What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-08 compared with 2022-05-06 · 566 added, 351 removed, 528 unchanged (63% of the section changed)

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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;

(iii) fluctuations in interest rates and the effects of inflation, a potential recession or slower economic growth caused by changes in energy prices or supply chain disruptions;

(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 credit losses;

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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 of March 31, 2022, the Company had one reporting unit to which goodwill has been allocated – the Bank.

As of June 30, 2022, 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.

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Intangible assets that are not amortized will be tested for impairment at least annually by comparing the fair values of those assets to their carrying values.

At March 31, 2022, 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 and the assumption of related deposits in the St.

At June 30, 2022, 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 and the assumption of related deposits in the St.

Louis market from Fifth Third Bank.

Other identifiable intangible assets that are subject to amortization are amortized on a straight-line basis over a period of seven years.

At March 31, 2022, the amortizable intangible assets consisted of core deposit intangibles of $527,000, which are reflected in the table below.

Other identifiable deposit intangible assets that are subject to amortization are amortized on a straight-line basis over a period of seven years.

In April 2022, the Company, through its subsidiary Great Southern Bank, entered into a naming rights agreement with Missouri State University related to the main arena on the university’s campus in Springfield, Missouri.

The terms of the agreement provide the naming rights to Great Southern Bank for a total cost of $5.5 million, to be paid over a period of seven years.

The Company expects to amortize the intangible asset through non-interest expense over a period not to exceed 15 years.

At June 30, 2022, the amortizable intangible assets included core deposit intangibles of $369,000 and the arena naming rights of $5.5 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.

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This judgment may include developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables and incorporating general economic and market conditions.

Management does not believe any of the Company’s goodwill or other intangible assets were impaired as of March 31, 2022.

While management believes no impairment existed at March 31, 2022, different conditions or assumptions used to measure fair value of the reporting unit, 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.

Management does not believe any of the Company’s goodwill or other intangible assets were impaired as of June 30, 2022.

While management believes no impairment existed at June 30, 2022, different conditions or assumptions used to measure fair value of the reporting unit, 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:

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Fifth Third Bank (January 2016)

Arena Naming Rights (April 2022)

Current Economic Conditions

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economy continued to operate at historically strong levels until the COVID-19 pandemic in March 2020.

economic trends have rebounded, new COVID variants have emerged and the severity and extent of the coronavirus on the global, national and regional economies is still uncertain.

economic trends have rebounded since the onset of the pandemic, new COVID variants have emerged and the severity and extent of the coronavirus on the global, national and regional economies is still uncertain.

Any long-term impact on the performance of the financial sector remains indeterminable.

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As a result, gross domestic product (GDP), the broadest measure of the nation’s economic output, plunged.

Since then, significant improvements in consumer spending, GDP, and employment have occurred, greatly supported by the actions described below.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), a fiscal relief bill passed by Congress and signed by the President in March 2020, injected approximately $3 trillion into the economy through direct payments to individuals and grants to small businesses that would keep employees on their payroll, fueling a historic bounce-back in economic activity.

To help our customers navigate through the pandemic situation, we offered and supplied Paycheck Protection Program (PPP) loans and short-term modifications to loan terms.

PPP loans and loan modifications were made in accordance with guidance from banking regulatory authorities.

These modifications did not result in loans being classified as troubled debt restructurings, potential problem loans or non-performing loans.

More severely impacted industries in our loan portfolio included retail, hotel and restaurants.

Nearly all modified loans have returned to original terms.

The Federal Reserve acted decisively, employing a wide arsenal of tools, including slashing its benchmark interest rate to near zero and ensuring credit availability to businesses, households, and municipal governments.

Total fiscal support to the economy throughout the pandemic, including the CARES Act passed into law in March 2020, the American Rescue Plan of March 2021, and several smaller fiscal packages, totals well over $5 trillion.

The amount of this support was equal to almost 25% of pre-pandemic 2019 GDP, approximately three times that provided during the global financial crisis of 2007-2008.

Additionally, the Federal Reserve acted decisively by slashing its benchmark interest rate to near zero and ensuring credit availability to businesses, households, and municipal governments.

The Federal Reserve’s efforts largely insulated the financial system from the problems in the economy, a significant difference from the financial crisis of 2007-2008.

Purchases of Treasury and agency mortgage-backed securities totaling $120 billion each month by the Federal Reserve commenced shortly after the pandemic began.

In November 2021, the Federal Reserve decided to taper its quantitative easing (QE), winding down its bond purchases with its final open market purchase conducted on March 9, 2022.

Additionally, Federal fund rates, which have been at zero lower bound since the pandemic began, increased 12 basis points in March 2022.

Financial markets are anticipating an aggressive increase in interest rates in 2022, with three to six hikes anticipated.

Several factors prompting the Federal Reserve to begin normalizing policy include:

the strengthening economy, the recent surge in inflation, higher inflation expectations, upward trajectory of wages, reduced pandemic concerns and the strong housing market.

However, the military hostilities in Ukraine have now created uncertainty regarding the world economy and the path of market interest rates, including the aggressiveness of Federal Reserve interest rate increases.

The “American Rescue Plan,” an economic relief fiscal measure of approximately $1.9 trillion with an emphasis on vaccination, individual and small business relief, was enacted early in 2021.

Additionally, many of the climate-related policies in the “Build Back Better” package may be passed into law later this year to be paid for with higher corporate taxes and tax enforcement.

The federal government posted a deficit of $2.8 trillion in the 2021 fiscal year and is expected to post a deficit of $1.2 trillion in the 2022 fiscal year.

While Congress has not been focused on deficits during the pandemic, it will likely face pressure to address the mounting fiscal debt.

The national unemployment rate dropped from 3.8% in February 2022 to 3.6% in March 2022, or 6 million unemployed individuals, compared to February 2020, just prior to the beginning of the COVID-19 pandemic, at which time the unemployment rate was 3.5% and unemployed persons numbered 5.7 million.

economy added 431,000 jobs in March 2022 with overall job growth averaging 562,000 per month in the first quarter of 2022, the same as the average monthly gain for 2021.

The labor market remains tighter than headline unemployment data would indicate as companies are still competing for qualified workers.

Wages and salaries grew 4.5% in 2021.

Across industries, the economic recovery remains uneven.

Employment in the financial activities, professional and business services, retail and transportation and warehousing sectors are now above pre-pandemic levels;

however, leisure and entertainment, healthcare and manufacturing remain under February 2020 employment levels.

One of the largest employment sectors in the country, leisure and hospitality, although showing job increases, remains negatively impacted by the loss of 1.5 million jobs, or 8.7% of the workforce, since February 2020.

Most jobs in the leisure and hospitality industry cannot be performed remotely, with many businesses closed or experiencing a sharp reduction in business at the onset of the health and economic crises.

As of March 2022, the labor force participation rate (the share of working-age Americans employed or actively looking for a job) was 62.4% which remains below the February 2020 reported rate of 63.4%.

The unemployment rate for the Midwest, where the Company conducts most of its business, has decreased from 5.2% in March 2021 to 3.5% in March 2022.

Unemployment rates for March 2022 in the states where the Company has a branch or loan production offices were Arizona at 3.3%, Arkansas at 3.1%, Colorado at 3.7%, Georgia at 3.1%, Illinois at 4.7%, Iowa at 3.3%, Kansas at 2.5%, Minnesota at 2.5%, Missouri at 3.6%, Nebraska at 2.0%, Oklahoma at 2.7%, and Texas at 4.4%.

In November 2021, the Federal Reserve began to taper its quantitative easing (QE), winding down its bond purchases with its final open market purchase conducted on March 9, 2022.

While initiatives by the Federal Reserve and Congress significantly improved consumer spending, GDP, and employment, economic momentum began to level off in first quarter of 2022 with a slowdown in inventory growth and a decline in net exports.

A 1.4% annualized decline was recorded in the first quarter of 2022, the first pullback since the pandemic-related fall of 31.2% in the second quarter of 2020.

Consumer spending was supported by stimulus payments that were sent to households during the pandemic, but has been slowing in 2022.

With demand now cooling, expectations of economic growth in the second quarter of 2022 have been lower, resulting in most analysts also downgrading their overall annual growth estimates.

Prompting the Fed to take a more aggressive policy stance in 2022 is the surge in inflation to a 40-year high, fueled in part by Russia’s invasion of Ukraine and causing oil and other commodity prices to spike.

It has also fanned already uncomfortably high inflation expectations.

Adding to the pressure to act more quickly is the strong economy, the rapid growth in jobs, and the decline in unemployment.

As of June 30, 2022, the economy was on track to return to full employment in the next few months with unemployment in the low threes.

In response to rising prices, the Federal Reserve is engaging in an aggressive tightening monetary program, raising the federal funds rate by 225 basis points thus far in 2022.

Fears of a coming recession are mushrooming, as the Federal Reserve raises interest rates to rein in inflation that is spiraling higher at decades-long record rates.

As a result, consumer sentiment has plunged and threatens to derail consumer spending, which supports roughly two-thirds of the economy.

Global oil prices have at times traded over $100 per barrel following the European Union’s decision to sanction Russian oil.

More than half of Russia’s pre-invasion oil exports have now been sanctioned.

Persistent shortages of materials and labor and snags in supply chains have caused prices to vault higher for months.

Inflation as measured by the consumer price index (CPI) rose by 1.3% in June 2022 over the prior month, an acceleration of May’s monthly pace of 1%.

The increase was largely driven by higher prices of gasoline, shelter, and food as the war in Ukraine rages on, disrupting both Ukrainian and Russian commodity exports.

The Fed has indicated it will also continue to allow the assets on its balance sheet, including $9 trillion in Treasury and mortgage-backed securities, to mature and prepay.

An average of nearly $100 billion in securities are expected to run off monthly, although there is an increasing likelihood the Fed may begin to actively sell its mortgage-backed securities.

Ten-year Treasury yields are close to 3%, as global bond investors digest the implications of the weakening economy, contined labor shortages and supply chain disruptions, high inflation, and the Fed’s aggressive monetary actions.

Ten-year yields are expected to rise to near 3.5% by year-end 2022 and reach their estimated long-run equilibrium of 4% by mid-decade.

This is consistent with expected nominal potential GDP growth.

However, fiscal policy is turning quickly contractionary as the pandemic support winds down.

Total support in 2021 was nearly $1.9 trillion, and it is projected to decline to $800 billion this year.

The $550 billion, 10-year public infrastructure package that passed into law last fall is not expected to have a material impact on the thrust of fiscal policy this year, although it is expected to modestly support growth from 2023 to 2025.

The federal government posted a deficit of $2.8 trillion in fiscal 2021 and is on track to post a deficit of $1.2 trillion in fiscal 2022.

The publicly traded debt-to-GDP ratio has surged to near 100%.

Lawmakers were appropriately not focused on deficits during early stages of the pandemic given the need to respond to the crisis, but addressing the nation’s fragile fiscal situation remains critical.

The national unemployment rate in June 2022 remained steady for the fourth month in a row at 3.6%.

The number of unemployed individuals remained essentially unchanged at 5.9 million, recovering close to pre-pandemic levels as of February 2020, at which time the unemployment rate was 3.5% and unemployed persons numbered 5.7 million.

economy added 372,000 jobs in June 2022 with overall job growth averaging 375,000 per month in the second quarter of 2022.

While the average job growth is lower than the first quarter 2022 average of 539,000, decelerating job growth is a sign of a stabilizing labor market recovering from a deep recession and quick turnaround in growth.

At June 30, 2022, private sector non-farm employment had fully recovered the jobs lost in 2020 due to the coronavirus pandemic.

This milestone happened years earlier than in prior recoveries.

Sectors with the fastest recoveries occurred in industrial production sectors and consumer spending on goods, particularly e-commerce.

By contrast, sectors that became higher risk during the pandemic due to their in-person work requirements and potentially lower wages, have not fully recovered.

The Labor Department reports unemployment claims are at a five month high.

Job cuts in technology and housing have occurred in recent months due to concerns of a recession as the Federal Reserve aggressively tightens monetary policy to quell inflation.

As of June 2022, the labor force participation rate (the share of working-age Americans employed or actively looking for a job) remained little changed at 62.2%.

The unemployment rate for the Midwest, where the Company conducts most of its business, has decreased from 5.5% in June 2021 to 3.7% in June 2022.

Unemployment rates for June 2022 in the states where the Company has a branch or loan production offices were Arizona at 3.3%, Arkansas at 3.2%, Colorado at 3.5%, Georgia at 3.0%, Illinois at 4.5%, Iowa at 2.9%, Kansas at 2.4%, Minnesota at 2.1%, Missouri at 3.2%, Nebraska at 1.9%, North Carolina at 3.4%, Oklahoma at 2.7%, and Texas at 4.2%.

Of the metropolitan areas in which the Company does business, most are below the national unemployment rate of 3.6% for March 2022.

Chicago leads our markets with a higher unemployment rate of 4.5%, followed by St.

Louis at 3.7% and Denver at 3.6% in March 2022.

Single Family Housing

New home sales in the United States dropped 8.6% in March 2022 when compared to February 2022, to a seasonally adjusted annual rate of 763,000 in March of 2022, according to U.S.

Sales of new single-family houses in June 2022 were at a seasonally adjusted annual rate of 590,000, according to the U.S.

Census Bureau and Department of Housing and Urban Development estimates.

The median sales price of new houses sold in March 2022 was $436,700, up from $359,600 a year earlier.

The average sales price in March 2022 of $523,900 was up from $414,700 in March 2021.

The inventory of new homes for sale, at an estimated 406,000 at the end of March 2022, would support a 6.4 months’ supply at the current sales rate, up from 4.2 months’ supply at the end of March 2021.

The housing market is beginning to feel the impact of sharply rising mortgage rates and higher inflation on purchasing power.

With rising mortgage rates, cash sales made up a larger percentage of transactions, climbing to its highest share since 2014.

Total existing-home sales dipped 2.7% from February 2022 to a seasonally adjusted annual rate of 5.77 million in March 2022.

Year-over-year, sales fell 4.5% (6.05 million in March 2021).

There were 950,000 previously owned homes on the market in March 2022, up 11.8% from February and down 9.5% from one year ago (1.05 million).

With slower demand, the inventory of unsold existing homes increased to 590,000 as of the end of March 2022, which would support 2 months at the monthly sales pace up from 1.7 months in February 2022 and down from 2.1 months in March 2021.

The median existing-home sales price as of March 2022 was $375,300, up 15% from $326,300 at March 2021 as prices rose in each region.

This marks 121 consecutive months of year-over-year increases, the longest-running streak on record.

Home prices have consistently moved upward as supply remains tight;

however, if and when demand subsides, easy-profit gains and multiple offers can be expected to decline.

Properties typically remained on the market for 17 days in March 2022, down from 18 days in February 2022 and 18 days in March 2021.

87% of homes sold in March 2022 were on the market for less than a month.

Year-over-year, prices increased in every region of the United States, with the Midwest showing an increase of 10.4%, with median prices increasing from $245,500 in March 2021 to $271,000 in March 2022.

First-time buyers accounted for 30% of sales in March 2022, up from 29% of sales in February 2022 and down from 32% in March 2021.

According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage was 4.17% in March 2022, up from 3.76% in February 2022.

The average commitment rate for all of 2021 was 2.96%, down from 3.11% for 2020.

Multi-Family Housing and Commercial Real Estate

This is 8.1% below the May 2022 rate of 642,000 and 17.4% below the June 2021 estimate of 714,000.

Single-family housing starts in June 2022 were at a rate of 982,000 which is a 2% drop from May 2022 and 6.3 % below the June 2021 rate of 1,664,000.

The median sales price of new houses sold in June 2022 was $402,400, up from $374,700 in June 2021.

The average sales price in June 2022 of $456,800 was up from $431,900 in June 2021.

The inventory of new homes for sale, at an estimated 444,000 at the end of May 2022, would support 9.3 months of sales at the current sales rate, up from 5.8 months’ supply at the end of June 2021.

Existing-home sales in June 2022 declined for the fifth straight month to a seasonally adjusted annual rate of 5.12 million.

Sales were down 5.4% from May 2022 and 14.2% from June 2021.

The median existing-home sales price climbed 13.4% from $366,900 as of June 2021 to $416,000 as of June 2022, a record high.

The inventory of unsold existing homes rose to 1.26 million by the end of June 2022 an increase of 9.6% from May 2022 and a 2.4% rise from the previous year (1.23 million).

Unsold inventory in June 2022 sat at 3.0 months at the current monthly sales pace, up from 2.6 months in May 2022 and 2.5 months in June 2021.

existing-home sales fell 14.2% from 5.97 million in June 2021 to 5.12 million in June 2022.

Existing-home sales in the Midwest slid 1.6% from 1,250,000 in May 2022 to 1,230,000 in June 2022, and dropping 9.6% from June 2021 sales of 1,360,000 .

median existing-home price for all housing types in June 2022 was $416,000, up 13.4% from $366,900 in June 2021, as prices increased in all regions.

This marked 124 consecutive months of year-over-year increases, the longest-running streak on record.

The Midwest recorded an increase in sales prices of 10.2%, with median prices increasing from $278,600 in June 2021 to $306,900 in June 2022.

Nationally, properties typically remained on the market for 14 days in June 2022, down from 16 days in May 2022 and 17

days in June 2021.

Eighty-eight percent of homes sold in June 2022 were on the market for less than a month.

All-cash sales represented 25% of transactions in June 2022, the same percentage as in May 2022 and up from 23% in June 2021.

The housing market is beginning to feel the impact of sharply rising mortgage rates and higher inflation on housing affordability.

If consumer price inflation continues to rise, mortgage rates can be expected to move higher.

Additionally, while home prices have consistently increased as supply was tight, demand was high and interest rates were low, prices may decline as available inventory increases due to lower demand.

First-time buyers accounted for 30% of sales in June 2022, up from 27% of sales in May 2022 and down from 31% in June 2021.

According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage was 5.52% in June 2022, up from 5.23% in May 2022.

The average commitment rate for all of 2021 was 2.96%,

Other Residential (Multi-Family) Housing and Commercial Real Estate

There has been unprecedented demand for apartments, with the vacancy rate hitting historic lows at the end of 2021 and continuing into 2022.

The overall lack of available housing, both single-family and rental apartment units, has pricing on a significant upward trajectory, resulting in a vacancy rate of 4.9% for the first quarter of 2022.

Absorption of units, however, did not keep pace with a mildly diminished demand resulting in a slight uptick in the national multi-family vacancy rate of 20 basis points to 5.1% in June 2022.

The tempering of demand in 2022 can be attributed to rising inflation cutting into potential renter household budgets and additional uncertainties created by COVID variants and the war in Ukraine.

The overall tight housing market in both single-family and rental apartment units continues to keep rents well above the historical average.

Rents nationally rose 11% in 2021, with the nation absorbing 714,000 units in 2021, twice the annual average of the past five years.

With demand and rent growth indicators surging, investors have shown high interest for apartment assets, creating a highly competitive acquisition environment and driving the average national cap rate to an all-time low.

Our market areas reflected the following apartment vacancy levels as of March 31, 2022:

With demand and rent growth indicators surging, investors have continued to show high interest for apartment assets, creating a highly competitive acquisition environment.

Upward pressure on the 10-year Treasury rate caused concern that the average national cap rate would rise during the 2nd quarter of 2022;

however, cap rates held steady as spreads compressed.

Our market areas reflected the following apartment vacancy levels as of June 2022:

Springfield, Missouri at 3.1%, St.

Louis at 6.9%, Kansas City at 6.1%, Minneapolis at 6.1%, Tulsa, Oklahoma at 6.1%, Dallas-Fort Worth at 6.1%, Chicago at 5.7%, Atlanta at 6.5%, Phoenix at 6.2%, and Denver at 6.6%.

Three of our market areas, Dallas-Fort Worth, Phoenix and Atlanta, were in the top ten metropolitan areas for current construction and 12 month deliveries to market.

The national office market is showing early signs of a recovery, but the sector still has a long way to go before it reaches pre-pandemic levels of performance.

Remote and hybrid work structures instituted early on in the pandemic appear here to stay, at least to an extent, and it is likely that office-using companies will continue to reassess their physical footprints as their leases roll over.

Office-using employment has bounced back quicker than the average for all employment sectors, and more office jobs could lead to stronger office leasing.

However, leasing volume is still below pre-pandemic norms, and the amount of sublet space on the market remains near record highs.

Furthermore, the national office market is contending with a glut of newly vacated space and a still-robust supply pipeline.

These trends, combined with the looming prospect of firms exploring more permanent remote and flexible work setups, may continue to place upward pressure on the national office vacancy rate in the near term.

Rent growth is flat on a year-over-year basis, and it will remain difficult for office owners to push asking rents until leasing activity returns to pre-pandemic levels for an extended period of time.

Despite a still uncertain near-term outlook, office sales volume rebounded in the second half of 2021.

As of March 31, 2022, national office vacancy rates remained about the same at 12.3%, compared to December 31, 2021, while our market areas reflected the following vacancy levels at March 31, 2022:

Louis at 7.7%, Kansas City at 6.4%, Minneapolis at 5.9%, Tulsa, Oklahoma at 6.2%, Dallas-Fort Worth at 6.3 %, Chicago at 4.9%, Atlanta at 7.1%, Phoenix at 7.7%, Denver at 6.1% and Charlotte, North Carolina at 6.8%.

Five of our market areas, Atlanta, Dallas-Fort Worth, Denver, Minneapolis, and Phoenix, were in the top ten metropolitan areas for current construction and 12 month deliveries to market.

After three consecutive quarters in positive territory, office demand weakened again in the second quarter of 2022.

On an annual basis, absorption remains positive nationally in about half of all major markets.

Even while demand is expected to improve in coming quarters, leasing volume will remain below pre-pandemic norms, making it difficult to offset the level of new supply and the record amount of sublet space on the market.

Office space utilization is still just a fraction of pre-pandemic levels, and improvement has stalled in recent months.

While many firms are returning to the office, most are committed to flexibility and hybrid workplace schedules are likely here to stay.

It will take some time for office-using tenants to assess space needs in this new environment, and even longer for the full impact on office space demand to be realized.

In the meantime, upward pressure in national office vacancy rates can be expected in the near term.

Rent growth as of June 30, 2022 was positive on a year-over year basis in most major markets.

Many office owners in the remaining market areas will continue to find it difficult to increase rents until leasing activity returns to pre-pandemic levels for an extended period of time.

As of June 30, 2022, national office vacancy rates remained about the same at 12.4% compared to March 31, 2022, while our market areas reflected the following vacancy levels at June 30, 2022:

Springfield, Missouri at 3.4%, St.

Louis at 9.0%, Kansas City at 9.5%, Minneapolis at 10.0%, Tulsa, Oklahoma at 12.2%, Dallas-Fort Worth at 17.6%, Chicago at 15.3%, Atlanta at 14.1% and Denver at 14.4%.

The retail sector continued its positive momentum into first quarter of 2022, as consumers drove continued improvement in the sector.

Louis at 9.5%, Kansas City at 9.6%, Minneapolis at 10.5%, Tulsa, Oklahoma at 11.9%, Dallas-Fort Worth at 17.7%, Chicago at 15.2%, Atlanta at 13.6%, Denver at 14.5%, Phoenix at 14.5% and Charlotte, North Carolina at 11.6%.

The retail sector continued its positive momentum in the first half of 2022, as consumers drove continued improvement in the sector.

Retail sales have accelerated briskly since mid-2021 due to the significant increase in consumers’ disposable income resulting from pandemic-related government transfers and strong wage growth.

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While demand for retail space is on the rise, construction activity continues to fall.

Just over 13 million square feet of retail space was delivered during the first quarter of 2022, 80% of which was pre-leased.

Over the past year, 46 million square feet of retail space was delivered with over 75% pre-leased prior to delivery.

Most recent construction activity has consisted of single-tenant build-to-suits or smaller ground floor spaces in mixed-use developments.

Thanks to growing demand and minimal new supply, vacancy rates declined across most retail segments in the first quarter of 2022, with exceptions still including regional and super-regional malls.

Rents increased at their fastest clip, 3.8%, in over a decade during the period from March 31, 2021 to March 31, 2022.

Due to growing demand and minimal new supply, vacancy rates declined across most retail segments in the second quarter of 2022.

Rents increased at their fastest clip, 4.2%, in over a decade during the period from June 30, 2021 to June 30, 2022.

Retail rent growth is forecast to accelerate over the coming quarters due to the combination of a strong retail sales environment and continued rising demand for space.

Inflation expectations will weigh on the real rate of rental growth though, likely keeping it in line with or slightly below the average growth rate seen during the five years preceding the pandemic.

At March 31, 2022, national retail vacancy rates remained level at 4.5% while our market areas reflected the following vacancy levels:

Inflation expectations will

weigh on the real rate of rental growth though, likely keeping it in line with or slightly below the average growth rate seen during the five years preceding the pandemic.

During the second quarter of 2022, national retail vacancy rates moved slightly higher to 4.4% while our market areas reflected the following vacancy levels:

Springfield, Missouri at 3.0%, St.

Louis at 6.0%, Kansas City at 5.0%, Minneapolis at 3.2%, Tulsa, Oklahoma at 3.5%, Dallas-Fort Worth at 4.9%, Chicago at 5.9%, Atlanta at 4.2%, Phoenix at 6.0% and Denver at 4.6%.

industrial market is experiencing a record level of new logistics facilities deliveries from late 2021 through the first quarter of 2022.

Louis at 5.9%, Kansas City at 4.6%, Minneapolis at 3.2%, Tulsa, Oklahoma at 3.1%, Dallas-Fort Worth at 4.8%, Chicago at 5.8%, Atlanta at 4.0%, Phoenix at 5.8%, Denver at 4.6%, and Charlotte, North Carolina at 3.4%.

has been in the midst of a historic boom in household spending on retail goods (both online and in store), all of which need to be stored in logistics properties across the country before reaching the end consumer.

Record savings accumulated during the pandemic and the strongest wage growth in more than 20 years will likely remain as tailwinds for elevated consumer spending over the next several months;

however, rising gas prices and inflation risk partially eroding consumers’ purchasing power, causing real goods spending to slow from current levels.

Signals are emerging that a gradual slowing in leasing and absorption is approaching, which should cause rent growth to slow given the active construction pipeline.

Amazon announced early in 2022 that it would be slowing growth in its distribution network from its recent breakneck pace.

At March 31, 2022, national industrial vacancy rates sat at a record low of 4.1% while our market areas reflected the following vacancy levels:

Even as inflation and interest rates have risen through spring and summer 2022, U.S.

industrial leasing has shown no sign of slowing and remained at a record high level of 60% above pre-pandemic levels.

The consumer savings stockpile accumulated during the pandemic and wage growth should help to support consumers if the U.S.

enters a recession or inflation continues its upward trajectory.

This savings stockpile is one reason why key industrial demand drivers, including consumer goods spending, and U.S.

imports have also held up far better in recent months than today’s diminished consumer confidence levels would suggest

industrial rent growth at 11.9% year over year continues to accelerate as the slowing macro economy has yet to move the retail space market in the tenants’ favor.

The jump in groundbreakings for speculative logistics developments during the latter half of the pandemic, combined with shortages of construction labor and materials, has set the stage for a choppy but protracted period of record-level completions of new industrial facilities in the U.S.

during 2022 and 2023.

Meanwhile, the industrial market’s largest tenant, Amazon, is slowing its expansion of its distribution network and signs of weakness are emerging in consumer confidence as well as in the U.S.

housing market, all due to rising inflation and interest rates.

These are signals that the industrial market’s vacancy rate, at a record low of 4.0% as of second quarter 2022, may increase over the next several quarters.

The magnitude of the change is difficult to gauge.

At June 30, 2022, national industrial vacancy rates sat at a record low of 4.0% while our market areas reflected the following vacancy levels:

Springfield, Missouri at 1.5%, St.

Louis at 2.9%, Kansas City at 4.4%, Minneapolis at 3.5%, Tulsa, Oklahoma at 3.7%, Dallas-Fort Worth at 5.7%, Chicago at 4.7%, Atlanta at 4.0%, Phoenix at 4.6% and Denver at 5.2%.

Our management will continue to monitor regional, national, and global economic indicators such as unemployment, GDP, housing starts and prices, commercial real estate occupancy, absorption and rental rates, as these could significantly affect customers in each of our market areas.

Louis at 2.7%, Kansas City at 4.4%, Minneapolis at 3.1%, Tulsa, Oklahoma at 3.5%, Dallas-Fort Worth at 5.5%, Chicago at 4.5%, Atlanta at 3.4%, Phoenix at 4.2%, Denver at 5.1% and Charlotte, North Carolina at 4.8%.

Our management will continue to monitor regional, national, and global economic indicators such as unemployment, GDP, housing starts and prices, consumer sentiment, commercial real estate price index 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

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The magnitude of the impact on the Company of the COVID-19 pandemic continues to evolve and will ultimately depend on the remaining length and severity of the economic downturn brought on by the pandemic.

Some positive economic signs have occurred in 2021 and early 2022, such as lower unemployment rates, improving gross domestic product (“GDP”) levels and other measures of the economy and increased vaccination rates.

Some positive economic signs have occurred in 2021 and early 2022, such as lower unemployment rates, improving GDP levels and other measures of the economy and increased vaccination rates.

However, supply-chain issues continue to negatively impact the economy and inflation has risen to a level significantly above the long-run objectives of the FOMC.

Over the previous two years, the COVID-19 pandemic has impacted the Company’s business in one or more of the following ways, among others.

● Consistently low market interest rates for a significant period of time have had a negative impact on our variable and fixed rate loans, resulting in reduced net interest income.

More recently, market interest rates have increased, which has resulted in increased net interest income.

● Certain fees for deposit and loan products were waived or reduced for a period of time.

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● Banking center lobbies were closed at various times, and may close again in future periods if the pandemic situation worsens again.

● Loan modifications occurred

● A contraction in economic activity reduced demand for our loans and for our other products and services

Current COVID-19 infection rates are low in our markets and the CDC has relaxed most restrictions that were previously in place.

● Loan modifications occurred in 2020 and 2021.

● A contraction in economic activity reduced demand for our loans and for our other products and services in 2020 and 2021.

COVID-19 infection rates are relatively low, but beginning to rise again, in our markets and the CDC has relaxed most restrictions that were previously in place.

In some cases those restrictions have been replaced with recommendations.

Also, states and local municipalities may restrict certain activities from time to time.

Our business is currently operating normally, similar to operations prior to the onset of the COVID-19 pandemic.

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Paycheck Protection Program Loans

Great Southern has actively participated in the PPP through the SBA.

In the first round of the PPP, we originated approximately 1,600 PPP loans, totaling approximately $121 million.

SBA forgiveness was approved and processed, and full repayment proceeds were received by us, for all of these PPP loans during 2021.

In the second round of the PPP, we funded approximately 1,650 PPP loans, totaling approximately $58 million.

As of March 31, 2022, full forgiveness proceeds have been received by us from the SBA for 1,608 of these PPP loans, totaling approximately $57 million.

Great Southern actively participated in the PPP through the SBA.

In total, we originated approximately 3,250 PPP loans, totaling approximately $179 million.

SBA forgiveness was approved and processed, and full repayment proceeds were received by us, for virtually all of these PPP loans during 2021 and early 2022.

Great Southern received fees from the SBA for originating PPP loans based on the amount of each loan.

At March 31, 2022, remaining net deferred fees related to PPP loans totaled $88,000, and we expect these remaining net deferred fees will accrete to interest income during the second quarter of 2022.

At June 30, 2022, remaining net deferred fees related to PPP loans totaled $35,000, and we expect these remaining net deferred fees will accrete to interest income during the third quarter of 2022.

The fees, net of origination costs, are deferred in accordance with standard accounting practices and accreted to interest income on loans over the contractual life of each loan.

In the three months ended March 31, 2022 and 2021, Great Southern recorded approximately $415,000 and $1.2 million, respectively, of net deferred fees in interest income on PPP loans.

In the three months ended June 30, 2022 and 2021, Great Southern recorded approximately $54,000 and $1.1 million, respectively, of net deferred fees in interest income on PPP loans.

In the six months ended June 30, 2022 and 2021, Great Southern recorded approximately $469,000 and $2.3 million, respectively, of net deferred fees in interest income on PPP loans.

The profitability of the Company and, more specifically, the profitability of its primary subsidiary, the Bank, depend primarily on net interest income, as well as provisions for credit losses and the level of non-interest income and non-interest expense.

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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 decreased $75.7 million, or 1.4%, from $5.45 billion at December 31, 2021, to $5.37 billion at March 31, 2022.

Details of the current period changes in total assets are provided in the “Comparison of Financial Condition at March 31, 2022 and December 31, 2021” section of this Quarterly Report on Form 10-Q.

Net outstanding loans increased $104.0 million, or 2.5%, from $4.01 billion at December 31, 2021, to $4.11 billion at March 31, 2022.

Great Southern’s total assets increased $102.1 million, or 1.9%, from $5.45 billion at December 31, 2021, to $5.55 billion at June 30, 2022.

Details of the current period changes in total assets are provided in the “Comparison of Financial Condition at June 30, 2022 and December 31, 2021” section of this Quarterly Report on Form 10-Q.

Net outstanding loans increased $354.1 million, or 8.8%, from $4.01 billion at December 31, 2021, to $4.36 billion at June 30, 2022.

The increase was primarily in other residential (multi-family) loans, commercial real estate loans and one- to four family residential loans.

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The Company’s strategy continues to be focused on maintaining credit risk and interest rate risk at appropriate levels.

Recent growth has occurred in some loan types, primarily other residential (multi-family) and commercial real estate, and in most of Great Southern’s primary lending locations, including Springfield, St.

Louis, Kansas City, Des Moines and Minneapolis, as well as our loan production offices in Atlanta, Chicago, Dallas, Denver, Omaha and Tulsa.

Recent growth has occurred in some loan types, primarily other residential (multi-family), commercial real estate and one- to four family residential real estate, and in most of Great Southern’s primary lending locations, including Springfield, St.

Louis, Kansas City, Des Moines and Minneapolis, as well as our loan production offices in Atlanta, Chicago, Dallas, Denver, Omaha, Phoenix and Tulsa.

Certain minimum underwriting standards and monitoring help assure the Company’s portfolio quality.

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Consumer loans, other than home equity 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.

In 2019, the Company decided to discontinue indirect auto loan originations.

In 2019, the Company discontinued indirect auto loan originations.

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.

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We consider these lending practices to be consistent with or more conservative than what we believe to be the norm for banks our size.

At both March 31, 2022 and December 31, 2021, 0.3% of our owner occupied one-to four-family residential loans had loan-to-value ratios above 100% at origination.

At both March 31, 2022 and December 31, 2021, an estimated 0.2% of total non-owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination.

At March 31, 2022, TDRs totaled $3.7 million, or 0.1% of total loans, a decrease of $121,000 from $3.9 million, or 0.1% of total loans, at December 31, 2021.

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 TDRs occurring during the three months ended March 31, 2022, none were restructured into multiple new loans.

At June 30, 2022 and December 31, 2021, 0.2% and 0.3%, respectively, of our owner occupied one-to four-family residential loans had loan-to-value ratios above 100% at origination.

At both June 30, 2022 and December 31, 2021, an estimated 0.2% of total non-owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination.

At June 30, 2022, TDRs totaled $3.6 million, or 0.1% of total loans, a decrease of $246,000 from $3.9 million, or 0.1% of total loans, at December 31, 2021.

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 TDRs occurring during the six months ended June 30, 2022, none were restructured into multiple new loans.

For TDRs occurring during the year ended December 31, 2021, one loan totaling $45,000 was restructured into multiple new loans.

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After 2021, certain LIBOR rates may no longer be published and it is expected to eventually be discontinued as a reference rate by June 2023.

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

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

The Company has been regularly monitoring its portfolio of loans tied to LIBOR since 2019, with specific groups of loans identified.

The Company implemented robust LIBOR fallback language for all commercial loan transactions beginning near the end of 2018, with such language utilized for all new originations and renewed/modified commercial loans since that time.

The Company is particularly monitoring the remaining group of loans that were originated prior to the fourth quarter of 2018, and have not been renewed or modified since that time.

At March 31, 2022, this represented approximately 47 commercial loans totaling approximately $122 million;

however, only 26 of those loans, totaling $22 million, mature after June 2023 (the date upon which the LIBOR indices used by the Company are expected to no longer be available).

The Company also has a portfolio of residential mortgage loans tied to LIBOR indices with standard index replacement language included (approximately $410 million at March 31, 2022), and that portfolio is being monitored for potential changes that may be facilitated by the mortgage industry.

As described, the vast majority of the loan portfolio tied to LIBOR now includes robust LIBOR replacement language which identifies appropriate “trigger” events for the cessation of LIBOR and the steps that the Company will take upon the occurrence of one or more of those events, including adjustments to any rate margin to ensure that the replacement interest rate on the loan is substantially similar to the previous LIBOR-based rate.

The Company implemented LIBOR fallback language for all commercial loan transactions near the end of 2018, with such language utilized for all commercial loan originations and renewals/modifications since that time.

The Company is monitoring the remaining group of loans that were originated prior to the fourth quarter of 2018, and have not been renewed or modified since that time.

At June 30, 2022, this represented approximately 47 commercial loans totaling approximately $122 million;

however, only 29 of those loans,

totaling $55 million, mature after June 2023 (the date upon which the LIBOR indices used by the Company are expected to no longer be available).

The Company also has a portfolio of residential mortgage loans tied to LIBOR indices with standard index replacement language included (approximately $381 million at June 30, 2022), and that portfolio is being monitored for potential changes that may be facilitated by the mortgage industry.

The vast majority of the loan portfolio tied to LIBOR now includes LIBOR replacement language that identifies “trigger” events for the cessation of LIBOR and the steps that the Company will take upon the occurrence of one or more of those events, including adjustments to any rate margin to ensure that the replacement interest rate on the loan is substantially similar to the previous LIBOR-based rate.

Available-for-sale Securities.

In the three months ended March 31, 2022, available-for-sale securities decreased $39.7 million, or 7.9%, from $501.0 million at December 31, 2021, to $461.4 million at March 31, 2022.

The decrease was primarily due to $226.5 million in available-for-sale securities being transferred to held-to-maturity during the period and calls of municipal securities and normal monthly payments received related to the portfolio of U.S.

Government agency mortgage-backed securities and collateralized mortgage obligations.

This was partially offset by the purchase of U.S.

In the six months ended June 30, 2022, available-for-sale securities increased $18.4 million, or 3.7%, from $501.0 million at December 31, 2021, to $519.5 million at June 30, 2022.

This increase was primarily due to the purchase of U.S.

Government agency fixed-rate single-family and multi-family mortgage-backed securities and collateralized mortgage obligations.

The Company used excess liquid funds and loan repayments to fund this increase in investment securities.

The increase was mostly offset by $226.5 million in available-for-sale securities being transferred to held-to-maturity during the period and calls of municipal securities and normal monthly payments received related to the portfolio of U.S.

Government agency mortgage-backed securities and collateralized mortgage obligations.

In determining securities that were elected to be transferred to the held-to-maturity category, the Company reviewed all of its investment securities purchased prior to 2022 and determined that certain of those securities, for various reasons, would likely be held to their maturity or full repayment prior to contractual maturity.

Held-to-maturity Securities.

In the three months ended March 31, 2022, as noted above, available-for-sale securities of $226.5 million were transferred to held-to-maturity.

In the six months ended June 30, 2022, as noted above, available-for-sale securities of $226.5 million were transferred to held-to-maturity.

This transfer included $220.2 million of mortgage-backed securities and collateralized mortgage obligations and $6.3 million in municipal securities.

At June 30, 2022 the balance of held-to-maturity securities was $215.4 million.

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 three months ended March 31, 2022, total deposit balances decreased $62.8 million, or 1.4%.

Compared to December 31, 2021, transaction account balances remained flat at $3.59 billion at March 31, 2022, while retail certificates of deposit decreased $63.0 million, or 7.1%, to $830.7 million at March 31, 2022.

Increases in transaction accounts were primarily a result of increases in various money market accounts and NOW deposit accounts, offset by decreases in non-interest-bearing accounts.

In the six months ended June 30, 2022, total deposit balances decreased $35.9 million, or 0.8%.

Compared to December 31, 2021, transaction account balances decreased $90.2 million, or 2.5%, to $3.50 billion at June 30, 2022, while retail certificates of deposit decreased $151.8 million, or 17.0%, to $741.8 million at June 30, 2022.

The decrease in transaction accounts was primarily a result of a decrease in non-interest-bearing accounts, partially offset by increases in various money market accounts and NOW deposit accounts.

Interest-bearing transaction account balances were also negatively impacted by one large customer that experienced net outflows of balances, which the Company had been made aware of and anticipated and which had accumulated in 2020 and 2021 during the height of the COVID-19 pandemic.

Their deposit balances are returning to pre-COVID-19 levels.

Retail time deposits decreased due to a decrease in retail certificates generated through the banking center network and decreases in national time deposits initiated through internet channels.

Time deposits initiated through internet channels experienced a planned decrease due to increases in overall liquidity levels and to reduce the Company’s cost of funds.

Brokered deposits were $67.4 million at both March 31, 2022 and December 31, 2021.

Time deposits initiated through internet channels experienced a planned decrease ($103.4 million in the six months ended June 30, 2022) due to increases in overall liquidity levels in 2021 and to reduce the Company’s cost of funds.

Brokered deposits were $273.5 million and $67.4 million at June 30, 2022 and December 31, 2021, respectively.

The Company uses brokered deposits of select maturities from time to time to supplement its various funding channels.

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.

When loan demand trends upward, we can increase rates paid on deposits to attract more deposits and utilize brokered deposits to obtain additional funding.

The level of competition for deposits in our markets is high.

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Securities sold under reverse repurchase agreements with customers.

Securities sold under reverse repurchase agreements with customers increased $10.9 million from $137.1 million at December 31, 2021 to $148.0 million at March 31, 2022.

Securities sold under reverse repurchase agreements with customers increased $8.7 million from $137.1 million at December 31, 2021 to $145.8 million at June 30, 2022.

These balances fluctuate over time based on customer demand for this product.

Short-term borrowings and other interest-bearing liabilities .

Short-term borrowings and other interest-bearing liabilities increased $170.1 million from $1.8 million at December 31, 2021 to $171.9 million at June 30, 2022.

At June 30, 2022, $170.0 million of this total was overnight borrowings from the FHLBank, which were utilized to fund growth in outstanding loans.

Net Interest Income and Interest Rate Risk Management.

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In response to the COVID-19 pandemic, the FRB decreased interest rates on two occasions in March 2020, a 0.50% decrease on March 3 and a 1.00% decrease on March 16.

In March 2022, the FRB increased interest rates 0.25%.

At March 31, 2022, the Federal Funds rate stood at 0.50%.

Financial markets are anticipating an aggressive increase in interest rates in 2022, with up to 2.00% of cumulative rate hikes currently anticipated.

A substantial portion of Great Southern’s loan portfolio ($1.31 billion at March 31, 2022) is tied to the one-month or three-month LIBOR index and will be subject to adjustment at least once within 90 days after March 31, 2022.

In 2022 to date, the FRB increased interest rates on four separate occasions, 0.25% on March 17, 0.50% on May 5, 0.75% on June 16 and 0.75% on July 27.

At June 30, 2022, the Federal Funds rate stood at 2.50%.

Financial markets are anticipating further increases in interest rates in the remainder of 2022, with up to 1.00% of additional cumulative rate hikes currently anticipated.

A substantial portion of Great Southern’s loan portfolio ($1.24 billion at June 30, 2022) is tied to the one-month or three-month LIBOR index and will be subject to adjustment at least once within 90 days after June 30, 2022.

Of these loans, $1.23 billion had interest rate floors.

Great Southern also has a portfolio of loans ($613 million at March 31, 2022) tied to a “prime rate” of interest and will adjust immediately or within 90 days with changes to the “prime rate” of interest.

Great Southern also has a portfolio of loans ($693 million at June 30, 2022) tied to a “prime rate” of interest that will adjust immediately or within 90 days with changes to the “prime rate” of interest.

Of these loans, $596 million had interest rate floors at various rates.

At March 31, 2022, $800 million in LIBOR and “prime rate” loans were at their floor rate.

If interest rates were to increase 50 basis points, approximately $460 million of these loans would move above their floor rate.

At June 30, 2022, nearly all of these LIBOR and “prime rate” loans had fully-indexed rates that were at or above their floor rate and so are expected to move fully with future market interest rate increases.

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 or the “prime rate” 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.

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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.

Because the Federal Funds rate is still 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, market interest rate increases would normally result in increased interest rates on our LIBOR-based and prime-based loans.

As of March 31, 2022, 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.

As of June 30, 2022, 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.

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In a situation where market interest rates decrease significantly in a short period of time, as they did in March 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 and “prime” 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.

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 2020, we did experience some compression of our net interest margin percentage due to 2.25% of Federal Fund rate cuts during the nine month period of July 2019 through March 2020.

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LIBOR interest rates decreased significantly in 2020 and remained very low in 2021, putting pressure on loan yields, and strong pricing competition for loans and deposits remains in most of our markets.

Beginning in March 2022, market interest rates, including LIBOR interest rates and “prime” interest rates, began to increase rapidly.

This has resulted in increasing loan yields and expansion of our net interest income and net interest margin in 2022.

For further discussion of the processes used to manage our exposure to interest rate risk, see “Item 3.

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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 Months Ended March 31, 2022 and 2021” section of this report.

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 Ended June 30, 2022 and 2021” section of this report.

Effect of Federal Laws and Regulations

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Economic Growth Act.

In May 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-

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.

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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” (“CBLR”) of between 8 and 10 percent.

Any qualifying depository institution or its holding company that exceeds the CBLR 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.

institution that exceeds the new ratio will be considered “well-capitalized” under the prompt corrective action rules.

Effective January 1, 2020, the CBLR was 9.0%.

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Centers for Disease Control and Prevention (CDC) guidelines, as well as directives from federal, state and local officials, are being followed to make informed operational decisions, if necessary.

The Company’s banking center network continues to be optimized.

During 2022, the high-performing banking center in Kimberling City, Missouri, will be replaced with a newly constructed building on the same property at 14309 Highway 13.

Customers will be served in a temporary building on the property during construction.

Customers are being served in a temporary building on the property during construction.

The new office is expected to open in the fourth quarter of 2022.

Including this office, the Company operates three banking centers in the Branson Tri-Lakes area of southwest Missouri.

In February 2022, the Company opened a new commercial loan production office (LPO) in Phoenix, Arizona, which represents the seventh LPO in the Company’s franchise.

A local and highly-experienced lender was hired to manage the office.

The new LPO provides a wide variety of commercial lending services, including commercial real estate loans for new and existing properties and commercial construction loans.

The Company expects to continue looking for opportunities to open additional LPOs in other markets during 2022.

The Company announced that its 2022 Annual Meeting of Stockholders, to be held at 10 a.m.

Central Time on May 11, 2022, will be a virtual meeting over the internet and will not be held at a physical location.

Stockholders will be able to attend the Annual Meeting via a live webcast.

Holders of record of Great Southern Bancorp, Inc.

common stock at the close of business on the record date, March 2, 2022, may vote during the live webcast of the Annual Meeting or by proxy.

Please see the Company’s Notice of Annual Meeting and Proxy Statement available on the Company’s website, www.GreatSouthernBank.com, (click “About” then “Investor Relations”) for additional information about the Annual Meeting.

Comparison of Financial Condition at March 31, 2022 and December 31, 2021

During the three months ended March 31, 2022, the Company’s total assets decreased by $75.7 million to $5.37 billion.

The decrease was primarily in cash equivalents, and was partially offset by an increase in loans and investment securities.

Cash and cash equivalents were $353.0 million at March 31, 2022, a decrease of $364.2 million, or 50.8%, from $717.3 million at December 31, 2021.

Louis market, a banking center in the Clayton area is slated to be consolidated into a nearby banking center at the close of business on August 19, 2022.

This lobby-only office, located at 8235 Forsyth Boulevard, will be consolidated into the Brentwood-area office, 2435 S.

Brentwood, a short distance away.

The commercial lending team currently housed in the Clayton office building will continue to serve customers from this location.

In June 2022, the Company opened a new commercial loan production office (LPO) in Charlotte, North Carolina, which represents the eighth LPO in the Company’s franchise.

A local and highly experienced lender was hired to manage this office.

The new LPO will provide a variety of commercial lending services, including commercial real estate loans for new and existing properties and commercial construction loans.

An LPO in Phoenix, Arizona, was also opened in February 2022.

Comparison of Financial Condition at June 30, 2022 and December 31, 2021

During the six months ended June 30, 2022, the Company’s total assets increased by $102.1 million to $5.55 billion.

The increase was primarily in loans and investment securities, partially offset by a decrease in cash equivalents.

Cash and cash equivalents were $195.7 million at June 30, 2022, a decrease of $521.6 million, or 72.7%, from $717.3 million at December 31, 2021.

Excess funds held at the Federal Reserve Bank at December 31, 2021 were primarily the result of increases in net loan repayments throughout 2021.

In 2022, these excess funds were used to fund the purchase of new investment securities and to fund loan originations.

The Company's available-for-sale securities decreased $39.7 million, or 7.9%, compared to December 31, 2021.

The decrease was primarily due to the transfer of $226.5 million in available-for-sale securities to held-to-maturity during the period and by calls of municipal securities and normal monthly payments received related to the portfolio of mortgage-backed securities and collateralized mortgage obligations.

This was mostly offset by the purchase of U.S.

Government agency fixed-rate single-family or multi-family

mortgage-backed securities and collateralized mortgage obligations.

The Company’s available-for-sale securities increased $18.4 million, or 3.7%, compared to December 31, 2021.

The increase was primarily related to the purchase of U.S.

Government agency fixed-rate single-family or multi-family mortgage-backed securities and collateralized mortgage obligations, partially offset by the transfer of $226.5 million in available-for-sale securities to held-to-maturity during the period and by calls of municipal securities and normal monthly payments received related to the portfolio of mortgage-backed securities and collateralized mortgage obligations.

The Company used excess funds held at the Federal Reserve Bank and loan repayments to fund this increase in investment securities.

The available-for-sale securities portfolio was 8.6% and 9.2% of total assets at March 31, 2022 and December 31, 2021, respectively.

The transfer of $226.5 million in available-for-sale securities to held-to-maturity included $220.2 million of mortgage-backed securities and collateralized mortgage obligations and $6.3 million in municipal securities.

The available-for-sale securities portfolio was 9.4% and 9.2% of total assets at June 30, 2022 and December 31, 2021, respectively.

Held-to-maturity securities were $215.4 million at June 30, 2022.

During the six months ended June 30, 2022, $226.5 million in available-for-sale securities were transferred to held-to-maturity.

This included $220.2 million of mortgage-backed securities and collateralized mortgage obligations and $6.3 million in municipal securities.

The held-to-maturity securities portfolio was 4.2% of total assets at March 31, 2022.

Net loans increased $104.0 million from December 31, 2021, to $4.11 billion at March 31, 2022.

The held-to-maturity securities portfolio was 3.9% of total assets at June 30, 2022.

Net loans increased $354.1 million from December 31, 2021, to $4.36 billion at June 30, 2022.

This increase was primarily in other residential (multi-family) loans ($220 million increase), commercial real estate loans ($147 million increase) and one- to four-family residential loans ($152 million increase).

These increases were partially offset by a decrease in construction loans ($170 million decrease).

Loan origination volume in the three months ended March 31, 2022 was similar to loan origination volume that occurred in 2020 and 2021.

Total liabilities decreased $41.5 million, from $4.83 billion at December 31, 2021 to $4.79 billion at March 31, 2022.

The decrease was primarily attributable to a reduction in total deposits, primarily time deposits.

Loan origination volume in the six months ended June 30, 2022 was similar to loan origination volume that occurred in 2020 and 2021;

however, the pace of loan payoffs prior to maturity has slowed in 2022 due to the increase in market rates of interest.

Total liabilities increased $169.2 million, from $4.83 billion at December 31, 2021 to $5.00 billion at June 30, 2022, primarily due to increases in short-term borrowings from FHLBank and brokered deposits.

This was partially offset by a reduction in total deposits, primarily demand deposits and retail time deposits.

Time deposits initiated through internet channels experienced a planned decrease due to increases in overall liquidity levels and to reduce the Company’s cost of funds.

Total deposits decreased $62.8 million, or 1.4%, to $4.49 billion at March 31, 2022.

Transaction account balances were flat at $3.59 billion at March 31, 2022, while retail certificates of deposit decreased $63.0 million compared to December 31, 2021, to $830.7 million at March 31, 2022.

Changes in transaction account balances were primarily a result of increases in NOW deposit accounts and money market accounts, offset by decreases in IntraFi Network Reciprocal Deposits and non-interest-bearing checking accounts.

Total interest-bearing checking accounts increased $33.8 million while demand deposit accounts decreased $33.5 million.

Total deposits decreased $35.9 million, or 0.8%, to $4.52 billion at June 30, 2022.

Transaction account balances decreased $90.2 million, from $3.59 billion at December 31, 2021 to $3.50 billion at June 30, 2022.

Retail certificates of deposit decreased $151.8 million compared to December 31, 2021, to $741.8 million at June 30, 2022.

Changes in transaction account balances were primarily due to decreases in IntraFi Network Reciprocal Deposits and non-interest-bearing checking accounts, offset by increases in NOW deposit accounts and money market accounts.

Total interest-bearing checking and demand deposit accounts decreased $31.1 million and $59.1 million, respectively.

Customer retail time deposits initiated through our banking center network decreased $41.9 million and time deposits initiated through our national internet network decreased $103.4 million.

Customer deposits at March 31, 2022 and December 31, 2021 totaling $38.9 million and $41.7 million, respectively, were part of the IntraFi Network Deposits program, which allows customers to maintain balances in an insured manner that would otherwise exceed the FDIC deposit insurance limit.

Brokered deposits were $67.4 million at both March 31, 2022 and December 31, 2021.

Securities sold under reverse repurchase agreements with customers increased $10.9 million from $137.1 million at December 31, 2021 to $148.0 million at March 31, 2022.

Customer deposits at June 30, 2022 and December 31, 2021 totaling $35.2 million and $41.7 million, respectively, were part of the IntraFi Network Deposits program, which allows customers to maintain balances in an insured manner that would otherwise exceed the FDIC deposit insurance limit.

Brokered deposits increased $206.1 million to $273.5 million at June 30, 2022, compared to $67.4 million at December 31, 2021.

Brokered deposits were utilized to fund growth in outstanding loans and to offset reductions in balances in other deposit categories.

Securities sold under reverse repurchase agreements with customers increased $8.7 million from $137.1 million at December 31, 2021 to $145.8 million at June 30, 2022.

These balances fluctuate over time based on customer demand for this product.

Total stockholders' equity decreased $34.2 million, from $616.8 million at December 31, 2021 to $582.6 million at March 31, 2022.

Accumulated other comprehensive income decreased $24.1 million during the three months ended March 31, 2022, primarily due to decreases in the fair value of available-for-sale investment securities.

Short-term borrowings and other interest-bearing liabilities increased $170.1 million from $1.8 million at December 31, 2021 to $171.9 million at June 30, 2022.

At June 30, 2022, $170.0 million of this total was overnight borrowings from the FHLBank.

Total stockholders’ equity decreased $67.1 million, from $616.8 million at December 31, 2021 to $549.6 million at June 30, 2022.

Accumulated other comprehensive income decreased $46.1 million during the six months ended June 30, 2022, primarily due to decreases in the fair value of available-for-sale investment securities due to increasing market interest rates, and to decreases in the fair value of certain the Company’s cash flow hedges.

Stockholders’ equity also decreased due to repurchases of the Company’s common stock totaling $50.4 million and dividends declared on common stock of $9.5 million.

The Company recorded net income of $17.0 million for the three months ended March 31, 2022.

The Company recorded net income of $35.2 million for the six months ended June 30, 2022.

In addition, stockholders’ equity increased $3.7 million due to stock option exercises.

Results of Operations and Comparison for the Three Months Ended March 31, 2022 and 2021

Net income was $17.0 million for the three months ended March 31, 2022 compared to $18.9 million for the three months ended March 31, 2021.

This decrease of $1.9 million, or 10.0%, was primarily due to an increase in noninterest expense of $947,000, or 3.1%, a decrease in net interest income of $823,000, or 1.9%, a decrease in noninterest income of $560,000, or 5.8%, and a smaller negative provision for credit losses on loans and unfunded commitments of $181,000, or 48.4%, partially offset by a decrease in income tax expense of $630,000, or 12.6%.

Results of Operations and Comparison for the Three and Six Months Ended June 30, 2022 and 2021

Net income was $18.2 million for the three months ended June 30, 2022 compared to $20.1 million for the three months ended June 30, 2021.

This decrease of $1.9 million, or 9.4%, was primarily due to an increase in provision for credit losses on loans and unfunded commitments of $3.5 million, or 270.1%, an increase in non-interest expense of $2.8 million, or 9.3%, and a decrease in non-interest income of $266,000, or 2.8%, partially offset by an increase in net interest income of $4.1 million, or 9.3%, and a decrease in income tax expense of $572,000, or 10.9%.

Net income was $35.2 million for the six months ended June 30, 2022 compared to $39.0 million for the six months ended June 30, 2021.

This decrease of $3.8 million, or 9.7%, was primarily due to an increase in non-interest expense of $3.8 million, or 6.2%, an increase in provision for credit losses on loans and unfunded commitments of $3.7 million, or 220.8%, and a decrease in non-interest income of $826,000, or 4.3%, partially offset by an increase in net interest income of $3.3 million, or 3.7%, and a decrease in income tax expense of $1.2 million, or 11.7%.

Total Interest Income

Total interest income decreased $4.0 million, or 7.8%, during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

The decrease was due to a $4.6 million decrease in interest income on loans, partially offset by a $684,000 increase in interest income on investment securities and other interest-earning assets.

Interest income on loans decreased for the three months ended March 31, 2022 compared to the same period in 2021, primarily due to lower average loan balances, combined with lower average rates of interest.

Interest income from investment securities and other interest-earning assets increased during the three

months ended March 31, 2022 compared to the same period in 2021 primarily due to higher average balances of investment securities and other interest-earning assets, partially offset by lower average rates of interest on investment securities.

Total interest income increased $2.2 million, or 4.5%, during the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

The increase was due to a $2.8 million increase in interest income on investment securities and other interest- earning assets, partially offset by a $596,000 decrease in interest income on loans.

Interest income from investment securities and

other interest-earning assets increased during the three months ended June 30, 2022 compared to the same period in 2021 primarily due to higher average balances of investment securities and higher average rates of interest on investment securities and other interest-earning assets.

Interest income on loans decreased for the three months ended June 30, 2022 compared to the same period in 2021, primarily due to lower average loan balances, slightly offset by higher average rates of interest.

Total interest income decreased $1.7 million, or 1.7%, during the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

The decrease was due to a $5.2 million decrease in interest income on loans, partially offset by a $3.5 million increase in interest income on investment securities and other interest-earning assets.

Interest income on loans decreased for the six months ended June 30, 2022 compared to the same period in 2021, primarily due to lower average loan balances, combined with lower average rates of interest on loans.

Interest income from investment securities and other interest-earning assets increased during the three months ended June 30, 2022 compared to the same period in 2021, primarily due to higher average balances of investment securities combined with higher average rates of interest on investment securities and other interest-earning assets.

Interest Income – Loans

During the three months ended March 31, 2022 compared to the three months ended March 31, 2021, interest income on loans decreased $3.0 million as the result of lower average loan balances, which decreased from $4.41 billion during the three months ended March 31, 2021, to $4.13 billion during the three months ended March 31, 2022.

The lower average balances were primarily due to higher loan repayments during 2021.

During the three months ended June 30, 2022 compared to the three months ended June 30, 2021, interest income on loans decreased $639,000 as the result of lower average loan balances, which decreased from $4.38 billion during the three months ended June 30, 2021, to $4.32 billion during the three months ended June 30, 2022.

The lower average balances were primarily due to higher loan repayments during the latter half of 2021.

Interest income on loans increased $43,000 as a result of slightly higher average interest rates on loans.

The average yield on loans increased from 4.33% during the three months ended June 30, 2021, to 4.34% during the three months ended June 30, 2022.

This increase was primarily due to the repricing of higher floating rates in 2022 as market interest rates began to increase.

During the six months ended June 30, 2022 compared to the six months ended June 30, 2021, interest income on loans decreased $3.6 million as the result of lower average loan balances, which decreased from $4.39 billion during the six months ended June 30, 2021, to $4.23 billion during the six months ended June 30, 2022.

The lower average balances were primarily due to higher loan repayments during the latter half of 2021.

Interest income on loans also decreased $1.6 million as a result of lower average interest rates on loans.

The average yield on loans decreased from 4.39% during the three months ended March 31, 2021, to 4.23% during the three months ended March 31, 2022.

The average yield on loans decreased from 4.36% during the six months ended June 30, 2021, to 4.29% during the six months ended June 30, 2022.

This decrease was primarily due to decreased yields in most loan categories as some loans with higher rates refinanced or repaid as a result of the sale of the financed project.

In addition, some new loans originated after March 31, 2021, had an average contractual interest rate that was less than the average contractual interest rate for the portfolio at the time.

Additionally, the Company’s net interest income included accretion of net deferred fees related to PPP loans originated in 2020 and 2021.

The amount of net deferred fees recognized in interest income was $416,000 in the three months ended March 31, 2022 compared to $1.2 million in the three months ended March 31, 2021 and $1.6 million in the three months ended December 31, 2021.

At March 31, 2022, remaining net deferred fees related to PPP loans was $88,000.

Additionally, the Company’s interest income on loans included accretion of net deferred fees related to PPP loans originated in 2020 and 2021.

The amount of net deferred fees recognized in interest income was $54,000 and $469,000 in the three and six months ended June 30, 2022, respectively, compared to $1.1 million and $2.3 million in the three and six months ended June 30, 2021, respectively.

In October 2018, the Company entered into an interest rate swap transaction as part of its ongoing interest rate management strategies to hedge the risk of its floating rate loans.

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This has the effect of reducing Accumulated Other Comprehensive Income and increasing Net Interest Income and Retained Earnings over the periods.

The Company recorded interest income related to this terminated interest rate swap of $2.0 million in each of the three months ended March 31, 2022 and 2021.

The Company recorded interest income related to the interest rate swap of $2.0 million in both the three months ended June 30, 2022 and the three months ended June 30, 2021.

The Company recorded interest income related to the interest rate swap of $4.0 million in both the six months ended June 30, 2022 and the six months ended June 30, 2021.

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

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To the extent that the fixed rate of interest continues to exceed one-month USD-LIBOR, the Company will receive net interest settlements, which will be recorded as loan interest income.

If one-month USD-LIBOR exceeds the fixed rate of interest in future periods, the Company will be required to pay net settlements to the counterparty and will record those net payments as a reduction of interest income on loans.

The Company recorded loan interest income related to this swap transaction of $370,000 in the three months ended March 31, 2022.

If one-month USD-LIBOR exceeds the fixed rate of interest in future periods, the Company will be required to pay net settlements to the counterparty and will record

those net payments as a reduction of interest income on loans.

The Company recorded loan interest income related to this swap transaction of $668,000 and $1.0 million in the three and six months ended June 30, 2022.

In July 2022, the Company entered into two interest rate swap transactions as part of its ongoing interest rate management strategies to hedge the risk of its floating rate loans.

The notional amount of each swap is $200 million with an effective date of May 1, 2023 and a termination date of May 1, 2028.

Under the terms of one swap, beginning in May 2023, the Company will receive a fixed rate of interest of 2.628% and will pay a floating rate of interest equal to one-month USD-SOFR OIS.

Under the terms of the other swap, beginning in May 2023, the Company will receive a fixed rate of interest of 5.725% and will pay a floating rate of interest equal to one-month USD-Prime.

In each case, the floating rate will be reset monthly and net settlements of interest due to/from the counterparty will also occur monthly.

To the extent the fixed rate of interest exceeds the floating rate of interest, the Company will receive net interest settlements, which will be recorded as loan interest income.

If the floating rate of interest exceeds the fixed rate of interest, the Company will be required to pay net settlements to the counterparty and will record those net payments as a reduction of interest income on loans.

Interest Income – Investments and Other Interest-earning Assets

Interest income on investments increased $593,000 in the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

Interest income increased $770,000 as a result of an increase in average balances from $414.7 million during the three months ended March 31, 2021, to $534.0 million during the three months ended March 31, 2022.

Interest income on investments increased $2.8 million in the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

Interest income increased $2.1 million as a result of an increase in average balances from $460.0 million during the three months ended June 30, 2021, to $741.4 million during the three months ended June 30, 2022.

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 four to ten years.

These purchased securities fit with the Company’s current asset/liability management strategies.

Partially offsetting that increase, interest income decreased $177,000 as a result of lower average interest rates from 2.75% during the three months ended March 31, 2021, to 2.59% during the three month period ended March 31, 2022.

Interest income on other interest-earning assets increased $91,000 in the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

Interest income increased $80,000 as a result of higher average interest rates from 0.10% during the three months ended March 31, 2021, to 0.18% during the three month period ended March 31, 2022.

Interest income increased $11,000 as a result of an increase in average balances from $419.4 million during the three months ended March 31, 2021, to $458.6 million during the three months ended March 31, 2022.

The increase in the average interest rates was due to the increase in the rate

paid on funds held at the Federal Reserve Bank.

This rate was increased in March 2022 in conjunction with the increase in the Federal Funds target interest rate.

Interest income increased $676,000 as a result of higher average interest rates from 2.58% during the three months ended June 30, 2021, to 3.09% during the three month period ended June 30, 2022.

During the three months ended June 30, 2022, the Company also recorded interest income of $812,000 received due to the early repayment of one investment security.

Interest income on investments increased $3.4 million in the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Interest income increased $2.8 million as a result of an increase in average balances from $437.5 million during the six months ended June 30, 2021, to $638.3 million during the six months ended June 30, 2022.

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 four to ten years.

These purchased securities fit with the Company’s current asset/liability management strategies.

In addition, interest income increased $514,000 as a result of higher average interest rates from 2.66% during the six months ended June 30, 2021, to 2.88% during the six month period ended June 30, 2022.

As indicated above, during the six months ended June 30, 2022, the Company also recorded interest income of $812,000 received due to the early repayment of one investment security.

Interest income on other interest-earning assets increased $83,000 in the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

Interest income increased $95,000 as a result of higher average interest rates from 0.10% during the three months ended June 30, 2021, to 0.74% during the three month period ended June 30, 2022.

Partially offsetting that increase, interest income decreased $12,000 as a result of a decrease in average balances from $514.7 million during the three months ended June 30, 2021, to $115.5 million during the three months ended June 30, 2022.

The increase in the average interest rates was due to the increase in the rate paid on funds held at the Federal Reserve Bank.

This rate was increased in March, May and June 2022 in conjunction with the increase in the Federal Funds target interest rate.

Interest income on other interest-earning assets increased $174,000 in the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Interest income increased $221,000 as a result of higher average interest rates from 0.10% during the six months ended June 30, 2021, to 0.29% during the six month period ended June 30, 2022.

Interest income decreased $47,000 as a result of a decrease in average balances from $467.3 million during the six months ended June 30, 2021, to $286.1 million during the six months ended June 30, 2022.

The increase in the average interest rates was due to the increase in the rate paid on funds held at the Federal Reserve Bank.

As noted above, this rate was increased in March, May and June 2022 in conjunction with the increase in the Federal Funds target interest rate.

Total Interest Expense

Total interest expense decreased $3.1 million, or 47.9%, during the three months ended March 31, 2022, when compared with the three months ended March 31, 2021, due to a decrease in interest expense on deposits of $2.0 million, or 48.5% and a decrease in interest expense on subordinated notes of $1.1 million, or 49.8%.

Total interest expense decreased $1.9 million, or 33.0%, during the three months ended June 30, 2022, when compared with the three months ended June 30, 2021, due to a decrease in interest expense on deposits of $1.1 million, or 31.8%, and a decrease in interest expense on subordinated notes of $1.1 million, or 49.5%, partially offset by an increase in interest expense on short-term borrowings of $236,000 and an increase in interest expense on subordinated debentures issued to capital trusts of $46,000, or 40.7%.

Total interest expense decreased $5.0 million, or 40.9%, during the six months ended June 30, 2022, when compared with the six months ended June 30, 2021, due to a decrease in interest expense on deposits of $3.1 million, or 41.0%, and a decrease in interest expense on subordinated notes of $2.2 million, or 49.6%, partially offset by an increase in interest expense on short-term borrowings of $237,000 and an increase in interest expense on subordinated debentures issued to capital trusts of $51,000, or 22.6%.

Interest Expense – Deposits

Interest expense on demand deposits decreased $512,000 due to average rates of interest that decreased from 0.22% in the three months ended March 31, 2021 to 0.13% in the three months ended March 31, 2022.

Interest rates paid on demand deposits were significantly lower in the 2022 period due to significant reductions in the federal funds rate of interest and other market interest rates since 2020.

Partially offsetting this decrease, interest expense on demand deposits increased $95,000, due to an increase in average balances from $2.19 billion during the three months ended March 31, 2021 to $2.38 billion during the three months ended March 31, 2022.

Interest expense on demand deposits decreased $241,000 due to average rates of interest that decreased from 0.18% in the three months ended June 30, 2021 to 0.14% in the three months ended June 30, 2022.

Interest rates paid on demand deposits were lower in the 2022 period due to significant reductions in the federal funds rate of interest and other market interest rates since 2020.

Partially offsetting this decrease, interest expense on demand deposits increased $33,000, due to an increase in average balances from $2.31 billion during the three months ended June 30, 2021 to $2.39 billion during the three months ended June 30, 2022.

The Company experienced increased balances in various types of money market accounts and certain types of NOW accounts.

Interest expense on time deposits decreased $892,000 as a result of a decrease in average rates of interest from 0.94% during the three months ended March 31, 2021, to 0.61% during the three months ended March 31, 2022.

Interest expense on time deposits also decreased $740,000 due to a decrease in average balances of time deposits from $1.31 billion during the three months ended March 31, 2021 to $931.1 million in the three months ended March 31, 2022.

Interest expense on demand deposits decreased $749,000 due to average rates of interest that decreased from 0.20% in the six months ended June 30, 2021 to 0.14% in the six months ended June 30, 2022.

Interest rates paid on demand deposits were lower in the 2022 period due to significant reductions in the federal funds rate of interest and other market interest rates since 2020.

Partially offsetting this decrease, interest expense on demand deposits increased $124,000, due to an increase in average balances from $2.25 billion during the six months ended June 30, 2021 to $2.38 billion during the six months ended June 30, 2022.

The Company experienced increased balances in various types of money market accounts and certain types of NOW accounts.

Interest expense on time deposits decreased $537,000 due to a decrease in average balances of time deposits from $1.21 billion during the three months ended June 30, 2021 to $914.6 million in the three months ended June 30, 2022.

Interest expense on time deposits also decreased $354,000 as a result of a decrease in average rates of interest from 0.80% during the three months ended June 30, 2021, to 0.67% during the three months ended June 30, 2022.

A large portion of the Company’s certificate of deposit portfolio matures within six to twelve 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 throughout 2021 with rates only beginning to increase minimally during the three months ended March 31, 2022 due to increases in the Federal Funds rate.

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 throughout 2021 with rates only beginning to increase minimally during the three months ended June 30, 2022 due to increases in market interest rates.

The decrease in average balances of time deposits was a result of decreases in retail customer time deposits obtained through the banking center network and retail customer time deposits obtained through on-line channels.

On-line channel deposits were actively reduced by the Company during 2021 and 2022 as other deposit sources increased.

Interest expense on time deposits decreased $1.3 million as a result of a decrease in average rates of interest from 0.87% during the six months ended June 30, 2021, to 0.64% during the six months ended June 30, 2022.

Interest expense on time deposits also decreased $1.3 million due to a decrease in average balances of time deposits from $1.26 billion during the six months ended June 30, 2021 to $922.8 million in the six months ended June 30, 2022.

A large portion of the Company’s certificate of deposit portfolio matures within six to twelve 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 throughout 2021 with rates only beginning to increase minimally during the six months ended June 30, 2022 due to increases in market interest rates.

On-line channel deposits were actively reduced by the Company during 2021 and 2022 as other deposit sources increased.

Interest Expense – FHLBank Advances;

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Subordinated Debentures Issued to Capital Trusts and Subordinated Notes

FHLBank advances and overnight borrowings from the FHLBank were not utilized during the three months ended March 31, 2022 and 2021.

Interest expense on repurchase agreements increased $1,000 during the three months ended March 31, 2022 when compared to the three months ended March 31, 2021.

The average rate of interest was 0.03% for both the three months ended March 31, 2022 and the three months ended March 31, 2021.

The average balance of repurchase agreements decreased $16.2 million from $144.5 million in the three months ended March 31, 2022 to $128.3 million in the three months ended March 31, 2022, which was due to changes in customers’ need for this product, which can fluctuate.

Interest expense on short-term borrowings and other interest-bearing liabilities increased $1,000 during the three months ended March 31, 2022 when compared to the three months ended March 31, 2021.

The average rate of interest was 0.08% for the three months ended March 31, 2022, compared to 0.00% for the three months ended March 31, 2021.

The average balance of short-term borrowings and other interest-bearing liabilities increased $1.9 million from $1.7 million in the three months ended March 31, 2021 to $3.6 million in the three months ended March 31, 2022, which was primarily due to cash collateral provided to the Company from one of its derivative counterparties to satisfy collateral pledging requirements.

During the three months ended March 31, 2022, compared to the three months ended March 31, 2021, interest expense on subordinated debentures issued to capital trusts increased $5,000 due to higher average interest rates.

The average interest rate was 1.86% in the three months ended March 31, 2022 compared to 1.78% in the three months ended March 31, 2021.

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 1.92% at March 31, 2022.

FHLBank advances were not utilized during the three and six months ended June 30, 2022 and 2021.

Interest expense on repurchase agreements decreased $2,000 during the three months ended June 30, 2022 when compared to the three months ended June 30, 2021.

The average rate of interest was 0.03% for the three months ended June 30, 2022 compared to 0.02% for the three months ended June 30, 2021.

The average balance of repurchase agreements decreased $6.4 million from $142.0 million in the three months ended June 30, 2022 to $135.5 million in the three months ended June 30, 2022, which was due to changes in customers’ need for this product, which can fluctuate.

Interest expense on repurchase agreements decreased $1,000 during the six months ended June 30, 2022 when compared to the six months ended June 30, 2021.

The average rate of interest was 0.03% for both the six months ended June 30, 2022 and the six months

ended June 30, 2021.

The average balance of repurchase agreements decreased $11.3 million from $143.2 million in the six months ended June 30, 2021 to $131.9 million in the six months ended June 30, 2022.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased $186,000 during the three months ended June 30, 2022 when compared to the three months ended June 30, 2021 due to higher average balances.

The average balance of short-term borrowings and other interest-bearing liabilities increased $71.7 million from $1.6 million in the three months ended June 30, 2021 to $73.3 million in the three months ended June 30, 2022, which is primarily due to changes in the Company’s funding needs and the mix of funding, which can fluctuate.

Most of this increase was due to the utilization of overnight borrowings from the FHLBank.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased $50,000 during the three months ended June 30, 2022 when compared to the three months ended June 30, 2021 due to higher average rates of interest.

The average rate of interest was 1.29% for the three months ended June 30, 2022, compared to -0-% for the three months ended June 30, 2021.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased $158,000 during the six months ended June 30, 2022 when compared to the six months ended June 30, 2021 due to higher average balances.

The average balance of short-term borrowings and other interest-bearing liabilities increased $37.0 million from $1.6 million in the six months ended June 30, 2021 to $38.7 million in the six months ended June 30, 2022, which is primarily due to changes in the Company’s funding needs and the mix of funding, which can fluctuate.

Most of this increase was due to the utilization of overnight borrowings from the FHLBank.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased $79,000 during the six months ended June 30, 2022 when compared to the six months ended June 30, 2021 due to higher average rates of interest.

The average rate of interest was 1.24% for the six months ended June 30, 2022, compared to -0-% for the six months ended June 30, 2021.

During the three months ended June 30, 2022, compared to the three months ended June 30, 2021, interest expense on subordinated debentures issued to capital trusts increased $46,000 due to higher average interest rates.

The average interest rate was 2.47% in the three months ended June 30, 2022 compared to 1.76% in the three months ended June 30, 2021.

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 2.89% at June 30, 2022.

There was no change in the average balance of the subordinated debentures between the 2021 and 2022 periods.

During the six months ended June 30, 2022, compared to the six months ended June 30, 2021, interest expense on subordinated debentures issued to capital trusts increased $51,000 due to higher average interest rates.

The average interest rate was 2.17% in the six months ended June 30, 2022 compared to 1.77% in the six months ended June 30, 2021.

There was no change in the average balance of the subordinated debentures between the 2021 and 2022 periods.

In August 2016, the Company issued $75.0 million of 5.25% fixed-to-floating rate subordinated notes due August 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.

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 June 2020, the Company issued $75.0 million of 5.50% fixed-to-floating rate subordinated notes due June 15, 2030.

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The notes were redeemed for cash by the Company at 100% of their principal amount, plus accrued and unpaid interest.

During the three months ended March 31, 2022, compared to the three months ended March 31, 2021, interest expense on subordinated notes decreased $1.1 million due to lower average balances during the three months ended March 31, 2022 resulting from the redemption of the 5.25% subordinated notes due August 15, 2026.

The average balance of subordinated notes was $74.0 million in the three months ended March 31, 2022 compared to $148.5 million in the three months ended March 31, 2021.

During the three months ended June 30, 2022, compared to the three months ended June 30, 2021, interest expense on subordinated notes decreased $1.1 million due to lower average balances during the three months ended June 30, 2022 resulting from the redemption of the 5.25% subordinated notes due August 15, 2026.

The average balance of subordinated notes was $74.1 million in the three months ended June 30, 2022 compared to $148.7 million in the three months ended June 30, 2021.

Interest expense on subordinated notes increased $32,000 due to slightly higher weighted average interest rates.

The average interest rate was 6.06% in the three months ended March 31, 2022 compared to 6.01% in the three months ended March 31, 2021.

The average interest rate was 5.99% in the three months ended June 30, 2022 compared to 5.90% in the three months ended June 30, 2021.

During the six months ended June 30, 2022, compared to the six months ended June 30, 2021, interest expense on subordinated notes decreased $2.2 million due to lower average balances, for the reasons discussed above.

The average interest rate increased slightly from 5.95% in the six months ended June 30, 2021 to 6.02% in the six months ended June 30, 2022.

Net Interest Income

Net interest income for the three months ended March 31, 2022 decreased $823,000 to $43.3 million compared to $44.1 million for the three months ended March 31, 2021.

Net interest margin was 3.43% in the three months ended March 31, 2022, compared to 3.41% in the three months ended March 31, 2021, an increase of two basis points, or 0.6%.

In the 2021 period compared to the 2022 period, the Company recorded a higher amount of interest income related to net deferred fees on PPP loans.

The Company's overall average interest rate spread increased eight basis points, or 2.5%, from 3.23% during the three months ended March 31, 2021 to 3.31% during the three months ended March 31, 2022.

The increase was due to a 30 basis point decrease in the weighted average rate paid on interest-bearing liabilities, partially offset by a 22 basis point decrease in the weighted average yield on interest-earning assets.

In comparing the two periods, the yield on loans decreased 16 basis points, the yield on investment securities decreased 16 basis points and the yield on other interest-earning assets increased eight basis points.

The rate paid on deposits decreased 22 basis points, the rate paid on subordinated debentures issued to capital trusts increased eight basis points, and the rate paid on subordinated notes increased five basis points.

Net interest income for the three months ended June 30, 2022 increased $4.1 million to $48.8 million compared to $44.7 million for the three months ended June 30, 2021.

Net interest margin was 3.78% in the three months ended June 30, 2022, compared to 3.35% in

the three months ended June 30, 2021, an increase of 43 basis points, or 12.8%.

The Company experienced increases in interest income on investment securities and decreases in interest expense on deposits and subordinated notes.

Interest income on loans decreased as the Company recorded a higher amount of interest income related to net deferred fees on PPP loans in the 2021 period.

Net interest income for the six months ended June 30, 2022 increased $3.3 million to $92.1 million compared to $88.8 million for the six months ended June 30, 2021.

Net interest margin was 3.61% in the six months ended June 30, 2022, compared to 3.38% in the six months ended June 30, 2021, an increase of 23 basis points, or 6.8%.

The Company experienced increases in interest income on investment securities and decreases in interest expense on deposits and subordinated notes.

Interest income on loans decreased as the Company recorded a higher amount of interest income related to net deferred fees on PPP loans in the 2021 period.

The Company’s overall average interest rate spread increased 47 basis points, or 14.8%, from 3.18% during the three months ended June 30, 2021 to 3.65% during the three months ended June 30, 2022.

The increase was due to a 30 basis point increase in the weighted average yield on interest-earning assets and a 17 basis point decrease in the weighted average rate paid on interest-bearing liabilities.

In comparing the two periods, the yield on loans increased one basis point, the yield on investment securities increased 51 basis points and the yield on other interest-earning assets increased 64 basis points.

The rate paid on deposits decreased ten basis points, the rate paid on subordinated debentures issued to capital trusts increased 71 basis points, and the rate paid on subordinated notes increased nine basis points.

In addition, the Company had outstanding overnight borrowings in the 2022 period, which had an average interest rate increase of 129 basis points.

The Company’s overall average interest rate spread increased 28 basis points, or 8.8%, from 3.20% during the six months ended June 30, 2021 to 3.48% during the six months ended June 30, 2022.

The increase was due to a 24 basis point decrease in the weighted average rate paid on interest-bearing liabilities and a four basis point increase in the weighted average yield on interest-earning assets.

In comparing the two periods, the yield on loans decreased seven basis points, the yield on investment securities increased 22 basis points and the yield on other interest-earning assets increased 19 basis points.

The rate paid on deposits decreased 16 basis points, the rate paid on subordinated debentures issued to capital trusts increased 40 basis points, and the rate paid on subordinated notes increased seven basis points.

In addition, the Company had outstanding overnight borrowings in the 2022 period, which had an average interest rate increase of 124 basis points.

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.

6 unchanged sentences

Historical credit loss experience provides the basis for the estimation of expected credit losses.

Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in the national unemployment rate, commercial real estate price index, housing price index and national retail sales index.

Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in economic conditions, such as changes in the national unemployment rate, commercial real estate price index, housing price index, consumer sentiment, gross domestic product (GDP) and construction spending.

Worsening economic conditions from the COVID-19 pandemic or similar events, higher inflation or interest rates, or other factors may lead to increased losses in the portfolio and/or requirements for an increase in provision expense.

2 unchanged sentences

Management determines which loans are collateral-dependent, evaluates risk of loss and makes additional provisions to expense, if necessary, to maintain the allowance at a satisfactory level.

During the three months ended March 31, 2022, the Company did not record a provision expense on its portfolio of outstanding loans, compared to a $300,000 provision expense recorded for the three months ended March 31, 2021.

In the three months ended March 31, 2022 and 2021, the Company experienced net recoveries of $43,000 and $64,000, respectively.

The negative provision for losses on

unfunded commitments for the three months ended March 31, 2022 was $193,000 compared to a negative provision of $674,000 for the three months ended March 31, 2021.

The level and mix of unfunded commitments resulted in a decrease in the required reserve for such potential losses.

General market conditions and unique circumstances related to specific industries and individual 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.

During the three months ended June 30, 2022, the Company did not record a provision expense on its portfolio of outstanding loans, compared to a negative provision expense of $1.0 million recorded for the three months ended June 30, 2021.

During the six months ended June 30, 2022, the Company did not record a provision expense on its portfolio of outstanding loans, compared to a negative

provision expense of $700,000 recorded for the six months ended June 30, 2021.

The Company considers the current allowance for credit losses adequate to cover losses inherent in the Bank’s loan portfolio at June 30, 2022, based on recent reviews of the Bank’s loan portfolio and current economic conditions.

The negative provision for credit losses in the 2021 periods reflected positive trends in asset quality metrics, combined with an improved economic forecast.

The positive trends in asset quality metrics continued in the 2022 periods.

In the three months ended June 30, 2022 and 2021, the Company experienced net recoveries of $261,000 and net charge offs of $100,000, respectively.

In the six months ended June 30, 2022 and 2021, the Company experienced net recoveries of $304,000 and net charge offs of $36,000, respectively.

The provision for losses on unfunded commitments for the three months ended June 30, 2022 was $2.2 million compared to a negative provision of $307,000 for the three months ended June 30, 2021.

The provision for losses on unfunded commitments for the six months ended June 30, 2022 was $2.0 million compared to a negative provision of $981,000 for the six months ended June 30, 2021.

The level and mix of unfunded commitments resulted in an increase in the required reserve for such potential losses.

General market conditions and unique circumstances related to specific industries and individual projects contribute to the level of provisions and charge-offs.

All FDIC-assisted 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 legacy Great 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 credit losses as a percentage of total loans was 1.46% and 1.49% at March 31, 2022 and December 31, 2021, respectively.

Management considers the allowance for credit losses adequate to cover losses inherent in the Bank’s loan portfolio at March 31, 2022, based on recent reviews of the Bank’s loan portfolio and current economic conditions.

If challenging economic conditions were to last longer than anticipated or deteriorate further or management’s assessment of the loan portfolio were to change, additional loan loss provisions could be required, thereby adversely affecting the Company’s future results of operations and financial condition.

Techniques used in determining risk of loss are similar to those used to determine the risk of loss for the legacy Great Southern Bank portfolio, with primary focus being placed on those loan pools which exhibit higher risk characteristics.

Review of the acquired loan portfolio includes review of financial information, collateral valuations and customer interaction to determine if additional reserves are warranted.

The Bank’s allowance for credit losses as a percentage of total loans was 1.38% and 1.49% at June 30, 2022 and December 31, 2021, respectively.

Management considers the allowance for credit losses adequate to cover losses inherent in the Bank’s loan portfolio at June 30, 2022, based on recent reviews of the Bank’s loan portfolio and current economic conditions.

If challenging economic conditions were to continue or deteriorate, or if management’s assessment of the loan portfolio were to change, additional loan loss provisions could be required, thereby adversely affecting the Company’s future results of operations and financial condition.

Non-performing Assets

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.

At March 31, 2022, non-performing assets were $5.2 million, a decrease of $821,000 from $6.0 million at December 31, 2021.

Non-performing assets as a percentage of total assets were 0.10% at March 31, 2022, compared to 0.11% at December 31, 2021.

Compared to December 31, 2021, non-performing loans decreased $454,000, to $5.0 million at March 31, 2022, and foreclosed and repossessed assets decreased $367,000, to $221,000 at March 31, 2022.

Non-performing one- to four-family residential loans comprised $2.0 million, or 40.3%, of the total non-performing loans at March 31, 2022, a decrease of $212,000 from December 31, 2021.

Non-performing commercial real estate loans comprised $1.8 million, or 35.7%, of the total non-performing loans at March 31, 2022, a decrease of $233,000 from December 31, 2021.

Non-performing consumer loans comprised $724,000, or 14.6%, of the total non-performing loans at March 31, 2022, a decrease of $9,000 from December 31, 2021.

Non-performing construction and land development loans comprised $468,000, or 9.4%, of the total non-performing loans at March 31, 2022, unchanged from December 31, 2021.

At June 30, 2022, non-performing assets were $4.3 million, a decrease of $1.7 million from $6.0 million at December 31, 2021.

Non-performing assets as a percentage of total assets were 0.08% at June 30, 2022, compared to 0.11% at December 31, 2021.

Compared to December 31, 2021, non-performing loans decreased $1.2 million, to $4.2 million at June 30, 2022, and foreclosed and repossessed assets decreased $544,000, to $44,000 at June 30, 2022.

Non-performing commercial real estate loans comprised $1.8 million, or 43.4%, of the total non-performing loans at June 30, 2022, a decrease of $174,000 from December 31, 2021.

Non-performing one- to four-family residential loans comprised $1.5 million, or 35.6%, of the total non-performing loans at June 30, 2022, a decrease of $714,000 from December 31, 2021.

Non-performing construction and land development loans comprised $468,000, or 11.1%, of the total non-performing loans at June 30, 2022, unchanged from December 31, 2021.

Non-performing consumer loans comprised $418,000, or 9.9%, of the total non-performing loans at June 30, 2022, a decrease of $315,000 from December 31, 2021.

Non-performing Loans.

Activity in the non-performing loans category during the three months ended March 31, 2022 was as follows:

Activity in the non-performing loans category during the six months ended June 30, 2022 was as follows:

Repossessions

10 unchanged sentences

FDIC-assisted acquired loans included above

At March 31, 2022, the non-performing one- to four-family residential category included 34 loans, none of which were added during the three months ended March 31, 2022.

At June 30, 2022, the non-performing one- to four-family residential category included 30 loans, one of which was added during the six months ended June 30, 2022.

The largest relationship in the category totaled $316,000, or 21.0% of the total category.

The non-performing commercial real estate category includes two loans, neither of which were added during the three months ended March 31, 2022.

The largest relationship in the category, which totaled $1.5 million, or 86.1% of the total category, was transferred from potential problems during the fourth quarter of 2021, and is collateralized by a mixed use commercial retail building.

The non-performing commercial real estate category includes three loans, one of which was added during the six months ended June 30, 2022.

The largest relationship in the category, which totaled $1.6 million, or 85.4% of the total category, was transferred from potential problem loans during the fourth quarter of 2021, and is collateralized by a mixed-use commercial retail building.

The non-performing land development category consisted of one loan added during the first quarter of 2021, which totaled $468,000 and is collateralized by unimproved zoned vacant ground in southern Illinois.

The non-performing consumer category included 30 loans, four of which were added during the three months ended March 31, 2022.

The non-performing consumer category included 23 loans, eight of which were added during the six months ended June 30, 2022.

Potential Problem Loans.

Compared to December 31, 2021, potential problem loans decreased $117,000, or 5.9%, to $1.9 million at March 31, 2022.

Compared to December 31, 2021, potential problem loans increased $172,000, or 8.7%, to $2.2 million at June 30, 2022.

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.

Activity in the potential problem loans categories during the three months ended March 31, 2022, was as follows:

Activity in the potential problem loans categories during the six months ended June 30, 2022, was as follows:

Repossessions

10 unchanged sentences

FDIC-assisted acquired loans included above

At March 31, 2022, the one- to four-family residential category of potential problem loans included 25 loans, one of which was added during the three months ended March 31, 2022.

The largest relationship in this category totaled $168,000, or 12.2% of the total

At June 30, 2022, the one- to four-family residential category of potential problem loans included 27 loans, four of which were added during the six months ended June 30, 2022.

The largest relationship in this category totaled $165,000, or 10.1% of the total category.

The commercial real estate category of potential problem loans included one loan, which was added in a previous period.

The consumer category of potential problem loans included 23 loans, four of which were added during the three months ended March 31, 2022.

The consumer category of potential problem loans included 32 loans, 17 of which were added during the six months ended June 30, 2022.

Other Real Estate Owned and Repossessions.

Of the total $1.7 million of other real estate owned and repossessions at March 31, 2022, $1.5 million represents properties which were not acquired through foreclosure.

Activity in other real estate owned and repossessions during the three months ended March 31, 2022, was as follows:

Of the total $329,000 of other real estate owned and repossessions at June 30, 2022, $285,000 represents properties which were not acquired through foreclosure.

Activity in foreclosed assets and repossessions during the six months ended June 30, 2022, was as follows:

(In Thousands)

9 unchanged sentences

FDIC-assisted acquired assets included above

At March 31, 2022, the one- to four-family residential category of foreclosed assets consisted of two properties (both of which were FDIC-assisted acquired assets).

The land development category of foreclosed assets previously consisted of one property in central Iowa (this was an FDIC-assisted acquired asset) which was sold during the three months ended March 31, 2022.

The one remaining property in the land development category of foreclosed assets was sold during the three months ended March 31, 2022.

The two remaining properties in the one- to four-family residential category of foreclosed assets were sold during the three months ended June 30, 2022.

The additions and sales in the consumer category were due to the volume of repossessions of automobiles, which generally are subject to a shorter repossession process.

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The Company reviews the credit quality of its loan portfolio using an internal grading system that classifies loans as “Satisfactory,” “Watch,” “Special Mention,” “Substandard” and “Doubtful.” Loans classified as “Watch” are being monitored because of indications of potential weaknesses or deficiencies that may require future classification as special mention or substandard.

In the three months ended March 31, 2022, loans classified as “Watch” increased $33,000, from $30.7 million at December 31, 2021 to $30.8 million at March 31, 2022.

In the six months ended June 30, 2022, loans classified as “Watch” decreased $10.6 million, from $30.7 million at December 31, 2021 to $20.1 million at June 30, 2022 primarily due to loans being upgraded out of the “Watch” category.

See Note 6 for further discussion of the Company’s loan grading system.

Non-interest Income

For the three months ended March 31, 2022, non-interest income decreased $560,000 to $9.2 million when compared to the three months ended March 31, 2021, primarily as a result of the following items:

For the three months ended June 30, 2022, non-interest income decreased $266,000 to $9.3 million when compared to the three months ended June 30, 2021, primarily as a result of the following items:

Net gains on loan sales :

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These loan originations increased substantially when market interest rates decreased to historically low levels in 2020 and 2021.

As a result of the significant volume of refinance activity in 2020 and 2021, and as market interest rates have moved higher in the first quarter of 2022, mortgage refinance volume has decreased and loan originations and related gains on sales of these loans have decreased substantially.

As a result of the significant volume of refinance activity in 2020 and 2021, and as market interest rates have moved higher in the second quarter of 2022, mortgage refinance volume has decreased and fixed rate loan originations and related gains on sales of these loans have decreased substantially.

Gain (loss) on derivative interest rate products :

In the 2022 period, the Company recognized a gain of $145,000 on the change in fair value of its back-to-back interest rate swaps related to commercial loans.

In the 2021 period, the Company recognized a loss of $179,000 on the change in fair value of its back-to-back interest rate swaps related to commercial loans.

Generally, as market interest rates increase, this creates a net increase in the fair value of these instruments.

This is a non-cash item as there was no required settlement of this amount between the Company and its swap counterparties.

Other income :

Other income increased $1.0 million compared to the prior year period.

In the 2022 period, a gain of $1.1 million was recognized on sales of fixed assets.

For the six months ended June 30, 2022, non-interest income decreased $826,000 to $18.5 million when compared to the six months ended June 30, 2021, primarily as a result of the following items:

Net gains on loan sales :

Net gains on loan sales decreased $3.7 million compared to the prior year period.

The decrease was due to a decrease in originations of fixed-rate single-family mortgage loans during the 2022 period compared to the 2021 period for the same reasons noted above.

Point-of-sale and ATM fees :

Point-of-sale and ATM fees increased $739,000 compared to the prior year period.

This increase was almost entirely due to increased customer debit card transactions in the 2022 period compared to the 2021 period.

In the latter half of 2021 and in the three months ended March 31, 2022, debit card usage by customers rebounded and was back to normal levels, and in many cases, increased levels of activity.

This increase was almost entirely due to increased customer debit card transactions in the 2022 period compared to the 2021 first quarter.

In the latter half of 2021 and in the first half of 2022, debit card usage by customers rebounded and was back to normal levels, and in many cases, increased levels of activity.

Overdraft and insufficient funds fees :

Overdraft and insufficient funds fees increased $781,000 compared to the prior year period.

It appears that consumers have continued to spend significantly in 2022, but some may have lower account balances as prices for goods and services have increased and government stimulus payments received by consumers in 2020 and 2021 have now been exhausted.

Other income :

Other income increased $255,000 compared to the prior year period.

In the 2022 period, the Company recorded a one-time bonus of $500,000 from its card processor as a result of achieving certain benchmarks related to debit card activity.

Other income increased $1.3 million compared to the prior year period.

In the 2022 period, a gain of $1.1 million was recognized on sales of fixed assets.

Also in the 2022 period, the Company recorded a one-time bonus of $500,000 from its card processor as a result of achieving certain benchmarks related to debit card activity.

Non-interest Expense

For the three months ended March 31, 2022, non-interest expense increased $947,000 to $31.3 million when compared to the three months ended March 31, 2021, primarily as a result of the following item:

For the three months ended June 30, 2022, non-interest expense increased $2.8 million to $33.0 million when compared to the three months ended June 30, 2021, primarily as a result of the following item:

Salaries and employee benefits :

Salaries and employee benefits increased $960,000 from the prior year period.

A significant amount of this increase related to normal annual merit increases in various lending and operations areas.

Salaries and employee benefits increased $1.5 million from the prior year period.

Most significantly contributing to the increase, in June 2022, the Company paid a special cash bonus to all employees totaling $1.1 million in response to the rapid and significant increases in prices for many goods and services.

A portion of this increase also related to normal annual merit increases in various lending and operations areas.

In 2022, many of these increases were larger than in previous years due to the current employment environment.

In addition, the new Phoenix loan production office was opened in the first quarter of 2022.

Lastly, certain loan origination compensation costs were deferred under accounting standards in the 2021 period that related primarily to the origination of PPP loans;

In addition, the new Phoenix loan office was opened in the first quarter of 2022 and the new Charlotte, North Carolina loan office was opened in the second quarter of 2022.

Lastly, certain loan origination compensation costs were deferred under accounting standards that related primarily to the origination of PPP loans;

therefore, more costs were deferred in the 2021 period versus the 2022 period.

Other expense categories experienced smaller changes compared to the prior year period, including a $186,000 increase in travel and entertainment expenses as there was very little in-person activity in the 2021 period due to COVID-19 restrictions;

a $120,000 increase in professional fees related to the swap transaction completed in 2022;

a $131,000 decrease in amortization of deposit intangibles due to the completion of the amortization for the 2014 acquisitions;

and a $105,000 decrease in expenses on other real estate owned and repossessions due to fewer foreclosed properties and repossessed autos in the 2022 period.

The Company’s efficiency ratio for the three months ended March 31, 2022, was 59.62% compared to 56.33% for the same period in 2021.

In the three-month period ended March 31, 2022, the higher efficiency ratio was primarily due to an increase in non-interest expense.

The Company’s ratio of non-interest expense to average assets was 2.34% and 2.22% for the three months ended March 31, 2022 and 2021, respectively.

Average assets for the three months ended March 31, 2022, decreased $121.8 million, or 2.2%, from the three months ended March 31, 2021, primarily due to a decrease in average net loans receivable, partially offset by increases in average investment securities and interest bearing cash equivalents.

Legal, Audit and Other Professional Fees :

Legal, audit and other professional fees increased $665,000 from the prior year period, to $1.2 million.

In the 2022 period, the Company expensed a total of $580,000 related to training and implementation costs for the upcoming core systems conversion and professional fees to consultants engaged to support the Company’s transition of core and ancillary software and information technology systems.

For the six months ended June 30, 2022, non-interest expense increased $3.8 million to $64.3 million when compared to the six months ended June 30, 2021, primarily as a result of the following item:

Salaries and employee benefits :

Salaries and employee benefits increased $2.5 million from the prior year period, for the same reasons noted above.

Legal, Audit and Other Professional Fees :

Legal, audit and other professional fees increased $823,000 from the prior year period, to $2.0 million, for the same reason noted above.

The Company’s efficiency ratio for the three months ended June 30, 2022, was 56.76% compared to 55.63% for the same period in 2021.

The Company’s efficiency ratio for the six months ended June 30, 2022, was 58.12% compared to 55.98% for the same period in 2021.

In the three- and six-month periods ended June 30, 2022, the higher efficiency ratio was primarily due to an increase in non-interest expense, for the reasons noted above.

The Company’s ratio of non-interest expense to average assets was 2.43% and 2.16% for the three months ended June 30, 2022 and 2021, respectively.

The Company’s ratio of non-interest expense to average assets was 2.39% and 2.19% for the six months ended June 30, 2022 and 2021, respectively.

Average assets for the three months ended June 30, 2022, decreased $153.2 million, or 2.7%, from the three months ended June 30, 2021, primarily due to decreases in interest-bearing cash equivalents and net loans receivable, partially offset by an increase in investment securities.

Average assets for the six months ended June 30, 2022, decreased $137.6 million, or 2.5%, from the six months ended June 30, 2021, primarily due to decreases in interest-bearing cash equivalents and net loans receivable, partially offset by an increase in investment securities.

Provision for Income Taxes

For the three months ended March 31, 2022 and 2021, the Company's effective tax rate was 20.5% and 21.0%, respectively.

These effective rates were at or below 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.

For the three months ended June 30, 2022 and 2021, the Company’s effective tax rate was 20.5% and 20.8%, respectively.

For the six months ended June 30, 2022 and 2021, the Company’s effective tax rate was 20.5% and 20.9%, respectively.

These effective rates were at or below the statutory federal tax rate of 21%, due primarily to the utilization of certain investment tax credits and the Company’s 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, the level of tax-exempt investments and loans, the amount of taxable income in various state jurisdictions and the overall level of pre-tax income.

State tax expense estimates evolved throughout 2021 as taxable income and apportionment between states were analyzed.

State tax expense estimates continually evolve as taxable income and apportionment between states is analyzed.

The Company’s effective income tax rate is currently generally expected to remain near the statutory federal tax rate due primarily to the factors noted above.

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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 $1.7 million and $2.5 million for the three months ended March 31, 2022 and 2021, respectively.

Interest income on loans also includes the amortization of net loan fees which were deferred in accordance with accounting standards.

Net fees included in interest income were $1.3 million and $2.5 million for the three months ended June 30, 2022 and 2021, respectively.

Net fees included in interest income were $3.1 million and $5.0 million for the six months ended June 30, 2022 and 2021, respectively.

Tax-exempt income was not calculated on a tax equivalent basis.

2 unchanged sentences

Three Months Ended

March 31, 2022

March 31, 2021

June 30, 2022

June 30, 2021

(Dollars in Thousands)

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* 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 $37.2 million and $45.2 million for the three months ended March 31, 2022 and 2021, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $16.9 million and $18.7 million for the three months ended March 31, 2022 and 2021, respectively.

income on tax-exempt assets included in this table was $459,000 and $419,000 for the three months ended March 31, 2022 and 2021, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $452,000 and $403,000 for the three months ended March 31, 2022 and 2021, respectively.

(1) Of the total average balances of investment securities, average tax-exempt investment securities were $53.3 million and $40.9 million for the three months ended June 30, 2022 and 2021, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $15.8 million and $17.9 million for the three months ended June 30, 2022 and 2021, respectively.

Interest income on tax-exempt assets included in this table was $394,000 and $428,000 for the three months ended June 30, 2022 and 2021, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $386,000 and $419,000 for the three months ended June 30, 2022 and 2021, respectively.

Six Months Ended

June 30, 2022

June 30, 2021

(Dollars in Thousands)

Interest-earning assets:

Loans receivable:

One- to four-family residential

Other residential

Commercial real estate

Commercial business

Industrial revenue bonds(1)

Total loans receivable

Investment securities(1)

Interest-earning deposits in other banks

Total interest-earning assets

Non-interest-earning assets:

Cash and cash equivalents

Other non-earning assets

Interest-bearing liabilities:

Interest-bearing demand and savings

Time deposits

Total deposits

Securities sold under reverse repurchase agreements

Short-term borrowings, overnight FHLBank borrowings and other interest-bearing liabilities

Subordinated debentures issued to capital trusts

Subordinated notes

Total interest-bearing liabilities

Non-interest-bearing liabilities:

Demand deposits

Other liabilities

Total liabilities

Stockholders’ equity

Total liabilities and stockholders’ equity

Net interest income:

Interest rate spread

Net interest margin*

Average interest-earning assets to average interest-bearing liabilities

* 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 $45.3 million and $43.0 million for the six months ended June 30, 2022 and 2021, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $16.3 million and $18.3 million for the six months ended June 30, 2022 and 2021, respectively.

Interest income on tax-exempt assets included in this table was $854,000 and $846,000 for the six months ended June 30, 2022 and 2021, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $838,000 and $822,000 for the six months ended June 30, 2022 and 2021, respectively.

Rate/Volume Analysis

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Tax-exempt income was not calculated on a tax equivalent basis.

Three Months Ended March 31,

Three Months Ended June 30,

Increase (Decrease)

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Net interest income

Six Months Ended June 30,

Increase (Decrease)

(Dollars in Thousands)

Interest-earning assets:

Loans receivable

Investment securities

Interest-earning deposits in other banks

Total interest-earning assets

Interest-bearing liabilities:

Demand deposits

Time deposits

Total deposits

Securities sold under reverse repurchase agreements

Short-term borrowings, overnight FHLBank borrowings and other interest-bearing liabilities

Subordinated debentures issued to capital trust

Subordinated notes

Total interest-bearing liabilities

Net interest income

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 withdrawals, and the day-to-day operations of the Company.

obligations include the credit needs of customers, funding deposit 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.

31, 2022, the Company had commitments of approximately $271.1 million to fund loan originations, $1.55 billion of unused lines of credit and unadvanced loans, and $11.9 million of outstanding letters of credit.

At June 30, 2022, the Company had commitments of approximately $173.4 million to fund loan originations, $1.82 billion of unused lines of credit and unadvanced loans, and $13.8 million of outstanding letters of credit.

Loan commitments and the unfunded portion of loans at the dates indicated were as follows (In Thousands):

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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 March 31, 2022 and December 31, 2021, the Company had these available secured lines and on-balance sheet liquidity:

March 31, 2022

At June 30, 2022 and December 31, 2021, the Company had these available secured lines and on-balance sheet liquidity:

June 30, 2022

December 31, 2021

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Unpledged securities – Held-to-maturity

196.0 million

Statements of Cash Flows.

During the three months ended March 31, 2022 and 2021, the Company had positive cash flows from operating activities and negative cash flows from investing activities.

The Company had negative cash flows from financing activities during the three months ended March 31, 2022 and positive cash flows from financing activities during the three months ended March 31, 2021.

During the six months ended June 30, 2022 and 2021, the Company had positive cash flows from operating activities and positive cash flows from financing activities.

The Company had negative cash flows from investing activities during the six months ended June 30, 2022 and positive cash flows from investing activities during the six months ended June 30, 2021.

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 credit 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 $31.4 million and $24.5 million during the three months ended March 31, 2022 and 2021, respectively.

During the three months ended March 31, 2022 and 2021, investing activities used cash of $318.4 million and $55.9 million, respectively.

Operating activities provided cash flows of $36.8 million and $54.8 million during the six months ended June 30, 2022 and 2021, respectively.

During the six months ended June 30, 2022 and 2021, investing activities used cash of $647.2 million and provided cash of $33.5 million, respectively.

Investing activities in the 2022 period used cash primarily due to the purchase of investment securities, the purchases of loans and the net origination of loans, partially offset by payments received on investment securities.

Investing activities in the 2021 period used cash primarily due to the purchase of investment securities and the purchases of loans, partially offset by payments received on investment securities and the net repayments of loans.

Investing activities in the 2021 period provided cash primarily due to the payments received on investment securities and the net repayments of loans, partially offset by the purchase of investment securities and the purchases of loans.

Changes in cash flows from financing activities during the periods covered by the Statements of Cash Flows were due to changes in deposits after interest credited and changes in short-term borrowings, as well as advances from borrowers for taxes and insurance, dividend payments to stockholders, repurchases of the Company’s common stock and the exercise of common stock options.

Financing activities used cash of $77.2 million during the three months ended March 31, 2022 and provided cash of $80.2 million during the three months ended March 31, 2021.

In the 2022 three-month period, financing activities used cash primarily as a result of decreases in time deposits, dividends paid to stockholders and the repurchase of the Company’s common stock, partially offset by net increases in short-term borrowings.

In the 2021 three-month period, financing activities provided cash primarily as a result of net increases in checking account balances, partially offset by decreases in time deposits, decreases in short-term borrowings, dividends paid to stockholders and the purchase of the Company’s common stock.

Financing activities provided cash of $88.9 million and $29.8 million during the six months ended June 30, 2022 and 2021, respectively.

In the 2022 six-month period, financing activities provided cash primarily as a result of net increases in short-term borrowings and increases in time deposits, partially offset by decreases in checking and savings deposits, the repurchase of the Company’s common stock and dividends paid to stockholders.

In the 2021 six-month period, financing activities provided cash primarily as a result of net increases in checking and savings account balances, partially offset by decreases in time deposits, decreases in short-term borrowings, dividends paid to stockholders and the purchase of the Company’s common stock.

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.

At March 31, 2022, the Company's total stockholders' equity and common stockholders’ equity were each $582.6 million, or 10.8% of total assets, equivalent to a book value of $45.65 per common share.

At June 30, 2022, the Company’s total stockholders’ equity and common stockholders’ equity were each $549.6 million, or 9.9% of total assets, equivalent to a book value of $44.53 per common share.

As of December 31, 2021, total stockholders’ equity and common stockholders’ equity were each $616.8 million, or 11.3% of total assets, equivalent to a book value of $46.98 per common share.

At March 31, 2022, the Company’s tangible common equity to tangible assets ratio was 10.7%, compared to 11.2% at December 31, 2021 (See Non-GAAP Financial Measures below).

Included in stockholders’ equity at March 31, 2022 and December 31, 2021, were unrealized gains (losses) (net of taxes) on the Company’s available-for-sale investment securities totaling $(11.1 million) and $9.1 million, respectively.

At June 30, 2022, the Company’s tangible common equity to tangible assets ratio was 9.7%, compared to 11.2% at December 31, 2021 (See Non-GAAP Financial Measures below).

Included in stockholders’ equity at June 30, 2022 and December 31, 2021, were unrealized gains (losses) (net of taxes) on the Company’s available-for-sale investment securities totaling $(28.4 million) and $9.1 million, respectively.

This decrease in unrealized gains primarily resulted from rising market interest rates, which decreased the fair value of investment securities.

Also included in stockholders’ equity at March 31, 2022, were unrealized gains (net of taxes) on the Company’s held-to-maturity investment securities totaling $759,000.

Also included in stockholders’ equity at June 30, 2022, were unrealized gains (net of taxes) on the Company’s held-to-maturity investment securities totaling $249,000.

Approximately $227 million of investment securities which were previously included in available-for-sale were transferred to held-to-maturity during the first quarter of 2022.

In addition, included in stockholders’ equity at March 31, 2022, were realized gains (net of taxes) on the Company’s terminated cash flow hedge (interest rate swap), totaling $22.1 million.

In addition, included in stockholders’ equity at June 30, 2022, were realized gains (net of taxes) on the Company’s terminated cash flow hedge (interest rate swap), totaling $20.5 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 in October 2025.

At March 31, 2022, the remaining pre-tax amount to be recorded in interest income was $28.6 million.

At June 30, 2022, the remaining pre-tax amount to be recorded in interest income was $26.6 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).

Also included in stockholders’ equity at March 31, 2022, was an unrealized loss (net of taxes) on the Company’s outstanding cash flow hedge (interest rate swap) totaling $3.1 million.

Also included in stockholders’ equity at June 30, 2022, was an unrealized loss (net of taxes) on the Company’s outstanding cash flow hedge (interest rate swap) totaling $5.7 million.

Anticipated higher market interest rates have caused the fair value of this interest rate swap to decrease.

As noted above, total stockholders’ equity decreased $67.2 million, from $616.8 million at December 31, 2021 to $549.6 million at June 30, 2022.

Stockholders’ equity also decreased due to repurchases of the Company’s common stock totaling $50.4 million and dividends declared on common stock of $9.5 million.

The Company recorded net income of $35.2 million for the six months ended June 30, 2022.

In addition, stockholders’ equity increased $3.7 million due to stock option exercises.

Banks are required to maintain minimum risk-based capital ratios.

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Under current guidelines, which became effective January 1, 2015, 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%.

On March 31, 2022, the Bank's common equity Tier 1 capital ratio was 13.3%, its Tier 1 capital ratio was 13.3%, its total capital ratio was 14.6% and its Tier 1 leverage ratio was 12.0%.

As a result, as of March 31, 2022, the Bank was well capitalized, with capital ratios in excess of those required to qualify as such.

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%.

On June 30, 2022, the Bank’s common equity Tier 1 capital ratio was 12.2%, its Tier 1 capital ratio was 12.2%, its total capital ratio was 13.4% and its Tier 1 leverage ratio was 11.7%.

As a result, as of June 30, 2022, the Bank was well capitalized, with capital ratios in excess of those required to qualify as such.

On December 31, 2021, the Bank’s common equity Tier 1 capital ratio was 14.1%, its Tier 1 capital ratio was 14.1%, its total capital ratio was 15.4% and its Tier 1 leverage ratio was 11.9%.

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The FRB has established capital regulations for bank holding companies that generally parallel the capital regulations for banks.

On March 31, 2022, 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 15.3% and its Tier 1 leverage ratio was 11.2%.

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 of March 31, 2022, the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such.

On December 31, 2021, the Company's common equity Tier 1 capital ratio was 12.9%, its Tier 1 capital ratio was 13.4%, its total capital ratio was 16.3% and its

Tier 1 leverage ratio was 11.3%.

On June 30, 2022, the Company’s common equity Tier 1 capital ratio was 10.8%, its Tier 1 capital ratio was 11.3%, its total capital ratio was 13.9% and its Tier 1 leverage ratio was 10.7%.

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 of June 30, 2022, the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such.

On December 31, 2021, the Company’s common equity Tier 1 capital ratio was 12.9%, its Tier 1 capital ratio was 13.4%, its total capital ratio was 16.3% and its Tier 1 leverage ratio was 11.3%.

As of December 31, 2021, the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such.

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.

At March 31, 2022, the Company and the Bank both had additional common equity Tier 1 capital in excess of the buffer amount.

At June 30, 2022, the Company and the Bank both had additional common equity Tier 1 capital in excess of the buffer amount.

On August 15, 2021, the Company completed the redemption, at par, of all $75.0 million aggregate principal amount of its 5.25% subordinated notes due August 15, 2026.

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These subordinated notes were included as capital in the Company’s calculation of its total capital ratio.

During the three months ended March 31, 2022, the Company declared a common stock cash dividend of $0.36 per share, or 28% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.36 per share (which was declared in December 2021).

During the three months ended March 31, 2021, the Company declared a common stock cash dividend of $0.34 per share, or 25% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.34 per share (which was declared in December 2020).

During the three months ended June 30, 2022, the Company declared a common stock cash dividend of $0.40 per share, or 28% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.36 per share (which was declared in March 2022).

During the three months ended June 30, 2021, the Company declared a common stock cash dividend of $0.34 per share, or 23% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.34 per share (which was declared in March 2021).

During the six months ended June 30, 2022, the Company declared common stock cash dividends totaling $0.76 per share, or 28% of net income per diluted common share for that six month period, and paid common stock cash dividends of $0.70 per share.

During the six months ended June 30, 2021, the Company declared common stock cash dividends of $0.68 per share, or 24% of net income per diluted common share for that six month period, and paid common stock cash dividends of $0.68 per share.

The Board of Directors meets regularly to consider the level and the timing of dividend payments.

The $0.36 per share dividend declared but unpaid as of March 31, 2022, was paid to stockholders in April 2022.

The $0.40 per share dividend declared but unpaid as of June 30, 2022, was paid to stockholders in July 2022.

Common Stock Repurchases and Issuances .

The Company has been in various buy-back programs since May 1990.

During the three months ended March 31, 2022, the Company repurchased 419,215 shares of its common stock at an average price of $60.40 per share and issued 51,694 shares of common stock at an average price of $47.49 per share to cover stock option exercises.

During the three months ended March 31, 2021, the Company repurchased 74,865 shares of its common stock at an average price of $50.50 per share and issued 15,904 shares of common stock at an average price of $39.09 per share to cover stock option exercises.

During the three months ended June 30, 2022, the Company repurchased 430,100 shares of its common stock at an average price of $58.27 per share and issued 12,577 shares of common stock at an average price of $40.74 per share to cover stock option exercises.

During the three months ended June 30, 2021, the Company repurchased 67,514 shares of its common stock at an average price of $54.50 per share and issued 33,227 shares of stock at an average price of $44.36 per share to cover stock option exercises.

During the six months ended June 30, 2022, the Company repurchased 849,315 shares of its common stock at an average price of $59.32 per share and issued 64,271 shares of common stock at an average price of $46.17 per share to cover stock option exercises.

During the six months ended June 30, 2021, the Company repurchased 142,379 shares of its common stock at an average price of $52.39 per share and issued 49,131 shares of stock at an average price of $42.66 per share to cover stock option exercises.

On January 19, 2022, the Company’s Board of Directors authorized management to purchase up to one million shares of the Company’s outstanding common stock, under a program of open market purchases or privately negotiated transactions.

This program does not have an expiration date.

The authorization of this program became effective upon completion of the previous repurchase program authorized in October 2020.

As of May 3, 2022, a total of approximately 700,000 shares were available in the Company’s stock repurchase authorization.

The authorization of this program became effective during the three months ended March 31, 2022 and 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 Company’s common stock would contribute to the overall growth of shareholder value.

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Non-GAAP Financial Measures

This document contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States (“GAAP”).

These non-GAAP financial measures include the ratio of tangible common equity to tangible assets.

This document contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States (“GAAP”), specifically, the ratio of tangible common equity to tangible assets.

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.

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.

These non-GAAP financial measures are supplemental and are not a substitute for any analysis based on GAAP financial measures.

This non-GAAP financial measurement 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.

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Ratio of Tangible Common Equity to Tangible Assets

March 31, 2022

June 30, 2022

December 31, 2021

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis