EffectiveJanuary 1, 2020 , the Community Bank Leverage Ratio was 9.0%. InApril 2020 , pursuant to the CARES Act, the federal bank regulatory agencies announced the issuance of two interim final rules, effective immediately, to provide temporary relief to community banking organizations. Under the interim final rules, the Community Bank Leverage Ratio requirement is a minimum of 8% for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. The Company and the Bank have chosen to not utilize the new Community Bank Leverage Ratio, due to the Company's size and complexity, including its commercial real estate and construction lending concentrations and significant off-balance sheet funding commitments.
In addition, the Economic Growth Act includes regulatory relief in the areas of examination cycles, call reports, mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
It is difficult at this time to predict when or how any new standards under the Economic Growth Act will ultimately be applied to us or what specific impact the Economic Growth Act and the forthcoming implementing rules and regulations will have on us. Business Initiatives The banking center network continues to evolve. In earlyApril 2020 , the Company was notified by its landlord that the Great Southern banking centers located inside the Hy-Vee stores at2900 Devils Glen Rd inBettendorf, Iowa , and2351 W. Locust St. inDavenport, Iowa , must permanently cease operations due to store infrastructure changes. These offices have been closed to the public since lateMarch 2020 due to the COVID-19 pandemic. Bank customers were previously informed and the Hy-Vee banking centers were permanently closed onJuly 21, 2020 , with customer accounts transferring to nearby offices. Great Southern now operates three banking centers in the Quad Cities market area - two inDavenport and one inBettendorf . During the second quarter 2020, remodeling of the downtown office at 1900 Main inParsons, Kansas , continued, which includes the addition of drive-thru banking lanes. Remodeling is expected to be completed in mid-August, whereupon the nearby drive-thru facility will be consolidated into the downtown office, leaving one location serving theParsons market. InJune 2020 , the Company completed the public offering and sale of$75 million of its 5.50% Fixed-to-Floating Rate Subordinated Notes dueJune 15, 2030 . The Notes were sold at par, resulting in net proceeds, after -------------------------------------------------------------------------------- 54
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underwriting discounts, commissions and other expenses, of approximately$73.5 million . The Notes are intended to qualify as Tier 2 capital for regulatory purposes. The Company intends to use the net proceeds of the offering for general corporate purposes, which may include repayment or redemption of outstanding indebtedness, the payment of dividends, providing capital to support its organic growth or growth through strategic acquisitions, capital expenditures, financing investments, repurchasing shares of its common stock and for investments in the Bank as regulatory capital. OnJune 17, 2020 , the Company announced thatDouglas Marrs , Vice President and Director of Operations of the Bank and Secretary of the Company, intends to retire inJune 2021 .Mr. Marrs is primarily responsible for general bank operations and facilities management. He announced his intention to retire well in advance to assure an orderly leadership transition over the next year. With more than 40 years in the banking industry,Mr. Marrs joined Great Southern in 1996. He has been an integral part of the Bank's growth and success for the last 24 years. During that time period, the Bank has grown from approximately$700 million in assets with operations primarily in the southwestMissouri region, to approximately$5.6 billion in assets and offices in 11 states, as ofJune 30, 2020 .Great Southern Bank has been recognized as part ofForbes' annual list of the World's Best Banks 2020. Great Southern was ranked as the sixth best bank inthe United States . The World's Best Banks list is comprised of the financial institutions that differentiate their services and build trustworthy relationships with their customers. 450 banks around the world are featured on the list, which was announced online onMay 14, 2020 , and can currently be viewed on theForbes website. The study involved 40,000 bank customers from 23 countries to rate banks they are involved with on general satisfaction and key attributes like trust, fees, digital services and financial advice.
Comparison of Financial Condition at
During the six months endedJune 30, 2020 , the Company's total assets increased by$551.6 million to$5.57 billion . The increase was primarily attributable to an increase in loans receivable, available-for-sale investment securities, and cash equivalents. Cash and cash equivalents were$473.6 million atJune 30, 2020 , an increase of$253.4 million , or 115.1%, from$220.2 million atDecember 31, 2019 . This increase was primarily related to excess funds held at theFederal Reserve Bank after repayment of FHLBank overnight borrowings. The Company's available-for-sale securities increased$72.7 million , or 19.4%, compared toDecember 31, 2019 . The increase was primarily due to the purchase ofFNMA and GNMA fixed-rate multi-family mortgage-backed securities and short-term municipal securities, partially offset by calls of municipal securities and normal monthly payments received related to the portfolio of mortgage-backed securities. The available-for-sale securities portfolio was 8.0% and 7.5% of total assets atJune 30, 2020 andDecember 31, 2019 , respectively. Net loans increased$245.7 million fromDecember 31, 2019 , to$4.40 billion atJune 30, 2020 . ExcludingFDIC -assisted acquired loans and mortgage loans held for sale, total gross loans (including the undisbursed portion of loans) increased$241.0 million , or 4.9%, fromDecember 31, 2019 toJune 30, 2020 . This increase was primarily in other residential (multi-family) loans ($158.6 million ), commercial business loans ($128.1 million ), and one- to four-family residential loans ($76.5 million ). These increases were partially offset by decreases in construction loans ($115.4 million ) and consumer auto loans ($37.9 million ). Total liabilities increased$527.9 million , from$4.41 billion atDecember 31, 2019 to$4.94 billion atJune 30, 2020 . The increase was primarily attributable to an increase in deposits, securities sold under reverse repurchase agreements and subordinated notes, primarily offset by a decrease in short term borrowings. Total deposits increased$552.1 million , or 13.9%, to$4.51 billion atJune 30, 2020 . Transaction account balances increased$566.0 million to$2.81 billion atJune 30, 2020 , while retail certificates of deposit decreased$50.1 million compared toDecember 31, 2019 , to$1.30 billion atJune 30, 2020 . The increase in transaction accounts was primarily a result of increases in NOW deposit accounts, money market accounts and Insured Cash Sweep (ICS) reciprocal accounts. Retail certificates of deposit decreased due to a net decrease in retail certificates generated through the banking center network, partially offset by increases in customer deposits in the CDARS reciprocal program.
Customer deposits at
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respectively, were part of the CDARS program, which allows customers to maintain balances in an insured manner that would otherwise exceed theFDIC deposit insurance limit. Brokered deposits, including CDARS program purchased funds, were$407.8 million atJune 30, 2020 , an increase of$36.1 million from$371.7 million atDecember 31, 2019 .
The Company had no FHLBank advances outstanding at both
Short term borrowings and other interest-bearing liabilities decreased$226.9 million from$228.2 million atDecember 31, 2019 to$1.3 million atJune 30, 2020 . Short term borrowings atJune 30, 2020 andDecember 31, 2019 , included overnight FHLBank borrowings of$-0- million and$196.0 million , respectively. The Company utilizes both overnight borrowings and short term FHLBank advances depending on relative interest rates. Securities sold under reverse repurchase agreements with customers increased$107.5 million from$84.2 million atDecember 31, 2019 to$191.6 million atJune 30, 2020 . These balances fluctuate over time based on customer demand for this product. Subordinated notes increased$73.8 million from$74.2 million atDecember 31, 2019 to$148.0 million atJune 30, 2020 . The Company issued$75.0 million of subordinated notes inJune 2020 , receiving net proceeds of$73.5 million . Total stockholders' equity increased$23.6 million from$603.1 million atDecember 31, 2019 to$626.7 million atJune 30, 2020 . The Company recorded net income of$28.1 million for the six months endedJune 30, 2020 . Accumulated other comprehensive income increased$26.8 million due to increases in the fair value of available-for-sale investment securities and the termination value of the cash flow hedge. In addition, total stockholders' equity increased$817,000 due to stock option exercises. These increases were partially offset by dividends declared on common stock of$23.8 million and repurchases of the Company's common stock totaling$8.1 million .
Results of Operations and Comparison for the Three and Six Months Ended
General Net income was$13.2 million for the three months endedJune 30, 2020 compared to$18.4 million for the three months endedJune 30, 2019 . This decrease of$5.2 million , or 28.1%, was primarily due to an increase in provision for loan losses of$4.4 million , or 275.0%, a decrease in net interest income of$1.5 million or 3.3%, and an increase in noninterest expense of$966,000 , or 3.4%, partially offset by an increase in noninterest income of$1.1 million , or 15.4%, and a decrease in income tax expense of$556,000 , or 14.9%. Net income was$28.1 million for the six months endedJune 30, 2020 compared to$36.0 million for the six months endedJune 30, 2019 . This decrease of$7.9 million , or 22.0%, was primarily due to an increase in provision for loan losses of$6.3 million , or 178.1%, an increase in noninterest expense of$3.3 million , or 5.8%, and a decrease in net interest income of$1.1 million , or 1.3%, partially offset by a decrease in income tax expense of$1.8 million , or 23.4%, and an increase in noninterest income of$1.0 million , or 7.0%. Total Interest Income Total interest income decreased$4.7 million , or 8.0%, during the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The decrease was due to a$4.9 million decrease in interest income on loans, partially offset by an increase in interest income on investments and other interest-earning assets of$211,000 . Interest income on loans decreased for the three months endedJune 30, 2020 compared to the same period in 2019, due to lower average rates of interest on loans, partially offset by higher average balances. Interest income from investment securities and other interest-earning assets increased during the three months endedJune 30, 2020 compared to the same period in 2019 primarily due to higher average balances of investment securities and other interest-earning assets, significantly offset by lower average rates of interest. -------------------------------------------------------------------------------- 56
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Total interest income decreased$4.6 million , or 4.0%, during the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . The decrease was due to a$5.3 million decrease in interest income on loans, partially offset by a$753,000 increase in interest income on investments and other interest-earning assets. Interest income on loans decreased for the six months endedJune 30, 2020 compared to the same period in 2019, due to lower average rates of interest on loans, partially offset by higher average balances. Interest income from investment securities and other interest-earning assets increased during the six months endedJune 30, 2020 compared to the same period in 2019 primarily due to higher average balances of investment securities and other interest-earning assets, significantly offset by lower average rates of interest. Interest Income - Loans During the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 , interest income on loans decreased$8.2 million as a result of lower average interest rates on loans. The average yield on loans decreased from 5.40% during the three months endedJune 30, 2019 , to 4.64% during the three months endedJune 30, 2020 . This decrease was primarily due to decreased yields in most loan categories as a result of decreased LIBOR and Federal Funds interest rates. In addition in the 2020 period, the Company originated$120 million of PPP loans, which have a much lower yield compared to the overall loan portfolio. Interest income on loans increased$3.3 million as the result of higher average loan balances, which increased from$4.14 billion during the three months endedJune 30, 2019 , to$4.40 billion during the three months endedJune 30, 2020 . The higher average balances were primarily due to organic loan growth in commercial business loans (including the PPP loans), other residential (multi-family), and one- to four-family residential loans, partially offset by decreases in outstanding construction and consumer loans. During the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 , interest income on loans decreased$10.8 million as a result of lower average interest rates on loans. The average yield on loans decreased from 5.41% during the six months endedJune 30, 2019 , to 4.89% during the six months endedJune 30, 2020 . This decrease was primarily due to decreased yields in most loan categories as a result of decreased LIBOR and Federal Funds interest rates during the six months endedJune 30, 2020 . This decrease also includes PPP loans, which have a much lower yields compared to the overall loan portfolio. Interest income on loans increased$5.4 million as the result of higher average loan balances, which increased from$4.11 billion during the six months endedJune 30, 2019 , to$4.31 billion during the six months endedJune 30, 2020 . The higher average balances were primarily due to organic loan growth in commercial business loans (including the PPP loans), other residential (multi-family), and one- to four-family residential loans, partially offset by decreases in outstanding construction and consumer loans. On an on-going basis, the Company has estimated the cash flows expected to be collected from the acquired loan pools. For each of the loan portfolios acquired, the cash flow estimates have increased, based on the payment histories and the collection of certain loans, thereby reducing loss expectations of certain loan pools, resulting in adjustments to be spread on a level-yield basis over the remaining expected lives of the loan pools. For the three months endedJune 30, 2020 and 2019, the adjustments increased interest income by$1.5 million and$1.4 million , respectively. For the six months endedJune 30, 2020 and 2019, the adjustments increased interest income by$3.4 million and$2.9 million , respectively. As ofJune 30, 2020 , the remaining accretable yield adjustment that will affect interest income was$4.2 million . Of the remaining adjustments affecting interest income, we expect to recognize$2.2 million of interest income during the remainder of 2020. Apart from the yield accretion, the average yield on loans was 4.50% during the three months endedJune 30, 2020 , compared to 5.27% during the three months endedJune 30, 2019 , as a result of lower current market rates on adjustable rate loans and new loans originated during the year. Apart from the yield accretion, the average yield on loans was 4.73% during the six months endedJune 30, 2020 , compared to 5.27% during the six months endedJune 30, 2019 . InOctober 2018 , the Company entered into an interest rate swap transaction as part of its ongoing interest rate management strategies to hedge the risk of its floating rate loans. The notional amount of the swap was$400 million with a contractual termination date inOctober 2025 . Under the terms of the swap, the Company received a fixed rate of interest of 3.018% and paid a floating rate of interest equal to one-month USD-LIBOR. The floating rate reset monthly and net settlements of interest due to/from the counterparty also occurred monthly.
To
the extent
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that the fixed rate exceeded one-month USD-LIBOR, the Company received net
interest settlements, which were recorded as interest income on loans. If
one-month USD-LIBOR exceeded the fixed rate of interest, the Company was
required to pay net settlements to the counterparty and record those net
payments as a reduction of interest income on loans. The Company recorded
interest income related to the swap of
OnMarch 2, 2020 , the Company and its swap counterparty mutually agreed to terminate the swap, effective immediately. The Company received a payment of$45.9 million , including accrued but unpaid interest, from its swap counterparty as a result of this termination. This$45.9 million , less the accrued interest portion and net of deferred income taxes, is reflected in the Company's stockholders' equity as Accumulated Other Comprehensive Income and a portion of it will be accreted to interest income on loans monthly through the original contractual termination date ofOctober 6, 2025 . This will have the effect of reducing Accumulated Other Comprehensive Income and increasing Interest Income and Retained Earnings over the period. In each quarterly period, commencing with the quarter endedJune 30, 2020 , until the original termination date, the Company expects to record loan interest income related to this swap transaction of approximately$2.0 million , based on the termination values of the swap.
Interest Income - Investments and Other Interest-earning Assets
Interest income on investments increased$667,000 in the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . Interest income increased$893,000 as a result of an increase in average balances from$309.2 million during the three months endedJune 30, 2019 , to$433.4 million during the three months endedJune 30, 2020 . Average balances of securities increased primarily due to purchases of agency multi-family mortgage-backed securities which have a fixed rate of interest with expected lives of six to twelve years. These purchased securities fit with the Company's current asset/liability management strategies. Interest income decreased$226,000 as a result of lower average interest rates from 3.13% during the three months endedJune 30, 2019 , to 2.86% during the three month period endedJune 30, 2020 . Interest income on investments increased in the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . Interest income increased$1.8 million as a result of an increase in average balances from$293.9 million during the six months endedJune 30, 2019 , to$409.2 million during the six months endedJune 30, 2020 . Average balances of securities increased primarily due to purchases of agency multi-family mortgage-backed securities which have a fixed rate of interest with expected lives of six to twelve years. As noted above, these purchased securities fit with the Company's current asset/liability management strategies. Interest income decreased$261,000 as a result of lower average interest rates from 3.20% during the six months endedJune 30, 2019 , to 3.03% during the six month period endedJune 30, 2020 .
Interest income on other interest-earning assets decreased
Interest income decreased$875,000 , primarily as a result of the decrease in average interest rates to 0.10% during the three months endedJune 30, 2020 compared to 2.45% during the three months endedJune 30, 2019 . Market interest rates earned on balances held at theFederal Reserve Bank were significantly lower in the 2020 period due to significant reductions in the federal funds rate of interest. Partially offsetting this decrease, interest income increased$419,000 , primarily as a result of the increase in average balances from$88.0 million during the three months endedJune 30, 2019 , to$321.4 million during the three months endedJune 30, 2020 . Excess liquidity, after repayments of FHLBank borrowings, was maintained at theFederal Reserve Bank as a result of the significant increase in deposits during the six months endedJune 30, 2020 .
Interest income on other interest-earning assets decreased
Interest income decreased$1.4 million , primarily as a result of the decrease in average interest rates to 0.33% during the six months endedJune 30, 2020 compared to 2.41% during the six months endedJune 30, 2019 . Market interest rates earned on balances held at theFederal Reserve Bank were significantly lower in the 2020 period due to significant reductions in the federal funds rate of interest. Partially offsetting this decrease, interest income increased$672,000 , primarily as a result of the increase in average balances from$91.2 million during the six months endedJune 30, 2019 , to$205.8 million during the six months endedJune 30, 2020 . -------------------------------------------------------------------------------- 58
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Total Interest Expense
Total interest expense decreased$3.2 million , or 23.5%, during the three months endedJune 30, 2020 , when compared with the three months endedJune 30, 2019 , due to a decrease in interest expense on deposits of$2.5 million , or 21.9%, a decrease in interest expense on short-term borrowings and repurchase agreements of$849,000 , or 98.8%, and a decrease in interest expense on subordinated debentures issued to capital trust of$100,000 , or 37.5%, partially offset by an increase in interest expense on subordinated notes of$244,000 , or 22.3%. Total interest expense decreased$3.5 million , or 13.0%, during the six months endedJune 30, 2020 , when compared with the six months endedJune 30, 2019 , due to a decrease in interest expense on deposits of$2.4 million , or 11.0%, a decrease in interest expense on short-term borrowings and repurchase agreements of$1.1 million , or 63.0%, and a decrease in interest expense on subordinated debentures issued to capital trust of$151,000 , or 28.3%, partially offset by an increase in interest expense on subordinated notes of$243,000 , or 11.1%. Interest Expense - Deposits Interest expense on demand deposits decreased$453,000 due to average rates of interest that decreased from 0.52% in the three months endedJune 30, 2019 to 0.41% in the three months endedJune 30, 2020 . Partially offsetting this decrease, interest expense on demand deposits increased$385,000 , due to an increase in average balances from$1.50 billion during the three months endedJune 30, 2019 to$1.84 billion during the three months endedJune 30, 2020 .
The
Company experienced increased balances in ICS reciprocal balances, money market accounts and certain types of NOW accounts.
Interest expense on demand deposits increased$533,000 due to an increase in average balances from$1.49 billion for the six months endedJune 30, 2019 to$1.71 billion for the six months endedJune 30, 2020 . Partially offsetting this increase, interest expense on demand deposits decreased$247,000 due to average rates of interest that decreased from 0.50% in the six months endedJune 30, 2019 compared to 0.47% in the six months endedJune 30, 2020 . Interest expense on time deposits decreased$2.8 million as a result of a decrease in average rates of interest from 2.23% during the three months endedJune 30, 2019 , to 1.61% during the three months endedJune 30, 2020 . Interest expense on time deposits increased$300,000 due to an increase in average balances of time deposits from$1.73 billion during the three months endedJune 30, 2019 to$1.79 billion in the three months endedJune 30, 2020 . A large portion of the Company's certificate of deposit portfolio matures within six to eighteen months and therefore reprices fairly quickly; this is consistent with the portfolio over the past several years. Older certificates of deposit that renewed or were replaced with new deposits generally resulted in the Company paying a lower rate of interest due to market interest rate decreases during the latter portion of 2019 and through the first half of 2020. In the three months endedJune 30, 2020 , the increase in average balances of time deposits was a result of increases in both retail customer time deposits obtained through on-line channels and brokered deposits, which were mainly added in the three months endedMarch 31, 2020 . Interest expense on time deposits decreased$3.2 million as a result of a decrease in average rates of interest from 2.17% during the six months endedJune 30, 2019 , to 1.80% during the six months endedJune 30, 2020 . Interest expense on time deposits increased$514,000 due to an increase in average balances of time deposits from$1.70 billion during the six months endedJune 30, 2019 to$1.75 billion in the six months endedJune 30, 2020 . A large portion of the Company's certificate of deposit portfolio matures within six to eighteen months and therefore reprices fairly quickly; this is consistent with the portfolio over the past several years. Older certificates of deposit that renewed or were replaced with new deposits generally resulted in the Company paying a lower rate of interest due to market interest rate decreases during the latter portion of 2019 and through the first half of 2020. In the six months endedJune 30, 2020 , the increase in average balances of time deposits was a result of increases in retail customer time deposits obtained through on-line channels and increases in brokered deposits including those added through the CDARS program purchased funds.
Interest Expense -
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FHLBank advances were not utilized during the three months endedJune 30, 2020 and 2019. Overnight borrowings from the FHLBank were utilized during the three and six months endedJune 30, 2019 and are included in short-term borrowings. Interest expense on short-term borrowings and repurchase agreements decreased$632,000 due to a decrease in average rates from 1.41% in the three months endedJune 30, 2019 to 0.03% in the three months endedJune 30, 2020 . The decrease was due to a decrease in market interest rates during the period and the lower interest rate charged on overnight FHLBank borrowings. Interest expense on short-term borrowings and repurchase agreements also decreased$217,000 due to a decrease in average balances from$244.6 million during the three months endedJune 30, 2019 to$162.3 million during the three months endedJune 30, 2020 , which was primarily due to changes in the Company's funding needs and the mix of funding, which can fluctuate. Interest expense on short-term borrowings and repurchase agreements decreased$886,000 due to a decrease in average rates from 1.43% in the six months endedJune 30, 2019 to 0.62% in the six months endedJune 30, 2020 . The decrease was due to a decrease in market interest rates during the period and the lower interest rate charged on overnight FHLBank borrowings. Interest expense on short-term borrowings and repurchase agreements also decreased$235,000 due to a decrease in average balances from$251.3 million during the six months endedJune 30, 2019 to$213.7 million during the six months endedJune 30, 2020 , which was primarily due to changes in the Company's funding needs and the mix of funding, which can fluctuate. During the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , interest expense on subordinated debentures issued to capital trusts decreased$100,000 due to lower average interest rates. The average interest rate was 4.16% in the three months endedJune 30, 2019 compared to 2.60% in the three months endedJune 30, 2020 . The subordinated debentures are variable-rate debentures which bear interest at an average rate of three-month LIBOR plus 1.60%, adjusting quarterly, which was 2.29% atJune 30, 2020 . There was no change in the average balance of the subordinated debentures between the 2020 and the 2019 periods. During the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , interest expense on subordinated debentures issued to capital trusts decreased$151,000 due to lower average interest rates. The average interest rate was 4.18% in the six months endedJune 30, 2019 compared to 2.99% in the six months endedJune 30, 2020 . There was no change in the average balance of the subordinated debentures between the 2020 and the 2019 periods. InAugust 2016 , the Company issued$75.0 million of 5.25% fixed-to-floating rate subordinated notes dueAugust 15, 2026 . The notes were sold at par, resulting in net proceeds, after underwriting discounts and commissions and other issuance costs, of approximately$73.5 million . InJune 2020 , the Company issued$75.0 million of 5.50% fixed-to-floating rate subordinated notes dueJune 15, 2030 . The notes were sold at par, resulting in net proceeds, after underwriting discounts and commissions and other issuance costs, of approximately$73.5 million . In both cases, these issuance costs are amortized over the expected life of the notes, which is five years from the issuance date, and therefore impact the overall interest expense on the notes. During the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , interest expense on subordinated notes increased$244,000 primarily due to the higher average balances due to the issuance of new notes in the three months endedJune 30, 2020 . The increase of$243,000 in the six-month period was for the same reason as stated for the three-month period. Net Interest Income Net interest income for the three months endedJune 30, 2020 decreased$1.4 million to$43.5 million compared to$44.9 million for the three months endedJune 30, 2019 . Net interest margin was 3.39% in the three months endedJune 30, 2020 , compared to 3.97% in the three months endedJune 30, 2019 , a decrease of 58 basis points, or 14.6%. In both three month periods, the Company's net interest income and margin were positively impacted by the increases in expected cash flows from theFDIC -assisted acquired loan pools and the resulting increase to accretable yield, which were previously discussed in Note 7 of the Notes to Consolidated Financial Statements. The positive impact of these changes in the three months endedJune 30, 2020 and 2019 were increases in interest income of$1.5 million and$1.4 million , respectively, and increases in net interest margin of 12 basis points and 12 basis points, respectively. Excluding the positive impact of the additional yield accretion, in the three months endedJune 30 , -------------------------------------------------------------------------------- 60
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2020, net interest margin decreased 58 basis points when compared to the year-ago three month period. The decrease was partially due to lower market interest rates, which caused lower LIBOR interest rates and generally resulted in lower yields on loans and other interest-earning assets. The margin decrease also resulted from an increase in average interest-earning assets that were primarily at rates that were much lower than the current portfolio rates. Increases included$260 million in loans ($120 million of which were PPP loans),$230 million of interest-earning cash equivalents and$125 million of investment securities. In addition, the subordinated notes issued inJune 2020 reduced net interest income by approximately$244,000 in the second quarter of 2020. Net interest income for the six months endedJune 30, 2020 decreased$1.1 million to$88.4 million compared to$89.5 million for the six months endedJune 30, 2019 . Net interest margin was 3.61% in the six months endedJune 30, 2020 , compared to 4.02% in the six months endedJune 30, 2019 , a decrease of 41 basis points, or 10.2%. In both six month periods, the Company's net interest income and margin were positively impacted by the increases in expected cash flows from theFDIC -assisted acquired loan pools and the resulting increase to accretable yield, which were previously discussed in Note 7 of the Notes to Consolidated Financial Statements. The positive impact of these changes in the six months endedJune 30, 2020 and 2019 were increases in interest income of$3.4 million and$2.9 million , respectively, and increases in net interest margin of 14 basis points and 13 basis points, respectively. Excluding the positive impact of the additional yield accretion, in the six months endedJune 30, 2020 , net interest margin decreased 42 basis points when compared to the year-ago six month period. The decrease was partially due to lower market interest rates, which caused lower LIBOR interest rates and generally resulted in lower yields on loans and other interest-earning assets. The margin decrease also resulted from an increase in average interest-earning assets that were primarily at rates that were much lower than the current portfolio rates, as described above. The Company's overall average interest rate spread decreased 52 basis points, or 14.3%, from 3.64% during the three months endedJune 30, 2019 to 3.12% during the three months endedJune 30, 2020 . The decrease was due to a 98 basis point decrease in the weighted average yield on interest-earning assets, partially offset by a 46 basis point decrease in the weighted average rate paid on interest-bearing liabilities. In comparing the two periods, the yield on loans decreased 76 basis points, the yield on investment securities decreased 27 basis points and the yield on other interest-earning assets decreased 235 basis points. The rate paid on deposits decreased 44 basis points, the rate paid on short-term borrowings and repurchase agreements decreased 138 basis points, the rate paid on subordinated debentures issued to capital trusts decreased 156 basis points, and the rate paid on subordinated notes increased six basis points. The Company's overall average interest rate spread decreased 37 basis points, or 10.0%, from 3.69% during the six months endedJune 30, 2019 to 3.32% during the six months endedJune 30, 2020 . The decrease was due to a 66 basis point decrease in the weighted average yield on interest-earning assets, partially offset by a 29 basis point decrease in the weighted average rate paid on interest-bearing liabilities. In comparing the two periods, the yield on loans decreased 52 basis points, the yield on investment securities decreased 17 basis points and the yield on other interest-earning assets decreased 208 basis points. The rate paid on deposits decreased 25 basis points, the rate paid on short-term borrowings and repurchase agreements decreased 81 basis points, the rate paid on subordinated debentures issued to capital trusts decreased 119 basis points, and the rate paid on subordinated notes decreased one basis point.
For additional information on net interest income components, refer to the "Average Balances, Interest Rates and Yields" tables in this Quarterly Report on Form 10-Q.
Provision for Loan Losses and Allowance for Loan Losses
In the first quarter of 2020, pursuant to the recently-enacted CARES Act and guidance from theSEC and FASB, we elected to delay adoption of the new accounting standard (CECL) related to accounting for credit losses. Our financial statements for the three and six months endedJune 30, 2020 , are prepared under the existing incurred loss methodology standard for accounting for loan losses. Management records a provision for loan losses in an amount it believes is sufficient to result in an allowance for loan losses that will cover current net charge-offs as well as risks believed to be inherent in the loan portfolio of the Bank. The amount of provision charged against current income is based on several factors, including, but not limited to, past loss experience, current portfolio mix, actual and potential losses identified in the loan portfolio, economic -------------------------------------------------------------------------------- 61
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conditions, and internal as well as external reviews. The levels of non-performing assets, potential problem loans, loan loss provisions and net charge-offs fluctuate from period to period and are difficult to predict.
Worsening economic conditions from the COVID-19 pandemic, higher inflation or interest rates, or other factors may lead to increased losses in the portfolio and/or requirements for an increase in loan loss provision expense. Management maintains various controls in an attempt to limit future losses, such as a watch list of possible problem loans, documented loan administration policies and loan review staff to review the quality and anticipated collectability of the portfolio. Additional procedures provide for frequent management review of the loan portfolio based on loan size, loan type, delinquencies, financial analysis, on-going correspondence with borrowers and problem loan work-outs. Management determines which loans are potentially uncollectible, or represent a greater risk of loss, and makes additional provisions to expense, if necessary, to maintain the allowance at a satisfactory level. The provision for loan losses for the three months endedJune 30, 2020 was$6.0 million compared with$1.6 million for the three months endedJune 30, 2019 . The provision for loan losses for the six months endedJune 30, 2020 was$9.9 million compared with$3.6 million for the six months endedJune 30, 2019 . Total net charge-offs were$127,000 and$997,000 for the three months endedJune 30, 2020 and 2019, respectively. During the three months endedJune 30, 2020 ,$115,000 of the$127,000 of net charge-offs were in the consumer category. Total net charge-offs were$365,000 and$2.7 million for the six months endedJune 30, 2020 and 2019, respectively. During the six months endedJune 30, 2020 ,$382,000 of the$365,000 of net charge-offs were in the consumer category. The Company experienced net recoveries in some of the other loan categories. We have seen and expect to continue to see rapid reductions in the automobile loan outstanding balance as we determined inFebruary 2019 to cease providing indirect lending services to automobile dealerships. AtJune 30, 2020 , indirect automobile loans totaled approximately$74 million . We expect this balance will be largely paid off in the next two years. General market conditions and unique circumstances related to individual borrowers and projects contributed to the level of provisions and charge-offs. Collateral and repayment evaluations of all assets categorized as potential problem loans, non-performing loans or foreclosed assets were completed with corresponding charge-offs or reserve allocations made as appropriate. AllFDIC -acquired loans were grouped into pools based on common characteristics and were recorded at their estimated fair values, which incorporated estimated credit losses at the acquisition date. These loan pools have been systematically reviewed by the Company to determine the risk of losses that may exceed those identified at the time of the acquisition. Techniques used in determining risk of loss are similar to those used to determine the risk of loss for the legacyGreat Southern Bank portfolio, with most focus being placed on those loan pools which include the larger loan relationships and those loan pools which exhibit higher risk characteristics. Review of the acquired loan portfolio also includes review of financial information, collateral valuations and customer interaction to determine if additional reserves are warranted. The Bank's allowance for loan losses as a percentage of total loans, excludingFDIC -assisted acquired loans, was 1.14% and 1.00% atJune 30, 2020 andDecember 31, 2019 , respectively. Management considers the allowance for loan losses adequate to cover losses inherent in the Bank's loan portfolio atJune 30, 2020 , based on recent reviews of the Bank's loan portfolio and current economic conditions. If economic conditions were to deteriorate further or management's assessment of the loan portfolio were to change, it is expected that additional loan loss provisions would be required, thereby adversely affecting the Company's future results of operations and financial condition. Non-performing Assets Non-performing assets acquired throughFDIC -assisted transactions, including foreclosed assets and potential problem loans, are not included in the totals or in the discussion of non-performing loans, potential problem loans and foreclosed assets below. These assets were initially recorded at their estimated fair values as of their acquisition dates and are accounted for in pools. Therefore, these loan pools are analyzed rather than the individual loans. The overall performance of the loan pools acquired in each of the fiveFDIC -assisted transactions has been better than original expectations as of the acquisition dates.
As a result of changes in balances and composition of the loan portfolio, changes in economic and market conditions and other factors specific to a borrower's circumstances, the level of non-performing assets will fluctuate.
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Non-performing assets, excluding allFDIC -assisted acquired assets, atJune 30, 2020 were$7.6 million , a decrease of$542,000 from$8.2 million atDecember 31, 2019 . Non-performing assets, excluding allFDIC -assisted acquired assets, as a percentage of total assets were 0.14% atJune 30, 2020 and 0.16% atDecember 31, 2019 . Compared toDecember 31, 2019 , non-performing loans increased$770,000 to$5.3 million atJune 30, 2020 , and foreclosed assets decreased$1.3 million to$2.3 million atJune 30, 2020 . Non-performing one- to four-family residential loans comprised$2.4 million , or 45.2%, of the total non-performing loans atJune 30, 2020 , an increase of$911,000 fromDecember 31, 2019 . Non-performing commercial business loans comprised$1.2 million , or 22.3%, of the total non-performing loans atJune 30, 2020 , a decrease of$53,000 fromDecember 31, 2019 . Non-performing consumer loans comprised$1.0 million , or 18.8%, of the total non-performing loans atJune 30, 2020 , a decrease of$183,000 fromDecember 31, 2019 . Non-performing commercial real estate loans comprised$727,000 , or 13.7%, of the total non-performing loans atJune 30, 2020 , an increase of$95,000 fromDecember 31, 2019 .
Non-performing Loans. Activity in the non-performing loans category during the
six months ended
Transfers to Transfers to Beginning Additions Removed Potential Foreclosed Ending Balance, to Non- from Non- Problem Assets and Charge- Balance, January 1 Performing Performing Loans
Repossessions Offs Payments June 30 (In Thousands) One- to four-family construction $ - $ - $ - $ - $ - $ - $ - $ - Subdivision construction - - - - - - - - Land development - - - - - - - - Commercial construction - - - - - - - - One- to four-family residential 1,477 1,104 - - - - (193) 2,388 Other residential - - - - - - - - Commercial real estate 632 107 - - - - (12) 727 Commercial business 1,235 - - - - - (53) 1,182 Consumer 1,175 276 - - (72) (148) (239) 992 Total$ 4,519 $ 1,487 $ - $ - $ (72)$ (148) $ (497) $ 5,289 AtJune 30, 2020 , the non-performing commercial business category included three loans, none of which were added during 2020. The largest relationship in this category, which was added during 2018, totaled$1.0 million , or 87.5% of the total category. This relationship is collateralized by an assignment of an interest in a real estate project. The non-performing one- to four-family residential category included 35 loans, 13 of which were added during the six months endedJune 30, 2020 . The largest relationship in the category totaled$276,000 , or 11.5% of the total category. The non-performing commercial real estate category included three loans, one of which was added during the six months endedJune 30, 2020 . The largest relationship in the category totaled$530,000 , or 72.9% of the total category, and is primarily related to a multi-tenant building inArkansas . The non-performing consumer category included 94 loans, 24 of which were added during the six months endedJune 30, 2020 , and the majority of which are indirect used automobile loans. Potential Problem Loans. Compared toDecember 31, 2019 , potential problem loans decreased$387,000 , or 8.8%, to$4.0 million atJune 30, 2020 . This decrease was primarily due to payments of$377,000 on potential problem loans,$119,000 in loans transferred to non-performing loans,$52,000 in loans transferred to foreclosed assets and repossessions, and$70,000 in loan write-downs, partially offset by$231,000 in loans added to potential problem loans. Potential problem loans are loans which management has identified through routine internal review procedures as having possible credit problems that may cause the borrowers difficulty in complying with the current repayment terms. These loans are not reflected in non-performing assets, but are considered in determining the adequacy of the allowance for loan losses. -------------------------------------------------------------------------------- 63
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Due to the deteriorating economic conditions from COVID-19, it is possible that we could experience an increase in potential problem loans in the remainder of 2020. As noted, we experienced an increased level of loan modifications in late March throughJune 2020 . In accordance with the CARES Act and guidance from the banking regulatory agencies, we made certain short-term modifications to loan terms to help our customers navigate through the current pandemic situation. Although loan modifications were made, they did not result in these loans being classified as troubled debt restructurings, potential problem loans or non-performing loans. If more severe or lengthier negative impacts of the COVID-19 pandemic occur or the effects of the SBA loan programs and other loan and stimulus programs do not enable companies and individuals to completely recover financially, this could result in longer-term modifications, which may be deemed to be troubled debt restructurings, additional potential problem loans and/or additional non-performing loans. Further actions on our part, including additions to the allowance for loan losses, could result.
Activity in the potential problem loans categories during the six months ended
Removed Transfers to Beginning Additions from Transfers to Foreclosed Ending Balance, to Potential Potential Non- Assets and Charge- Balance, January 1 Problem Problem Performing Repossessions Offs Payments June 30 (In Thousands) One- to four-family construction $ - $ - $ - $ - $ - $ - $ - $ - Subdivision construction - 24 - - - - - 24 Land development - - - - - - - - Commercial construction - - - - - - - - One- to four-family residential 791 - - (83) - - (128) 580 Other residential - - - - - - - - Commercial real estate 3,078 - - - - - (131) 2,947 Commercial business - - - - - - - - Consumer 512 207 - (36) (52) (70) (118) 443 Total$ 4,381 $ 231 $ -$ (119) $ (52)$ (70) $ (377) $ 3,994 AtJune 30, 2020 , the commercial real estate category of potential problem loans included two loans, neither of which was added during 2020. The largest relationship in this category (added during 2018), which totaled$1.8 million , or 61.6% of the total category, is collateralized by a mixed use commercial retail building. Payments were current on this relationship atJune 30, 2020 . The other relationship in the category (added during 2019), which totaled$1.1 million , or 38.4% of the total category, is collateralized by a commercial retail building. Payments were also current on this relationship atJune 30, 2020 . The one- to four-family residential category of potential problem loans included 14 loans, none of which were added during the six months endedJune 30, 2020 . The consumer category of potential problem loans included 56 loans, 22 of which were added during the six months endedJune 30, 2020 . Other Real Estate Owned and Repossessions. Of the total$4.4 million of other real estate owned and repossessions atJune 30, 2020 ,$1.2 million represents the fair value of foreclosed and repossessed assets related to loans acquired inFDIC -assisted transactions and$860,000 represents properties which were not acquired through foreclosure. The foreclosed and other assets acquired in theFDIC -assisted transactions and the properties not acquired through foreclosure are not included in the following table and discussion of other real estate owned and repossessions. -------------------------------------------------------------------------------- 64
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Activity in other real estate owned and repossessions during the six months
ended
Beginning Ending Balance, Capitalized Write- Balance, January 1 Additions Sales Costs Downs June 30 (In Thousands) One- to four-family construction $ - $ - $ - $ - $ - $ - Subdivision construction 689 - (455) 126 (10) 350 Land development 1,816 - (315) - (143) 1,358 Commercial construction - - - - - - One- to four-family residential 601 - (310) - - 291 Other residential - - - - - - Commercial real estate - - - - - - Commercial business - - - - - - Consumer 545 684 (889) - - 340 Total$ 3,651 $ 684 $ (1,969) $ 126$ (153) $ 2,339 AtJune 30, 2020 , the land development category of foreclosed assets included three properties, the largest of which was located in theBranson, Mo. area and had a balance of$768,000 , or 56.5% of the total category. Of the total dollar amount in the land development category of foreclosed assets, 60.2% was located in theBranson, Mo. area, including the largest property previously mentioned. A portion of a land development property located in theBranson, Mo. area was sold during the three months endingMarch 31, 2020 for$315,000 , which resulted in a write-down of$143,000 . The subdivision construction category of foreclosed assets included one property located in theBranson, Mo. area and had a balance of$350,000 . One property in theBranson, Mo. area was sold during the three months endedMarch 31, 2020 , which reduced the foreclosed assets balance by$69,000 and another property in theBranson, Mo. area was sold during the three months endedJune 30, 2020 , which reduced the foreclosed assets balance by$260,000 . The one- to four-family residential category of foreclosed assets included one property inSpringfield, Mo and had a balance of$291,000 . A one- to four-family residential property located inLake Ozark, Mo. was sold during the three months endedMarch 31, 2020 for$380,000 , resulting in a gain of$70,000 . The amount of additions and sales in the consumer category are due to the volume of repossessions of automobiles, which generally are subject to a shorter repossession process. The Company experienced increased levels of delinquencies and repossessions in indirect and used automobile loans throughout 2016 and 2017. The level of delinquencies and repossessions in indirect and used automobile loans generally decreased in 2018 through 2020. Non-interest Income For the three months endedJune 30, 2020 , non-interest income increased$1.1 million to$8.3 million when compared to the three months endedJune 30, 2019 , primarily as a result of the following items:
Net gains on loan sales: Net gains on loan sales increased
Other income: Other income increased
Service charges and ATM fees: Service charges and ATM fees decreased$1.2 million compared to the prior year period. This decrease was primarily due to a decrease in overdraft and insufficient funds fees on customer accounts. This was due to both a reduction in usage by customers and a decision near the end of the first quarter of 2020 to waive certain fees for customers in response to the COVID-19 pandemic, with the effects of that decision felt primarily during the three months endedJune 30, 2020 .
For the six months ended
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Net gains on loan sales: Net gains on loan sales increased$1.8 million compared to the prior year period. The increase was due to an increase in originations of fixed-rate loans during the 2020 period compared to the 2019 period. As noted above, fixed rate single-family mortgage loans originated are generally subsequently sold in the secondary market. Other income: Other income increased$894,000 compared to the prior year period. In the 2020 period, the Company recognized approximately$1.3 million of fee income related to newly-originated interest rate swaps in the Company's back-to-back swap program with loan customers and swap counterparties. The Company also recognized approximately$441,000 in income related to the exit of certain tax credit partnerships during the six months endedJune 30, 2020 . In the 2019 period, the Company recognized gains totaling$677,000 from the sale of, or recovery of, receivables and assets that were acquired several years prior inFDIC -assisted transactions, with no similar sales or recoveries in the current period. Service charges and ATM fees: Service charges and ATM fees decreased$1.4 million compared to the prior year period. This decrease was primarily due to a decrease in overdraft and insufficient funds fees on customer accounts. As noted above, a decision to waive certain fees for customers was made in response to the COVID-19 pandemic during the first quarter 2020 and customer usage decreased in the 2020 period. Also during the first quarter of 2020,$200,000 in additional expenses netted into ATM fee income during the conversion to a new debit card processing system. Gain (loss) on derivative interest rate products: The net loss on derivative interest rate products increased$446,000 compared to the net loss in the prior year period. In the 2020 period, the Company recognized a$514,000 decrease in the net fair value related to interest rate swaps in the Company's back-to-back swap program with loan customers and swap counterparties. As market interest rates fall this generally decreases the net fair value of these back-to-back swaps. This is a non-cash item as there was no required settlement of this amount between the Company and its swap counterparties. Non-interest Expense
For the three months ended
Salaries and employee benefits: Salaries and employee benefits increased$1.4 million from the prior year period. The increase was primarily due to annual employee compensation merit increases and increased incentives in lending and operations areas. Approximately half of the compensation increase was in the mortgage division where we have added staff and variable compensation increased due to significant increases in new mortgage loan originations, much of which is sold in the secondary market as noted above Net occupancy expense: Net occupancy expense increased$258,000 compared to the prior year period. This was primarily related to increased depreciation on new ATM/ITMs and ATM operating software upgrades implemented during the fourth quarter of 2019. Also included in net occupancy expense for the 2020 quarter are COVID-19-related expenses for various items such as cleaning services, equipment, costs to set up remote work sites and other items. Advertising: Advertising expense decreased$405,000 compared to the prior year period. This decrease was primarily due to activities related to sponsorship agreements being halted as a result of the COVID-19 pandemic. Other operating expenses: Other operating expenses decreased$187,000 from the prior year period. This decrease was primarily due to travel restrictions during the 2020 period. Total travel and entertainment for the three months endedJune 30, 2020 was$77,000 compared to$462,000 during the prior year period. This decrease was partially offset with small increases in other expense categories. In response to the COVID-19 pandemic, the Company made contributions of$48,000 during the current year period to various organizations that assist the communities the Company serves. Insurance: Insurance expense decreased$128,000 compared to the prior year period. This decrease was primarily due to a decrease inFDIC deposit insurance premiums. The Bank had a credit with theFDIC for a portion of premiums previously paid to the deposit insurance fund. The remaining credit offset a portion of the deposit insurance premium due for the three months endedJune 30, 2020 .
For the six months ended
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Salaries and employee benefits: Salaries and employee benefits increased$3.9 million in the six months endedJune 30, 2020 compared to the prior year period. The increase was primarily due to annual employee compensation merit increases and increased incentives in lending, including mortgage lending activities as noted above, and operations areas. Additionally, inMarch 2020 , the Company approved a special cash bonus to all employees totaling$1.1 million in response to the COVID-19 pandemic. Net occupancy expense: Net occupancy expense increased$623,000 in the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . This was primarily related to increased depreciation on new ATM/ITMs and ATM operating software upgrades implemented during the fourth quarter of 2019. Also included in net occupancy expense for the 2020 period are COVID-19-related expenses for various items such as cleaning services, equipment, costs to set up remote work sites and other items. Insurance: Insurance expense decreased$412,000 compared to the prior year period. This decrease was primarily due to a decrease inFDIC deposit insurance premiums. The Bank had a credit with theFDIC for a portion of premiums previously paid to the deposit insurance fund leaving no premium being due for the three months endedMarch 31, 2020 . The remaining credit mostly offset the deposit insurance premium due during the three months endedJune 30, 2020 . Advertising: Advertising expense decreased$311,000 compared to the prior year period. This decrease was primarily due to activities related to sponsorship agreements being halted as a result of the COVID-19 pandemic. Expense on other real estate owned and repossessions: Expense on other real estate owned and repossessions decreased$292,000 compared to the prior year period primarily due to sales of other assets and higher valuation write-downs of certain foreclosed assets during the prior year period. During the 2019 period, valuation write-downs of certain foreclosed assets totaled approximately$444,000 , while valuation write-downs in the 2020 period totaled approximately$213,000 . The Company's efficiency ratio for the three months endedJune 30, 2020 , was 56.75% compared to 54.50% for the same period in 2019. The efficiency ratio for the six months endedJune 30, 2020 , was 57.84% compared to 54.62% for the same period in 2019. The higher efficiency ratio in the 2020 three and six month periods were primarily due to an increase in non-interest expense. Despite this increase in non-interest expense, the Company's ratio of non-interest expense to average assets was 2.17% and 2.32% for the three and six months endedJune 30, 2020 , respectively, compared to 2.35% and 2.38% for the three and six months endedJune 30, 2019 , respectively. The decreases in the current three and six month ratios were primarily due to an increase in average assets in the 2020 periods compared to the 2019 periods. Average assets for the three months endedJune 30, 2020 , increased$581.6 million , or 12.1%, from the three months endedJune 30, 2019 , primarily due to increases in loans receivable, investment securities and interest bearing cash balances at theFederal Reserve Bank .
Average assets for the six months ended
Provision for Income Taxes For the three months endedJune 30, 2020 and 2019, the Company's effective tax rate was 19.3% and 16.8%, respectively. For the six months endedJune 30, 2020 and 2019, the Company's effective tax rate was 17.4% and 17.7%, respectively. These effective rates were lower than the statutory federal tax rate of 21%, due primarily to the utilization of certain investment tax credits and to tax-exempt investments and tax-exempt loans, which reduced the Company's effective tax rate. The Company's effective tax rate may fluctuate in future periods as it is impacted by the level and timing of the Company's utilization of tax credits and the level of tax-exempt investments and loans and the overall level of pre-tax income. The Company's effective income tax rate is currently expected to remain below the statutory rate due primarily to the factors noted above. The Company currently expects its effective tax rate (combined federal and state) to be approximately 16.0% to 17.5% for the full year of 2020 and in future years. -------------------------------------------------------------------------------- 67
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Average Balances, Interest Rates and Yields
The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Average balances of loans receivable include the average balances of non-accrual loans for each period. Interest income on loans includes interest received on non-accrual loans on a cash basis. Interest income on loans includes the amortization of net loan fees which were deferred in accordance with accounting standards. Net fees included in interest income were$1.5 million and$1.0 million for the three months endedJune 30, 2020 and 2019, respectively. Net fees included in interest income were$2.6 million and$2.1 million for the six months endedJune 30, 2020 and 2019, respectively. Tax-exempt income was not calculated on a tax equivalent basis. The table does not reflect any effect of income taxes. -------------------------------------------------------------------------------- 68
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June 30, Three Months Ended Three Months Ended 2020(2) June 30, 2020 June 30, 2019 Yield/ Average Yield/ Average Yield/ Rate Balance Interest Rate Balance Interest Rate (Dollars in Thousands) Interest-earning assets: Loans receivable: One- to four-family
residential 3.84%
515,749
Other residential 4.29 936,541 10,940 4.70
819,577 11,270 5.52
Commercial real estate 4.23 1,533,078 17,390 4.56
1,414,009 18,304 5.19
Construction 4.34 636,914 7,612 4.81
713,885 10,585 5.95
Commercial business 3.72 340,872 3,361 3.97
259,779 3,358 5.18
Other loans 5.32 293,432 3,891 5.33
403,584 5,450 5.42
Industrial revenue bonds(1) 4.44 9,757 222 9.16 14,940 248 6.67 Total loans receivable 4.34 4,402,875 50,848 4.64 4,141,523 55,771 5.40 Investment securities(1) 2.97 433,410 3,082 2.86 309,170 2,415 3.13 Other interest-earning assets 0.24 321,414 81 0.10 88,024 537 2.45 Total interest-earning assets 3.91 5,157,699 54,011 4.21 4,538,717 58,723 5.19 Non-interest-earning assets: Cash and cash equivalents 97,468 92,500 Other non-earning assets 148,031 190,416 Total assets$ 5,403,198 $ 4,821,633 Interest-bearing liabilities: Interest-bearing demand and savings 0.34$ 1,838,077 1,862 0.41$ 1,498,795 1,930 0.52 Time deposits 1.44 1,789,349 7,179 1.61 1,733,163 9,652 2.23 Total deposits 0.86 3,627,426 9,041 1.00 3,231,958 11,582 1.44 Short-term borrowings, repurchase agreements and other interest-bearing liabilities 0.02 162,346 10 0.03 244,586 859 1.41
Subordinated
debentures
issued to capital trusts 2.29 25,774 167 2.60 25,774 267 4.16 Subordinated notes 5.86 89,840 1,338 5.99
74,015 1,094 5.93
Total
interest-bearing
liabilities 1.01 3,905,386 10,556 1.09 3,576,333 13,802 1.55 Non-interest-bearing liabilities: Demand deposits 833,251 655,642 Other liabilities 39,824 34,504 Total liabilities 4,778,461 4,266,479 Stockholders' equity 624,737 555,154 Total liabilities and stockholders' equity$ 5,403,198 $ 4,821,633 Net interest income: Interest rate spread 2.90%$ 43,455 3.12%
$ 44,921 3.64% Net interest margin* 3.39% 3.97% Average interest-earning assets to average interest- bearing liabilities 132.1% 126.9%
* Defined as the Company's net interest income divided by total average
interest-earning assets. (1) Of the total average balances of investment securities, average tax-exempt
investment securities were
months ended
tax-exempt loans and industrial revenue bonds were
million for the three months ended
Interest income on tax-exempt assets included in this table was
Interest income net of disallowed interest expense related to tax-exempt
assets was
2019, respectively. (2) The yield on loans atJune 30, 2020 does not include the impact of the
accretable yield (income) on loans acquired in the
transactions. See "Net Interest Income" for a discussion of the effect on
results of operations for the three months ended
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June 30, Six Months Ended Six Months Ended 2020(2) June 30, 2020 June 30, 2019 Yield/ Average Yield/ Average Yield/ Rate Balance Interest Rate Balance Interest Rate (Dollars in Thousands) Interest-earning assets: Loans receivable: One- to four-family
residential 3.84%
506,490
Other residential 4.29 881,486 21,696 4.95
815,354 22,260 5.51
Commercial real estate 4.23 1,511,434 35,970 4.79
1,400,789 36,000 5.18
Construction 4.34 673,444 17,335 5.18
690,883 20,758 6.06
Commercial business 3.72 305,016 6,552 4.32
261,967 6,750 5.20
Other loans 5.32 305,435 8,424 5.55
420,190 11,154 5.35
Industrial revenue bonds(1) 4.44 10,015 431 8.65 15,072 461 6.17 Total loans receivable 4.34 4,314,906 104,978 4.89 4,110,745 110,327 5.41 Investment securities(1) 2.97 409,206 6,165 3.03 293,937 4,666 3.20 Other interest-earning assets 0.24 205,768 342 0.33
91,182 1,088 2.41
Total
interest-earning
assets 3.91 4,929,880 111,485 4.55 4,495,864 116,081 5.21 Non-interest-earning assets: Cash and cash equivalents 94,124 91,657 Other non-earning assets 159,353 185,672 Total assets$ 5,183,357 $ 4,773,193 Interest-bearing liabilities: Interest-bearing demand and savings 0.34$ 1,706,794 3,979 0.47$ 1,485,948 3,693 0.50 Time deposits 1.44 1,751,125 15,639 1.80 1,703,087 18,359 2.17 Total deposits 0.86 3,457,919 19,618 1.14 3,189,035 22,052 1.39 Short-term borrowings, repurchase agreements and other interest-bearing liabilities 0.02 213,700 659 0.62 251,347 1,780 1.43 Subordinated debentures issued to capital trusts 2.29 25,774 383 2.99 25,774 534 4.18 Subordinated notes 5.86 82,087 2,432 5.96
73,958 2,189 5.97
Total
interest-bearing
liabilities 1.01 3,779,480 23,092 1.23 3,540,114 26,555 1.52 Non-interest-bearing liabilities: Demand deposits 754,618 657,018 Other liabilities 37,385 30,011 Total liabilities 4,571,483 4,227,143 Stockholders' equity 611,874 546,050 Total liabilities and stockholders' equity$ 5,183,357 $ 4,773,193 Net interest income: Interest rate spread 2.90%$ 88,393 3.32%
$ 89,526 3.69% Net interest margin* 3.61% 4.02% Average interest-earning assets to average interest- bearing liabilities 130.4% 127.0%
* Defined as the Company's net interest income divided by total average
interest-earning assets. (1) Of the total average balances of investment securities, average tax-exempt
investment securities were
ended
loans and industrial revenue bonds were
the six months ended
tax-exempt assets included in this table was
for the six months ended
income net of disallowed interest expense related to tax-exempt assets was
respectively.
(2) The yield on loans at
accretable yield (income) on loans acquired in the
transactions. See "Net Interest Income" for a discussion of the effect on
results of operations for the six months ended
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Rate/Volume Analysis
The following tables present the dollar amounts of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities for the periods shown. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in rate (i.e., changes in rate multiplied by old volume) and (ii) changes in volume (i.e., changes in volume multiplied by old rate). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to volume and rate. Tax-exempt income was not calculated on a tax equivalent basis. Three Months Ended June 30, 2020 vs. 2019 Increase (Decrease) Total Due to Increase Rate Volume (Decrease) (Dollars in Thousands) Interest-earning assets: Loans receivable$ (8,233) 3,310$ (4,923) Investment securities (226) 893 667 Other interest-earning assets (875) 419
(456)
Total interest-earning assets (9,334) 4,622
(4,712)
Interest-bearing liabilities: Demand deposits (453) 385 (68) Time deposits (2,773) 300 (2,473) Total deposits (3,226) 685 (2,541) Short-term borrowings (632) (217) (849) Subordinated debentures issued to capital trust (100) -
(100)
Subordinated notes 11 233
244
Total interest-bearing liabilities (3,947) 701 (3,246) Net interest income$ (5,387) 3,921$ (1,466) Six Months Ended June 30, 2020 vs. 2019 Increase (Decrease) Total Due to Increase Rate Volume (Decrease) (Dollars in Thousands) Interest-earning assets: Loans receivable$ (10,768) $ 5,419 $ (5,349) Investment securities (261) 1,760 1,499 Other interest-earning assets (1,418) 672
(746)
Total interest-earning assets (12,447) 7,851
(4,596)
Interest-bearing liabilities: Demand deposits (247) 533 286 Time deposits (3,234) 514 (2,720) Total deposits (3,481) 1,047 (2,434) Short-term borrowings (886) (235) (1,121) Subordinated debentures issued to capital trust (151) -
(151)
Subordinated notes (4) 247
243
Total interest-bearing liabilities (4,522) 1,059 (3,463) Net interest income$ (7,925) $ 6,792 $ (1,133) Liquidity Liquidity is a measure of the Company's ability to generate sufficient cash to meet present and future financial obligations in a timely manner through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. These obligations include the credit needs of customers, funding deposit -------------------------------------------------------------------------------- 71
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withdrawals, and the day-to-day operations of the Company. Liquid assets include cash, interest-bearing deposits with financial institutions and certain investment securities and loans. As a result of the Company's management of the ability to generate liquidity primarily through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its borrowers' credit needs. AtJune 30, 2020 , the Company had commitments of approximately$186.7 million to fund loan originations,$1.12 billion of unused lines of credit and unadvanced loans, and$16.6 million of outstanding letters of credit. Loan commitments and the unfunded portion of loans at the dates indicated were as follows (in thousands): June 30, March 31, December 31, December 31, December 31, 2020 2020 2019 2018 2017 Closed non-construction loans with unused available lines Secured by real estate (one- to four-family)$ 158,687 $ 156,381 $ 155,831
Secured by real estate (not one- to four-family) 16,124 16,832 19,512 11,063 10,836 Not secured by real estate - commercial business 105,071 79,117 83,782
87,480 113,317
Closed construction loans with unused
available lines
Secured by real estate (one-to four-family) 37,789 50,101 48,213 37,162 20,919 Secured by real estate (not one-to four-family) 753,589 809,436 798,810
906,006 718,277
Loan Commitments not closed
Secured by real estate (one-to four-family) 112,769 141,432 69,295 24,253 23,340 Secured by real estate (not one-to four-family) 73,103 95,652 92,434
104,871 156,658
Not secured by real estate - commercial business 800 - - 405 4,870$ 1,257,932 $ 1,348,951 $ 1,267,877 $ 1,322,188 $ 1,181,804 The Company's primary sources of funds are customer deposits, FHLBank advances, other borrowings, loan repayments, unpledged securities, proceeds from sales of loans and available-for-sale securities and funds provided from operations. The Company utilizes particular sources of funds based on the comparative costs and availability at the time. The Company has from time to time chosen not to pay rates on deposits as high as the rates paid by certain of its competitors and, when believed to be appropriate, supplements deposits with less expensive alternative sources of funds.
At
Federal Home Loan Bank line$ 1,135.6 million Federal Reserve Bank line$ 426.9 million Cash and cash equivalents$ 473.6 million Unpledged securities$ 219.5 million Statements of Cash Flows. During both the six months endedJune 30, 2020 and 2019, the Company had positive cash flows from operating activities, negative cash flows from investing activities and positive cash flows from financing activities. Cash flows from operating activities for the periods covered by the Statements of Cash Flows have been primarily related to changes in accrued and deferred assets, credits and other liabilities, the provision for loan losses, depreciation and amortization, realized gains on sales of loans and the amortization of deferred loan origination fees and discounts (premiums) on loans and investments, all of which are non-cash or non-operating adjustments to operating cash flows. Net income adjusted for non-cash and non-operating items and the origination and sale of loans held for sale were the primary source of cash flows from operating activities. Operating activities provided cash flows of$35.4 million and$39.2 million during the six months endedJune 30, 2020 and 2019, respectively. During the six months endedJune 30, 2020 , investing activities used cash of$259.5 million , primarily due to the net origination of loans, the purchase of investment securities and the purchase of equipment, partially offset by cash proceeds from the termination of interest rate derivatives, the sale of other real estate owned and payments received on investment securities. Investing activities in the 2019 period used cash of$180.3 million , primarily due to the -------------------------------------------------------------------------------- 72
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purchase of loans and the net origination of loans, the purchase of investment securities and the purchase of equipment, partially offset by the sale of other real estate owned, the sale of investment securities and payments received on investment securities. Changes in cash flows from financing activities during the periods covered by the Statements of Cash Flows are due to changes in deposits after interest credited, changes in FHLBank advances and changes in short-term borrowings, as well as advances from borrowers for taxes and insurance, dividend payments to stockholders, purchases of the Company's common stock and the exercise of common stock options. Financing activities provided cash of$477.6 million and$119.7 million during the six months endedJune 30, 2020 and 2019, respectively. In the 2020 six-month period, financing activities provided cash primarily as a result of net increases in checking account balances, partially offset by decreases in short-term borrowings, dividends paid to stockholders and the purchase of the Company's common stock. Also in the 2020 period, cash was provided by the issuance of subordinated notes. In the 2019 six-month period, financing activities provided cash primarily as a result of net increases in checking account balances and certificates of deposit, partially offset by decreases in short-term borrowings and dividends paid to stockholders. Capital Resources Management continuously reviews the capital position of the Company and the Bank to ensure compliance with minimum regulatory requirements, as well as to explore ways to increase capital either by retained earnings or other means. AtJune 30, 2020 , the Company's total stockholders' equity and common stockholders' equity were each$626.7 million , or 11.3% of total assets, equivalent to a book value of$44.50 per common share. As ofDecember 31, 2019 , total stockholders' equity and common stockholders' equity were each$603.1 million , or 12.0% of total assets, equivalent to a book value of$42.29 per common share. AtJune 30, 2020 , the Company's tangible common equity to tangible assets ratio was 11.1%, compared to 11.9% atDecember 31, 2019 (See Non-GAAP Financial Measures below). Included in stockholders' equity atJune 30, 2020 andDecember 31, 2019 , were unrealized gains (net of taxes) on the Company's available-for-sale investment securities totaling$26.0 million and$9.0 million , respectively. This increase in unrealized gains primarily resulted from lower market interest rates which increased the fair value of the investment securities. Also included in stockholders' equity atJune 30, 2020 , were realized gains (net of taxes) on the Company's cash flow hedge (interest rate swap), which was terminated inMarch 2020 , totaling$33.1 million . This amount, plus associated deferred taxes, is expected to be accreted to interest income over the remaining term of the original interest rate swap contract, which was to end inOctober 2025 . AtJune 30, 2020 , the remaining pre-tax amount to be recorded in interest income was$42.8 million . The net effect on total stockholders' equity over time will be no impact as the reduction of this realized gain will be offset by an increase in retained earnings (as the interest income flows through pre-tax income). Banks are required to maintain minimum risk-based capital ratios. These ratios compare capital, as defined by the risk-based regulations, to assets adjusted for their relative risk as defined by the regulations. Under current guidelines banks must have a minimum common equity Tier 1 capital ratio of 4.50%, a minimum Tier 1 risk-based capital ratio of 6.00%, a minimum total risk-based capital ratio of 8.00%, and a minimum Tier 1 leverage ratio of 4.00%. To be considered "well capitalized," banks must have a minimum common equity Tier 1 capital ratio of 6.50%, a minimum Tier 1 risk-based capital ratio of 8.00%, a minimum total risk-based capital ratio of 10.00%, and a minimum Tier 1 leverage ratio of 5.00%. OnJune 30, 2020 , the Bank's common equity Tier 1 capital ratio was 13.1%, its Tier 1 capital ratio was 13.1%, its total capital ratio was 14.2% and its Tier 1 leverage ratio was 11.5%. As a result, as ofJune 30, 2020 , the Bank was well capitalized, with capital ratios in excess of those required to qualify as such. OnDecember 31, 2019 , the Bank's common equity Tier 1 capital ratio was 13.1%, its Tier 1 capital ratio was 13.1%, its total capital ratio was 14.0% and its Tier 1 leverage ratio was 12.3%. As a result, as ofDecember 31, 2019 , the Bank was well capitalized, with capital ratios in excess of those required to qualify as such. -------------------------------------------------------------------------------- 73
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The FRB has established capital regulations for bank holding companies that generally parallel the capital regulations for banks. OnJune 30, 2020 , the Company's common equity Tier 1 capital ratio was 12.5%, its Tier 1 capital ratio was 13.0%, its total capital ratio was 17.2% and its Tier 1 leverage ratio was 11.4%. To be considered well capitalized, a bank holding company must have a Tier 1 risk-based capital ratio of at least 6.00% and a total risk-based capital ratio of at least 10.00%. As ofJune 30, 2020 , the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such. OnDecember 31, 2019 , the Company's common equity Tier 1 capital ratio was 12.0%, its Tier 1 capital ratio was 12.5%, its total capital ratio was 15.0% and its Tier 1 leverage ratio was 11.8%. As ofDecember 31, 2019 , the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such. InJune 2020 , the Company further enhanced its regulatory capital position with the issuance of$75.0 million of 5.50% fixed-to-floating rate subordinated notes dueJune 15, 2030 , which count as Tier 2 Capital in the calculation of the Total Capital Ratio. The notes will accrue interest at the fixed rate of 5.50% to but excludingJune 15, 2025 . From and includingJune 15, 2025 to but excluding the maturity date ofJune 15, 2030 , if not redeemed by the Company, the notes will accrue interest at a floating rate. In addition to the minimum common equity Tier 1 capital ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio, the Company and the Bank have to maintain a capital conservation buffer consisting of additional common equity Tier 1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. For additional information, see "Item 1. Business--Government Supervision andRegulation-Capital " in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . Dividends. During the three months endedJune 30, 2020 , the Company declared common stock cash dividends of$0.34 per share, or 37% of net income per diluted common share for that three month period, and paid common stock cash dividends of$0.34 per share (which was declared inMarch 2020 ). During the three months endedJune 30, 2019 , the Company declared a common stock cash dividend of$0.32 per share, or 25% of net income per diluted common share for that three month period, and paid a common stock cash dividend of$0.32 per share (which was declared inMarch 2019 ). During the six months endedJune 30, 2020 , the Company declared common stock cash dividends of$1.68 per share, or 85% of net income per diluted common share for that six month period, and paid common stock cash dividends of$1.68 per share ($0.34 of which was declared inDecember 2019 ). The total dividends declared during the six months endedJune 30, 2020 , consisted of regular cash dividends of$0.68 per share and a special cash dividend of$1.00 per share. During the six months endedJune 30, 2019 , the Company declared common stock cash dividends of$1.39 per share, or 55% of net income per diluted common share for that six month period, and paid a common stock cash dividend of$1.39 per share. The total dividends declared during the six months endedJune 30, 2019 , consisted of regular cash dividends of$0.64 per share and a special cash dividend of$0.75 per share. The Board of Directors meets regularly to consider the level and the timing of dividend payments. The$0.34 per share dividend declared but unpaid as ofJune 30, 2020 , was paid to stockholders inJuly 2020 . Common Stock Repurchases and Issuances. The Company has been in various buy-back programs sinceMay 1990 . During the three months endedJune 30, 2020 , the Company issued 600 shares of stock at an average price of$23.19 per share to cover stock option exercises and did not repurchase any shares of its common stock. During the three months endedJune 30, 2019 , the Company issued 30,858 shares of stock at an average price of$28.50 per share to cover stock option exercises and did not repurchase any shares of its common stock. During the six months endedJune 30, 2020 , the Company issued 7,075 shares of stock at an average price of$36.36 per share to cover stock option exercises and repurchased 183,707 shares of its common stock at an average price of$44.36 per share. During the six months endedJune 30, 2019 , the Company issued 66,458 shares of stock at an average price of$29.06 per share to cover stock option exercises and repurchased 16,040 shares of its common stock at an average price of$52.93 per share. OnApril 18, 2018 , the Company's Board of Directors authorized management to repurchase up to 500,000 shares of the Company's outstanding common stock, under a program of open market purchases or privately negotiated transactions. The program does not have an expiration date. Management has historically utilized stock buy-back programs from time to time as long as management believed that repurchasing the stock would contribute to the -------------------------------------------------------------------------------- 74
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overall growth of shareholder value. The number of shares of stock that will be repurchased at any particular time and the prices that will be paid are subject to many factors, several of which are outside of the control of the Company. The primary factors, however, are the number of shares available in the market from sellers at any given time, the price of the stock within the market as determined by the market and the projected impact on the Company's earnings per share and capital. As ofJune 30, 2020 , there were 282,771 shares still available to be repurchased under the program. Non-GAAP Financial Measures This document contains certain financial information determined by methods other than in accordance with accounting principles generally accepted inthe United States ("GAAP"), consisting of the tangible common equity to tangible assets ratio.
In calculating the ratio of tangible common equity to tangible assets, we subtract period-end intangible assets from common equity and from total assets.
Management believes that the presentation of this measure excluding the impact of intangible assets provides useful supplemental information that is helpful in understanding our financial condition and results of operations, as it provides a method to assess management's success in utilizing our tangible capital as well as our capital strength. Management also believes that providing a measure that excludes balances of intangible assets, which are subjective components of valuation, facilitates the comparison of our performance with the performance of our peers. In addition, management believes that this is a standard financial measure used in the banking industry to evaluate performance. This non-GAAP financial measure is supplemental and is not a substitute for any analysis based on GAAP financial measures. Because not all companies use the same calculation of non-GAAP measures, this presentation may not be comparable to similarly titled measures as calculated by other companies. Non-GAAP Reconciliation: Ratio of Tangible Common Equity to Tangible Assets June 30, December 31, 2020 2019 (Dollars in Thousands) Common equity at period end$ 626,728 $ 603,066 Less: Intangible assets at period end 7,521
8,098
Tangible common equity at period end (a)$ 619,207 $
594,968
Total assets at period end$ 5,566,650 $
5,015,072
Less: Intangible assets at period end 7,521
8,098
Tangible assets at period end (b)$ 5,559,129 $
5,006,974
Tangible common equity to tangible assets (a) / (b) 11.14 %
11.88 %
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