What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-08 · 547 added, 385 removed, 493 unchanged (65% of the section changed)

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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) 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;

(xv) competition;

(xvi) uncertainty regarding the future of LIBOR and potential replacement indexes;

and (xvii) natural disasters, war, terrorist activities or civil unrest and their effects on economic and business environments in which the Company operates.

The Company wishes to advise readers that the factors listed above and other risks described from time to time in documents filed or furnished by the Company with the SEC could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

(iii) the remaining effects of the COVID-19 pandemic on general economic and financial market conditions and on public health;

(iv) fluctuations in interest rates, the effects of inflation or a potential recession, whether caused by Federal Reserve actions or otherwise;

(v) the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment;

(vi) slower economic growth caused by changes in energy prices, supply chain disruptions or other factors;

(vii) 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;

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

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

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

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

(xii) 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;

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

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

(xv) 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;

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

(xvii) competition;

(xviii) the transition from LIBOR to new interest rate benchmarks;

and (xix) natural disasters, war, terrorist activities or civil unrest and their effects on economic and business environments in which the Company operates.

The Company wishes to advise readers that the factors listed above and other risks described in the Company’s most recent Annual Report on Form 10-K, including, without limitation, those described under “Item 1A.

Risk Factors,” subsequent Quarterly Reports on Form 10-Q and other documents filed or furnished from time to time by the Company with the SEC (which are available on our website at www.greatsouthernbank.com and the SEC’s website at www.sec.gov), could affect the Company’s financial performance and cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake-and specifically declines any obligation- to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

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Allowance for Credit Losses and Valuation of Foreclosed Assets

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.

See Note 6 of the accompanying financial statements for additional information.

The Company believes that the determination of the allowance for credit losses involves a higher degree of judgment and complexity than its other significant accounting policies.

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.

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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.

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

See Note 6 “Loans and Allowance for Credit Losses” of the accompanying financial statements for additional information regarding the allowance for credit losses.

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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.

On January 1, 2021, the Company adopted the new accounting standard related to the allowance for credit losses.

See Note 6 of the accompanying financial statements for additional information.

In addition, the Company considers that the determination of the valuations of foreclosed assets held for sale involves a high degree of judgment and complexity.

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Goodwill is tested for impairment using a process that estimates the fair value of each of the Company’s reporting units compared with its carrying value.

The Company defines reporting units as a level below each of its operating segments for which there is discrete financial information that is regularly reviewed.

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

The Company defines reporting units as a level

below each of its operating segments for which there is discrete financial information that is regularly reviewed.

As of June 30, 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 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.

At June 30, 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 March 31, 2023, the amortizable intangible assets included the arena naming rights of $5.3 million, which are reflected in the table below.

At June 30, 2023, the amortizable intangible assets included the arena naming rights of $5.2 million, which are reflected in the table below.

These amortizable intangible assets are reviewed for impairment if circumstances indicate their value may not be recoverable based on a comparison of fair value.

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

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

Management does not believe any of the Company’s goodwill or other intangible assets were impaired as of June 30, 2023.

While management believes no impairment existed at June 30, 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:

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Arena Naming Rights (April 2022)

Goodwill – Branch acquisitions

Current Economic Conditions

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

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

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

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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, the American Rescue Plan of 2021, and several smaller fiscal packages, totaled well over $5 trillion.

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.

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.

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.

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.

The Federal Reserve has been aggressively raising interest rates since early 2022, pushing the federal funds rate to more than 5%.

Monetary policy is projected to continue to tighten as the Fed allows Treasury and mortgage-backed securities on its balance sheet to mature and prepay.

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

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

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 February 2023, March 2023, and May 2023.

This brought the funds rate target to more than 5.00%.

This quantitative tightening is expected to reduce the central bank’s holdings of securities by about $100 billion each month.

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.

Adding to the pressure to act is the resilient growth in jobs, low unemployment 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.

Congress passed the Inflation Reduction Act in August 2022, which is designed to raise 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.

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%.

Broadly, the legislation addresses climate change, lowers healthcare costs for lower-income households and seniors, and reduces future budget deficits.

As of June 2023, global oil prices continued to hover near $75 per barrel.

This reflects the 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

during 2022-2023, but only modestly as the country’s economic recovery has been tepid to date.

OPEC is projected to cut oil production over the remainder of 2023 and into 2024, if necessary, to ensure prices rebound.

Ten-year Treasury yields are fluctuating between 3.5% and 3.75%, which is just below their estimated long-run equilibrium of 4%.

The national unemployment rate increased slightly to 3.6% in June 2023, compared to 3.5% in March 2023.

The number of unemployed individuals also increased slightly to 6.0 million in June 2023, compared to 5.8 million in March 2023.

The unemployment rate has ranged from 3.4% to 3.7% since March 2022.

Total employment increased by 209,000 in June 2023, compared with the average monthly gain of 334,000 over the prior 6 months.

In June 2023, employment in leisure and hospitality was little changed for the third consecutive month.

Employment in the industry remains below its February 2020 level by 369,000, or 2.2%.

Employment in transportation and warehousing changed little in June 2023 and has shown no clear trend in recent months.

Over the month, employment edged down in warehousing and storage, while air transportation added jobs.

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

Based on June 2023 information, the unemployment rate for the Midwest, where the Company conducts most of its business, has decreased from 3.3% in June 2022 to 3.2% in June 2023.

Unemployment rates for June 2023 in the states where the Company has branches or loan production offices were Arizona at 3.5%, Arkansas at 2.6%, Colorado at 2.8%, Georgia at 3.2%, Illinois at 4.0%, Iowa at 2.7%, Kansas at 2.8%, Minnesota at 2.9%, Missouri at 2.6%, Nebraska at 1.9%, North Carolina at 3.3%, Oklahoma at 2.7%, and Texas at 4.1%.

Single Family Housing

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.

In June 2023, sales of new single-family houses in the U.S.

were at a seasonally adjusted annual rate of 697,000, 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 is 2.5% below the revised May 2023 rate of 715,000 and 23.8% above the June 2022 estimate of 563,000.

The median sales price of new houses sold in June 2023 was $415,400, down slightly from $416,300 in May 2023.

The average sales price in June 2023 of $494,700 was up from $487,300 in May 2023.

The seasonally‐adjusted estimate of new houses for sale at the end of June 2023 was 432,000.

This represents a supply of 7.4 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.

After recording a slight increase in May 2023, national existing-home sales fell 3.3% in June 2023 to a seasonally adjusted rate of 4.16 million.

Sales retreated 18.9% from one year ago.

Existing–home sales in the Midwest were flat from May 2023 and down 19.5% year over year.

The median existing-home sales price nationally as of June 2023 was $410,200, up from the May 2023 median of $396,100 and slightly less than the all-time high of $413,800 recorded in June 2022.

Limited supply is leading to competitive negotiations, with one-third of homes sold this month being sold above the list price.

The median price in the Midwest rose 2.1% over a year ago to $311,800, but still remains the lowest of the four major regions.

Nationally, properties on average remained on the market for 18 days in June 2023, compared to 14 days in June 2022.

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

Unsold inventory sat at 1.08 million units at the end of June 2023, which is down 13.6% from June 2022.

The number represents only a 3.1 month supply, which is well short of the 5 to 6 months typically required for a more balanced market.

New home construction dropped precipitously after the Great Recession and has yet to fully recover.

Additional issues have contributed to the current housing shortage, including the pandemic, inflation and increased interest rates.

A lack of housing options creates a very competitive market, in which many buyers must compete for few available properties.

This often results in bidding wars and drives up home prices.

It can also leave buyers with little power and fewer protections in the transaction, as sellers have their choice of other hopefuls who might be willing to waive contingencies and accept any terms the seller wants.

First-time buyers accounted for 27% of sales in June 2023, down from 28% in May 2023 and 30% in June 2022.

According to Freddie Mac, the average commitment rate for a 30-year, fixed-rate mortgage was 6.96% as of July 13, 2023 which was up from 6.81% the previous week and from 5.51% one year ago.

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

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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.

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 1.1%.

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

Sun Belt markets have seen significant slowing 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.

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

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 6.8% as of June 30, 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.

Absorption in the first quarter of 2023 was well below the five-year pre-pandemic average of 82,000, as higher costs due to elevated inflation weighed on demand.

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.

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:

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

The national forecast predicts 530,000 new units to be delivered in 2023, the most new supply to hit the market since the mid-1980s.

In addition, 20 markets are projected to hit new record deliveries in 2023 and Sun Belt locations comprise 12 of those markets.

These record deliveries are hitting at the exact same time demand remains weak, putting several of these 20 markets at significant risk of worsening fundamentals by the end of the year.

The difference in price points in the sector does make a difference in vacancy.

Four & Five Star vacancies both rose by 20 basis points to 8.7% in the first quarter of 2023.

Not all markets, however, registered increased vacancies over the past year.

Chicago finished the first quarter of 2023 at the same level as a year ago, at 5.5%.

Although factors such as declining household formations, rising supply deliveries, and weakening demand may present temporary obstacles, the long-term issue of a major housing shortage remains in our nation.

Thus, rent growth is anticipated to rebound above historical averages.

As of June 30, 2023, national multi-family market vacancy rates increased to 6.8%.

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

Springfield, Missouri at 4.4%, St.

Louis at 9.4%, Kansas City at 7.1%, Minneapolis at 6.9%, Tulsa, Oklahoma at 7.7%, Dallas-Fort Worth at 8.8 %, Chicago at 5.3%, Atlanta at 10.7%, Phoenix at 9.6%, Denver at 7.8% and Charlotte, North Carolina at 9.7%.

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:

Office fundamentals remain weak as 2023 enters its second half and industry players settle in for what looks to be an ongoing period of difficult market conditions.

So far this year, tenants have vacated nearly 40 million square feet more than they have occupied, putting 2023 on pace for the largest amount of negative net absorption on record.

Since the beginning of 2020, office occupiers have given back over 150 million square feet, nearly 2% of inventory.

As a result, vacancy is at a record 13.2% and is still climbing.

A projected 67 million square feet of new inventory, the most since 2009, is set to be delivered by the end of the year, adding to near-term supply-side pressure.

Some positive market indications show that while hybrid work is prevalent, fully remote work has declined, suggesting a potential floor on office needs has been reached.

Furthermore, major tech companies like Amazon and Meta have firmed up requirements for in-person work, and in April 2023, the Biden Administration issued guidance to Federal Government agencies with the stated goal of “substantially increasing in-person work.”

As of June 30, 2023, national office vacancy rates increased to 13.2% from 12.4% as of June 30, 2022, while our market areas reflected the following vacancy levels at June 30, 2023:

Springfield, Missouri at 4.1%, 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%.

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:

Louis at 10.8%, Kansas City at 11.5%,

Minneapolis at 10.9%, Tulsa, Oklahoma at 11.7%, Dallas-Fort Worth at 17.9%, Chicago at 15.7%, Atlanta at 14.7%, Denver at 15.5%, Phoenix at 15.7% and Charlotte, North Carolina at 12.3%.

Despite growing concerns surrounding rising costs and a potential recession, resilient demand from a diverse array of sectors, coupled with a below-average pace of store closures, resulted in another quarter of positive expansion for the U.S.

retail sector in the second quarter of 2023.

The lack of available retail space in desirable locations is a factor contributing to the recent pullback in leasing activity.

Other factors include a more challenging operating environment, a lack of available labor, and a rise in uncertainty surrounding the outlook for consumption.

Despite slowing leasing activity, the growth in demand for retail space outpaced net deliveries in the three months ended June 30, 2023.

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

Springfield, Missouri at 3.1%, St.

Louis at 4.8%, Kansas City at 4.2%, Minneapolis at 3.1%, Tulsa, Oklahoma at 3.0%, Dallas-Fort Worth at 4.6%, Chicago at 5.1%, Atlanta at 3.7%, Phoenix at 4.7%, Denver at 4.1%, and Charlotte, North Carolina at 3.1%.

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.

industrial market performance is downshifting heading into the second half of 2023.

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

So far during 2023, net absorption has remained positive but has lost steam, with the second quarter of 2023 coming in 30% below second quarter levels averaged during the three years prior to the pandemic.

After continuously rebuilding inventories from the fall of 2021 through the fall of 2022, retailers and wholesalers are pausing further inventory accumulation out of caution over the economic outlook, causing U.S.

imports to decline from record highs.

Regardless, oncoming new supply is likely to push the national vacancy rate up during 2023 and early 2024.

National industrial vacancy rates increased to 4.8% from 4.0% as of June 30, 2022.

Our market areas reflected the following vacancy levels:

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Louis at 4.4%, Kansas City at 4.4%, Minneapolis at 3.3%, Tulsa, Oklahoma at 3.6%, Dallas-Fort Worth at 7.2%, Chicago at 4.2%, Atlanta at 4.6%, Phoenix at 4.3%, Denver at 6.4% and Charlotte, North Carolina at 5.1%.

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

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

COVID-19 Impact to Our Business and Response

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

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

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

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

In some cases those restrictions have been replaced with recommendations.

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

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

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

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

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.

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

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.

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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 $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.

Great Southern’s total assets increased $38.9 million, or 0.7%, from $5.68 billion at December 31, 2022, to $5.72 billion at June 30, 2023.

Details of the current period changes in total assets are provided below, under “Comparison of Financial Condition at June 30, 2023 and December 31, 2022.”

Net outstanding loans increased $9.8 million, or 0.2%, from $4.51 billion at December 31, 2022, to $4.52 billion at June 30, 2023.

The increase was primarily in other residential (multi-family) loans.

This increase was partially offset by a decrease in construction loans and commercial real estate loans.

As loan demand is affected by a variety of factors, including general economic conditions, and because of the competition we face and our focus on pricing discipline and credit quality, we cannot be assured that our loan growth will match or exceed the average level of growth achieved in prior years.

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

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

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

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

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

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

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

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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 or 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 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 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.

At both June 30, 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 our 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.

We generally do not accrue interest income on these loans and do not recognize interest income until the loans are repaid or interest payments have been made for a period of time sufficient to provide evidence of performance on the loans.

Generally, the higher the level of non-performing assets, the greater the negative impact on interest income and net income.

The Company continues its preparation for discontinuation of use of interest rates such as LIBOR.

The Company has prepared for discontinuation of the use of interest rates such as LIBOR.

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.

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.

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

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

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

At 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.

All LIBOR rates have been discontinued as reference rates after June 30, 2023.

Other interest rates used globally could be discontinued in the future.

With the cessation of all remaining LIBOR indices as of June 30, 2023, the Company implemented its LIBOR fallback plan for all remaining LIBOR-based loans, replacing the LIBOR indices with various SOFR-based indices consistent with the regulations of the Board of Governors of the Federal Reserve System implementing the Adjustable Interest Rate (LIBOR) Act.

All impacted customers were notified and the Company’s systems were updated with the applicable indices as of July 1, 2023.

Available-for-sale 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.

In the six months ended June 30, 2023, available-for-sale securities decreased $13.7 million, or 2.8%, from $490.6 million at December 31, 2022, to $476.9 million at June 30, 2023.

Held-to-maturity Securities.

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.

In the six months ended June 30, 2023, held-to-maturity securities decreased $4.1 million, or 2.0%, from $202.5 million at December 31, 2022, to $198.4 million at June 30, 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 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.

In the six months ended June 30, 2023, total deposit balances increased $139.7 million, or 3.0%.

Compared to December 31, 2022, transaction account balances decreased $77.4 million, or 2.4%, to $3.17 billion at June 30, 2023, and retail certificates of deposit decreased $41.2 million, or 4.0%, to $980.1 million at June 30, 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.

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

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.

Brokered deposits, including IntraFi program purchased funds, were $669.7 million and $411.5 million at June 30, 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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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.

See “Results of Operations and Comparison for the Three and Six Months Ended June 30, 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 $106.1 million from $176.8 million at December 31, 2022 to $70.7 million at March 31, 2023.

Securities sold under reverse repurchase agreements with customers decreased $117.6 million from $176.8 million at December 31, 2022 to $59.3 million at June 30, 2023.

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

Short-term borrowings and other interest-bearing liabilities .

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.

The Company’s FHLBank term advances were $-0- at both June 30, 2023 and December 31, 2022.

At June 30, 2023 there were $70.5 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.

Short term borrowings and other interest-bearing liabilities decreased $17.5 million from $89.6 million at December 31, 2022 to $72.1 million at June 30, 2023.

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

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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/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).

A large portion of our loan portfolio is tied to one-month SOFR, three-month SOFR 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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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.

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

At June 30, 2023 the Federal Funds rate was 5.25%.

On July 26, 2023, the FRB implemented another 0.25% rate increase, bringing the Federal Funds rate to 5.50%.

Financial markets now expect the possibility of further increases in Federal Funds interest rates in the latter half of 2023 to be less likely.

However, the FRB has indicated that interest rate decisions will be made at each meeting based on economic data available to the FRB at the time.

A substantial portion of Great Southern’s loan portfolio ($499.7 million at June 30, 2023) is tied to the one-month or three-month LIBOR index (SOFR index effective July 1, 2023) and will be subject to adjustment at least once within 90 days after June 30, 2023.

Of these loans, $499.4 million had interest rate floors.

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.

Great Southern’s loan portfolio also includes loans ($890.9 million at June 30, 2023) tied to various SOFR indexes that will be subject to adjustment at least once within 90 days after June 30, 2023.

Of these loans, $890.9 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.

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.

Great Southern also has a portfolio of loans ($769.3 million at June 30, 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.

All of these loans had interest rate floors at various rates.

Great Southern also has a portfolio of loans ($6.7 million at June 30, 2023) tied to an AMERIBOR index that will adjust immediately or within 90 days of a change to the “prime rate” of interest.

All of these loans had interest rate floors at various rates.

At June 30, 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 (now transitioned to SOFR), SOFR indices or the “prime rate” index and will be subject to adjustment at least once within 90 days or loans which generally adjust immediately as the Federal Funds rate adjusts.

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

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Conversely, market interest rate increases would normally result in increased interest rates on our LIBOR-based, SOFR-based and prime-based loans.

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.

As of June 30, 2023, Great Southern’s interest rate risk models indicate that, generally, rising interest rates are expected to have a modestly positive impact on the Company’s net interest income, while declining interest rates are expected to have a negative impact on net interest income.

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

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

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

In a situation where market interest rates decrease significantly in a short period of time, as they did in March 2020, our net interest margin decrease may be more pronounced in the very near term (first one to three months), due to fairly rapid decreases in LIBOR interest rates, SOFR interest rates and “prime” interest rates.

In the subsequent months, we expect that the net interest margin would stabilize and begin to improve, as renewal interest rates on maturing time deposits are expected to decrease compared to the current rates paid on those products.

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

Margin compression primarily resulted from changes in the asset mix, mainly the addition of lower-yielding assets and the issuance of subordinated notes during 2020 and the net interest margin remained lower than our historical average in 2021.

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

In a situation where market interest rates decrease significantly in a short period of time, as they did in March 2020, our net interest margin decrease may be more pronounced in the very near term (first one to three months), due to fairly rapid decreases in SOFR interest rates and “prime” interest rates.

In the subsequent months, we expect that net interest margin would stabilize and begin to improve, as renewal interest rates on maturing time deposits are expected to decrease compared to the current rates paid on those products.

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

Margin compression primarily resulted from changes in the asset mix, mainly the addition of lower-yielding assets and the issuance of subordinated notes during 2020, and net interest margin remained lower than our historical average in 2021.

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, 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.

This resulted in increasing loan yields and expansion of our net interest income and net interest margin throughout 2022 and into the first three months of 2023.

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

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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 below, under “Results of Operations and Comparison for the Three Months Ended March 31, 2023 and 2022.”

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 and Six Months Ended June 30, 2023 and 2022.”

Effect of Federal Laws and Regulations

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

Any qualifying depository institution or its holding company that exceeds the CBLR will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the new ratio will be considered “well-capitalized” under the prompt corrective action rules.

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

considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the new ratio will be considered “well-capitalized” under the prompt corrective action rules.

Currently, the CBLR is 9.0%.

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

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

In addition, the Economic Growth Act includes regulatory relief in the areas of examination cycles, call reports, mortgage disclosures and risk weights for certain high-risk commercial real estate loans.

Business Initiatives

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.

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 drive-thru, which will use only interactive teller machine (ITM) technology to serve customers.

The modern four-lane drive-up center is expected to open in early September 2023 and be the first-of-its-kind in the Springfield market.

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

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

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.

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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.

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.

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.

Comparison of Financial Condition at June 30, 2023 and December 31, 2022

During the six months ended June 30, 2023, the Company’s total assets increased by $38.9 million to $5.72 billion.

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

Cash and cash equivalents were $203.9 million at June 30, 2023, an increase of $35.4 million, or 21.0%, from $168.5 million at December 31, 2022.

This increase was primarily due to a $34.8 million increase in interest bearing deposits in the Federal Reserve Bank.

The Company’s available-for-sale securities decreased $13.7 million, or 2.8%, compared to December 31, 2022.

The decrease was primarily due to a decrease in the market value of these available-for-sale securities as a result of increases in marked interest rates and by normal monthly payments received related to the portfolio of mortgage-backed securities and collateralized mortgage obligations.

The available-for-sale securities portfolio was 8.3% of total assets at June 30, 2023 compared to 8.6% at December 31, 2022.

Held-to-maturity securities were $198.4 million at June 30, 2023, a decrease of $4.1 million, or 2.0%, from $202.5 million at December 31, 2022.

The held-to-maturity securities portfolio was 3.5% and 3.6% of total assets at June 30, 2023 and December 31, 2022, respectively.

Net loans increased $9.8 million from December 31, 2022, to $4.52 billion at June 30, 2023.

This increase was primarily in other residential (multi-family) loans ($104 million increase), which was partially offset by a decrease in commercial construction loans ($49 million decrease) and commercial real estate loans ($33 million decrease).

Loan origination volume in the six months ended June 30, 2023 significantly decreased compared to the origination volume that occurred in 2021 and most of 2022 due to the increase in market interest rates that began in late 2022 and continued during the 2023 period.

In addition, 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.

The Company did experience a few large loan payoffs in the three months ended June 30, 2023, as completed projects were sold or the borrower paid off our loan by refinancing the debt elsewhere with long-term financing.

Total liabilities increased $25.7 million, from $5.15 billion at December 31, 2022 to $5.17 billion at June 30, 2023.

This increase was primarily due to an increase in brokered deposits, which was partially offset by a reduction in securities sold under reverse repurchase agreements with customers, which decreased $117.6 million in the six months ended June 30, 2023.

Total deposits increased $139.7 million, or 3.0%, to $4.82 billion at June 30, 2023.

Total checking account balances decreased $77.4 million, from $3.25 billion at December 31, 2022 to $3.17 billion at June 30, 2023.

Total interest-bearing checking accounts increased $5.7 million while non-interest-bearing checking accounts decreased $83.1 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 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.

Retail certificates of deposit decreased $41.2 million compared to December 31, 2022, to $980.1 million at June 30, 2023.

Customer retail time deposits initiated through our banking center network decreased $12.9 million and time deposits initiated through our national internet network decreased $27.3 million.

Brokered deposits increased $258.2 million to $669.7 million at June 30, 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.

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.

The market remains extremely competitive for both time deposits and non-time deposits.

The Company attempts to retain its non-brokered deposits, but at times will utilize more brokered deposits and overnight FHLBank borrowings when market rates paid on non-brokered deposits are very high.

Securities sold under reverse repurchase agreements with customers decreased $117.6 million from $176.8 million at December 31, 2022 to $59.3 million at June 30, 2023.

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

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.

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

Short-term borrowings and other interest-bearing liabilities decreased $17.5 million from $89.6 million at December 31, 2022 to $72.1 million at June 30, 2023.

At June 30, 2023, $70.5 million of this total was overnight borrowings from the FHLBank, which was used to fund increases in outstanding loans.

Total stockholders’ equity increased $13.2 million, from $533.1 million at December 31, 2022 to $546.3 million at June 30, 2023.

Stockholders’ equity increased due to net income of $38.8 million for the six months ended June 30, 2023 and a $1.1 million increase due to stock option exercises.

Partially offsetting these increases were repurchases of the Company’s common stock totaling $14.3 million and dividends declared on common stock of $9.6 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%.

Accumulated other comprehensive income/loss decreased $2.7 million (meaning net loss increased) during the six months ended June 30, 2023, primarily due to decreases in the fair value of cash flow hedges, as a result of increased market interest rates.

Results of Operations and Comparison for the Three and Six Months Ended June 30, 2023 and 2022

Net income was $18.3 million for the three months ended June 30, 2023 compared to $18.2 million for the three months ended June 30, 2022.

This increase of $96,000, or 0.5%, was primarily due to a decrease in provision for credit losses on unfunded commitments of $3.8 million, or 172.8%, and a decrease in income tax expense of $211,000, or 4.5%, partially offset by an increase in non-interest expense of $1.7 million, or 5.2%, a decrease in non-interest income of $1.6 million, or 16.6%, and a decrease in net interest income of $693,000, or 1.4%.

Net income was $38.8 million for the six months ended June 30, 2023 compared to $35.2 million for the six months ended June 30, 2022.

This increase of $3.6 million, or 10.1%, was primarily due to an increase in net interest income of $9.2 million, or 10.0%, and a decrease in provision for credit losses on loans and unfunded commitments of $3.0 million, or 146.6%.

The provision for credit losses on loans increased $1.5 million, while the provision for credit losses on unfunded commitments decreased $4.5 million.

These items were partially offset by an increase in non-interest expense of $4.9 million, or 7.6%, a decrease in non-interest income of $2.8 million, or 15.3%, and an increase in income tax expense of $896,000, or 9.9%.

Total Interest Income

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.

Total interest income increased $20.9 million, or 39.7%, during the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

The increase was due to a $20.7 million increase in interest income on loans and a $242,000 increase in interest income on investment securities and other interest-earning assets.

Interest income from loans increased during the three months ended June 30, 2023 compared to the same period in 2022 due to higher average balances and higher average rates of interest.

Interest income from investment securities and other interest-earning assets increased during the three months ended June 30, 2023 compared to the same period in 2022 due to higher average balances of investment securities and higher average rates of interest.

Total interest income increased $45.7 million, or 46.0%, during the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

The increase was due to a $43.1 million increase in interest income on loans and a $2.7 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 from loans increased during the six months ended June 30, 2023 compared to the same period in 2022 due to higher average balances and higher average rates of interest.

income from investment securities and other interest-earning assets increased during the six months ended June 30, 2023 compared to the same period in 2022 due to higher average rates of interest and higher average balances of investment securities.

Interest Income – Loans

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.

During the three months ended June 30, 2023 compared to the three months ended June 30, 2022, interest income on loans increased $17.1 million due to higher average interest rates on loans.

The average yield on loans increased from 4.34% during the three months ended June 30, 2022, to 5.84% during the three months ended June 30, 2023.

This increase was primarily due to the origination of new loans and 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 $3.5 million as the result of higher average loan balances, which increased from $4.32 billion during the three months ended June 30, 2022, to $4.63 billion during the three months ended June 30, 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.

Since the end of 2022, loan originations and net loan growth have been muted.

During the six months ended June 30, 2023 compared to the six months ended June 30, 2022, interest income on loans increased $34.0 million due to higher average interest rates on loans.

The average yield on loans increased from 4.29% during the six months ended June 30, 2022, to 5.80% during the six months ended June 30, 2023.

This increase was primarily due to the origination of new loans and 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 $9.0 million as the result of higher average loan balances, which increased from $4.23 billion during the six months ended June 30, 2022, to $4.62 billion during the six months ended June 30, 2023.

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 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.

The Company recorded interest income related to the interest rate swap of $2.0 million in each of the quarters ended June 30, 2023 and 2022.

The Company recorded interest income related to the interest rate swap of $4.0 million in each of the six month periods ended June 30, 2023 and 2022.

At June 30, 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 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).

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 (now SOFR).

The floating rate resets monthly and net settlements of interest due to/from the counterparty also occur monthly.

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

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, 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%.

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

If one-month USD-SOFR exceeds the fixed rate of interest (as it does currently), 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 of loan interest income related to this swap transaction of $2.6 million in the three months ended June 30, 2023.

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

The Company recorded a reduction of loan interest income related to this swap transaction of $4.7 million in the six months ended June 30, 2023.

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

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

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

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

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

If the floating rate of interest exceeds the fixed rate of interest (as it does currently), 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 of loan interest income related to these swap transactions of $1.7 million in the three and six months ended June 30, 2023.

At June 30, 2023, the USD-Prime rate was 8.25% and the one-month USD-SOFR OIS rate was 5.06528%.

Interest Income – Investments and Other Interest-earning Assets

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 $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.

Interest income on investments decreased $737,000 in the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

Interest income decreased $421,000 as a result of lower average interest rates from 3.09% during the three months ended June 30, 2022, to 2.86% during the three month period ended June 30, 2023.

The decrease in the average rates was primarily due to certain bonds issued by state and local subdivisions with higher interest rates being called prior to their maturity date.

Interest income decreased $316,000 as a result of a decrease in average balances from $741.4 million during the three months ended June 30, 2022, to $699.0 million during the three months ended June 30, 2023.

Average balances of securities decreased primarily due to 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.

Interest income on investments increased $855,000 in the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Interest income increased $918,000 as a result of an increase in average balances from $638.3 million during the six months ended June 30, 2022, to $702.9 million during the six months ended June 30, 2023.

Average balances of securities increased primarily due to purchases of agency multi-family mortgage-backed securities that 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, partially offset by 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.

Interest income decreased $63,000 as a result of lower average interest rates, which decreased from 2.88% during the six months ended June 30, 2022, to 2.86% during the six month period ended June 30, 2023 for the same reason noted above.

Interest income on other interest-earning assets increased $979,000 in the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

Interest income increased $1.0 million as a result of higher average interest rates from 0.74% during the three months ended June 30, 2022, to 4.93% during the three months ended June 30, 2023.

Partially offsetting that increase, interest income decreased $29,000 as a result of a decrease in average balances from $115.5 million during the three months ended June 30, 2022, to $97.0 million during the three months ended June 30, 2023.

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

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.

Interest income on other interest-earning assets increased $1.8 million in the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Interest income increased $1.9 million as a result of higher average interest rates from 0.29% during the six months ended June 30, 2022, to 4.73% during the six months ended June 30, 2023.

Partially offsetting that increase, interest income decreased $83,000 as a result of a decrease in average balances from $286.1 million during the six months ended June 30, 2022, to $94.4 million during the six months ended June 30, 2023.

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

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 $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%.

Total interest expense increased $21.6 million, or 558.9%, during the three months ended June 30, 2023, when compared with the three months ended June 30, 2022, due to an increase in interest expense on deposits of $19.4 million, or 823.9%, an increase in interest expense on short-term borrowings of $1.7 million, or 723.3%, an increase in interest expense on subordinated debentures issued to capital trusts of $267,000, or 167.9%, and an increase in interest expense on securities sold under reverse repurchase agreements of $213,000, or 2,662.5%.

Interest expense on subordinated notes decreased $1,000, or 0.1%.

Total interest expense increased $36.5 million, or 501.4%, during the six months ended June 30, 2023, when compared with the six months ended June 30, 2022, due to an increase in interest expense on deposits of $31.9 million, or 703.9%, an increase in interest expense on short-term borrowings of $3.5 million, or 1,470.9%, an increase in interest expense on securities sold under reverse repurchase agreements of $545,000, or 3,027.8%, and an increase in interest expense on subordinated debentures issued to capital trusts of $542,000, or 195.7%.

Interest Expense – Deposits

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 expense on demand and savings deposits increased $6.1 million due to average rates of interest that increased from 0.14% in the three months ended June 30, 2022 to 1.25% in the three months ended June 30, 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.

Partially offsetting this increase, interest expense on demand deposits decreased $62,000, due to a decrease in average balances from $2.39 billion during the three months ended June 30, 2022 to $2.19 billion during the three months ended June 30, 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 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.

Interest expense on demand and savings deposits increased $9.9 million due to average rates of interest that increased from 0.14% in the six months ended June 30, 2022 to 1.03% in the six months ended June 30, 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 $284,000, due to a decrease in average balances from $2.38 billion during the six months ended June 30, 2022 to $2.19 billion during the six months ended June 30, 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 time deposits increased $5.7 million as a result of an increase in average rates of interest from 0.53% during the three months ended June 30, 2022, to 2.85% during the three months ended June 30, 2023.

Interest expense on time deposits increased $339,000 due to an increase in average balances of time deposits from $781.8 million during the three months ended June 30, 2022 to $987.5 billion in the three months ended June 30, 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 increases in market interest rates throughout 2022 and targeted promotions during the latter half of 2022 and the first three months of 2023.

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.

Interest expense on time deposits increased $8.5 million as a result of an increase in average rates of interest from 0.55% during the six months ended June 30, 2022, to 2.46% during the six months ended June 30, 2023.

Interest expense on time deposits increased $1.5 million due to an increase in average balances of time deposits from $822.5 million during the six months ended June 30, 2022 to $1.00 billion in the six months ended June 30, 2023.

As noted above, 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.

Interest expense on brokered deposits increased $4.6 million, due to an increase in average balances from $132.7 million during the three months ended June 30, 2022 to $637.6 million during the three months ended June 30, 2023.

Interest expense on brokered deposits increased $2.8 million due to average rates of interest that increased from 1.50% in the three months ended June 30, 2022 to 4.97% in the three months ended June 30, 2023.

Brokered deposits added during 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 on brokered deposits increased $10.6 million, due to an increase in average balances from $100.3 million during the six months ended June 30, 2022 to $547.7 million during the six months ended June 30, 2023.

Interest expense on brokered deposits increased $1.7 million due to average rates of interest that increased from 1.39% in the six months ended June 30, 2022 to 4.79% in the six months ended June 30, 2023.

Brokered deposits added during 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 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.

FHLBank term advances were not utilized during the three and six months ended June 30, 2023 and 2022.

Interest expense on reverse repurchase agreements increased $215,000 due to higher average interest rates during the three months ended June 30, 2023 when compared to the three months ended June 30, 2022.

The average rate of interest was 0.02% for the three months ended June 30, 2022 compared to 1.60% for the three months ended June 30, 2023.

The average balance of repurchase agreements decreased $80.3 million from $135.5 million in the three months ended June 30, 2022 to $55.3 million in the three months ended June 30, 2023, which was due to changes in customers’ desire for this product, which can fluctuate.

Interest expense on reverse repurchase agreements increased $548,000 due to higher average interest rates during the six months ended June 30, 2023 when compared to the six months ended June 30, 2022.

The average rate of interest was 0.03% for the six months ended June 30, 2022 compared to 1.12% for the six months ended June 30, 2023.

The average balance of repurchase agreements decreased $31.0 million from $131.9 million in the six months ended June 30, 2022 to $100.9 million in the six months ended June 30, 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 $1.3 million during the three months ended June 30, 2023 when compared to the three months ended June 30, 2022 due to higher average rates of interest.

The average rate of interest was 1.29% for the three months ended June 30, 2022, compared to 5.24% for the three months ended June 30, 2023.

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.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased $429,000 during the three months ended June 30, 2023 when compared to the three months ended June 30, 2022 due to higher average balances.

The average balance of short-term borrowings and other interest-bearing liabilities increased $75.3 million from $73.3 million in the three months ended June 30, 2022 to $148.6 million in the three months ended June 30, 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.

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.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased $1.8 million during the six months ended June 30, 2023 when compared to the six months ended June 30, 2022 due to higher average rates of interest.

The average rate of interest was 1.24% for the six months ended June 30, 2022, compared to 5.00% for the six months ended June 30, 2023.

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 $1.7 million during the six months ended June 30, 2023 when compared to the six months ended June 30, 2022 due to higher average balances.

The average balance of short-term borrowings and other interest-bearing liabilities increased $111.6 million from $38.7 million in the six months ended June 30, 2022 to $150.2 million in the six months ended June 30, 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.

During the three months ended June 30, 2023, compared to the three months ended June 30, 2022, interest expense on subordinated debentures issued to capital trusts increased $267,000 due to higher average interest rates.

The average interest rate was 6.63% in the three months ended June 30, 2023 compared to 2.47% in the three months ended June 30, 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 6.90% at June 30, 2023.

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

During the six months ended June 30, 2023, compared to the six months ended June 30, 2022, interest expense on subordinated debentures issued to capital trusts increased $542,000 due to higher average interest rates.

The average interest rate was 6.41% in the six months ended June 30, 2023 compared to 2.17% in the six months ended June 30, 2022.

The subordinated debentures are variable-rate debentures, as stated above.

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

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

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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.

During the three months ended June 30, 2023, compared to the three months ended June 30, 2022, interest expense on subordinated notes decreased $1,000.

There was no change in the interest expense on subordinated notes during the six months ended June 30, 2023, compared to the six months ended June 30, 2022.

Net Interest Income

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%.

Net interest income for the three months ended June 30, 2023 decreased $693,000 to $48.1 million compared to $48.8 million for the three months ended June 30, 2022.

Net interest margin was 3.56% in the three months ended June 30, 2023, compared to 3.78% in the three months ended June 30, 2022, a decrease of 22 basis points, or 5.8%.

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.

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 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.

The Company experienced increases in interest expense on deposits, short-term borrowings, subordinated debentures issued to capital trust and securities sold under reverse repurchase agreements with customers.

Net interest income for the six months ended June 30, 2023 increased $9.2 million to $101.3 million compared to $92.1 million for the six months ended June 30, 2022.

Net interest margin was 3.77% in the six months ended June 30, 2023, compared to 3.61% in the six

months ended June 30, 2022, an increase of 16 basis points, or 4.4%.

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

The Company’s overall average interest rate spread decreased 69 basis points, or 18.9%, from 3.65% during the three months ended June 30, 2022 to 2.96% during the three months ended June 30, 2023.

The decrease was due to a 205 basis point increase in the weighted average rate paid on interest-bearing liabilities, partially offset by a 136 basis point increase in the weighted average yield on interest-earning assets.

In comparing the two periods, the yield on loans increased 150 basis points, the yield on investment securities decreased 23 basis points and the yield on other interest-earning assets increased 419 basis points.

The rate paid on deposits increased 200 basis points, the rate paid on reverse repurchase agreements increased 158 basis points, the rate paid on short-term borrowings and other interest-bearing liabilities increased 395 basis points and the rate paid on subordinated debentures issued to capital trust increased 416 basis points.

The Company’s overall average interest rate spread decreased 24 basis points, or 6.9%, from 3.48% during the six months ended June 30, 2022 to 3.24% during the six months ended June 30, 2023.

The decrease was due to a 175 basis point increase in the weighted average rate paid on interest-bearing liabilities, partially offset by a 151 basis point increase in the weighted average yield on interest-earning assets.

In comparing the two periods, the yield on loans increased 151 basis points, the yield on investment securities decreased two basis points and the yield on other interest-earning assets increased 444 basis points.

The rate paid on deposits increased 168 basis points, the rate paid on reverse repurchase agreements increased 109 basis points, the rate paid on short-term borrowings and other interest-bearing liabilities increased 376 basis points the rate paid on subordinated debentures issued to capital trust increased 424 basis points.

Interest rates on short-term borrowings and subordinated debentures issued to capital trust reprice quickly and directly with changes to market interest rates.

Interest rates earned on loans and paid on deposits are affected by the mix of the loan and deposit portfolios, the stated maturity of loans and time deposits, the amount of fixed-rate and variable-rate loans and other repricing characteristics.

Throughout 2022, competition for deposits was not as intense and market rates on deposits moved higher at a slower pace.

In 2023, overall competition for deposits intensified and market rates moved higher more rapidly.

In addition, in the three months ended June 30, 2023, the Company had over $500 million of lower-rate time deposits mature and reprice substantially higher at the then-market interest rates.

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

Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in 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.

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.

changes in the national unemployment rate, commercial real estate price index, housing price index, consumer sentiment, gross domestic product (GDP) and construction spending.

Challenging or worsening economic conditions from higher inflation or interest rates, COVID-19 and subsequent variant outbreaks or similar events, global unrest 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 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.

During the three months ended June 30, 2023 and June 30, 2022, the Company did not record a provision expense on its portfolio of outstanding loans.

During the six months ended June 30, 2023, the Company recorded provision expense of $1.5 million on its portfolio of outstanding loans.

During the six months ended June 30, 2022, the Company did not record a provision expense on its

portfolio of outstanding loans.

Total net charge-offs were $135,000 for the three months ended June 30, 2023, compared to net recoveries of $261,000 in the three months ended June 30, 2022.

Total net charge-offs were $128,000 for the six months ended June 30, 2023, compared to net recoveries of $304,000 in the six months ended June 30, 2022.

The provision for losses on unfunded commitments for the three months ended June 30, 2023 was a negative provision of $1.6 million, compared to a provision expense of $2.2 million for the three months ended June 30, 2022.

The provision for losses on unfunded commitments for the six months ended June 30, 2023 was a negative provision of $2.4 million, compared to a provision expense of $2.0 million for the six months ended June 30, 2022.

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.

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.

The Bank’s allowance for credit losses as a percentage of total loans was 1.41% and 1.39% at June 30, 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 June 30, 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 adversely affecting the Company’s future results of operations and financial condition.

Non-performing Assets

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

At March 31, 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.

At June 30, 2023, non-performing assets were $11.2 million, an increase of $7.5 million from $3.7 million at December 31, 2022.

Non-performing assets as a percentage of total assets were 0.20% at June 30, 2023, compared to 0.07% at December 31, 2022.

Compared to December 31, 2022, non-performing loans increased $7.4 million, to $11.1 million at June 30, 2023, and foreclosed and repossessed assets decreased $15,000, to $35,000 at June 30, 2023.

The majority of the increase in non-performing loans was in the commercial real estate loans category, which included $8.7 million in loans transferred to non-performing since December 31, 2022.

Non-performing Loans .

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

Activity in the non-performing loans category during the six months ended June 30, 2023 was as follows:

Repossessions

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FDIC-assisted acquired loans included above

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.

At June 30, 2023, the non-performing commercial real estate category included four loans, one of which was added during the current period.

The largest relationship in the category, which totaled $8.6 million, or 84.7% of the total category, was previously classified as “watch” and was added to non-performing loans during the second quarter of 2023 and is collateralized by an office building in Missouri.

The non-performing one- to four-family residential category included four loans, two of which were added during the

current period.

The largest relationship in the category totaled $153,000, or 42.7% of the category.

The non-performing one- to four-family residential category experienced $484,000 in repayments during the six months ended June 30, 2023, primarily related to a note sale of 16 non-performing loans.

The loan sale proceeds were sufficient to result in no loss to the Company.

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.

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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.

The non-performing consumer category included 17 loans, 13 of which were added during the current period.

Potential Problem Loans.

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.

Compared to December 31, 2022, potential problem loans decreased $1.1 million, or 68.9%, to $491,000 at June 30, 2023.

The decrease during the period was primarily due to multiple loans totaling $1.0 million that were upgraded to a satisfactory risk rating, $137,000 in loan payments , $108,000 in loans downgraded to the non-performing category and $13,000 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 three months ended March 31, 2023, was as follows:

Activity in the potential problem loans categories during the six months ended June 30, 2023, was as follows:

Repossessions

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FDIC-assisted acquired loans included above

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.

At June 30, 2023, the one- to four-family residential category of potential problem loans included four loans, two of which were added during 2023.

The largest relationship in this category totaled $143,000, or 37.5% of the total category.

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

During the six months ended

June 30, 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 11 loans, one of which was added during the current period.

Other Real Estate Owned and Repossessions.

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:

All of the total $35,000 of other real estate owned and repossessions at June 30, 2023 were acquired through foreclosure.

Activity in foreclosed assets and repossessions during the six months ended June 30, 2023, was as follows:

(In thousands)

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Total foreclosed assets and repossessions

FDIC-assisted acquired loans included above

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

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

In the three months ended March 31, 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.

In the six months ended June 30, 2023, loans classified as “Watch” decreased $18.6 million, from $28.7 million at December 31, 2022 to $10.1 million at June 30, 2023, primarily due to the combination of one large loan being upgraded out of the “Watch” category and another unrelated loan being downgraded to substandard and added to non-performing loans.

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

Non-interest Income

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:

For the three months ended June 30, 2023, non-interest income decreased $1.5 million to $7.8 million when compared to the three months ended June 30, 2022, primarily as a result of the following items:

Other income :

Other income decreased $998,000 compared to the prior year quarter.

In the 2022 period, a gain of $1.1 million was recognized on sales of fixed assets, with no similar transactions occurring in the current year period.

Point-of-sale and ATM fees :

Point-of-sale and ATM fees decreased $325,000 compared to the prior year period.

This decrease was primarily due to a reduction in fee income due to a portion of transactions now being routed through channels with lower fees to us.

For the six months ended June 30, 2023, non-interest income decreased $2.8 million to $15.7 million when compared to the six months ended June 30, 2022, primarily as a result of the following items:

Other income :

Other income decreased $855,000 compared to the prior year period.

In the 2022 period, a gain of $1.1 million was recognized on sales of fixed assets, with no similar transactions occurring in the current year period.

Point-of-sale and ATM fees :

Point-of-sale and ATM fees decreased $588,000 compared to the prior year period, for the same reason noted above.

Net gains on loan sales :

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

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

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

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

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In the 2022 period, the Company recognized a gain of $297,000 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 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:

For the three months ended June 30, 2023, non-interest expense increased $1.7 million to $34.7 million when compared to the three months ended June 30, 2022, primarily as a result of the following items:

Legal, Audit and Other Professional Fees :

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.

Legal, audit and other professional fees increased $451,000 from the prior year period, to $1.6 million.

In the 2023 period, the Company expensed a total of $986,000 primarily 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.

Net occupancy expenses :

Net occupancy expenses increased $601,000 from the prior year period.

Various components of computer license and support expenses increased by $180,000 in the 2023 period compared to the 2022 period.

In addition, various repairs and maintenance expenses increased by $446,000 in the 2023 period compared to the 2022 period.

Insurance expense increased $223,000 from the prior year quarter.

The increase was due to previously announced increases in deposit insurance rates for the FDIC’s Deposit Insurance Fund.

For the six months ended June 30, 2023, non-interest expense increased $4.9 million to $69.2 million when compared to the six months ended June 30, 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 period, to $3.6 million, for the same reason noted above.

Net occupancy expenses :

Net occupancy expenses increased $1.4 million from the prior year period.

Various components of computer license and support expenses increased by $650,000 in the 2023 period compared to the 2022 period.

In addition, various repairs and maintenance expenses increased by $560,000 in the 2023 period compared to the 2022 period.

Salaries and employee benefits :

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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.

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

In addition, compensation costs related to originated loans, which are deferred under accounting rules, decreased by $970,000 in the 2023 period compared to the 2022 period, as the volume of loans originated in the first six months of 2023 decreased substantially compared to the same period in 2022.

The Company’s efficiency ratio for the three months ended June 30, 2023, was 62.10% compared to 56.76% for the same period in 2022.

The Company’s efficiency ratio for the six months ended June 30, 2023, was 59.13% compared to 58.12% for the same period in 2022.

The Company’s ratio of non-interest expense to average assets was 2.43% for both the three months ended June 30, 2023 and 2022, respectively.

The Company’s ratio of non-interest expense to average assets was 2.42% and 2.39% for the six months ended June 30, 2023 and 2022, respectively.

Average assets for the three months ended June 30, 2023, increased $286.8 million, or 5.3%, from the three months ended June 30, 2022, primarily due to an increase in net loans receivable, partially offset by a decrease in interest bearing cash equivalents and investment securities.

Average assets for the six months ended June 30, 2023, increased $322.2 million, or 6.0%, compared to the six months ended June 30, 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 March 31, 2023 and 2022, the Company’s effective tax rate was 21.2% and 20.5%, respectively.

For the three months ended June 30, 2023 and 2022, the Company’s effective tax rate was 19.7% and 20.5%, respectively.

For the six months ended June 30, 2023 and 2022, the Company’s effective tax rate was 20.5% 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.

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

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

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

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Average Balances, Interest Rates and Yields

The following tables present, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin.

Average balances of loans receivable include the average balances of non-accrual loans for each period.

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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 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.

Net loan fees included in interest income were $1.5 million and $1.3 million for the three months ended June 30, 2023 and 2022, respectively.

Net loan fees included in interest income were $2.9 million and $3.1 million for the six months ended June 30, 2023 and 2022, respectively.

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

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Three Months Ended

March 31, 2023

March 31, 2022

June 30, 2023

June 30, 2022

(Dollars in Thousands)

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

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

(1) Of the total average balances of investment securities, average tax-exempt investment securities were $57.1 million and $53.3 million for the three months ended June 30, 2023 and 2022, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $14.0 million and $15.8 million for the three months ended June 30, 2023 and 2022, respectively.

Interest income on tax-exempt assets included in this table was $611,000 and $394,000 for the three months ended June 30, 2023 and 2022, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $517,000 and $386,000 for the three months ended June 30, 2023 and 2022, respectively.

Six Months Ended

June 30, 2023

June 30, 2022

(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

Brokered 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.

Of the total average balances of investment securities, average tax-exempt investment securities were $57.5 million and $45.3 million for the six months ended June 30, 2023 and 2022, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $14.4 million and $16.3 million for the six months ended June 30, 2023 and 2022, respectively.

Interest income on tax-exempt assets included in this table was $1.2 million and $854,000 for the six months ended June 30, 2023 and 2022, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $1.1 million and $838,000 for the six months ended June 30, 2023 and 2022, respectively.

Rate/Volume Analysis

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

Three Months Ended March 31,

Three Months Ended June 30,

Increase (Decrease)

16 unchanged sentences

Net interest income

Six Months Ended June 30,

Increase (Decrease)

(Dollars in Thousands)

Interest-earning assets:

Loans receivable

Investment securities

Interest-earning deposits in other banks

Total interest-earning assets

Interest-bearing liabilities:

Demand deposits

Time deposits

Brokered deposits

Total deposits

Securities sold under reverse repurchase agreements

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

Subordinated debentures issued to capital trust

Subordinated notes

Total interest-bearing liabilities

Net interest income

Liquidity is a measure of the Company’s ability to generate sufficient cash to meet present and future financial obligations in a timely manner through either the sale or maturity of existing assets or the acquisition of additional funds through liability management.

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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.

At June 30, 2023, the Company had commitments of approximately $26.6 million to fund loan originations, $1.67 billion of unused lines of credit and unadvanced loans, and $14.5 million of outstanding letters of credit.

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

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The Company utilizes particular sources of funds based on the comparative costs and availability at the time.

The Company has from time to time chosen not to pay rates on deposits as high as the rates paid by certain of its competitors and, when believed to be appropriate, supplements deposits with less expensive alternative sources of funds.

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

March 31, 2023

The Company has from time to time chosen not

to pay rates on deposits as high as the rates paid by certain of its competitors and, when believed to be appropriate, supplements deposits with less expensive alternative sources of funds.

At June 30, 2023 and December 31, 2022, the Company had the following available secured lines and on-balance sheet liquidity:

June 30, 2023

December 31, 2022

2 unchanged sentences

1,005.1 million

Federal Reserve Bank line

Federal Reserve Bank line (traditional funding line)

409.6 million

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Statements of Cash Flows.

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.

During the six months ended June 30, 2023 and 2022, the Company had positive cash flows from operating activities.

The Company had positive cash flows from investing activities during the six months ended June 30, 2023 and negative cash flows from investing activities during the six months ended June 30, 2022.

The Company had negative cash flows from financing activities during the six months ended June 30, 2023 and positive cash flows from financing activities during the six months ended June 30, 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 $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.

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 $47.6 million and $36.8 million during the six months ended June 30, 2023 and 2022, respectively.

During the six months ended June 30, 2023 and 2022, investing activities provided cash of $3.9 million and used cash of $647.2 million, respectively.

Investing activities in the 2023 period provided cash primarily due to payments received on investment securities, partially offset by the net originations of loans and purchases of premises and equipment.

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.

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 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.

During the six months ended June 30, 2023 and 2022, financing activities used cash of $16.1 million and provided cash of $88.9 million, respectively.

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

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

Capital Resources

Management continuously reviews the capital position of the Company and the Bank to ensure compliance with minimum regulatory requirements, as well as to explore ways to increase capital either by retained earnings or other means.

At March 31, 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.

At June 30, 2023, the Company’s total stockholders’ equity and common stockholders’ equity were each $546.3 million, or 9.6% of total assets, equivalent to a book value of $45.64 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 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.

At June 30, 2023, the Company’s tangible common equity to tangible assets ratio was 9.4%, compared to 9.2% at December 31, 2022 (See Non-GAAP Financial Measures below).

Included in stockholders’ equity at June 30, 2023 and December 31, 2022, were unrealized losses (net of taxes) on the Company’s available-for-sale investment securities totaling $46.9 million and $47.2 million, respectively.

This small change in net unrealized loss during the six months ended June 30, 2023, primarily resulted from decreasing intermediate-term market interest rates (which generally increased the fair value of investment securities) during the first three months of 2023, followed by increasing intermediate-term market interest rates (which generally decreased the fair value of investment securities) during the three months ended June 30, 2023.

Also included in stockholders’ equity at June 30, 2023, were unrealized gains (net of taxes) totaling $35,000 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 March 31, 2023, were realized gains (net of taxes) on the Company’s terminated cash flow hedge (interest rate swap), totaling $15.8 million.

In addition, included in stockholders’ equity at June 30, 2023, were realized gains (net of taxes) on the Company’s terminated cash flow hedge (interest rate swap), totaling $14.2 million.

This amount, plus associated deferred taxes, is expected to be accreted to interest income over the remaining term of the original interest rate swap contract, which was to end in October 2025.

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

At June 30, 2023, the remaining pre-tax amount to be recorded in interest income was $18.5 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 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.

Also included in stockholders’ equity at June 30, 2023, was an unrealized loss (net of taxes) on the Company’s outstanding cash flow hedges (interest rate swaps) totaling $23.4 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.

As noted above, total stockholders’ equity increased $13.2 million, from $533.1 million at December 31, 2022 to $546.3 million at June 30, 2023.

Stockholders’ equity increased due to net income of $38.8 million in the six months ended June 30, 2023 and a $1.1 million increase in stockholders’ equity due to stock option exercises.

Partially offsetting these increases were repurchases of the Company’s common stock totaling $14.3 million and dividends declared on common stock of $9.6 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.

Accumulated other comprehensive income decreased $2.7 million during the six months ended June 30, 2023, primarily due changes in the fair value of cash flow hedges.

The Company also had unrealized losses on its portfolio of held-to-maturity investment securities, which totaled $24.7 million at June 30, 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 $18.6 million at June 30, 2023.

This amount was equal to 3.4% of total stockholders’ equity of $546.3 million.

3 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 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 June 30, 2023, the Bank’s Tier 1 Leverage Ratio was 11.7%, Common Equity Tier 1 Capital Ratio was 12.7%, Tier 1 Capital Ratio was 12.7%, and Total Capital Ratio was 14.0%.

As a result, as of June 30, 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%.

1 unchanged sentence

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

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%.

On June 30, 2023, the Company’s Tier 1 Leverage Ratio was 10.8%, Common Equity Tier 1 Capital Ratio was 11.4%, Tier 1 Capital Ratio was 11.8%, and Total Capital Ratio was 14.5%.

To be considered well capitalized, a bank holding company must have a Tier 1 risk-based capital ratio of at least 6.00% and a total risk-based capital ratio of at least 10.00%.

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

As of June 30, 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%.

1 unchanged sentence

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

At March 31, 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).

At June 30, 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 June 30, 2023, the Company declared a common stock cash dividend of $0.40 per share, or 26% 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 March 2023).

During the three months ended June 30, 2022, the Company declared a common stock cash dividend of $0.40 per share, or 28% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.36 per share (which was declared in March 2022).

During the six months ended June 30, 2023, the Company

declared common stock cash dividends totaling $0.80 per share, or 25% of net income per diluted common share for that six month period, and paid common stock cash dividends of $0.80 per share.

During the six months ended June 30, 2022, the Company declared common stock cash dividends totaling $0.76 per share, or 28% of net income per diluted common share for that six month period, and paid common stock cash dividends of $0.70 per share.

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 March 31, 2023, was paid to stockholders in April 2023.

The $0.40 per share dividend declared but unpaid as of June 30, 2023, was paid to stockholders in July 2023.

Common Stock Repurchases and Issuances .

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

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.

During the three months ended June 30, 2023, the Company repurchased 170,200 shares of its common stock at an average price of $50.70 per share and issued 5,838 shares of common stock at an average price of $31.07 per share to cover stock option exercises.

During the three months ended June 30, 2022, the Company repurchased 430,100 shares of its common stock at an average price of $58.27 per share and issued 12,577 shares of common stock at an average price of $40.74 per share to cover stock option exercises.

During the six months ended June 30, 2023, the Company repurchased 269,321 shares of its common stock at an average price of $52.54 per share and issued 7,555 shares of common stock at an average price of $33.79 per share to cover stock option exercises.

During the six months ended June 30, 2022, the Company repurchased 849,315 shares of its common stock at an average price of $59.32 per share and issued 64,271 shares of common stock at an average price of $46.17 per share to cover stock option exercises.

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.

At June 30, 2023, approximately 908,000 shares remained available in our stock repurchase authorization.

The number of shares that will be repurchased at any particular time and the prices that will be paid are subject to many factors, several of which are outside of the control of the Company.

10 unchanged sentences

Ratio of Tangible Common Equity to Tangible Assets

March 31, 2023

June 30, 2023

December 31, 2022

8 unchanged sentences

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