10-Q 1 gs-10q063019.htm QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2019


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934

For the Quarterly Period Ended June 30, 2019

Commission File Number 0-18082

GREAT SOUTHERN BANCORP, INC.
 
(Exact name of registrant as specified in its charter)

Maryland
 
43-1524856
(State or other jurisdiction of incorporation
or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1451 E. Battlefield, Springfield, Missouri
 
65804
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(417) 887-4400
(Registrant's telephone number, including area code)

 
Securities registered pursuant to Section 12(b) of the Act.

Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock,
   
par value $0.01 per share
GSBC
The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
Yes /X/     No /  /
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes/X/   No /  /
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer /  /
Accelerated filer /X/
Non-accelerated filer /  /
Smaller reporting company /  /
 
Emerging growth company /  /

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. / /

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes /  /   No /X/
 
The number of shares outstanding of each of the registrant's classes of common stock: 14,212,579 shares of common stock, par value $.01 per share, outstanding at August 5, 2019.

1



 
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.

GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except number of shares)

   
JUNE 30,
   
DECEMBER 31,
 
   
2019
   
2018
 
   
(Unaudited)
       
             
ASSETS
           
Cash
 
$
99,567
   
$
110,108
 
Interest-bearing deposits in other financial institutions
   
81,805
     
92,634
 
Cash and cash equivalents
   
181,372
     
202,742
 
Available-for-sale securities
   
305,649
     
243,968
 
Mortgage loans held for sale
   
11,106
     
1,650
 
Loans receivable, net of allowance for loan losses of $39,254 – June 2019;
$38,409 - December 2018
   
4,112,455
     
3,989,001
 
Interest receivable
   
14,351
     
13,448
 
Prepaid expenses and other assets
   
76,241
     
55,336
 
Other real estate owned and repossessions, net
   
7,107
     
8,440
 
Premises and equipment, net
   
143,473
     
132,424
 
Goodwill and other intangible assets
   
8,675
     
9,288
 
Federal Home Loan Bank stock
   
11,093
     
12,438
 
Current and deferred income taxes
   
     
7,465
 
          Total Assets
 
$
4,871,522
   
$
4,676,200
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Liabilities:
               
Deposits
 
$
3,888,536
   
$
3,725,007
 
Securities sold under reverse repurchase agreements with customers
   
98,632
     
105,253
 
Short-term borrowings and other interest-bearing liabilities
   
168,636
     
192,725
 
Subordinated debentures issued to capital trust
   
25,774
     
25,774
 
Subordinated notes
   
74,059
     
73,842
 
Accrued interest payable
   
4,209
     
3,570
 
Advances from borrowers for taxes and insurance
   
10,550
     
5,092
 
Accrued expenses and other liabilities
   
26,499
     
12,960
 
Current and deferred income taxes
   
2,318
     
 
          Total Liabilities
   
4,299,213
     
4,144,223
 
Stockholders' Equity:
               
Capital stock
               
Serial preferred stock –$.01 par value; authorized 1,000,000 shares; issued
and outstanding June 2019 and December 2018 - -0- shares
   
     
 
Common stock, $.01 par value; authorized 20,000,000 shares;
issued and outstanding June 2019  –14,201,616 shares;
December 2018 - 14,151,198 shares
   
142
     
142
 
Additional paid-in capital
   
31,603
     
30,121
 
Retained earnings
   
508,427
     
492,087
 
Accumulated other comprehensive income
   
32,137
     
9,627
 
          Total Stockholders' Equity
   
572,309
     
531,977
 
          Total Liabilities and Stockholders' Equity
 
$
4,871,522
   
$
4,676,200
 

See Notes to Consolidated Financial Statements

2





GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
   
THREE MONTHS ENDED
JUNE 30,
 
   
2019
   
2018
 
   
(Unaudited)
 
             
INTEREST INCOME
           
Loans
 
$
55,771
   
$
48,219
 
Investment securities and other
   
2,952
     
1,724
 
TOTAL INTEREST INCOME
   
58,723
     
49,943
 
                 
INTEREST EXPENSE
               
Deposits
   
11,582
     
6,123
 
Federal Home Loan Bank advances
   
     
1,166
 
Short-term borrowings and repurchase agreements
   
859
     
180
 
Subordinated debentures issued to capital trust
   
267
     
238
 
Subordinated notes
   
1,094
     
1,024
 
TOTAL INTEREST EXPENSE
   
13,802
     
8,731
 
NET INTEREST INCOME
   
44,921
     
41,212
 
Provision for Loan Losses
   
1,600
     
1,950
 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
   
43,321
     
39,262
 
                 
NON-INTEREST INCOME
               
Commissions
   
163
     
312
 
Service charges and ATM fees
   
5,309
     
5,488
 
Net gains on loan sales
   
376
     
559
 
Late charges and fees on loans
   
356
     
385
 
Gain (loss) on derivative interest rate products
   
(44
)
   
11
 
Other income
   
997
     
704
 
TOTAL NON-INTEREST INCOME
   
7,157
     
7,459
 
                 
NON-INTEREST EXPENSE
               
Salaries and employee benefits
   
15,428
     
14,947
 
Net occupancy and equipment expense
   
6,449
     
6,298
 
Postage
   
784
     
834
 
Insurance
   
662
     
650
 
Advertising
   
842
     
632
 
Office supplies and printing
   
226
     
301
 
Telephone
   
839
     
792
 
Legal, audit and other professional fees
   
630
     
689
 
Expense on other real estate and repossessions
   
419
     
2,737
 
Partnership tax credit investment amortization
   
91
     
91
 
Acquired deposit intangible asset amortization
   
289
     
412
 
Other operating expenses
   
1,724
     
1,532
 
TOTAL NON-INTEREST EXPENSE
   
28,383
     
29,915
 
                 
INCOME BEFORE INCOME TAXES
   
22,095
     
16,806
 
Provision for Income Taxes
   
3,720
     
2,967
 
NET INCOME AND NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
 
$
18,375
   
$
13,839
 
                 
Basic Earnings Per Common Share
 
$
1.29
   
$
0.98
 
Diluted Earnings Per Common Share
 
$
1.28
   
$
0.97
 
Dividends Declared Per Common Share
 
$
0.32
   
$
0.28
 

See Notes to Consolidated Financial Statements

3





GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
   
SIX MONTHS ENDED
JUNE 30,
 
   
2019
   
2018
 
   
(Unaudited)
 
             
INTEREST INCOME
           
Loans
 
$
110,327
   
$
93,384
 
Investment securities and other
   
5,754
     
3,442
 
TOTAL INTEREST INCOME
   
116,081
     
96,826
 
                 
INTEREST EXPENSE
               
Deposits
   
22,052
     
11,706
 
Federal Home Loan Bank advances
   
     
1,772
 
Short-term borrowings and repurchase agreements
   
1,780
     
208
 
Subordinated debentures issued to capital trust
   
534
     
440
 
Subordinated notes
   
2,189
     
2,049
 
TOTAL INTEREST EXPENSE
   
26,555
     
16,175
 
NET INTEREST INCOME
   
89,526
     
80,651
 
Provision for Loan Losses
   
3,550
     
3,900
 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
   
85,976
     
76,751
 
                 
NON-INTEREST INCOME
               
Commissions
   
497
     
560
 
Service charges and ATM fees
   
10,268
     
10,732
 
Net gains on loan sales
   
623
     
1,021
 
Late charges and fees on loans
   
702
     
774
 
Net realized gains on sales of available-for-sale securities
   
10
     
 
Gain (loss) on derivative interest rate products
   
(68
)
   
48
 
Other income
   
2,575
     
1,259
 
TOTAL NON-INTEREST INCOME
   
14,607
     
14,394
 
                 
NON-INTEREST EXPENSE
               
Salaries and employee benefits
   
31,068
     
29,570
 
Net occupancy and equipment expense
   
12,850
     
12,683
 
Postage
   
1,550
     
1,700
 
Insurance
   
1,328
     
1,321
 
Advertising
   
1,368
     
1,303
 
Office supplies and printing
   
485
     
534
 
Telephone
   
1,742
     
1,511
 
Legal, audit and other professional fees
   
1,342
     
1,498
 
Expense on other real estate and repossessions
   
1,039
     
3,878
 
Partnership tax credit investment amortization
   
182
     
393
 
Acquired deposit intangible asset amortization
   
613
     
825
 
Other operating expenses
   
3,310
     
3,012
 
TOTAL NON-INTEREST EXPENSE
   
56,877
     
58,228
 
                 
INCOME BEFORE INCOME TAXES
   
43,706
     
32,917
 
Provision for Income Taxes
   
7,718
     
5,612
 
NET INCOME AND NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
 
$
35,988
   
$
27,305
 
                 
Basic Earnings Per Common Share
 
$
2.54
   
$
1.93
 
Diluted Earnings Per Common Share
 
$
2.52
   
$
1.91
 
Dividends Declared Per Common Share
 
$
1.39
   
$
0.56
 

See Notes to Consolidated Financial Statements

4





GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

   
THREE MONTHS ENDED
JUNE 30,
 
   
2019
   
2018
 
   
(Unaudited)
 
             
Net Income
 
$
18,375
   
$
13,839
 
                 
Unrealized appreciation (depreciation) on available-for-sale securities,
   net of taxes (credit) of $1,540 and $(121), for 2019 and 2018, respectively
   
5,213
     
(420
)
                 
Reclassification adjustment for gains included in net income,
   net of taxes of $0 and $0,for 2019 and 2018, respectively
   
     
 
                 
Change in fair value of cash flow hedge, net of taxes of $2,519 and $0,
   for 2019 and 2018, respectively
   
8,528
     
 
                 
Comprehensive Income
 
$
32,116
   
$
13,419
 

   
SIX MONTHS ENDED
JUNE 30,
 
   
2019
   
2018
 
   
(Unaudited)
 
             
Net Income
 
$
35,988
   
$
27,305
 
                 
Unrealized appreciation (depreciation) on available-for-sale securities,
   net of taxes (credit) of $2,419 and $(662), for 2019 and 2018, respectively
   
8,190
     
(2,301
)
                 
Reclassification adjustment for gains included in net income,
   net of taxes of $2 and $0,for 2019 and 2018, respectively
   
(8
)
   
 
                 
Change in fair value of cash flow hedge, net of taxes of $4,231 and $0,
   for 2019 and 2018, respectively
   
14,328
     
 
                 
Comprehensive Income
 
$
58,498
   
$
25,004
 

See Notes to Consolidated Financial Statements












5




GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except per share data)

                     
Accumulated
             
                     
Other
             
   
Common
   
Additional
   
Retained
   
Comprehensive
   
Treasury
       
   
Stock
   
Paid-in Capital
   
Earnings
   
Income (Loss)
   
Stock
   
Total
 
   
(Unaudited)
 
                                     
Balance, March 31, 2018
 
$
141
   
$
28,624
   
$
451,603
   
$
(368
)
 
$
   
$
480,000
 
Net income
   
     
     
13,839
     
     
     
13,839
 
Stock issued under Stock Option
                                               
Plan
   
     
510
     
     
     
299
     
809
 
Common dividends declared,
                                               
$0.28 per share
   
     
     
(3,957
)
   
     
     
(3,957
)
Other comprehensive gain (loss)
   
     
     
     
(420
)
   
     
(420
)
Reclassification of treasury stock
                                               
per Maryland law
   
     
     
299
     
     
(299
)
   
 
                                                 
Balance, June 30, 2018
 
$
141
   
$
29,134
   
$
461,784
   
$
(788
)
 
$
   
$
490,271
 
                                                 

                     
Accumulated
             
                     
Other
             
   
Common
   
Additional
   
Retained
   
Comprehensive
   
Treasury
       
   
Stock
   
Paid-in Capital
   
Earnings
   
Income (Loss)
   
Stock
   
Total
 
   
(Unaudited)
 
                                     
Balance, March 31, 2019
 
$
142
   
$
30,916
   
$
494,181
   
$
18,396
   
$
   
$
543,635
 
Net income
   
     
     
18,375
     
     
     
18,375
 
Stock issued under Stock Option
                                               
Plan
   
     
687
     
     
     
415
     
1,102
 
Common dividends declared,
                                               
$0.32 per share
   
     
     
(4,544
)
   
     
     
(4,544
)
Purchase of the Company’s
                                               
common stock
   
     
     
     
     
     
 
Other comprehensive gain
   
     
     
     
13,741
     
     
13,741
 
Reclassification of treasury stock
                                               
per Maryland law
   
     
     
415
     
     
(415
)
   
 
                                                 
Balance, June 30, 2019
 
$
142
   
$
31,603
   
$
508,427
   
$
32,137
   
$
   
$
572,309
 
                                                 

See Notes to Consolidated Financial Statements

6



GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except per share data)

                     
Accumulated
             
                     
Other
             
   
Common
   
Additional
   
Retained
   
Comprehensive
   
Treasury
       
   
Stock
   
Paid-in Capital
   
Earnings
   
Income (Loss)
   
Stock
   
Total
 
   
(Unaudited)
 
                                     
Balance, January 1, 2018
 
$
141
   
$
28,203
   
$
442,077
   
$
1,241
   
$
   
$
471,662
 
Net income
   
     
     
27,305
     
     
     
27,305
 
Stock issued under Stock Option
                                               
Plan
   
     
931
     
     
     
582
     
1,513
 
Common dividends declared,
                                               
$0.56 per share
   
     
     
(7,908
)
   
     
     
(7,908
)
Reclassification of stranded tax
                                               
effects resulting from change in
                                               
Federal income tax rate
   
     
     
(272
)
   
272
     
     
 
Other comprehensive gain (loss)
   
     
     
     
(2,301
)
   
     
(2,301
)
Reclassification of treasury stock
                                               
per Maryland law
   
     
     
582
     
     
(582
)
   
 
                                                 
Balance, June 30, 2018
 
$
141
   
$
29,134
   
$
461,784
   
$
(788
)
 
$
   
$
490,271
 
                                                 

                     
Accumulated
             
                     
Other
             
   
Common
   
Additional
   
Retained
   
Comprehensive
   
Treasury
       
   
Stock
   
Paid-in Capital
   
Earnings
   
Income (Loss)
   
Stock
   
Total
 
   
(Unaudited)
 
                                     
Balance, January 1, 2019
 
$
142
   
$
30,121
   
$
492,087
   
$
9,627
   
$
   
$
531,977
 
Net income
   
     
     
35,988
     
     
     
35,988
 
Stock issued under Stock Option
                                               
Plan
   
     
1,482
     
     
     
892
     
2,374
 
Common dividends declared,
                                               
$1.39 per share
   
     
     
(19,691
)
   
     
     
(19,691
)
Purchase of the Company’s
                                               
common stock
   
     
     
     
     
(849
)
   
(849
)
Other comprehensive gain
   
     
     
     
22,510
     
     
22,510
 
Reclassification of treasury stock
                                               
per Maryland law
   
     
     
43
     
     
(43
)
   
 
                                                 
Balance, June 30, 2019
 
$
142
   
$
31,603
   
$
508,427
   
$
32,137
   
$
   
$
572,309
 
                                                 

See Notes to Consolidated Financial Statements

7





GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

   
SIX MONTHS ENDED
JUNE 30,
 
   
2019
   
2018
 
   
(Unaudited)
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
 
$
35,988
   
$
27,305
 
Proceeds from sales of loans held for sale
   
34,375
     
49,629
 
Originations of loans held for sale
   
(43,145
)
   
(45,218
)
Items not requiring (providing) cash:
               
Depreciation
   
4,631
     
4,569
 
Amortization
   
1,059
     
1,296
 
Compensation expense for stock option grants
   
443
     
357
 
Provision for loan losses
   
3,550
     
3,900
 
Net gains on loan sales
   
(623
)
   
(1,021
)
Net realized gains on sales of available-for-sale securities
   
(10
)
   
 
Net losses on sale of premises and equipment
   
21
     
94
 
Net losses on sale/write-down of other real estate owned and repossessions
   
161
     
2,184
 
Accretion of deferred income, premiums, discounts and other
   
(1,990
)
   
(1,287
)
 (Gain) loss on derivative interest rate products
   
68
     
(48
)
Deferred income taxes
   
578
     
(6,544
)
Changes in:
               
Interest receivable
   
(903
)
   
(111
)
Prepaid expenses and other assets
   
(2,031
)
   
6,084
 
Accrued expenses and other liabilities
   
4,443
     
1,857
 
Income taxes refundable/payable
   
2,555
     
7,370
 
Net cash provided by operating activities
   
39,170
     
50,416
 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Net change in loans
   
(83,072
)
   
(101,884
)
Purchase of loans
   
(45,240
)
   
(42,179
)
Purchase of premises and equipment
   
(6,708
)
   
(6,054
)
Proceeds from sale of premises and equipment
   
113
     
23
 
Proceeds from sale of other real estate owned and repossessions
   
4,537
     
8,856
 
Capitalized costs on other real estate owned
   
     
(143
)
Proceeds from sales of available-for-sale securities
   
28,057
     
 
Proceeds from maturities and calls of held-to-maturity securities
   
     
130
 
Proceeds from maturities and calls of available-for-sale securities
   
7,870
     
2,031
 
Principal reductions on mortgage-backed securities
   
7,402
     
10,530
 
Purchase of available-for-sale securities
   
(94,558
)
   
(6,689
)
Redemption (purchase) of Federal Home Loan Bank stock
   
1,345
     
(4,496
)
Net cash used in investing activities
   
(180,254
)
   
(139,875
)
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase in certificates of deposit
   
139,518
     
13,616
 
Net increase (decrease) in checking and savings deposits
   
24,040
     
(13,655
)
Proceeds from Federal Home Loan Bank advances
   
     
1,454,500
 
Repayments of Federal Home Loan Bank advances
   
     
(1,323,000
)
Net decrease in short-term borrowings
   
(30,710
)
   
(232
)
Advances from borrowers for taxes and insurance
   
5,458
     
2,638
 
Dividends paid
   
(19,674
)
   
(7,332
)
Purchase of the Company’s common stock
   
(849
)
   
 
Stock options exercised
   
1,931
     
1,156
 
Net cash provided by financing activities
   
119,714
     
127,691
 
INCREASES ( DECREASES) IN CASH AND CASH EQUIVALENTS
   
(21,370
)
   
38,232
 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
   
202,742
     
242,253
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
181,372
   
$
280,485
 

See Notes to Consolidated Financial Statements

8





GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements of Great Southern Bancorp, Inc. (the "Company" or "Great Southern") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The financial statements presented herein reflect all adjustments which are, in the opinion of management, necessary to fairly present the financial condition, results of operations, changes in stockholders’ equity and cash flows of the Company as of the dates and for the periods presented. Those adjustments consist only of normal recurring adjustments. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the full year. The consolidated statement of financial condition of the Company as of December 31, 2018, has been derived from the audited consolidated statement of financial condition of the Company as of that date.  Certain prior period amounts have been reclassified to conform to the current period presentation.  These reclassifications had no effect on net income.

Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for 2018 filed with the Securities and Exchange Commission.


NOTE 2: NATURE OF OPERATIONS AND OPERATING SEGMENTS

The Company operates as a one-bank holding company.  The Company’s business primarily consists of the operations of Great Southern Bank (the “Bank”), which provides a full range of financial services to customers primarily located in Missouri, Iowa, Kansas, Minnesota, Nebraska and Arkansas.  The Bank also originates commercial loans from lending offices in Dallas, Texas, Tulsa, Okla., Chicago, Ill., Atlanta, Ga., Denver, Colo. and Omaha, Neb.  The Company and the Bank are subject to regulation by certain federal and state agencies and undergo periodic examinations by those regulatory agencies.

The Company’s banking operation is its only reportable segment.  The banking operation is principally engaged in the business of originating residential and commercial real estate loans, construction loans, commercial business loans and consumer loans and funding these loans by attracting deposits from the general public, accepting brokered deposits and borrowing from the Federal Home Loan Bank and others.  The operating results of this segment are regularly reviewed by management to make decisions about resource allocations and to assess performance.  Selected information is not presented separately for the Company’s reportable segment, as there is no material difference between that information and the corresponding information in the consolidated financial statements.


NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) and in July 2018 FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases.  The amendments in this Update revise the accounting related to lessee accounting.  Under the new guidance, lessees are required to recognize a lease liability and a right-of-use asset for all leases.  The Update became effective for the Company on January 1, 2019.  Adoption of the standard required the use of a modified retrospective transition approach for all periods presented at the time of adoption.  Based on the Company’s leases outstanding at December 31, 2018, which totaled less than 20 leased properties and no significant leased equipment, the adoption of the new standard did not have a material impact on our consolidated statements of financial condition or our consolidated statements of income, although an increase to assets and liabilities occurred at the time of adoption.  In the first quarter of 2019, the Company recognized a lease liability and a corresponding right-of-use asset for all leases of $9.5 million based on the lease portfolio at that time.  Subsequent to December 31, 2018, the Company’s lease terminations, new leases and lease modifications and renewals will impact the amount of lease liability and a corresponding right-of-use asset recognized.  The

9





Company’s leases are currently all “operating leases” as defined in the Update; therefore, no material change in the income statement presentation of lease expense occurred in the three and six months ended June 30, 2019. The Company’s lease activities are discussed further in Note 9 of the Notes to Consolidated Financial Statements contained in this report.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326).  The Update amends guidance on reporting credit losses for assets held at amortized cost and available for sale debt securities. For assets held at amortized cost, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. This Update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.  For public companies, the update is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. An entity will apply the amendments in this update on a modified retrospective basis, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company previously formed a cross-functional committee to oversee the system, data, reporting and other considerations for purposes of meeting the requirements of this standard.  Data and system needs were assessed.  As a result, third-party software was acquired and implemented to manage the data.  We have completed the upload of the necessary historical loan data to the software that will be used in meeting certain requirements of this standard.  Our loss data covers multiple credit cycles back to 2003.  Parallel testing of the new methodology compared to the current methodology has been performed throughout 2019 and the Company continues to evaluate the impact of adopting the new guidance.  We have engaged a third party to perform validation of the accuracy of our inputs into the model.  This review is currently in process.  We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective for us (the three-month period ending March 31, 2020), but cannot yet determine the exact amount of any such one-time adjustment, or the overall impact of the new guidance on the Company’s consolidated financial statements.  Based on the current modeling results, we anticipate that the one-time cumulative effect adjustment will be less than five percent of total stockholders’ equity.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment (Topic 350). To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test should be performed by comparing the fair value of a reporting unit with its carrying amount and an impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.  An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary.  The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017.  We are currently evaluating the impact of adopting the new guidance, including consideration of early adoption, on the consolidated financial statements, but it is not expected to have a material impact.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this update remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 is effective for periods beginning after December 15, 2019, with early adoption permitted for certain removed and modified disclosures, and is not expected to have a significant impact on our financial statements.





10





NOTE 4: EARNINGS PER SHARE

   
Three Months Ended June 30,
 
   
2019
   
2018
 
   
(In Thousands, Except Per Share Data)
 
             
Basic:
           
Average common shares outstanding
   
14,192
     
14,125
 
Net income and net income available to common stockholders
 
$
18,375
   
$
13,839
 
Per common share amount
 
$
1.29
   
$
0.98
 
                 
Diluted:
               
Average common shares outstanding
   
14,192
     
14,125
 
Net effect of dilutive stock options – based on the treasury
               
stock method using average market price
   
122
     
153
 
Diluted common shares
   
14,314
     
14,278
 
Net income and net income available to common stockholders
 
$
18,375
   
$
13,839
 
Per common share amount
 
$
1.28
   
$
0.97
 

   
Six Months Ended June 30,
 
   
2019
   
2018
 
   
(In Thousands, Except Per Share Data)
 
             
Basic:
           
Average common shares outstanding
   
14,176
     
14,113
 
Net income and net income available to common stockholders
 
$
35,988
   
$
27,305
 
Per common share amount
 
$
2.54
   
$
1.93
 
                 
Diluted:
               
Average common shares outstanding
   
14,176
     
14,113
 
Net effect of dilutive stock options – based on the treasury
               
stock method using average market price
   
122
     
153
 
Diluted common shares
   
14,298
     
14,266
 
Net income and net income available to common stockholders
 
$
35,988
   
$
27,305
 
Per common share amount
 
$
2.52
   
$
1.91
 

Options outstanding at June 30, 2019 and 2018, to purchase 309,000 and 161,400 shares of common stock, respectively, were not included in the computation of diluted earnings per common share for each of the three and six month periods because the exercise prices of such options were greater than the average market prices of the common stock for the three and six months ended June 30, 2019 and 2018, respectively.


NOTE 5: INVESTMENT SECURITIES
The amortized cost and fair values of securities classified as available-for-sale were as follows:

   
June 30, 2019
 
         
Gross
   
Gross
         
Tax
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
   
Equivalent
 
   
Cost
   
Gains
   
Losses
   
Value
   
Yield
 
   
(In Thousands)
 
                               
AVAILABLE-FOR-SALE SECURITIES:
                             
Agency mortgage-backed securities
 
$
184,302
   
$
7,898
   
$
623
   
$
191,577
     
3.01
%
Agency collateralized mortgage obligations
   
69,761
     
2,098
     
52
     
71,807
     
3.24
 
States and political subdivisions
   
40,622
     
1,643
     
     
42,265
     
4.88
 
   
$
294,685
   
$
11,639
   
$
675
   
$
305,649
     
3.32
%


11





   
December 31, 2018
 
         
Gross
   
Gross
         
Tax
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
   
Equivalent
 
   
Cost
   
Gains
   
Losses
   
Value
   
Yield
 
   
(In Thousands)
 
                               
AVAILABLE-FOR-SALE SECURITIES:
                             
Agency mortgage-backed securities
 
$
154,557
   
$
1,272
   
$
2,571
   
$
153,258
     
2.83
%
Agency collateralized mortgage obligations
   
39,024
     
250
     
14
     
39,260
     
3.18
 
States and political subdivisions
   
50,022
     
1,428
     
     
51,450
     
4.81
 
   
$
243,603
   
$
2,950
   
$
2,585
   
$
243,968
     
3.29
%

The amortized cost and fair value of available-for-sale securities at June 30, 2019, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
Amortized
 
Fair
 
 
Cost
 
Value
 
 
(In Thousands)
 
         
One year or less
 
$
   
$
 
After one through five years
   
869
     
947
 
After five through ten years
   
10,133
     
10,495
 
After ten years
   
29,620
     
30,823
 
Securities not due on a single maturity date
   
254,063
     
263,384
 
                 
   
$
294,685
   
$
305,649
 

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at June 30, 2019 and December 31, 2018, was approximately $61.6 million and $95.7 million, respectively, which is approximately 20.1% and 39.2% of the Company’s available-for-sale investment portfolio, respectively.

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

The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2019 and December 31, 2018:

   
June 30, 2019
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
Description of Securities
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
   
(In Thousands)
 
                                     
Agency mortgage-backed securities
 
$
1,734
   
$
(1
)
 
$
56,205
   
$
(622
)
 
$
57,939
   
$
(623
)
Agency collateralized mortgage obligations
   
3,624
     
(52
)
   
     
     
3,624
     
(52
)
   
$
5,358
   
$
(53
)
 
$
56,205
   
$
(622
)
 
$
61,563
   
$
(675
)


12




   
December 31, 2018
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
Description of Securities
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
   
(In Thousands)
 
                                     
Agency mortgage-backed securities
 
$
11,255
   
$
(82
)
 
$
74,186
   
$
(2,489
)
 
$
85,441
   
$
(2,571
)
Agency collateralized mortgage obligations
   
9,725
     
(14
)
   
     
     
9,725
     
(14
)
State and political
                                               
subdivisions
   
511
     
     
     
     
511
     
 
   
$
21,491
   
$
(96
)
 
$
74,186
   
$
(2,489
)
 
$
95,677
   
$
(2,585
)

There were no sales of available-for-sale securities during the three months ended June 30, 2019.  Gross gains of $226,000 and gross losses of $216,000 resulting from sales of available-for-sale securities were realized during the six months ended June 30, 2019.  There were no sales of available-for-sale securities during the three and six months ended June 30, 2018.  Gains and losses on sales of securities are determined on the specific-identification method.

Other-than-temporary Impairment.  Upon acquisition of a security, the Company decides whether it is within the scope of the accounting guidance for beneficial interests in securitized financial assets or will be evaluated for impairment under the accounting guidance for investments in debt and equity securities.

The accounting guidance for beneficial interests in securitized financial assets provides incremental impairment guidance for a subset of the debt securities within the scope of the guidance for investments in debt and equity securities.  For securities where the security is a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial asset impairment model.  For securities where the security is not a beneficial interest in securitized financial assets, the Company uses the debt and equity securities impairment model.  The Company does not currently have securities within the scope of this guidance for beneficial interests in securitized financial assets.

The Company routinely conducts periodic reviews to identify and evaluate each investment security to determine whether an other-than-temporary impairment has occurred.  The Company considers the length of time a security has been in an unrealized loss position, the relative amount of the unrealized loss compared to the carrying value of the security, the type of security and other factors.  If certain criteria are met, the Company performs additional review and evaluation using observable market values or various inputs in economic models to determine if an unrealized loss is other-than-temporary.  The Company uses quoted market prices for marketable equity securities and uses broker pricing quotes based on observable inputs for equity investments that are not traded on a stock exchange.  For non-agency collateralized mortgage obligations, to determine if the unrealized loss is other than temporary, the Company projects total estimated defaults of the underlying assets (mortgages) and multiplies that calculated amount by an estimate of realizable value upon sale in the marketplace (severity) in order to determine the projected collateral loss.  The Company also evaluates any current credit enhancement underlying these securities to determine the impact on cash flows.  If the Company determines that a given security position will be subject to a write-down or loss, the Company records the expected credit loss as a charge to earnings.

During the three and six months ended June 30, 2019 and 2018, respectively, no securities were determined to have impairment that had become other-than-temporary.

Credit Losses Recognized on Investments.  During the three months ended June 30, 2019 and 2018, respectively, there were no debt securities that had experienced fair value deterioration due to credit losses, or due to other market factors, but were not otherwise other-than-temporarily impaired.

Amounts Reclassified Out of Accumulated Other Comprehensive Income.  Amounts reclassified from accumulated other comprehensive income and the affected line items in the statements of income during the three and six months ended June 30, 2019 and 2018, are shown below.


13




The FASB previously issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). The amendment allows an entity to elect to reclassify the stranded tax effects resulting from the change in income tax rate from H.R.1, originally known as the “Tax Cuts and Jobs Act” (the “Tax Act), from accumulated other comprehensive income to retained earnings.  The Company chose to early adopt ASU 2018-02 effective January 1, 2018.  The stranded tax amount related to unrealized gains and losses on available for sale securities, which was reclassified from accumulated other comprehensive income to retained earnings at the time of adoption, was $272,000.  There were no other income tax effects related to the application of the Tax Act to be reclassified from AOCI to retained earnings.

   
Amounts Reclassified from
Accumulated Other
   
   
Comprehensive Income
Three Months Ended June 30,
 
Affected Line Item in the
   
2019
   
2018
 
Statements of Income
   
(In Thousands)
   
                  
Unrealized gains on available-
           
Net realized gains on sales of
for-sale securities
 
$
--
   
$
--
 
available-for-sale securities
                 
(Total reclassified amount before tax)
Income Taxes
   
--
     
--
 
Provision for income taxes
Total reclassifications out of accumulated
                   
other comprehensive income
 
$
--
   
$
--
   

   
Amounts Reclassified from
Accumulated Other
   
   
Comprehensive Income
Six Months Ended June 30,
 
Affected Line Item in the
   
2019
   
2018
 
Statements of Income
   
(In Thousands)
   
                  
Unrealized gains on available-
           
Net realized gains on sales of
for-sale securities
 
$
10
   
$
--
 
available-for-sale securities
                 
(Total reclassified amount before tax)
Income Taxes
   
(2
)
   
--
 
Provision for income taxes
Total reclassifications out of accumulated
                   
other comprehensive income
 
$
8
   
$
--
   





14





NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES

Classes of loans at June 30, 2019 and December 31, 2018 were as follows:

   
June 30,
   
December 31,
 
   
2019
   
2018
 
   
(In Thousands)
 
             
One- to four-family residential construction
 
$
30,255
   
$
26,177
 
Subdivision construction
   
12,973
     
13,844
 
Land development
   
46,032
     
44,492
 
Commercial construction
   
1,391,158
     
1,417,166
 
Owner occupied one- to four-family residential
   
322,207
     
276,866
 
Non-owner occupied one- to four-family residential
   
122,858
     
122,438
 
Commercial real estate
   
1,446,166
     
1,371,435
 
Other residential
   
796,341
     
784,894
 
Commercial business
   
312,965
     
322,118
 
Industrial revenue bonds
   
13,643
     
13,940
 
Consumer auto
   
201,061
     
253,528
 
Consumer other
   
52,077
     
57,350
 
Home equity lines of credit
   
120,102
     
121,352
 
Loans acquired and accounted for under ASC 310-30, net of discounts
   
151,694
     
167,651
 
     
5,019,532
     
4,993,251
 
Undisbursed portion of loans in process
   
(861,054
)
   
(958,441
)
Allowance for loan losses
   
(39,254
)
   
(38,409
)
Deferred loan fees and gains, net
   
(6,769
)
   
(7,400
)
   
$
4,112,455
   
$
3,989,001
 
                 
Weighted average interest rate
   
5.25
%
   
5.16
%











15





Classes of loans by aging were as follows:

   
June 30, 2019
 
                                       
Total Loans
 
                                 
Total
   
> 90 Days
 
   
30-59 Days
   
60-89 Days
   
Over
   
Total
         
Loans
   
Past Due and
 
   
Past Due
   
Past Due
   
90 Days
   
Past Due
   
Current
   
Receivable
   
Still Accruing
 
   
(In Thousands)
 
                                           
One- to four-family
                                         
residential construction
 
$
   
$
   
$
   
$
   
$
30,255
   
$
30,255
   
$
 
Subdivision construction
   
44
     
     
     
44
     
12,929
     
12,973
     
 
Land development
   
     
72
     
3,556
     
3,628
     
42,404
     
46,032
     
 
Commercial construction
   
     
     
     
     
1,391,158
     
1,391,158
     
 
Owner occupied one- to
                                                       
four-family residential
   
726
     
189
     
999
     
1,914
     
320,293
     
322,207
     
 
Non-owner occupied one-
                                                       
to four-family residential
   
170
     
293
     
533
     
996
     
121,862
     
122,858
     
 
Commercial real estate
   
1,121
     
954
     
3,675
     
5,750
     
1,440,416
     
1,446,166
     
 
Other residential
   
422
     
     
     
422
     
795,919
     
796,341
     
 
Commercial business
   
194
     
36
     
1,359
     
1,589
     
311,376
     
312,965
     
 
Industrial revenue bonds
   
     
     
     
     
13,643
     
13,643
     
 
Consumer auto
   
1,601
     
436
     
661
     
2,698
     
198,363
     
201,061
     
 
Consumer other
   
288
     
38
     
252
     
578
     
51,499
     
52,077
     
 
Home equity lines of credit
   
284
     
59
     
353
     
696
     
119,406
     
120,102
     
 
Loans acquired and accounted for under
                                                       
ASC 310-30, net of discounts
   
983
     
340
     
6,612
     
7,935
     
143,759
     
151,694
     
 
     
5,833
     
2,417
     
18,000
     
26,250
     
4,993,282
     
5,019,532
     
 
Less loans acquired and accounted for under
                                                       
ASC 310-30, net
   
983
     
340
     
6,612
     
7,935
     
143,759
     
151,694
     
 
                                                         
Total
 
$
4,850
   
$
2,077
   
$
11,388
   
$
18,315
   
$
4,849,523
   
$
4,867,838
   
$
 







16





   
December 31, 2018
 
                                       
Total Loans
 
                                 
Total
   
> 90 Days Past
 
   
30-59 Days
   
60-89 Days
   
Over 90
   
Total Past
         
Loans