What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-08 compared with 2022-08-08 · 447 added, 479 removed, 615 unchanged (60% of the section changed)

6 unchanged sentences

The novel coronavirus disease, or COVID-19, pandemic has adversely affected the Company, its customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on the Company’s business, financial position, results of operations, liquidity, and prospects is uncertain.

While general business and economic conditions have improved, increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect the Company’s revenues and the values of its assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility.

While general business and economic conditions have improved, increases in unemployment rates, labor shortages, or turbulence in domestic or global financial markets could adversely affect the Company’s revenues and the values of its assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility.

In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to, COVID-19, could affect the Company in substantial and unpredictable ways.

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The allowance for credit losses is calculated with the objective of maintaining an allowance level believed by management to be sufficient to absorb estimated credit losses.

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

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

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

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in other instances, the factors that led to the deterioration may improve or the credit may be refinanced elsewhere and allocated allowances may be released from the particular credit.

Significant changes were made to management’s overall methodology for evaluating the allowance for credit losses beginning in 2021 due to the adoption of ASU 2016-13.

On January 1, 2021, the Company adopted the new accounting standard related to the Allowance for Credit Losses.

Significant changes were made to management’s overall methodology for evaluating the allowance for credit losses beginning on January 1, 2021 due to the adoption of ASU 2016-13.

For assets held at amortized cost basis, this standard eliminates the probable initial recognition threshold in GAAP and, instead, requires an entity to reflect its current estimate of all expected 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 June 30, 2022, the Company had one reporting unit to which goodwill has been allocated – the Bank.

As of September 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.

1 unchanged sentence

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 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.

At September 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.

3 unchanged sentences

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.

At September 30, 2022, the amortizable intangible assets included core deposit intangibles of $211,000 and the arena naming rights of $5.4 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.

Our regular annual impairment assessment occurs in the third quarter of each year.

At September 30, 2022, the Company performed this annual review and concluded that no impairment of its goodwill or intangible assets had occurred at September 30, 2022.

While the Company believes no impairment of its goodwill or other intangible assets existed at September 30, 2022, different conditions or assumptions used to measure fair value of reporting units, or changes in cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the outcome of the Company’s impairment evaluation in the future.

For purposes of testing goodwill for impairment, the Company used a market approach to value its reporting unit.

2 unchanged sentences

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 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:

September 30,

(In Thousands)

4 unchanged sentences

Current Economic Conditions

Changes in economic conditions could cause the values of assets and liabilities recorded in the financial statements to change rapidly, resulting in material future adjustments in asset values, the allowance for credit losses, or capital that could negatively impact the Company’s ability to meet regulatory capital requirements and maintain sufficient liquidity.

Changes in economic conditions could cause the values of assets and liabilities recorded in the financial statements to change rapidly, resulting in material future adjustments in asset values, the allowance for credit losses, or capital that could negatively affect the Company’s ability to meet regulatory capital requirements and maintain sufficient liquidity.

Following the housing and mortgage crisis and correction beginning in mid-2007, the United States entered an economic downturn.

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Economic conditions improved in the subsequent years, as indicated by higher consumer confidence levels, increased economic activity and low unemployment levels.

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

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.

economy continued to operate at historically strong levels until the COVID-19 pandemic in March 2020, which severely affected tourism, labor markets, business travel, immigration and the global supply chain among other areas.

The economy plunged into recession in the first quarter of 2020, as efforts to contain the spread of the coronavirus forced all but essential business activity, or any work that could not be done from home, to stop, shuttering factories, restaurants, entertainment, sports events, retail shops, personal services, and more.

Currently, the pandemic continues to recede and is thus becoming less disruptive to the U.S.

and global economies.

While there are likely to be future waves of the virus, governments, households and businesses are increasingly adept at adjusting to the virus.

More than 22 million jobs were lost in March and April 2020 as businesses closed their doors or reduced their operations, sending employees home on furlough or layoffs.

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

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.

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.

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 loans to small businesses that would help keep employees on their payroll, fueling a historic bounce-back in economic activity.

The amount of this support was equal to almost 25% of pre-pandemic 2019 GDP and 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.

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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.

Real gross domestic product (GDP) increased at an annual rate of 2.6% in the third quarter of 2022 according to the “advance” estimate released by the Bureau of Economic Analysis.

In the second quarter 2022, real GDP decreased 0.6%.

The third quarter 2022 increase in real GDP reflected increases in net exports, consumer spending, nonresidential fixed investment, federal government spending, and state and local government spending that were partly offset by decreases in residential fixed investment and private inventory investment.

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.

This 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.

As of September 30, 2022, the economy was on track to return to full employment in the next few months with unemployment around 3.5%.

In response to rising prices and the high inflation rate, the Federal Reserve has engaged in an aggressive monetary tightening program, raising the federal funds rate by 300 basis points thus far in 2022.

The forecast is for a 75-basis point rate hike at the November 2022 Federal Open Market Committee meeting.

This is expected to be followed by rate hikes of 50 basis points in December 2022 and 25 basis points in early 2023 per Moody’s Analytics.

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

At October 31, 2022, the US Index of Consumer Sentiment was at 59.90, up 2.22% from 58.60 at September 30, 2022 and down 16.46% from 71.70 one year ago.

Following Russia’s invasion of Ukraine in February 2022, global oil prices began to rise and were trading over $100 per barrel by summer 2022.

OPEC’s recent decision to cut its production quotas has pushed oil prices back up near $100 per barrel.

Prices had slumped below $90 per barrel on a weaker global economy and oil demand, the strong U.S.

dollar, and the European Union’s slow implementation of sanctions on its imports of Russian oil.

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.

Inflation as measured by the consumer price index (CPI) decreased by 0.1% in September 2022 when compared to August 2022.

The Fed reduced its securities holdings by up to a total of $47.5 billion each month from June 2022 through August 2022, and since September 2022, the maximum monthly reduction has been $95 billion.

The Fed will reinvest any maturing amounts above the monthly caps by buying at auctions for Treasury securities or by purchasing securities in the secondary market in the case of agency MBS.

Ten-year Treasury yields are currently close to 4%, as global bond investors digest the implications of the Fed’s aggressive monetary actions.

Yields are consistent with their estimated long-run equilibrium, which is consistent with the estimate of nominal potential GDP growth of 4%.

The recently passed Inflation Reduction Act raises nearly $750 billion over the next decade through higher taxes on large corporations and wealthy individuals and lower Medicare prescription drug costs, to pay for nearly $450 billion in tax credits and deductions and additional government spending to address climate change and lower health insurance premiums for Americans who benefit from the Affordable Care Act.

The remaining more than $300 billion goes to reducing future budget deficits.

Broadly, the legislation is intended to address climate change, lower healthcare costs for lower-income households and seniors, and reduce future budget deficits.

The federal government posted a deficit of $2.8 trillion in fiscal 2021 and is on track to post a deficit of $1 trillion in fiscal 2022.

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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 national unemployment rate in September 2022 edged down to 3.5%.

The number of unemployed individuals remained essentially unchanged at 5.8 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.

In the U.S., monthly job growth has averaged 420,000 thus far in 2022, compared to an average of 562,000 per month in 2021.

In September 2022, notable job gains occurred in leisure, hospitality, and healthcare.

In September 2022, private sector non-farm employment had increased by 263,000.

This milestone happened years earlier than in prior recoveries.

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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.

As of September 2022, the labor force participation rate (the share of working-age Americans employed or actively looking for a job) remained little changed at 62.3%.

Based on September 2022 information, the unemployment rate for the Midwest, where the Company conducts most of its business, has decreased from 4.3% in September 2021 to 3.4% in September 2022.

Unemployment rates for August 2022 in the states where the Company has a branch or loan production offices were Arizona at 4.2%, Arkansas at 3.5%, Colorado at 3.3%, Georgia at 3.1%, Illinois at 4.8%, Iowa at 2.9%, Kansas at 3.1%, Minnesota at 2.1%, Missouri at 3.0%, Nebraska at 2.2%, North Carolina at 3.9%, Oklahoma at 3.4%, and Texas at 4.2%.

Of the metropolitan areas in which the Company does business, most are below the national unemployment rate of 3.5% for September 2022, with the major outlier being Chicago at 4.9%.

Single Family Housing

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

Sales of new single-family houses in September 2022 were at a seasonally adjusted annual rate of 603,000, according to U.S.

Census Bureau and Department of Housing and Urban Development estimates.

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 is 10.9% below the revised August 2022 rate of 677,000 and 17.6% below the September 2021 estimate of 732,000.

In September 2022, U.S.

single-family housing starts fell to their lowest level in more than two years, dropping 8.1% to a seasonally adjusted annual rate of 1.4 million from the August 2022 rate of 1.6 million and registered 7.7% below the September 2021 rate of 1.6 million.

Single-family housing starts in September 2022 were at a rate of 892,000, which was a 4.7% drop from August 2022 at 936,000.

The median sales price of new houses sold in September 2022 was $470,600, up from $413,200 in September 2021.

The average sales price in September 2022 of $517,700 was up from $470,600 in September 2021.

The inventory of new homes for sale, at an estimated 468,000 at the end of September 2022, would support 9.5 months of sales at the current sales rate, up from 6.5 months’ supply at the end of September 2021.

National existing-home sales in September 2022 declined for the eighth consecutive month to a seasonally adjusted annual rate of 4.71 million.

Sales were down 1.5% from August 2022 and 23.8% from September 2021.

Existing–home sales in the Midwest slid 1.7% from August 2022 to an annual rate of 1.14 million in September 2022, falling 19.7% from September 2021 sales of 1.42 million.

The median existing-home sales price nationally as of September 30, 2022 climbed 8.4% to $385,000 from $355,000 as of September 2021.

This marked 127 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%,

The median price in the Midwest was $282,000, up 6.9% from the prior year median price of $263,000.

Nationally, properties typically on average remained on the market for 19 days in September 2022, up from 16 days in August 2022 and 17 days in September 2021.

Of homes sold in September 2022, 70% were on the market for less than a month.

All-cash sales represented 23% of transactions in September 2022, down from 24% in August 2022 and 23% in September 2021.

The inventory of unsold existing homes at the end of September 2022 was 1.25 million which was down 2.3% from August 2022 and 0.8% from September 2021.

Unsold inventory in September 2022 represents 3.2 months’ supply at the current monthly sales pace, unchanged from August 2022 and up from 2.4 months in September 2021.

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

If consumer price inflation continues to remain at current levels, mortgage rates can be expected to move higher.

Additionally, while home prices have consistently increased due to tight supply, prices may decline as available inventory increases due to lower demand.

First-time buyers accounted for 29% of sales in September 2022, unchanged from August 2022 but slightly higher than 28% in September 2021.

According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage was 6.11% in September 2022, up from 5.22% in August 2022.

The average 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.

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 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:

After years of unprecedented demand for apartment units resulting in vacancy rates hitting historic lows at the end of 2021, the 127,000 new units delivered during the quarter ending September 30, 2022 has contributed to the current oversupply situation and pushed the national vacancy rate up from an all-time low of 4.7% just a year ago to 5.5% as of September 2022.

Overall, absorption during 2022 of constructed units did not keep pace with a diminished demand caused by rising inflation cutting into renter household budgets.

Additionally, consumer concerns regarding a possible recession has likely put a hold on a number of potential household formations

CoStar projects that national year-over-year rent growth will moderate further from its current 5.7% pace to 3.8% at the end of the 2022.

Midwest and gateway markets fared the best over the past 3 months with rent growth slipping only slightly.

Louis and Kansas City registered third quarter annual rent growth of 7.3%, which remains significantly higher than their 5-year prepandemic average.

Investment capital continued to pour into the multifamily sector during the third quarter, as multifamily transaction activity topped the four major real estate sectors.

Investors still see rent growth remaining above the long-term average despite the moderation in rents experienced so far in 2022.

Furthermore, sales activity in the third quarter of 2022 stood well above pre-pandemic levels.

The combination of rising interest rates, more expensive debt and lower pro-forma rents led to 4- and 5- Star cap rates rising during the summer.

With the 10-year treasury rate rising, upward pressure on cap rates will most likely continue.

Some investors have already moved to the sidelines as they await further signaling on the direction of economic growth and the Federal Reserve's inflation fighting.

Transaction activity may slow during the fourth quarter of 2022 as the market awaits more clarity.

As of September 30, 2022, national multifamily market vacancy rates increased to 5.5%.

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

Springfield, Missouri at 2.7%, St.

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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:

Demand for office space is weakening once again, with net absorption falling back into negative territory and the pool of available sublease space expanding.

Uncertainty remains the prevailing theme, as firms continue to debate workplace schedules and assess real estate requirements.

With the additional risk of recession rising amid high inflation and aggressive Fed policy, a full recovery in the office market is likely a longer-term proposition.

Rent growth as of September 30, 2022 is now positive on a year-over-year basis in most major markets, although it remains modest in many.

The current oversupply of available space, both existing and forthcoming, points to downside risk.

Multiple factors could weigh on both activity and pricing in the office market going forward, including higher interest rates and subsequent cost of debt, slowing economic growth, and continued shift to remote and hybrid workplace schedules.

As of September 30, 2022, national office vacancy rates remained about the same at 12.5% compared to June 30, 2022, while our market areas reflected the following vacancy levels at September 30, 2022:

Springfield, Missouri at 4.9%, St.

Louis at 10.7%, Kansas City at 10%, Minneapolis at 10.5%, Tulsa, Oklahoma at 12.1%, Dallas-Fort Worth at 17.2%, Chicago at 14.9%, Atlanta at 14.3%, Denver at 14.9%, Phoenix at 14.9% and Charlotte, North Carolina at 11.2%.

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.

With additional funds at their disposal, American consumers pushed brick and mortar retail sales to record levels in 2021.

With sales sitting at record highs, some retailers have selectively turned back to expansion mode.

The retail sector remains in expansion mode despite growing headwinds from inflation and rising interest rates.

Overall, consumers continue to spend at a very healthy clip, though the increased cost of necessities such as food, gas, and housing are starting to weigh on the real growth of spending for non-essential goods.

Leasing activity for smaller spaces is being overwhelmingly driven by growth in quick service restaurants and cellular service retailers.

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

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.

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.

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:

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

While rents increased at 4.2% over the most recent 12-month period, inflation expectations will likely restrain the real rate of rental growth and keep it in line with or slightly below the average growth rate seen during the five years preceding the pandemic.

During the third quarter of 2022, national retail vacancy rates remained level at 4.4% while our market areas reflected the following vacancy levels:

Springfield, Missouri at 3.1%, St.

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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.

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:

industrial leasing has held up remarkably well despite rising interest rates and stubbornly high inflation rates eroding household purchasing power, which has resulted in a decline in consumer goods spending from high levels recorded during early 2021 when the final round of stimulus checks were issued.

Even when adjusted for recent inflation, monthly goods spending still continues at the latter part of 2022, to come in about 6% higher than levels that likely would have been recorded, had spending not spiked in recent years and simply continued to rise in line with its pre-pandemic growth trend.

Risks that industrial leasing will moderate back down toward levels that are more normal in 2023 are accumulating.

Leading indicators of U.S.

economic growth including housing permitting, the yield curve, and consumer expectations for business conditions have been flashing warning signs since the Federal Reserve began raising interest rates during early 2022.

Amazon, which accounted for 15%-20% of North American industrial absorption during 2020–21 by CoStar estimates, has clearly pumped the brakes on its distribution network expansion, canceling a range of development projects and even putting more than 6 million SF worth of existing distribution centers back on the market, either through sublease or by letting leases expire.

So far, Amazon has disproportionately shed its smaller, older distribution space in locations where the firm has recently leased larger, more modern distribution centers nearby.

industrial rent growth at 11.4% year over year continues to accelerate as the slowing economy has yet to move the retail industrial space market in tenants' favor.

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

Springfield, Missouri at 1.2%, St.

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

The Company continues to work diligently with its nearly 1,100 associates to enforce the most current health, hygiene and social distancing practices.

To date, there have been no service disruptions or reductions in staffing.

As always, customers can conduct their banking business using our banking center network, online and mobile banking services, ATMs, Telephone Banking, and online account opening services.

As health conditions in local markets dictate, Great Southern banking center lobbies are open following social distancing and health protocols.

Great Southern continues to work with customers experiencing hardships caused by the pandemic.

As a resource to customers, a COVID-19 information center continues to be available on the Company’s website, www.GreatSouthernBank.com.

General information about the Company’s pandemic response, how to receive assistance, and how to avoid COVID-19 scams and fraud are included.

Impacts to Our Business Going Forward :

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 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.

● Non-interest expenses increased as we dealt with the effects of the COVID-19 pandemic, including cleaning costs, supplies, equipment and other items.

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

● 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.

Customers can conduct their banking business using our banking center network, online and mobile banking services, ATMs, Telephone Banking, and online account opening services.

COVID-19 infection rates currently are relatively low 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.

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Paycheck Protection Program Loans

Great Southern actively participated in the PPP through the SBA.

Great Southern actively participated in the Paycheck Protection Program (“PPP”) through the SBA.

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

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

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.

At September 30, 2022, remaining net deferred fees related to PPP loans totaled $8,000, and we expect these remaining net deferred fees will accrete to interest income during the fourth 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 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.

In the three months ended September 30, 2022 and 2021, Great Southern recorded approximately $28,000 and $1.6 million, respectively, of net deferred fees in interest income on PPP loans.

In the nine months ended September 30, 2022 and 2021, Great Southern recorded approximately $497,000 and $3.9 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 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.

Great Southern’s total assets increased $226.3 million, or 4.2%, from $5.45 billion at December 31, 2021, to $5.68 billion at September 30, 2022.

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

Net outstanding loans increased $489.6 million, or 12.2%, from $4.01 billion at December 31, 2021, to $4.50 billion at September 30, 2022.

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

These increases were partially offset by a decrease in construction loans.

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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.

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

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

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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 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.

At September 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 September 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 September 30, 2022, TDRs totaled $3.0 million, or 0.07% of total loans, a decrease of $865,000 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 nine months ended September 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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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.

At September 30, 2022, this represented approximately 34 commercial loans totaling approximately $63 million;

however, only 24 of those loans, totaling $23 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 $364 million at September 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 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.

In the nine months ended September 30, 2022, available-for-sale securities decreased $18.2 million, or 3.6%, from $501.0 million at December 31, 2021, to $482.8 million at September 30, 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.

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.

The decrease was mostly offset with purchases 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.

Held-to-maturity Securities.

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.

In the nine months ended September 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.

At September 30, 2022 the balance of held-to-maturity securities was $206.5 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 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.

In the nine months ended September 30, 2022, total deposit balances increased $187.0 million, or 4.1%.

Compared to December 31, 2021, transaction account balances decreased $212.6 million, or 5.9%, to $3.38 billion at September 30, 2022, while retail certificates of deposit increased $105.4 million, or 11.8%, to $999.1 million at September 30, 2022.

The decrease in transaction accounts was primarily a result of a decrease in non-interest-bearing accounts, IntraFi Network Reciprocal Deposits and various money market accounts, as small businesses and individuals appear to be drawing down their balances to pay for goods and services.

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 ($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.

Retail time deposits increased due to an increase in retail certificates generated through the banking center network, partially offset by decreases in national time deposits initiated through internet channels.

Time deposits initiated through internet channels experienced a planned decrease ($125.5 million in the nine months ended September 30, 2022) due to increases in overall liquidity levels in 2021 and to reduce the Company’s cost of funds.

Brokered deposits were $361.6 million and $67.4 million at September 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 and to manage interest rate risk.

Our deposit balances may fluctuate depending on customer preferences and our relative need for funding.

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To accomplish this goal, increasing rates to attract deposits may be necessary, which could negatively impact the Company’s net interest margin.

Our ability to fund growth in future periods may also depend on our ability to continue to access brokered deposits and FHLBank advances.

Our ability to fund growth in future periods may also depend on our continued access to brokered deposits and FHLBank advances.

In times when our loan demand has outpaced our generation of new deposits, we have utilized brokered deposits and FHLBank advances to fund these loans.

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Securities sold under reverse repurchase agreements with customers.

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.

Securities sold under reverse repurchase agreements with customers decreased $12.9 million from $137.1 million at December 31, 2021 to $124.2 million at September 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.

Short-term borrowings and other interest-bearing liabilities increased $97.3 million from $1.8 million at December 31, 2021 to $99.1 million at September 30, 2022.

At September 30, 2022, $98.0 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 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.

In 2022 to date, the FRB increased interest rates on six separate occasions, 0.25% on March 17, 0.50% on May 5, 0.75% on June 16, 0.75% on July 27, 0.75% on September 22 and 0.75% on November 2.

At September 30, 2022, the Federal Funds rate stood at 3.25% and today stands at 4.00%.

Financial markets are anticipating further increases in interest rates in the remainder of 2022 and the beginning of 2023, with 0.75-1.00% of additional cumulative rate hikes currently anticipated.

A substantial portion of Great Southern’s loan portfolio ($1.08 billion at September 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 September 30, 2022.

Of these loans, $1.07 billion had interest rate floors.

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.

Great Southern’s loan portfolio also includes loans ($357 million at September 30, 2022) tied to various SOFR indexes that will be subject to adjustment at least once within 90 days after September 30, 2022.

Of these loans, $357 million had interest rate floors.

Great Southern also has a portfolio of loans ($724 million at September 30, 2022) tied to a “prime rate” of interest that will adjust immediately or within 90 days of a change to the “prime rate” of interest.

Of these loans, $665 million had interest rate floors at various rates.

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.

At September 30, 2022, nearly all of these LIBOR/SOFR 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, SOFR indices 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.

Interest rate floors may at least partially mitigate the negative impact of interest rate decreases.

Loans at their floor rates are, however, subject to the risk that borrowers will seek to refinance elsewhere at the lower market rate.

Because the Federal Funds rate is still 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 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.

There may also be a negative impact on the Company’s net interest income if the Company’s is unable to significantly lower its funding costs due to a highly 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, SOFR-based and prime-based loans.

As of September 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.

The results of our modeling indicate that net interest income is not likely to be significantly affected either positively or negatively in the first twelve months following relatively minor changes in market interest rates because our portfolios are relatively well-matched in a twelve-month horizon.

In a situation where market interest rates increase significantly in a short period of time, our net interest margin increase may be more pronounced in the very near term (first one to three months), due to fairly rapid increases in LIBOR interest rates and “prime” interest rates.

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.

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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 and Six Months Ended June 30, 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 Nine Months Ended September 30, 2022 and 2021” section of this report.

Effect of Federal Laws and Regulations

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In addition to the minimum capital ratios, the rules include a capital conservation buffer, under which a banking organization must have CET1 more than 2.5% above each of its minimum risk-based capital ratios in order to avoid restrictions on paying dividends, repurchasing shares, and paying certain discretionary bonuses.

The capital conservation buffer requirement began phasing in on January 1, 2016 when a buffer greater than 0.625% of risk-weighted assets was required, which amount increased an equal amount each year until the buffer requirement of greater than 2.5% of risk-weighted assets became fully implemented on January 1, 2019.

The capital conservation buffer became fully implemented on January 1, 2019.

Effective January 1, 2015, these rules also revised the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels show signs of weakness.

Under the revised prompt corrective action requirements, insured depository institutions are required to meet the following in order to qualify as “well capitalized:” (i) a common equity Tier 1 risk-based capital ratio of at least 6.5%, (ii) a Tier 1 risk-based capital ratio of at least 8%, (iii) a total risk-based capital ratio of at least 10% and (iv) a Tier 1 leverage ratio of 5%, and must not be subject to an order, agreement or directive mandating a specific capital level.

Under the revised prompt corrective action requirements, insured depository institutions are required to meet the following in order to qualify as “well capitalized:” (i) CET1 risk-based capital ratio of at least 6.5%, (ii) a Tier 1 risk-based capital ratio of at least 8%, (iii) a total risk-based capital ratio of at least 10% and (iv) a Tier 1 leverage ratio of 5%, and must not be subject to an order, agreement or directive mandating a specific capital level.

Economic Growth Act.

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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.

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%.

In April 2020, pursuant to the CARES Act, the federal bank regulatory agencies announced the issuance of two interim final rules, effective immediately, to provide temporary relief to community banking organizations.

Under the interim final rules, the CBLR requirement was a minimum of 8.5% for calendar year 2021, and is 9% thereafter.

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.

Currently, the CBLR is 9.0%.

The Company and the Bank have chosen to not utilize the new CBLR due to the Company’s size and complexity, including its commercial real estate and construction lending concentrations and significant off-balance sheet funding commitments.

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Business Initiatives

Great Southern continues to monitor and respond to the effects of the COVID-19 pandemic.

As always, the health, safety and well-being of our customers, associates and communities, while maintaining uninterrupted service, are the Company’s top priorities.

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

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 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.

On October 17, 2022, the Company’s new banking center in Kimberling City, Missouri, opened for business.

This newly-constructed building replaced the Company’s former facility located on the same property at 14309 Highway 13.

Customers were served from a temporary building on the property during the demolition and construction period.

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

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.

In the first quarter of 2023, a high-transaction-volume banking center located at 1615 West Sunshine Street in Springfield, Missouri, is expected to be razed to make way for an Express Banking facility, utilizing only interactive teller machine (ITM) technology to serve customers.

The modern four-lane drive-up center will be the first-of-its-kind in the Springfield market.

ITMs, also known as video remote tellers, offer an ATM-like interface, but with the enhancement of a video screen that allows customers to speak directly to a service representative in real time and in a highly personal manner.

Nearly any teller transaction that can be performed in the traditional drive-thru can be performed at an ITM, including cashing a check to the penny.

ITMs provide convenience and enhanced access for customers, while creating greater operational efficiencies for the Bank.

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

During the nine months ended September 30, 2022, the Company’s total assets increased by $226.3 million to $5.68 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.

Cash and cash equivalents were $189.0 million at September 30, 2022, a decrease of $528.3 million, or 73.6%, 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 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 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.

In 2022, these excess funds were used to purchase new investment securities and originate loans.

The Company’s available-for-sale securities decreased $18.2 million, or 3.6%, compared to December 31, 2021.

The decrease was primarily related to the transfer of $226.5 million in available-for-sale securities to held-to-maturity during 2022 and by calls of municipal securities and normal monthly payments received related to the portfolio of mortgage-backed securities and collateralized mortgage obligations.

This decrease 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 available-for-sale securities portfolio was 8.5% and 9.2% of total assets at September 30, 2022 and December 31, 2021, respectively.

Held-to-maturity securities were $206.5 million at September 30, 2022.

As indicated above, during the nine months ended September 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 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).

The held-to-maturity securities portfolio was 3.6% of total assets at September 30, 2022.

Net loans increased $489.6 million from December 31, 2021, to $4.50 billion at September 30, 2022.

This increase was primarily in other residential (multi-family) loans ($217 million increase), one- to four-family residential loans ($202 million increase) and commercial real estate loans ($100 million increase).

These increases were partially offset by a decrease in construction loans ($29 million decrease).

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

Loan origination volume in the nine months ended September 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 $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 liabilities increased $331.8 million, from $4.83 billion at December 31, 2021 to $5.16 billion at September 30, 2022, primarily due to increases in short-term borrowings from FHLBank and brokered deposits.

This was partially offset by a reduction in non-interest bearing checking accounts and national time deposits initiated through internet channels.

Time deposits initiated through internet channels experienced a planned decrease as part of the Company’s balance sheet management between funding sources.

Total deposits increased $187.0 million, or 4.1%, to $4.74 billion at September 30, 2022.

Transaction account balances decreased $212.6 million, from $3.59 billion at December 31, 2021 to $3.38 billion at September 30, 2022.

Retail certificates of deposit increased $105.4 million compared to December 31, 2021, to $999.1 million at September 30, 2022.

Changes in transaction account balances were primarily due to decreases in IntraFi Network Reciprocal Deposits and non-interest-bearing checking accounts.

Total interest-bearing checking and demand deposit accounts decreased $115.1 million and $97.5 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 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.

Customer retail time deposits initiated through our banking center network increased $237.1 million and time deposits initiated through our national internet network decreased $125.5 million.

The increase in customer retail time deposits initiated through the banking center network was primarily due to targeted promotions that started in late June 2022.

Customer deposits at September 30, 2022 and December 31, 2021 totaling $35.6 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 $294.2 million to $361.6 million at September 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.

The Company has the capacity to further expand its use of brokered deposits if it chooses to do so.

Securities sold under reverse repurchase agreements with customers decreased $12.9 million from $137.1 million at December 31, 2021 to $124.2 million at September 30, 2022.

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

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.

Short-term borrowings and other interest-bearing liabilities increased $97.3 million from $1.8 million at December 31, 2021 to $99.1 million at September 30, 2022.

At September 30, 2022, $98.0 million of this total was overnight borrowings from the FHLBank, used to fund loans.

Total stockholders’ equity decreased $105.5 million, from $616.8 million at December 31, 2021 to $511.3 million at September 30, 2022.

Accumulated other comprehensive income decreased $91.1 million during the nine months ended September 30, 2022, primarily due to decreases in the fair value of available-for-sale investment securities and the fair value of cash flow hedges, as a result of increased market interest rates.

Stockholders’ equity also decreased due to repurchases of the Company’s common stock totaling $59.2 million and dividends declared on common stock of $14.5 million.

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

The Company recorded net income of $53.3 million for the nine months ended September 30, 2022.

In addition, stockholders’ equity increased $6.0 million due to stock option exercises.

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%.

Results of Operations and Comparison for the Three and Nine Months Ended September 30, 2022 and 2021

Net income was $18.1 million for the three months ended September 30, 2022 compared to $20.4 million for the three months ended September 30, 2021.

This decrease of $2.3 million, or 11.0%, was primarily due to an increase in provision for credit losses on loans and unfunded commitments of $5.7 million, or 240.6%, an increase in non-interest expense of $3.4 million, or 10.9%, and a decrease in non-interest income of $1.8 million, or 18.5%, partially offset by an increase in net interest income of $8.0 million, or 17.8%, and a decrease in income tax expense of $699,000, or 13.0%.

Net income was $53.3 million for the nine months ended September 30, 2022 compared to $59.3 million for the nine months ended September 30, 2021.

This decrease of $6.0 million, or 10.1%, was primarily due to an increase in non-interest expense of $7.2 million, or 7.8%, an increase in provision for credit losses on loans and unfunded commitments of $9.4 million, or 232.4%, and a decrease in non-interest income of $2.6 million, or 9.1%, partially offset by an increase in net interest income of $11.3 million, or 8.5%, and a decrease in income tax expense of $1.9 million, or 12.1%.

Total Interest Income

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.

Total interest income increased $10.0 million, or 20.2%, during the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

The increase was due to a $2.5 million increase in interest income on investment securities and other interest-earning assets and a $7.5 million increase in interest income on loans.

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

Total interest income increased $8.3 million, or 5.5%, during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

The increase was due to a $6.0 million increase in interest income on investment securities and other interest-earning assets and a $2.3 million increase in interest income on loans.

Interest income on loans increased for the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to higher average rates of interest on loans, partially offset by lower average loan balances.

Interest income from investment securities and other interest-earning assets increased during the nine months ended September 30, 2022 compared to the same period in 2021, 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 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.

During the three months ended September 30, 2022 compared to the three months ended September 30, 2021, interest income on loans increased $4.8 million due to higher average interest rates on loans.

The average yield on loans increased from 4.35% during the three months ended September 30, 2021, to 4.79% during the three months ended September 30, 2022.

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

Interest income on loans also increased $2.7 million as the result of higher average loan balances, which increased from $4.24 billion during the three months ended September 30, 2021, to $4.48 billion during the three months ended September 30, 2022.

The Company continued to originate loans at a pace similar to prior periods, but overall loan repayments slowed in 2022 compared to the level of repayments in 2021.

During the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, interest income on loans increased $3.3 million as a result of higher average interest rates on loans.

The average yield on loans increased from 4.36% during the nine months ended September 30, 2021, to 4.46% during the nine months ended September 30, 2022.

This increase was primarily due to increased yields as market interest rates began to increase significantly in 2022.

Partially offsetting that increase was a decrease in average loan balances.

Interest income on loans decreased $1.0 million as the result of lower average loan balances, which decreased from $4.34 billion during the nine months ended September 30, 2021, to $4.31 billion during the nine months ended September 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 4.36% 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.

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.

Net deferred fees recognized in interest income were $28,000 and $497,000 in the three and nine months ended September 30, 2022, respectively, compared to $1.6 million and $3.9 million in the three and nine months ended September 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.

The notional amount of the swap was $400 million with a contractual termination date in October 2025.

As previously disclosed by the Company, in March 2020, the Company and its swap counterparty mutually agreed to terminate the $400 million interest rate swap prior to its contractual maturity.

The Company received a payment of $45.9 million from its swap counterparty as a result of this termination.

As previously disclosed by the Company, in March 2020, the Company and its swap counterparty mutually agreed to terminate the $400 million notional interest rate swap prior to its contractual maturity.

The Company was paid $45.9 million from its swap counterparty as a result of this termination.

This $45.9 million, less the accrued to date interest portion and net of deferred income taxes, is reflected in the Company’s stockholders’ equity as Accumulated Other Comprehensive Income and is being accreted to interest income on loans monthly through the original contractual termination date of October 6, 2025.

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

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.

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

The Company recorded interest income related to the interest rate swap of $6.1 million in each of the nine months ended September 30, 2022 and the nine months ended September 30, 2021.

At September 30, 2022, the Company expected to have a sufficient amount of eligible variable rate loans to continue to accrete this interest income ratably in future periods.

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

4 unchanged sentences

The initial floating rate of interest was set at 0.2414%.

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 $668,000 and $1.0 million in the three and six months ended June 30, 2022.

To the extent that the fixed rate of interest exceeds 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 a reduction in loan interest income related to this swap transaction of $428,000 in the three months ended September 30, 2022 and interest income of $610,000 in the nine months ended September 30, 2022.

At October 1, 2022, the one-month USD-LIBOR rate was 3.14271%.

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.

5 unchanged sentences

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.

At September 30, 2022, the USD-Prime rate was 6.25% and the one-month USD-SOFR OIS rate was 2.49208%.

Interest Income – Investments and Other Interest-earning Assets

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.

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.

Interest income on investments increased $2.3 million in the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Interest income increased $1.9 million as a result of an increase in average balances from $453.3 million during the three months ended September 30, 2021, to $734.5 million during the three months ended September 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, which fits with the Company’s current asset/liability management strategies.

Interest income increased $313,000 as a result of higher average interest rates from 2.52% during the three months ended September 30, 2021, to 2.77% during the three month period ended September 30, 2022.

Interest income on investments increased $5.6 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Interest income increased $4.8 million as a result of an increase in average balances from $442.8 million during the nine months ended September 30, 2021, to $670.7 million during the nine months ended September 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.

In addition, interest income increased $816,000 as a result of higher average interest rates from 2.61% during the nine months ended September 30, 2021, to 2.84% during the nine months ended September 30, 2022.

Also, during the nine months ended September 30, 2022, the Company recorded interest income of $812,000 received due to the early repayment of one investment security.

Interest income on other interest-earning assets increased $224,000 in the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Interest income increased $240,000 as a result of higher average interest rates from 0.15% during the three months ended September 30, 2021, to 2.11% during the three month period ended September 30, 2022.

Partially offsetting that increase, interest income decreased $16,000 as a result of a decrease in average balances from $604.0 million during the three months ended September 30, 2021, to $84.8 million during the three months ended September 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.

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

Interest income on other interest-earning assets increased $397,000 in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Interest income increased $479,000 as a result of higher average interest rates from 0.12% during the nine months ended September 30, 2021, to 0.53% during the nine month period ended September 30, 2022.

Interest income decreased $82,000 as a result of a decrease in average balances from $513.4 million during the nine months ended September 30, 2021, to $218.3 million during the nine months ended September 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.

Total Interest Expense

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%.

Total interest expense increased $2.0 million, or 43.3%, during the three months ended September 30, 2022, when compared with the three months ended September 30, 2021, due to an increase in interest expense on deposits of $2.1 million, or 70.4%, an increase in interest expense on short-term borrowings of $377,000, an increase in interest expense on subordinated debentures issued to capital trusts of $137,000, or 123.4%, and an increase in interest expense on securities sold under reverse repurchase agreements of $35,000, or 350.0%, partially offset by a decrease in interest expense on subordinated notes of $566,000, or 33.9%.

Total interest expense decreased $3.0 million, or 17.6%, during the nine months ended September 30, 2022, when compared with the nine months ended September 30, 2021, due to a decrease in interest expense on subordinated notes of $2.7 million, or 45.3%, and a decrease in interest expense on deposits of $1.1 million, or 10.3%, partially offset by an increase in interest expense on short-term borrowings of $614,000, or 182.2%, an increase in interest expense on subordinated debentures issued to capital trusts of $188,000, or 55.8%, and an increase in interest expense on securities sold under reverse repurchase agreements of $33,000, or 113.8%.

Interest Expense – Deposits

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 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.

Interest expense on demand deposits increased $420,000 due to average rates of interest that increased from 0.15% in the three months ended September 30, 2021 to 0.23% in the three months ended September 30, 2022.

Interest rates paid on demand deposits were higher in the 2022 period due to significant reductions in the federal funds rate of interest and other market interest rates in 2020 and 2021 that are now increasing.

Partially offsetting this increase, interest expense on demand deposits decreased $22,000, due to a decrease in average balances from $2.36 billion during the three months ended September 30, 2021 to $2.30 billion during the three months ended September 30, 2022.

The Company experienced decreased balances in various types of money market accounts, certain types of NOW accounts and IntraFi Network Reciprocal Deposits.

Interest expense on demand deposits decreased $319,000 due to average rates of interest that decreased from 0.18% in the nine months ended September 30, 2021 to 0.17% in the nine months ended September 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, although those market interest rates have been increasing significantly since May 2022.

Partially offsetting this decrease, interest expense on demand deposits increased $92,000, due to an increase in average balances from $2.29 billion during the nine months ended September 30, 2021 to $2.36 billion during the nine months ended September 30, 2022.

The Company experienced increased balances in various types of money market accounts, certain types of NOW accounts and IntraFi Network Reciprocal Deposits.

Interest expense on time deposits increased $1.5 million as a result of an increase in average rates of interest from 0.71% during the three months ended September 30, 2021, to 1.22% during the three months ended September 30, 2022.

Interest expense on time deposits increased $153,000 due to an increase in average balances of time deposits from $1.11 billion during the three months ended September 30, 2021 to $1.20 billion in the three months ended September 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 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.

Older certificates of deposit that renewed or were replaced with new deposits generally resulted in the Company paying a higher rate of interest due to increases in market interest rates throughout 2022 and targeted promotions during the three months ended September 30, 2022.

The increase in average balances of time deposits was primarily a result of increases in retail customer time deposits obtained through the banking center network and increases in brokered time deposits.

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.

Interest expense on time deposits decreased $1.3 million due to a decrease in average balances of time deposits from $1.21 billion during the nine months ended September 30, 2021 to $1.02 billion in the nine months ended September 30, 2022.

Interest expense on time deposits increased $458,000 as a result of an increase in average rates of interest from 0.82% during the nine months ended September 30, 2021, to 0.87% during the nine months ended September 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.

Older certificates of deposit that renewed or were replaced with new deposits generally resulted in the Company paying a higher rate of interest due to rates increasing during the nine months ended September 30, 2022 due to increases in market interest rates and targeted promotions.

The decrease in average balances of time deposits was primarily 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.

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Subordinated Debentures Issued to Capital Trusts and Subordinated Notes

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.

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

Interest expense on reverse repurchase agreements increased $35,000 during the three months ended September 30, 2022 when compared to the three months ended September 30, 2021.

The average rate of interest was 0.13% for the three months ended September 30, 2022 compared to 0.03% for the three months ended September 30, 2021.

The average balance of repurchase agreements decreased $15.1 million from $150.0 million in the three months ended September 30, 2021 to $134.9 million in the three months ended September 30, 2022, which was due to changes in customers’ need for this product, which can fluctuate.

Interest expense on reverse repurchase agreements increased $33,000 during the nine months ended September 30, 2022 when compared to the nine months ended September 30, 2021.

The average rate of interest was 0.06% for the nine months ended September 30, 2022, compared to 0.03% during the nine months ended September 30, 2021.

The average balance of repurchase agreements decreased $12.6 million from $145.5 million in the nine months ended September 30, 2021 to $132.9 million in the nine months ended September 30, 2022.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased $278,000 during the three months ended September 30, 2022 when compared to the three months ended September 30, 2021 due to higher average balances.

The average balance of short-term borrowings and other interest-bearing liabilities increased $68.8 million from $1.2 million in the three months ended September 30, 2021 to $70.0 million in the three months ended September 30, 2022, which was 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.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased $99,000 during the three months ended September 30, 2022 when compared to the three months ended September 30, 2021 due to higher average rates of interest.

The average rate of interest was 2.14% for the three months ended September 30, 2022, compared to 0.00% for the three months ended September 30, 2021.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased $413,000 during the nine months ended September 30, 2022 when compared to the nine months ended September 30, 2021 due to higher average balances.

The average balance of short-term borrowings and other interest-bearing liabilities increased $47.7 million from $1.5 million in the nine months ended September 30, 2021 to $49.2 million in the nine months ended September 30, 2022, which was 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.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased $201,000 during the nine months ended September 30, 2022 when compared to the nine months ended September 30, 2021 due to higher average rates of interest.

The average rate of interest was 1.67% for the nine months ended September 30, 2022, compared to 0.00% for the nine months ended September 30, 2021.

During the three months ended September 30, 2022, compared to the three months ended September 30, 2021, interest expense on subordinated debentures issued to capital trusts increased $137,000 due to higher average interest rates.

The average interest rate was 3.82% in the three months ended September 30, 2022 compared to 1.71% in the three months ended September 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 4.38% at September 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.

During the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, interest expense on subordinated debentures issued to capital trusts increased $188,000 due to higher average interest rates.

The average interest rate was 2.72% in the nine months ended September 30, 2022 compared to 1.75% in the nine months ended September 30, 2021.

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

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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 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 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.

During the three months ended September 30, 2022, compared to the three months ended September 30, 2021, interest expense on subordinated notes decreased $516,000 due to lower average balances during the three months ended September 30, 2022 resulting from the redemption of the 5.25% subordinated notes due August 15, 2026.

The average balance of subordinated notes was $74.2 million in the three months ended September 30, 2022 compared to $108.9 million in the three months ended September 30, 2021.

Interest expense on subordinated notes decreased $50,000 due to slightly lower weighted average interest rates.

The average interest rate was 5.91% in the three months ended September 30, 2022 compared to 6.09% in the three months ended September 30, 2021.

During the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, interest expense on subordinated notes decreased $2.7 million due to lower average balances, for the reasons discussed above.

There was no change to the average interest rate in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Net Interest Income

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.

Net interest income for the three months ended September 30, 2022 increased $8.0 million to $52.9 million compared to $44.9 million for the three months ended September 30, 2021.

Net interest margin was 3.96% in the three months ended September 30, 2022, compared to 3.36% in the three months ended September 30, 2021, an increase of 60 basis points, or 17.9%.

The Company experienced increases in interest income on both loans and investment securities.

The Company experienced increases in interest expense on deposits, short-term borrowings and subordinated debentures issued to capital trust, and experienced a decrease in interest expense on subordinated notes.

Net interest income for the nine months ended September 30, 2022 increased $11.3 million to $145.0 million compared to $133.7 million for the nine months ended September 30, 2021.

Net interest margin was 3.73% in the nine months ended September 30, 2022, compared to 3.37% in the nine months ended September 30, 2021, an increase of 36 basis points, or 10.7%.

The Company experienced increases in interest income on both loans and investment securities.

The Company experienced decreases in interest expense on subordinated notes and deposits, and experienced an increase in interest expense on short-term borrowings and subordinated debentures issued to capital trust.

The Company’s overall average interest rate spread increased 54 basis points, or 16.8%, from 3.22% during the three months ended September 30, 2021 to 3.76% during the three months ended September 30, 2022.

The increase was due to a 74 basis point increase in the weighted average yield on interest-earning assets and a 20 basis point increase in the weighted average rate paid on interest-bearing liabilities.

In comparing the two periods, the yield on loans increased 44 basis points, the yield on investment securities increased 25 basis points and the yield on other interest-earning assets increased 196 basis points.

The rate paid on deposits increased 23 basis points, the rate paid on subordinated debentures issued to capital trusts increased 211 basis points, the rate paid on reverse repurchase agreements increased 11 basis points and the rate paid on subordinated notes decreased 18 basis points.

In addition, the Company had outstanding overnight borrowings in the 2022 period, which had an average interest rate of 214 basis points compared to none in the 2021 period.

The Company’s overall average interest rate spread increased 38 basis points, or 11.9%, from 3.20% during the nine months ended September 30, 2021 to 3.58% during the nine months ended September 30, 2022.

The increase was due to a 29 basis point increase in the weighted average yield on interest-earning assets and a nine basis point decrease in the weighted average rate paid on interest-bearing liabilities.

In comparing the two periods, the yield on loans increased ten basis points, the yield on investment securities increased 23 basis points and the yield on other interest-earning assets increased 41 basis points.

The rate paid on deposits decreased three basis points, the rate paid on subordinated debentures issued to capital trusts increased 97 basis points, the rate paid on reverse repurchase agreements increased three basis points and the rate paid on subordinated notes was unchanged.

In addition, the Company had outstanding overnight borrowings in the 2022 period, which had an average interest rate of 167 basis points compared to none in the 2021 period.

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.

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

The CECL methodology replaces the incurred loss methodology with a lifetime “expected credit loss” measurement objective for loans, held-to-maturity debt securities and other receivables measured at amortized cost at the time the financial asset is originated or acquired.

The CECL methodology replaced the incurred loss methodology with a lifetime “expected credit loss” measurement objective for loans, held-to-maturity debt securities and other receivables measured at amortized cost at the time the financial asset is originated or acquired.

This standard requires the consideration of historical loss experience and current conditions adjusted for reasonable and supportable economic forecasts.

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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.

Worsening economic conditions from COVID-19 and subsequent variant outbreaks 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.

Management maintains various controls in an attempt to identify and limit future losses, such as a watch list of problem loans and potential problem loans, documented loan administration policies and loan review staff to review the quality and anticipated collectability of the portfolio.

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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 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.

During the three months ended September 30, 2022, the Company recorded provision expense of $2.0 million on its portfolio of outstanding loans, compared to a negative provision expense of $3.0 million recorded for the three months ended September 30, 2021.

During the nine months ended September 30, 2022, the Company recorded provision expense of $2.0 million on its portfolio of outstanding loans, compared to a negative provision of $3.7 million recorded for the nine months ended September 30, 2021.

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 provision recorded during the three months ended September 30, 2022 was primarily due to loan growth.

In the three months ended September 30, 2022 and 2021, the Company experienced net charge-offs of $297,000 and net recoveries of $27,000, respectively.

In the nine months ended September 30, 2022 and 2021, the Company experienced net recoveries of $7,000 and net charge-offs of $9,000, respectively.

The provision for losses on unfunded commitments for the three months ended September 30, 2022 was $1.3 million, compared to a provision of $643,000 for the three months ended September 30, 2021.

The provision for losses on unfunded commitments for the nine months ended September 30, 2022 was $3.3 million, compared to a negative provision of $338,000 for the nine months ended September 30, 2021.

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

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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.

The Bank’s allowance for credit losses as a percentage of total loans was 1.38% and 1.49% at September 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 September 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.

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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 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.

At September 30, 2022, non-performing assets were $3.4 million, a decrease of $2.6 million from $6.0 million at December 31, 2021.

Non-performing assets as a percentage of total assets were 0.06% at September 30, 2022, compared to 0.11% at December 31, 2021.

Compared to December 31, 2021, non-performing loans decreased $2.1 million, to $3.3 million at September 30, 2022, and foreclosed and repossessed assets decreased $502,000, to $86,000 at September 30, 2022.

Non-performing commercial real estate loans comprised $1.6 million, or 49.2%, of the total non-performing loans at September 30, 2022, a decrease of $388,000 from December 31, 2021.

Non-performing one- to four-family residential loans comprised $821,000, or 24.9%, of the total non-performing loans at September 30, 2022, a decrease of $1.4 million from December 31, 2021.

Non-performing construction and land development loans comprised $468,000, or 14.2%, of the total non-performing loans at September 30, 2022, unchanged from December 31, 2021.

Non-performing consumer loans comprised $386,000, or 11.7%, of the total non-performing loans at September 30, 2022, a decrease of $347,000 from December 31, 2021.

Non-performing Loans.

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

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

Repossessions

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FDIC-assisted acquired loans included above

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 three loans, one of which was added during the six months ended June 30, 2022.

At September 30, 2022, the non-performing commercial real estate category included three loans, one of which was added during the nine months ended September 30, 2022.

The largest relationship in the category, which totaled $1.4 million, or 83.6% 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 one- to four-family residential category included 24 loans, four of which were added during the nine months ended September 30, 2022.

The largest relationship in the category totaled $204,000, or 24.8% of the category.

The non-performing one- to four-family residential category experienced $1.3 million in repayments during the nine months ended September 30, 2022, of which $752,000 related to a note sale of six non-performing loans during the three months ending September 30, 2022.

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 23 loans, eight of which were added during the six months ended June 30, 2022.

The non-performing consumer category included 25 loans, nine of which were added during the nine months ended September 30, 2022.

Potential Problem Loans.

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

Compared to December 31, 2021, potential problem loans decreased $155,000, or 7.8%, to $1.8 million at September 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 six months ended June 30, 2022, was as follows:

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

Repossessions

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FDIC-assisted acquired loans included above

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.

At September 30, 2022, the one- to four-family residential category of potential problem loans included 22 loans, one of which was added during the nine months ended September 30, 2022.

The largest relationship in this category totaled $161,000, or 11.8% 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 32 loans, 17 of which were added during the six months ended June 30, 2022.

The consumer category of potential problem loans included 28 loans, 18 of which were added during the nine months ended September 30, 2022.

Other Real Estate Owned and Repossessions.

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:

Of the total $269,000 of other real estate owned and repossessions at September 30, 2022, $183,000 represents properties which were not acquired through foreclosure.

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

(In Thousands)

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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 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.

In the nine months ended September 30, 2022, loans classified as “Watch” decreased $1.9 million, from $30.7 million at December 31, 2021 to $28.9 million at September 30, 2022 primarily due to loans being upgraded out of the “Watch” category, partially offset by loans being downgraded to the “Watch” category.

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

Non-interest Income

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:

For the three months ended September 30, 2022, non-interest income decreased $1.8 million to $8.0 million when compared to the three months ended September 30, 2021, primarily as a result of the following item:

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 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:

As a result of the significant volume of refinance activity in 2020 and 2021, and as market interest rates moved higher beginning 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.

The lower level of originations is expected to continue as long as market rates remain elevated.

For the nine months ended September 30, 2022, non-interest income decreased $2.6 million to $26.5 million when compared to the nine months ended September 30, 2021, primarily as a result of the following items:

Net gains on loan sales :

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Point-of-sale and ATM fees increased $899,000 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 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.

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

In the latter half of 2021 and through the first three quarters of 2022, debit card usage by customers rebounded and was back to historical 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.

Overdraft and Insufficient funds fees increased $1.0 million compared to the prior year period.

Other income :

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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.

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

Non-interest Expense

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:

For the three months ended September 30, 2022, non-interest expense increased $3.5 million to $34.8 million when compared to the three months ended September 30, 2021, primarily as a result of the following items:

Salaries and employee benefits :

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.

Salaries and employee benefits increased $1.1 million from the prior year quarter.

A portion of this increase 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 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.

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

The operation of these offices added approximately $200,000 of expense in the 2022 quarter.

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:

Legal, audit and other professional fees increased $1.6 million from the prior year quarter, to $2.2 million.

In the 2022 period, the Company expensed a total of $1.1 million 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.

Also in the 2022 period, the Company expensed $372,000 in fees related to the interest rate swaps initiated in July 2022.

Other operating expenses :

Other operating expenses increased $576,000 from the prior year quarter, to $2.4 million.

Of this increase, $142,000 related to business development, $152,000 related to deposit account fraud losses and $90,000 related to charitable contributions.

For the nine months ended September 30, 2022, non-interest expense increased $7.1 million to $99.0 million when compared to the nine months ended September 30, 2021, primarily as a result of the following items:

Salaries and employee benefits :

Salaries and employee benefits increased $3.6 million from the prior year period, for the same reasons noted above.

Also, in the second quarter of 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.

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.

Legal, audit and other professional fees increased $2.4 million from the prior year period, to $4.2 million, with $1.6 million 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.

Also in the 2022 period, the Company expensed $492,000 in fees related to the interest rate swaps initiated at various times in 2022.

Other operating expenses :

Other operating expenses increased $1.3 million from the prior year period, to $6.1 million.

Of this increase, $353,000 related to business development, $278,000 related to deposit account fraud losses and $188,000 related to charitable contributions.

The Company’s efficiency ratio for the three months ended September 30, 2022, was 57.09% compared to 57.27% for the same period in 2021.

The Company’s efficiency ratio for the nine months ended September 30, 2022, was 57.75% compared to 56.42% for the same period in 2021.

In the three-month period ended September 30, 2022, the improvement in the efficiency ratio was primarily due to an increase in net interest income, as a result of increased loan and investment balances and increased market interest rates compared to the three-month period ended September 30, 2021, partially offset by increased non-interest expense.

In the nine-month period ended September 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 2.49% and 2.27% for the three months ended September 30, 2022 and 2021, respectively.

The Company’s ratio of non-interest expense to average assets was 2.42% and 2.22% for the nine months ended September 30, 2022 and 2021, respectively.

Average assets for the three months ended September 30, 2022, decreased $50.0 million, or 0.9%, from the three months ended September 30, 2021, primarily due to a decrease in interest bearing cash equivalents, partially offset by an increase in net loans receivable and investment securities.

Average assets for the nine months ended September 30, 2022, decreased $74.4 million, or 1.3%, from the nine months ended September 30, 2021, primarily due to a decrease 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 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.

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

For the nine months ended September 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.

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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.

Net fees included in interest income were $1.6 million and $2.9 million for the three months ended September 30, 2022 and 2021, respectively.

Net fees included in interest income were $4.7 million and $7.9 million for the nine months ended September 30, 2022 and 2021, respectively.

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

The table does not reflect any effect of income taxes.

September 30,

Three Months Ended

June 30, 2022

June 30, 2021

September 30, 2022

September 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 $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

(1) Of the total average balances of investment securities, average tax-exempt investment securities were $63.4 million and $40.8 million for the three months ended September 30, 2022 and 2021, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $16.2 million and $17.6 million for the three months ended September 30, 2022 and 2021, respectively.

Interest income on tax-exempt assets included in this table was $628,000 and $397,000 for the three months ended September 30, 2022 and 2021, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $604,000 and $389,000 for the three months ended September 30, 2022 and 2021, respectively.

September 30,

Nine Months Ended

September 30, 2022

September 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 $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.

(1) Of the total average balances of investment securities, average tax-exempt investment securities were $51.4 million and $42.3 million for the nine months ended September 30, 2022 and 2021, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $16.3 million and $18.1 million for the nine months ended September 30, 2022 and 2021, respectively.

Interest income on tax-exempt assets included in this table was $1.5 million and $1.2 million for the nine months ended September 30, 2022 and 2021, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $1.4 million and $1.2 million for the nine months ended September 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 June 30,

Three Months Ended September 30,

Increase (Decrease)

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Net interest income

Six Months Ended June 30,

Nine Months Ended September 30,

Increase (Decrease)

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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.

obligations include the credit needs of customers, funding deposit withdrawals, and the day-to-day operations of the Company.

These 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.

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.

At September 30, 2022, the Company had commitments of approximately $112.6 million to fund loan originations, $2.02 billion of unused lines of credit and unadvanced loans, and $15.7 million of outstanding letters of credit.

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

September 30,

Closed non-construction loans with unused available lines

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

June 30, 2022

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

September 30, 2022

December 31, 2021

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Statements of Cash Flows.

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.

During the nine months ended September 30, 2022 and 2021, the Company had positive cash flows from operating activities.

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

The Company had positive cash flows from financing activities during the nine months ended September 30, 2022 and negative cash flows from financing activities during the nine months ended September 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 $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.

Operating activities provided cash flows of $53.9 million and $77.7 million during the nine months ended September 30, 2022 and 2021, respectively.

During the nine months ended September 30, 2022 and 2021, investing activities used cash of $788.9 million and provided cash of $239.9 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.

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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 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.

During the nine months ended September 30, 2022 and 2021, financing activities provided cash of $206.7 million and used cash of $112.2 million, respectively.

In the 2022 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 period, financing activities used cash primarily as a result of the redemption of subordinated notes, net decreases in time deposits, dividends paid to stockholders and the purchase of the Company’s common stock, partially offset by net increases in checking and savings account balances.

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 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.

At September 30, 2022, the Company’s total stockholders’ equity and common stockholders’ equity were each $511.3 million, or 9.0% of total assets, equivalent to a book value of $41.75 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 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 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 June 30, 2022, were realized gains (net of taxes) on the Company’s terminated cash flow hedge (interest rate swap), totaling $20.5 million.

At September 30, 2022, the Company’s tangible common equity to tangible assets ratio was 8.8%, compared to 11.2% at December 31, 2021 (See Non-GAAP Financial Measures below).

Included in stockholders’ equity at September 30, 2022 and December 31, 2021, were unrealized gains (losses) (net of taxes) on the Company’s available-for-sale investment securities totaling $(51.7 million) and $9.1 million, respectively.

This change from a net unrealized gain to a net unrealized loss during 2022 primarily resulted from increasing market interest rates throughout 2022, which decreased the fair value of investment securities.

Also included in stockholders’ equity at September 30, 2022, were unrealized gains (net of taxes) totaling $30,000 on the Company’s investment securities that were transferred to the held-to-maturity category.

Approximately $227 million of investment securities 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 September 30, 2022, were realized gains (net of taxes) on the Company’s terminated cash flow hedge (interest rate swap), totaling $18.9 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 June 30, 2022, the remaining pre-tax amount to be recorded in interest income was $26.6 million.

At September 30, 2022, the remaining pre-tax amount to be recorded in interest income was $24.5 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 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.

Also included in stockholders’ equity at September 30, 2022, was an unrealized loss (net of taxes) on the Company’s outstanding cash flow hedges (three interest rate swaps) totaling $25.6 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.

As noted above, total stockholders’ equity decreased $105.5 million, from $616.8 million at December 31, 2021 to $511.3 million at September 30, 2022.

Stockholders’ equity also decreased due to repurchases of the Company’s common stock totaling $59.3 million and dividends declared on common stock of $14.5 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.

Partially offsetting these decreases were net income of $53.3 million for the nine months ended September 30, 2022 and a $6.0 million increase due to stock option exercises.

Banks are required to maintain minimum risk-based capital ratios.

2 unchanged sentences

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 September 30, 2022, the Bank’s common equity Tier 1 capital ratio was 10.4%, its Tier 1 capital ratio was 10.8%, its total capital ratio was 13.4% and its Tier 1 leverage ratio was 10.6%.

As a result, as of September 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 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 September 30, 2022, the Company’s common equity Tier 1 capital ratio was 11.8%, its Tier 1 capital ratio was 11.8%, its total capital ratio was 13.0% and its Tier 1 leverage ratio was 11.5%.

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 September 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%.

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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 June 30, 2022, the Company and the Bank both had additional common equity Tier 1 capital in excess of the buffer amount.

At September 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 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.

During the three months ended September 30, 2022, the Company declared a common stock cash dividend of $0.40 per share, or 27% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.40 per share (which was declared in June 2022).

During the three months ended September 30, 2021, the Company declared a common stock cash dividend of $0.36 per share, or 24% 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 June 2021).

During the nine months ended September 30, 2022, the Company declared common stock cash dividends totaling $1.16 per share, or 28% of net income per diluted common share for that nine month period, and paid common stock cash dividends of $1.12 per share ($0.36 of which was declared in December 2021).

During the nine months ended September 30, 2021, the Company declared common stock cash dividends of $1.04 per share, or 24% of net income per diluted common share for that nine month period, and paid common stock cash dividends of $1.02 per share ($0.34 of which was declared in December 2020).

The Board of Directors meets regularly to consider the level and the timing of dividend payments.

The $0.40 per share dividend declared but unpaid as of June 30, 2022, was paid to stockholders in July 2022.

The $0.40 per share dividend declared but unpaid as of September 30, 2022, was paid to stockholders in October 2022.

Common Stock Repurchases and Issuances .

The Company has been in various buy-back programs since May 1990.

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.

During the three months ended September 30, 2022, the Company repurchased 150,271 shares of its common stock at an average price of $59.06 per share and issued 52,415 shares of common stock at an average price of $37.26 per share to cover stock option exercises.

During the three months ended September 30, 2021, the Company repurchased 307,059 shares of its common stock at an average price of $53.13 per share and issued 14,439 shares of stock at an average price of $37.87 per share to cover stock option exercises.

During the nine months ended September 30, 2022, the Company repurchased 999,586 shares of its common stock at an average price of $59.28 per share and issued 116,686 shares of common stock at an average price of $42.17 per share to cover stock option exercises.

During the nine months ended September 30, 2021, the Company repurchased 449,438 shares of its common stock at an average price of $52.89 per share and issued 63,570 shares of stock at an average price of $41.57 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.

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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.

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Ratio of Tangible Common Equity to Tangible Assets

June 30, 2022

September 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