What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-07 compared with 2023-08-04 · 482 added, 454 removed, 586 unchanged (61% of the section changed)

34 unchanged sentences

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.

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.

12 unchanged sentences

The forecast is used for a reasonable and supportable period before reverting back to historical averages using a straight-line method.

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

The forecast-adjusted loss rate is applied to the principal balance over the remaining contractual lives, adjusted for expected prepayments.

The contractual term excludes expected extensions, renewals and modifications.

12 unchanged sentences

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 June 30, 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 September 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.

1 unchanged sentence

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

At June 30, 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 September 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.

3 unchanged sentences

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

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

At September 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.

3 unchanged sentences

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

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

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

At September 30, 2023, the Company performed this annual review and concluded that no impairment of its goodwill or other intangible assets had occurred at September 30, 2023.

While the Company believes no impairment of its goodwill or other intangible assets existed at September 30, 2023, different conditions or assumptions used to measure fair value of reporting units, or changes in cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the outcome of the Company’s impairment evaluation in the future.

A summary of goodwill and intangible assets is as follows:

September 30,

(In Thousands)

4 unchanged sentences

Current Economic Conditions

Changes in economic conditions could cause the values of assets and liabilities recorded in the 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.

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

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

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

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

The economy plunged into recession in the first quarter

of 2020, as efforts to contain the spread of the coronavirus forced all but essential business activity, or any work that could not be done from home, to stop, shuttering factories, restaurants, entertainment, sporting events, retail shops, personal services, and more.

The pandemic is now less disruptive to the U.S.

and global economies, with governments, households and businesses becoming increasingly adept at making adjustments for the virus.

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

1 unchanged sentence

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

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

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

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 intended to 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 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.

3 unchanged sentences

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 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.

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.

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%.

The Federal Reserve has been aggressively raising interest rates since early 2022, pushing the federal funds rate to more than 5.25%, its highest level in 22 years.

The Fed's actions were motivated by surging inflation in 2021 caused by pandemic-fueled spending, which outpaced the ability of producers to supply goods and services after having been impacted by COVID-related shutdowns and clogged transportation systems.

The Fed has made some headway in its attempt to tamp inflation down.

The personal consumption expenditures (PCE) price index, the Federal Reserve's preferred measure of inflation, eased from its peak of 7.1% in June 2022 to 3.5% in August 2023, but core PCE, which excludes food and energy prices, has been slower to retreat and still sits at 3.9%, almost twice the Federal Reserve's target.

Overall, the U.S.

economy strengthened in the third quarter of 2023, with estimates of real GDP growth ranging from 3% to close to 5% (on a seasonally adjusted annual rate).

Economists have pushed back expectations of a mild recession but expect GDP growth to slow later this year or early next year, as consumers and businesses slow purchases and investments in the face of higher borrowing costs brought about by the Fed's rate hiking program.

On an average annual basis, Moody’s projects growth to be 2.1% in 2023 and 1.3% in 2024 with growth returning to trend in 2025.

Recent data confirms a slowdown in some activity.

Manufacturers report new orders for their products have fallen and the housing market has seen sales plummet over the past year as higher borrowing costs and still elevated prices erode affordability.

The services sector, with increased demand for travel, entertainment, and dining out has been persistently solid, however, recent revisions to economic data show that households have been spending at a slower pace than previously reported.

Additionally, real disposable income has slowed meaningfully during the past two months.

These trends are expected to continue, slowing the economy in coming months.

The national unemployment rate remained unchanged for the month at 3.8% as of September 2023, ranging from 3.4% to 3.8% since March 2022.

The number of unemployed individuals also increase slightly to 6.4 million as of September 2023, compared to 6.0 million in June 2023, with total employment increasing by 336,000 in September 2023, compared with the average monthly gain of 267,000 over the prior 12 months.

In September 2023, employment gains occurred in leisure and hospitality;

professional, scientific, technical services;

and social assistance.

While the labor market remains strong, there are signs of softening.

Wage growth has been moderating and, while layoffs are not rising yet, departure rates are down to pre-pandemic levels.

Employers are cutting back on hours and are hiring fewer temporary workers, possibly an early sign that demand for labor is pulling back.

As of September 2023, the labor force participation rate (the share of working-age Americans employed or actively looking for a job) remained stable at 62.8%.

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

Unemployment rates for

September 2023 in the states where the Company has branches or loan production offices were:

Arizona at 4.0%, Arkansas at 2.9%, Colorado at 3.2%, Georgia at 3.4%, Illinois at 4.4%, Iowa at 3.0%, Kansas at 2.8%, Minnesota at 3.1%, Missouri at 2.9%, Nebraska at 2.1%, North Carolina at 3.4%, Oklahoma at 3.0%, and Texas at 4.1%.

Of the metropolitan areas in which the Company does business, most are below the national unemployment rate of 3.8% for September 2023.

Single Family Housing

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 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.

Existing home sales slipped to a seasonally adjusted annual rate of 3.96 million in September 2023, down 2% from 4 million in August 2023 and down 15.4% from 4.68 million in September 2022.

In the Midwest, existing-home sales declined by 4.1% from the previous month to an annual rate of 930,000 in September 2023, and down 18.4% from one year ago.

The median existing-home sales price nationally as of September 2023 was $394,300, up 2.8% from the September 2022 median of $383,500.

All four U.S.

regions posted price increases with the median price in the Midwest recorded at $293,300, up 4.7% from September 2022.

For the third consecutive month, home prices are up from a year ago, confirming the pressing need for more housing supply.

The inventory of unsold existing homes climbed 2.7% from the prior month to 1.13 million at the end of September 2023 but down 8.1% from one year ago of 1.23 million.

Unsold inventory sits at a 3.4-month supply at the current sales pace, up from 3.3 months in August 2023 and 3.2 months in September 2022.

A 5 to 6 month supply is typically required for a more balanced market.

Nationally, properties on average remained on the market for 21 days in September 2023, up from 20 days in August 2023 and 19 days in September 2022.

Sixty-nine percent of homes sold in September were on the market for less than a month.

New home construction dropped precipitously after the financial crisis of 2007-2008 and has yet to fully recover.

Issues contributing to the country’s current housing shortage include increasing labor and materials costs, availability of building materials, increased interest rates and tighter lending underwriting standards.

Sales of new single‐family houses in September 2023 were at a seasonally adjusted annual rate of 759,000, according to the U.S.

Census Bureau and the Department of Housing and Urban Development.

This is 12.3% above the revised August 2023 rate of 676,000 and 33.9% above the September 2022 estimate of 567,000.

The median sales price of new houses sold in September 2023 was $418,800, down from $477,700 in September 2022.

The average sales price in September 2023 of $503,900 was down from $530,100 in September 2022.

The seasonally‐ adjusted estimate of new houses for sale at the end of September 2023 was 435,000.

This represents a supply of 6.9 months at the current sales rate.

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.

First-time buyers accounted for 27% of sales in September 2023, down from 29% in August 2023 and September 2022.

According to Freddie Mac, the average commitment rate for a 30-year, fixed-rate mortgage was 7.57% as of October 12, 2023 which is up from 7.49% the previous week and 6.92% one year ago.

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

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

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

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

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.

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 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:

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

The national forecast sits at 554,000 new units to be delivered in 2023, the most new supply to hit the market since the mid-1980s.

In addition, 15 markets are projected to hit new record deliveries in 2023 and Sun Belt locations make up 12 of those markets.

These record deliveries are hitting at a time when demand remains weak, putting several of these 15 markets at significant risk of worsening fundamentals by the end of the year.

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 7.1% in the third quarter of 2023.

The national vacancy rate is forecasted to finish 2023 in the mid 7% range, which would be 100 basis points higher than pre-pandemic levels.

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

Springfield, Missouri at 4.4%, St.

Louis at 10.0%, Kansas City at 7.6%, Minneapolis at 7.1%, Tulsa, Oklahoma at 8.4%, Dallas-Fort Worth at 9.4%, Chicago at 5.5%, Atlanta at 11.4%, Phoenix at 10.2%, Denver at 8.1% and Charlotte, North Carolina at 10.6%.

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:

More than 1 million units were under construction at the end of the third quarter of 2023, with almost 450,000 units expected to deliver in 2024.

However, the rising interest rate environment combined with a pullback in construction lending has seen some

developers unable to move forward on proposed projects, suggesting the beginning of a meaningful pause in deliveries towards the end of 2024 and into 2025.

This pause could allow many overbuilt markets to absorb their current supply overhang and return to equilibrium more quickly.

The Midwest region now leads the nation in terms of rent growth and is projected to hold that lead throughout 2023.

Midwest markets have avoided the sharp reversal of rent growth seen in Sun Belt locations as their construction pipelines remained modest during the pandemic.

Deliveries in the Midwest in 2022 were only 5,500 units higher than what was delivered in 2019.

That limited increase in new supply for the Midwest allowed those markets to be better balanced and avoid the dramatic surge and now pullback in rent growth as was experienced in Sun Belt locations.

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

Conversion of office buildings to multi-family units has been a trending topic in commercial real estate circles as hybrid work arrangements have diminished office utilization.

However, the number of conversion projects that are actually moving forward at this time remains very low.

Thus, rent growth is anticipated to rebound above historical averages, and multi-family should maintain its place as investors’ choice.

The Office sector remains weak in 2023 with office vacancy rates continuing their climb to a record 13.4% nationally, compared to 12.5% at September 30, 2022, while our market areas reflected the following vacancy levels at September 30, 2023:

Springfield, Missouri at 4.1%, St.

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:

Louis at 10.5%, Kansas City at 11.8%, Minneapolis at 11.2%, Tulsa, Oklahoma at 11.0%, Dallas-Fort Worth at 17.8%, Chicago at 16.2%, Atlanta at 15%, Denver at 16.1%, Phoenix at 15.9% and Charlotte, North Carolina at 12.8%.

So far in 2023, tenants have vacated nearly 60 million square feet (SF), putting 2023 on pace for the largest amount of negative net absorption on record.

Total occupancy is now at its lowest level since the first quarter of 2017, despite office-using employment being over 11% higher.

To add to this, the quantity of space that is formally occupied but nevertheless available for lease has risen by more than 40 million SF since mid-2020.

Recent market trends suggest that stagnant demand is likely to linger and that space-per-worker requirements could shrink even further.

Leasing data for the most recent four quarters shows the volume of new leasing activity to be 15-20% below pre-pandemic norms, with the average size of a new lease shrinking by a similar amount.

Two factors contributing to this trend are large tenants moving into smaller spaces when their existing leases expire and smaller tenants choosing to relocate rather than renew, pushing the market toward projects with smaller lease space requirements.

Through the first three quarters of 2023, about 30 million SF in net new office inventory has come online, further exacerbating vacancy.

Another 20 million SF is expected before the end of 2023, though construction delays associated with rising costs have already pushed a number of projects into 2024.

The total of just over 50 million SF would be in line with net annual deliveries since 2015.

Another 45 million SF is expected in 2024, most of it in the first half of the year.

By 2025, however, supply pressure should moderate quickly.

Construction starts have been modest throughout the pandemic era and are now slowing rapidly, due in part to a difficult lending environment.

retail sector in the third quarter 2023.

Although a pullback in leasing activity has occurred, a significant slowdown in move-outs has contributed to consistent demand growth across the U.S.

retail sector, which has now recorded 11 consecutive quarters of positive net absorption.

Approximately 53.9 million square feet of retail space has been absorbed across the U.S.

over the past year, about 90% of which has flowed into the general retail or neighborhood center segments.

Availabilities are now at record-low levels within small to mid-sized centers and freestanding single-tenant properties.

On the other hand, availabilities within the mall segment (which consists of regional and super-regional malls as well as lifestyle centers) have continued to increase since the pandemic.

However, there is significant variation in performance across the mall segment, with 4 & 5 Star malls and lifestyle centers seeing fundamentals improve over the past year, while malls rated 3 Star and below continue to see vacancies rise.

This difference is likely to persist, as numerous mall-based retailers such as Bath and Body Works, Victoria's Secret, and Macy's have announced plans to move more stores out of malls and into open-air neighborhood and community centers with stronger foot traffic.

Despite longstanding concerns of a softening economy and eventual pullback in consumer spending, U.S.

retail space markets have remained resilient through the first three quarters of the year thanks to steady demand from a diverse array of sectors, a significant pullback in store closures, and minimal new supply.

On a cautionary note, U.S.

consumer spending will potentially take center stage over the next few months following the depletion of $2.1 trillion in excess economic relief savings and increased consumer credit card debt.

As consumers increasingly rely on credit and contend with higher interest rates, the consumer's financial health appears to be deteriorating.

Since their spending contributes to roughly two-thirds of the U.S.

GDP, instability here could send reverberations across the retail sector in 2024.

During the third quarter of 2023, national retail vacancy rates remained steady at 4.1% while our market areas reflected the following vacancy levels:

Springfield, Missouri at 3.3%, St.

Louis at 4.6%, Kansas City at 4.3%, Minneapolis at 2.9%, Tulsa, Oklahoma at 2.7%, Dallas-Fort Worth at 4.4%, Chicago at 4.9%, Atlanta at 3.6%, Phoenix at 4.6%, Denver at 4.1%, and Charlotte, North Carolina at 2.9%.

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.

industrial market performance continues to downshift as 2024 approaches.

Accelerating completions of new industrial developments have caused the U.S.

industrial vacancy rate to inch up from a record low of 3.9% in mid-2022, to 5.3% as of 3 rd quarter 2023.

While that is still comfortably below the market's average vacancy rate of 7.3% over the past 20 years, U.S.

industrial net absorption has also slowed to a crawl in 2023 with the slowdown broad-based across most market areas.

Not only was 3 rd quarter absorption down more than 75% from the booming levels recorded in 2021 and 2022, it was the weakest third-quarter recorded since 2012.

Our market areas reflected the following vacancy levels:

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Louis at 4.1%, Kansas City at 4.7%, Minneapolis at 3.6%, Tulsa, Oklahoma at 3.1%, Dallas-Fort Worth at 7.8%, Chicago at 4.6%, Atlanta at 5.4%, Phoenix at 7.2%, Denver at 6.9% and Charlotte, North Carolina at 5.5%.

After rebuilding inventories during 2022, tenant retailers and wholesalers are pausing further inventory accumulation out of caution over the economic outlook, causing U.S.

imports to decline from record highs.

A swift recovery appears unlikely, with higher interest rates still weighing on the economy and posing downside risks for net absorption through 2024.

As higher interest rates keep home sales depressed, companies with sales tied to the housing market have shed the most space.

Tenants including Bed Bath & Beyond, Ashley Furniture, American Building Supply, and Big Lots have all closed distribution centers larger than 500,000 SF since the beginning of 2023.

In June 2023, The Home Depot announced plans to cut supply chain costs by $500 million throughout 2024.

However, on net, the industrial tenant base is still growing.

Amazon sales have been rising by double digits, and the company is slowing the distribution center closures it began in early 2022.

The recent slowdown in imports has also helped major retailers including Walmart, Target, and Costco clear excess inventories accumulated last year.

Drags on household finances including elevated gas prices, and multi-decade highs in credit card interest rates may need to abate before consumer goods spending can reaccelerate and give retailers the confidence to resume distribution network expansions.

Regardless, large distribution center expansions by companies that sell necessities consumers still generally purchase in high volume despite inflation, including Dollar General, Sam's Club, and auto parts suppliers, may continue to help offset distribution center closures and keep net absorption positive in the remainder of 2023.

Higher interest rates have also caused construction starts on new industrial projects to plummet this year.

Given the average construction time of 14 months for large industrial projects, this recent pullback in starts signals that by late 2024, the number of new projects completing construction will begin to rapidly decline.

This may well set the stage for vacancies to stabilize or begin tightening again in late 2024, and for rent growth to accelerate thereafter.

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.

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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 $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.

Great Southern’s total assets increased $67.4 million, or 1.2%, from $5.68 billion at December 31, 2022, to $5.75 billion at September 30, 2023.

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

Net outstanding loans increased $57.7 million, or 1.3%, from $4.51 billion at December 31, 2022, to $4.56 billion at September 30, 2023.

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

This increase was partially offset by a decrease in 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), 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 commercial business, 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.

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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 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.

At both September 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.

At September 30, 2023 and December 31, 2022, an estimated 0.1% and 0.2%, respectively, 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.

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

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.

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Available-for-sale Securities.

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.

In the nine months ended September 30, 2023, available-for-sale securities decreased $42.6 million, or 8.7%, from $490.6 million at December 31, 2022, to $447.9 million at September 30, 2023.

A decrease in the market value of these securities accounted for $22.0 million of this balance decrease while the rest of the decrease related to normal monthly payments on mortgage-backed securities and collateralized mortgage obligations.

The available-for-sale securities portfolio had a gross unrealized loss of $84.3 million at September 30, 2023.

As of that date, the portfolio had a tax-equivalent yield of approximately 2.70% and an estimated effective duration of five to six years.

Held-to-maturity Securities.

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.

In the nine months ended September 30, 2023, held-to-maturity securities decreased $5.8 million, or 2.9%, from $202.5 million at December 31, 2022, to $196.7 million at September 30, 2023.

The held-to-maturity securities portfolio had a gross unrealized loss of $30.6 million at September 30, 2023, that was not included in the Company’s total capital balance.

As of September 30, 2023, the portfolio had a tax-equivalent yield of approximately 2.63% and an estimated effective duration of five to six years.

If these held-to-maturity unrealized losses were included in capital (net of taxes), this would have decreased total stockholder’s equity by $23.1 million at September 30, 2023.

This amount was equal to 4.3% of total stockholders’ equity of $531.7 million.

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 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.

In the nine months ended September 30, 2023, total deposit balances increased $166.6 million, or 3.6%.

Compared to December 31, 2022, transaction account balances decreased $66.3 million, or 2.0%, to $3.19 billion at September 30, 2023, and retail certificates of deposit decreased $24.9 million, or 2.4%, to $996.4 million at September 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.

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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 $669.7 million and $411.5 million at June 30, 2023 and December 31, 2022, respectively.

Brokered deposits, including IntraFi program purchased funds, were $669.3 million and $411.5 million at September 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 and Six Months Ended June 30, 2023 and 2022 – Liquidity” below for further information on funding sources.

See “Results of Operations and Comparison for the Three and Nine Months Ended September 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 $117.6 million from $176.8 million at December 31, 2022 to $59.3 million at June 30, 2023.

Securities sold under reverse repurchase agreements with customers decreased $118.6 million from $176.8 million at December 31, 2022 to $58.2 million at September 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 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 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.

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

At September 30, 2023 and December 31, 2022, overnight borrowings from the FHLBank were $82.5 million and $88.5 million, respectively, which are included in short term borrowings.

Short term borrowings and other interest-bearing liabilities decreased $5.5 million from $89.6 million at December 31, 2022 to $84.1 million at September 30, 2023.

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

Net Interest Income and Interest Rate Risk Management.

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

A large portion of our loan portfolio is tied to one-month 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%, 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 ($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 ($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.

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

At September 30, 2023 the Federal Funds rate was 5.50%.

Financial markets now expect the possibility of significant further increases in Federal Funds interest rates in the latter months of 2023 and into 2024 to be less likely, with interest rate decisions being made at each FRB meeting based on economic data available at the time.

However, the FRB has further indicated, and financial markets now have begun to price in, that it is likely that the Federal Funds interest rate will remain near this peak level for many months before any rate cuts occur.

Great Southern’s loan portfolio includes loans ($1.27 billion at September 30, 2023) tied to various SOFR indices that will be subject to adjustment at least once within 90 days after September 30, 2023.

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.

Great Southern also has a portfolio of loans ($790.9 million at September 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.

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.

Great Southern also has a portfolio of loans ($6.7 million at September 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 September 30, 2023, nearly all of these 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 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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There may also be a negative impact on the Company’s net interest income if the Company is unable to significantly lower its funding costs due to a highly competitive rate environment, although interest rates on assets may decline further.

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

As of 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.

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

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

The negative impact of a falling Federal Funds rate and other market interest rates also falling could be more pronounced if we are not able to decrease non-maturity deposit rates accordingly.

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

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In a situation where market interest rates 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.

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 would be expected to decrease compared to the then-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.

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

Effect of Federal Laws and Regulations

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

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

ratio of at least 6.5%, (ii) a Tier 1 risk-based capital ratio of at least 8%, (iii) a total risk-based capital ratio of at least 10% and (iv) a Tier 1 leverage ratio of 5%, and must not be subject to an order, agreement or directive mandating a specific capital level.

Economic Growth Act.

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

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%.

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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 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.

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 during extended business hours.

Since early 2022, Great Southern has been preparing to convert to a new core banking platform (New System) to be delivered by a third-party vendor.

As previously disclosed, the migration to the New System, originally scheduled for the third quarter of 2023, has been delayed to mid-2024.

Certain contractual disputes have arisen between Great Southern and the third-party vendor.

While discussions are ongoing between the parties, there is no assurance that a resolution will be achieved.

In the meantime, Great Southern expects to continue operations with its current core banking provider, which will allow Great Southern to offer its full array of products and services.

In September 2023, in Springfield, Missouri, the Company opened Great Southern Express, a modern four-lane drive-through center using only interactive teller machine (ITM) technology to serve customers.

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.

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

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

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

As significant preliminary work was completed in 2022 and early 2023, it was determined to extend the conversion timeline from third quarter 2023 to allow for further system testing related to some of our more highly-customized applications and products and to accommodate certain functionality enhancements to the platform.

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.

Also in the Springfield market, after a thorough evaluation, at the close of business on January 12, 2024, the banking center at 600 West Republic Road will be consolidated into the Great Southern banking center located at 2945 W.

Republic Road, a short distance away.

After the West Republic Road location closes, an on-site ITM will be available there indefinitely for customers’ convenience.

Headquartered in Springfield, Missouri, Great Southern offers a broad range of banking services to customers.

The Company operates 90 retail banking centers in Missouri, Iowa, Kansas, Minnesota, Arkansas and Nebraska and commercial lending offices in Atlanta;

Charlotte, North Carolina;

Omaha, Nebraska;

Phoenix and Tulsa, Oklahoma.

The common stock of Great Southern Bancorp, Inc.

is listed on the Nasdaq Global Select Market under the symbol "GSBC."

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

During the nine months ended September 30, 2023, the Company’s total assets increased by $67.4 million to $5.75 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.

Cash and cash equivalents were $182.3 million at September 30, 2023, an increase of $13.8 million, or 8.2%, from $168.5 million at December 31, 2022.

This increase was primarily due to a $26.5 million increase in interest-bearing deposits in the Federal Reserve Bank.

The Company’s available-for-sale securities decreased $42.6 million, or 8.7%, 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.

The decrease was primarily due to a decrease in the market value of these available-for-sale securities as a result of increases in market 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 7.8% of total assets at September 30, 2023 compared to 8.6% at December 31, 2022.

Held-to-maturity securities were $196.7 million at September 30, 2023, a decrease of $5.8 million, or 2.9%, from $202.5 million at December 31, 2022.

The held-to-maturity securities portfolio was 3.4% and 3.6% of total assets at September 30, 2023 and December 31, 2022, respectively.

Net loans increased $57.7 million from December 31, 2022, to $4.56 billion at September 30, 2023.

This increase was primarily in other residential (multi-family) loans ($64 million increase) and commercial business loans ($50 million increase), which was partially offset by a decrease in commercial real estate loans ($27 million decrease).

Loan origination volume in the nine months ended September 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 into 2023.

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.

The Company did experience a few large loan payoffs in the three months ended September 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 $68.8 million, from $5.15 billion at December 31, 2022 to $5.22 billion at September 30, 2023.

This increase was primarily due to an increase in deposits ($167 million increase), which was partially offset by a reduction in securities sold under reverse repurchase agreements with customers ($119 million decrease).

Total deposits increased $166.6 million, or 3.6%, to $4.85 billion at September 30, 2023.

Total checking account balances decreased $66.3 million, from $3.25 billion at December 31, 2022 to $3.19 billion at September 30, 2023.

Total interest-bearing checking accounts increased $55.1 million while non-interest-bearing checking accounts decreased $121.4 million.

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.

Retail certificates of deposit decreased $24.9 million compared to December 31, 2022, to $996.4 million at September 30, 2023.

Customer retail time deposits initiated through our banking center network increased $8.6 million and time deposits initiated through our national internet network decreased $31.9 million.

Brokered deposits increased $257.8 million to $669.3 million at September 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.

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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.

Securities sold under reverse repurchase agreements with customers decreased $118.6 million from $176.8 million at December 31, 2022 to $58.2 million at September 30, 2023.

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

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.

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.

In 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 $5.5 million from $89.6 million at December 31, 2022 to $84.1 million at September 30, 2023.

At September 30, 2023, $82.5 million of this total was overnight borrowings from the FHLBank, which was used to fund increases in outstanding loans.

Total stockholders’ equity decreased $1.4 million, from $533.1 million at December 31, 2022 to $531.7 million at September 30, 2023.

Stockholders’ equity decreased due to repurchases of the Company’s common stock totaling $19.5 million and dividends declared on common stock of $14.4 million.

Accumulated other comprehensive income/loss decreased $23.4 million (net loss increased) during the nine months ended September 30, 2023, due to decreases in the fair value of available-for-sale investment securities and cash flow hedges, as a result of increased market interest rates.

Partially offsetting these decreases were net income of $54.7 million for the nine months ended September 30, 2023 and a $1.3 million increase due to stock option exercises.

Results of Operations and Comparison for the Three and Nine Months Ended September 30, 2023 and 2022

Net income was $15.9 million for the three months ended September 30, 2023 compared to $18.1 million for the three months ended September 30, 2022.

This decrease of $2.2 million, or 12.4%, was primarily due to a decrease in net interest income of $6.2 million, or 11.6% and an increase in non-interest expense of $799,000, or 2.3%, partially offset by a decrease in provision for credit losses on loans and unfunded commitments of $4.5 million, or 136.0%, and a decrease in income tax expense of $327,000, or 7.0%.

Net income was $54.7 million for the nine months ended September 30, 2023 compared to $53.4 million for the nine months ended September 30, 2022.

This increase of $1.3 million, or 2.5%, was primarily due to an increase in net interest income of $3.1 million, or 2.1%, and a decrease in provision for credit losses on loans and unfunded commitments of $7.5 million, or 140.0%.

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

The provision for credit losses on loans decreased $500,000, while the provision for credit losses on unfunded commitments decreased $7.0 million.

These items were partially offset by an increase in non-interest expense of $5.7 million, or 5.8%, a decrease in non-interest income of $3.0 million, or 11.2%, and an increase in income tax expense of $570,000, or 4.1%.

Total Interest Income

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.

Total interest income increased $15.6 million, or 26.2%, during the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

The increase was due to a $14.8 million increase in interest income on loans and an $814,000 increase in interest income on investment securities and other interest-earning assets.

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

Total interest income increased $61.3 million, or 38.6%, during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

The increase was due to a $57.9 million increase in interest income on loans and a $3.5 million increase in interest income on investment securities and other interest-earning assets.

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 from loans increased during the nine months ended September 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 nine months ended September 30, 2023 compared to the same period in 2022 due to higher average rates of interest and higher average balances of investment securities, partially offset by decreased average balances of other interest-earning assets.

Interest Income – Loans

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.

During the three months ended September 30, 2023 compared to the three months ended September 30, 2022, interest income on loans increased $13.1 million due to higher average interest rates on loans.

The average yield on loans increased from 4.79% during the three months ended September 30, 2022, to 5.92% during the three months ended September 30, 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 and the origination of new fixed-rate loans at higher market interest rates.

Interest income on loans also increased $1.7 million as the result of higher average loan balances, which increased from $4.48 billion during the three months ended September 30, 2022, to $4.62 billion during the three months ended September 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.

During the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, interest income on loans increased $47.0 million due to higher average interest rates on loans.

The average yield on loans increased from 4.46% during the nine months ended September 30, 2022, to 5.84% during the nine months ended September 30, 2023.

Interest income on loans also increased $10.9 million as the result of higher average loan balances, which increased from $4.31 billion during the nine months ended September 30, 2022, to $4.62 billion during the nine months ended September 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.

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

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

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

As previously disclosed by the Company, on March 2, 2020, the Company and its swap counterparty mutually agreed to terminate this swap, effective immediately.

The Company was paid $45.9 million, including accrued but unpaid interest, from its swap counterparty as a result of this termination.

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

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

The Company recorded interest income related to the interest rate swap of $2.0 million in 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.

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

The Company recorded interest income related to the interest rate swap of $6.1 million in each of the nine month periods ended September 30, 2023 and 2022.

At September 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 (now SOFR).

In March 2022, the Company entered into another 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 a contractual termination date of March 1, 2024.

Under the terms of the swap, the Company receives a fixed rate of interest of 1.6725% and pays a floating rate

of interest equal to one-month USD-LIBOR (now the equivalent replacement USD-SOFR rate since USD-LIBOR rate is no longer available).

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-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.

To the extent that the fixed rate exceeds one-month USD-SOFR, the Company receives net interest settlements, which are recorded as loan interest income.

If one-month USD-SOFR exceeds the fixed rate of interest, the Company pays net settlements to the counterparty and records 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 $2.8 million in the three months ended September 30, 2023, compared to a reduction of $428,000 in the three months ended September 30, 2022.

The Company recorded a reduction of loan interest income related to this swap transaction of $7.5 million in the nine months ended September 30, 2023.

The Company recorded loan interest income related to this swap transaction of $610,000 in the nine months ended September 30, 2022.

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

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

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

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

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

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

If the floating rate of interest exceeds the fixed rate of interest (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%.

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

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

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

To the extent the fixed rate of interest exceeds the floating rate of interest, the Company receives net interest settlements, which are recorded as loan interest income.

If the floating rate of interest exceeds the fixed rate of interest, the Company pays net settlements to the counterparty and records 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 $2.7 million and $4.4 million, respectively, in the three and nine months ended September 30, 2023.

At September 30, 2023, the USD-Prime rate was 8.50% and the one-month USD-SOFR OIS rate was 5.31663%.

Interest Income – Investments and Other Interest-earning Assets

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.

Interest income on investments decreased $111,000 in the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

Interest income decreased $493,000 as a result of a decrease in average balances from $734.5 million during the three months ended September 30, 2022, to $678.6 million during the three months ended September 30, 2023.

Average balances of securities decreased primarily due to 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.

Interest income increased $382,000 as a result of higher average interest rates, which increased from 2.77% during the three months ended September 30, 2022, to 2.93% during the three month period ended September 30, 2023.

Interest income on investments increased $745,000 in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Interest income increased $516,000 as a result of an increase in average balances from $670.7 million during the nine months ended September 30, 2022, to $694.7 million during the nine months ended September 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 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.

Interest income also increased $229,000 as a result of higher average interest rates, which increased from 2.84% during the nine months ended September 30, 2022, to 2.89% during the nine month period ended September 30, 2023.

Interest income on other interest-earning assets increased $925,000 in the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

Interest income increased $799,000 as a result of higher average interest rates, which increased from 2.11% during the three months ended September 30, 2022, to 5.22% during the three months ended September 30, 2023.

Interest income also increased $126,000 as a result of an increase in average balances from $84.8 million during the three months ended September 30, 2022, to $104.5 million during the three months ended September 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.

Interest income on other interest-earning assets increased $2.7 million in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Interest income increased $2.9 million as a result of higher average interest rates, which increased from 0.53% during the nine months ended September 30, 2022, to 4.91% during the nine months ended September 30, 2023.

Partially offsetting that increase, interest income decreased $194,000 as a result of a decrease in average balances from $218.3 million during the nine months ended September 30, 2022, to $97.8 million during the nine months ended September 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.

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 $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%.

Total interest expense increased $21.8 million, or 322.2%, during the three months ended September 30, 2023, when compared with the three months ended September 30, 2022, due to an increase in interest expense on deposits of $20.2 million, or 406.3%, an increase in interest expense on short-term borrowings of $1.1 million, or 280.1%, an increase in interest expense on securities sold under reverse repurchase agreements of $263,000, or 584.4%, and an increase in interest expense on subordinated debentures issued to capital trusts of $206,000, or 83.1%.

Total interest expense increased $58.3 million, or 415.1%, during the nine months ended September 30, 2023, when compared with the nine months ended September 30, 2022, due to an increase in interest expense on deposits of $52.2 million, or 548.0%, an increase in interest expense on short-term borrowings of $4.5 million, or 739.7%, an increase in interest expense on securities sold under reverse repurchase agreements of $809,000, or 1,304.8%, and an increase in interest expense on subordinated debentures issued to capital trusts of $748,000, or 142.5%.

Interest Expense – Deposits

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 expense on demand and savings deposits increased $6.8 million due to average rates of interest that increased from 0.23% in the three months ended September 30, 2022 to 1.46% in the three months ended September 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 $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.

Partially offsetting this increase, interest expense on demand deposits decreased $59,000, due to a decrease in average balances from $2.30 billion during the three months ended September 30, 2022 to $2.20 billion during the three months ended September 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 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 expense on demand and savings deposits increased $16.5 million due to average rates of interest that increased from 0.17% in the nine months ended September 30, 2022 to 1.18% in the nine months ended September 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.

Partially offsetting this increase, interest expense on demand deposits decreased $190,000, due to a decrease in average balances from $2.36 billion during the nine months ended September 30, 2022 to $2.19 billion during the nine months ended September 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.

Interest expense on time deposits increased $6.3 million as a result of an increase in average rates of interest from 0.82% during the three months ended September 30, 2022, to 3.37% during the three months ended September 30, 2023.

Interest expense on time deposits increased $292,000 due to an increase in average balances of time deposits from $872.3 million during the three months ended September 30, 2022 to $996.2 million in the three months ended September 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 half of 2023.

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.

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 2023 and targeted promotions during the latter half of 2022 and the first nine months of 2023.

Interest expense on time deposits increased $16.5 million as a result of an increase in average rates of interest from 0.54% during the nine months ended September 30, 2022, to 2.76% during the nine months ended September 30, 2023.

Interest expense on time deposits increased $764,000 due to an increase in average balances of time deposits from $839.3 million during the nine months ended September 30, 2022 to $999.9 million in the nine months ended September 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.

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 2023 and targeted promotions during the latter half of 2022 and the first nine months of 2023.

Interest expense on brokered deposits increased $3.7 million due to average rates of interest that increased from 2.27% in the three months ended September 30, 2022 to 5.16% in the three months ended September 30, 2023.

Interest expense on brokered deposits also increased $3.1 million due to an increase in average balances from $324.2 million during the three months ended September 30, 2022 to $669.8 million during the three months ended September 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.

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

Interest expense on brokered deposits increased $12.9 million, due to an increase in average balances from $175.7 million during the nine months ended September 30, 2022 to $588.9 million during the nine months ended September 30, 2023.

Interest expense on brokered deposits also increased $5.6 million due to average rates of interest that increased from 2.45% in the nine months ended September 30, 2022 to 4.93% in the nine months ended September 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 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.

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

Interest expense on reverse repurchase agreements increased $273,000 due to higher average interest rates during the three months ended September 30, 2023 when compared to the three months ended September 30, 2022.

The average rate of interest was 0.13% for the three months ended September 30, 2022 compared to 2.18% for the three months ended September 30, 2023.

The average balance of repurchase agreements decreased $78.7 million from $134.9 million in the three months ended September 30, 2022 to $56.2 million in the three months ended September 30, 2023, which was due to changes in customers’ desire for this product, which can fluctuate.

Interest expense on reverse repurchase agreements increased $823,000 due to higher average interest rates during the nine months ended September 30, 2023 when compared to the nine months ended September 30, 2022.

The average rate of interest was 0.06% for the nine months ended September 30, 2022 compared to 1.36% for the nine months ended September 30, 2023.

The average balance of repurchase agreements decreased $47.1 million from $132.9 million in the nine months ended September 30, 2022 to $85.8 million in the nine months ended September 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 $806,000 during the three months ended September 30, 2023 when compared to the three months ended September 30, 2022 due to higher average rates of interest.

The average rate of interest was 2.14% for the three months ended September 30, 2022, compared to 5.47% for the three months ended September 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 $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.

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.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased $250,000 during the three months ended September 30, 2023 when compared to the three months ended September 30, 2022 due to higher average balances.

The average balance of short-term borrowings and other interest-bearing liabilities increased from $70.0 million in the three months ended September 30, 2022 to $103.8 million in the three months ended September 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, which were used to fund loan growth and supplement deposit balances.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased $2.5 million during the nine months ended September 30, 2023 when compared to the nine months ended September 30, 2022 due to higher average rates of interest.

The average rate of interest was 1.67% for the nine months ended September 30, 2022, compared to 5.12% for the nine months ended September 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.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased $2.1 million during the nine months ended September 30, 2023 when compared to the nine months ended September 30, 2022 due to higher average balances.

The average balance of short-term borrowings and other interest-bearing liabilities increased from $49.2 million in the nine months ended September 30, 2022 to $134.6 million in the nine months ended September 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.

During the three months ended September 30, 2023, compared to the three months ended September 30, 2022, interest expense on subordinated debentures issued to capital trusts increased $206,000 due to higher average interest rates.

The average interest rate was 7.00% in the three months ended September 30, 2023 compared to 3.82% in the three months ended September 30, 2022.

The subordinated debentures are variable-rate debentures which bear interest at an average rate of three-month SOFR (originally LIBOR) plus 1.60%, adjusting quarterly, which was 7.23% at September 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.

During the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, interest expense on subordinated debentures issued to capital trusts increased $748,000 due to higher average interest rates.

The average interest rate was 6.61% in the nine months ended September 30, 2023 compared to 2.72% in the nine months ended September 30, 2022.

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

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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 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.

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

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

Net Interest Income

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.

Net interest income for the three months ended September 30, 2023 decreased $6.2 million to $46.7 million compared to $52.9 million for the three months ended September 30, 2022.

Net interest margin was 3.43% in the three months ended September 30, 2023, compared to 3.96% in the three months ended September 30, 2022, a decrease of 53 basis points, or 13.4%.

The Company experienced increases in interest income on both loans and other interest-earning assets.

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.

Net interest income for the nine months ended September 30, 2023 increased $3.1 million to $148.1 million compared to $145.0 million for the nine months ended September 30, 2022.

Net interest margin was 3.66% in the nine months ended September 30, 2023, compared to 3.73% in the nine months ended September 30, 2022, a decrease of 7 basis points, or 1.9%.

The Company experienced increases in interest income on loans, other interest-earning assets 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 Company’s overall average interest rate spread decreased 97 basis points, or 25.8%, from 3.76% during the three months ended September 30, 2022 to 2.79% during the three months ended September 30, 2023.

The decrease was due to a 204 basis point increase in the weighted average rate paid on interest-bearing liabilities, partially offset by a 107 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.

In comparing the two periods, the yield on loans increased 113 basis points, the yield on investment securities increased 16 basis points and the yield on other interest-earning assets increased 311 basis points.

The rate paid on deposits increased 203 basis points, the rate paid on reverse repurchase agreements increased 205 basis points, the rate paid on short-term borrowings and other interest-bearing liabilities increased 333 basis points and the rate paid on subordinated debentures issued to capital trust increased 318 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 Company’s overall average interest rate spread decreased 49 basis points, or 13.8%, from 3.58% during the nine months ended September 30, 2022 to 3.09% during the nine months ended September 30, 2023.

The decrease was due to a 185 basis point increase in the weighted average rate paid on interest-bearing liabilities, partially offset by a 135 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.

In comparing the two periods, the yield on loans increased 138 basis points, the yield on investment securities increased five basis points and the yield on other interest-earning assets increased 438 basis points.

The rate paid on deposits increased 180 basis points, the rate paid on reverse repurchase agreements increased 130 basis points, the rate paid on short-term borrowings and other interest-bearing liabilities increased 345 basis points and the rate paid on subordinated debentures issued to capital trust increased 389 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.

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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.

In 2023, overall competition for deposits intensified as a few banks experienced significant liquidity issues in March 2023 and market rates moved higher more rapidly.

Also, as market interest rates moved higher, some deposit holders chose to move funds into non-deposit investment products.

In addition, in the three months ended September 30, 2023, the Company had nearly $200 million of lower-rate time deposits mature and reprice at the substantially higher then-market interest rates.

If market interest rates remain near their current levels, the Company’s interest rate swaps will continue to have a negative impact on net interest income.

Based on the interest rates on these swaps at September 30, 2023, the negative impact of all the interest rate swaps combined in the three months ending December 31, 2023 is expected to be approximately $3.7 million.

The negative impact of all the interest rate swaps combined in the three months ended September 30, 2023 was approximately $3.5 million.

As noted previously, one of these interest rate swaps will terminate March 1, 2024.

This interest rate swap had a negative impact to net interest income of $2.8 million in the three months ended September 30, 2023.

It is expected to have a negative impact to net interest income of $2.9 million in the three months ending December 31, 2023 and $1.9 million in the three months ending March 31, 2024, then no further impact in subsequent periods.

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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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.

Additional procedures provide for frequent management review of the loan portfolio based on loan size, loan type, delinquencies, financial analysis, on-going correspondence with borrowers and problem loan work-outs.

Additional procedures provide for frequent management review of the loan portfolio based on loan size, loan type, delinquencies, financial analysis, ongoing correspondence with borrowers and problem loan workouts.

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

During the three months ended June 30, 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.

During the three months ended September 30, 2023, the Company did not record a provision expense on its portfolio of outstanding loans, compared to a $2.0 million provision expense during the three months ended September 30, 2022.

During the nine months ended September 30, 2023 and September 30, 2022, the Company recorded provision expense of $1.5 million and $2.0 million, respectively, on its portfolio of outstanding loans.

Total net charge-offs were $99,000 for the three months ended September 30, 2023, compared to $297,000 in the three months ended September 30, 2022.

Total net charge-offs were $227,000 for the nine months ended September 30, 2023, compared to net recoveries of $7,000 in the nine months ended September 30, 2022.

For the three months ended September 30, 2023, the Company recorded a negative provision for losses on unfunded commitments of $1.2 million, compared to provision expense of $1.3 million for the three months ended September 30, 2022.

For the nine months ended September 30, 2023, the Company recorded a negative provision for losses on unfunded commitments of $3.6 million, compared to provision expense of $3.3 million for the nine months ended September 30, 2022.

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 1.41% 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.

The Bank’s allowance for credit losses as a percentage of total loans was 1.40% and 1.39% at September 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 September 30, 2023 based on recent reviews of the Bank’s loan portfolio and current economic conditions.

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

Non-performing Assets

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

At 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.

At September 30, 2023, non-performing assets were $10.9 million, an increase of $7.2 million from $3.7 million at December 31, 2022.

Non-performing assets as a percentage of total assets were 0.19% at September 30, 2023, compared to 0.07% at December 31, 2022.

Compared to December 31, 2022, non-performing loans increased $7.1 million, to $10.8 million at September 30, 2023, and foreclosed and repossessed assets decreased $12,000, to $38,000 at September 30, 2023.

The majority of the increase in non-performing loans was in the commercial real estate loans category, which included $8.6 million in loans transferred to non-performing since December 31, 2022.

Non-performing Loans .

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

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

Repossessions

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FDIC-assisted acquired loans included above

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.

At September 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 $8.5 million, or 84.3% of the total category, was added to non-performing loans during the three months ended June 30, 2023 and is collateralized by an office building in Missouri.

The non-performing one- to four-family residential category included three loans, one of which was added during 2023.

The largest relationship in the category totaled $150,000, or 62.3% 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 non-performing one- to four-family residential category experienced $602,000 in repayments during the nine months ended September 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.

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

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

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

The non-performing consumer category included seven loans.

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.

Compared to December 31, 2022, potential problem loans decreased $1.2 million, or 78.6%, to $337,000 at September 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, $294,000 in loan payments, $111,000 in loans downgraded to the non-performing category and $13,000 in charge offs, partially offset by $181,000 in loans added to potential problem loans.

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These loans are not reflected in non-performing assets.

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

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

Repossessions

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FDIC-assisted acquired loans included above

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.

At September 30, 2023, the one- to four-family residential category of potential problem loans included three loans, one of which was added during 2023.

The largest relationship in this category totaled $99,000, or 42.0% of the total category.

During the six months ended

June 30, 2023, 17 loans, totaling $939,000, met the criteria to be upgraded to a satisfactory risk rating.

During the nine months ended September 30, 2023, 19 loans, totaling $1.0 million, met the criteria to be upgraded to a satisfactory risk rating.

The consumer category of potential problem loans included 10 loans, one of which was added during the current period.

Other Real Estate Owned and Repossessions.

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:

All of the total $38,000 of other real estate owned and repossessions at September 30, 2023 were acquired through foreclosure.

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

(In thousands)

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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.

Loans Classified “Watch”

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

In the six months ended June 30, 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.

Loans Classified “Watch” and “Special Mention”

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 identified as “Watch” are monitored due to indications of potential weaknesses or deficiencies that may require future re-classification as special mention or substandard.

In the nine months ended September 30, 2023, loans classified as “Watch” decreased $9.8 million, from $28.7 million at December 31, 2022 to $18.9 million at September 30, 2023, primarily due to the combination of one large loan being upgraded to “Satisfactory” out of the “Watch” category and an unrelated loan being downgraded to substandard and added to non-performing loans, partially offset by two unrelated loans being downgraded from “Satisfactory” to “Watch.” While loans classified as “Special Mention” are not adversely classified, they are deserving of management's close attention to ensure deterioration of the repayment prospects or the credit position of the assets does not expose the institution to elevated risk to warrant adverse classification at a future date.

In the nine months ended September 30, 2023, loans classified as “Special Mention” increased $21.7 million as two loan relationships were downgraded from “Satisfactory.” See Note 6 for further discussion of the Company’s loan grading system.

Non-interest Income

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:

For the three months ended September 30, 2023, non-interest income decreased $132,000 to $7.9 million when compared to the three months ended September 30, 2022.

None of the components of non-interest income experienced increases or decreases exceeding $200,000 in comparing the two periods.

For the nine months ended September 30, 2023, non-interest income decreased $3.0 million to $23.5 million when compared to the nine months ended September 30, 2022, primarily as a result of the following items:

Other income :

2 unchanged sentences

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 :

Net gains on loan sales decreased $534,000 compared to the prior year period.

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

Fixed rate single-family mortgage loans originated are generally subsequently sold in the secondary market.

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

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

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

Point-of-sale and ATM fees decreased $738,000 compared to the prior year period.

This decrease was primarily due to a portion of these transactions now being routed through channels with lower fees to the Company, which we expect will continue in future periods.

Gain (loss) on derivative interest rate products :

2 unchanged sentences

Non-interest Expense

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 $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 :

For the three months ended September 30, 2023, non-interest expense increased $799,000 to $35.6 million when compared to the three months ended September 30, 2022, primarily as a result of the following items:

Salaries and employee benefits :

Salaries and employee benefits increased $697,000 in comparing the three month periods.

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

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 that are deferred under accounting rules decreased by $233,000 in the 2023 period compared to the 2022 period (which resulted in higher expense in the 2023 period because deferred costs and the related credit to expense were less), as the volume of loans originated in the three months ended September 30, 2023 decreased substantially compared to the three months ended September 30, 2022.

Net occupancy and equipment expenses :

Net occupancy expenses increased $531,000 from the prior year period.

1 unchanged sentence

In addition, various repairs and maintenance expenses increased by $106,000 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:

Insurance expense increased $498,000 from the prior year period.

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

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.

Legal, audit and other professional fees decreased $390,000 from the prior year period, to $1.8 million.

In the 2022 period, the Company expensed $372,000 in professional fees related to the interest rate swaps initiated in July 2022, which was not repeated in the 2023 period.

For the nine months ended September 30, 2023, non-interest expense increased $5.7 million to $104.7 million when compared to the nine months ended September 30, 2022, primarily as a result of the following items:

Salaries and employee benefits :

2 unchanged sentences

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.

In addition, compensation costs related to originated loans that are deferred under accounting rules decreased by $1.2 million in the 2023 period compared to the 2022 period (which resulted in higher expense in the 2023 period because deferred costs and the related credit to expense were less), as the volume of loans originated in the first nine months of 2023 decreased substantially compared to the same period in 2022.

Net occupancy and equipment expenses :

Net occupancy expenses increased $2.0 million from the prior year period.

Various components of computer license and support expenses increased by $986,000 in the 2023 period compared to the 2022 period.

Depreciation and related expenses for equipment placed in service in 2023 increased expenses by $500,000 in the 2023 period compared to the 2022 period.

In addition, various repairs and maintenance expenses increased by $224,000 in the 2023 period compared to the 2022 period.

Legal, Audit and Other Professional Fees :

Legal, audit and other professional fees increased $1.2 million from the prior year period, to $5.5 million.

In the 2023 period, the Company expensed a total of $3.1 million, compared to $1.7 million expensed in the 2022 period, 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.

Insurance expense increased $795,000 from the prior year period.

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

The Company’s efficiency ratio for the three months ended September 30, 2023, was 65.13% compared to 57.09% for the same period in 2022.

The Company’s efficiency ratio for the nine months ended September 30, 2023, was 61.04% compared to 57.75% for the same period in 2022.

The Company’s ratio of non-interest expense to average assets was 2.49% for both the three months ended September 30, 2023 and the three months ended September 30, 2022.

The Company’s ratio of non-interest expense to average assets was 2.45% and 2.42% for the nine months ended September 30, 2023 and 2022, respectively.

Average assets for the three months ended September 30, 2023, increased $124.5 million, or 2.2%, from the three months ended September 30, 2022, primarily due to an increase in net loans receivable and interest-bearing cash equivalents, partially offset by a decrease in investment securities.

Average assets for the nine months ended September 30, 2023, increased $255.6 million, or 4.7%, compared to the nine months ended September 30, 2022, primarily due to an increase in net loans receivable and investment securities, partially offset by a decrease in interest-bearing cash equivalents.

In comparing the 2023 and 2022 periods, the increases in the efficiency ratio and the ratio of net non-interest expense to average assets primarily resulted from increases in non-interest expense.

Provision for Income Taxes

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.

For the three months ended September 30, 2023 and 2022, the Company’s effective tax rate was 21.5% and 20.5%, respectively.

For the nine months ended September 30, 2023 and 2022, the Company’s effective tax rate was 20.8% 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.

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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 $1.5 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.

Net loan fees included in interest income were $1.5 million and $1.6 million for the three months ended September 30, 2023 and 2022, respectively.

Net loan fees included in interest income were $4.4 million and $4.7 million for the nine months ended September 30, 2023 and 2022, respectively.

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

The table does not reflect any effect of income taxes.

September 30,

Three Months Ended

June 30, 2023

June 30, 2022

September 30, 2023

September 30, 2022

(Dollars in Thousands)

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Stockholders’ equity

Total liabilities and stockholders’ equity

Net interest income:

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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 $57.1 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

(1) Of the total average balances of investment securities, average tax-exempt investment securities were $56.1 million and $63.4 million for the three months ended September 30, 2023 and 2022, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $13.7 million and $16.2 million for the three months ended September 30, 2023 and 2022, respectively.

Interest income on tax-exempt assets included in this table was $608,000 and $628,000 for the three months ended September 30, 2023 and 2022, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $503,000 and $604,000 for the three months ended September 30, 2023 and 2022, respectively.

September 30,

Nine Months Ended

September 30, 2023

September 30, 2022

(Dollars in Thousands)

34 unchanged sentences

* 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.

Of the total average balances of investment securities, average tax-exempt investment securities were $57.0 million and $51.4 million for the nine months ended September 30, 2023 and 2022, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $14.2 million and $16.3 million for the nine months ended September 30, 2023 and 2022, respectively.

Interest income on tax-exempt assets included in this table was $1.9 million and $1.5 million for the nine months ended September 30, 2023 and 2022, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $1.6 million and $1.4 million for the nine months ended September 30, 2023 and 2022, respectively.

Rate/Volume Analysis

3 unchanged sentences

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

Three Months Ended June 30,

Three Months Ended September 30,

Increase (Decrease)

16 unchanged sentences

Net interest income

Six Months Ended June 30,

Nine Months Ended September 30,

Increase (Decrease)

20 unchanged sentences

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 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.

At September 30, 2023, the Company had commitments of approximately $22.1 million to fund loan originations, $1.46 billion of unused lines of credit and unadvanced loans, and $16.9 million of outstanding letters of credit.

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

September 30,

Closed non-construction loans with unused available lines

5 unchanged sentences

Secured by real estate (not one-to four-family)

Loan commitments not closed

Loan commitments

Secured by real estate (one-to four-family)

3 unchanged sentences

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

June 30, 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 September 30, 2023, approximately 35% of the Company’s total deposits were uninsured, when including deposit accounts of consolidated subsidiaries of the Company and collateralized deposits of unaffiliated entities.

Excluding deposit accounts of the Company’s consolidated subsidiaries, approximately 16% of the Company’s total deposits were uninsured at September 30, 2023.

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

September 30, 2023

December 31, 2022

15 unchanged sentences

Statements of Cash Flows.

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.

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

The Company had negative cash flows from investing activities during the nine months ended September 30, 2023 and 2022.

The Company had positive cash flows from financing activities during the nine months ended September 30, 2023 and 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 $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.

Operating activities provided cash flows of $40.1 million and $53.9 million during the nine months ended September 30, 2023 and 2022, respectively.

During the nine months ended September 30, 2023 and 2022, investing activities used cash of $39.1 million and $788.9 million, respectively.

Investing activities in the 2023 period used cash primarily for the net origination of loans, partially offset by payments received on investment securities.

Investing activities in the 2022 period used cash primarily for 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 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.

During the nine months ended September 30, 2023 and 2022, financing activities provided cash of $12.8 million and $206.7 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 net decreases in short-term borrowings, the repurchase of the Company’s common stock and dividends paid to stockholders.

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

Capital Resources

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

At June 30, 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.

At September 30, 2023, the Company’s total stockholders’ equity and common stockholders’ equity were each $531.7 million, or 9.3% of total assets, equivalent to a book value of $44.81 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 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.

At September 30, 2023, the Company’s tangible common equity to tangible assets ratio was 9.1%, compared to 9.2% at December 31, 2022 (See Non-GAAP Financial Measures below).

Included in stockholders’ equity at September 30, 2023 and December 31, 2022, were unrealized losses (net of taxes) on the Company’s available-for-sale investment securities totaling $63.5 million and $47.2 million, respectively.

This change in net unrealized loss during the nine months ended September 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 period from March 31, 2023 through September 30, 2023.

Also included in stockholders’ equity at September 30, 2023, were unrealized losses (net of taxes) totaling $3,000 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 June 30, 2023, were realized gains (net of taxes) on the Company’s terminated cash flow hedge (interest rate swap), totaling $14.2 million.

In addition, included in stockholders’ equity at September 30, 2023, were realized gains (net of taxes) on the Company’s terminated cash flow hedge (interest rate swap), totaling $12.7 million.

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

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

At September 30, 2023, the remaining pre-tax amount to be recorded in interest income was $16.4 million.

The net effect on total stockholders’ equity over time will be no impact, as the reduction of this realized gain will be offset by an increase in retained earnings (as the interest income flows through pre-tax income).

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

Also included in stockholders’ equity at September 30, 2023, was an unrealized loss (net of taxes) on the Company’s outstanding cash flow hedges (interest rate swaps) totaling $25.9 million.

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

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.

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.

As noted above, total stockholders’ equity decreased $1.4 million, from $533.1 million at December 31, 2022 to $531.7 million at September 30, 2023.

Stockholders’ equity decreased due to repurchases of the Company’s common stock totaling $19.5 million and dividends declared on common stock of $14.4 million.

In addition, accumulated other comprehensive loss increased $23.4 million during the nine months ended September 30, 2023, primarily due to declines in the market value of available-for-sale securities and decreases in the fair value of cash flow hedges.

Partially offsetting these changes were net income of $54.7 million in the nine months ended September 30, 2023 and a $1.3 million increase in stockholders’ equity due to stock option exercises.

The Company also had unrealized losses on its portfolio of held-to-maturity investment securities, which totaled $30.6 million at September 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 $23.1 million at September 30, 2023.

This amount was equal to 4.3% of total stockholders’ equity of $531.7 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 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 September 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 September 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 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%.

On September 30, 2023, the Company’s Tier 1 Leverage Ratio was 11.0%, Common Equity Tier 1 Capital Ratio was 11.5%, Tier 1 Capital Ratio was 12.0%, and Total Capital Ratio was 14.7%.

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

As of June 30, 2023, the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such.

As of September 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 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.

At September 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 September 30, 2023, the Company declared a common stock cash dividend of $0.40 per share, or 30% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.40 per share (which was declared in June 2023).

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

During the nine months ended September 30, 2023, the Company declared common stock cash dividends totaling $1.20 per share, or 27% of net income per diluted common share for that nine month period, and paid common stock cash dividends of $1.20 per share.

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

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

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

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

Common Stock Repurchases and Issuances .

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

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.

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.

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

During the three months ended September 30, 2023, the Company repurchased 106,801 shares of its common stock at an average price of $50.52 per share and issued 1,640 shares of common stock at an average price of $33.71 per share to cover stock option exercises.

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

During the nine months ended September 30, 2023, the Company repurchased 376,122 shares of its common stock at an average price of $51.97 per share and issued 9,195 shares of common stock at an average price of $33.78 per share to cover stock option exercises.

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

In December 2022, the Company’s Board of Directors authorized the purchase of up to one million shares of the Company’s outstanding common stock, under a program of open market purchases or privately negotiated transactions.

At September 30, 2023, approximately 801,000 shares remained available in our stock repurchase authorization.

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 stockholder value.

8 unchanged sentences

This non-GAAP financial measurement is supplemental and is not a substitute for any analysis based on GAAP financial measures.

Because not all companies use the same calculation of non-GAAP measures, this presentation may not be comparable to similarly titled measures as calculated by other companies.

Because not all companies use the same calculation of non-GAAP measures, this presentation may not be comparable to other similarly titled measures as calculated by other companies.

Non-GAAP Reconciliation:

Ratio of Tangible Common Equity to Tangible Assets

June 30, 2023

September 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