What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-08 compared with 2022-11-08 · 404 added, 588 removed, 474 unchanged (68% of the section changed)

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Forward-looking Statements

When used in this Quarterly Report and in documents filed or furnished by Great Southern Bancorp, Inc.

When used in this Quarterly Report and in other documents filed or furnished by Great Southern Bancorp, Inc.

(the “Company”) with the Securities and Exchange Commission (the “SEC”), in the Company’s press releases or other public or stockholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases “may,” “might,” “could,” “should,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “believe,” “estimate,” “project,” “intends” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

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The Company’s ability to predict results or the actual effects of future plans or strategies is inherently uncertain, and the Company’s actual results could differ materially from those contained in the forward-looking statements.

The novel coronavirus disease, or COVID-19, pandemic 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, 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.

Other factors that could cause or contribute to such differences include, but are not limited to:

Factors that could cause or contribute to such differences include, but are not limited to:

(i) expected revenues, cost savings, earnings accretion, synergies and other benefits from the Company’s merger and acquisition activities might not be realized within the anticipated time frames or at all, and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, and labor shortages might be greater than expected;

(ii) changes in economic conditions, either nationally or in the Company’s market areas;

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

(iv) the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses;

(v) the possibility of realized or unrealized losses on securities held in the Company’s investment portfolio;

(vi) the Company’s ability to access cost-effective funding;

(vii) fluctuations in real estate values and both residential and commercial real estate market conditions;

(viii) the ability to adapt successfully to technological changes to meet customers’ needs and developments in the marketplace;

(ix) the possibility that security measures implemented might not be sufficient to mitigate the risk of a cyber-attack or cyber theft, and that such security measures might not protect against systems failures or interruptions;

(x) legislative or regulatory changes that adversely affect the Company’s business;

(xi) changes in accounting policies and practices or accounting standards;

(xii) results of examinations of the Company and Great Southern Bank by their regulators, including the possibility that the regulators may, among other things, require the Company to limit its business activities, change its business mix, increase its allowance for credit losses, write-down assets or increase its capital levels, or affect its ability to borrow funds or maintain or increase deposits, which could adversely affect its liquidity and earnings;

(iii) the remaining effects of the COVID-19 pandemic, including on our credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic;

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

(v) the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses;

(vi) the possibility of realized or unrealized losses on securities held in the Company’s investment portfolio;

(vii) the Company’s ability to access cost-effective funding and maintain sufficient liquidity;

(viii) fluctuations in real estate values and both residential and commercial real estate market conditions;

(ix) the ability to adapt successfully to technological changes to meet customers’ needs and developments in the marketplace;

(x) the possibility that security measures implemented might not be sufficient to mitigate the risk of a cyber-attack or cyber theft, and that such security measures might not protect against systems failures or interruptions;

(xi) legislative or regulatory changes that adversely affect the Company’s business;

(xii) changes in accounting policies and practices or accounting standards;

(xiii) results of examinations of the Company and Great Southern Bank by their regulators, including the possibility that the regulators may, among other things, require the Company to limit its business activities, change its business mix, increase its allowance for credit losses, write-down assets or increase its capital levels, or affect its ability to borrow funds or maintain or increase deposits, which could adversely affect its liquidity and earnings;

(xiv) costs and effects of litigation, including settlements and judgments;

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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 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 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.

Loans are aggregated into pools based on similar risk characteristics, including borrower type, collateral and repayment types and expected credit loss patterns.

Loans that do not share similar risk characteristics, primarily classified and/or TDR loans with a balance greater than or equal to $100,000 which are classified or restructured troubled debt, are evaluated on an individual basis.

Loans that do not share similar risk characteristics, primarily classified loans with a balance greater than or equal to $100,000, are evaluated on an individual basis.

For loans evaluated for credit losses on a collective basis, average historical loss rates are calculated for each pool using the Company’s historical net charge-offs (combined charge-offs and recoveries by observable historical reporting period) and outstanding loan balances during a lookback period.

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The forecast adjusted loss rate is applied to the amortized cost of loans over the remaining contractual lives, adjusted for expected prepayments.

The contractual term excludes expected extensions, renewals and modifications unless there is a reasonable expectation that a troubled debt restructuring will be executed.

The contractual term excludes expected extensions, renewals and modifications.

Additionally, the allowance for credit losses considers other qualitative factors not included in historical loss rates or macroeconomic forecast such as changes in portfolio composition, underwriting practices, or significant unique events or conditions.

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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 on January 1, 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.

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 September 30, 2022, the Company had one reporting unit to which goodwill has been allocated – the Bank.

As of March 31, 2023, the Company had one reporting unit to which goodwill has been allocated – the Bank.

If the fair value of a reporting unit exceeds its carrying value, then no impairment is recorded.

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

At 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.

At March 31, 2023, 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.

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

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.

At March 31, 2023, the amortizable intangible assets included the arena naming rights of $5.3 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.

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

The market approach applies a market multiple, based on observed purchase transactions for each reporting unit, to the metrics appropriate for the valuation of the operating unit.

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

Management does not believe any of the Company’s goodwill or other intangible assets were impaired as of March 31, 2023.

While management believes no impairment existed at March 31, 2023, 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)

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Arena Naming Rights (April 2022)

Goodwill – Branch acquisitions

Current Economic Conditions

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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.

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, sporting events, retail shops, personal services, and more.

The pandemic has not been disruptive to the U.S.

and global economies for several months now, with governments, households and businesses increasingly adept at making adjustments for 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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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.

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, totaled well over $5 trillion.

Total fiscal support to the economy throughout the pandemic, including the CARES Act, the American Rescue Plan of 2021, and several smaller fiscal packages, totaled well over $5 trillion.

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.

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

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

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

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.

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 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) 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.

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

The Federal Reserve continues to aggressively tighten monetary policy by increasing rates and allowing its balance sheet to shrink through quantitative tightening.

The federal government deficit was $2.8 trillion in fiscal 2021, close to $1.38 trillion in fiscal 2022, and is expected to be $1.4 trillion in fiscal 2023.

The publicly traded debt-to-GDP ratio is near 95%, up from 80% prior to the pandemic and 35% prior to the global financial crisis.

Lawmakers were appropriately not focused on deficits during the pandemic, but as the pandemic fades, addressing the fragile fiscal situation becomes critical.

Real gross domestic product (GDP) increased at an annual rate of 2.9% in the fourth quarter of 2022 according to the “advance” estimate released by the Bureau of Economic Analysis.

In the third quarter of 2022, real GDP increased 3.2%.

The fourth quarter 2022 increase primarily reflected increases in inventory investment and consumer spending that were partly offset by a decrease in housing investment.

Prompting the Fed to take such a hawkish policy stance is the painfully high inflation, resulting largely from pandemic-related disruptions to global supply chains and labor markets, and Russia’s invasion of Ukraine, which pushed up oil and other commodity prices.

Adding to the pressure to act is the resilient growth in jobs, low unemployment in the mid-3s (consistent with full employment), and overly strong wage growth.

The unemployment rate returned to its post-pandemic low of 3.5%, and it did so even as the labor force expanded by 439,000 and the participation rate edged higher to 62.3%.

The unemployment rate was down or unchanged across most major demographic groups.

However, the least educated workers saw an increase in joblessness from 4.4% to 5%.

The Fed increased the fed funds rate by 50 basis points at the December 2022 meeting of the Federal Open Market Committee and 25 basis points in each of February 2023 and March 2023.

This brings the funds rate target to 5.00%.

The Fed also continues to allow the assets on its balance sheet, including more than $8.3 trillion remaining in Treasury and mortgage-backed securities, to mature and prepay.

The Inflation Reduction Act was enacted in August 2022, which 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.

The publicly traded debt-to-GDP ratio has surged to near 95%.

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 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.

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.

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

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

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 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%.

In April 2023, global oil prices hovered near $80 per barrel.

This reflects the graceful implementation of the European Union’s sanctions on Russian oil and a price cap on Russian oil imposed by Western nations led by the U.S.

Chinese oil demand has picked up with its economy, but there has been enough supply, at least so far.

The estimated long-run equilibrium price of oil is near $70 per barrel.

Ten-year Treasury yields have fallen back to near 3.5% given the angst created by recent bank failures and global investors’ flight to quality.

Yields are consistent with Moody’s Analytics’ estimate of nominal potential GDP growth of 4% (2% long-run inflation plus 2% real potential GDP growth).

Moody’s expects yields to hover near 4% for the foreseeable future.

The national unemployment rate remained unchanged at 3.5% in March 2023.

The number of unemployed individuals increased slightly to 5.8 million in March 2023.

Both measures have shown little net movement since early 2022.

Total employment increased by 236,000 in March 2023, compared with the average monthly gain of 334,000 over the prior 6 months.

In March 2023, employment continued to trend up in leisure and hospitality, government, professional and business services, and health care.

Unemployment levels have recovered to pre-pandemic levels as of February 2020 when the unemployment rate registered at 3.5% and there were 5.8 million unemployed individuals.

Job cuts occurred in technology, warehousing and storage, building material, garden equipment, supplies dealers, furniture, home furnishings, electronics, and appliance retailers.

As of March 2023, the labor force participation rate (the share of working-age Americans employed or actively looking for a job) remained little changed at 62.6%.

Based on March 2023 information, the unemployment rate for the Midwest, where the Company conducts most of its business, has decreased from 3.6% in March 2022 to 3.4% in March 2023.

Unemployment rates for March 2023 in the states where the Company has a branch or a loan production office were Arizona at 3.5%, Arkansas at 3.0%, Colorado at 2.8%, Georgia at 3.1%, Illinois at 4.4%, Iowa at 2.8%, Kansas at 2.9%, Minnesota at 2.8%, Missouri at 2.5%, Nebraska at 2.1%, North Carolina at 3.5%, Oklahoma at 3.0%, and Texas at 4.0%.

Of the metropolitan areas in which the Company does business, most are below the national unemployment rate of 3.5% for March 2023, with the major outlier being Chicago at 4.4%.

Single Family Housing

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 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 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%.

Sales of new single-family houses in March 2023 were at a seasonally adjusted annual rate of 683,000, according to the estimates released jointly by the U.S.

Census Bureau and Department of Housing and Urban Development.

This is 9.6% above the revised February 2023 rate of 623,000 but is 3.4% below the March 2022 estimate of 707,000.

The median sales price of new houses sold in March 2023 was $449,800, up from $435,900 in March 2022.

The average sales price in March 2023 of $511,800 was up from $540,000 in March 2022.

The seasonally‐adjusted estimate of new houses for sale at the end of March was 432,000.

This represents a supply of 7.6 months at the current sales rate.

National existing-home sales fell 2.4% in March 2023 to a seasonally adjusted annual rate of 4.44 million.

Year-over-year, sales waned 22.0% (down from 5.69 million in March 2022).

Existing–home sales in the Midwest retracted 5.5% from Febraury 2023 to an annual rate of 1.03 million in March 2023, falling 17.6% from the previous year.

The median existing-home sales price nationally as of March 2023 was $375,700, a decline of 0.9% from March 2022 ($379,300).

The median price in the Midwest was $273,400, up 1.7% from March 2022.

Nationally, properties on average remained on the market for 29 days in March 2023, down from 34 days in February 2023 but up from 17 days in March 2022.

Sixty-five percent of homes sold in March 2023 were on the market for less than a month.

Unsold inventory sits at a 2.6-month supply at the current sales pace for March 2023, unchanged from February 2023 but up from 2.0 months in March 2022.

Once overall consumer price inflation calms and rents decelerate from robust apartment construction, the Federal Reserve’s monetary policy may shift from tightening to neutral to possibly loosening over the next 12 months.

First-time homebuyers accounted for 28% of sales in March 2023, up from 27% in February 2023 but down from 30% in March 2022.

According to Freddie Mac, the average commitment rate for a 30-year, fixed-rate mortgage was 6.27% as of April 13, 2023 which is down from 6.28% from the prior week but up from 5% one year ago.

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

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:

The multi-family trend of supply outpacing demand continued for the sixth quarter in a row to start off 2023.

Net absorption rebounded into positive territory after turning negative at the end of 2022, with 42,000 units absorbed.

However, with 109,000 new units delivered during the first quarter of 2023, rent growth nationally decelerated once again, going from 3.8% at the end of 2022 to 2.2% at March 2023.

Midwest and Northeast markets fared the best over the past 12 months, with rent growth down marginally.

Sun Belt markets have seen significant pull back in rents over the past 12 months.

Phoenix has gone from rent growth rates of 17% to -1.9%.

The downward movement of rents nationally is expected to continue for the rest of 2023, as the risk of recession hangs over the economy and many markets are experiencing oversupply conditions.

The supply/demand imbalance has pushed the national vacancy rate up 200 basis points from an all-time low of 4.7% in the third quarter of 2021 to 6.7% as of March 31, 2023.

CoStar’s current forecast is for the national vacancy rate to finish this year in the mid 7% range, which would be 100 basis points higher than pre-pandemic levels.

As indicated above, absorption in the first quarter of 2023 registered just 42,000 units, which is well below the five-year pre-pandemic average of 82,000.

Tempering of multi-family demand has come from higher costs due to elevated inflation.

Significant rent increases in 2021 and 2022 also are forcing some renter households to find alternative housing situations, such as returning home to their parents or finding a roommate.

Plus, economic uncertainty continues to hold back household formation, which is dampening middle market demand.

When demand in the multi-family market spiked in the first year of the pandemic, developers accelerated plans for new projects.

Now two years later, a good number of those developments are set to deliver in 2023.

The national forecast sits at 519,000 new units to be delivered in 2023, the most new supply to hit the market since the mid-1980s.

The rising interest rate environment, combined with a pullback in construction lending, has led some developers nationwide to not move forward on proposed projects.

With fewer projects moving forward, there could be a meaningful pause in deliveries towards the

end of 2024 and into 2025.

This pause would be very helpful in allowing many overbuilt Sun Belt markets to soak up the current supply overhang and return to equilibrium quicker.

Multi-family continued to be the most sought-after asset type in 2022 despite a pullback in transaction activity.

On the heels of a record-breaking 2021, sales decreased to $227 billion, representing the second-best year on record.

However, this activity occurred primarily in the first half of 2022 with the second half of 2022 weakening, posting a 25% decline over the prior six months.

As of March 31, 2023, national multi-family market vacancy rates increased to 6.7%.

Our market areas reflected the following apartment vacancy levels as of March 2023:

Springfield, Missouri at 3.7%, St.

Louis at 8.9%, Kansas City at 7.8%, Minneapolis at 7.3%, Tulsa, Oklahoma at 8.2%, Dallas-Fort Worth at 8.7 %, Chicago at 5.6%, Atlanta at 9.6%, Phoenix at 9.1%, Denver at 7.4% and Charlotte, North Carolina at 9.4%.

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.

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:

Demand for office market space continues its decline.

Tenants gave back another 20 million square feet during the first quarter, bringing total net absorption since the end of 2019 to a staggering -140 million square feet.

This propelled vacancy to a record 12.9%, eclipsing its peak from the Great Recession.

There is every indication that vacancies will continue to rise, especially with 60 million square feet of new supply—the most in a calendar year since 2009—projected to come online by the end of 2023.

As of March 31, 2023, national office vacancy rates increased to 12.8% from 12.7% as of December 31, 2022, while our market areas reflected the following vacancy levels at March 31, 2023:

Springfield, Missouri at 4.2%, St.

Louis at 10.2%, Kansas City at 11.6%, Minneapolis at 11.0%, Tulsa, Oklahoma at 11.8%, Dallas-Fort Worth at 18.0%, Chicago at 15.4%, Atlanta at 14.1%, Denver at 14.8%, Phoenix at 15.2% and Charlotte, North Carolina at 12.6%.

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.

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 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:

retail tenants signed for over 230 million square feet (SF) of retail space in 2022, which was the second-highest total for any year since 2017.

At the same time, tenants closed just 20 million SF of retail space during 2022, which was the lowest total recorded since before the Great Recession and a fraction of the prior five-year average for retail space closed of 114.6 million SF.

The combination of strong leasing volumes and the significant reduction in move-outs drove net absorption to its highest level in six years in 2022, at 74 million SF.

Fundamental tightening and rising retail sales pushed retail asking rents upward at their fastest clip in over a decade in 2022 at 4.1%, with average triple net asking rents across the U.S.

finishing the year at a record high of $24.00/SF.

However, growth has slowed in each of the past two quarters and is forecast to decelerate further over the coming quarters, while above-average inflation is expected to continue to weigh on the real rate of rent growth, keeping it below historical norms for the foreseeable future.

During the first quarter of 2023, national retail vacancy rates remained steady at 4.2% while our market areas reflected the following vacancy levels:

Springfield, Missouri at 3.4%, St.

Louis at 5.0%, Kansas City at 4.2%, Minneapolis at 3.1%, Tulsa, Oklahoma at 3.0%, Dallas-Fort Worth at 4.6%, Chicago at 5.4%, Atlanta at 3.7%, Phoenix at 5.0%, Denver at 4.1%, and Charlotte, North Carolina at 3.2%.

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.

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:

industrial market performance is slowing down heading into mid-2023.

While the national vacancy rate is expected to remain below its 20-year average of 7.3%, the next six to 12 months could still prove to be one of the more challenging periods for the market over the next five years.

Oncoming new supply is all but certain to push the national vacancy rate up during 2023.

CoStar is tracking 619 million SF of projects under construction, most of which are unleased and set to be completed in 2023.

The national vacancy rate has already begun to inch up in recent quarters and rent growth is slowing from the peak of 3% quarterly growth reached in mid-2022.

Further deceleration in rent growth seems unavoidable in 2023, given that landlords will be contending with a record amount of speculative development, at a time when 2022’s sharp interest rate increases will likely still be weighing on the macro economy.

At March 31, 2023, national industrial vacancy rates increased to 4.5% from 4.2% as of December 31, 2022.

Our market areas reflected the following vacancy levels:

Springfield, Missouri at 1.2%, St.

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We continue to monitor infection rates and other health and economic indicators to ensure we are prepared to respond to future challenges, should they arise.

Paycheck Protection Program Loans

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.

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

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

At 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 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.

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

Net interest income is the difference between the interest income the Bank earns on its loans and investment portfolios, and the interest it pays on interest-bearing liabilities, which consists mainly of interest paid on deposits and borrowings.

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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 $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.

Great Southern’s total assets increased $88.0 million, or 1.5%, from $5.68 billion at December 31, 2022, to $5.77 billion at March 31, 2023.

Details of the current period changes in total assets are provided below, under “Comparison of Financial Condition at March 31, 2023 and December 31, 2022.”

Net outstanding loans increased $62.5 million, or 1.4%, from $4.51 billion at December 31, 2022, to $4.57 billion at March 31, 2023.

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

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

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

Great Southern’s loan committee reviews and approves all new loan originations in excess of lender approval authorities.

All new loan originations that exceed lender approval authorities are subject to review and approval by Great Southern’s loan committee.

Generally, the Company considers commercial construction, consumer, other residential (multi-family) and commercial real estate loans to involve a higher degree of risk compared to some other types of loans, such as first mortgage loans on one- to four-family, owner-occupied residential properties.

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Underwriting standards for all loans also include loan-to-value ratio limitations which vary depending on collateral type, debt service coverage ratios or debt payment to income ratio guidelines, where applicable, credit histories, use of guaranties and other recommended terms relating to equity requirements, amortization, and maturity.

Consumer loans, other than home equity loans, are primarily secured by new and used motor vehicles and these loans are also subject to certain minimum underwriting standards to assure portfolio quality.

Consumer loans, other than home equity loans, are primarily secured by new or used motor vehicles and these loans are also subject to certain minimum underwriting standards to assure portfolio quality.

In 2019, the Company discontinued indirect auto loan originations.

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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 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 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.

For further information on TDRs, see Note 6 of the Notes to Consolidated Financial Statements contained in this report.

At both March 31, 2023 and December 31, 2022, 0.2% of our owner occupied one-to four-family residential loans had loan-to-value ratios above 100% at origination and an estimated 0.2% of total non-owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination.

The level of non-performing loans and foreclosed assets affects our net interest income and net income.

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LIBOR is a benchmark interest rate referenced in a variety of agreements used by the Company, but by far the most significant area impacted by LIBOR is related to commercial and residential mortgage loans.

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

Certain LIBOR rates are no longer published and it is expected that all LIBOR rates will be discontinued as reference rates by June 30, 2023.

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

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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 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.

At March 31, 2023, this represented approximately 23 commercial loans totaling approximately $21 million;

however, only 14 of those loans, totaling $860 thousand, 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 $351 million at March 31, 2023), 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 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.

In the three months ended March 31, 2023, available-for-sale securities increased $2.7 million, or 0.6%, from $490.6 million at December 31, 2022, to $493.3 million at March 31, 2023.

Held-to-maturity Securities.

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 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.

In the three months ended March 31, 2023, held-to-maturity securities decreased $2.1 million, or 1.0%, from $202.5 million at December 31, 2022, to $200.4 million at March 31, 2023.

The Company attracts deposit accounts through its retail branch network, correspondent banking and corporate services areas, internet channels 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 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.

In the three months ended March 31, 2023, total deposit balances increased $114.2 million, or 2.4%.

Compared to December 31, 2022, transaction account balances decreased $26.3 million, or 0.8%, to $3.23 billion at March 31, 2023, while retail certificates of deposit increased $14.9 million, or 1.5%, to $1.04 billion at March 31, 2023.

The decrease in transaction accounts was primarily a result of a decrease in non-interest-bearing accounts and various NOW accounts, as small businesses and individuals appear to be drawing down their balances to pay for goods and services, or are seeking a higher-yielding alternative.

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.

Time deposits initiated through internet channels are no longer a significant part of the Company’s total deposits.

Brokered deposits, including IntraFi program purchased funds, were $537.0 million and $411.5 million at March 31, 2023 and December 31, 2022, 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.

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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 continued access to brokered deposits and FHLBank advances.

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

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

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While we do not currently anticipate that our ability to access these sources will be reduced or eliminated in future periods, if this should happen, the limitation on our ability to fund additional loans could have a material adverse effect on our business, financial condition and results of operations.

See “Results of Operations and Comparison for the Three Months Ended March 31, 2023 and 2022 – Liquidity” below for further information on funding sources.

Securities sold under reverse repurchase agreements with customers.

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.

Securities sold under reverse repurchase agreements with customers decreased $106.1 million from $176.8 million at December 31, 2022 to $70.7 million at March 31, 2023.

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 $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.

The Company’s FHLBank term advances were $-0- at both March 31, 2023 and December 31, 2022.

At March 31, 2023 there were $154.5 million in overnight borrowings from the FHLBank, which are included in short term borrowings.

At December 31, 2022 there were $88.5 million in overnight borrowings from the FHLBank.

Short term borrowings and other interest-bearing liabilities increased $66.1 million from $89.6 million at December 31, 2022 to $155.7 million at March 31, 2023.

The Company may utilize both overnight borrowings and short-term FHLBank advances depending on relative interest rates.

Net Interest Income and Interest Rate Risk Management.

Our net interest income may be affected positively or negatively by changes in market interest rates.

A large portion of our loan portfolio is tied to one-month LIBOR, three-month LIBOR or the “prime rate” and adjusts immediately or shortly after the index rate adjusts (subject to the effect of contractual interest rate floors on some of the loans, which are discussed below).

A large portion of our loan portfolio is tied to one-month LIBOR/SOFR, three-month LIBOR or the “prime rate” and adjusts immediately or shortly after the index rate adjusts (subject to the effect of contractual interest rate floors on some of the loans, which are discussed below).

We monitor our sensitivity to interest rate changes on an ongoing basis (see “Item 3.

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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 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’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.

At December 31, 2021, the Federal Funds rate was 0.25%.

In 2022, the FRB implemented rate increases of 0.25%, 0.50%, 0.75%, 0.75%, 0.75%, 0.75% and 0.50% in March, May, June, July, September, November and December 2022, respectively.

At December 31, 2022, the Federal Funds rate was 4.50%.

In 2023, the FRB implemented rate increases of 0.25% and 0.25% in February and March 2023, respectively.

At March 31, 2023 the Federal Funds rate was 5.00%.

Financial markets expect the possibility of further increases in Federal Funds interest rates in the first half of 2023, with 0.25-0.50% of additional cumulative rate hikes currently anticipated.

A substantial portion of Great Southern’s loan portfolio ($868.8 million at March 31, 2023) is tied to the one-month or three-month LIBOR index and will be subject to adjustment at least once within 90 days after March 31, 2023.

Of these loans, $868.5 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.

Great Southern’s loan portfolio also includes loans ($693.4 million at March 31, 2023) tied to various SOFR indexes that will be subject to adjustment at least once within 90 days after March 31, 2023.

Of these loans, $693.4 million had interest rate floors.

Great Southern also has a portfolio of loans ($738.6 million at March 31, 2023) 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, $725.8 million had interest rate floors at various rates.

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.

Great Southern also has a portfolio of loans ($6.7 million at March 31, 2023) tied to an AMERIBOR index that will adjust immediately or within 90 days of a change to the “prime rate” of interest.

Of these loans, $6.7 million had interest rate floors at various rates.

At March 31, 2023, 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.

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

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.

There may also be a negative impact on the Company’s net interest income if the Company 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.

As of March 31, 2023, Great Southern’s interest rate risk models indicate that, generally, rising interest rates are expected to have a positive impact on the Company’s net interest income, while declining interest rates are expected to have a negative impact on net interest income.

We model various interest rate scenarios for rising and falling rates, including both parallel and non-parallel shifts in rates.

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

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

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

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

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

In 2023, market interest rate increases have moderated and loan yield increases have also moderated in line with market rates.

However, there has been increased competition for deposits and other sources of funding, resulting in higher costs for those funds.

This has been especially true since early March 2023.

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

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Operating expenses consist primarily of salaries and employee benefits, occupancy-related expenses, expenses related to foreclosed assets, postage, FDIC deposit insurance, advertising and public relations, telephone, professional fees, office expenses and other general operating expenses.

Details of the current period changes in non-interest income and non-interest expense are provided in the “Results of Operations and Comparison for the Three and Nine Months Ended September 30, 2022 and 2021” section of this report.

Details of the current period changes in non-interest income and non-interest expense are provided below, under “Results of Operations and Comparison for the Three Months Ended March 31, 2023 and 2022.”

Effect of Federal Laws and Regulations

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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) 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.

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

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

Economic Growth Act.

In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Economic Growth Act”), was enacted to modify or eliminate certain financial reform rules and regulations, including some implemented under the Dodd-Frank Act.

While the Economic Growth Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion.

Many of these amendments could result in meaningful regulatory changes.

The Economic Growth Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” (“CBLR”) of between 8 and 10 percent.

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Business Initiatives

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.

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.

In January 2023, a high-transaction-volume banking center located at 1615 West Sunshine Street in Springfield, Missouri, was razed to make way for a new Express Center, which will use only interactive teller machine (ITM) technology to serve customers.

The modern four-lane drive-up center is expected to open during the third quarter of 2023 and 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.

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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 $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 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 3.6% 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 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 $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.

A leased banking center office at 1232 S.

Rangeline Road in Joplin, Missouri, was consolidated into a nearby office at 2801 E.

The leased office was closed at the end of the business day on March 17, 2023, leaving one banking center serving the Joplin market.

During 2023, the Great Southern team is preparing to convert to a new core banking platform and ancillary systems, delivered by a third party vendor.

This upgrade in the operational platform is expected to provide new and advanced tools and access to more meaningful information to better serve customers.

The migration to the new system is expected to occur in mid-2024.

As significant preliminary work was completed in 2022 and early 2023, it was determined to extend the conversion timeline from third quarter 2023

to allow for further system testing related to some of our more highly-customized applications and products and to accommodate certain functionality enhancements to the platform.

The Company announced that its 2023 Annual Meeting of Stockholders, to be held at 10 a.m.

Central Time on May 10, 2023, will be a virtual meeting over the internet and will not be held at a physical location.

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

Holders of record of Great Southern Bancorp, Inc.

common stock at the close of business on the record date, March 1, 2023, may vote during the live webcast of the Annual Meeting or by proxy.

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

Comparison of Financial Condition at March 31, 2023 and December 31, 2022

During the three months ended March 31, 2023, the Company’s total assets increased by $88.0 million to $5.77 billion.

The increase was primarily in loans and interest-bearing deposits in other financial institutions.

Cash and cash equivalents were $184.7 million at March 31, 2023, an increase of $16.2 million, or 9.6%, from $168.5 million at December 31, 2022.

The Company’s available-for-sale securities increased $2.7 million, or 0.6%, compared to December 31, 2022.

The increase was primarily due to an increase in the market value of these available-for-sale securities, partially offset by normal monthly payments received related to the portfolio of mortgage-backed securities and collateralized mortgage obligations.

The available-for-sale securities portfolio was 8.6% of total assets at both March 31, 2023 and December 31, 2022.

Held-to-maturity securities were $200.4 million at March 31, 2023, a decrease of $2.1 million, or 1.0%, from $202.5 million at December 31, 2022.

The held-to-maturity securities portfolio was 3.5% and 3.6% of total assets at March 31, 2023 and December 31, 2022, respectively.

Net loans increased $62.5 million from December 31, 2022, to $4.57 billion at March 31, 2023.

This increase was primarily in other residential (multi-family) loans ($104 million increase) and commercial real estate loans ($30 million increase).

These increases were partially offset by a decrease in commercial construction loans ($61 million decrease).

Loan origination volume in the three months ended March 31, 2023 significantly decreased compared to the origination volume that occurred in 2021 and most of 2022;

however, the pace of loan payoffs prior to maturity has slowed in the latter half of 2022 and into 2023 due to the significant increase in market rates of interest.

Total liabilities increased $65.6 million, from $5.15 billion at December 31, 2022 to $5.21 billion at March 31, 2023, primarily due to increases in brokered deposits and short-term borrowings from FHLBank.

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.

In addition, securities sold under reverse repurchase agreements decreased $106 million in the three months ended March 31, 2023.

Total deposits increased $114.2 million, or 2.4%, to $4.80 billion at March 31, 2023.

Transaction account balances decreased $26.3 million, from $3.25 billion at December 31, 2022 to $3.23 billion at March 31, 2023.

Retail certificates of deposit increased $14.9 million compared to December 31, 2022, to $1.04 billion at March 31, 2023.

Total interest-bearing checking accounts increased $45.8 million while non-interest-bearing checking accounts decreased $72.1 million.

Customer retail time deposits initiated through our banking center network increased $36.7 million and time deposits initiated through our national internet network decreased $19.8 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.

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 and continued from time to time into the first three months of 2023.

Brokered deposits increased $125.5 million to $537.0 million at March 31, 2023, compared to $411.5 million at December 31, 2022.

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

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.

The Company’s term Federal Home Loan Bank advances were $-0- at both March 31, 2023 and December 31, 2022.

At March 31, 2023 and December 31, 2022 there were overnight borrowings from the FHLBank, which are included in the short term borrowings category.

Securities sold under reverse repurchase agreements with customers decreased $106.1 million from $176.8 million at December 31, 2022 to $70.7 million at March 31, 2023.

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

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 $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 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%.

2023, some customers elected to move funds from these repurchase accounts into other types of deposit accounts that included deposit insurance coverage through the IntraFi deposit program.

Short-term borrowings and other interest-bearing liabilities increased $66.1 million from $89.6 million at December 31, 2022 to $155.7 million at March 31, 2023.

At March 31, 2023, $154.5 million of this total was overnight borrowings from the FHLBank, which was used to fund increases in outstanding loans.

Total stockholders’ equity increased $22.4 million, from $533.1 million at December 31, 2022 to $555.5 million at March 31, 2023.

Accumulated other comprehensive loss decreased $11.9 million during the three months ended March 31, 2023, primarily due to increases in the fair value of available-for-sale investment securities and the fair value of cash flow hedges, as a result of decreased market interest rates.

Stockholders’equity also increased due to net income of $20.5 million for the three months ended March 31, 2023 and a $470,000 increase in stockholders’ equity due to stock option exercises.

Partially offsetting these increases were repurchases of the Company’s common stock totaling $5.6 million and dividends declared on common stock of $4.9 million.

Results of Operations and Comparison for the Three Months Ended March 31, 2023 and 2022

Net income was $20.5 million for the three months ended March 31, 2023 compared to $17.0 million for the three months ended March 31, 2022.

This increase of $3.5 million, or 20.4%, was primarily due to an increase in net interest income of $9.9 million, or 22.9%, partially offset by an increase in non-interest expense of $3.2 million, or 10.2%, a decrease in non-interest income of $1.3 million, or 14.0%, an increase in income tax expense of $1.1 million, or 25.3%, and an increase in provision for credit losses on loans and unfunded commitments of $867,000, or 449.2%.

Total Interest Income

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.

Total interest income increased $24.8 million, or 53.1%, during the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

The increase was due to a $22.4 million increase in interest income on loans and a $2.4 million increase in interest income on investment securities and other interest-earning assets.

Interest income from loans, investment securities and other interest-earning assets increased during the three months ended March 31, 2023 compared to the same period in 2022 due to higher average balances and higher average rates of interest.

Interest Income – Loans

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.

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

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.

During the three months ended March 31, 2023 compared to the three months ended March 31, 2022, interest income on loans increased $16.9 million due to higher average interest rates on loans.

The average yield on loans increased from 4.23% during the three months ended March 31, 2022, to 5.76% during the three months ended March 31, 2023.

This increase was primarily due to the repricing of floating rate loans in the second half of 2022 and into 2023 as market interest rates increased significantly.

Interest income on loans also increased $5.5 million as the result of higher average loan balances, which increased from $4.13 billion during the three months ended March 31, 2022, to $4.61 billion during the three months ended March 31, 2023.

The Company continued to originate loans at a pace similar to prior periods through the first nine months of 2022, and overall loan repayments slowed in 2022 and 2023 compared to the level of repayments in 2021.

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

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

The Company recorded interest income related to 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.

The Company recorded interest income related to the interest rate swap of $2.0 million in each of the three months ended March 31, 2023 and 2022.

At March 31, 2023, 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.

In February 2022, 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 is $300 million with an effective date of March 1, 2022 and a termination date of March 1, 2024.

In March 2022, 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 is $300 million with an effective date of March 1, 2022 and a

termination date of March 1, 2024.

Under the terms of the swap, the Company will receive a fixed rate of interest of 1.6725% and will pay a floating rate of interest equal to one-month USD-LIBOR (or the equivalent replacement rate if USD-LIBOR rate is not available).

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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%.

If one-month USD-LIBOR 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.

The Company recorded a reduction in loan interest income related to this swap transaction of $2.2 million in the three months ended March 31, 2023 and loan interest income related to this swap transaction of $370,000 in the three months ended March 31, 2022.

At April 1, 2023, the one-month USD-LIBOR rate on this interest rate swap was 4.85771%.

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.

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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%.

At March 31, 2023, the USD-Prime rate was 8.00% and the one-month USD-SOFR OIS rate was 4.62101%.

Interest Income – Investments and Other Interest-earning Assets

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.

Interest income on investments increased $1.6 million in the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Interest income increased $1.2 million as a result of an increase in average balances from $534.0 million during the three months ended March 31, 2022, to $706.9 million during the three months ended March 31, 2023.

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.

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.

Interest income increased $400,000 as a result of higher average interest rates from 2.59% during the three months ended March 31, 2022, to 2.87% during the three month period ended March 31, 2023.

Interest income on other interest-earning assets increased $823,000 in the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Interest income increased $850,000 as a result of higher average interest rates from 0.18% during the three months ended March 31, 2022, to 4.51% during the three months ended March 31, 2023.

Partially offsetting that increase, interest income decreased $27,000 as a result of a decrease in average balances from $458.6 million during the three months ended March 31, 2022, to $91.8 million during the three months ended March 31, 2023.

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, 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.

This rate was increased multiple times in 2022 and 2023 in conjunction with the increase in the Federal Funds target interest rate.

The decrease in average balances was due to utilization of these funds in loan originations and securities purchases.

Total Interest Expense

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%.

Total interest expense increased $14.9 million, or 436.3%, during the three months ended March 31, 2023, when compared with the three months ended March 31, 2022, due to an increase in interest expense on deposits of $12.5 million, or 574.2%, an increase in interest expense on short-term borrowings of $1.8 million, an increase in interest expense on securities sold under reverse repurchase agreements of $332,000, or 3320.0%, an increase in interest expense on subordinated debentures issued to capital trusts of $275,000, or 233.1%, and an increase in interest expense on subordinated notes of $1,000, or 0.1%.

Interest Expense – Deposits

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.

Interest expense on demand and savings deposits increased $3.6 million due to average rates of interest that increased from 0.13% in the three months ended March 31, 2022 to 0.81% in the three months ended March 31, 2023.

Interest rates paid on demand deposits were higher in the 2023 period due to significant increases in overall market rates.

Partially offsetting this increase, interest expense on demand deposits decreased $57,000, due to a decrease in average balances from $2.38 billion during the three months ended March 31, 2022 to $2.18 billion during the three months ended March 31, 2023.

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 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 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.

Interest expense on time deposits increased $3.7 million as a result of an increase in average rates of interest from 0.56% during the three months ended March 31, 2022, to 2.07% during the three months ended March 31, 2023.

Interest expense on time deposits increased $247,000 due to an increase in average balances of time deposits from $863.7 million during the three months ended March 31, 2022 to $1.02 billion in the three months ended March 31, 2023.

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 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.

Interest expense on brokered deposits increased $3.3 million, due to an increase in average balances from $67.4 million during the three months ended March 31, 2022 to $456.8 million during the three months ended March 31, 2023.

Interest expense on brokered deposits increased $1.6 million due to average rates of interest that increased from 1.17% in the three months ended March 31, 2022 to 4.53% in the three months ended March 31, 2023.

Brokered deposits added during the three months ended March 31, 2023 were at higher market rates than brokered deposits previously issued.

The Company uses brokered deposits of select maturities from time to time to supplement its various funding channels and to manage interest rate risk.

Interest Expense – FHLBank Advances;

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Subordinated Debentures Issued to Capital Trusts and Subordinated Notes

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 $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.

FHLBank term advances were not utilized during the three months ended March 31, 2023 and 2022.

Interest expense on reverse repurchase agreements increased $330,000 due to higher average interest rates during the three months ended March 31, 2023 when compared to the three months ended March 31, 2022.

The average rate of interest was 0.94% for the three months ended March 31, 2023 compared to 0.03% for the three months ended March 31, 2022.

The average balance of repurchase agreements increased $18.7 million from $128.3 million in the three months ended March 31, 2022 to $147.0 million in the three months ended March 31, 2023, which was due to changes in customers’ desire for this product, which can fluctuate.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased $1.1 million during the three months ended March 31, 2023 when compared to the three months ended March 31, 2022 due to higher average rates of interest.

The average rate of interest was 4.75% for the three months ended March 31, 2023, compared to 0.08% for the three months ended March 31, 2022.

Short-term market interest rates increased sharply throughout 2022 and into 2023.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased $722,000 during the three months ended March 31, 2023 when compared to the three months ended March 31, 2022 due to higher average balances.

The average balance of short-term borrowings and other interest-bearing liabilities increased $148.2 million from $3.6 million in the three months ended March 31, 2022 to $151.8 million in the three months ended March 31, 2023, 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 $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 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.

During the three months ended March 31, 2023, compared to the three months ended March 31, 2022, interest expense on subordinated debentures issued to capital trusts increased $275,000 due to higher average interest rates.

The average interest rate was 6.18% in the three months ended March 31, 2023 compared to 1.86% in the three months ended March 31, 2022.

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 6.41% at March 31, 2023.

There was no change in the average balance of the subordinated debentures between the 2022 and 2023 periods.

In August 2016, the Company issued $75.0 million of 5.25% fixed-to-floating rate subordinated notes due August 15, 2026.

The notes were sold at par, resulting in net proceeds, after underwriting discounts and commissions and other issuance costs, of approximately $73.5 million.

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

The notes were sold at par, resulting in net proceeds, after underwriting discounts and commissions and other issuance costs, of approximately $73.5 million.

In both cases, these issuance costs are amortized over the expected life of the notes, which is five years from the issuance date, impacting the overall interest expense on the notes.

On August 15, 2021, the Company completed the redemption of $75.0 million aggregate principal amount of its 5.25% subordinated notes due August 15, 2026.

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 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.

These issuance costs are amortized over the expected life of the notes, which is five years from the issuance date, impacting the overall interest expense on the notes.

During the three months ended March 31, 2023, compared to the three months ended March 31, 2022, interest expense on subordinated notes increased $1,000.

Net Interest Income

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%.

Net interest income for the three months ended March 31, 2023 increased $9.9 million to $53.2 million compared to $43.3 million for the three months ended March 31, 2022.

Net interest margin was 3.99% in the three months ended March 31, 2023, compared to 3.43% in the three months ended March 31, 2022, an increase of 56 basis points, or 16.3%.

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.

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

The Company’s overall average interest rate spread increased 22 basis points, or 6.6%, from 3.31% during the three months ended March 31, 2022 to 3.53% during the three months ended March 31, 2023.

The increase was due to a 166 basis point increase in the weighted average yield on interest-earning assets, partially offset by a 144 basis point increase in the weighted average rate paid on interest-bearing liabilities.

In comparing the two periods, the yield on loans increased 153 basis points, the yield on investment securities increased 28 basis points and the yield on other interest-earning assets increased 433 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.

The rate paid on deposits increased 135 basis points, the rate paid on reverse repurchase agreements increased 91 basis points, the rate paid on short-term borrowings and other interest-bearing liabilities increased 467 basis points the rate paid on subordinated debentures issued to capital trusts increased 432 basis points.

For additional information on net interest income components, refer to the “Average Balances, Interest Rates and Yields” tables in this Quarterly Report on Form 10-Q.

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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 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.

Continued challenging or 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 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.

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.

During the three months ended March 31, 2023, the Company recorded provision expense of $1.5 million on its portfolio of outstanding loans.

During the three months ended March 31, 2022, the Company did not record a provision expense on its portfolio of outstanding loans.

The provision recorded during the three months ended March 31, 2023 was primarily due to increases in outstanding loan balances, combined with a modestly worsening economic forecast.

In the three months ended March 31, 2023 and 2022, the Company experienced net recoveries of $7,000 and $43,000, respectively.

The provision for losses on unfunded commitments for the three months ended March 31, 2023 and March 31, 2022 was a negative provision of $826,000 and $193,000, respectively.

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

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

All FDIC-assisted acquired loans were grouped into pools based on common characteristics and were recorded at their estimated fair values, which incorporated estimated credit losses at the acquisition date.

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

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

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

The Bank’s allowance for credit losses as a percentage of total loans was 1.40% and 1.39% at March 31, 2023 and December 31, 2022, respectively.

Management considers the allowance for credit losses adequate to cover losses inherent in the Bank’s loan portfolio at March 31, 2023, based on recent reviews of the Bank’s loan portfolio and current economic conditions.

If challenging

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

Non-performing Assets

As a result of changes in balances and composition of the loan portfolio, changes in economic and market conditions and other factors specific to a borrower’s circumstances, the level of non-performing assets will fluctuate.

At 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.

At March 31, 2023, non-performing assets were $3.0 million, a decrease of $693,000 from $3.7 million at December 31, 2022.

Non-performing assets as a percentage of total assets were 0.05% at March 31, 2023, compared to 0.07% at December 31, 2022.

Compared to December 31, 2022, non-performing loans decreased $688,000, to $3.0 million at March 31, 2023, and foreclosed and repossessed assets decreased $5,000, to $45,000 at March 31, 2023.

The majority of the decrease in non-performing loans was in the commercial business loans category, which decreased $570,000 from December 31, 2022.

Non-performing Loans.

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

Activity in the non-performing loans category during the three months ended March 31, 2023 was as follows:

Repossessions

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FDIC-assisted acquired loans included above

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.

At March 31, 2023, the non-performing commercial real estate category included three loans, none of which were added during the current period.

The largest relationship in the category, which totaled $1.3 million, or 82.8% of the total category, was transferred from potential problem loans during 2021, and is collateralized by a mixed-use commercial retail building.

Although considered non-performing, periodic payments have been received on this relationship.

The non-performing one- to four-family residential category included 20 loans, none of which were added during the current period.

The largest relationship in the category totaled $155,000, 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 25 loans, nine of which were added during the nine months ended September 30, 2022.

The non-performing land development category consisted of one loan added during 2021, which totaled $384,000 and is collateralized by unimproved zoned vacant ground in southern Illinois.

The non-performing commercial business category consisted of one loan, which was added during the current period.

The balance in this category was reduced by $586,000 due to the repayment in full of the one existing relationship at the beginning of the current period.

The non-performing consumer category included 21 loans, five of which were added during the current period.

Potential Problem Loans.

Compared to December 31, 2021, potential problem loans decreased $155,000, or 7.8%, to $1.8 million at September 30, 2022.

Compared to December 31, 2022, potential problem loans decreased $961,000, or 60.9%, to $617,000 at March 31, 2023.

The decrease during the period was primarily due to multiple loans totaling $1.0 million that were upgraded to a satisfactory risk rating, $117,000 in loan payments and $12,000 in charge offs, partially offset by $174,000 in loans added to potential problem loans.

Potential problem loans are loans which management has identified through routine internal review procedures as having possible credit problems that may cause the borrowers difficulty in complying with the current repayment terms.

These loans are not reflected in non-performing assets.

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

Activity in the potential problem loans categories during the three months ended March 31, 2023, was as follows:

Repossessions

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FDIC-assisted acquired loans included above

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.

At March 31, 2023, the one- to four-family residential category of potential problem loans included five loans, two of which were added during the current period.

The largest relationship in this category totaled $143,000, or 29.2% 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 28 loans, 18 of which were added during the nine months ended September 30, 2022.

During the three months ending March 31, 2023, 17 loans, totaling $939,000, met the criteria to be upgraded to a satisfactory risk rating.

The consumer category of potential problem loans included 13 loans, one of which was added during the current period.

Other Real Estate Owned and Repossessions.

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:

Of the total $154,000 of other real estate owned and repossessions at March 31, 2023, $109,000 represents properties which were not acquired through foreclosure.

Activity in foreclosed assets and repossessions during the three months ended March 31, 2023, was as follows:

(In thousands)

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Total foreclosed assets and repossessions

FDIC-assisted acquired assets included above

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

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

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

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

In the 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.

In the three months ended March 31, 2023, loans classified as “Watch” decreased $10.3 million, from $28.7 million at December 31, 2022 to $18.4 million at March 31, 2023, primarily due to loans being upgraded out of the “Watch” category.

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

Non-interest Income

For the three months ended 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:

For the three months ended March 31, 2023, non-interest income decreased $1.3 million to $7.9 million when compared to the three months ended March 31, 2022, primarily as a result of the following items:

Net gains on loan sales :

Net gains on loan sales decreased $1.7 million compared to the prior year period.

Net gains on loan sales decreased $745,000 compared to the prior year period.

The decrease was due to a decrease in originations of fixed-rate single-family mortgage loans during the 2023 period compared to the 2022 period.

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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 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.

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 decreased and fixed rate loan originations and related gains on sales of these loans 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 :

Net gains on loan sales decreased $5.4 million compared to the prior year period.

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

Point-of-sale and ATM fees :

Point-of-sale and ATM fees increased $899,000 compared to the prior year period.

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 $1.0 million 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 been exhausted.

Other income :

Other income increased $1.1 million compared to the prior year period.

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

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

Gain (loss) on derivative interest rate products :

In the 2023 period, the Company recognized a loss of $291,000 on the change in fair value of its back-to-back interest rate swaps related to commercial loans and the change in fair value on interest rate swaps related to brokered time deposits.

In the 2022 period, the Company recognized a gain of $152,000 on the change in fair value of its back-to-back interest rate swaps related to commercial loans.

Changes in the fair value of these types of swaps generally relate to movements in market interest rates during the period and the cumulative changes in these fair values will ultimately total zero at maturity of the swaps.

Non-interest Expense

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 $1.1 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 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.

For the three months ended March 31, 2023, non-interest expense increased $3.2 million to $34.5 million when compared to the three months ended March 31, 2022, primarily as a result of the following items:

Legal, Audit and Other Professional Fees :

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

Legal, audit and other professional fees increased $1.2 million from the prior year period, to $2.0 million.

In the 2023 period, the Company expensed a total of $1.3 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 $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.

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

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

In the 2023 period, some of these increases were larger than in previous periods due to the current employment environment.

In addition, the Charlotte commercial loan office was opened in the second quarter of 2022 and therefore had no expense in the first quarter of 2022.

The operation of this office added approximately $85,000 of salaries and benefits expense in the three months ended March 31, 2023.

In addition, compensation costs related to originated loans which are deferred under accounting rules, decreased by $350,000 in the 2023 period compared to the 2022 period, due to lower origination volumes.

Net occupancy expenses :

Net occupancy expenses increased $842,000 from the prior year period.

Various components of computer license and support increased by $500,000 in the 2023 period compared to the 2022 period.

In addition, repairs and maintenance on various buildings and ATMs increased by $250,000 in the 2023 period compared to the 2022 period.

The Company’s efficiency ratio for the three months ended March 31, 2023, was 56.42% compared to 59.62% for the same period in 2022.

The improved efficiency ratio was primarily due to an increase in net interest income, partially offset by an increase in non-interest expense.

The Company’s ratio of non-interest expense to average assets was 2.42% and 2.34% for the three months ended March 31, 2023 and 2022, respectively.

Average assets for the three months ended March 31, 2023, increased $358.0 million, or 6.7%, from the three months ended March 31, 2022, primarily due to an increase in net loans receivable and investment securities, partially offset by a decrease in interest bearing cash equivalents.

Provision for Income Taxes

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.

For the three months ended March 31, 2023 and 2022, the Company’s effective tax rate was 21.2% and 20.5%, respectively.

These effective rates were near or below the statutory federal tax rate of 21%, due primarily to the utilization of certain investment tax credits and the Company’s tax-exempt investments and tax-exempt loans, which reduced the Company’s effective tax rate.

The Company’s effective tax rate may fluctuate in future periods as it is impacted by the level and timing of the Company’s utilization of tax credits, the level of tax-exempt investments and loans, the amount of taxable income in various state jurisdictions and the overall level of pre-tax income.

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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 $1.6 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.

Net loan fees included in interest income were $1.3 million and $1.7 million for the three months ended March 31, 2023 and 2022, 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

September 30, 2022

September 30, 2021

(Dollars in Thousands)

Interest-earning assets:

Loans receivable:

One- to four-family residential

Other residential

Commercial real estate

Commercial business

Industrial revenue bonds(1)

Total loans receivable

Investment securities(1)

Interest-earning deposits in other banks

Total interest-earning assets

Non-interest-earning assets:

Cash and cash equivalents

Other non-earning assets

Interest-bearing liabilities:

Interest-bearing demand and savings

Time deposits

Total deposits

Securities sold under reverse repurchase agreements

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

Subordinated debentures issued to capital trusts

Subordinated notes

Total interest-bearing liabilities

Non-interest-bearing liabilities:

Demand deposits

Other liabilities

Total liabilities

Stockholders’ equity

Total liabilities and stockholders’ equity

Net interest income:

Interest rate spread

Net interest margin*

Average interest-earning assets to average interest- bearing liabilities

* Defined as the Company’s net interest income divided by total average interest-earning assets.

(1) Of the total average balances of investment securities, average tax-exempt investment securities were $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

March 31, 2023

March 31, 2022

(Dollars in Thousands)

16 unchanged sentences

Time deposits

Brokered deposits

Total deposits

15 unchanged sentences

* 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 $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.

(1) Of the total average balances of investment securities, average tax-exempt investment securities were $57.8 million and $37.2 million for the three months ended March 31, 2023 and 2022, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $10.7 million and $16.9 million for the three months ended March 31, 2023 and 2022, respectively.

Interest income on tax-exempt assets included in this table was $637,000 and $459,000 for the three months ended March 31, 2023 and 2022, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $569,000 and $452,000 for the three months ended March 31, 2023 and 2022, respectively.

Rate/Volume Analysis

3 unchanged sentences

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

Three Months Ended September 30,

Increase (Decrease)

(Dollars in Thousands)

Interest-earning assets:

Loans receivable

Investment securities

Interest-earning deposits in other banks

Total interest-earning assets

Interest-bearing liabilities:

Demand deposits

Time deposits

Total deposits

Securities sold under reverse repurchase agreements

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

Subordinated debentures issued to capital trust

Subordinated notes

Total interest-bearing liabilities

Net interest income

Nine Months Ended September 30,

Three Months Ended March 31,

Increase (Decrease)

8 unchanged sentences

Time deposits

Brokered deposits

Total deposits

8 unchanged sentences

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 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.

As a result of the Company’s management of its 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 March 31, 2023, the Company had commitments of approximately $60.2 million to fund loan originations, $1.89 billion of unused lines of credit and unadvanced loans, and $16.6 million of outstanding letters of credit.

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

September 30,

Closed non-construction loans with unused available lines

12 unchanged sentences

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

September 30, 2022

At March 31, 2023 and December 31, 2022, the Company had the following available secured lines and on-balance sheet liquidity:

March 31, 2023

December 31, 2022

13 unchanged sentences

176.7 million

202.5 million

Statements of Cash Flows.

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.

During the three months ended March 31, 2023 and 2022, the Company had positive cash flows from operating activities.

The Company had negative cash flows from investing activities during the three months ended March 31, 2023 and 2022.

The Company had positive cash flows from financing activities during the three months ended March 31, 2023 and negative cash flows from financing activities during the three months ended March 31, 2022.

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 $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.

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 $5.4 million and $31.4 million during the three months ended March 31, 2023 and 2022, respectively.

During the three months ended March 31, 2023 and 2022, investing activities used cash of $53.4 million and $318.4 million, respectively.

Investing activities in the 2023 period used cash primarily due to the net originations of loans.

Investing activities in the 2022 period used cash primarily due to the purchase of investment securities, the purchases of loans and the net origination of loans, partially offset by payments received on investment securities.

Investing activities in the 2021 period provided cash primarily due to the payments received on investment securities and the net repayments of loans, partially offset by the purchase of investment securities and the purchases of loans.

Changes in cash flows from financing activities during the periods covered by the Statements of Cash Flows were due to changes in deposits after interest credited and changes in short-term borrowings, as well as advances from borrowers for taxes and insurance, dividend payments to stockholders, repurchases of the Company’s common stock and the exercise of common stock options.

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.

During the three months ended March 31, 2023 and 2022, financing activities provided cash of $64.1 million and used cash of $77.2 million, respectively.

In the 2023 period, financing activities provided cash primarily as a result of net increases in time deposits and checking and savings deposits, partially offset by decreases in short-term borrowings, the repurchase of the Company’s common stock and dividends paid to stockholders.

In the 2022 period, financing activities used cash primarily as a result of net decreases in time deposits, dividends paid to stockholders and the purchase of the Company’s common stock, partially offset by net increases in short-term borrowings.

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 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.

At March 31, 2023, the Company’s total stockholders’ equity and common stockholders’ equity were each $555.5 million, or 9.6% of total assets, equivalent to a book value of $45.78 per common share.

As of December 31, 2022, total stockholders’ equity and common stockholders’ equity were each $533.1 million, or 9.4% of total assets, equivalent to a book value of $43.58 per common share.

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.

At March 31, 2023, the Company’s tangible common equity to tangible assets ratio was 9.5%, compared to 9.2% at December 31, 2022 (See Non-GAAP Financial Measures below).

Included in stockholders’ equity at March 31, 2023 and December 31, 2022, were unrealized losses (net of taxes) on the Company’s available-for-sale investment securities totaling $40.3 million and $47.2 million, respectively.

This change in net unrealized loss during the three months ended March 31, 2023, primarily resulted from decreasing intermediate-term market interest rates, which generally increased the fair value of investment securities.

Also included in stockholders’ equity at March 31, 2023, were unrealized gains (net of taxes) totaling $72,000 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.

In addition, included in stockholders’ equity at March 31, 2023, were realized gains (net of taxes) on the Company’s terminated cash flow hedge (interest rate swap), totaling $15.8 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 September 30, 2022, the remaining pre-tax amount to be recorded in interest income was $24.5 million.

At March 31, 2023, the remaining pre-tax amount to be recorded in interest income was $20.5 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 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 $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.

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.

Also included in stockholders’ equity at March 31, 2023, was an unrealized loss (net of taxes) on the Company’s outstanding cash flow hedges (interest rate swaps) totaling $17.0 million.

Increases in market interest rates since the inception of these hedges have caused their fair values to decrease.

However, during the three months ended March 31, 2023, decreasing forward swap rates resulted in increasing fair values of these hedges.

As noted above, total stockholders’ equity increased $22.4 million, from $533.1 million at December 31, 2022 to $555.5 million at March 31, 2023.

Accumulated other comprehensive income increased $11.9 million during the three months ended March 31, 2023, primarily due to increases in the fair value of available-for-sale investment securities and the fair value of cash flow hedges.

Stockholders’ equity also increased due to net income of $20.5 million for the three months ended March 31, 2023 and a $470,000 increase due to stock option exercises.

Partially offsetting these increases were repurchases of the Company’s common stock totaling $5.6 million and dividends declared on common stock of $4.9 million.

The Company also had unrealized losses on its portfolio of held-to-maturity investment securities, which totaled $20.6 million at March 31, 2023, that were not included in its total capital balance.

If these held-to-maturity unrealized losses were included in capital

(net of taxes) it would have decreased total stockholder’s equity by $15.5 million at March 31, 2023.

This amount was equal to 2.8% of total stockholders’ equity of $555.5 million.

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 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%.

On March 31, 2023, the Bank’s common equity Tier 1 capital ratio was 12.3%, its Tier 1 risk-based capital ratio was 12.3%, its total risk-based capital ratio was 13.5% and its Tier 1 leverage ratio was 11.7%.

As a result, as of March 31, 2023, the Bank was well capitalized, with capital ratios in excess of those required to qualify as such.

On December 31, 2022, the Bank’s common equity Tier 1 capital ratio was 11.9%, its Tier 1 risk-based capital ratio was 11.9%, its total risk-based capital ratio was 13.1% and its Tier 1 leverage ratio was 11.5%.

As a result, as of December 31, 2022, the Bank was well capitalized, with capital ratios in excess of those required to qualify as such.

The FRB has established capital regulations for bank holding companies that generally parallel the capital regulations for banks.

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%.

On March 31, 2023, the Company’s common equity Tier 1 capital ratio was 10.9%, its Tier 1 risk-based capital ratio was 11.3%, its total risk-based capital ratio was 13.9% and its Tier 1 leverage ratio was 10.8%.

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%.

As of March 31, 2023, the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such.

On December 31, 2022, the Company’s common equity Tier 1 capital ratio was 10.6%, its Tier 1 risk-based capital ratio was 11.0%, its total risk-based capital ratio was 13.5% and its Tier 1 leverage ratio was 10.6%.

As of December 31, 2022, the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such.

In addition to the minimum common equity Tier 1 capital ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio, the Company and the Bank have to maintain a capital conservation buffer consisting of additional common equity Tier 1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses.

At 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.

The Company utilized cash on hand for the redemption payment.

The annual combined interest expense and amortization of deferred issuance costs on these subordinated notes was approximately $4.3 million.

These subordinated notes were included as capital in the Company’s calculation of its total capital ratio.

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).

At March 31, 2023, the Company and the Bank both had additional common equity Tier 1 capital in excess of the buffer amount.

During the three months ended March 31, 2023, the Company declared a common stock cash dividend of $0.40 per share, or 24% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.40 per share (which was declared in December 2022).

During the three months ended March 31, 2022, the Company declared a common stock cash dividend of $0.36 per share, or 28% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.36 per share (which was declared in December 2021).

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 September 30, 2022, was paid to stockholders in October 2022.

The $0.40 per share dividend declared but unpaid as of March 31, 2023, was paid to stockholders in April 2023.

Common Stock Repurchases and Issuances .

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

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.

The authorization of this program became effective during the three months ended March 31, 2022 and does not have an expiration date.

During the three months ended March 31, 2023, the Company repurchased 99,121 shares of its common stock at an average price of $55.70 per share and issued 1,717 shares of common stock at an average price of $43.05 per share to cover stock option exercises.

During the three months ended March 31, 2022, the Company repurchased 419,215 shares of its common stock at an average price of $60.40 per share and issued 51,694 shares of common stock at an average price of $47.49 per share to cover stock option exercises.

In January 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.

At March 31, 2023, there were approximately 78,000 shares which could still be purchased under this authorization.

In December 2022, the Company’s Board of Directors authorized the purchase of up to an additional one million shares of the Company’s outstanding common stock, under a program of open market purchases or privately negotiated transactions, resulting in a total of approximately 1.1 million shares available in our stock repurchase authorization as of March 31, 2023.

Management has historically utilized stock buy-back programs from time to time as long as management believed that repurchasing the Company’s common stock would contribute to the overall growth of shareholder value.

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Ratio of Tangible Common Equity to Tangible Assets

September 30, 2022

March 31, 2023

December 31, 2022

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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