What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-06 compared with 2024-08-07 · 455 added, 428 removed, 585 unchanged (60% of the section changed)

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(xvii) competition;

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

and (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 and general practices within the financial services industry.

The accounting and financial 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.

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

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

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

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

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

As of June 30, 2024, the Company had one reporting unit to which goodwill has been allocated – the Bank.

As of September 30, 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.

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

At June 30, 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

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

At September 30, 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.

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

At June 30, 2024, the amortizable intangible assets included the arena naming rights of $4.9 million, which are reflected in the table below.

At September 30, 2024, the amortizable intangible assets included the arena naming rights of $4.8 million, which are reflected in the table below.

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

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

Management does not believe any of the Company’s goodwill or other intangible assets were impaired as of June 30, 2024.

While management believes no impairment existed at June 30, 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 date indicated is as follows:

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

The Company performed this annual review as of September 30, 2024 and concluded that no impairment of its goodwill or other intangible assets had occurred as of that date.

While management believes no impairment existed as of September 30, 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:

September 30,

(In Thousands)

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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.

The Federal Reserve’s efforts largely insulated the financial system from the

problems in the economy, a significant difference from the financial crisis of 2007-2008.

The Federal Reserve’s efforts largely insulated the financial system from the problems in the economy, a significant difference from the financial crisis of 2007-2008.

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

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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 2.6% at June 2024, still above the Federal Reserve's target of 2%.

Moody’s is projecting real GDP in 2024 to be slightly lower than previously forecast, as the persistence of high interest rates continues to impact GDP growth rates.

Real GDP is projected to rise 2.4% in 2024 on an annual average basis, a downward revision of 0.1%, and is projected to grow to 1.8% in 2025 and 1.9% in 2026.

The actual real GDP quarterly increase in the first quarter of 2024 was 1.4% and the second quarter of 2024 advance estimate for real GDP was a quarterly increase of 2.8%.

The national unemployment rate was 4.1% as of June 2024 and has ranged from 3.4% to 4.1% since June 2022.

The number of unemployed individuals remained steady at 6.8 million as of June 2024, with 206,000 jobs added in June 2024.

In June 2024, employment gains in healthcare, government, and construction contributed to 153,000 of the total job gains.

As of June 2024, the labor force participation rate (the share of working - age Americans employed or actively looking for a job) remained stable at 62.6%.

The unemployment rate for the Midwest, where the Company conducts most of its business, has increased from 3.4% in June 2023 to 3.8% in June 2024.

Unemployment rates for June 2024 in the states where the Company has a branch or a loan production office were Arizona at 3.3%, Arkansas at 3.3%, Colorado at 3.8%, Georgia at 3.3%, Illinois at 5.0%, Iowa at 2.8%, Kansas at 3.1%, Minnesota at 2.9%, Missouri at 3.7%, Nebraska at 2.6%, North Carolina at 3.6%, and Texas at 4.0%.

The rates are slightly higher for many of these states compared to March 2024.

Of the metropolitan areas in which the Company does business, most are below the national unemployment rate for June 2024 of 4.1%.

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.

Core PCE, which excludes food and energy prices was 2.7% at September 30, 2024, above the Federal Reserve’s target of 2%.

Based on Moody’s U.S.

Baseline Outlook and Alternative Scenarios Analysis dated October 2024, real GDP in 2024 is projected to be slightly higher than previously forecast.

Real GDP is projected to rise 2.7% in 2024 on an annual average basis, and is projected to grow 2.3% in 2025 and 2.1% in 2026.

Higher consumer spending and business investment drove the upward revisions to the outlook in those years.

The national unemployment rate changed little for the month of September 2024 at 4.1%, ranging from 3.4% to 4.1% since September 2022.

The number of unemployed individuals was 6.8 million as of September 2024 with 254,000 jobs added in September 2024.

In September 2024, the healthcare, government, social assistance, food services, and construction sectors contributed to 170,000 of the total job gains.

As of September 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 3.6% in September 2023 to 4.1% in September 2024.

Unemployment rates for September 2024 in the states where the Company has a branch or a loan production office were:

Arizona at 3.5%, Arkansas at 3.3%, Colorado at 4.0%, Georgia at 3.6%, Illinois at 5.3%, Iowa at 2.9%, Kansas at 3.3%, Minnesota at 3.4%, Missouri at 3.9%, Nebraska at 2.7%, North Carolina at 3.8%, Oklahoma at 3.4%, and Texas at 4.1%.

The rates above are slightly higher for a majority of these states compared to June 2024.

Of the metropolitan areas in which the Company does business, most are below the national unemployment rate for September 2024 of 4.1%.

Single Family Housing

Existing - home sales decreased to a seasonally adjusted annual rate of 3.89 million in June 2024, down 5.4% from the previous year.

In the Midwest, existing - home sales declined to an annual rate of 920,000 in June 2024, down 6.1% from one year ago.

The median existing - home sales price rose 4.1% from June 2023 to an all - time high of $426,900 in June 2024.

All four U.S.

regions registered price gains.

The median price in the Midwest was $327,100, up 5.5% from June 2023.

Total housing inventory registered at the end of June 2024 was 1.32 million units, up 3.1% from May 2024 and up 23.4% from one year ago of 1.07 million units.

Unsold inventory sat at a 4.1 - month supply in June 2024, up from 3.7 months in May 2024 and up from 3.1 months in June 2023.

Existing-home sales decreased 1.0% in September 2024 to a seasonally adjusted annual rate of 3.84 million, down 3.5% from the previous year.

In the Midwest, existing-home sales fell 2.2% in September 2024 to an annual rate of 900,000, down 5.3% from one year ago.

The median existing-home sales price rose 3.0% from September 2023 to $404,500 in September 2024, which is the 15th consecutive month of year-over-year price increases.

The median price in the Midwest was $306,600, up 5.0% from September 2023.

All regions reported median price increases when compared to the prior year.

Total housing inventory registered at the end of September 2024 was 1.39 million units, up 1.5% from August 2024 and up 23% from 1.13 million one year ago.

Unsold inventory sat at a 4.3-month supply in September 2024, up from 4.2 months in August 2024 and 3.4 months in September 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 June 2024 were at a seasonally adjusted annual rate of 617,000, according to the U.S.

Sales of new single‐family houses in September 2024 were at a seasonally adjusted annual rate of 738,000, according to the U.S.

Census Bureau and the Department of Housing and Urban Development.

This was 0.6% below the revised May 2024 rate of 621,000 and was 7.4% below the June 2023 rate of 666,000.

The median sales price of new houses sold in June 2024 was $417,300, up from $415,400 in June 2023.

The average sales price in June 2024 of $487,200 was down from $494,700 in June 2023.

The seasonally - adjusted estimate of new houses for sale at the end of June 2024 was 476,000.

This is 4.1% above the August 2024 rate of 709,000 and 6.3% above the September 2023 rate of 694,000.

The median sales price of new houses sold in September 2024 was $426,300, in line with $426,100 reported in September 2023.

The average sales price in September 2024 of $501,000 was down from $515,000 in September 2023.

The seasonally‐adjusted estimate of new houses for sale at the end of September 2024 was 470,000.

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

According to Freddie Mac, the average commitment rate for a 30 - year, fixed - rate mortgage was 6.77% as of July 22, 2024, which is down from 6.89% for the previous week and down from 6.78% one year ago.

According to Freddie Mac, the average commitment rate for a 30-year, fixed-rate mortgage was 6.44% as of October 18, 2024 which was up from 6.32% the previous week and down from 7.63% one year ago.

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

multi - family market experienced a healthy rebound in demand for the first half of 2024, driven by rising consumer confidence and diminishing recession fears.

Despite the notable growth in demand in 2024, the influx of new supply continues to saturate the market.

During the first quarter of 2024, 153,000 units were completed, with an estimated 163,000 units expected to be delivered in the second quarter.

multi-family market experienced a continued strong recovery in demand through the first nine months of 2024, driven by stable economic growth plus a continued slowing of renter households, making the jump to ownership and creating fewer units to backfill.

Despite the notable growth in demand in 2024, the influx of new supply continued to saturate the market.

During the second quarter of 2024, 190,000 units were completed, with approximately 154,000 units delivered in the first two months of the third quarter.

Most new supply additions are concentrated at the 4 and 5 Star price point, contributing to the weakest rent growth observed in this market.

Consequently, the persistent imbalance between supply and demand is projected to increase the vacancy rate, which is expected to reach a record 7.9% by the end of June 2024.

The Midwest and Northeast have fared the best over the past two years seeing the most favorable rent growth.

The Sun Belt market rent growth has been more sluggish, with numerous markets reporting negative year over year rent growth by the end of May 2024.

Current projections indicate 533,000 completions for the year, reflecting a 9% decline from the record supply seen in 2023.

At the same time, absorption is accelerating, offering the national market an opportunity to stabilize and possibly begin recovering by the end of 2024.

The June 2024 national multi-family market vacancy rates remained consistent with the previous quarter at 7.8%.

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

Consequently, the persistent imbalance between supply and demand stabilized the vacancy rate in the third quarter of 2024 at 7.9%.

The Midwest and Northeast regions have fared the best over the past two years in terms of rent growth.

Projected deliveries in the Midwest for 2024 are only 11,000 units higher than in 2019.

This controlled increase in projected new supply is expected to keep Midwestern markets more balanced, thereby avoiding the oversupply conditions that contributed to weaker rent growth in the Sun Belt.

The Sun Belt market rent growth has been sluggish, with numerous markets reporting negative year-over-year rent growth.

Austin, Texas and Raleigh, North Carolina have experienced the steepest rent declines over the past four quarters, with year-over-year rent growth of negative 5.7% and negative 2.9%, respectively.

The vacancy rate is also climbing for 4 & 5 Star properties in Austin, Texas from 10.4% in the second quarter of 2023 to 14.1% by the end of the second quarter of 2024.

Per CoStar, nationally, absorption is accelerating, offering the market an opportunity to stabilize and possibly begin recovering by the end of the year.

The third quarter of 2024 saw 152,000 units absorbed, bringing the year to date demand to 450,000 units, which is the strongest since 2021.

With supply numbers finally pulling back and demand surging, the large imbalances experienced in 2022 and 2023 appear to be lessening.

With the national vacancy rate anticipated to stabilize in the second half of 2024 and projected deliveries dropping almost in half in 2025, overall market conditions appear well-positioned to begin recovery.

The September 2024 national multi-family market vacancy rates remained consistent with the previous quarter at 7.9%.

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

Springfield, Missouri at 4.8%, St.

Louis at 9.6%, Kansas City at 7.5%, Minneapolis at 7.4%, Dallas-Fort Worth at 11%, Chicago at 5.3%, Atlanta at 12.5%, Phoenix at 11%, Denver at 10.5% and Charlotte, North Carolina at 12.2%.

The rates are slightly higher for some of these cities compared to March 2024.

Absorption was positive in the second quarter of 2024 for the office industry, but supply additions held vacancy at 13.8%.

Owner occupied, medical office users, and fewer high profile move-outs drove the uptick in occupancy, but persistently small leases and looming rollover exposure suggest the reprieve is likely temporary.

The 89.1 million SF under construction is the lowest amount since 2013, and the 20 million SF in construction starts over the past year is the lowest amount on record for a 12-month period.

Net deliveries are expected to taper off to a negligible amount by the end of 2025, which should tighten the market for desirable existing space.

Asking rental rates are still expected to dip as basis resets.

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.

New leasing volume has hovered around 10% below the average amount from 2015-2019.

Much of the decline in volume has been driven by average lease sizes 15-20% smaller than the 2015-2019 average.

Market participants confirm that, while the leasing market is active, typical requirements are smaller, with pre-built spec suites attracting some of the strongest demand.

In the traditional leasing market, however, there has been an ongoing adjustment in per-worker space needs, with new construction winning out.

Buildings completed during the current decade have maintained positive net absorption but older properties have suffered from an extreme lack of demand.

During the next 18-24 months, about 25% of square footage leased before April 2020 is set to expire.

Thus, the outlook is for a continued rise in vacancy, which is expected to increase approximately 1.5% by early 2026.

As of June 2024, national office vacancy rates remained stable at 13.8% compared to March 2024, while our market areas reflected the following vacancy levels:

Absorption for the office industry has been flat for 2024 through September 30, 2024, but the addition of 11 million square feet (“SF”) of net new supply since April 2024 has pushed the vacancy rate up to a record 13.9%.

CoStar expects the vacancy rate to rise further before plateauing in 2026.

Rents are expected to flatten out in the next 12 months before beginning a recovery driven by stabilizing demand and a lack of relevant, competitive supply.

Values for multi-tenanted, investment-grade buildings targeting traditional office tenants have fallen 40-45% from their peak and could dip further as more liquidity leads to a final round of price adjustments.

Supply growth has slowed to a decade-low pace in 2024.

About 50 million SF in new deliveries is expected in 2024, roughly 60% of which had already been completed as of the beginning of the fourth quarter of 2024 and far below the 10-year average of around 70 million SF.

Lower interest rates and the ongoing pricing resets could trigger more renovations and supply reductions, including conversions of office buildings to other uses.

The ongoing reset in property values could lead to lower asking rates as more buildings transact at significant discounts to prior valuations.

CoStar reported office asking rents have remained steady over the past four years, and said a combination of aggressive discounts by new, low-basis owners, a looming lack of available space in premium new buildings, and an ongoing amount of sublease inventory is expected to keep office asking rents flat for the next 12 to 18 months.

With attendance rising only gradually and job growth stagnant, there appears little likelihood of a dramatic change in demand conditions in the next 18-24 months.

As of September 2024, national office vacancy rates remained stable at 13.9% compared to June 2024, while our market areas reflected the following vacancy levels:

Springfield, Missouri at 4.3%, St.

Louis at 10.4%, Kansas City at 11.9%, Minneapolis at 11.5%, Dallas-Fort Worth at 18.2%, Chicago at 16.3%, Atlanta at 16.4%, Denver at 17.2%, Phoenix at 16.8% and Charlotte, North Carolina at 14.3%.

The rates are higher for many of these cities compared to March 2024.

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 40.1 million SF during the past 12 months and over 212 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.

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

Approximately 36.5 million SF of new retail space was delivered across the U.S.

over the past 12 months, which is half of the prior 10-year average.

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

Given the structural downshift in activity coupled with the fact that over three years of new deliveries have typically had a tenant in place at delivery, the

retail market is currently in one of its firmest fundamental positions on record thanks to steadily rising demand and limited new supply.

However, there has been a sharp uptick in bankruptcies and store closures.

There is just 576 million SF of space available for lease across the U.S., which was lower by over 5 million SF on a year-over-year basis and almost 200 million SF (or 26%) below the amount available for lease during the height of the pandemic.

Leasing activity remains concentrated in smaller spaces of under 2,500 SF, where activity is being driven by growth from quick-service restaurants and personal services.

Tenants such as Starbucks, Crumbl Cookies, Yum Brands, and Restaurant Brands International (owner of BK, Tim Hortons, Popeye’s, and Firehouse Subs) have all signed up for dozens of new locations over the past year.

Demand for junior and anchor spaces has been driven by tenants from numerous sectors, including discount, off-price, health and beauty, and discount grocery.

Approximately 27.9 million SF of retail space has been absorbed across the U.S.

over the past year, approximately 80% of which has flowed into the general retail (20.4 million SF) and neighborhood center (2.5 million SF) segments.

Seven of the top 10 markets leading the way in inventory-adjusted demand growth over the past year were in the Sun Belt, including four of the top five (Austin, Orlando, Miami and Phoenix).

The other three markets in the top 10 for inventory-adjusted demand growth over the past year were all in the Midwest, with Indianapolis, St.

Louis, and Minneapolis each seeing absorption of at least 1.5 million SF over that time.

A primary driver of tight conditions within the U.S.

retail market has been the limited amount of new development over the past 15 years.

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

Given the structural downshift in activity coupled with the fact that over three years of new deliveries 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 as higher interest rates challenge the feasibility of many new potential retail developments at current rent levels.

Rents continue to rise due to minimal availability and the significant boost in retail sales coming out of the pandemic.

Asking rents for retail spaces have increased by 2.4% over the past year to a new record high of $25.00 per SF.

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

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

Rents continue to rise at a healthy rate due to minimal availability and the significant boost in retail sales coming out of the pandemic.

Asking rents for retail spaces have increased by 2.1% over the past year to a record high of $25.00 per/SF.

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

Springfield, Missouri at 2.2%, St.

Louis at 4.2%, Kansas City at 3.7%, Minneapolis at 2.6%, Dallas-Fort Worth at 4.5%, Chicago at 4.7%, Atlanta at 3.8 %, Phoenix at 4.8%, Denver at 3.7%, and Charlotte, North Carolina at 2.9%.

The rates are slightly lower for many of these cities compared to March 2024.

industrial market performance continued to downshift in the second quarter of 2024.

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 the first quarter of 2024 registering the lowest first quarter absorption tally since 2012.

This weakness partly reflects 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 as inflation gradually subsides.

Large distribution center expansions by companies that sell necessities consumers are still purchasing in high volume, 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 2024–26 to begin production, with Arizona, Texas, Georgia, and the Carolinas securing the most new operations.

The trend of slowing absorption and rising space availability rates has been broad-based across major U.S.

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 signals that by late 2024, the number of new projects completing construction should continue to decline.

For the second quarter of 2024, national industrial vacancy rates increased to 6.6%, from 6.2% for the first quarter of 2024.

Our market areas reflected the following industrial vacancy levels:

industrial market performance continued to downshift in the third quarter of 2024.

While the national vacancy rate is not expected to rise above its 20-year average of 7.0%, the next 6-12 months could still prove challenging for the market.

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

This weakness ties 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 Big Lots, Ashley Furniture, and Home Depot.

More positive signs for tenant demand have been emerging as the year progresses.

Led by sales at non-store retailers and general merchandise stores, overall real retail goods spending has been gradually rising since early 2024 as inflation subsides.

Declines that carried through last year have leveled off in 2024 for key indicators such as warehousing and storage employment and wholesale trade inventories.

imports, which also declined last year, have been rising since February 2024, meaning the volume of goods flowing through distribution centers across the U.S.

is back on the rise, with the exception being during the October 2024 strikes by dockworkers at major East Coast and Gulf Coast ports.

industrial market is nearing the end of a record development surge.

Higher interest rates have caused construction starts on new industrial projects to fall over the past two years.

The volume of projects completing construction each quarter is expected to remain elevated through late 2024 or early 2025 but has already begun to decline and is expected to hit 10-year lows by late 2025.

Gradual but persistent decline in speculative development completions has already begun.

The amount of vacant space among existing Phoenix logistics properties 50,000 SF or larger has increased by 29 million SF, primarily due to speculative development since 2019 pushing the current vacancy rate among these buildings over 17%, while another 16.6 million SF worth of unleased space remains under construction.

Nationally, year-over-year industrial rent growth has decelerated over the past 24 months to 2.8%, a rate which is below the pre-pandemic five-year average.

In the near term, it is expected that rent growth will slow further in both the small bay and big box logistics sectors.

If net absorption can gradually increase, there is potential for rent growth to reaccelerate and return to the pre-pandemic three-year average of 5.5% to 6% by 2026-2027, given the limited amount of new supply that will likely be on track to complete during those years.

However, big box logistics properties in markets most saturated with speculative development such as Austin, Indianapolis, Greenville/Spartanburg, Phoenix, and San Antonio are most at risk of lagging in any developing rent recovery, either due to slower asking rent increases or lingering, high levels of concessions.

For the third quarter of 2024, national industrial vacancy rates increased to 6.8%, from 6.6% for the second quarter of 2024.

Our market areas reflected the following industrial vacancy levels for the third quarter of 2024:

Springfield, Missouri at 1.6%, St.

2 unchanged sentences

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

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

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

Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on these balances.

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 $146.4 million, or 2.5%, from $5.81 billion at December 31, 2023, to $5.96 billion at June 30, 2024.

Details of the current period changes in total assets are provided below, under “Comparison of Financial Condition at June 30, 2024 and December 31, 2023.”

Net outstanding loans increased $44.0 million, or 1.0%, from $4.59 billion at December 31, 2023, to $4.63 billion at June 30, 2024.

The increase was primarily in other residential (multi-family) loans and was partially offset by decreases in construction loans and commercial business 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.

Great Southern’s total assets increased $224.1 million, or 3.9%, from $5.81 billion at December 31, 2023, to $6.04 billion at September 30, 2024.

Details of the current period changes in total assets are provided below, under “Comparison of Financial Condition at September 30, 2024 and December 31, 2023.”

Net outstanding loans increased $121.7 million, or 2.7%, from $4.59 billion at December 31, 2023, to $4.71 billion at September 30, 2024.

The increase was primarily in other residential (multi-family) loans, partially offset by decreases in construction loans, commercial business loans, and one-to four- family residential 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, no assurance can be given that our loan growth will match or exceed the average level of growth achieved in prior years.

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

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

Recent growth has occurred in some loan types, primarily other residential (multi-family), 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.

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In 2019, the Company discontinued indirect auto loan originations.

While our policy allows us to lend up to 95% of the appraised value on one-to four-family residential properties, originations of loans with loan-to-value ratios at that level are minimal.

While our policy allows us to lend up to 95% of the appraised value on one-to four-family residential properties, originations of loans with loan-to-value ratios at or above that level are minimal.

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

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We consider these lending practices to be consistent with or more conservative than what we believe to be the norm for banks our size.

At both June 30, 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 and an estimated 0.4% of our non-owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination.

At both September 30, 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 and an estimated 0.4% of our non-owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination.

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

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Available-for-sale Securities.

In the six months ended June 30, 2024, available-for-sale securities increased $70.9 million, or 14.8%, from $478.2 million at December 31, 2023, to $549.1 million at June 30, 2024.

In the nine months ended September 30, 2024, available-for-sale securities increased $87.0 million, or 18.2%, from $478.2 million at December 31, 2023, to $565.2 million at September 30, 2024.

In the three months ended June 30, 2024, the Company elected to purchase some fixed rate securities similar to ones already in its portfolio, to provide interest rate protection if market interest rates should fall in future periods.

These securities are expected to yield over 5.00%.

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

Held-to-maturity Securities.

In the six months ended June 30, 2024, held-to-maturity securities decreased $3.8 million, or 1.9%, from $195.0 million at December 31, 2023, to $191.2 million at June 30, 2024.

In the nine months ended September 30, 2024, held-to-maturity securities decreased $5.8 million, or 3.0%, from $195.0 million at December 31, 2023, to $189.3 million at September 30, 2024.

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

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

In the six months ended June 30, 2024, total deposit balances decreased $106.4 million, or 2.3%.

Compared to December 31, 2023, transaction account balances decreased $50.7 million, or 1.6%, to $3.06 billion at June 30, 2024, and retail certificates of deposit decreased $64.2 million, or 6.8%, to $884.0 million at June 30,

In the nine months ended September 30, 2024, total deposit balances decreased $24.2 million, or 0.5%.

Compared to December 31, 2023, transaction account balances decreased $19.1 million, or 0.6%, to $3.09 billion at September 30, 2024, and retail certificates of deposit decreased $154.0 million, or 16.2%, to $794.2 million at September 30, 2024.

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 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 $670.0 million and $661.5 million at June 30, 2024 and December 31, 2023, respectively.

Competition for time deposits has been, and remains, significant in many of our markets.

Brokered deposits, including IntraFi program purchased funds, were $810.4 million and $661.5 million at September 30, 2024 and December 31, 2023, respectively.

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

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

See “Results of Operations and Comparison for the Three and Six Months Ended June 30, 2024 and 2023 – Liquidity” below for further information on funding sources.

See “Results of Operations and Comparison for the Three and Nine Months Ended September 30, 2024 and 2023 – Liquidity” below for further information on funding sources.

Securities sold under reverse repurchase agreements with customers.

Securities sold under reverse repurchase agreements with customers increased $3.4 million from $70.8 million at December 31, 2023 to $74.2 million at June 30, 2024.

Securities sold under reverse repurchase agreements with customers increased $5.0 million from $70.8 million at December 31, 2023 to $75.8 million at September 30, 2024.

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

Short-term borrowings and other interest-bearing liabilities .

Short term borrowings and other interest-bearing liabilities increased $223.7 million from $252.6 million at December 31, 2023 to $476.3 million at June 30, 2024.

Short term borrowings and other interest-bearing liabilities increased $189.6 million from $252.6 million at December 31, 2023 to $442.2 million at September 30, 2024.

The Company may, from time to time, utilize overnight borrowings, short-term FHLBank advances, and BTFP borrowings from the Federal Reserve Bank of St.

Louis (FRBSTL), depending on relative interest rates.

The Company’s FHLBank term advances were $-0- at both June 30, 2024 and December 31, 2023.

At June 30, 2024 and December 31, 2023, there was $295.0 million and $251.0 million, respectively, in overnight borrowings from the FHLBank, which were included in short term borrowings.

The Company’s FHLBank term advances were $-0- at both September 30, 2024 and December 31, 2023.

At September 30, 2024 and December 31, 2023, there was $261.0 million and $251.0 million, respectively, in overnight borrowings from the FHLBank, which were included in short term borrowings.

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

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 $191.3 million at June 30, 2024.

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

The line is secured primarily by the Bank’s held-to-maturity investment securities, with assets pledged totaling approximately $189.5 million at September 30, 2024.

The proceeds from these borrowings were primarily used to repay a portion of the Bank’s overnight borrowings from the FHLBank.

Net Interest Income and Interest Rate Risk Management.

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This was the first rate increase since September 29, 2006.

The FRB also implemented rate change increases of 0.25% on eight additional occasions beginning December 14, 2016 and through December 31, 2018, with the Federal Funds rate reaching as high as 2.50%.

The FRB also implemented rate increases of 0.25% on eight additional occasions beginning December 14, 2016 and through December 31, 2018, with the Federal Funds rate reaching as high as 2.50%.

After December 2018, the FRB paused its rate increases and, in July, September and October 2019, implemented rate decreases of 0.25% on each of those occasions.

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At December 31, 2023, the Federal Funds rate was 5.50%.

To date in 2024, the FRB has not implemented any rate changes and at June 30, 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.

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 a few more months before any rate cuts occur, possibly as early as September 2024.

Great Southern’s loan portfolio includes loans ($1.41 billion at June 30, 2024) tied to various SOFR indexes that will be subject to adjustment at least once within 90 days after June 30, 2024.

In 2024, the FRB implemented a rate decrease of 0.50% in September.

At September 30, 2024, the Federal Funds rate was 5.00%.

Financial markets expect the possibility of further decreases in Federal Funds interest rates in 2024 and 2025 to be likely, but at a methodical pace and 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 ($1.54 billion at September 30, 2024) tied to various SOFR indexes that will be subject to adjustment at least once within 90 days after September 30, 2024.

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

Great Southern also has a portfolio of loans ($826 million at June 30, 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.

Great Southern also has a portfolio of loans ($782 million at September 30, 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.

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

In addition, Great Southern has a portfolio of loans ($7 million at June 30, 2024) tied to an AMERIBOR index that will adjust immediately or within 90 days of a change to the “prime rate” of interest.

In addition, Great Southern has a portfolio of loans ($8.0 million at September 30, 2024) tied to an AMERIBOR index that will adjust immediately or within 90 days of a change to the rate on this index.

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

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

At September 30, 2024, nearly all of these SOFR, AMERIBOR 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.

The current rates are such that a significant majority of these loans will also move fully with moderate future market interest rate decreases.

A rate cut by the FRB generally would have an anticipated immediate negative impact on the Company’s interest income on loans due to the large total balance of loans tied to the SOFR indexes or the “prime rate” index and will be subject to adjustment at least once within 90 days or loans which generally adjust immediately as the Federal Funds rate adjusts.

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

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

As of June 30, 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.

As of September 30, 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 mostly neutral impact on net interest income.

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

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

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

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

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

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Non-interest income consists primarily of service charges and ATM fees, POS interchange fees, late charges and prepayment fees on loans, gains on sales of loans and available-for-sale investments and other general operating income.

Non-interest income may also be affected by the Company’s interest rate derivative activities, if the Company chooses to implement derivatives.

Non-interest income may also be affected by the Company’s interest rate derivative activities.

See Note 16 “Derivatives and Hedging Activities” in the Notes to Consolidated Financial Statements included in this report.

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

Details of the current period changes in non-interest income and non-interest expense are provided below, under “Results of Operations and Comparison for the Three and Six Months Ended June 30, 2024 and 2023.”

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, 2024 and 2023.”

Effect of Federal Laws and Regulations

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The system migration efforts were 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.

Therefore, Great Southern took 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.

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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, as well as the third-party vendor’s misrepresentations and omissions.

As of the filing date of this Quarterly Report on Form 10-Q, the third-party vendor has not yet filed a responsive pleading to Great Southern’s complaint.

The third-party vendor filed a counterclaim alleging that Great Southern terminated the Master Agreement without cause and that Great Southern must pay an early termination fee in an amount to be proven at trial.

Great Southern denies the allegations in the third-party vendor’s counterclaim and will vigorously defend itself.

The parties continue informal settlement discussions, but there is no guarantee that the parties will reach a mutually agreed upon settlement to terminate the litigation.

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.

Comparison of Financial Condition at June 30, 2024 and December 31, 2023

During the six months ended June 30, 2024, the Company’s total assets increased by $146.4 million to $5.96 billion.

The increase was primarily in investment securities and loans, partially offset by a decrease in cash and cash equivalents.

Cash and cash equivalents were $186.5 million at June 30, 2024, a decrease of $24.9 million, or 11.8%, from $211.3 million at December 31, 2023.

In 2025, the banking center at Benton and Chestnut in Springfield, Mo.

will be replaced with a newly-constructed building on the same property at 723 N.

Construction on the new building is anticipated to begin in the first quarter of 2025, with completion in the fourth quarter of 2025.

During construction, customers will be serviced from a temporary facility on the property.

The Company also has 11 other banking centers and an Express Center in Springfield.

Kris Conley, Chief Retail Banking Officer, will retire in December 2024 after a notable career at Great Southern Bank.

He joined the Company in 1998 and has led the retail banking division since 2010.

During his tenure, Great Southern expanded from 30 banking centers, mainly in southwest Missouri, to 89 banking centers across six states.

In early 2023, Conley announced his retirement plans to facilitate a smooth transition, with Laura Smith named as his successor.

Smith, who has been with Great Southern since 2003, previously managed the Company’s investment services division.

Kelly Polonus, Chief Communications & Marketing Officer, will also retire in December 2024, concluding a distinguished 41-year career in banking, including the last 22 years at Great Southern Bank.

She announced her planned retirement in mid-2023 to ensure a seamless management transition.

Succeeding Polonus will be Stacy Fender, who joined Great Southern in June 2024 after serving 18 years in communications and marketing roles at a regional healthcare system.

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

The Company operates 89 retail banking centers in Missouri, Iowa, Kansas, Minnesota, Arkansas and Nebraska and seven commercial lending offices in Atlanta, Charlotte, Chicago, Dallas, Denver, Omaha, and Phoenix.

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, 2024 and December 31, 2023

During the nine months ended September 30, 2024, the Company’s total assets increased by $224.1 million to $6.04 billion.

The increase was primarily in investment securities and loans.

Cash and cash equivalents were $208.4 million at September 30, 2024, a decrease of $3.0 million, or 1.4%, from $211.3 million at December 31, 2023.

The Company’s available-for-sale securities increased $87.0 million, or 18.2%, compared to December 31, 2023.

The increase was primarily due to the purchase of several collateralized mortgage obligations and mortgage-backed securities, partially offset by normal monthly payments received related to the portfolio of mortgage-backed securities and collateralized mortgage obligations.

The available-for-sale securities portfolio was 9.2% and 8.2% of total assets at June 30, 2024 and December 31, 2023, respectively.

The available-for-sale securities portfolio was 9.4% and 8.2% of total assets at September 30, 2024 and December 31, 2023, respectively.

The Company’s held-to-maturity securities decreased $5.8 million, or 3.0%, 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 3.2% and 3.4% of total assets at June 30, 2024 and December 31, 2023, respectively.

Net loans increased $44.0 million from December 31, 2023, to $4.63 billion at June 30, 2024.

The held-to-maturity securities portfolio was 3.1% and 3.4% of total assets at September 30, 2024 and December 31, 2023, respectively.

Net loans increased $121.7 million from December 31, 2023, to $4.71 billion at September 30, 2024.

This increase was primarily in other residential (multi-family) loans ($627.8 million increase), which was partially offset by a decrease in construction loans ($383.3 million decrease) and commercial business loans ($91.0 million decrease).

The decrease in commercial business loans was primarily related to a few large loan payoffs in the three months ended March 31, 2024.

Despite the decrease in construction loans, the pipeline of construction loan commitments and the unfunded portion of construction loans remained strong in the six months ending June 30, 2024.

The decrease in commercial business loans was primarily related to a few large loan payoffs early in 2024.

Despite the decrease in construction loans, the pipeline of construction loan commitments and the unfunded portion of construction loans remained strong in the nine months ending September 30, 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 increased $149.4 million, from $5.24 billion at December 31, 2023 to $5.39 billion at June 30, 2024.

This increase was primarily due to an increase in short-term borrowings, partially offset by a reduction in transaction account deposits and certificate of deposit accounts.

Total deposits decreased $106.4 million, or 2.3%, from $4.72 billion at December 31, 2023 to $4.62 billion at June 30, 2024.

Transaction account balances decreased $50.7 million, from $3.11 billion at December 31, 2023 to $3.06 billion at June 30, 2024.

Total interest-bearing checking accounts decreased $25.5 million, while non-interest-bearing checking accounts decreased $25.3 million.

Retail certificates of deposit decreased $64.2 million compared to December 31, 2023, to $884.0 million at June 30, 2024 due to competition for deposits.

Brokered deposits increased $8.5 million to $670.0 million at June 30, 2024, compared to $661.5 million at December 31, 2023.

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

Total liabilities increased $183.9 million, from $5.24 billion at December 31, 2023 to $5.42 billion at September 30, 2024.

This increase was primarily due to increases in short-term borrowings and brokered deposits, partially offset by a reduction in transaction account deposits and certificates of deposit.

Total deposits decreased $24.2 million, or 0.5%, from $4.72 billion at December 31, 2023 to $4.70 billion at September 30, 2024.

Transaction account balances decreased $19.1 million, from $3.11 billion at December 31, 2023 to $3.09 billion at September 30, 2024.

Total interest-bearing checking accounts increased $19.7 million, while non-interest-bearing checking accounts decreased $38.8 million.

Retail certificates of deposit decreased $154.0 million compared to December 31, 2023, to $794.2 million at September 30, 2024, due to competition for deposits.

Brokered deposits increased $148.9 million to $810.4 million at September 30, 2024, compared to $661.5 million at December 31, 2023.

Brokered deposits were utilized to offset reductions in other deposit categories and, along with borrowings, to fund increases in loans and investment securities.

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

Of the total brokered deposits at June 30, 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 June 30, 2024 and December 31, 2023.

At June 30, 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.

Of the total brokered deposits at September 30, 2024, $300.0 million were floating rate deposits, which adjust daily, based on the effective federal funds rate index.

The Company also utilized brokered deposits with maturities within three to nine months as part of its interest rate risk management strategies.

The Company’s term FHLBank advances were $-0- at both September 30, 2024 and December 31, 2023.

At September 30, 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 increased $223.7 million from $252.6 million at December 31, 2023 to $476.3 million at June 30, 2024.

At June 30, 2024, $295.0 million of this total was overnight borrowings from the FHLBank, which was used to fund loan originations and purchases of investment securities, compared to $251.0 million of overnight borrowings from the FHLBank at December 31, 2023.

Short-term borrowings and other interest-bearing liabilities increased $189.6 million from $252.6 million at December 31, 2023 to $442.2 million at September 30, 2024.

At September 30, 2024, $261.0 million of this total was in overnight borrowings from the FHLBank, which were used to fund loan originations and purchases of investment securities, compared to $251.0 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 $191.3 million as of June 30, 2024.

The line is secured primarily by the Bank’s held-to-maturity investment securities, with assets pledged totaling approximately $189.5 million as of September 30, 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 $3.4 million, or 4.7%, from $70.8 million at December 31, 2023 to $74.2 million at June 30, 2024.

Securities sold under reverse repurchase agreements with customers increased $5.0 million, or 7.0%, from $70.8 million at December 31, 2023 to $75.8 million at September 30, 2024.

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

Total stockholders’ equity decreased $3.0 million, from $571.8 million at December 31, 2023 to $568.8 million at June 30, 2024.

Accumulated other comprehensive loss (a reduction in equity) increased $13.0 million during the six months ended June 30, 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 decreased due to repurchases of the Company’s common stock totaling $12.4 million and dividends declared on common stock of $9.3 million.

Partially offsetting these decreases were net income of $30.4 million for the six months ended June 30, 2024 and a $1.4 million increase in stockholders’ equity due to stock option exercises.

Results of Operations and Comparison for the Three and Six Months Ended June 30, 2024 and 2023

Net income was $17.0 million for the three months ended June 30, 2024 compared to $18.3 million for the three months ended June 30, 2023.

This decrease of $1.3 million, or 7.3%, was primarily due to a decrease in net interest income of $1.3 million, or 2.7%, an increase in non-interest expense of $1.7 million, or 4.9% and an increase in provision for credit losses on unfunded commitments of $1.0 million, or 62.5%, partially offset by an increase in non-interest income of $2.1 million, or 26.6%, and a decrease in income tax expense of $627,000, or 14.0%.

Net income was $30.4 million for the six months ended June 30, 2024 compared to $38.8 million for the six months ended June 30, 2023.

This decrease of $8.4 million, or 21.6%, was primarily due to a decrease in net interest income of $9.7 million, or 9.6%, an increase in non-interest expense of $1.7 million, or 2.4%, and an increase in provision for credit losses on loans and unfunded commitments of $968,000, or 102.4%.

The provision for credit losses on loans decreased $1.0 million, while the provision for credit losses on unfunded commitments increased $2.0 million.

These items were partially offset by a decrease in income tax expense of $3.0 million, or 29.6%, and an increase in non-interest income of $981,000, or 6.3%.

Total stockholders’ equity increased $40.3 million, from $571.8 million at December 31, 2023 to $612.1 million at September 30, 2024.

Accumulated other comprehensive loss (a reduction in equity) decreased $13.1 million during the nine months ended September 30, 2024, primarily due to increases in the fair value of available-for-sale investment securities and the fair value of cash flow hedges, as a result of decreased market interest rates.

Stockholders’ equity also increased due to net income of $46.9 million for the nine months ended September 30, 2024 and rose by $6.9 million due to stock option exercises.

Partially offsetting these changes were repurchases of the Company’s common stock totaling $12.5 million and dividends declared on common stock of $14.0 million.

Results of Operations and Comparison for the Three and Nine Months Ended September 30, 2024 and 2023

Net income was $16.5 million for the three months ended September 30, 2024 compared to $15.9 million for the three months ended September 30, 2023.

This increase of $611,000, or 3.8%, was primarily due to a decrease in non-interest expense of $1.8 million, or 5.2%, an increase in net interest income of $1.2 million, or 2.6%, and a decrease in income tax expense of $726,000, or 16.7%, partially offset by an increase in provision for credit losses on loans and unfunded commitments of $2.3 million, or 195.1%, and a decrease in non-interest income of $860,000, or 11.0%.

Net income was $46.9 million for the nine months ended September 30, 2024 compared to $54.7 million for the nine months ended September 30, 2023.

This decrease of $7.8 million, or 14.2%, was primarily due to a decrease in net interest income of $8.5 million, or 5.7%, and an increase in provision for credit losses on loans and unfunded commitments of $3.3 million, or 154.2%, partially offset by a decrease in income tax expense of $3.7 million, or 25.7%, a decrease in non-interest expense of $190,000, or 0.2%, and an increase in non-interest income of $121,000, or 0.5%.

Total Interest Income

Total interest income increased $7.3 million, or 9.9%, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

The increase was due to a $6.9 million increase in interest income on loans and a $456,000 increase in interest income on investment securities and other interest-earning assets.

Interest income from loans increased during the three months ended June 30, 2024 compared to the same period in 2023 due to higher average balances and higher average rates of interest.

Interest income from investment securities and other interest-earning assets increased during the three months ended June 30, 2024 compared to the same period in 2023 due to higher average rates of interest.

Total interest income increased $13.2 million, or 9.1%, during the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

The increase was due to a $12.5 million increase in interest income on loans and a $745,000 increase in interest income on investment securities and other interest-earning assets.

Interest income from loans increased during the six months ended June 30,

2024 compared to the same period in 2023 due to higher average balances and higher average rates of interest.

Interest income from investment securities and other interest-earning assets increased during the six months ended June 30, 2024 compared to the same period in 2023 due to higher average rates of interest, partially offset by slightly lower average balances of investment securities.

Total interest income increased $8.5 million, or 11.3%, during the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

The increase was due to a $7.5 million, or 11.0%, increase in interest income on loans and a $977,000, or 15.3%, increase in interest income on investment securities and other interest-earning assets.

Interest income from loans and from investment securities and other interest-earning assets increased during the three months ended September 30, 2024 compared to the same period in 2023 due to higher average balances and higher average rates of interest.

Total interest income increased $21.8 million, or 9.9%, during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

The increase was due to a $20.0 million, or 9.9%, increase in interest income on loans and a $1.7 million, or 9.3%, increase in interest income on investment securities and other interest-earning assets.

Interest income from loans and from investment securities and other interest-earning assets increased during the nine months ended September 30, 2024 compared to the same period in 2023 due to higher average balances and higher average rates of interest.

Interest Income – Loans

During the three months ended June 30, 2024 compared to the three months ended June 30, 2023, interest income on loans increased $6.0 million due to higher average interest rates on loans.

The average yield on loans increased from 5.84% during the three months ended June 30, 2023, to 6.37% during the three months ended June 30, 2024.

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

Interest income on loans also increased $834,000 as the result of higher average loan balances, which increased from $4.63 billion during the three months ended June 30, 2023, to $4.69 billion during the three months ended June 30, 2024.

During the three months ended September 30, 2024 compared to the three months ended September 30, 2023, interest income on loans increased $5.9 million due to higher average interest rates on loans.

The average yield on loans increased from 5.92% during the three months ended September 30, 2023, to 6.44% during the three months ended September 30, 2024.

This increase was primarily due to the repricing of floating rate loans as market interest rates increased in 2023 and the addition of fixed rate loans at higher rates in 2024.

Interest income on loans also increased $1.6 million as the result of higher average loan balances, which increased from $4.62 billion during the three months ended September 30, 2023, to $4.72 billion during the three months ended September 30, 2024.

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

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

During the six months ended June 30, 2024 compared to the six months ended June 30, 2023, interest income on loans increased $10.8 million due to higher average interest rates on loans.

The average yield on loans increased from 5.80% during the six months ended June 30, 2023, to 6.25% during the six months ended June 30, 2024.

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

Interest income on loans also increased $1.7 million as the result of higher average loan balances, which increased from $4.62 billion during the six months ended June 30, 2023, to $4.68 billion during the six months ended June 30, 2024.

Average loan balances increased in the other residential and commercial real estate categories, partially offset by a decrease in average loan balances in the construction and commercial business categories.

As construction loans were completed, they were either paid off or moved into the other residential or commercial real estate categories.

During the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, interest income on loans increased $16.7 million due to higher average interest rates on loans.

The average yield on loans increased from 5.84% during the nine months ended September 30, 2023, to 6.31% during the nine months ended September 30, 2024.

This increase was due to the same reasons noted above.

Interest income on loans also increased $3.3 million as the result of higher average loan balances, which increased from $4.62 billion during the nine months ended September 30, 2023, to $4.69 billion during the nine months ended September 30, 2024.

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

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This has 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 June 30, 2024 and 2023.

The Company recorded $4.1 million of interest income related to the swap in the six months ended June 30, 2024 and $4.0 million of interest income related to the swap in the six months ended June 30, 2023.

At June 30, 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.

The Company recorded interest income related to the interest rate swap of $2.0 million in each of the three months ended September 30, 2024 and 2023.

The Company recorded $6.1 million of interest income related to the swap in both the nine months ended September 30, 2024 and the nine months ended September 30, 2023.

At September 30, 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.

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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.

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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 of loan interest income related to this swap transaction of $1.9 million in the six months ended June 30, 2024.

The Company recorded a reduction of loan interest income related to this swap transaction of $2.6 million and $4.7 million, respectively, in the three and six months ended June 30, 2023.

As this interest rate swap reached its contractual termination date of March 1, 2024, there was no impact from this swap in the three months ended June 30, 2024, and there will be no further interest income impact related to this swap.

The Company recorded a reduction of loan interest income related to this swap transaction of $1.9 million in the nine months ended September 30, 2024.

The Company recorded a reduction of loan interest income related to this swap transaction of $2.8 million and $7.5 million, respectively, in the three and nine months ended September 30, 2023.

As this interest rate swap reached its contractual termination date of March 1, 2024, there was no impact from this swap in the three months ended September 30, 2024, and there will be no further interest income impact 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.

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

If the floating rate of interest exceeds the fixed rate of interest, the Company pays net settlements to the counterparty and records those net

payments as a reduction of interest income on loans.

The Company recorded a reduction of loan interest income related to these swap transactions of $2.8 million in the three months ended June 30, 2024, compared to a $1.7 million reduction of interest income in the three months ended June 30, 2023.

The Company recorded a reduction of loan interest income related to these swap transactions of $5.5 million in the six months ended June 30, 2024, compared to a $1.7 million reduction of interest income in the the six months ended June 30, 2023.

At June 30, 2024, the USD-Prime rate was 8.50% and the one-month USD-SOFR OIS rate was 5.33643%.

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 in both the three months ended September 30, 2024 and the three months ended September 30, 2023.

The Company recorded a reduction of loan interest income related to these swap transactions of $8.3 million in the nine months ended September 30, 2024, compared to a $4.4 million reduction of interest income in the nine months ended September 30, 2023.

At September 30, 2024, the USD-Prime rate was 8.00% and the one-month USD-SOFR OIS rate was 5.16334%.

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 increased $364,000 in the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Interest income increased $383,000 as a result of higher average interest rates from 2.86% during the three months ended June 30, 2023, to 3.09% during the three month period ended June 30, 2024.

Partially offsetting that increase, interest income decreased $19,000 as a result of a decrease in average balances from $699.0 million during the three months ended June 30, 2023, to $696.2 million during the three months ended June 30, 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 on investments increased $371,000 in the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Interest income increased $663,000 as a result of higher average interest rates from 2.86% during the six months ended June 30, 2023, to 3.05% during the six month period ended June 30, 2024.

Partially offsetting that increase, interest income decreased $292,000 as a result of a decrease in average balances from $702.9 million during the six months ended June 30, 2023, to $683.0 million during the six months ended June 30, 2024.

Average balances of securities decreased primarily due to normal monthly payments received related to the portfolio of U.S.

Interest income on investments increased $1.1 million in the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

Interest income increased $614,000 as a result of an increase in average balances from $678.6 million during the three months ended September 30, 2023, to $758.8 million during the three months ended September 30, 2024.

Average balances of securities increased primarily due to investment securities purchases earlier in 2024, partially offset by normal monthly payments received related to the portfolio of U.S.

Government agency mortgage-backed securities and collateralized mortgage obligations.

Proceeds from repayment of securities were generally used to fund loan growth and, to a limited extent, purchase additional securities.

Interest income on other interest-earning assets increased $92,000 in the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Interest income increased $88,000 as a result of higher average interest rates from 4.93% during the three months ended June 30, 2023, to 5.31% during the three months ended June 30, 2024.

Interest income increased $4,000 as a result of a slight increase in average balances from $97.0 million during the three months ended June 30, 2023, to $97.3 million during the three months ended June 30, 2024.

Interest income on other interest-earning assets increased $374,000 in the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Interest income increased $263,000 as a result of higher average interest rates from 4.73% during the six months ended June 30, 2023, to 5.26% during the six months ended June 30, 2024.

Interest income increased $111,000 as a result of an increase in average balances from $94.4 million during the six months ended June 30, 2023, to $98.9 million during the six months ended June 30, 2024.

Interest income on investments also increased $460,000 as a result of higher average interest rates from 2.93% during the three months ended September 30, 2023, to 3.19% during the three month period ended September 30, 2024.

The securities purchased in 2024 had higher interest rates than the rest of the portfolio.

Interest income on investments increased $1.4 million in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

Interest income increased $1.1 million as a result of higher average interest rates, which rose from 2.89% during the nine months ended September 30, 2023, to 3.10% during the nine month period ended September 30, 2024.

Interest income on investments also increased $304,000 as a result of an increase in average balances from $694.7 million during the nine months ended September 30, 2023, to $708.4 million during the nine months ended September 30, 2024.

Average balances of securities increased due to the same reasons noted above.

Interest income on other interest-earning assets decreased $97,000 in the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

Interest income decreased $109,000 as a result of a decrease in average balances from $104.5 million during the three months ended September 30, 2023, to $96.6 million during the three months ended September 30, 2024.

Partially offsetting this decrease, interest income increased $12,000 as a result of higher average interest rates, which rose from 5.22% during the three months ended September 30, 2023, to 5.27% during the three months ended September 30, 2024.

Interest income on other interest-earning assets increased $277,000 in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

Interest income increased $265,000 as a result of higher average interest rates, which rose from 4.91% during the nine months ended September 30, 2023, to 5.26% during the nine months ended September 30, 2024.

Interest income increased $12,000 as a result of an increase in average balances from $97.8 million during the nine months ended September 30, 2023, to $98.2 million during the nine months ended September 30, 2024.

Total Interest Expense

Total interest expense increased $8.6 million, or 33.9%, during the three months ended June 30, 2024, when compared with the three months ended June 30, 2023, due to an increase in interest expense on deposits of $6.0 million, or 27.5%, an increase in interest expense on short-term borrowings of $2.4 million, or 125.1%, an increase in interest expense on securities sold under reverse repurchase agreements of $173,000, or 78.3%, and an increase in interest expense on subordinated debentures issued to capital trusts of $28,000, or 6.6%.

Total interest expense increased $22.9 million, or 52.4%, during the six months ended June 30, 2024, when compared with the six months ended June 30, 2023, due to an increase in interest expense on deposits of $19.0 million, or 52.1%, an increase in interest expense on short-term borrowings of $3.7 million, or 99.2%, an increase in interest expense on securities sold under reverse repurchase agreements of $164,000, or 29.1%, and an increase in interest expense on subordinated debentures issued to capital trusts of $89,000, or 10.9%.

Total interest expense increased $7.3 million, or 25.5%, during the three months ended September 30, 2024, when compared with the three months ended September 30, 2023, due to an increase in interest expense on short-term borrowings of $4.0 million, or 276.0%, an increase in interest expense on deposits of $3.3 million, or 12.9%, an increase in interest expense on securities sold under reverse repurchase agreements of $77,000, or 25.0%, and an increase in interest expense on subordinated debentures issued to capital trusts of $2,000, or 0.4%.

Total interest expense increased $30.2 million, or 41.8%, during the nine months ended September 30, 2024, when compared with the nine months ended September 30, 2023, due to an increase in interest expense on deposits of $22.2 million, or 36.1%, an increase in interest expense on short-term borrowings of $7.6 million, or 148.4%, an increase in interest expense on securities sold under reverse repurchase agreements of $241,000, or 27.7%, and an increase in interest expense on subordinated debentures issued to capital trusts of $91,000, or 7.1%.

Interest Expense – Deposits

Interest expense on demand and savings deposits increased $2.8 million due to average rates of interest that increased from 1.25% in the three months ended June 30, 2023 to 1.76% in the three months ended June 30, 2024.

Interest rates paid on demand deposits were

higher in the 2024 period due to significant increases in overall market rates and competition for deposits.

Interest expense on demand deposits increased $127,000, due to an increase in average balances from $2.19 billion during the three months ended June 30, 2023, to $2.23 billion during the three months ended June 30, 2024.

Interest expense on demand and savings deposits increased $1.9 million due to average rates of interest that increased from 1.46% in the three months ended September 30, 2023 to 1.80% in the three months ended September 30, 2024.

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

Interest expense on demand deposits increased $55,000, due to an increase in average balances from $2.20 billion during the three months ended September 30, 2023, to $2.21 billion during the three months ended September 30, 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 demand and savings deposits increased $7.9 million due to average rates of interest that increased from 1.03% in the six months ended June 30, 2023 to 1.74% in the six months ended June 30, 2024.

Interest expense on demand and savings deposits increased $9.7 million due to average rates of interest that increased from 1.18% in the nine months ended September 30, 2023 to 1.76% in the nine months ended September 30, 2024.

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

Interest expense on demand deposits increased $208,000, due to an increase in average balances from $2.19 billion during the six months ended June 30, 2023, to $2.23 billion during the six months ended June 30, 2024.

Interest expense on demand deposits increased $281,000, due to an increase in average balances from $2.19 billion during the nine months ended September 30, 2023, to $2.22 billion during the nine months ended September 30, 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 $2.6 million as a result of an increase in average rates of interest from 2.85% during the three months ended June 30, 2023, to 4.08% during the three months ended June 30, 2024.

Partially offsetting this increase, interest expense on time deposits decreased $575,000 due to a decrease in average balances of time deposits from $987.5 million during the three months ended June 30, 2023 to $894.5 million in the three months ended June 30, 2024.

Interest expense on time deposits increased $754,000 as a result of an increase in average rates of interest from 3.37% during the three months ended September 30, 2023, to 4.02% during the three months ended September 30, 2024.

Partially offsetting this increase, interest expense on time deposits decreased $540,000 due to a decrease in average balances of time deposits from $996.2 million during the three months ended September 30, 2023 to $856.4 million in the three months ended September 30, 2024.

A large portion of the Company’s certificate of deposit portfolio matures within six to twelve months and therefore reprices fairly quickly;

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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 2024.

Interest expense on time deposits increased $7.0 million as a result of an increase in average rates of interest from 2.46% during the six months ended June 30, 2023, to 4.00% during the six months ended June 30, 2024.

Partially offsetting this increase, interest expense on time deposits decreased $948,000 due to a decrease in average balances of time deposits from $1.00 billion during the six months ended June 30, 2023 to $916.1 million in the six months ended June 30, 2024.

Interest expense on time deposits increased $8.1 million as a result of an increase in average rates of interest from 2.76% during the nine months ended September 30, 2023, to 4.01% during the nine months ended September 30, 2024.

Partially offsetting this increase, interest expense on time deposits decreased $1.9 million due to a decrease in average balances of time deposits from $999.9 million during the nine months ended September 30, 2023 to $896.1 million in the nine months ended September 30, 2024.

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.

Interest expense on brokered deposits increased $571,000, due to an increase in average balances from $637.6 million during the three months ended June 30, 2023 to $683.3 million during the three months ended June 30, 2024.

Interest expense on brokered deposits increased $441,000 due to average rates of interest that increased from 4.97% in the three months ended June 30, 2023 to 5.25% in the three months ended June 30, 2024.

Interest expense on brokered deposits increased $970,000, due to an increase in average balances from $669.8 million during the three months ended September 30, 2023 to $745.4 million during the three months ended September 30, 2024.

Interest expense on brokered deposits increased $103,000 due to average rates of interest that increased from 5.16% in the three months ended September 30, 2023 to 5.23% in the three months ended September 30, 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 $3.6 million, due to an increase in average balances from $547.7 million during the six months ended June 30, 2023 to $686.1 million during the six months ended June 30, 2024.

Interest expense on brokered deposits increased $1.3 million due to average rates of interest that increased from 4.79% in the six months ended June 30, 2023 to 5.25% in the six months ended June 30, 2024.

Interest expense on brokered deposits increased $4.5 million, due to an increase in average balances from $588.9 million during the nine months ended September 30, 2023 to $706.0 million during the nine months ended September 30, 2024.

Interest expense on brokered deposits increased $1.4 million due to average rates of interest that increased from 4.93% in the nine months ended September 30, 2023 to 5.24% in the nine months ended September 30, 2024.

As noted above, brokered deposits added during 2023 and 2024 were at higher market rates than brokered deposits previously issued.

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Subordinated Debentures Issued to Capital Trusts and Subordinated Notes

FHLBank term advances were not utilized during the three and six months ended June 30, 2024 and 2023.

FHLBank term advances were not utilized during the three and nine months ended September 30, 2024 and 2023.

Interest expense on reverse repurchase agreements increased $104,000 due to higher average balances.

The average balance of repurchase agreements increased $21.7 million from $55.3 million in the three months ended June 30, 2023 to $77.0 million in the three months ended June 30, 2024, due to changes in customers’ desire for this product, which can fluctuate.

Interest expense on reverse repurchase agreements increased $72,000 due to higher average interest rates during the three months ended June 30, 2024 when compared to the three months ended June 30, 2023.

The average rate of interest was 1.60% for the three months ended June 30, 2023 compared to 2.06% for the three months ended June 30, 2024, due to higher market interest rates.

Interest expense on reverse repurchase agreements increased $252,000 due to higher average interest rates during the six months ended June 30, 2024 when compared to the six months ended June 30, 2023.

The average rate of interest was 1.12% for the six months ended June 30, 2023 compared to 1.93% for the six months ended June 30, 2024, due to higher market interest rates.

The average balance of repurchase agreements increased $20.4 million from $56.2 million in the three months ended September 30, 2023 to $76.6 million in the three months ended September 30, 2024, due to changes in customers’ desire for this product, which can fluctuate.

Partially offsetting this increase, interest expense on reverse repurchase agreements decreased $27,000 due to lower average interest rates during the three months ended September 30, 2024 when compared to the three months ended September 30, 2023.

The average rate of interest was 2.18% for the three months ended September 30, 2023 compared to 2.00% for the three months ended September 30, 2024, due to lower market interest rates.

Interest expense on reverse repurchase agreements increased $326,000 due to higher average interest rates during the nine months ended September 30, 2024 when compared to the nine months ended September 30, 2023.

The average rate of interest was 1.36% for the nine months ended September 30, 2023 compared to 1.95% for the nine months ended September 30, 2024, due to higher market interest rates.

Partially offsetting this increase, interest expense on reverse repurchase agreements decreased $85,000 due to lower average balances.

The average balance of repurchase agreements decreased $25.2 million from $100.9 million in the six months ended June 30, 2023 to $75.7 million in the six months ended June 30, 2024, due to changes in customers’ desire for this product.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank and BTFP borrowings from FRBSTL) and other interest-bearing liabilities increased $2.5 million during the three months ended June 30, 2024 when compared to the three months ended June 30, 2023 due to higher average balances.

The average balance of short-term borrowings and other interest-bearing liabilities increased $190.7 million from $148.6 million in the three months ended June 30, 2023 to $339.3 million in the three months ended June 30, 2024, primarily due to changes in the Company’s deposits and the mix of funding, which can fluctuate.

Partially offsetting this increase, interest expense on short-term borrowings (including overnight borrowings from the FHLBank and BTFP borrowings from FRBSTL) and other interest-bearing liabilities decreased $22,000 during the three months ended June 30, 2024 when compared to the three months ended June 30, 2023 due to lower average rates of interest.

The average rate of interest was 5.24% for the three months ended June 30, 2023, compared to 5.18% for the three months ended June 30, 2024.

The average balance of repurchase agreements decreased $9.8 million from $85.8 million in the nine months ended September 30, 2023 to $76.0 million in the nine months ended September 30, 2024, due to changes in customers’ desire for this product.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank and BTFP borrowings from FRBSTL) and other interest-bearing liabilities increased $4.0 million during the three months ended September 30, 2024 when compared to the three months ended September 30, 2023 due to higher average balances.

The average balance of short-term borrowings and other interest-bearing liabilities increased $304.9 million from $103.8 million in the three months ended September 30, 2023 to $408.7 million in the three months ended September 30, 2024, primarily due to decreases in the Company’s deposits, which caused a change in the mix of funding, which can fluctuate, as these amounts were used to fund increases in loans and investment securities.

Partially offsetting this increase, interest expense on short-term borrowings (including overnight borrowings from the FHLBank and BTFP borrowings from FRBSTL) and other interest-bearing liabilities decreased $62,000 during the three months ended September 30, 2024 when compared to the three months ended September 30, 2023 due to lower average rates of interest.

The average rate of interest was 5.47% for the three months ended September 30, 2023, compared to 5.24% for the three months ended September 30, 2024.

The decrease in the average rate of interest was primarily due to the 2024 period including the BTFP borrowing, which had a lower rate of interest than the FHLB overnight borrowings.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank and BTFP borrowings from FRBSTL) and other interest-bearing liabilities increased $3.6 million during the six months ended June 30, 2024 when compared to the six months ended June 30, 2023 due to higher average balances.

The average balance of short-term borrowings and other interest-bearing liabilities increased $140.2 million from $150.2 million in the six months ended June 30, 2023 to $290.4 million in the six months ended June 30, 2024, primarily due to changes in the Company’s deposits and the mix of funding.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank and BTFP borrowings from FRBSTL) and other interest-bearing liabilities increased $106,000 during the six months ended June 30, 2024 when compared to the six months ended June 30, 2023 due to higher average rates of interest.

The average rate of interest was 5.00% for the six months ended June 30, 2023, compared to 5.14% for the six months ended June 30, 2024.

During the three months ended June 30, 2024, compared to the three months ended June 30, 2023, interest expense on subordinated debentures issued to capital trusts increased $28,000 due to higher average interest rates.

The average interest rate was 7.08% in the three months ended June 30, 2024 compared to 6.63% in the three months ended June 30, 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 7.19% at June 30, 2024.

Interest rates on borrowings also decreased in the latter half of September 2024 after the fed funds rate was cut by 50 basis points.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank and BTFP borrowings from FRBSTL) and other interest-bearing liabilities increased $7.6 million during the nine months ended September 30, 2024 when compared to the nine months ended September 30, 2023 due to higher average balances.

The average balance of short-term borrowings and other interest-bearing liabilities increased $195.6 million from $134.6 million in the nine months ended September 30, 2023 to $330.2 million in the nine months ended September 30, 2024, primarily due to the same reasons discussed above.

Interest expense on short-term borrowings (including overnight borrowings from the FHLBank and BTFP borrowings from FRBSTL) and other interest-bearing liabilities increased $60,000 during the nine months ended September 30, 2024 when compared to the nine months ended September 30, 2023 due to higher average rates of interest.

The average rate of interest was 5.12% for the nine months ended September 30, 2023, compared to 5.18% for the nine months ended September 30, 2024.

During the three months ended September 30, 2024, compared to the three months ended September 30, 2023, interest expense on subordinated debentures issued to capital trusts increased $2,000 due to higher average interest rates.

The average interest rate was 7.04% in the three months ended September 30, 2024 compared to 7.00% in the three months ended September 30, 2023.

The subordinated debentures are variable-rate debentures, which bear interest at an average rate of three-month SOFR (originally LIBOR), plus 1.60%, adjusted quarterly, which was 7.11% at September 30, 2024.

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

During the six months ended June 30, 2024, compared to the six months ended June 30, 2023, interest expense on subordinated debentures issued to capital trusts increased $89,000 due to higher average interest rates.

The average interest rate was 7.08% in the six months ended June 30, 2024 compared to 6.41% in the six months ended June 30, 2023.

During the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, interest expense on subordinated debentures issued to capital trusts increased $91,000 due to higher average interest rates.

The average interest rate was 7.07% in the nine months ended September 30, 2024 compared to 6.61% in the nine months ended September 30, 2023.

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

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

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

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

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

There was no change in the interest expense on subordinated notes during the three or six months ended June 30, 2024, compared to the three and six months ended June 30, 2023.

There was no change in the interest expense on subordinated notes during the three or nine months ended September 30, 2024, compared to the three and nine months ended September 30, 2023.

Net Interest Income

Net interest income for the three months ended June 30, 2024 decreased $1.3 million to $46.8 million compared to $48.1 million for the three months ended June 30, 2023.

Net interest margin was 3.43% in the three months ended June 30, 2024, compared to 3.56% in the three months ended June 30, 2023, a decrease of 13 basis points, or 3.7%.

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, subordinated debentures issued to capital trust and securities sold under reverse repurchase agreements with customers.

Net interest income for the six months ended June 30, 2024 decreased $9.7 million to $91.6 million compared to $101.3 million for the six months ended June 30, 2023.

Net interest margin was 3.38% in the six months ended June 30, 2024, compared to 3.77% in the six months ended June 30, 2023, a decrease of 39 basis points, or 10.3%.

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

The Company’s overall average interest rate spread decreased 19 basis points, or 6.6%, from 2.96% during the three months ended June 30, 2023 to 2.77% during the three months ended June 30, 2024.

Net interest income for the three months ended September 30, 2024 increased $1.3 million to $48.0 million compared to $46.7 million for the three months ended September 30, 2023.

Net interest margin was 3.42% in the three months ended September 30, 2024, compared to 3.43% in the three months ended September 30, 2023, a decrease of one basis point, or 0.3%.

The Company experienced increases in interest income on both loans and investment securities and 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, 2024 decreased $8.5 million to $139.6 million compared to $148.1 million for the nine months ended September 30, 2023.

Net interest margin was 3.39% in the nine months ended September 30, 2024, compared to 3.66% in the nine months ended September 30, 2023, a decrease of 27 basis points, or 7.4%.

The Company’s overall average interest rate spread decreased five basis points, or 1.8%, from 2.79% during the three months ended September 30, 2023 to 2.74% during the three months ended September 30, 2024.

The decrease was due to a 50 basis point increase in the weighted average rate paid on interest-bearing liabilities, partially offset by a 45 basis point increase in the weighted average yield earned on interest-earning assets.

In comparing the two periods, the yield on loans increased 53 basis points, the yield on investment securities increased 23 basis points and the yield on other interest-earning assets increased 38 basis points.

The rate paid on deposits increased 64 basis points, the rate paid on reverse repurchase agreements increased 46 basis points, the rate paid on short-term borrowings and other interest-bearing liabilities decreased 6 basis points and the rate paid on subordinated debentures issued to capital trust increased 45 basis points.

In comparing the two periods, the yield on loans increased 52 basis points, the yield on investment securities increased 26 basis points and the yield on other interest-earning assets increased five basis points.

The rate paid on deposits increased 38 basis points, the rate paid on reverse repurchase agreements decreased 18 basis points, the rate paid on short-term borrowings and other interest-bearing liabilities decreased 23 basis points and the rate paid on subordinated debentures issued to capital trust increased four 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.

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

Overall competition for deposits has remained elevated in 2024 and market interest rates have remained higher in 2024.

The Company’s overall average interest rate spread decreased 53 basis points, or 16.4%, from 3.24% during the six months ended June 30, 2023 to 2.71% during the six months ended June 30, 2024.

The decrease was due to a 96 basis point increase in the weighted average rate paid on interest-bearing liabilities, partially offset by a 43 basis point increase in the weighted average yield earned on interest-earning assets.

Overall competition for deposits has remained elevated in 2024 and market interest rates have been higher in 2024.

The Company’s overall average interest rate spread decreased 37 basis points, or 11.9%, from 3.09% during the nine months ended September 30, 2023 to 2.72% during the nine months ended September 30, 2024.

The decrease was due to an 80 basis point increase in the weighted average rate paid on interest-bearing liabilities, partially offset by a 44 basis point increase in the weighted average yield earned on interest-earning assets.

In comparing the two periods, the yield on loans increased 47 basis points, the yield on investment securities increased 21 basis points and the yield on other interest-earning assets increased 35 basis points.

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

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

anticipated collectability of the portfolio.

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

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

During the three months ended June 30, 2024 and June 30, 2023, the Company did not record a provision expense on its portfolio of outstanding loans.

During the six months ended June 30, 2024, the Company recorded provision expense of $500,000 on its portfolio of outstanding loans.

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

Total net recoveries were $168,000 for the three months ended June 30, 2024, compared to net charge-offs of $135,000 in the three months ended June 30, 2023.

Total net recoveries were $85,000 for the six months ended June 30, 2024, compared to net charge-offs of $128,000 in the six months ended June 30, 2023.

The provision for losses on unfunded commitments for the three months ended June 30, 2024 was a negative provision of $607,000, compared to a negative provision of $1.6 million for the three months ended June 30, 2023.

The provision for losses on unfunded commitments for the six months ended June 30, 2024 was a negative provision of $477,000, compared to a negative provision of $2.4 million for the six months ended June 30, 2023.

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

Management determines which loans are non-homogeneous or 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, 2024, the Company recorded provision expense of $1.2 million on its portfolio of outstanding loans.

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

During the nine months ended September 30, 2024, the Company recorded provision expense of $1.7 million on its portfolio of outstanding loans, compared to $1.5 million in the nine months ended September 30, 2023.

Total net charge-offs were $1.5 million for the three months ended September 30, 2024, compared to net charge-offs of $99,000 in the three months ended September 30, 2023.

Total net charge-offs were $1.5 million for the nine months ended September 30, 2024, compared to net charge-offs of $227,000 in the nine months ended September 30, 2023.

The provision for losses on unfunded commitments for the three months ended September 30, 2024 was a negative provision of $63,000, compared to a negative provision of $1.2 million for the three months ended September 30, 2023.

The provision for losses on unfunded commitments for the nine months ended September 30, 2024 was a negative provision of $540,000, compared to a negative provision of $3.6 million for the nine months ended September 30, 2023.

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

The Bank’s allowance for credit losses as a percentage of total loans was 1.39% at both June 30, 2024 and December 31, 2023.

Management considers the allowance for credit losses adequate to cover losses inherent in the Bank’s loan portfolio at June 30, 2024, based on recent reviews of the Bank’s loan portfolio and current economic conditions.

The Bank’s allowance for credit losses as a percentage of total loans was 1.36% at September 30, 2024, compared to 1.39% at December 31, 2023.

Management considers the allowance for credit losses adequate to cover losses inherent in the Bank’s loan portfolio at September 30, 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 if management’s assessment of the loan portfolio were to change, additional loan loss provisions could be required, thereby adversely affecting the Company’s future results of operations and financial condition.

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As a result of changes in 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 June 30, 2024, non-performing assets were $20.4 million, an increase of $8.6 million from $11.8 million at December 31, 2023.

Non-performing assets as a percentage of total assets were 0.34% at June 30, 2024, compared to 0.20% at December 31, 2023.

One loan relationship, totaling $9.3 million, was transferred from non-performing loans to foreclosed assets held for sale in the three months ended June 30, 2024.

Compared to December 31, 2023, non-performing loans decreased $765,000, to $11.0 million at June 30, 2024.

The majority of this decrease was in the non-performing commercial real estate loans category, which decreased $788,000 from December 31, 2023.

Compared to December 31, 2023, foreclosed assets increased $9.4 million to $9.4 million at June 30, 2024.

Nearly all of this increase was in the other residential (multi-family) loans category, which increased $9.3 million from December 31, 2023.

At September 30, 2024, non-performing assets were $7.7 million, a decrease of $4.1 million from $11.8 million at December 31, 2023.

Non-performing assets as a percentage of total assets were 0.13% at September 30, 2024, compared to 0.20% at December 31, 2023.

One other residential loan relationship, totaling $9.3 million, was transferred from non-performing loans to foreclosed assets held for sale in the three months ended June 30, 2024 and was sold for a gain during the three months ended September 30, 2024.

Another non-performing commercial real estate loan totaling $2.4 million was also resolved with no loss in the three months ended September 30, 2024.

Compared to December 31, 2023, non-performing loans decreased $4.3 million, to $7.5 million at September 30, 2024.

The majority of this decrease was in the non-performing commercial real estate loans category, which decreased $4.4 million from December 31, 2023.

Compared to December 31, 2023, foreclosed assets increased $240,000 to $263,000 at September 30, 2024.

Non-performing Loans .

Activity in the non-performing loans category during the six months ended June 30, 2024 was as follows:

Activity in the non-performing loans category during the nine months ended September 30, 2024 was as follows:

Repossessions

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Total non-performing loans

At June 30, 2024, the non-performing commercial real estate category included five loans, three of which were added during the current period.

At September 30, 2024, the non-performing commercial real estate category included three loans, one of which was added during 2024.

The largest relationship in the category, which totaled $6.0 million, or 98.6% of the total category, was added to non-performing loans during the second quarter of 2023 and is collateralized by an office building in Missouri.

The balance of this relationship was reduced by payments of $883,000 during the six months ended June 30, 2024.

Another loan, totaling $2.4 million, which was a purchased participation loan originally obtained through an FDIC-assisted acquisition, is collateralized by a low-income assisted living facility in Wisconsin.

During the first quarter of 2024, the Company purchased the lead participant’s $220,000 interest in this note, resulting in a 66% ownership interest.

The other residential (multi-family) category of non-performing loans consisted of one student housing project in Texas, which was added to this category during the first quarter of 2024 and transferred to foreclosed assets during the three months ended June 30, 2024.

The non-performing one- to four-family residential category included three loans.

The largest relationship in the category totaled $593,000, or 51.7% of the category, and was added in the current period.

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

The balance of this relationship was reduced by a charge-off of $1.2 million during the three months ended September 30, 2024.

This asset was foreclosed upon in October 2024 and has been moved to foreclosed assets.

Another loan, totaling $2.4 million, which was a purchased participation loan originally obtained through an FDIC-assisted acquisition, was collateralized by a low-income assisted living facility in Wisconsin.

During the third quarter of 2024, the Company initiated foreclosure proceedings on this collateral through a sheriff’s sale.

The Company was outbid at the sale by another party and the loan was paid in full.

The non-performing land development category consisted of one loan added during the third quarter of 2024, which totaled $553,000 and is collateralized by improved commercial land in the Omaha, Nebraska area.

The non-performing one- to four-family residential category included four loans.

The largest relationship in the category totaled $525,000, or 88.6% of the category, and was added in the second quarter of 2024.

The non-performing consumer category included five loans.

The non-performing other residential category had one loan which was added in the first quarter of 2024 and was later transferred to foreclosed assets and subsequently sold.

Potential Problem Loans.

Potential problem loans decreased $1.8 million, to $5.6 million at June 30, 2024 from $7.4 million at December 31, 2023.

The decrease during the period was primarily due to a $7.2 million loan in the other residential (multi-family) category that paid off during the period, partially offset by the addition of one loan relationship totaling $4.9 million ($4.4 million in the commercial real estate category and $498,000 in the consumer category) during the six months ended June 30, 2024.

Potential problem loans decreased $1.4 million, to $6.0 million at September 30, 2024 from $7.4 million at December 31, 2023.

The decrease during the period was primarily due to a $7.2 million loan in the other residential (multi-family) category that paid off during the period, partially offset by the addition of one loan relationship totaling $5.0 million ($4.4 million in the commercial real estate category and $598,000 in the consumer category) during the second quarter of 2024.

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 category during the six months ended June 30, 2024 was as follows:

Activity in the potential problem loans category during the nine months ended September 30, 2024 was as follows:

Repossessions

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Total potential problem loans

At June 30, 2024, the commercial real estate category of potential problem loans included three loans, all of which are part of one relationship and were added during the current period.

At September 30, 2024, the commercial real estate category of potential problem loans included three loans, all of which are part of one relationship and were added in the second quarter of 2024.

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

The borrower’s business cash flow was negatively impacted by a labor shortage and a decrease in Medicaid reimbursement during 2022-2023.

Monthly payments were made prior to and continued to be made after the transfer to this category.

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

Monthly payments were timely made prior to the transfer to this category and have continued to be paid.

The one- to four-family residential category of potential problem loans included seven loans, three of which were added during the third quarter of 2024 and two of which were added during the second quarter of 2024.

The largest relationship in this category totaled $154,000, or 23.0% of the total category.

The commercial business category of potential problem loans included two loans.

The largest relationship in this category totaled $200,000, or 96.5% of the total category, and was added during the current period.

The consumer category of potential problem loans included 11 loans, nine of which were added during the current period, including one home equity loan totaling $498,000 that is related to the nursing care facility relationship noted above.

The decrease in the other residential (multi-family) category of potential problem loans included the payment in full in April 2024 of one $7.2 million loan relationship that was collateralized by an apartment and retail project in Oklahoma.

The largest relationship in this category totaled $191,000, or 99.0% of the total category, and was added during the second quarter of 2024.

The consumer category of potential problem loans included 13 loans, 12 of which were added at various times throughout 2024, including one home equity loan totaling $598,000 related to the nursing care facility relationship noted above.

The decrease in the other residential (multi-family) category of potential problem loans included the payment in full of one $7.2 million loan relationship that was collateralized by an apartment and retail project in Oklahoma.

Other Real Estate Owned and Repossessions.

All of the total $9.4 million of other real estate owned and repossessions at June 30, 2024 were acquired through foreclosure.

Activity in foreclosed assets and repossessions during the six months ended June 30, 2024 was as follows:

All of the total $263,000 of other real estate owned and repossessions at September 30, 2024 were acquired through foreclosure.

Activity in foreclosed assets and repossessions during the nine months ended September 30, 2024 was as follows:

(In thousands)

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Total foreclosed assets and repossessions

At June 30, 2024, the land development category of foreclosed assets consisted of one property in southern Illinois, which was transferred from non-performing loans during the six months ended June 30, 2024.

The other residential (multi-family) category of foreclosed assets included one property consisting of student housing in Texas, which was added during the six months ended June 30, 2024.

At September 30, 2024, the commercial real estate category of foreclosed assets consisted of one property which was transferred from non-performing loans during the three months ended September 30, 2024 and was sold in October 2024.

The other residential (multi-family) category of foreclosed assets previously included one property consisting of student housing in Texas, which was added during the three months ended June 30, 2024, as indicated above.

This property was sold in the three months ended September 30, 2024, with the Company realizing a gain of $300,000.

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

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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 $1.0 million, from $8.3 million at December 31, 2023 to $7.3 million at June 30, 2024, primarily due to the payoff of a single $1.4 million loan.

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, which might warrant adverse classification at a future date.

In the six months ended June 30, 2024, loans classified as “Special Mention” decreased $7.9 million, to $18.7 million, as two loan relationships were downgraded to “Substandard” and added to non-performing loans.

The largest relationship consisted of four commercial business loans totaling $16.0 million at June 30, 2024 and is secured by business assets, equipment, accounts receivable and real estate.

Loans classified as “Watch” increased $890,000, from $8.3 million at December 31, 2023 to $9.2 million at September 30, 2024, primarily due to the addition of six loans totaling $4.3 million, partially offset by the payoff of a single $1.4 million loan and one loan totaling $993,000, that was downgraded to “Special Mention.” 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, which might warrant adverse classification at a future date.

In the nine months ended September 30, 2024, loans classified as “Special Mention” decreased $15.5 million, to $11.2 million, as two loan relationships were downgraded to “Substandard” and added to non-performing loans.

The largest relationship classified as “Special Mention” consisted of four commercial business loans totaling $7.0 million at September 30, 2024 (a decrease from $16.0 million at June 30, 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.

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Non-interest Income

For the three months ended June 30, 2024, non-interest income increased $2.1 million to $9.8 million when compared to the three months ended June 30, 2023, primarily as a result of the following items:

Other income :

Other income increased $2.6 million compared to the prior year period.

In the three months ended June 30, 2024, the Company recorded $2.7 million of other income, net of expenses and write-offs, related to the termination of the Master Agreement between the Company and a third-party software vendor for the conversion of the Company’s core banking platform.

This termination was previously disclosed in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2024.

This amount represented the elimination of certain deferred credits and other liabilities, along with the write-off of certain capitalized hardware, software and other assets, that previously had been recorded as part of the preparation to convert to the new core-banking platform.

Net gains on loan sales :

Net gains on loan sales increased $418,000 compared to the prior year period.

The increase was partially due to an increase in balance of fixed-rate single-family mortgage loans sold during the 2024 period compared to the 2023 period.

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

The Company realized higher

premiums on the sales of loans in the 2024 period compared to the 2023 period, as market interest rates were more stable in the first half of 2024 compared to the first half of 2023.

For the three months ended September 30, 2024, non-interest income decreased $860,000 to $7.0 million when compared to the three months ended September 30, 2023, primarily as a result of the following items:

Overdraft and insufficient funds fees :

Overdraft and insufficient funds fees decreased $759,000 compared to the prior year period.

Overdraft and insufficient funds fees decreased $710,000 compared to the same period in 2023.

This decrease was primarily due to the 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.

We expect these fees generally to continue to decrease in the future.

For the six months ended June 30, 2024, non-interest income increased $981,000 to $16.6 million when compared to the six months ended June 30, 2023, primarily as a result of the following items:

Other income :

Other income increased $2.1 million compared to the prior year period, for the same reason noted in the quarterly comparison above.

We expect this trend to continue in future periods.

Point-of-sale and ATM fees :

Point-of-sale and ATM fees decreased $257,000 compared to the same period in 2023 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.

Net gains on loan sales :

Net gains on loan sales increased $706,000 compared to the prior year period, for the same reason noted in the quarterly comparison above.

Net gains on loan sales increased $292,000 compared to the same period in 2023.

The increase was partially due to an increase in balance of fixed-rate single-family mortgage loans sold during the three months ended September 30, 2024 compared to the same period in 2023.

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

The Company realized higher premiums on the sale of loans in the 2024 period compared to the 2023 period, as market interest rates were more stable in the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

For the nine months ended September 30, 2024, non-interest income increased $121,000 to $23.6 million when compared to the nine months ended September 30, 2023, primarily as a result of the following items:

Overdraft and insufficient funds fees :

Overdraft and insufficient funds fees decreased $1.4 million compared to the prior year period, for the same reason noted in the quarterly comparison above.

Overdraft and insufficient funds fees decreased $2.1 million compared to the same period in 2023, for the same reason noted above.

Point-of-sale and ATM fees :

Point-of-sale and ATM fees decreased $709,000 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 us, which we expect will continue in future periods, and slightly lower usage of debit cards by our customers.

Point-of-sale and ATM fees decreased $966,000 compared to the same period in 2023, for the same reason noted above.

Net gains on loan sales :

Net gains on loan sales increased $998,000 compared to the same period in 2023, for the same reason noted above.

Other income :

Other income increased $1.9 million compared to the same period in 2023.

For additional information, see Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Initiatives.”

Non-interest Expense

For the three months ended June 30, 2024, non-interest expense increased $1.7 million to $36.4 million when compared to the three months ended June 30, 2023, primarily as a result of the following items:

Other operating expenses :

Other operating expenses increased $466,000 from the prior year period, to $2.6 million.

In the 2024 period, the Company recorded expenses totaling $600,000 related to ongoing compliance matters.

The Company continually monitors its compliance programs, including matters that may arise from time to time, which could result in additional compliance expenses in future periods.

For the three months ended September 30, 2024, non-interest expense decreased $1.8 million to $33.7 million when compared to the three months ended September 30, 2023, primarily as a result of the following items:

Legal, audit and other professional fees :

Legal, audit and other professional fees decreased $1.0 million from the same period in 2023, to $809,000.

In the three months ended September 30, 2024, the Company expensed a total of $39,000, compared to $903,000 expensed in the three months ended September 30, 2023, related to training and implementation costs for the intended core systems conversion and professional fees to consultants engaged to support the Company’s proposed transition of core and ancillary software and information technology systems, which was terminated in April 2024.

Expense on other real estate owned :

Expense on other real estate owned decreased $598,000 from the same period in 2023, to a gain of $536,000 in the three months ended September 30, 2024.

In the 2024 period, the Company recorded a gain on foreclosed asset sales of $459,000 compared to $22,000 in the same period in 2023.

Net occupancy expenses :

Net occupancy expenses increased $432,000 from the prior year period.

Various components of computer license and support expenses collectively increased by $476,000 in the 2024 period compared to the 2023 period.

Several other non-interest expense categories increased $916,000 in total compared to the prior year period.

For the six months ended June 30, 2024, non-interest expense increased $1.7 million to $70.8 million when compared to the six months ended June 30, 2023, primarily as a result of the following items:

Net occupancy expenses increased $409,000 from the same period in 2023.

Various components of computer license and support expenses collectively increased by $369,000 in the 2024 three-month period compared to the same period in 2023.

For the nine months ended September 30, 2024, non-interest expense decreased $190,000 to $104.5 million when compared to the nine months ended September 30, 2023, primarily as a result of the following items:

Legal, audit and other professional fees :

Legal, audit and other professional fees decreased $1.1 million from the same period in 2023, to $4.4 million.

In the 2024 period, the Company expensed a total of $1.9 million, compared to $2.7 million expensed in the 2023 period, related to training and implementation costs for the intended core systems conversion and professional fees to consultants engaged to support the Company’s proposed transition of core and ancillary software and information technology systems, which was terminated in April 2024.

Expense on other real estate owned :

Expense on other real estate owned decreased $453,000 from the same period in 2023, to a gain of $190,000.

In the 2024 period, the Company recorded a gain on foreclosed loan sales of $491,000 compared to $41,000 in the 2023 period.

Net occupancy expenses :

Net occupancy expenses increased $960,000 from the same period in 2023, for the same reason noted above.

Salaries and employee benefits :

Salaries and employee benefits expense increased $661,000, a 1.7% increase, from the prior year period.

Salaries and employee benefits increased $536,000, or 0.9%, from the same period in 2023.

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

Net occupancy expenses :

Net occupancy expenses increased $551,000 from the prior year period, for the same reason noted in the quarterly comparison above.

Insurance expense increased $530,000 from the prior year period.

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

The Company’s efficiency ratio for the three months ended June 30, 2024, was 64.27% compared to 62.10% for the same period in 2023.

The Company’s efficiency ratio for the six months ended June 30, 2024, was 65.42% compared to 59.13% for the same period in 2023.

The Company’s ratio of non-interest expense to average assets was 2.50% and 2.44% for the three- and six-months ended June 30, 2024, respectively, compared to 2.43% and 2.42% for the three- and six-months ended June 30, 2023, respectively.

Average assets for the three months ended June 30, 2024, increased $110.2 million, or 1.9%, from the three months ended June 30, 2023, primarily due to an increase in net loans receivable and non-interest-earning assets.

Average assets for the six months ended June 30,

2024, increased $84.0 million, or 1.5%, compared to the six months ended June 30, 2023, primarily due to increases in net loans receivable and non-interest-earning assets.

The Company’s efficiency ratio for the three months ended September 30, 2024, was 61.34% compared to 65.13% for the same period in 2023.

The Company’s efficiency ratio for the nine months ended September 30, 2024, was 64.05% compared to 61.04% for the same period in 2023.

The Company’s ratio of non-interest expense to average assets was 2.27% and 2.38% for the three- and nine-months ended September 30, 2024, respectively, compared to 2.49% and 2.45% for the three- and nine-months ended September 30, 2023, respectively.

Average assets for the three months ended September 30, 2024, increased $249.6 million, or 4.4%, compared to the three months ended September 30, 2023, and average assets for the nine months ended September 30, 2024, increased $139.6 million, or 2.4%, compared to the nine months ended September 30, 2023.

The increases in average assets were primarily due to growth in net loans receivable and available-for-sale securities.

Provision for Income Taxes

For the three months ended June 30, 2024 and 2023, the Company’s effective tax rate was 18.5% and 19.7%, respectively.

For the six months ended June 30, 2024 and 2023, the Company’s effective tax rate was 18.8% and 20.5%, respectively.

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

For the three months ended September 30, 2024 and 2023, the Company’s effective tax rate was 18.0% and 21.5%, respectively.

For the nine months ended September 30, 2024 and 2023, the Company’s effective tax rate was 18.5% and 20.8%, respectively.

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

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

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

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

The Company currently expects its effective tax rate (combined federal and state) will be approximately 18.0% to 20.0% in future periods, primarily due to additional investment tax credits being utilized beginning in 2024.

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

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

Interest income on loans includes interest received on non-accrual loans on a cash basis.

Average balances of loans receivable include the average balances of nonaccrual loans for each period.

Interest income on loans includes interest received on nonaccrual loans on a cash basis.

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 $1.1 million and $1.5 million for the three months ended June 30, 2024 and 2023, respectively.

Net loan fees included in interest income were $2.3 million and $2.9 million for the six months ended June 30, 2024 and 2023, respectively.

Net loan fees included in interest income were $1.1 million and $1.5 million for the three months ended September 30, 2024 and 2023, respectively.

Net loan fees included in interest income were $3.4 million and $4.4 million for the nine months ended September 30, 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.

The tables do not reflect any effect of income taxes.

September 30,

Three Months Ended

June 30, 2024

June 30, 2023

September 30, 2024

September 30, 2023

(Dollars in Thousands)

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* 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 $56.3 million and $57.1 million for the three months ended June 30, 2024 and 2023, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $10.7 million and $14.0 million for the three months ended June 30, 2024 and 2023, respectively.

Interest income on tax-exempt assets included in this table was $589,000 and $611,000 for the three months ended June 30, 2024 and 2023, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $481,000 and $517,000 for the three months ended June 30, 2024 and 2023, respectively.

Six Months Ended

June 30, 2024

June 30, 2023

Of the total average balances of investment securities, average tax-exempt investment securities were $57.0 million and $56.1 million for the three months ended September 30, 2024 and 2023, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $10.4 million and $13.7 million for the three months ended September 30, 2024 and 2023, respectively.

Interest income on tax-exempt assets included in this table was $463,000 and $608,000 for the three months ended September 30, 2024 and 2023, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $354,000 and $503,000 for the three months ended September 30, 2024 and 2023, respectively.

September 30,

Nine Months Ended

September 30, 2024

September 30, 2023

(Dollars in Thousands)

34 unchanged sentences

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

Of the total average balances of investment securities, average tax-exempt investment securities were $56.9 million and $57.5 million for the six months ended June 30, 2024 and 2023, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $11.1 million and $14.4 million for the six months ended June 30, 2024 and 2023, respectively.

Interest income on tax-exempt assets included in this table was $1.2 million and $1.2 million for the six months ended June 30, 2024 and 2023, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $941,000 and $1.1 million for the six months ended June 30, 2024 and 2023, respectively.

Of the total average balances of investment securities, average tax-exempt investment securities were $56.9 million and $57.0 million for the nine months ended September 30, 2024 and 2023, respectively.

In addition, average tax-exempt loans and industrial revenue bonds were $10.8 million and $14.2 million for the nine months ended September 30, 2024 and 2023, respectively.

Interest income on tax-exempt assets included in this table was $1.6 million and $1.9 million for the nine months ended September 30, 2024 and 2023, respectively.

Interest income net of disallowed interest expense related to tax-exempt assets was $1.3 million and $1.6 million for the nine months ended September 30, 2024 and 2023, respectively.

Rate/Volume Analysis

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

Three Months Ended June 30,

Three Months Ended September 30,

Increase (Decrease)

16 unchanged sentences

Net interest income

Six Months Ended June 30,

Nine Months Ended September 30,

Increase (Decrease)

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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 June 30, 2024, the Company had commitments of approximately $32.6 million to fund loan originations, $1.09 billion of unused lines of credit and unadvanced loans, and $12.5 million of outstanding letters of credit.

At September 30, 2024, the Company had commitments of approximately $110.2 million to fund loan originations, $976.9 million of unused lines of credit and unadvanced loans, and $13.6 million of outstanding letters of credit.

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

September 30,

Closed non-construction loans with unused available lines

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

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

Since mid-2022, the Company had been increasing the interest rates paid on many deposit products.

In September 2024, the Company decreased the interest rates it pays on certain 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 June 30, 2024 and December 31, 2023, the Company had the following available secured lines and on-balance sheet liquidity:

June 30, 2024

At September 30, 2024 and December 31, 2023, the Company had the following available secured lines and on-balance sheet liquidity:

September 30, 2024

December 31, 2023

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Statements of Cash Flows.

During the six months ended June 30, 2024 and 2023, the Company had positive cash flows from operating activities.

The Company had negative cash flows from investing activities during the six months ended June 30, 2024 and 2023.

The Company had positive cash flows from financing activities during the six months ended June 30, 2024 and negative cash flows from financing activities during the six months ended June 30, 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.

During the nine months ended September 30, 2024 and 2023, the Company had positive cash flows from operating activities and financing activities.

The Company had negative cash flows from investing activities during the nine months ended September 30, 2024 and 2023.

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 of $16.6 million and $59.0 million during the six months ended June 30, 2024 and 2023, respectively.

During the six months ended June 30, 2024 and 2023, investing activities used cash of $144.2 million and $7.5 million, respectively.

Investing activities in the 2024 period used cash primarily due to net originations of loans, purchases of available-for-sale securities and investments in tax credit partnerships, partially offset by the payments received on investment securities.

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

Operating activities provided cash of $34.3 million and $66.9 million during the nine months ended September 30, 2024 and 2023, respectively.

During the nine months ended September 30, 2024 and 2023, investing activities used cash of $191.5 million and $65.9 million, respectively.

Investing activities in the 2024 and 2023 periods used cash primarily due to net originations of loans, purchases of available-for-sale securities and investments in tax credit partnerships, partially offset by the payments received on investment securities.

Changes in cash flows from financing activities during the periods covered by the Statements of Cash Flows were due primarily 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 and repurchases of the Company’s common stock.

During the six months ended June 30, 2024 and 2023, financing activities provided cash of $102.8 million and used cash of $16.1 million, respectively.

During the nine months ended September 30, 2024 and 2023, financing activities provided cash of $154.3 million and $12.8 million, respectively.

In the 2024 period, financing activities provided cash primarily as a result of increases in FRB borrowings and short-term borrowings, partially offset by repurchases of the Company’s common stock, dividends paid to stockholders, and net decreases in time deposits and checking and savings deposits.

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

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

Capital Resources

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

At June 30, 2024, the Company’s total stockholders’ equity and common stockholders’ equity were each $568.8 million, or 9.6% of total assets, equivalent to a book value of $49.11 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 June 30, 2024, the Company’s tangible common equity to tangible assets ratio was 9.4%, compared to 9.7% at December 31, 2023 (See Non-GAAP Financial Measures below).

Included in stockholders’ equity at June 30, 2024 and December 31, 2023, were unrealized losses (net of taxes) on the Company’s available-for-sale investment securities totaling $47.3 million and $40.5 million, respectively.

This change in net unrealized losses during the six months ended June 30, 2024, primarily resulted from increasing intermediate-term market interest rates (which generally decreased the fair value of investment securities) during the period.

In addition, included in stockholders’ equity at June 30, 2024, were realized gains (net of taxes) on the Company’s terminated cash flow hedge (interest rate swap), totaling $8.0 million.

At September 30, 2024, the Company’s total stockholders’ equity was $612.1 million, or 10.1% of total assets, equivalent to a book value of $52.40 per common share.

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

At September 30, 2024, the Company’s tangible common equity to tangible assets ratio was 10.0%, compared to 9.7% at December 31, 2023 (See Non-GAAP Financial Measures below).

Included in stockholders’ equity at September 30, 2024 and December 31, 2023, were unrealized losses (net of taxes) on the Company’s available-for-sale investment securities totaling $29.1 million and $40.5 million, respectively.

This change in net unrealized losses during the nine months ended September 30, 2024, primarily resulted from decreasing intermediate-term market interest rates which generally increased the fair value of investment securities.

In addition, included in stockholders’ equity at September 30, 2024, were realized gains (net of taxes) on the Company’s terminated cash flow hedge (interest rate swap), totaling $6.4 million.

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

At June 30, 2024, the remaining pre-tax amount to be recorded in interest income was $10.3 million.

At September 30, 2024, the remaining pre-tax amount to be recorded in interest income was $8.3 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 June 30, 2024, was an unrealized loss (net of taxes) on the Company’s two outstanding cash flow hedges (interest rate swaps) totaling $16.0 million.

Also included in stockholders’ equity at September 30, 2024, was an unrealized loss (net of taxes) on the Company’s two outstanding cash flow hedges (interest rate swaps) totaling $6.4 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 $3.0 million, from $571.8 million at December 31, 2023 to $568.8 million at June 30, 2024.

Stockholders’ equity decreased due to repurchases of the Company’s common stock totaling $12.4 million and dividends declared on common stock of $9.3 million.

Accumulated other comprehensive loss increased $13.0 million during the six months ended June 30, 2024, primarily due to reductions in the fair value of cash flow hedges and available-for-sale investment securities resulting from increases in market interest rates.

Partially offsetting these decreases were net income of $30.4 million in the six-month period and a $1.4 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 $26.1 million at June 30, 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 $19.6 million at June 30, 2024.

This amount was equal to 3.5% of total stockholders’ equity of $568.8 million.

The unrealized loss position on these swaps improved substantially in the three months ended September 30, 2024 due to a decline in market interest rates in that period.

As noted above, total stockholders’ equity increased $40.3 million, from $571.8 million at December 31, 2023 to $612.1 million at September 30, 2024.

Stockholders’ equity increased due to net income of $46.9 million in the nine months ended September 30, 2024, a $6.9 million increase in stockholders’ equity during that period due to stock option exercises and a decrease in accumulated other comprehensive loss of $13.1 million during that period primarily due to increases in the fair value of cash flow hedges and available-for-sale investment securities resulting from decreases in market interest rates.

Partially offsetting these changes were repurchases of

the Company’s common stock during the nine months ended September 30, 2024 totaling $12.5 million and dividends declared on common stock during that period of $14.0 million.

The Company also had unrealized losses on its portfolio of held-to-maturity investment securities, which totaled $19.2 million at September 30, 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 $14.6 million at September 30, 2024.

This amount was equal to 2.4% of total stockholders’ equity of $612.1 million at September 30, 2024.

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

2 unchanged sentences

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

On June 30, 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 14.2% and its Tier 1 leverage ratio was 11.4%.

As a result, as of June 30, 2024, the Bank was well capitalized, with capital ratios in excess of those required to qualify as such.

On September 30, 2024, the Bank’s common equity Tier 1 capital ratio was 12.9%, its Tier 1 risk-based capital ratio was 12.9%, its total risk-based capital ratio was 14.2% and its Tier 1 leverage ratio was 11.2%.

As a result, as of September 30, 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 risk-based capital ratio was 13.1%, its total risk-based capital ratio was 14.3% and its Tier 1 leverage ratio was 11.6%.

1 unchanged sentence

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

On June 30, 2024, the Company’s common equity Tier 1 capital ratio was 12.0%, its Tier 1 risk-based capital ratio was 12.5%, its total risk-based capital ratio was 15.2% and its Tier 1 leverage ratio was 11.0%.

On September 30, 2024, the Company’s common equity Tier 1 capital ratio was 12.3%, its Tier 1 risk-based capital ratio was 12.8%, its total risk-based capital ratio was 15.5% 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 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%.

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

At June 30, 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 June 30, 2024, the Company declared a common stock cash dividend of $0.40 per share, or 28% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.40 per share (which was declared in March 2024).

During the three months ended June 30, 2023, the Company declared a common stock cash dividend of $0.40 per share, or 26% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.40 per share (which was declared in March 2023).

During the six months ended June 30, 2024, the Company declared common stock cash dividends totaling $0.80 per share, or 31% of net income per diluted common share for that six month period, and paid common stock cash dividends of $0.80 per share.

During the six months ended June 30, 2023, the Company declared common stock cash dividends totaling $0.80 per share, or 25% of net income per diluted common share for that six month period, and paid common stock cash dividends of $0.80 per share.

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

The $0.40 per share dividend declared but unpaid as of June 30, 2024, was paid to stockholders in July 2024.

At September 30, 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 September 30, 2024, the Company declared a common stock cash dividend of $0.40 per share, or 28% of net income per diluted common share for that three month period, and paid a common stock cash dividend of $0.40 per share (which was declared in June 2024).

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 nine months ended September 30, 2024, the Company declared common stock cash dividends totaling $1.20 per share, or 30% 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, 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.

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

The $0.40 per share dividend declared but unpaid as of September 30, 2024, was paid to stockholders in October 2024.

Common Stock Repurchases and Issuances .

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

During the three months ended June 30, 2024, the Company repurchased 124,600 shares of its common stock at an average price of $51.88 per share and issued 7,850 shares of common stock at an average price of $38.77 per share to cover stock option exercises.

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

During the six months ended June 30, 2024, the Company repurchased 236,962 shares of its common stock at an average price of $51.67 per share and issued 15,138 shares of common stock at an average price of $37.15 per share to cover stock option exercises.

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

During the three months ended September 30, 2024, the Company repurchased 2,971 shares of its common stock at an average price of $53.04 per share and issued 101,333 shares of common stock at an average price of $50.07 per share to cover stock option exercises.

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 nine months ended September 30, 2024, the Company repurchased 239,933 shares of its common stock at an average price of $51.69 per share and issued 116,471 shares of common stock at an average price of $48.39 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.

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 June 30, 2024, approximately 490,000 shares remained available in our stock repurchase authorization.

At September 30, 2024, approximately 488,000 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.

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.

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.

The primary factors typically include the number of shares available in the market from sellers at any given time, the market price of the stock and the projected impact on the Company’s earnings per share and capital.

9 unchanged sentences

Ratio of Tangible Common Equity to Tangible Assets

June 30, 2024

September 30, 2024

December 31, 2023

8 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis