GREAT SOUTHERN BANCORP INC

Effective January 1, 2020, a bank that elects to use the Community Bank Leverage Ratio will generally be considered well-capitalized and to have met the risk-based and leverage capital requirements of the capital regulations if it has a leverage ratio greater than 9.0%. To be eligible to elect the Community Bank Leverage Ratio, the bank also must have total consolidated assets of less than $10 billion, off-balance sheet exposures of 25% or less of its total consolidated assets, and trading assets and trading liabilities of 5.0% or less of its total consolidated assets, all as of the end of the most recent quarter. Similarly, effective January 1, 2020, a bank holding company that elects to use the Community Bank Leverage Ratio will generally be considered to have met the risk-based and leverage capital requirements of the capital regulations if it has a leverage ratio greater than 9.0% if it elects the Community Bank Leverage Ratio based on the same eligibility criteria as described for the bank. We do not intend to elect the Community Bank Leverage Ratio for either the Company or the Bank in their March 31, 2020 regulatory reports.

Adverse developments in the financial services industry and the impact of new legislation and regulations in response to those developments could restrict our business operations, including our ability to originate loans, and adversely impact our results of operations and financial condition. Overall, during some of the past several years, the general business environment had an adverse effect on our business. The past few years have seen some areas of improvement in the general business environment; however, our business, financial condition and results of operations could be adversely affected by negative circumstances in the general business environment. In addition, other events beyond our control could have an adverse effect on our business, financial condition and results of operations.  For example, there are broad and continuing concerns related to the potential effects of the coronavirus outbreak on international trade (including supply chains and export levels), travel, employee productivity, consumer and business demand and confidence levels and other matters that could have a destabilizing effect on financial markets and economic activity.  If the coronavirus or any other pandemic has an adverse effect on the ability of our borrowers to satisfy their obligations to us, on the demand for our loans or our other products and services, on other aspects of our business operations or on financial markets or economic growth, our financial condition and results of operations could be adversely affected.

The adoption of the CECL model required us to recognize a one-time cumulative adjustment to our allowance for loan losses and a liability for potential losses related to the unfunded portion of our loans and commitments in order to fully transition from the incurred loss model to the CECL model.  Upon adoption in the first quarter of 2020, we expect to increase the balance of our allowance for credit losses in a range of $11 million to $14 million and create a liability for potential losses related to the unfunded portion of our loans and commitments in a range of $7 million to $10 million.  The after-tax effect of this is expected to result in a decrease in our retained earnings of $14 million to $18 million.  These estimates are subject to change as material assumptions are refined and model validations are completed as we finalize our first quarter 2020 financial statements. This reduction in retained earnings is not expected to change our well capitalized status.  The federal banking agencies have adopted final rules allowing all banking organizations that experience a reduction in retained earnings from the adoption of CECL to elect a three-year phase-in of the initial adverse impact to regulatory capital.

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% on December 16, 2015, the FRB had last changed interest rates on December 16, 2008. This was the first rate increase since September 29, 2006.  The FRB also implemented rate change increases of 0.25% on eight additional occasions beginning December 14, 2016 and through December 31, 2018, with the Federal Funds rate reaching as high as 2.50%.  After December 2018, the FRB paused its rate increases and, in July, September and October 2019, implemented rate change decreases of 0.25% on each of those occasions. At December 31, 2019, the Federal Funds rate stood at 1.75%.  A substantial portion of Great Southern’s loan portfolio ($1.89 billion at December 31, 2019) is tied to the one-month or three-month LIBOR index and will be subject to adjustment at least once within 90 days after December 31, 2019.  Of these loans, $1.71 billion had interest rate floors.  Great Southern also has a portfolio of loans ($210 million at December 31, 2019) 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 still generally 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 of December 31, 2019, Great

Southern's interest rate risk models indicate that, generally, rising interest rates are expected to have a positive impact on the Company's net interest income, while declining interest rates are expected to have a negative impact on net interest income. We model various interest rate scenarios for rising and falling rates, including both parallel and non-parallel shifts in rates. The results of our modeling indicate that net interest income is not likely to be significantly affected either positively or negatively in the first twelve months following a rate change, regardless of any changes in interest rates, because our portfolios are relatively well matched in a twelve-month horizon. The effects of interest rate changes, if any, on net interest income are expected to be greater in the 12 to 36 months following rate changes. During the latter half of 2019, we did experience some compression of our net interest margin percentage due to 0.75% of Federal Funds rate cuts over a 12-week period during July through October.  Margin compression primarily resulted from generally unchanged average interest rates on deposits and certain borrowings and lower yields on loans and other interest-earning assets.  LIBOR interest rates have 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 “Quantitative and Qualitative Disclosures About Market Risk – How We Measure the Risks to Us Associated with Interest Rate Changes.”

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 basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. This Update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.  The Update became effective for the Company on January 1, 2020.  The Company applied the amendments in this update on a modified retrospective basis, through a cumulative-effect adjustment to retained earnings in the first quarter of 2020. The adoption of the CECL model required us to recognize a one-time cumulative adjustment to our allowance for loan losses and a liability for potential losses related to the unfunded portion of our loans and commitments in order to fully transition from the incurred loss model to the CECL model.  Upon adoption, we expect to increase the balance of our allowance for credit losses in a range of $11 million to $14 million and created a liability for potential losses related to the unfunded portion of our loans and commitments in a range of $7 million to $10 million.  The after-tax effect of this is expected to result in a decrease in our retained earnings of $14 million to $18 million.  These estimates are subject to change as material assumptions are refined and model validations are completed as we finalize our first quarter 2020 financial statements.