What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-04-30 compared with 2023-11-07 · 447 added, 647 removed, 421 unchanged (72% of the section changed)

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Forward-looking Statements

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

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

When used in this Quarterly Report on Form 10-Q and in other documents filed or furnished by Great Southern Bancorp, Inc.

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

Forward-looking statements also include, but are not limited to, statements regarding plans, objectives, expectations or consequences of announced transactions, known trends and statements about future performance, operations, products and services of the Company.

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(xvii) competition;

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

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

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

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

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Critical Accounting Policies, Judgments and Estimates

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and general practices within the financial services industry.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States and general practices within the financial services industry.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes.

Actual results could differ from those estimates.

Allowance for Credit Losses and Valuation of Foreclosed Assets

Allowance for Credit Losses

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

See Note 6 “Loans and Allowance for Credit Losses” in the Notes to Consolidated Financial Statements included in this report for additional information.

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

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The calculated average net charge-off rate is then adjusted for current conditions and reasonable and supportable forecasts.

These adjustments increase or decrease the average historical loss rate to reflect expectations of future losses given economic forecasts of key macroeconomic variables including, but not limited to, unemployment rate, GDP, disposable income and market volatility.

The adjustments are based on results from various regression models projecting the impact of the macroeconomic variables to loss rates.

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

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

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

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

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

Inherent in this process is the evaluation of individual significant credit relationships.

From time to time certain credit relationships may deteriorate due to payment performance, cash flow of the borrower, value of collateral, or other factors.

In these instances, management may revise its loss estimates and assumptions for these specific credits due to changing circumstances.

In some cases, additional losses may be realized;

See Note 6 “Loans and Allowance for Credit Losses” in the Notes to Consolidated Financial Statements included in this report for additional information regarding the allowance for credit losses.

Inherent in this process is the evaluation and risk assessment of individual credit relationships.

From time to time, certain credit relationships may deteriorate due to changes in payment performance, cash flow of the borrower, value of collateral, or other factors.

Due to these changing circumstances, management may revise its loss estimates and assumptions for these specific credits.

In some cases, losses may be realized;

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

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

The carrying value of foreclosed assets reflects management’s best estimate of the amount to be realized from the sales of the assets.

While the estimate is generally based on a valuation by an independent appraiser or recent sales of similar properties, the amount that the Company realizes from the sales of the assets could differ materially from the carrying value reflected in the financial statements, resulting in losses that could adversely impact earnings in future periods.

Goodwill and Intangible Assets

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

As of September 30, 2023, the Company had one reporting unit to which goodwill has been allocated – the Bank.

As of March 31, 2024, 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.

If the carrying value exceeds the fair value of a reporting unit, further testing is completed comparing the implied fair value of the reporting unit’s goodwill to its carrying value to measure the amount of impairment, if any.

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

At September 30, 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.

At March 31, 2024, 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.

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

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

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

The terms of the agreement provide the

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

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

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

At March 31, 2024, the amortizable intangible assets included the arena naming rights of $5.0 million, which are reflected in the table below.

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

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

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,

Management does not believe any of the Company’s goodwill or other intangible assets were impaired as of March 31, 2024.

While management believes no impairment existed at March 31, 2024, different conditions or assumptions used to measure fair value of the reporting unit, or changes in cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the outcome of the Company’s impairment evaluation in the future.

A summary of goodwill and intangible assets as of the dates indicated is as follows:

(In Thousands)

Goodwill – Branch acquisitions

Deposit intangibles

Fifth Third Bank (January 2016)

Arena Naming Rights (April 2022)

Arena Naming Rights

Current Economic Conditions

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

The economy plunged into recession in the first quarter

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

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.

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.

Hunkered down at home with uncertain incomes and limited buying opportunities, consumer spending plummeted.

With uncertain incomes and limited buying opportunities, consumer spending plummeted.

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

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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.

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

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

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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 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.

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.

The federal government deficit was $2.8 trillion in fiscal 2021, close to $1.4 trillion in fiscal 2022, and $1.7 trillion in fiscal 2023.

The Federal Reserve aggressively raised the federal funds interest rates since early 2022 through mid-2023, pushing the federal funds rate to more than 5.50%, its highest level in 22 years.

The Federal Reserve’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 Federal Reserve has made some headway in its attempt to force 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 2.9% in December 2023, but core PCE, which excludes food and energy prices, has been slower to retreat and sat at 2.8% at March 2024, above the Federal Reserve's target of 2.0%.

Moody’s is projecting real GDP in 2024 to be higher than previously forecast, but the persistence of high interest rates may slow economic growth.

Real GDP is projected to rise 2.6% in 2024 on an annual average basis, an upward revision of 0.1%, and is projected to grow 1.6% in 2025 and 1.9% in 2026.

The national unemployment rate has ranged from 3.4% to 3.8% since March 2022.

The number of unemployed individuals also remained steady at 6.4 million as of March 2024 with 303,000 jobs added in March 2024.

In March 2024, employment gains in health and private education, government, and leisure and hospitality contributed to 208,000 of the total job gains.

Leisure and hospitality employment rebounded to its pre-pandemic level, with 49,000 of job gains in March 2024, partly boosted by the milder winter.

As of March 2024, the labor force participation rate (the share of working-age Americans employed or actively looking for a job) remained stable at 62.7%.

The unemployment rate for the Midwest, where the Company conducts most of its business, increased from 3.3% in March 2023 to 3.6% in March 2024.

Unemployment rates for March 2024 in the states where the Company has a branch or a loan production office were Arizona at 3.8%, Arkansas at 3.5%, Colorado at 3.7%, Georgia at 3.1%, Illinois at 4.8%, Iowa at 2.9%, Kansas at 2.7%, Minnesota at 2.7%, Missouri at 3.3%, Nebraska at 2.4%, North Carolina at 3.5% and Texas at 3.9%.

Of the metropolitan areas in which the Company does business, most are below the national unemployment rate for March 2024 of 3.8%, except for Chicago at 4.7%.

Single Family Housing

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.

Existing home sales decreased 4.3% in March 2024 from February 2024 to a seasonally adjusted annual rate of 4.19 million, down 3.7% from the previous year.

In the Midwest, existing-home sales retracted 1.9% from February 2024 to an annual rate of 1.01 million in March 2024, down 1.0% from one year ago.

The median existing-home sales price rose 4.8% from March 2023 to $394,000 in March 2024.

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.

regions registered price gains.

The median price in the Midwest was $292,000, up 7.5% from March 2023.

Total housing inventory registered at the end of March 2024 was 1.1 million units, up 4.7% from February 2024 and up 14.4% from one year ago of 970,000.

Unsold inventory sat at a supply of 3.2 months in March 2024, up from 2.9 months in February 2024 and 2.7 months in March 2023.

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.

Sales of new single‐family houses in March 2024 were at a seasonally adjusted annual rate of 693,000, 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.

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.

This was 8.8% above the revised February 2024 rate of 637,000 and 8.3% above the March 2023 rate of 640,000.

The median sales price of new houses sold in March 2024 was $431,000, down from $439,000 in March 2023.

The average sales price in March 2024 of $525,000 was up from $520,000 in March 2023.

The seasonally‐ adjusted estimate of new houses for sale at the end of March 2024 was 477,000.

This represented a supply of 8.3 months at the current sales rate.

According to Freddie Mac, the average commitment rate for a 30-year, fixed-rate mortgage was 7.1% as of April 18, 2024 which is up 6.9% from the previous week and 6.4% from one year ago.

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

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

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%.

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.

Rising consumer sentiment and slowing inflation resulted in a strong demand rebound in 2023 for the U.S.

multifamily market.

New deliveries for 2023 were at a 40-year high of almost 583,000 units.

Supply additions are projected to fall by 21% in 2024 to 460,000 units, as a higher interest rate environment, combined with a pullback in construction lending, has seen some developers unable to move forward on proposed projects.

This suggests the beginning of a meaningful pause in deliveries towards the end of 2024 and into 2025, allowing overbuilt Sun Belt markets to absorb their current supply overhang and return to equilibrium more quickly.

Until then, these markets may experience significant performance pressures, especially in the 4 & 5 Star segment, where most of the new supply is priced.

The Midwest and Northeast fared the best in 2023 with nine out of the ten strongest rent growth markets in 2023 from one of those two regions.

The Chicago market rents rose from 3.0% to 3.7% in 2023.

Downward pressure on rent growth will likely continue in the first half of 2024.

Per CoStar projections, markets in the South and luxury properties remain at the most risk for weakness due to oversupply conditions, while Midwest and Northeast locations and mid-priced 3 Star properties could outperform.

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, 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:

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

As of March 31, 2024, the national multi-family market vacancy rate was 7.8%.

Our market areas reflected the following apartment vacancy levels as of March 2024:

Springfield, Missouri at 4.9%, St.

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.

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 period of positive expansion for the U.S.

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:

Louis at 10.5%, Kansas City at 8.9%, Minneapolis at 8.3%, Tulsa, Dallas-Fort Worth at 10.8%, Chicago at 5.6%, Atlanta at 12.2%, Phoenix at 10.6%, Denver at 9.0% and Charlotte, North Carolina at 11.6%.

Shrinking demand continues to plague the U.S.

office market so far in 2024, shooting vacancy up to a record 13.8% and bringing cumulative negative absorption to more than 200 million SF since the beginning of 2020.

Deliveries in 2025 are expected to be the lowest in a decade, tapering off to a negligible amount afterward.

This should tighten the market for desirable first-generation space.

Higher vacancy and deteriorating rents have severe implications for property values, with further cap rate expansion expected to exacerbate the situation.

On average, values are down around 20% since the end of 2021.

An additional value correction over the next 12-18 months is expected as a steady stream of low-rate loans maturing into a high rate environment provides motivation for repricing.

Office users are continuing to respond to stable attendance and slowing employment growth by shrinking their footprints, resulting in ongoing occupancy losses.

Tenants gave back another 20 million SF in the first quarter of 2024, bringing the market's losing streak to eight consecutive quarters.

Shrinking overall demand has produced a negative-sum game in the market for leased space.

There currently appears to be little likelihood of a dramatic change in demand conditions in the next 18-24 months, during which about 25% of leases executed before 2020 are set to expire.

Thus, the outlook is for a continued rise in vacancy, which is expected to approach, if not exceed, 16% by the end of 2025.

As of March 2024, the national office vacancy rate was 13.8%, while our market areas reflected the following vacancy levels at March 2024:

Springfield, Missouri at 4.3%, 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 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:

Louis at 10.3%, Kansas City at 12.1%, Minneapolis at 10.9%, Dallas-Fort Worth at 18.1%, Chicago at 16.3%, Atlanta at 15.7%, Denver at 16.5%, Phoenix at 16.1% and Charlotte, North Carolina at 14.5%.

retail market is in one of its firmest fundamental positions on record thanks to steadily rising demand, a significant reduction in tenant bankruptcies and store closures, and limited new supply.

Demand for retail space has increased by nearly 42 million SF during the past 12 months and over 200 million SF since the start of 2021.

While the increase in demand for space has been driven by growth from numerous sources, the most significant gains are from tenants in the food and beverage, discount, off-price, and experiential sectors, which combined accounted for over half of all new leasing activity over the past year.

Only 4.8% of retail space is currently available for lease, the lowest level on record.

While demand for space continues to rise, new retail development activity remains minimal.

Approximately 62 million SF of new retail space was delivered across the U.S.

over the past year, more than 40% below the prior 10-year average.

Most retail construction activity comprises single-tenant build-to-suits or smaller ground-floor spaces in mixed-use developments.

Over 155 million SF of space has been demolished over the past five years, the vast majority of which was attached to, or within, underperforming malls.

Given the structural downshift in activity coupled with the fact that over three-quarters of new deliveries during the past five years have had a tenant in place at delivery, the U.S.

retail market has faced virtually no threat from new supply.

This looks to continue for

the foreseeable future, as retail construction starts fell to new historic lows and higher interest rates challenge the feasibility of many potential new retail developments at current rent levels.

During the first quarter of 2024, national retail vacancy rates remained steady at 4.1% while our market areas reflected the following vacancy levels:

Springfield, Missouri at 2.8%, St.

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.

COVID-19 Impact to Our Business and Response

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

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

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

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

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

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

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

Louis at 4.5%, Kansas City at 4.0%, Minneapolis at 2.6%, Dallas-Fort Worth at 4.5%, Chicago at 4.9%, Atlanta at 3.6%, Phoenix at 4.7%, Denver at 3.9%, and Charlotte, North Carolina at 2.7%.

industrial market performance continued to downshift as 2024 kicked off.

While the national vacancy rate is not expected to rise well above its 20-year average of 7.1%, the next 6-12 months could still prove to be the market's most challenging period over the next five years.

Net absorption has remained positive but continued to lose steam, with early 2024 registering the lowest first quarter absorption tally since 2012.

This weakness tied partly to recent 12-year lows in home sales, which has lowered sales of furniture, building materials, and appliances, leading to large distribution center closures by tenants including Bed Bath & Beyond, Ashley Furniture, and Home Depot.

Third-party distributors that leased ahead of their long-term space needs during the pandemic have also been closing facilities they opened during 2020-2022.

Oncoming new supply will likely push the national vacancy rate up further through late 2024.

Higher interest rates have caused construction starts on new industrial projects to plummet since last fall.

The volume of projects completing construction each quarter has already begun to decline and will likely hit 10-year lows in late 2025.

This could set the stage for vacancies to begin tightening again and for rent growth to accelerate thereafter.

Overall growth in real consumer goods spending has been re-accelerating since last spring even as inflation persists.

Large distribution center expansions by companies that sell necessities consumers are still purchasing in high volume despite inflation, including Burlington Coat Factory, TJX Companies, Chuck and Dwight, and Nestle USA, which have all signed new leases larger than 700,000 SF this year.

While a potential stagnation in consumer spending poses downside risks in CoStar’s absorption forecast for the next 12 months, high-tech manufacturing will likely be a key driver of leasing from 2024–26.

The 2022 passage of the CHIPS and Science Act and the Inflation Reduction Act approved over $400 billion worth of incentives for growth in U.S.

based high-tech manufacturing.

CoStar is tracking more than 30 planned semiconductor, electric vehicle, and battery plants with estimated payrolls of more than 1,000 employees.

The majority of these plants are targeting 2024–25 to begin production, with Arizona, Texas, Georgia, and the Carolinas securing the most new operations.

New deliveries will likely remain elevated for the next six to nine months, driving the national vacancy rate higher.

Higher interest rates have caused construction starts on new industrial projects to halt.

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

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

For the first quarter of 2024, national industrial vacancy rates increased to 6.2% from 4.5% as of March 31, 2023.

Our market areas reflected the following industrial vacancy levels as of March 2024:

Springfield, Missouri at 1.6%, St.

Louis at 4.6%, Kansas City at 5.3%, Minneapolis at 4.0%, Dallas-Fort Worth at 9.5%, Chicago at 5.5%, Atlanta at 6.6%, Phoenix at 9.9%, Denver at 7.7% and Charlotte, North Carolina at 7.1%.

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

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

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

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When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.

Great Southern’s total assets increased $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.

Great Southern’s total assets decreased $35.2 million, or 0.6%, from $5.81 billion at December 31, 2023, to $5.78 billion at March 31, 2024.

Details of the current period changes in total assets are provided below, under “Comparison of Financial Condition at March 31, 2024 and December 31, 2023.”

Net outstanding loans decreased $3.4 million, or 0.1%, from $4.59 billion at December 31, 2023, to $4.59 billion at March 31, 2024.

This decrease was primarily in commercial business loans, commercial real estate loans, construction loans and one- to four-family residential loans, significantly offset by an increase in other residential (multi-family) 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 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.

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

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

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

Underwriting standards and monitoring procedures utilized by the Company are designed to help assure the Company’s portfolio quality.

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

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

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

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

In 2019, the Company discontinued indirect auto loan originations.

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Private mortgage insurance is typically required for loan amounts above the 80% level.

Few exceptions occur and would be based on analyses which determined minimal transactional risk to be involved.

Few exceptions occur and would be based on analyses that determined minimal transactional risk to be involved.

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 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.

At March 31, 2024 and December 31, 2023, 0.2% of our owner occupied one-to four-family residential loans had loan-to-value ratios above 100% at origination.

At March 31, 2024 and December 31, 2023, an estimated 0.4% and 0.4% of total non-owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination.

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

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

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

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

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

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

Available-for-sale Securities.

In the 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.

In the three months ended March 31, 2024, available-for-sale securities decreased $12.9 million, or 2.7%, from $478.2 million at December 31, 2023, to $465.3 million at March 31, 2024.

Held-to-maturity Securities.

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.

In the three months ended March 31, 2024, held-to-maturity securities decreased $1.6 million, or 0.8%, from $195.0 million at December 31, 2023, to $193.4 million at March 31, 2024.

See Note 5 “Investment Securities” in the Notes to Consolidated Financial Statements included in this report for additional information.

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

The Company then utilizes these deposit funds, along with FHLBank advances and other borrowings, to meet loan demand or otherwise fund its activities.

In the nine months ended September 30, 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.

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

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

Brokered deposits, including IntraFi program purchased funds, were $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.

In the three months ended March 31, 2024, total deposit balances increased $51.7 million, or 1.1%.

Compared to December 31, 2023, transaction account balances increased $60.4 million, or 1.9%, to $3.17 billion at March 31, 2024, and retail certificates of deposit decreased $32.7 million, or 3.5%, to $915.5 million at March 31, 2024.

The increase in transaction accounts was primarily a result of an increase in various money market accounts as customers sought accounts paying a higher rate of interest.

Retail time deposits decreased due to a decrease in retail certificates

generated through the banking center network.

Competition for time deposits remains significant in many of our markets.

Brokered deposits, including IntraFi program purchased funds, were $685.5 million and $661.5 million at March 31, 2024 and December 31, 2023, respectively.

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

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

We do not consider our retail certificates of deposit to be guaranteed long-term funding because customers can withdraw their funds at any time with minimal interest penalty.

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

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

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

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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 Nine Months Ended September 30, 2023 and 2022 – Liquidity” below for further information on funding sources.

See “Results of Operations and Comparison for the Three Months Ended March 31, 2024 and 2023 – Liquidity” for further information on funding sources.

Securities sold under reverse repurchase agreements with customers.

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.

Securities sold under reverse repurchase agreements with customers increased $1.9 million from $70.9 million at December 31, 2023 to $72.8 million at March 31, 2024.

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 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.

The Company’s FHLBank term advances were $-0- at both March 31, 2024 and December 31, 2023.

At March 31, 2024, there were no overnight borrowings from the FHLBank.

At December 31, 2023, there were $251.0 million in overnight borrowings from the FHLBank.

In January 2024, the Bank borrowed $180.0 million under the Federal Reserve Bank’s Bank Term Funding Program (BTFP).

The BTFP borrowing, which matures in January 2025 and has a fixed interest rate of 4.83%, may be repaid in full or in part without penalty prior to its stated maturity date.

The line is secured primarily by the Bank’s held-to-maturity investment securities, with assets pledged totaling approximately $193 million at March 31, 2024.

These funds were primarily used to repay a portion of the Bank’s overnight borrowings from the FHLBank.

Short-term borrowings and other interest-bearing liabilities decreased $71.3 million from $252.6 million at December 31, 2023 to $181.3 million at March 31, 2024.

The Company may utilize overnight borrowings, short-term FHLBank advances, and BTFP borrowings from FRBSTL depending on relative interest rates.

Net Interest Income and Interest Rate Risk Management.

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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.

Quantitative and Qualitative Disclosures About Market Risk”).

We monitor our sensitivity to interest rate changes on an ongoing basis (see “Quantitative and Qualitative Disclosures About Market Risk”).

The current level and shape of the interest rate yield curve poses challenges for interest rate risk management.

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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 ($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.

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.

At March 31, 2024, the Federal Funds rate was 5.50%.

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

Great Southern’s loan portfolio includes loans ($1.28 billion at March 31, 2024) tied to various SOFR indices that will be subject to adjustment at least once within 90 days after March 31, 2024.

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

Great Southern also has a portfolio of loans ($826.7 million at March 31, 2024) tied to a “prime rate” of interest that will adjust immediately or within 90 days of a change to the “prime rate” of interest.

Of these loans, $814.5 million had interest rate floors at various rates.

In addition, Great Southern has a portfolio of loans ($6.7 million at March 31, 2024) 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.

At March 31, 2024, 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.

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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.

As of March 31, 2024, 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 modestly negative impact on net interest income.

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

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In a situation where market interest rates 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 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.

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 would expect that net interest margin would stabilize and begin to improve, as renewal interest rates on maturing time deposits decrease.

During 2020, we experienced some compression of our net interest margin 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.

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

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

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

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

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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 Nine Months Ended September 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 Months Ended March 31, 2024 and 2023.”

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.

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

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

Economic Growth Act.

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

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

Many of these amendments could result in meaningful regulatory changes.

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

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.

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

Currently, the CBLR is 9.0%.

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

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

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

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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.

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 seven days a week.

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.

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.

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

In addition, as also previously disclosed, certain contractual disputes arose between Great Southern and the third-party vendor.

While discussions were ongoing between the parties for an extended period of time, no meaningful progress was made in resolving the contractual disputes.

The system migration efforts have been beset by a variety of significant issues, including having missed a second conversion date because of continued operational and system problems.

Therefore, Great Southern has taken the following actions to protect its interests.

On April 24, 2024, Great Southern informed the third-party vendor that it was terminating the Master Agreement between Great Southern and the third-party vendor in accordance with Great Southern’s rights under the Master Agreement.

In addition, on April 24, 2024, Great Southern initiated legal action against the third-party vendor by filing a complaint in the U.S.

District Court for the Western District of Missouri, Southern Division.

The complaint seeks to recover damages caused by the third-party vendor’s material breach of the Master Agreement, inability and/or inaction on the part of the third-party vendor to effectively and timely manage the system migration, along with the third-party vendor’s misrepresentations and omissions.

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

A retail banking center in Springfield, Missouri, was consolidated into a nearby banking center in January 2024.

The office at 600 W.

Republic Road was 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 $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 vacated property was subsequently sold in April 2024.

The Company announced that its 2024 Annual Meeting of Stockholders will be held at 10 a.m.

Central Time on May 8, 2024, and will be held in a virtual format.

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

Holders of record of Great Southern Bancorp, Inc.

common stock at the close of business on the record date, February 28, 2024, may vote during the live webcast of the Annual Meeting or by proxy.

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

Comparison of Financial Condition at March 31, 2024 and December 31, 2023

During the three months ended March 31, 2024, the Company’s total assets decreased by $35.2 million to $5.78 billion.

The decrease was primarily in cash and cash equivalents and investment securities.

Cash and cash equivalents were $171.4 million at March 31, 2024, a decrease of $39.9 million, or 18.9%, from $211.3 million at December 31, 2023.

The Company’s available-for-sale securities decreased $12.9 million, or 2.7%, compared to December 31, 2023.

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 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.

The decrease was primarily due to normal monthly payments received related to the portfolio of mortgage-backed securities and collateralized mortgage obligations.

The available-for-sale securities portfolio was 8.1% and 8.2% of total assets at March 31, 2024 and December 31, 2023, respectively.

The Company’s held-to-maturity securities decreased $1.6 million, or 0.8%, compared to December 31, 2023.

The decrease was primarily due to normal monthly payments received related to the portfolio of mortgage-backed securities and collateralized mortgage obligations.

The held-to-maturity securities portfolio was 3.3% and 3.4% of total assets at March 31, 2024 and December 31, 2023, respectively.

Net loans decreased $3.4 million from December 31, 2023, to $4.59 billion at March 31, 2024.

This decrease was primarily in commercial business loans ($58.6 million decrease), commercial real estate loans ($18.4 million decrease), construction loans ($11.8 million decrease) and one- to four-family residential loans ($10.2 million decrease), significantly offset by an increase in other residential (multi-family) loans ($98.2 million increase).

The pipeline of loan commitments and the unfunded portion of construction loans remained strong in the first quarter of 2024.

As construction projects were completed, the related loans were either moved from the construction category to the appropriate permanent loan categories or paid off.

Total liabilities decreased $28.6 million, from $5.24 billion at December 31, 2023 to $5.21 billion at March 31, 2024.

The decrease was primarily due to decreases in short-term borrowings, partially offset by an increase in transaction account deposits and brokered deposits.

Total deposits increased $51.7 million, or 1.1%, from $4.72 billion at December 31, 2023 to $4.77 billion at March 31, 2024.

Transaction account balances increased $60.4 million, from $3.11 billion at December 31, 2023 to $3.17 billion at March 31, 2024.

Total interest-bearing checking accounts increased $79.2 million while non-interest-bearing checking accounts decreased $18.8 million.

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.

Retail certificates of deposit decreased $32.7 million compared to December 31, 2023, to $915.5 million at March 31, 2024.

Customer retail time deposits initiated through our banking center network decreased $29.8 million and time deposits initiated through our national internet network decreased $2.9 million.

Brokered deposits increased $24.0 million to $685.5 million at March 31, 2024, compared to $661.5 million at December 31, 2023.

Brokered deposits were utilized to offset reductions in balances in other deposit categories and borrowings.

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

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

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

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

Of the total brokered deposits at March 31, 2024, $300.0 million were floating rate deposits, which adjust daily, based on the effective federal funds rate index.

The Company’s term FHLBank advances were $-0- at both March 31, 2024 and December 31, 2023.

At March 31, 2024 and December 31, 2023, there were no borrowings from the FHLBank, other than overnight borrowings, which are included in the short-term borrowings category.

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

Short-term borrowings and other interest-bearing liabilities decreased $71.3 million from $252.6 million at December 31, 2023 to $181.3 million at March 31, 2024.

At March 31, 2024, none of this total was overnight borrowings from the FHLBank, compared to $154.5 million of overnight borrowings from the FHLBank at December 31, 2023.

In January 2024, the Bank borrowed $180.0 million under the BTFP.

The BTFP borrowing, which matures in January 2025 and has a fixed interest rate of 4.83%, may be repaid in full or in part without penalty prior to its stated maturity date.

The line is secured primarily by the Bank’s held-to-maturity investment securities, with assets pledged totaling approximately $193 million as of March 31, 2024.

These funds were primarily used to repay a portion of the Bank’s overnight borrowings from the FHLBank.

Securities sold under reverse repurchase agreements with customers increased $1.9 million, or 2.7%, from $70.9 million at December 31, 2023 to $72.8 million at March 31, 2024.

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

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 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 stockholders’ equity decreased $6.7 million, from $571.8 million at December 31, 2023 to $565.2 million at March 31, 2024.

Accumulated other comprehensive loss (a reduction in equity) increased $10.0 million during the three months ended March 31, 2024, primarily due to decreases in the fair value of available-for-sale investment securities and the fair value of cash flow hedges, as a result of increased market interest rates.

Stockholders’ equity also decreased due to repurchases of the Company’s common stock totaling $5.8 million and dividends declared on common stock of $4.7 million.

Partially offsetting these decreases were net income of $13.4 million for the three months ended March 31, 2024 and a $692,000 increase in stockholders’ equity due to stock option exercises.

Results of Operations and Comparison for the Three Months Ended March 31, 2024 and 2023

Net income was $13.4 million for the three months ended March 31, 2024 compared to $20.5 million for the three months ended March 31, 2023.

This decrease of $7.1 million, or 34.5%, was primarily due to a decrease in net interest income of $8.4 million, or 15.7%, and a decrease in non-interest income of $1.1 million, or 13.7%, partially offset by a decrease in income tax expense of $2.3 million, or 42.4%.

Total Interest Income

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 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.

Total interest income increased $5.9 million, or 8.3%, during the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

The increase was due to a $5.6 million increase in interest income on loans and a $289,000 increase in interest income on investment securities and other interest-earning assets.

Interest income from loans and other interest-earning assets increased during the three months ended March 31, 2024 compared to the same period in 2023 due to higher average balances and higher average rates of interest.

Interest income from investment securities increased during the three-months ended March 31, 2024 compared to the three-months ended March 31, 2023, primarily due to higher average rates of interest on investment securities mostly offset by lower average balances of investment securities.

Interest Income – Loans

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.

During the three months ended March 31, 2024 compared to the three months ended March 31, 2023, interest income on loans increased $4.8 million due to higher average interest rates on loans.

The average yield on loans increased from 5.76% during the three months ended March 31, 2023, to 6.13% during the three months ended March 31, 2024.

This increase was primarily due to the repricing of floating rate loans as market interest rates increased.

Interest income on loans also increased $878,000 as the result of higher average loan balances, which increased from $4.61 billion during the three months ended March 31, 2023, to $4.67 billion during the three months ended March 31, 2024.

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

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.

however, some loan growth has come as a result of the funding of previously approved but unfunded balances on construction loans and the slowed loan prepayments in 2023 and 2024, due to the increase in market interest rates.

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

As previously disclosed by the Company, in March 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 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.

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 (AOCI) and is being accreted to interest income on loans monthly through the original contractual termination date of October 6, 2025.

This has had the effect of reducing AOCI and increasing Net Interest Income and Retained Earnings over the periods.

The Company recorded interest income related to the interest rate swap of $2.0 million in each of the three months ended March 31, 2024 and 2023.

At March 31, 2024, 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 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 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.

The notional amount of the swap was $300 million, with a contractual termination date of March 1, 2024.

Under the terms of the swap, the Company received a fixed rate of interest of 1.6725% and paid a floating rate of interest equal to one-month USD-LIBOR (or the equivalent replacement USD-SOFR rate once USD-LIBOR rate ceased to be available).

The floating rate was reset monthly and net settlements of interest due to/from the counterparty also occurred monthly.

To the extent that the fixed rate exceeded one-month USD-LIBOR/SOFR, the Company received net interest settlements, which were recorded as loan interest income.

If one-month USD-LIBOR/SOFR exceeded the fixed rate of interest, the Company paid net settlements to the counterparty and recorded those net payments as a reduction of interest income on loans.

The Company recorded a reduction in loan interest income related to this swap transaction of $1.9 million and $2.2 million in the three months ended March 31, 2024 and 2023, respectively.

As this interest rate swap has reached its contractual termination date, there will be no further interest income impacts related to this swap.

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 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.

Under the terms of one swap, 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, 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.

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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%.

The Company recorded a reduction of loan interest income related to these swap transactions of $2.8 million in the three months ended March 31, 2024, compared to no reduction of interest income related to these swap transactions in the 2023 period.

At March 31, 2024, the USD-Prime rate was 8.50% and the one-month USD-SOFR OIS rate was 5.32240%.

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.

Interest Income – Investments and Other Interest-earning Assets

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.

Interest income on investments increased $6,000 in the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Interest income increased $63,000 as a result of higher average interest rates from 2.87% during the three months ended March 31, 2023, to 3.01% during the three months ended March 31, 2024.

Substantially offsetting that increase, interest income decreased $57,000 as a result of a decrease in average balances from $706.9 million during the three months ended March 31, 2023, to $669.7 million during the three months ended March 31, 2024.

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 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 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.

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.

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 $283,000 in the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Interest income increased $177,000 as a result of higher average interest rates from 4.51% during the three months ended March 31, 2023, to 5.22% during the three months ended March 31, 2024.

Interest income increased $106,000 as a result of an increase in average balances from $91.8 million during the three months ended March 31, 2023, to $100.5 million during the three months ended March 31, 2024.

Total Interest Expense

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%.

Total interest expense increased $14.3 million, or 78.3%, during the three months ended March 31, 2024, when compared with the three months ended March 31, 2023, due to an increase in interest expense on deposits of $13.0 million, or 88.6%, an increase in interest expense on short-term borrowings of $1.3 million, or 71.0%, and an increase in interest expense on subordinated debentures issued to capital trusts of $61,000, or 15.5%, partially offset by the decrease in interest expense on securities sold under reverse repurchase agreements of $9,000, or 2.6%.

Interest Expense – Deposits

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 $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 $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 expense on demand and savings deposits increased $5.0 million due to average rates of interest that increased from 0.81% in the three months ended March 31, 2023 to 1.71% in the three months ended March 31, 2024.

Interest rates paid on demand deposits were higher in the 2024 period due to significant increases in overall market rates.

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 $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.

Interest expense on demand deposits increased $80,000, due to an increase in average balances from $2.18 billion during the three months ended March 31, 2023 to $2.22 billion during the three months ended March 31, 2024.

The Company also experienced increased balances in various types of money market accounts due to the increase in average rates on these accounts.

Interest expense on time deposits increased $4.4 million as a result of an increase in average rates of interest from 2.07% during the three months ended March 31, 2023, to 3.93% during the three months ended March 31, 2024.

Partially offsetting this increase, interest expense on time deposits decreased $373,000 due to a decrease in average balances of time deposits from $1.02 billion during the three months ended March 31, 2023 to $937.7 million in the three months ended March 31, 2024.

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 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 $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.

Competition for time deposits remains significant in our market areas, and upon maturity, we lost some of these deposits to competitors.

Older certificates of deposit that renewed or were replaced with new deposits generally resulted in the Company paying a higher rate of interest compared to the year-ago period due to increases in market interest rates and targeted promotions during 2023 and into early 2024.

Interest expense on brokered deposits increased $3.0 million due to an increase in average balances from $456.8 million during the three months ended March 31, 2023 to $688.8 million during the three months ended March 31, 2024.

Interest expense on brokered deposits increased $921,000 due to average rates of interest that increased from 4.53% in the three months ended March 31, 2023 to 5.25% in the three months ended March 31, 2024.

Brokered deposits added during 2023 and 2024 were at higher market rates than brokered deposits previously issued.

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.

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 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 $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 $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 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 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.

FHLBank term advances were not utilized during the three months ended March 31, 2024 and 2023.

Interest expense on reverse repurchase agreements decreased $27,000 due to lower average balances.

The average balance of repurchase agreements decreased from $147.0 million in the three months ended March 31, 2023 to $74.5 million in the three months ended March 31, 2024, which was due to changes in customers’ desire for this product, which can fluctuate.

Partially offsetting this decrease, interest expense on reverse repurchase agreements increased $18,000 due to higher average interest rates during the three months ended March 31, 2024 when compared to the three months ended March 31, 2023.

The average rate of interest was 1.80% for the three months ended March 31, 2024 compared to 0.94% for the three months ended March 31, 2023.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank and BTFP borrowings from FRBSTL) and other interest-bearing liabilities increased $1.1 million during the three months ended March 31, 2024 when compared to the three months ended March 31, 2023 due to higher average balances.

The average balance of short-term borrowings and other interest-bearing liabilities increased from $151.8 million in the three months ended March 31, 2023 to $241.6 million in the three months ended March 31, 2024, 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 and other interest-bearing liabilities increased $126,000 during the three months ended March 31, 2024 when compared to the three months ended March 31, 2023 due to higher average rates of interest.

The average rate of interest was 5.07% for the three months ended March 31, 2024, compared to 4.75% for the three months ended March 31, 2023.

During the three months ended March 31, 2024, compared to the three months ended March 31, 2023, interest expense on subordinated debentures issued to capital trusts increased $61,000 due to higher average interest rates.

The average interest rate was

7.08% in the three months ended March 31, 2024 compared to 6.18% in the three months ended March 31, 2023.

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 7.17% at March 31, 2024.

There was no change in the average balance of the subordinated debentures between the 2023 and 2024 periods.

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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 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.

There was no change in the interest expense on subordinated notes during the three months ended March 31, 2024, compared to the three months ended March 31, 2023.

Net Interest Income

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 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 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.

Net interest income for the three months ended March 31, 2024 decreased $8.4 million to $44.8 million compared to $53.2 million for the three months ended March 31, 2023.

Net interest margin was 3.32% in the three months ended March 31, 2024, compared to 3.99% in the three months ended March 31, 2023, a decrease of 67 basis points, or 16.8%.

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

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

The Company’s overall average interest rate spread decreased 87 basis points, or 24.6%, from 3.53% during the three months ended March 31, 2023 to 2.66% during the three months ended March 31, 2024.

The decrease was due to a 124 basis point increase in the weighted average rate paid on interest-bearing liabilities, partially offset by a 37 basis point increase in the weighted average yield on interest-earning assets.

In comparing the two periods, the yield on loans increased 37 basis points, the yield on investment securities increased 14 basis points and the yield on other interest-earning assets increased 71 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 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 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.

The rate paid on deposits increased 127 basis points, the rate paid on reverse repurchase agreements increased 86 basis points, the rate paid on short-term borrowings and other interest-bearing liabilities increased 32 basis points, and the rate paid on subordinated debentures issued to capital trusts increased 90 basis points.

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

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

In 2023, overall competition for deposits intensified 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.

Overall competition for deposits has remained elevated in early 2024.

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.

Provision for and Allowance for Credit Losses

The Company adopted ASU 2016 13, Financial Instruments – Credit Losses (Topic 326):

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

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

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

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

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

Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level or term, as well as for changes in economic conditions, including but not limited to;

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

Adjustments to historical loss information are made for changes in current loan-specific risk characteristics such as underwriting standards, portfolio mix, delinquency level or term, as well as for changes in economic conditions, including but not limited to, changes in the national unemployment rate, commercial real estate price index, consumer sentiment, gross domestic product (GDP) and construction spending.

Challenging or worsening economic conditions from higher inflation or interest rates, COVID-19 and subsequent variant outbreaks or similar events, global unrest or other factors may lead to increased losses in the portfolio and/or requirements for an increase in provision expense.

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

During the three months ended September 30, 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.

During the three months ended March 31, 2024, the Company recorded provision expense of $500,000 on its portfolio of outstanding loans, compared to a $1.5 million provision expense during the three months ended March 31, 2023.

In the three months ended March 31, 2024 and 2023, the Company experienced net charge offs of $83,000 and net recoveries of $7,000, respectively.

For the three months ended March 31, 2024, the Company recorded a provision for losses on unfunded commitments of $130,000, compared to a negative provision of $826,000 for the three months ended March 31, 2023.

Total unfunded commitments decreased significantly during 2023, resulting in a lower required reserve, while total unfunded commitments did not change significantly in the three months

ended March 31, 2024.

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

The Bank’s allowance for credit losses as a percentage of total loans was 1.40% and 1.39% at 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.

The Bank’s allowance for credit losses as a percentage of total loans was 1.40% and 1.39% at March 31, 2024 and December 31, 2023, respectively.

Management considers the allowance for credit losses adequate to cover losses inherent in the Bank’s loan portfolio at March 31, 2024, based on recent reviews of the Bank’s loan portfolio and current economic conditions.

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

Non-performing Assets

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

At September 30, 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.

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

At March 31, 2024, non-performing assets were $21.3 million, an increase of $9.5 million from $11.8 million at December 31, 2023.

Non-performing assets as a percentage of total assets were 0.37% at March 31, 2024, compared to 0.20% at December 31, 2023.

Compared to December 31, 2023, non-performing loans increased $9.6 million, to $21.3 million at March 31, 2024, and foreclosed and repossessed assets increased $24,000, to $47,000 at March 31, 2024.

The majority of the increase in non-performing loans was in the other residential (multi-family) loans category, which increased $9.6 million from December 31, 2023.

Non-performing Loans.

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

Activity in the non-performing loans category during the three months ended March 31, 2024 was as follows:

Repossessions

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One- to four-family residential

Other residential

Other residential (multi-family)

Commercial real estate

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Total non-performing loans

FDIC-assisted acquired loans included above

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.

At March 31, 2024, the non-performing commercial real estate category included five loans, two of which were added during the current period.

The largest relationship in the category, which totaled $7.9 million, or 74.7% of the total category, was added to non-performing loans in 2023 and is collateralized by an office building in Missouri.

Another loan, totaling $2.2 million, which was a purchased participation loan originally obtained through an FDIC-assisted acquisition, was added to non-performing loans in the fourth quarter of 2023.

This loan is collateralized by a low-income assisted living facility in Wisconsin.

During the three months ended March 31, 2024, material terms were changed on this loan, including the Company purchasing the lead participant’s $220,000 interest in this note.

The other residential (multi-family) category of non-performing loans included one loan, which totaled $9.6 million and was added during the current period.

The Company purchased a participation interest in this loan in 2018, and was not the lead lender for the relationship.

This loan was collateralized by a student housing project in Texas and was foreclosed upon in April 2024.

The Company does not currently expect any material charge-off on this foreclosed asset.

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

The largest relationship in the category totaled $529,000, or 84.4% of the category.

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 consumer category included seven loans.

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

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

Potential Problem Loans.

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.

Potential problem loans increased $16,000 from December 31, 2023.

The increase during the period was primarily due to multiple loans, totaling $109,000, being added to potential problem loans, partially offset by $72,000 in loan payments and $21,000 in charge offs.

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

These loans are not reflected in non-performing assets.

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

Activity in the potential problem loans categories during the three months ended March 31, 2024, was as follows:

Repossessions

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One- to four-family residential

Other residential

Other residential (multi-family)

Commercial real estate

1 unchanged sentence

Total potential problem loans

FDIC-assisted acquired loans included above

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.

At March 31, 2024, the other residential (multi-family) category of potential problem loans included one loan, which totaled $7.2 million and was added to potential problem loans in 2023.

This loan is collateralized by an apartment and retail project in Oklahoma City, Oklahoma.

This loan was fully paid off in April 2024.

The one- to four-family residential category of potential problem loans included two loans, one of which was added during the current period.

The largest relationship in this category totaled $98,000, or 81.0% of the total category.

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.

The commercial business category of potential problem loans included one loan, which totaled $13,000, and was added during the current period.

The consumer category of potential problem loans included nine loans, six of which were added during the current period.

Other Real Estate Owned and Repossessions.

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:

Of the total $1.0 million of other real estate owned and repossessions at March 31, 2024, $995,000 represents Bank-owned properties that were not acquired through foreclosure.

Activity in foreclosed assets and repossessions during the three months ended March 31, 2024, was as follows:

(In thousands)

4 unchanged sentences

One- to four-family residential

Other residential

Other residential (multi-family)

Commercial real estate

1 unchanged sentence

Total foreclosed assets and repossessions

FDIC-assisted acquired loans included above

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

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.

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.” Multiple loan reviews take place on a continuous basis by credit risk and

lending management.

Reviews are focused on financial performance, occupancy trends, delinquency status, covenant compliance, collateral support, economic considerations and various other factors.

Loans classified as “Watch” are being monitored due to indications of potential weaknesses or deficiencies that may require future reclassification as special mention or substandard.

Loans classified as “Watch” decreased $1.5 million, from $8.3 million at December 31, 2023 to $6.8 million at March 31, 2024, primarily due to one large commercial business loan being paid off.

While loans classified as “Special Mention” are not adversely classified, they are deserving of management’s close attention to ensure repayment prospects and that the credit position of the assets does not deteriorate and expose the institution to elevated risk to warrant adverse classification at a future date.

In the three months ended March 31, 2024, loans classified as “Special Mention” decreased $3.5 million, to $23.2 million, as one loan relationship totaling $9.6 million was downgraded to “Substandard” and added to non-performing loans.

The largest relationship consisted of four commercial business loans totaling $15.6 million at March 31, 2024 and is secured by business assets, equipment, accounts receivable and real estate.

The relationship was added to the “Special Mention” category during 2023 due to stressed cash flow associated with business expansion.

The borrower reduced debt significantly in 2023 by restructuring business operations, resulting in improved business cash flow and collateral margins and since December 31, 2023 has drawn $5.8 million on a working capital line of credit.

Another relationship totaling $4.8 million at March 31, 2024 was added to the “Special Mention” category in 2023.

This relationship is collateralized by three assisted care facilities located in southwest Missouri.

Business cash flow was negatively impacted by a labor shortage and a decrease in Medicaid reimbursement during 2022-2023.

Monthly payments continue to amortize the loan balance.

See Note 6 “Loans and Allowance for Credit Losses” in the Notes to Consolidated Financial Statements included in this report for further discussion of the Company’s loan grading system.

Non-interest Income

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 :

Other income decreased $845,000 compared to the prior year period.

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

For the three months ended March 31, 2024, non-interest income decreased $1.1 million to $6.8 million when compared to the three months ended March 31, 2023, primarily as a result of the following items:

Overdraft and Insufficient Funds fees :

Overdraft and Insufficient funds fees decreased $607,000 compared to the prior year period.

This decrease was primarily due to a continuation of a multi-year trend whereby our customers are choosing to forego authorizing payments of certain items which exceed their account balances, resulting in fewer overdrafts in checking accounts and related fees.

Point-of-sale and ATM fees :

Point-of-sale and ATM fees decreased $518,000 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 :

In the 2023 period, the Company recognized a loss of $234,000 on the change in fair value of its back-to-back interest rate swaps related to commercial loans and the change in fair value on interest rate swaps related to brokered time deposits.

In the 2022 period, the Company recognized a gain of $385,000 on the change in fair value of its back-to-back interest rate swaps related to commercial loans.

This decrease was primarily due to a portion of these transactions now being routed through channels with lower fees to us, which we expect will continue in future periods, and slightly lower usage of debit cards by our customers.

Other income :

Other income decreased $465,000 compared to the prior year period.

In the 2024 period, the Company recorded $404,000 related to activity incentives for debit card usage, compared to $799,000 in the 2023 period.

Non-interest Expense

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.

Various components of computer license and support expenses increased by $333,000 in the 2023 period compared to the 2022 period.

In addition, various repairs and maintenance expenses increased by $106,000 in the 2023 period compared to the 2022 period.

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.

For the three months ended March 31, 2024, non-interest expense decreased $41,000 to $34.4 million when compared to the three months ended March 31, 2023, primarily as a result of the following items:

Advertising :

Advertising expenses decreased $297,000 from the prior year period, to $350,000.

In the 2024 period, the Company received an annual marketing and card expense reimbursement for qualifying expenditures from its debit card brand provider of $423,000;

this was used to offset marketing and advertising costs that included this branding.

In the previous year period, $321,000 of this annual reimbursement was applied to marketing and advertising expenses.

Legal, Audit and Other Professional Fees :

Legal, audit and other professional fees decreased $256,000 from the prior year period, to $1.7 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:

In the 2023 period, the Company expensed a total of $1.3 million related to legal expenses and training and implementation costs for the core systems conversion and professional fees to consultants engaged to support the Company’s transition of core and ancillary software and information technology systems.

In the 2024 period, this expense was $929,000.

Salaries and employee benefits :

Salaries and employee benefits increased $2.1 million from the prior year period.

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

In 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 $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.

Salaries and employee benefits increased $453,000 from the prior year period.

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

Insurance expense increased $277,000 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.

The increase was primarily due to increases in deposit insurance rates by the FDIC’s Deposit Insurance Fund, which went into effect in 2023.

The Company’s efficiency ratio for the three months ended March 31, 2024, was 66.68% compared to 56.42% for the same period in 2023.

The Company’s ratio of non-interest expense to average assets was 2.39% and 2.42% for the three months ended March 31,

2024 and 2023, respectively.

Average assets for the three months ended March 31, 2024, increased $57.8 million, or 1.0%, from the three months ended March 31, 2023, primarily due to an increase in net loans receivable and interest bearing cash equivalents, partially offset by a decrease in investment securities.

Provision for Income Taxes

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.

For the three months ended March 31, 2024 and 2023, the Company’s effective tax rate was 19.1% and 21.2%, respectively.

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

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

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

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

The Company currently expects its effective tax rate (combined federal and state) will be approximately 20.5% to 22.0% in future periods.

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

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

The Company currently expects its effective tax rate (combined federal and state) will be approximately 18.5% to 20.5% in future periods, primarily due to additional investment tax credits expected to be utilized beginning in 2024.

Average Balances, Interest Rates and Yields

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

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

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

1 unchanged sentence

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 $1.6 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.

Net loan fees included in interest income were $1.2 million and $1.3 million for the three months ended March 31, 2024 and 2023, respectively.

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

The table does not reflect any effect of income taxes.

September 30,

Three Months Ended

September 30, 2023

September 30, 2022

(Dollars in Thousands)

Interest-earning assets:

Loans receivable:

One- to four-family residential

Other residential

Commercial real estate

Commercial business

Industrial revenue bonds(1)

Total loans receivable

Investment securities(1)

Interest-earning deposits in other banks

Total interest-earning assets

Non-interest-earning assets:

Cash and cash equivalents

Other non-earning assets

Interest-bearing liabilities:

Interest-bearing demand and savings

Time deposits

Brokered deposits

Total deposits

Securities sold under reverse repurchase agreements

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

Subordinated debentures issued to capital trusts

Subordinated notes

Total interest-bearing liabilities

Non-interest-bearing liabilities:

Demand deposits

Other liabilities

Total liabilities

Stockholders’ equity

Net interest income:

Interest rate spread

Net interest margin*

Average interest-earning assets to average interest-bearing liabilities

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

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

March 31, 2024

March 31, 2023

(Dollars in Thousands)

2 unchanged sentences

One- to four-family residential

Other residential

Other residential (multi-family)

Commercial real estate

3 unchanged sentences

Investment securities(1)

Interest-earning deposits in other banks

Other interest-earning assets

Total interest-earning assets

23 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 $57.0 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.

(1) Of the total average balances of investment securities, average tax-exempt investment securities were $57.6 million and $57.8 million for the three months ended March 31, 2024 and 2023, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $11.4 million and $10.7 million for the three months ended March 31, 2024 and 2023, respectively.

Interest income on tax-exempt assets included in this table was $568,000 and $637,000 for the three months ended March 31, 2024 and 2023, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $460,000 and $569,000 for the three months ended March 31, 2024 and 2023, respectively.

Rate/Volume Analysis

The following tables present the dollar amounts of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities for the periods shown.

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities for the periods shown.

For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in rate (i.e., changes in rate multiplied by old volume) and (ii) changes in volume (i.e., changes in volume multiplied by old rate).

1 unchanged sentence

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

Three Months Ended September 30,

Increase (Decrease)

(Dollars in Thousands)

Interest-earning assets:

Loans receivable

Investment securities

Interest-earning deposits in other banks

Total interest-earning assets

Interest-bearing liabilities:

Demand deposits

Time deposits

Brokered deposits

Total deposits

Securities sold under reverse repurchase agreements

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

Subordinated debentures issued to capital trust

Subordinated notes

Total interest-bearing liabilities

Net interest income

Nine Months Ended September 30,

Three Months Ended March 31,

Increase (Decrease)

19 unchanged sentences

Liquid assets include cash, interest-bearing deposits with financial institutions and certain investment securities and loans.

As a result of the Company’s management of 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 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.

As a result of the Company’s ability to generate liquidity primarily through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its borrowers’ credit needs.

At March 31, 2024, the Company had commitments of approximately $41.0 million to fund loan originations, $1.20 billion of unused lines of credit and unadvanced loans, and $15.7 million of outstanding letters of credit.

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

September 30,

Closed non-construction loans with unused available lines

5 unchanged sentences

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

Loan commitments

Loan commitments not closed

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

1 unchanged sentence

Not secured by real estate - commercial business

The Company’s primary sources of funds are customer deposits, FHLBank advances, other borrowings, loan repayments, unpledged securities, proceeds from sales of loans and available-for-sale securities and funds provided from operations.

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

The Company’s primary sources of funds are customer deposits, brokered deposits, short-term borrowings at the FHLBank, other borrowings, loan repayments, unpledged securities, proceeds from sales of loans and available-for-sale securities and funds provided from operations.

The Company utilizes some or all these sources of funds depending 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 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

Since mid-2022, the Company has increased the interest rates it pays on many deposit products.

The Company has also utilized both fixed-rate and floating-rate brokered deposits of varying terms, as well as overnight FHLBank borrowings and term borrowings from the FRB.

At March 31, 2024 and December 31, 2023, the Company had the following available secured lines and on-balance sheet liquidity:

March 31, 2024

December 31, 2023

2 unchanged sentences

919.1 million

Federal Reserve Bank line (traditional funding line)

Federal Reserve Bank line

391.9 million

8 unchanged sentences

191.7 million

202.5 million

Statements of Cash Flows.

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.

During the three months ended March 31, 2024, the Company had negative cash flows from operating activities compared to positive cash flows from operating activities for the three months ended March 31, 2023.

The Company had positive cash flows from investing activities during the three months ended March 31, 2024, compared to negative cash flows from investing activities during the three months ended March 31, 2023.

The Company had negative cash flows from financing activities during the three months ended March 31, 2024, compared to positive cash flows from financing activities during the three months ended March 31, 2023.

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 $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.

Operating activities used cash of $26.9 million and provided cash of $15.2 million during the three months ended March 31, 2024 and 2023, respectively.

During the three months ended March 31, 2024 and 2023, investing activities provided cash of $13.5 million and used cash of $63.1 million, respectively.

Investing activities in the three months ended March 31, 2024 provided cash primarily due to the net repayment of loans and investment securities and net redemption of FHLBank stock.

Investing activities in the three months ended March 31, 2023 used cash primarily due to the net origination of loans.

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

During the nine months ended September 30, 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.

During the three months ended March 31, 2024 and 2023, financing activities used cash of $26.5 million and provided cash of $64.1 million, respectively.

In the three months ended March 31, 2024, financing activities used cash primarily as a result of net decreases in time deposits and short-term borrowings, purchases of the Company’s common stock and dividends paid to stockholders.

partialy offset by net increases in checking and savings deposits.

In the three months ended March 31, 2023, financing activities provided cash primarily as a result of net increases in time deposits and checking and savings deposits, partially offset by a decrease in short-term borrowings, purchases 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 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.

At March 31, 2024, the Company’s total stockholders’ equity and common stockholders’ equity were each $565.2 million, or 9.8% of total assets, equivalent to a book value of $48.31 per common share.

As of December 31, 2023, total stockholders’ equity and common stockholders’ equity were each $571.8 million, or 9.8% of total assets, equivalent to a book value of $48.44 per common share.

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

At March 31, 2024, the Company’s tangible common equity to tangible assets ratio was 9.6%, compared to 9.7% at December 31, 2023 (See Non-GAAP Financial Measures below).

Included in stockholders’ equity at March 31, 2024 and December 31, 2023, were unrealized losses (net of taxes) on the Company’s available-for-sale investment securities totaling $45.9 million and $40.5 million, respectively.

This change in net unrealized loss during the three months ended March 31, 2024, primarily resulted from increasing intermediate-term market interest rates, which generally decreased the fair value of investment securities.

In addition, included in stockholders’ equity at March 31, 2024, were realized gains (net of taxes) on the Company’s terminated cash flow hedge (interest rate swap), totaling $9.5 million.

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

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

At March 31, 2024, the remaining pre-tax amount to be recorded in interest income was $12.3 million.

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

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

Also included in stockholders’ equity at March 31, 2024, was an unrealized loss (net of taxes) on the Company’s two outstanding cash flow hedges (interest rate swaps) totaling $16.0 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 decreased $1.4 million, from $533.1 million at December 31, 2022 to $531.7 million at September 30, 2023.

During the three months ended March 31, 2024, increasing forward swap rates resulted in decreasing fair values of these hedges.

As noted above, total stockholders’ equity decreased $6.7 million, from $571.8 million at December 31, 2023 to $565.2 million at March 31, 2024.

Stockholders’ equity decreased due to repurchases of the Company’s common stock totaling $5.8 million and dividends declared on common stock of $4.7 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.

Accumulated Other Comprehensive Loss increased $10.0 million (decrease to stockholders’ equity) during the three months ended March 31, 2024, primarily due to changes (decreases) in the market value of available-for-sale securities and in the fair value of cash flow hedges.

Partially offsetting these decreases were net income of $13.4 million for the three months ended March 31, 2024 and an increase of $692,000 due to stock option exercises.

The adoption of a new accounting standard (ASU 2023-02) in the first quarter of 2024 also decreased stockholders’ equity by $223,000.

The Company had unrealized losses on its portfolio of held-to-maturity investment securities, which totaled $25.6 million at March 31, 2024, that were not included in its total capital balance.

If these held-to-maturity unrealized losses were included in capital (net of taxes), they would have decreased total stockholder’s equity by $19.3 million at March 31, 2024.

This amount was equal to 3.4% of total stockholders’ equity of $565.2 million.

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To be considered “well capitalized,” banks must have a minimum common equity Tier 1 capital ratio of 6.50%, a minimum Tier 1 risk-based capital ratio of 8.00%, a minimum total risk-based capital ratio of 10.00%, and a minimum Tier 1 leverage ratio of 5.00%.

On September 30, 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%.

On March 31, 2024, the Bank’s common equity Tier 1 capital ratio was 13.0%, its Tier 1 risk-based capital ratio was 13.0%, its total risk-based capital ratio was 14.3% and its Tier 1 leverage ratio was 11.5%.

As a result, as of March 31, 2024, the Bank was well capitalized, with capital ratios in excess of those required to qualify as such.

On December 31, 2023, the Bank’s common equity Tier 1 capital ratio was 13.1%, its Tier 1 capital ratio was 13.1%, its total capital ratio was 14.3% and its Tier 1 leverage ratio was 11.6%.

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

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

On September 30, 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 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%.

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

On March 31, 2024, the Company’s common equity Tier 1 capital ratio was 11.9%, its Tier 1 risk-based capital ratio was 12.4%, its total risk-based capital ratio was 15.2% and its Tier 1 leverage ratio was 11.0%.

On December 31, 2023, the Company’s common equity Tier 1 capital ratio was 11.9%, its Tier 1 capital ratio was 12.4%, its total capital ratio was 15.2% and its Tier 1 leverage ratio was 11.0%.

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

At September 30, 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.

At March 31, 2024 and December 31, 2023, both the Company and the Bank had a capital conservation buffer that exceeded the required minimum levels.

During the three months ended March 31, 2024, the Company declared a common stock cash dividend of $0.40 per share, or 35% of net income per diluted common share for that three-month period, and paid a common stock cash dividend of $0.40 per share (which was declared in December 2023).

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

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

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

The $0.40 per share dividend declared but unpaid as of March 31, 2024, was paid to stockholders in April 2024.

Common Stock Repurchases and Issuances .

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

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.

During the three months ended March 31, 2024, the Company repurchased 112,362 shares of its common stock at an average price of $51.44 per share and issued 7,288 shares of common stock at an average price of $35.41 per share to cover stock option exercises.

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

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.

At March 31, 2024, approximately 615,000 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 shareholder value.

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

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Ratio of Tangible Common Equity to Tangible Assets

September 30, 2023

March 31, 2024

December 31, 2023

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis