Forward-looking Statements
When used in this Quarterly Report and in documents filed or furnished byGreat Southern Bancorp, Inc. (the "Company") with theSecurities and Exchange Commission (the "SEC"), in the Company's press releases or other public or stockholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "may," "might," "could," "should," "will likely result," "are expected to," "will continue," "is anticipated," "believe," "estimate," "project," "intends" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements also include, but are not limited to, statements regarding plans, objectives, expectations or consequences of announced transactions, known trends and statements about future performance, operations, products and services of the Company. The Company's ability to predict results or the actual effects of future plans or strategies is inherently uncertain, and the Company's actual results could differ materially from those contained in the forward-looking statements. The novel coronavirus disease, or COVID-19, pandemic has adversely affected the Company, its customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on the Company's business, financial position, results of operations, liquidity, and prospects is uncertain. While general business and economic conditions have improved, increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect the Company's revenues and the values of its assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to, COVID-19, could affect the Company in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to: (i) expected revenues, cost savings, earnings accretion, synergies and other benefits from the Company's merger and acquisition activities might not be realized within the anticipated time frames or at all, and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, and labor shortages might be greater than expected; (ii) changes in economic conditions, either nationally or in the Company's market areas; (iii) fluctuations in interest rates and the effects of inflation, a potential recession or slower economic growth caused by changes in energy prices or supply chain disruptions; (iv) the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses; (v) the possibility of realized or unrealized losses on securities held in the Company's investment portfolio; (vi) the Company's ability to access cost-effective funding; (vii) fluctuations in real estate values and both residential and commercial real estate market conditions; (viii) the ability to adapt successfully to technological changes to meet customers' needs and developments in the marketplace; (ix) the possibility that security measures implemented might not be sufficient to mitigate the risk of a cyber-attack or cyber theft, and that such security measures might not protect against systems failures or interruptions; (x) legislative or regulatory changes that adversely affect the Company's business; (xi) changes in accounting policies and practices or accounting standards; (xii) results of examinations of the Company andGreat Southern Bank by their regulators, including the possibility that the regulators may, among other things, require the Company to limit its business activities, change its business mix, increase its allowance for credit losses, write-down assets or increase its capital levels, or affect its ability to borrow funds or maintain or increase deposits, which could adversely affect its liquidity and earnings; (xiv) costs and effects of litigation, including settlements and judgments; (xv) competition; (xvi) uncertainty regarding the future of LIBOR and potential replacement indexes; and (xvii) natural disasters, war, terrorist activities or civil unrest and their effects on economic and business environments in which the Company operates. The Company wishes to advise readers that the factors listed above and other risks described from time to time in documents filed or furnished by the Company with theSEC could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake-and specifically declines any obligation- to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. 37
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform to accounting principles generally accepted inthe United States of America and general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
Allowance for Credit Losses and Valuation of Foreclosed Assets
The Company believes that the determination of the allowance for credit losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for credit losses is calculated with the objective of maintaining an allowance level believed by management to be sufficient to absorb estimated credit losses. The allowance for credit losses is measured using an average historical loss model which incorporates relevant information about past events (including historical credit loss experience on loans with similar risk characteristics), current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the loans. The allowance for credit losses is measured on a collective (pool) basis. Loans are aggregated into pools based on similar risk characteristics including borrower type, collateral and repayment types and expected credit loss patterns. Loans that do not share similar risk characteristics, primarily classified and/or TDR loans with a balance greater than or equal to$100,000 which are classified or restructured troubled debt, are evaluated on an individual basis. 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. Lookback periods can be different based on the individual pool and represent management's credit expectations for the pool of loans over the remaining contractual life. In certain loan pools, if the Company's own historical loss rate is not reflective of the loss expectations, the historical loss rate is augmented by industry and peer data. The calculated average net charge-off rate is then adjusted for current conditions and reasonable and supportable forecasts. These adjustments increase or decrease the average historical loss rate to reflect expectations of future losses given economic forecasts of key macroeconomic variables including, but not limited to, unemployment rate, GDP, disposable income and market volatility. The adjustments are based on results from various regression models projecting the impact of the macroeconomic variables to loss rates. The forecast is used for a reasonable and supportable period before reverting back to historical averages using a straight-line method. The forecast adjusted loss rate is applied to the amortized cost of loans over the remaining contractual lives, adjusted for expected prepayments. The contractual term excludes expected extensions, renewals and modifications unless there is a reasonable expectation that a troubled debt restructuring will be executed. Additionally, the allowance for credit losses considers other qualitative factors not included in historical loss rates or macroeconomic forecast such as changes in portfolio composition, underwriting practices, or significant unique events or conditions. See Note 6 "Loans and Allowance for Credit Losses" of the accompanying financial statements for additional information regarding the allowance for credit losses. Inherent in this process is the evaluation of individual significant credit relationships. From time to time certain credit relationships may deteriorate due to payment performance, cash flow of the borrower, value of collateral, or other factors. In these instances, management may revise its loss estimates and assumptions for these specific credits due to changing circumstances. In some cases, additional losses may be realized; in other instances, the factors that led to the deterioration may improve or the credit may be refinanced elsewhere and allocated allowances may be released from the particular credit. Significant changes were made to management's overall methodology for evaluating the allowance for credit losses beginning in 2021 due to the adoption of ASU 2016-13. OnJanuary 1, 2021 , the Company adopted the new accounting standard related to the Allowance for Credit Losses. For assets held at amortized cost basis, this standard eliminates the probable initial recognition threshold in GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. See Note 6 of the accompanying financial statements for additional information. In addition, the Company considers that the determination of the valuations of foreclosed assets held for sale involves a high degree of judgment and complexity. The carrying value of foreclosed assets reflects management's best estimate of the amount to be realized from the sales of the assets. While the estimate is generally based on a valuation by an independent appraiser or recent sales of similar properties, the amount that the Company realizes from the sales of the assets could differ materially from the carrying value reflected in the financial statements, resulting in losses that could adversely impact earnings in future periods. 38
Goodwill and intangible assets that have indefinite useful lives are subject to an impairment test at least annually and more frequently if circumstances indicate their value may not be recoverable.Goodwill is tested for impairment using a process that estimates the fair value of each of the Company's reporting units compared with its carrying value. The Company defines reporting units as a level below each of its operating segments for which there is discrete financial information that is regularly reviewed. As ofJune 30, 2022 , the Company had one reporting unit to which goodwill has been allocated - the Bank. If the fair value of a reporting unit exceeds its carrying value, then no impairment is recorded. If the carrying value exceeds the fair value of a reporting unit, further testing is completed comparing the implied fair value of the reporting unit's goodwill to its carrying value to measure the amount of impairment, if any. Intangible assets that are not amortized will be tested for impairment at least annually by comparing the fair values of those assets to their carrying values. AtJune 30, 2022 , goodwill consisted of$5.4 million at the Bank reporting unit, which included goodwill of$4.2 million that was recorded during 2016 related to the acquisition of 12 branches and the assumption of related deposits in theSt. Louis market fromFifth Third Bank . Other identifiable deposit intangible assets that are subject to amortization are amortized on a straight-line basis over a period of seven years. InApril 2022 , the Company, through its subsidiaryGreat Southern Bank , entered into a naming rights agreement withMissouri State University related to the main arena on the university's campus inSpringfield, Missouri . The terms of the agreement provide the naming rights toGreat Southern Bank for a total cost of$5.5 million , to be paid over a period of seven years. The Company expects to amortize the intangible asset through non-interest expense over a period not to exceed 15 years. AtJune 30, 2022 , the amortizable intangible assets included core deposit intangibles of$369,000 and the arena naming rights of$5.5 million , which are reflected in the table below. These amortizable intangible assets are reviewed for impairment if circumstances indicate their value may not be recoverable based on a comparison of fair value. For purposes of testing goodwill for impairment, the Company used a market approach to value its reporting unit. The market approach applies a market multiple, based on observed purchase transactions for each reporting unit, to the metrics appropriate for the valuation of the operating unit. Significant judgment is applied when goodwill is assessed for impairment. This judgment may include developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables and incorporating general economic and market conditions. Management does not believe any of the Company's goodwill or other intangible assets were impaired as ofJune 30, 2022 . While management believes no impairment existed atJune 30, 2022 , different conditions or assumptions used to measure fair value of the reporting unit, or changes in cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the outcome of the Company's impairment evaluation in the future.
A summary of goodwill and intangible assets is as follows:
June 30 ,December 31, 2022 2021 (In Thousands)
369 685 Arena Naming Rights (April 2022) 5,481 -$ 11,246 $ 6,081 Current Economic Conditions Changes in economic conditions could cause the values of assets and liabilities recorded in the financial statements to change rapidly, resulting in material future adjustments in asset values, the allowance for credit losses, or capital that could negatively impact the Company's ability to meet regulatory capital requirements and maintain sufficient liquidity. Following the housing and mortgage crisis and correction beginning in mid-2007,the United States entered an economic downturn. Unemployment rose from 4.7% inNovember 2007 to peak at 10.0% inOctober 2009 . Economic conditions improved in the subsequent years, as indicated by higher consumer confidence levels, increased economic activity and low unemployment levels. TheU.S. economy continued to operate at historically strong levels until the COVID-19 pandemic inMarch 2020 . WhileU.S. economic trends have rebounded since the onset of the pandemic, new COVID variants have emerged and the severity and extent of the coronavirus on the global, national and regional economies is still uncertain. Any long-term impact on the performance of the financial sector remains indeterminable. 39 The economy plunged into recession in the first quarter of 2020, as efforts to contain the spread of the coronavirus forced all but essential business activity, or any work that could not be done from home, to stop, shuttering factories, restaurants, entertainment, sports events, retail shops, personal services, and more. More than 22 million jobs were lost in March andApril 2020 as businesses closed their doors or reduced their operations, sending employees home on furlough or layoffs. Hunkered down at home with uncertain incomes and limited buying opportunities, consumer spending plummeted. As a result, gross domestic product (GDP), the broadest measure of the nation's economic output, plunged. The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), a fiscal relief bill passed byCongress and signed by the President inMarch 2020 , injected approximately$3 trillion into the economy through direct payments to individuals and grants to small businesses that would keep employees on their payroll, fueling a historic bounce-back in economic activity. Total fiscal support to the economy throughout the pandemic, including the CARES Act passed into law inMarch 2020 , the American Rescue Plan ofMarch 2021 , and several smaller fiscal packages, totals well over$5 trillion . The amount of this support was equal to almost 25% of pre-pandemic 2019 GDP, approximately three times that provided during the global financial crisis of 2007-2008. Additionally, theFederal Reserve acted decisively by slashing its benchmark interest rate to near zero and ensuring credit availability to businesses, households, and municipal governments. TheFederal 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 ofTreasury and agency mortgage-backed securities totaling$120 billion each month by theFederal Reserve commenced shortly after the pandemic began. InNovember 2021 , theFederal Reserve began to taper its quantitative easing (QE), winding down its bond purchases with its final open market purchase conducted onMarch 9, 2022 . While initiatives by theFederal Reserve andCongress significantly improved consumer spending, GDP, and employment, economic momentum began to level off in first quarter of 2022 with a slowdown in inventory growth and a decline in net exports. A 1.4% annualized decline was recorded in the first quarter of 2022, the first pullback since the pandemic-related fall of 31.2% in the second quarter of 2020. Consumer spending was supported by stimulus payments that were sent to households during the pandemic, but has been slowing in 2022. With demand now cooling, expectations of economic growth in the second quarter of 2022 have been lower, resulting in most analysts also downgrading their overall annual growth estimates. Prompting the Fed to take a more aggressive policy stance in 2022 is the surge in inflation to a 40-year high, fueled in part byRussia's invasion ofUkraine and causing oil and other commodity prices to spike. It has also fanned already uncomfortably high inflation expectations. Adding to the pressure to act more quickly is the strong economy, the rapid growth in jobs, and the decline in unemployment. As ofJune 30, 2022 , the economy was on track to return to full employment in the next few months with unemployment in the low threes. In response to rising prices, theFederal Reserve is engaging in an aggressive tightening monetary program, raising the federal funds rate by 225 basis points thus far in 2022.
Fears of a coming recession are mushrooming, as the
Global oil prices have at times traded over
Persistent shortages of materials and labor and snags in supply chains have caused prices to vault higher for months. Inflation as measured by the consumer price index (CPI) rose by 1.3% inJune 2022 over the prior month, an acceleration of May's monthly pace of 1%. The increase was largely driven by higher prices of gasoline, shelter, and food as the war inUkraine rages on, disrupting both Ukrainian and Russian commodity exports.The Fed has indicated it will also continue to allow the assets on its balance sheet, including$9 trillion inTreasury and mortgage-backed securities, to mature and prepay. An average of nearly$100 billion in securities are expected to run off monthly, although there is an increasing likelihood the Fed may begin to actively sell its mortgage-backed securities. Ten-yearTreasury yields are close to 3%, as global bond investors digest the implications of the weakening economy, contined labor shortages and supply chain disruptions, high inflation, and the Fed's aggressive monetary actions. Ten-year yields are expected to rise to near 3.5% by year-end 2022 and reach their estimated long-run equilibrium of 4% by mid-decade. This is consistent with expected nominal potential GDP growth. 40 However, fiscal policy is turning quickly contractionary as the pandemic support winds down. Total support in 2021 was nearly$1.9 trillion , and it is projected to decline to$800 billion this year. The$550 billion , 10-year public infrastructure package that passed into law last fall is not expected to have a material impact on the thrust of fiscal policy this year, although it is expected to modestly support growth from 2023 to 2025. The federal government posted a deficit of$2.8 trillion in fiscal 2021 and is on track to post a deficit of$1.2 trillion in fiscal 2022. The publicly traded debt-to-GDP ratio has surged to near 100%. Lawmakers were appropriately not focused on deficits during early stages of the pandemic given the need to respond to the crisis, but addressing the nation's fragile fiscal situation remains critical.
Employment
The national unemployment rate inJune 2022 remained steady for the fourth month in a row at 3.6%. The number of unemployed individuals remained essentially unchanged at 5.9 million, recovering close to pre-pandemic levels as ofFebruary 2020 , at which time the unemployment rate was 3.5% and unemployed persons numbered 5.7 million. TheU.S. economy added 372,000 jobs inJune 2022 with overall job growth averaging 375,000 per month in the second quarter of 2022. While the average job growth is lower than the first quarter 2022 average of 539,000, decelerating job growth is a sign of a stabilizing labor market recovering from a deep recession and quick turnaround in growth. AtJune 30, 2022 , private sector non-farm employment had fully recovered the jobs lost in 2020 due to the coronavirus pandemic. This milestone happened years earlier than in prior recoveries. Sectors with the fastest recoveries occurred in industrial production sectors and consumer spending on goods, particularly e-commerce. By contrast, sectors that became higher risk during the pandemic due to their in-person work requirements and potentially lower wages, have not fully recovered.The Labor Department reports unemployment claims are at a five month high. Job cuts in technology and housing have occurred in recent months due to concerns of a recession as theFederal Reserve aggressively tightens monetary policy to quell inflation. As ofJune 2022 , the labor force participation rate (the share of working-age Americans employed or actively looking for a job) remained little changed at 62.2%. The unemployment rate for the Midwest, where the Company conducts most of its business, has decreased from 5.5% inJune 2021 to 3.7% inJune 2022 . Unemployment rates forJune 2022 in the states where the Company has a branch or loan production offices wereArizona at 3.3%,Arkansas at 3.2%,Colorado at 3.5%,Georgia at 3.0%,Illinois at 4.5%,Iowa at 2.9%,Kansas at 2.4%,Minnesota at 2.1%,Missouri at 3.2%,Nebraska at 1.9%,North Carolina at 3.4%,Oklahoma at 2.7%, andTexas at 4.2%. Of the metropolitan areas in which the Company does business, most are below the national unemployment rate of 3.6% forMarch 2022 .
Sales of new single-family houses inJune 2022 were at a seasonally adjusted annual rate of 590,000, according to theU.S. Census Bureau andDepartment of Housing and Urban Development estimates. This is 8.1% below theMay 2022 rate of 642,000 and 17.4% below theJune 2021 estimate of 714,000. Single-family housing starts inJune 2022 were at a rate of 982,000 which is a 2% drop fromMay 2022 and 6.3 % below theJune 2021 rate of 1,664,000. The median sales price of new houses sold inJune 2022 was$402,400 , up from$374,700 inJune 2021 . The average sales price inJune 2022 of$456,800 was up from$431,900 inJune 2021 . The inventory of new homes for sale, at an estimated 444,000 at the end ofMay 2022 , would support 9.3 months of sales at the current sales rate, up from 5.8 months' supply at the end ofJune 2021 . Existing-home sales inJune 2022 declined for the fifth straight month to a seasonally adjusted annual rate of 5.12 million. Sales were down 5.4% fromMay 2022 and 14.2% fromJune 2021 . The median existing-home sales price climbed 13.4% from$366,900 as ofJune 2021 to$416,000 as ofJune 2022 , a record high. The inventory of unsold existing homes rose to 1.26 million by the end ofJune 2022 an increase of 9.6% fromMay 2022 and a 2.4% rise from the previous year (1.23 million). Unsold inventory inJune 2022 sat at 3.0 months at the current monthly sales pace, up from 2.6 months inMay 2022 and 2.5 months inJune 2021 .
TheU.S. median existing-home price for all housing types inJune 2022 was$416,000 , up 13.4% from$366,900 inJune 2021 , as prices increased in all regions. This marked 124 consecutive months of year-over-year increases, the longest-running streak on record. The Midwest recorded an increase in sales prices of 10.2%, with median prices increasing from$278,600 inJune 2021 to$306,900 inJune 2022 . Nationally, properties typically remained on the market for 14 days inJune 2022 , down from 16 days inMay 2022 and 17 41 days inJune 2021 . Eighty-eight percent of homes sold inJune 2022 were on the market for less than a month. All-cash sales represented 25% of transactions inJune 2022 , the same percentage as inMay 2022 and up from 23% inJune 2021 . The housing market is beginning to feel the impact of sharply rising mortgage rates and higher inflation on housing affordability. If consumer price inflation continues to rise, mortgage rates can be expected to move higher. Additionally, while home prices have consistently increased as supply was tight, demand was high and interest rates were low, prices may decline as available inventory increases due to lower demand.
First-time buyers accounted for 30% of sales in
According to Freddie Mac, the average commitment rate for a 30-year,
conventional, fixed-rate mortgage was 5.52% in
Other
There has been unprecedented demand for apartments, with the vacancy rate hitting historic lows at the end of 2021 and continuing into 2022. Absorption of units, however, did not keep pace with a mildly diminished demand resulting in a slight uptick in the national multi-family vacancy rate of 20 basis points to 5.1% inJune 2022 . The tempering of demand in 2022 can be attributed to rising inflation cutting into potential renter household budgets and additional uncertainties created by COVID variants and the war inUkraine . The overall tight housing market in both single-family and rental apartment units continues to keep rents well above the historical average. Rents nationally rose 11% in 2021, with the nation absorbing 714,000 units in 2021, twice the annual average of the past five years. With demand and rent growth indicators surging, investors have continued to show high interest for apartment assets, creating a highly competitive acquisition environment. Upward pressure on the 10-yearTreasury rate caused concern that the average national cap rate would rise during the 2nd quarter of 2022; however, cap rates held steady as spreads compressed. Our market areas reflected the following apartment vacancy levels as ofJune 2022 :Springfield, Missouri at 3.1%,St. Louis at 7.7%,Kansas City at 6.4%,Minneapolis at 5.9%,Tulsa, Oklahoma at 6.2%,Dallas-Fort Worth at 6.3 %,Chicago at 4.9%,Atlanta at 7.1%,Phoenix at 7.7%,Denver at 6.1% andCharlotte, North Carolina at 6.8%. Five of our market areas,Atlanta ,Dallas-Fort Worth ,Denver ,Minneapolis , andPhoenix , were in the top ten metropolitan areas for current construction and 12 month deliveries to market. After three consecutive quarters in positive territory, office demand weakened again in the second quarter of 2022. On an annual basis, absorption remains positive nationally in about half of all major markets. Even while demand is expected to improve in coming quarters, leasing volume will remain below pre-pandemic norms, making it difficult to offset the level of new supply and the record amount of sublet space on the market. Office space utilization is still just a fraction of pre-pandemic levels, and improvement has stalled in recent months. While many firms are returning to the office, most are committed to flexibility and hybrid workplace schedules are likely here to stay. It will take some time for office-using tenants to assess space needs in this new environment, and even longer for the full impact on office space demand to be realized. In the meantime, upward pressure in national office vacancy rates can be expected in the near term. Rent growth as ofJune 30, 2022 was positive on a year-over year basis in most major markets. Many office owners in the remaining market areas will continue to find it difficult to increase rents until leasing activity returns to pre-pandemic levels for an extended period of time. As ofJune 30, 2022 , national office vacancy rates remained about the same at 12.4% compared toMarch 31, 2022 , while our market areas reflected the following vacancy levels atJune 30, 2022 :Springfield, Missouri at 3.4%,St. Louis at 9.5%,Kansas City at 9.6%,Minneapolis at 10.5%,Tulsa, Oklahoma at 11.9%,Dallas-Fort Worth at 17.7%,Chicago at 15.2%,Atlanta at 13.6%,Denver at 14.5%,Phoenix at 14.5% andCharlotte, North Carolina at 11.6%. The retail sector continued its positive momentum in the first half of 2022, as consumers drove continued improvement in the sector. Retail sales have accelerated briskly since mid-2021 due to the significant increase in consumers' disposable income resulting from pandemic-related government transfers and strong wage growth. With additional funds at their disposal, American consumers pushed brick and mortar retail sales to record levels in 2021. With sales sitting at record highs, some retailers have selectively turned back to expansion mode. While demand for retail space is on the rise, construction activity continues to fall. Over the past year, 46 million square feet of retail space was delivered with over 75% pre-leased prior to delivery. Most recent construction activity has consisted of single-tenant build-to-suits or smaller ground floor spaces in mixed-use developments. Due to growing demand and minimal new supply, vacancy rates declined across most retail segments in the second quarter of 2022. Rents increased at their fastest clip, 4.2%, in over a decade during the period fromJune 30, 2021 toJune 30, 2022 . Retail rent growth is forecast to accelerate over the coming quarters due to the combination of a strong retail sales environment and continued rising demand for space. Inflation expectations will 42 weigh on the real rate of rental growth though, likely keeping it in line with or slightly below the average growth rate seen during the five years preceding the pandemic. During the second quarter of 2022, national retail vacancy rates moved slightly higher to 4.4% while our market areas reflected the following vacancy levels:Springfield, Missouri at 3.0%,St. Louis at 5.9%,Kansas City at 4.6%,Minneapolis at 3.2%,Tulsa, Oklahoma at 3.1%,Dallas-Fort Worth at 4.8%,Chicago at 5.8%,Atlanta at 4.0%,Phoenix at 5.8%,Denver at 4.6%, andCharlotte, North Carolina at 3.4%. TheU.S. has been in the midst of a historic boom in household spending on retail goods (both online and in store), all of which need to be stored in logistics properties across the country before reaching the end consumer. Even as inflation and interest rates have risen through spring and summer 2022,U.S. industrial leasing has shown no sign of slowing and remained at a record high level of 60% above pre-pandemic levels. The consumer savings stockpile accumulated during the pandemic and wage growth should help to support consumers if theU.S. enters a recession or inflation continues its upward trajectory. This savings stockpile is one reason why key industrial demand drivers, including consumer goods spending, andU.S. imports have also held up far better in recent months than today's diminished consumer confidence levels would suggest
The jump in groundbreakings for speculative logistics developments during the latter half of the pandemic, combined with shortages of construction labor and materials, has set the stage for a choppy but protracted period of record-level completions of new industrial facilities in theU.S. during 2022 and 2023. Meanwhile, the industrial market's largest tenant, Amazon, is slowing its expansion of its distribution network and signs of weakness are emerging in consumer confidence as well as in theU.S. housing market, all due to rising inflation and interest rates. These are signals that the industrial market's vacancy rate, at a record low of 4.0% as of second quarter 2022, may increase over the next several quarters. The magnitude of the change is difficult to gauge. AtJune 30, 2022 , national industrial vacancy rates sat at a record low of 4.0% while our market areas reflected the following vacancy levels:Springfield, Missouri at 1.5%,St. Louis at 2.7%,Kansas City at 4.4%,Minneapolis at 3.1%,Tulsa, Oklahoma at 3.5%,Dallas-Fort Worth at 5.5%,Chicago at 4.5%,Atlanta at 3.4%,Phoenix at 4.2%,Denver at 5.1% andCharlotte, North Carolina at 4.8%.
Our management will continue to monitor regional, national, and global economic indicators such as unemployment, GDP, housing starts and prices, consumer sentiment, commercial real estate price index and commercial real estate occupancy, absorption and rental rates, as these could significantly affect customers in each of our market areas.
COVID-19 Impact to Our Business and Response
Great Southern continues to monitor and respond to the effects of the COVID 19 pandemic. As always, the health, safety and well-being of our customers, associates and communities, while maintaining uninterrupted service, are the Company's top priorities.Centers for Disease Control and Prevention (CDC ) guidelines, as well as directives from federal, state and local officials, are being closely followed to make informed operational decisions, if necessary. The Company continues to work diligently with its nearly 1,100 associates to enforce the most current health, hygiene and social distancing practices. To date, there have been no service disruptions or reductions in staffing. As always, customers can conduct their banking business using our banking center network, online and mobile banking services, ATMs, Telephone Banking, and online account opening services. As health conditions in local markets dictate, Great Southern banking center lobbies are open following social distancing and health protocols. Great Southern continues to work with customers experiencing hardships caused by the pandemic. As a resource to customers, a COVID-19 information center continues to be available on the Company's website, www.GreatSouthernBank.com. General information about the Company's pandemic response, how to receive assistance, and how to avoid COVID-19 scams and fraud are included. 43 Impacts to Our Business Going Forward: The magnitude of the impact on the Company of the COVID-19 pandemic continues to evolve and will ultimately depend on the remaining length and severity of the economic downturn brought on by the pandemic. Some positive economic signs have occurred in 2021 and early 2022, such as lower unemployment rates, improving GDP levels and other measures of the economy and increased vaccination rates. However, supply-chain issues continue to negatively impact the economy and inflation has risen to a level significantly above the long-run objectives of theFOMC . Over the previous two years, the COVID-19 pandemic has impacted the Company's business in one or more of the following ways, among others.
Consistently low market interest rates for a significant period of time have
? had a negative impact on our variable and fixed rate loans, resulting in
reduced net interest income. More recently, market interest rates have
increased, which has resulted in increased net interest income.
? Certain fees for deposit and loan products were waived or reduced for a period
of time.
? Non-interest expenses increased as we dealt with the effects of the COVID-19
pandemic, including cleaning costs, supplies, equipment and other items.
? Banking center lobbies were closed at various times, and may close again in
future periods if the pandemic situation worsens again.
? Loan modifications occurred in 2020 and 2021.
? A contraction in economic activity reduced demand for our loans and for our
other products and services in 2020 and 2021.
COVID-19 infection rates are relatively low, but beginning to rise again, in our markets and theCDC has relaxed most restrictions that were previously in place. In some cases those restrictions have been replaced with recommendations. Also, states and local municipalities may restrict certain activities from time to time. Our business is currently operating normally, similar to operations prior to the onset of the COVID-19 pandemic. We continue to monitor infection rates and other health and economic indicators to ensure we are prepared to respond to future challenges, should they arise.
Paycheck Protection Program Loans
Great Southern actively participated in the PPP through the SBA. In total, we originated approximately 3,250 PPP loans, totaling approximately$179 million . SBA forgiveness was approved and processed, and full repayment proceeds were received by us, for virtually all of these PPP loans during 2021 and early 2022. Great Southern received fees from the SBA for originating PPP loans based on the amount of each loan. AtJune 30, 2022 , remaining net deferred fees related to PPP loans totaled$35,000 , and we expect these remaining net deferred fees will accrete to interest income during the third quarter of 2022. The fees, net of origination costs, are deferred in accordance with standard accounting practices and accreted to interest income on loans over the contractual life of each loan. In the three months endedJune 30, 2022 and 2021, Great Southern recorded approximately$54,000 and$1.1 million , respectively, of net deferred fees in interest income on PPP loans. In the six months endedJune 30, 2022 and 2021, Great Southern recorded approximately$469,000 and$2.3 million , respectively, of net deferred fees in interest income on PPP loans.
General
The profitability of the Company and, more specifically, the profitability of its primary subsidiary, the Bank, depend primarily on net interest income, as well as provisions for credit losses and the level of non-interest income and non-interest expense. 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 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
44 Loans. Net outstanding loans increased$354.1 million , or 8.8%, from$4.01 billion atDecember 31, 2021 , to$4.36 billion atJune 30, 2022 . The increase was primarily in other residential (multi-family) loans, commercial real estate loans and one- to four family residential loans. These increases were partially offset by a decrease in construction loans. As loan demand is affected by a variety of factors, including general economic conditions, and because of the competition we face and our focus on pricing discipline and credit quality, we cannot be assured that our loan growth will match or exceed the average level of growth achieved in prior years. The Company's strategy continues to be focused on maintaining credit risk and interest rate risk at appropriate levels. Recent growth has occurred in some loan types, primarily other residential (multi-family), commercial real estate and one- to four family residential real estate, and in most of Great Southern's primary lending locations, includingSpringfield ,St. Louis ,Kansas City ,Des Moines andMinneapolis , as well as our loan production offices inAtlanta ,Chicago ,Dallas ,Denver ,Omaha ,Phoenix andTulsa . Certain minimum underwriting standards and monitoring help assure the Company's portfolio quality. Great Southern's loan committee reviews and approves all new loan originations in excess of lender approval authorities. Generally, the Company considers commercial construction, consumer, other residential (multi-family) and commercial real estate loans to involve a higher degree of risk compared to some other types of loans, such as first mortgage loans on one- to four-family, owner-occupied residential properties. For other residential (multi-family), commercial real estate, commercial business and construction loans, the credits are subject to an analysis of the borrower's and guarantor's financial condition, credit history, verification of liquid assets, collateral, market analysis and repayment ability. It has been, and continues to be, Great Southern's practice to verify information from potential borrowers regarding assets, income or payment ability and credit ratings as applicable and as required by the authority approving the loan. To minimize construction risk, projects are monitored as construction draws are requested by comparison to budget and with progress verified through property inspections. The geographic and product diversity of collateral, equity requirements and limitations on speculative construction projects help to mitigate overall risk in these loans. Underwriting standards for all loans also include loan-to-value ratio limitations which vary depending on collateral type, debt service coverage ratios or debt payment to income ratio guidelines, where applicable, credit histories, use of guaranties and other recommended terms relating to equity requirements, amortization, and maturity. Consumer loans, other than home equity loans, are primarily secured by new and used motor vehicles and these loans are also subject to certain minimum underwriting standards to assure portfolio quality. 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. Private mortgage insurance is typically required for loan amounts above the 80% level. Few exceptions occur and would be based on analyses which determined minimal transactional risk to be involved. We consider these lending practices to be consistent with or more conservative than what we believe to be the norm for banks our size. AtJune 30, 2022 andDecember 31, 2021 , 0.2% and 0.3%, respectively, of our owner occupied one-to four-family residential loans had loan-to-value ratios above 100% at origination. At bothJune 30, 2022 andDecember 31, 2021 , an estimated 0.2% of total non-owner occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination. AtJune 30, 2022 , TDRs totaled$3.6 million , or 0.1% of total loans, a decrease of$246,000 from$3.9 million , or 0.1% of total loans, atDecember 31, 2021 . Concessions granted to borrowers experiencing financial difficulties may include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. For TDRs occurring during the six months endedJune 30, 2022 , none were restructured into multiple new loans. For TDRs occurring during the year endedDecember 31, 2021 , one loan totaling$45,000 was restructured into multiple new loans. For further information on TDRs, see Note 6 of the Notes to Consolidated Financial Statements contained in this report. The level of non-performing loans and foreclosed assets affects our net interest income and net income. We generally do not accrue interest income on these loans and do not recognize interest income until the loans are repaid or interest payments have been made for a period of time sufficient to provide evidence of performance on the loans. Generally, the higher the level of non-performing assets, the greater the negative impact on interest income and net income. The Company continues its preparation for discontinuation of use of interest rates such as LIBOR. LIBOR is a benchmark interest rate referenced in a variety of agreements used by the Company, but by far the most significant area impacted by LIBOR is related to commercial and residential mortgage loans. After 2021, certain LIBOR rates may no longer be published and it is expected to eventually be discontinued as a reference rate byJune 2023 . Other interest rates used globally could be discontinued for similar reasons. The Company has been regularly monitoring its portfolio of loans tied to LIBOR since 2019, with specific groups of loans identified. The Company implemented LIBOR fallback language for all commercial loan transactions near the end of 2018, with such language utilized for all commercial loan originations and renewals/modifications since that time. The Company is monitoring the remaining group of loans that were originated prior to the fourth quarter of 2018, and have not been renewed or modified since that time. AtJune 30, 2022 , this represented approximately 47 commercial loans totaling approximately$122 million ; however, only 29 of those loans, 45 totaling$55 million , mature afterJune 2023 (the date upon which the LIBOR indices used by the Company are expected to no longer be available). The Company also has a portfolio of residential mortgage loans tied to LIBOR indices with standard index replacement language included (approximately$381 million atJune 30, 2022 ), and that portfolio is being monitored for potential changes that may be facilitated by the mortgage industry. The vast majority of the loan portfolio tied to LIBOR now includes LIBOR replacement language that identifies "trigger" events for the cessation of LIBOR and the steps that the Company will take upon the occurrence of one or more of those events, including adjustments to any rate margin to ensure that the replacement interest rate on the loan is substantially similar to the previous LIBOR-based rate.Available-for-sale Securities . In the six months endedJune 30, 2022 , available-for-sale securities increased$18.4 million , or 3.7%, from$501.0 million atDecember 31, 2021 , to$519.5 million atJune 30, 2022 . This increase was primarily due to the purchase ofU.S. Government agency fixed-rate single-family and multi-family mortgage-backed securities and collateralized mortgage obligations. The Company used excess liquid funds and loan repayments to fund this increase in investment securities. The increase was mostly offset by$226.5 million in available-for-sale securities being transferred to held-to-maturity during the period and calls of municipal securities and normal monthly payments received related to the portfolio ofU.S. Government agency mortgage-backed securities and collateralized mortgage obligations. In determining securities that were elected to be transferred to the held-to-maturity category, the Company reviewed all of its investment securities purchased prior to 2022 and determined that certain of those securities, for various reasons, would likely be held to their maturity or full repayment prior to contractual maturity.Held-to-maturity Securities . In the six months endedJune 30, 2022 , as noted above, available-for-sale securities of$226.5 million were transferred to held-to-maturity. This transfer included$220.2 million of mortgage-backed securities and collateralized mortgage obligations and$6.3 million in municipal securities. AtJune 30, 2022 the balance of held-to-maturity securities was$215.4 million . Deposits. The Company attracts deposit accounts through its retail branch network, correspondent banking and corporate services areas, and brokered deposits. The Company then utilizes these deposit funds, along with FHLBank advances and other borrowings, to meet loan demand or otherwise fund its activities. In the six months endedJune 30, 2022 , total deposit balances decreased$35.9 million , or 0.8%. Compared toDecember 31, 2021 , transaction account balances decreased$90.2 million , or 2.5%, to$3.50 billion atJune 30, 2022 , while retail certificates of deposit decreased$151.8 million , or 17.0%, to$741.8 million atJune 30, 2022 . The decrease in transaction accounts was primarily a result of a decrease in non-interest-bearing accounts, partially offset by increases in various money market accounts and NOW deposit accounts. Interest-bearing transaction account balances were also negatively impacted by one large customer that experienced net outflows of balances, which the Company had been made aware of and anticipated and which had accumulated in 2020 and 2021 during the height of the COVID-19 pandemic. Their deposit balances are returning to pre-COVID-19 levels. Retail time deposits decreased due to a decrease in retail certificates generated through the banking center network and decreases in national time deposits initiated through internet channels. Time deposits initiated through internet channels experienced a planned decrease ($103.4 million in the six months endedJune 30, 2022 ) due to increases in overall liquidity levels in 2021 and to reduce the Company's cost of funds. Brokered deposits were$273.5 million and$67.4 million atJune 30, 2022 andDecember 31, 2021 , respectively. The Company uses brokered deposits of select maturities from time to time to supplement its various funding channels. Our deposit balances may fluctuate depending on customer preferences and our relative need for funding. We do not consider our retail certificates of deposit to be guaranteed long-term funding because customers can withdraw their funds at any time with minimal interest penalty. When loan demand trends upward, we can increase rates paid on deposits to attract more deposits and utilize brokered deposits to obtain additional funding. The level of competition for deposits in our markets is high. It is our goal to gain deposit market share, particularly checking accounts, in our branch footprint. To accomplish this goal, increasing rates to attract deposits may be necessary, which could negatively impact the Company's net interest margin. Our ability to fund growth in future periods may also depend on our ability to continue to access brokered deposits and FHLBank advances. In times when our loan demand has outpaced our generation of new deposits, we have utilized brokered deposits and FHLBank advances to fund these loans. These funding sources have been attractive to us because we can create either fixed or variable rate funding, as desired, which more closely matches the interest rate nature of much of our loan portfolio. It also gives us greater flexibility in increasing or decreasing the duration of our funding. 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. Securities sold under reverse repurchase agreements with customers. Securities sold under reverse repurchase agreements with customers increased$8.7 million from$137.1 million atDecember 31, 2021 to$145.8 million atJune 30, 2022 . These balances fluctuate over time based on customer demand for this product. 46 Short-term borrowings and other interest-bearing liabilities. Short-term borrowings and other interest-bearing liabilities increased$170.1 million from$1.8 million atDecember 31, 2021 to$171.9 million atJune 30, 2022 . AtJune 30, 2022 ,$170.0 million of this total was overnight borrowings from the FHLBank, which were utilized to fund growth in outstanding loans. Net Interest Income and Interest Rate Risk Management. Our net interest income may be affected positively or negatively by changes in market interest rates. A large portion of our loan portfolio is tied to one-month LIBOR, three-month LIBOR or the "prime rate" and adjusts immediately or shortly after the index rate adjusts (subject to the effect of contractual interest rate floors on some of the loans, which are discussed below). We monitor our sensitivity to interest rate changes on an ongoing basis (see "Item 3. Quantitative and Qualitative Disclosures About Market Risk"). The current level and shape of the interest rate yield curve poses challenges for interest rate risk management. Prior to its increase of 0.25% onDecember 16, 2015 , the FRB had last changed interest rates onDecember 16, 2008 . This was the first rate increase sinceSeptember 29, 2006 . The FRB also implemented rate change increases of 0.25% on eight additional occasions beginningDecember 14, 2016 and throughDecember 31, 2018 , with the Federal Funds rate reaching as high as 2.50%. AfterDecember 2018 , the FRB paused its rate increases and, in July, September andOctober 2019 , implemented rate decreases of 0.25% on each of those occasions. AtDecember 31, 2019 , the Federal Funds rate stood at 1.75%. In response to the COVID-19 pandemic, the FRB decreased interest rates on two occasions inMarch 2020 , a 0.50% decrease onMarch 3 and a 1.00% decrease onMarch 16 . In 2022 to date, the FRB increased interest rates on four separate occasions, 0.25% onMarch 17 , 0.50% onMay 5 , 0.75% onJune 16 and 0.75% onJuly 27 . AtJune 30, 2022 , the Federal Funds rate stood at 2.50%. Financial markets are anticipating further increases in interest rates in the remainder of 2022, with up to 1.00% of additional cumulative rate hikes currently anticipated. A substantial portion of Great Southern's loan portfolio ($1.24 billion atJune 30, 2022 ) is tied to the one-month or three-month LIBOR index and will be subject to adjustment at least once within 90 days afterJune 30, 2022 . Of these loans,$1.23 billion had interest rate floors. Great Southern also has a portfolio of loans ($693 million atJune 30, 2022 ) tied to a "prime rate" of interest that will adjust immediately or within 90 days with changes to the "prime rate" of interest. Of these loans,$596 million had interest rate floors at various rates. AtJune 30, 2022 , nearly all of these LIBOR and "prime rate" loans had fully-indexed rates that were at or above their floor rate and so are expected to move fully with future market interest rate increases. A rate cut by the FRB generally would have an anticipated immediate negative impact on the Company's net interest income due to the large total balance of loans tied to the one-month or three-month LIBOR index 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. Loans at their floor rates are, however, subject to the risk that borrowers will seek to refinance elsewhere at the lower market rate. Because the Federal Funds rate is still very low, there may also be a negative impact on the Company's net interest income due to the Company's inability to significantly lower its funding costs in the current competitive rate environment, although interest rates on assets may decline further. Conversely, market interest rate increases would normally result in increased interest rates on our LIBOR-based and prime-based loans. As ofJune 30, 2022 , Great Southern's interest rate risk models indicate that, generally, rising interest rates are expected to have a positive impact on the Company's net interest income, while declining interest rates are expected to have a negative impact on net interest income. We model various interest rate scenarios for rising and falling rates, including both parallel and non-parallel shifts in rates. The results of our modeling indicate that net interest income is not likely to be significantly affected either positively or negatively in the first twelve months following relatively minor changes in market interest rates because our portfolios are relatively well-matched in a twelve-month horizon. In a situation where market interest rates increase significantly in a short period of time, our net interest margin increase may be more pronounced in the very near term (first one to three months), due to fairly rapid increases in LIBOR interest rates and "prime" interest rates. In a situation where market interest rates decrease significantly in a short period of time, as they did inMarch 2020 , our net interest margin decrease may be more pronounced in the very near term (first one to three months), due to fairly rapid decreases in LIBOR interest rates and "prime" interest rates. In the subsequent months we expect that the net interest margin would stabilize and begin to improve, as renewal interest rates on maturing time deposits are expected to decrease compared to the current rates paid on those products. During 2020, we did experience some compression of our net interest margin percentage due to 2.25% ofFederal Fund rate cuts during the nine month period ofJuly 2019 throughMarch 2020 . Margin compression primarily resulted from changes in the asset mix, mainly the addition of lower-yielding assets and the issuance of subordinated notes during 2020 and the net interest margin remained lower than our historical average in 2021. LIBOR interest rates decreased significantly in 2020 and remained very low in 2021, putting pressure on loan yields, and strong pricing competition for loans and deposits remains in most of our markets. Beginning inMarch 2022 , market interest rates, including LIBOR interest rates and "prime" interest rates, began to increase rapidly. This has resulted in increasing loan yields and expansion of our net interest income and net interest margin in 2022. For further discussion of the processes used to manage our exposure to interest rate risk, see "Item 3. Quantitative and Qualitative Disclosures About Market Risk - How We Measure the Risks to Us Associated with Interest Rate Changes." 47 Non-Interest Income and Non-Interest (Operating) Expenses. The Company's profitability is also affected by the level of its non-interest income and operating expenses. 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. 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 in the "Results of Operations and Comparison for the Three and Six Months EndedJune 30, 2022 and 2021" section of this report.
Effect of Federal Laws and Regulations
General. Federal legislation and regulation significantly affect the operations of the Company and the Bank, and have increased competition among commercial banks, savings institutions, mortgage banking enterprises and other financial institutions. In particular, the capital requirements and operations of regulated banking organizations such as the Company and the Bank have been and will be subject to changes in applicable statutes and regulations from time to time, which changes could, under certain circumstances, adversely affect the Company or the Bank. Dodd-Frank Act. In 2010, sweeping financial regulatory reform legislation entitled the "Dodd-Frank Wall Street Reform and Consumer Protection Act" (the "Dodd-Frank Act") was signed into law. The Dodd-Frank Act implemented far-reaching changes across the financial regulatory landscape. Certain aspects of the Dodd-Frank Act have been affected by the more recently enacted Economic Growth Act, as defined and discussed below under "-Economic Growth Act." Capital Rules. The federal banking agencies have adopted regulatory capital rules that substantially amend the risk-based capital rules applicable to the Bank and the Company. The rules implement the "Basel III" regulatory capital reforms and changes required by the Dodd-Frank Act. "Basel III" refers to various documents released by theBasel Committee on Banking Supervision . For the Company and the Bank, the general effective date of the rules wasJanuary 1, 2015 , and, for certain provisions, various phase-in periods and later effective dates apply. The chief features of these rules are summarized below. The rules refine the definitions of what constitutes regulatory capital and add a new regulatory capital element, common equity Tier 1 capital. The minimum capital ratios are (i) a common equity Tier 1 ("CET1") risk-based capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6%; (iii) a total risk-based capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. In addition to the minimum capital ratios, the rules include a capital conservation buffer, under which a banking organization must have CET1 more than 2.5% above each of its minimum risk-based capital ratios in order to avoid restrictions on paying dividends, repurchasing shares, and paying certain discretionary bonuses. The capital conservation buffer requirement began phasing in onJanuary 1, 2016 when a buffer greater than 0.625% of risk-weighted assets was required, which amount increased an equal amount each year until the buffer requirement of greater than 2.5% of risk-weighted assets became fully implemented onJanuary 1, 2019 . EffectiveJanuary 1, 2015 , these rules also revised the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels show signs of weakness. Under the revised prompt corrective action requirements, insured depository institutions are required to meet the following in order to qualify as "well capitalized:" (i) a common equity Tier 1 risk-based capital ratio of at least 6.5%, (ii) a Tier 1 risk-based capital ratio of at least 8%, (iii) a total risk-based capital ratio of at least 10% and (iv) a Tier 1 leverage ratio of 5%, and must not be subject to an order, agreement or directive mandating a specific capital level. Economic Growth Act. InMay 2018 , the Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Economic Growth Act"), was enacted to modify or eliminate certain financial reform rules and regulations, including some implemented under the Dodd-Frank Act. While the Economic Growth Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than$10 billion and for large banks with assets of more than$50 billion . Many of these amendments could result in meaningful regulatory changes. The Economic Growth Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than$10 billion by instructing the federal banking regulators to establish a single "Community Bank Leverage Ratio" ("CBLR") of between 8 and 10 percent. Any qualifying depository institution or its holding company that exceeds the CBLR will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository 48 institution that exceeds the new ratio will be considered "well-capitalized" under the prompt corrective action rules. EffectiveJanuary 1, 2020 , the CBLR was 9.0%. InApril 2020 , pursuant to the CARES Act, the federal bank regulatory agencies announced the issuance of two interim final rules, effective immediately, to provide temporary relief to community banking organizations. Under the interim final rules, the CBLR requirement was a minimum of 8.5% for calendar year 2021, and is 9% thereafter. The Company and the Bank have chosen to not utilize the new CBLR due to the Company's size and complexity, including its commercial real estate and construction lending concentrations and significant off-balance sheet funding commitments.
In addition, the Economic Growth Act includes regulatory relief in the areas of examination cycles, call reports, mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
Business Initiatives
Great Southern continues to monitor and respond to the effects of the COVID-19 pandemic. As always, the health, safety and well-being of our customers, associates and communities, while maintaining uninterrupted service, are the Company's top priorities.Centers for Disease Control and Prevention (CDC ) guidelines, as well as directives from federal, state and local officials, are being followed to make informed operational decisions, if necessary. During 2022, the high-performing banking center inKimberling City, Missouri , will be replaced with a newly constructed building on the same property at14309 Highway 13 . Customers are being served in a temporary building on the property during construction. The new office is expected to open in the fourth quarter of 2022. Including this office, the Company operates three banking centers in the Branson Tri-Lakes area of southwestMissouri . In theSt. Louis market, a banking center in theClayton area is slated to be consolidated into a nearby banking center at the close of business onAugust 19, 2022 . This lobby-only office, located at8235 Forsyth Boulevard , will be consolidated into theBrentwood -area office, 2435 S. Brentwood, a short distance away. The commercial lending team currently housed in theClayton office building will continue to serve customers from this location. InJune 2022 , the Company opened a new commercial loan production office (LPO) inCharlotte, North Carolina , which represents the eighth LPO in the Company's franchise. A local and highly experienced lender was hired to manage this office. The new LPO will provide a variety of commercial lending services, including commercial real estate loans for new and existing properties and commercial construction loans. An LPO inPhoenix, Arizona , was also opened inFebruary 2022 .
Comparison of Financial Condition at
During the six months ended
Cash and cash equivalents were$195.7 million atJune 30, 2022 , a decrease of$521.6 million , or 72.7%, from$717.3 million atDecember 31, 2021 . Excess funds held at theFederal Reserve Bank atDecember 31, 2021 were primarily the result of increases in net loan repayments throughout 2021. In 2022, these excess funds were used to fund the purchase of new investment securities and to fund loan originations. The Company's available-for-sale securities increased$18.4 million , or 3.7%, compared toDecember 31, 2021 . The increase was primarily related to the purchase ofU.S. Government agency fixed-rate single-family or multi-family mortgage-backed securities and collateralized mortgage obligations, partially offset by the transfer of$226.5 million in available-for-sale securities to held-to-maturity during the period and by calls of municipal securities and normal monthly payments received related to the portfolio of mortgage-backed securities and collateralized mortgage obligations. The Company used excess funds held at theFederal Reserve Bank and loan repayments to fund this increase in investment securities. The available-for-sale securities portfolio was 9.4% and 9.2% of total assets atJune 30, 2022 andDecember 31, 2021 , respectively. Held-to-maturity securities were$215.4 million atJune 30, 2022 . During the six months endedJune 30, 2022 ,$226.5 million in available-for-sale securities were transferred to held-to-maturity. This included$220.2 million of mortgage-backed securities and collateralized mortgage obligations and$6.3 million in municipal securities. In determining securities that were elected to be transferred to the held-to-maturity category, the Company reviewed all of its investment securities purchased prior to 2022 and determined that certain of those securities, for various reasons, would likely be held to their maturity or full repayment prior to contractual maturity. The held-to-maturity securities portfolio was 3.9% of total assets atJune 30, 2022 . 49 Net loans increased$354.1 million fromDecember 31, 2021 , to$4.36 billion atJune 30, 2022 . This increase was primarily in other residential (multi-family) loans ($220 million increase), commercial real estate loans ($147 million increase) and one- to four-family residential loans ($152 million increase). These increases were partially offset by a decrease in construction loans ($170 million decrease). Loan origination volume in the six months endedJune 30, 2022 was similar to loan origination volume that occurred in 2020 and 2021; however, the pace of loan payoffs prior to maturity has slowed in 2022 due to the increase in market rates of interest. Total liabilities increased$169.2 million , from$4.83 billion atDecember 31, 2021 to$5.00 billion atJune 30, 2022 , primarily due to increases in short-term borrowings from FHLBank and brokered deposits. This was partially offset by a reduction in total deposits, primarily demand deposits and retail time deposits. Time deposits initiated through internet channels experienced a planned decrease due to increases in overall liquidity levels and to reduce the Company's cost of funds. Total deposits decreased$35.9 million , or 0.8%, to$4.52 billion atJune 30, 2022 . Transaction account balances decreased$90.2 million , from$3.59 billion atDecember 31, 2021 to$3.50 billion atJune 30, 2022 . Retail certificates of deposit decreased$151.8 million compared toDecember 31, 2021 , to$741.8 million atJune 30, 2022 . Changes in transaction account balances were primarily due to decreases in IntraFi Network Reciprocal Deposits and non-interest-bearing checking accounts, offset by increases in NOW deposit accounts and money market accounts. Total interest-bearing checking and demand deposit accounts decreased$31.1 million and$59.1 million , respectively. Customer retail time deposits initiated through our banking center network decreased$41.9 million and time deposits initiated through our national internet network decreased$103.4 million . Customer deposits atJune 30, 2022 andDecember 31, 2021 totaling$35.2 million and$41.7 million , respectively, were part of the IntraFi Network Deposits program, which allows customers to maintain balances in an insured manner that would otherwise exceed theFDIC deposit insurance limit. Brokered deposits increased$206.1 million to$273.5 million atJune 30, 2022 , compared to$67.4 million atDecember 31, 2021 . Brokered deposits were utilized to fund growth in outstanding loans and to offset reductions in balances in other deposit categories. Securities sold under reverse repurchase agreements with customers increased$8.7 million from$137.1 million atDecember 31, 2021 to$145.8 million atJune 30, 2022 . These balances fluctuate over time based on customer demand for this product. Short-term borrowings and other interest-bearing liabilities increased$170.1 million from$1.8 million atDecember 31, 2021 to$171.9 million atJune 30, 2022 . AtJune 30, 2022 ,$170.0 million of this total was overnight borrowings from the FHLBank. Total stockholders' equity decreased$67.1 million , from$616.8 million atDecember 31, 2021 to$549.6 million atJune 30, 2022 . Accumulated other comprehensive income decreased$46.1 million during the six months endedJune 30, 2022 , primarily due to decreases in the fair value of available-for-sale investment securities due to increasing market interest rates, and to decreases in the fair value of certain the Company's cash flow hedges. Stockholders' equity also decreased due to repurchases of the Company's common stock totaling$50.4 million and dividends declared on common stock of$9.5 million . The Company recorded net income of$35.2 million for the six months endedJune 30, 2022 . In addition, stockholders' equity increased$3.7 million due to stock option exercises.
Results of Operations and Comparison for the Three and Six Months Ended
General Net income was$18.2 million for the three months endedJune 30, 2022 compared to$20.1 million for the three months endedJune 30, 2021 . This decrease of$1.9 million , or 9.4%, was primarily due to an increase in provision for credit losses on loans and unfunded commitments of$3.5 million , or 270.1%, an increase in non-interest expense of$2.8 million , or 9.3%, and a decrease in non-interest income of$266,000 , or 2.8%, partially offset by an increase in net interest income of$4.1 million , or 9.3%, and a decrease in income tax expense of$572,000 , or 10.9%. Net income was$35.2 million for the six months endedJune 30, 2022 compared to$39.0 million for the six months endedJune 30, 2021 . This decrease of$3.8 million , or 9.7%, was primarily due to an increase in non-interest expense of$3.8 million , or 6.2%, an increase in provision for credit losses on loans and unfunded commitments of$3.7 million , or 220.8%, and a decrease in non-interest income of$826,000 , or 4.3%, partially offset by an increase in net interest income of$3.3 million , or 3.7%, and a decrease in income tax expense of$1.2 million , or 11.7%. Total Interest Income Total interest income increased$2.2 million , or 4.5%, during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . The increase was due to a$2.8 million increase in interest income on investment securities and other interest- earning assets, partially offset by a$596,000 decrease in interest income on loans. Interest income from investment securities and 50
other interest-earning assets increased during the three months endedJune 30, 2022 compared to the same period in 2021 primarily due to higher average balances of investment securities and higher average rates of interest on investment securities and other interest-earning assets. Interest income on loans decreased for the three months endedJune 30, 2022 compared to the same period in 2021, primarily due to lower average loan balances, slightly offset by higher average rates of interest. Total interest income decreased$1.7 million , or 1.7%, during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . The decrease was due to a$5.2 million decrease in interest income on loans, partially offset by a$3.5 million increase in interest income on investment securities and other interest-earning assets. Interest income on loans decreased for the six months endedJune 30, 2022 compared to the same period in 2021, primarily due to lower average loan balances, combined with lower average rates of interest on loans. Interest income from investment securities and other interest-earning assets increased during the three months endedJune 30, 2022 compared to the same period in 2021, primarily due to higher average balances of investment securities combined with higher average rates of interest on investment securities and other interest-earning assets.
Interest Income - Loans
During the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 , interest income on loans decreased$639,000 as the result of lower average loan balances, which decreased from$4.38 billion during the three months endedJune 30, 2021 , to$4.32 billion during the three months endedJune 30, 2022 . The lower average balances were primarily due to higher loan repayments during the latter half of 2021. Interest income on loans increased$43,000 as a result of slightly higher average interest rates on loans. The average yield on loans increased from 4.33% during the three months endedJune 30, 2021 , to 4.34% during the three months endedJune 30, 2022 . This increase was primarily due to the repricing of higher floating rates in 2022 as market interest rates began to increase. During the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 , interest income on loans decreased$3.6 million as the result of lower average loan balances, which decreased from$4.39 billion during the six months endedJune 30, 2021 , to$4.23 billion during the six months endedJune 30, 2022 . The lower average balances were primarily due to higher loan repayments during the latter half of 2021. Interest income on loans also decreased$1.6 million as a result of lower average interest rates on loans. The average yield on loans decreased from 4.36% during the six months endedJune 30, 2021 , to 4.29% during the six months endedJune 30, 2022 . This decrease was primarily due to decreased yields in most loan categories as some loans with higher rates refinanced or repaid as a result of the sale of the financed project. Additionally, the Company's interest income on loans included accretion of net deferred fees related to PPP loans originated in 2020 and 2021. The amount of net deferred fees recognized in interest income was$54,000 and$469,000 in the three and six months endedJune 30, 2022 , respectively, compared to$1.1 million and$2.3 million in the three and six months endedJune 30, 2021 , respectively. InOctober 2018 , the Company entered into an interest rate swap transaction as part of its ongoing interest rate management strategies to hedge the risk of its floating rate loans. The notional amount of the swap was$400 million with a contractual termination date inOctober 2025 . As previously disclosed by the Company, inMarch 2020 , the Company and its swap counterparty mutually agreed to terminate the$400 million interest rate swap prior to its contractual maturity. The Company received a payment of$45.9 million from its swap counterparty as a result of this termination. This$45.9 million , less the accrued to date interest portion and net of deferred income taxes, is reflected in the Company's stockholders' equity as Accumulated Other Comprehensive Income and is being accreted to interest income on loans monthly through the original contractual termination date ofOctober 6, 2025 . This has the effect of reducing Accumulated Other Comprehensive Income and increasing Net Interest Income and Retained Earnings over the periods. The Company recorded interest income related to the interest rate swap of$2.0 million in both the three months endedJune 30, 2022 and the three months endedJune 30, 2021 . The Company recorded interest income related to the interest rate swap of$4.0 million in both the six months endedJune 30, 2022 and the six months endedJune 30, 2021 . The Company currently expects 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. InFebruary 2022 , the Company entered into an interest rate swap transaction as part of its ongoing interest rate management strategies to hedge the risk of its floating rate loans. The notional amount of the swap is$300 million with an effective date ofMarch 1, 2022 and a termination date ofMarch 1, 2024 . Under the terms of the swap, the Company will receive a fixed rate of interest of 1.6725% and will pay a floating rate of interest equal to one-month USD-LIBOR (or the equivalent replacement rate if USD-LIBOR rate is not available). The floating rate resets monthly and net settlements of interest due to/from the counterparty also occur monthly. The initial floating rate of interest was set at 0.2414%. To the extent that the fixed rate of interest continues to exceed one-month USD-LIBOR, the Company will receive net interest settlements, which will be recorded as loan interest income. If one-month USD-LIBOR exceeds the fixed rate of interest in future periods, the Company will be required to pay net settlements to the counterparty and will record 51
those net payments as a reduction of interest income on loans. The Company
recorded loan interest income related to this swap transaction of
InJuly 2022 , the Company entered into two interest rate swap transactions as part of its ongoing interest rate management strategies to hedge the risk of its floating rate loans. The notional amount of each swap is$200 million with an effective date ofMay 1, 2023 and a termination date ofMay 1, 2028 . Under the terms of one swap, beginning inMay 2023 , the Company will receive a fixed rate of interest of 2.628% and will pay a floating rate of interest equal to one-month USD-SOFR OIS. Under the terms of the other swap, beginning inMay 2023 , the Company will receive a fixed rate of interest of 5.725% and will pay a floating rate of interest equal to one-month USD-Prime. In each case, the floating rate will be reset monthly and net settlements of interest due to/from the counterparty will also occur monthly. To the extent the fixed rate of interest exceeds the floating rate of interest, the Company will receive net interest settlements, which will be recorded as loan interest income. If the floating rate of interest exceeds the fixed rate of interest, the Company will be required to pay net settlements to the counterparty and will record those net payments as a reduction of interest income on loans.
Interest Income - Investments and Other Interest-earning Assets
Interest income on investments increased$2.8 million in the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . Interest income increased$2.1 million as a result of an increase in average balances from$460.0 million during the three months endedJune 30, 2021 , to$741.4 million during the three months endedJune 30, 2022 . Average balances of securities increased primarily due to purchases of agency multi-family mortgage-backed securities which have a fixed rate of interest with expected lives of four to ten years. These purchased securities fit with the Company's current asset/liability management strategies. Interest income increased$676,000 as a result of higher average interest rates from 2.58% during the three months endedJune 30, 2021 , to 3.09% during the three month period endedJune 30, 2022 . During the three months endedJune 30, 2022 , the Company also recorded interest income of$812,000 received due to the early repayment of one investment security. Interest income on investments increased$3.4 million in the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . Interest income increased$2.8 million as a result of an increase in average balances from$437.5 million during the six months endedJune 30, 2021 , to$638.3 million during the six months endedJune 30, 2022 . Average balances of securities increased primarily due to purchases of agency multi-family mortgage-backed securities which have a fixed rate of interest with expected lives of four to ten years. These purchased securities fit with the Company's current asset/liability management strategies. In addition, interest income increased$514,000 as a result of higher average interest rates from 2.66% during the six months endedJune 30, 2021 , to 2.88% during the six month period endedJune 30, 2022 . As indicated above, during the six months endedJune 30, 2022 , the Company also recorded interest income of$812,000 received due to the early repayment of one investment security. Interest income on other interest-earning assets increased$83,000 in the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . Interest income increased$95,000 as a result of higher average interest rates from 0.10% during the three months endedJune 30, 2021 , to 0.74% during the three month period endedJune 30, 2022 . Partially offsetting that increase, interest income decreased$12,000 as a result of a decrease in average balances from$514.7 million during the three months endedJune 30, 2021 , to$115.5 million during the three months endedJune 30, 2022 . The increase in the average interest rates was due to the increase in the rate paid on funds held at theFederal Reserve Bank . This rate was increased in March, May andJune 2022 in conjunction with the increase in the Federal Funds target interest rate. Interest income on other interest-earning assets increased$174,000 in the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . Interest income increased$221,000 as a result of higher average interest rates from 0.10% during the six months endedJune 30, 2021 , to 0.29% during the six month period endedJune 30, 2022 . Interest income decreased$47,000 as a result of a decrease in average balances from$467.3 million during the six months endedJune 30, 2021 , to$286.1 million during the six months endedJune 30, 2022 . The increase in the average interest rates was due to the increase in the rate paid on funds held at theFederal Reserve Bank . As noted above, this rate was increased in March, May andJune 2022 in conjunction with the increase in the Federal Funds target interest rate.
Total Interest Expense
Total interest expense decreased$1.9 million , or 33.0%, during the three months endedJune 30, 2022 , when compared with the three months endedJune 30, 2021 , due to a decrease in interest expense on deposits of$1.1 million , or 31.8%, and a decrease in interest expense on subordinated notes of$1.1 million , or 49.5%, partially offset by an increase in interest expense on short-term borrowings of$236,000 and an increase in interest expense on subordinated debentures issued to capital trusts of$46,000 , or 40.7%. 52 Total interest expense decreased$5.0 million , or 40.9%, during the six months endedJune 30, 2022 , when compared with the six months endedJune 30, 2021 , due to a decrease in interest expense on deposits of$3.1 million , or 41.0%, and a decrease in interest expense on subordinated notes of$2.2 million , or 49.6%, partially offset by an increase in interest expense on short-term borrowings of$237,000 and an increase in interest expense on subordinated debentures issued to capital trusts of$51,000 , or 22.6%.
Interest Expense - Deposits
Interest expense on demand deposits decreased$241,000 due to average rates of interest that decreased from 0.18% in the three months endedJune 30, 2021 to 0.14% in the three months endedJune 30, 2022 . Interest rates paid on demand deposits were lower in the 2022 period due to significant reductions in the federal funds rate of interest and other market interest rates since 2020. Partially offsetting this decrease, interest expense on demand deposits increased$33,000 , due to an increase in average balances from$2.31 billion during the three months endedJune 30, 2021 to$2.39 billion during the three months endedJune 30, 2022 . The Company experienced increased balances in various types of money market accounts and certain types of NOW accounts. Interest expense on demand deposits decreased$749,000 due to average rates of interest that decreased from 0.20% in the six months endedJune 30, 2021 to 0.14% in the six months endedJune 30, 2022 . Interest rates paid on demand deposits were lower in the 2022 period due to significant reductions in the federal funds rate of interest and other market interest rates since 2020. Partially offsetting this decrease, interest expense on demand deposits increased$124,000 , due to an increase in average balances from$2.25 billion during the six months endedJune 30, 2021 to$2.38 billion during the six months endedJune 30, 2022 . The Company experienced increased balances in various types of money market accounts and certain types of NOW accounts. Interest expense on time deposits decreased$537,000 due to a decrease in average balances of time deposits from$1.21 billion during the three months endedJune 30, 2021 to$914.6 million in the three months endedJune 30, 2022 . Interest expense on time deposits also decreased$354,000 as a result of a decrease in average rates of interest from 0.80% during the three months endedJune 30, 2021 , to 0.67% during the three months endedJune 30, 2022 . A large portion of the Company's certificate of deposit portfolio matures within six to twelve months and therefore reprices fairly quickly; this is consistent with the portfolio over the past several years. Older certificates of deposit that renewed or were replaced with new deposits generally resulted in the Company paying a lower rate of interest due to market interest rate decreases throughout 2021 with rates only beginning to increase minimally during the three months endedJune 30, 2022 due to increases in market interest rates. The decrease in average balances of time deposits was a result of decreases in retail customer time deposits obtained through the banking center network and retail customer time deposits obtained through on-line channels. On-line channel deposits were actively reduced by the Company during 2021 and 2022 as other deposit sources increased. Interest expense on time deposits decreased$1.3 million as a result of a decrease in average rates of interest from 0.87% during the six months endedJune 30, 2021 , to 0.64% during the six months endedJune 30, 2022 . Interest expense on time deposits also decreased$1.3 million due to a decrease in average balances of time deposits from$1.26 billion during the six months endedJune 30, 2021 to$922.8 million in the six months endedJune 30, 2022 . A large portion of the Company's certificate of deposit portfolio matures within six to twelve months and therefore reprices fairly quickly; this is consistent with the portfolio over the past several years. Older certificates of deposit that renewed or were replaced with new deposits generally resulted in the Company paying a lower rate of interest due to market interest rate decreases throughout 2021 with rates only beginning to increase minimally during the six months endedJune 30, 2022 due to increases in market interest rates. The decrease in average balances of time deposits was a result of decreases in retail customer time deposits obtained through the banking center network and retail customer time deposits obtained through on-line channels. On-line channel deposits were actively reduced by the Company during 2021 and 2022 as other deposit sources increased.
Interest Expense -
FHLBank advances were not utilized during the three and six months ended
Interest expense on repurchase agreements decreased$2,000 during the three months endedJune 30, 2022 when compared to the three months endedJune 30, 2021 . The average rate of interest was 0.03% for the three months endedJune 30, 2022 compared to 0.02% for the three months endedJune 30, 2021 . The average balance of repurchase agreements decreased$6.4 million from$142.0 million in the three months endedJune 30, 2022 to$135.5 million in the three months endedJune 30, 2022 , which was due to changes in customers' need for this product, which can fluctuate. Interest expense on repurchase agreements decreased$1,000 during the six months endedJune 30, 2022 when compared to the six months endedJune 30, 2021 . The average rate of interest was 0.03% for both the six months endedJune 30, 2022 and the six months 53
ended
Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased$186,000 during the three months endedJune 30, 2022 when compared to the three months endedJune 30, 2021 due to higher average balances. The average balance of short-term borrowings and other interest-bearing liabilities increased$71.7 million from$1.6 million in the three months endedJune 30, 2021 to$73.3 million in the three months endedJune 30, 2022 , which is primarily due to changes in the Company's funding needs and the mix of funding, which can fluctuate. Most of this increase was due to the utilization of overnight borrowings from the FHLBank. Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased$50,000 during the three months endedJune 30, 2022 when compared to the three months endedJune 30, 2021 due to higher average rates of interest. The average rate of interest was 1.29% for the three months endedJune 30, 2022 , compared to -0-% for the three months endedJune 30, 2021 . Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased$158,000 during the six months endedJune 30, 2022 when compared to the six months endedJune 30, 2021 due to higher average balances. The average balance of short-term borrowings and other interest-bearing liabilities increased$37.0 million from$1.6 million in the six months endedJune 30, 2021 to$38.7 million in the six months endedJune 30, 2022 , which is primarily due to changes in the Company's funding needs and the mix of funding, which can fluctuate. Most of this increase was due to the utilization of overnight borrowings from the FHLBank. Interest expense on short-term borrowings (including overnight borrowings from the FHLBank) and other interest-bearing liabilities increased$79,000 during the six months endedJune 30, 2022 when compared to the six months endedJune 30, 2021 due to higher average rates of interest. The average rate of interest was 1.24% for the six months endedJune 30, 2022 , compared to -0-% for the six months endedJune 30, 2021 . During the three months endedJune 30, 2022 , compared to the three months endedJune 30, 2021 , interest expense on subordinated debentures issued to capital trusts increased$46,000 due to higher average interest rates. The average interest rate was 2.47% in the three months endedJune 30, 2022 compared to 1.76% in the three months endedJune 30, 2021 . The subordinated debentures are variable-rate debentures which bear interest at an average rate of three-month LIBOR plus 1.60%, adjusting quarterly, which was 2.89% atJune 30, 2022 . There was no change in the average balance of the subordinated debentures between the 2021 and 2022 periods. During the six months endedJune 30, 2022 , compared to the six months endedJune 30, 2021 , interest expense on subordinated debentures issued to capital trusts increased$51,000 due to higher average interest rates. The average interest rate was 2.17% in the six months endedJune 30, 2022 compared to 1.77% in the six months endedJune 30, 2021 . There was no change in the average balance of the subordinated debentures between the 2021 and 2022 periods. InAugust 2016 , the Company issued$75.0 million of 5.25% fixed-to-floating rate subordinated notes dueAugust 15, 2026 . The notes were sold at par, resulting in net proceeds, after underwriting discounts and commissions and other issuance costs, of approximately$73.5 million . InJune 2020 , the Company issued$75.0 million of 5.50% fixed-to-floating rate subordinated notes dueJune 15, 2030 . The notes were sold at par, resulting in net proceeds, after underwriting discounts and commissions and other issuance costs, of approximately$73.5 million . In both cases, these issuance costs are amortized over the expected life of the notes, which is five years from the issuance date, impacting the overall interest expense on the notes. OnAugust 15, 2021 , the Company completed the redemption of$75.0 million aggregate principal amount of its 5.25% subordinated notes dueAugust 15, 2026 . The notes were redeemed for cash by the Company at 100% of their principal amount, plus accrued and unpaid interest. During the three months endedJune 30, 2022 , compared to the three months endedJune 30, 2021 , interest expense on subordinated notes decreased$1.1 million due to lower average balances during the three months endedJune 30, 2022 resulting from the redemption of the 5.25% subordinated notes dueAugust 15, 2026 . The average balance of subordinated notes was$74.1 million in the three months endedJune 30, 2022 compared to$148.7 million in the three months endedJune 30, 2021 . Interest expense on subordinated notes increased$32,000 due to slightly higher weighted average interest rates. The average interest rate was 5.99% in the three months endedJune 30, 2022 compared to 5.90% in the three months endedJune 30, 2021 . During the six months endedJune 30, 2022 , compared to the six months endedJune 30, 2021 , interest expense on subordinated notes decreased$2.2 million due to lower average balances, for the reasons discussed above. The average interest rate increased slightly from 5.95% in the six months endedJune 30, 2021 to 6.02% in the six months endedJune 30, 2022 .
Net Interest Income
Net interest income for the three months endedJune 30, 2022 increased$4.1 million to$48.8 million compared to$44.7 million for the three months endedJune 30, 2021 . Net interest margin was 3.78% in the three months ended June
30, 2022, compared to 3.35% in 54 the three months endedJune 30, 2021 , an increase of 43 basis points, or 12.8%. The Company experienced increases in interest income on investment securities and decreases in interest expense on deposits and subordinated notes. Interest income on loans decreased as the Company recorded a higher amount of interest income related to net deferred fees on PPP loans in the 2021 period. Net interest income for the six months endedJune 30, 2022 increased$3.3 million to$92.1 million compared to$88.8 million for the six months endedJune 30, 2021 . Net interest margin was 3.61% in the six months endedJune 30, 2022 , compared to 3.38% in the six months endedJune 30, 2021 , an increase of 23 basis points, or 6.8%. The Company experienced increases in interest income on investment securities and decreases in interest expense on deposits and subordinated notes. Interest income on loans decreased as the Company recorded a higher amount of interest income related to net deferred fees on PPP loans in the 2021 period. The Company's overall average interest rate spread increased 47 basis points, or 14.8%, from 3.18% during the three months endedJune 30, 2021 to 3.65% during the three months endedJune 30, 2022 . The increase was due to a 30 basis point increase in the weighted average yield on interest-earning assets and a 17 basis point decrease in the weighted average rate paid on interest-bearing liabilities. In comparing the two periods, the yield on loans increased one basis point, the yield on investment securities increased 51 basis points and the yield on other interest-earning assets increased 64 basis points. The rate paid on deposits decreased ten basis points, the rate paid on subordinated debentures issued to capital trusts increased 71 basis points, and the rate paid on subordinated notes increased nine basis points. In addition, the Company had outstanding overnight borrowings in the 2022 period, which had an average interest rate increase of 129 basis points. The Company's overall average interest rate spread increased 28 basis points, or 8.8%, from 3.20% during the six months endedJune 30, 2021 to 3.48% during the six months endedJune 30, 2022 . The increase was due to a 24 basis point decrease in the weighted average rate paid on interest-bearing liabilities and a four basis point increase in the weighted average yield on interest-earning assets. In comparing the two periods, the yield on loans decreased seven basis points, the yield on investment securities increased 22 basis points and the yield on other interest-earning assets increased 19 basis points. The rate paid on deposits decreased 16 basis points, the rate paid on subordinated debentures issued to capital trusts increased 40 basis points, and the rate paid on subordinated notes increased seven basis points. In addition, the Company had outstanding overnight borrowings in the 2022 period, which had an average interest rate increase of 124 basis points.
For additional information on net interest income components, refer to the "Average Balances, Interest Rates and Yields" tables in this Quarterly Report on Form 10-Q.
Provision for and Allowance for Credit Losses
The Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effectiveJanuary 1, 2021 . The CECL methodology replaces the incurred loss methodology with a lifetime "expected credit loss" measurement objective for loans, held-to-maturity debt securities and other receivables measured at amortized cost at the time the financial asset is originated or acquired. This standard requires the consideration of historical loss experience and current conditions adjusted for reasonable and supportable economic forecasts. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in economic conditions, such as changes in the national unemployment rate, commercial real estate price index, housing price index, consumer sentiment, gross domestic product (GDP) and construction spending. Worsening economic conditions from the COVID-19 pandemic or similar events, higher inflation or interest rates, or other factors may lead to increased losses in the portfolio and/or requirements for an increase in provision expense. Management maintains various controls in an attempt to identify and limit future losses, such as a watch list of problem loans and potential problem loans, documented loan administration policies and loan review staff to review the quality and anticipated collectability of the portfolio. Additional procedures provide for frequent management review of the loan portfolio based on loan size, loan type, delinquencies, financial analysis, on-going correspondence with borrowers and problem loan work-outs. 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 endedJune 30, 2022 , the Company did not record a provision expense on its portfolio of outstanding loans, compared to a negative provision expense of$1.0 million recorded for the three months endedJune 30, 2021 . During the six months endedJune 30, 2022 , the Company did not record a provision expense on its portfolio of outstanding loans, compared to a negative 55 provision expense of$700,000 recorded for the six months endedJune 30, 2021 . The Company considers the current allowance for credit losses adequate to cover losses inherent in the Bank's loan portfolio atJune 30, 2022 , based on recent reviews of the Bank's loan portfolio and current economic conditions. The negative provision for credit losses in the 2021 periods reflected positive trends in asset quality metrics, combined with an improved economic forecast. The positive trends in asset quality metrics continued in the 2022 periods. In the three months endedJune 30, 2022 and 2021, the Company experienced net recoveries of$261,000 and net charge offs of$100,000 , respectively. In the six months endedJune 30, 2022 and 2021, the Company experienced net recoveries of$304,000 and net charge offs of$36,000 , respectively. The provision for losses on unfunded commitments for the three months endedJune 30, 2022 was$2.2 million compared to a negative provision of$307,000 for the three months endedJune 30, 2021 . The provision for losses on unfunded commitments for the six months endedJune 30, 2022 was$2.0 million compared to a negative provision of$981,000 for the six months endedJune 30, 2021 . The level and mix of unfunded commitments resulted in an increase in the required reserve for such potential losses. General market conditions and unique circumstances related to specific industries and individual projects contribute to the level of provisions and charge-offs. AllFDIC -assisted acquired loans were grouped into pools based on common characteristics and were recorded at their estimated fair values, which incorporated estimated credit losses at the acquisition date. Techniques used in determining risk of loss are similar to those used to determine the risk of loss for the legacyGreat Southern Bank portfolio, with primary focus being placed on those loan pools which exhibit higher risk characteristics. Review of the acquired loan portfolio includes review of financial information, collateral valuations and customer interaction to determine if additional reserves are warranted. The Bank's allowance for credit losses as a percentage of total loans was 1.38% and 1.49% atJune 30, 2022 andDecember 31, 2021 , respectively. Management considers the allowance for credit losses adequate to cover losses inherent in the Bank's loan portfolio atJune 30, 2022 , based on recent reviews of the Bank's loan portfolio and current economic conditions. If challenging economic conditions were to continue or deteriorate, or if management's assessment of the loan portfolio were to change, additional loan loss provisions could be required, thereby adversely affecting the Company's future results of operations and financial condition. Non-performing Assets
As a result of changes in balances and composition of the loan portfolio, changes in economic and market conditions and other factors specific to a borrower's circumstances, the level of non-performing assets will fluctuate.
AtJune 30, 2022 , non-performing assets were$4.3 million , a decrease of$1.7 million from$6.0 million atDecember 31, 2021 . Non-performing assets as a percentage of total assets were 0.08% atJune 30, 2022 , compared to 0.11% atDecember 31, 2021 . Compared toDecember 31, 2021 , non-performing loans decreased$1.2 million , to$4.2 million atJune 30, 2022 , and foreclosed and repossessed assets decreased$544,000 , to$44,000 atJune 30, 2022 . Non-performing commercial real estate loans comprised$1.8 million , or 43.4%, of the total non-performing loans atJune 30, 2022 , a decrease of$174,000 fromDecember 31, 2021 . Non-performing one- to four-family residential loans comprised$1.5 million , or 35.6%, of the total non-performing loans atJune 30, 2022 , a decrease of$714,000 fromDecember 31, 2021 . Non-performing construction and land development loans comprised$468,000 , or 11.1%, of the total non-performing loans atJune 30, 2022 , unchanged fromDecember 31, 2021 . Non-performing consumer loans comprised$418,000 , or 9.9%, of the total non-performing loans atJune 30, 2022 , a decrease of$315,000 fromDecember 31, 2021 . 56
Non-performing Loans. Activity in the non-performing loans category during the
six months ended
Transfers to Transfers to Beginning Additions Removed Potential Foreclosed Ending Balance, to Non- from Non- Problem Assets and Charge- Balance, January 1 Performing Performing Loans Repossessions Offs Payments June 30 (In Thousands)
One- to four-family construction $ - $ -
$ - $ - $ - $ - $ - $ - Subdivision construction - - - - - - - - Land development 468 - - - - - - 468 Commercial construction - - - - - - - -
One- to four-family residential 2,216 54
- (279) - (36) (453) 1,502 Other residential - - - - - - - - Commercial real estate 2,006 58 - - - - (232) 1,832 Commercial business - - - - - - - - Consumer 733 74 - (71) (9) (17) (292) 418
Total non-performing loans$ 5,423 $ 186 $ -$ (350) $ (9)$ (53) $
(977)
$ - $ - $ - $ - $
(574)
AtJune 30, 2022 , the non-performing one- to four-family residential category included 30 loans, one of which was added during the six months endedJune 30, 2022 . The largest relationship in the category totaled$316,000 , or 21.0% of the total category. The non-performing commercial real estate category includes three loans, one of which was added during the six months endedJune 30, 2022 . The largest relationship in the category, which totaled$1.6 million , or 85.4% of the total category, was transferred from potential problem loans during the fourth quarter of 2021, and is collateralized by a mixed-use commercial retail building. The non-performing land development category consisted of one loan added during the first quarter of 2021, which totaled$468,000 and is collateralized by unimproved zoned vacant ground in southernIllinois . The non-performing consumer category included 23 loans, eight of which were added during the six months endedJune 30, 2022 . Potential Problem Loans. Compared toDecember 31, 2021 , potential problem loans increased$172,000 , or 8.7%, to$2.2 million atJune 30, 2022 . Potential problem loans are loans which management has identified through routine internal review procedures as having possible credit problems that may cause the borrowers difficulty in complying with the current repayment terms. These loans are not reflected in non-performing assets.
Activity in the potential problem loans categories during the six months ended
Removed Transfers to Beginning Additions from Transfers to Foreclosed Ending Balance, to Potential Potential Non- Assets and Charge- Balance, January 1 Problem
Problem Performing Repossessions Offs Payments
(In Thousands) One- to four-family construction $ - $
- $ - $ - $ - $ - $ - $ - Subdivision construction 15 - - - - - (5) 10 Land development - - - - - - - - Commercial construction - - - - - - - - One- to four-family residential 1,432 279 - - - - (86) 1,625 Other residential - - - - - - - - Commercial real estate 210 - - - - - (10) 200 Commercial business - - - - - - - - Consumer 323 120 - (37) (14) (9) (66) 317 Total potential problem loans$ 1,980 $ 399 $ - $ (37) $ (14)$ (9) $ (167) $ 2,152
FDIC-assisted acquired loans included above$ 1,004 $ - $ - $ - $ - $ - $
(36)
AtJune 30, 2022 , the one- to four-family residential category of potential problem loans included 27 loans, four of which were added during the six months endedJune 30, 2022 . The largest relationship in this category totaled$165,000 , or 10.1% of the total category. The commercial real estate category of potential problem loans included one loan, which was added in a previous period. The consumer category of potential problem loans included 32 loans, 17 of which were added during the six months endedJune 30, 2022 . 57 Other Real Estate Owned and Repossessions. Of the total$329,000 of other real estate owned and repossessions atJune 30, 2022 ,$285,000 represents properties which were not acquired through foreclosure. Activity in foreclosed assets and repossessions during the six months endedJune 30, 2022 , was as follows: Beginning Ending Balance, Capitalized Write- Balance, January 1 Additions Sales Costs Downs June 30 (In Thousands)
One- to four-family construction $ - $ -
$ - $ - $ - $ - Subdivision construction - - - - - - Land development 315 - (300) - (15) - Commercial construction - - - - - -
One- to four-family residential 183 -
(175) - (8) - Other residential - - - - - - Commercial real estate - - - - - - Commercial business - - - - - - Consumer 90 158 (204) - - 44
Total foreclosed assets and repossessions$ 588 $ 158 $ (679) $ -$ (23) $ 44 FDIC-assisted acquired assets included above$ 498 $ -$ (475) $ -$ (23) $ - The one remaining property in the land development category of foreclosed assets was sold during the three months endedMarch 31, 2022 . The two remaining properties in the one- to four-family residential category of foreclosed assets were sold during the three months endedJune 30, 2022 . The additions and sales in the consumer category were due to the volume of repossessions of automobiles, which generally are subject to a shorter repossession process.
Loans Classified "Watch"
The Company reviews the credit quality of its loan portfolio using an internal grading system that classifies loans as "Satisfactory," "Watch," "Special Mention," "Substandard" and "Doubtful." Loans classified as "Watch" are being monitored because of indications of potential weaknesses or deficiencies that may require future classification as special mention or substandard. In the six months endedJune 30, 2022 , loans classified as "Watch" decreased$10.6 million , from$30.7 million atDecember 31, 2021 to$20.1 million atJune 30, 2022 primarily due to loans being upgraded out of the "Watch" category. See Note 6 for further discussion of the Company's loan grading system.
Non-interest Income
For the three months endedJune 30, 2022 , non-interest income decreased$266,000 to$9.3 million when compared to the three months endedJune 30, 2021 , primarily as a result of the following items: Net gains on loan sales: Net gains on loan sales decreased$2.1 million compared to the prior year period. The decrease was due to a decrease in originations of fixed-rate single-family mortgage loans during the 2022 period compared to the 2021 period. Fixed rate single-family mortgage loans originated are generally subsequently sold in the secondary market. These loan originations increased substantially when market interest rates decreased to historically low levels in 2020 and 2021. As a result of the significant volume of refinance activity in 2020 and 2021, and as market interest rates have moved higher in the second quarter of 2022, mortgage refinance volume has decreased and fixed rate loan originations and related gains on sales of these loans have decreased substantially. Gain (loss) on derivative interest rate products: In the 2022 period, the Company recognized a gain of$145,000 on the change in fair value of its back-to-back interest rate swaps related to commercial loans. In the 2021 period, the Company recognized a loss of$179,000 on the change in fair value of its back-to-back interest rate swaps related to commercial loans. Generally, as market interest rates increase, this creates a net increase in the fair value of these instruments. This is a non-cash item as there was no required settlement of this amount between the Company and its swap counterparties. Other income: Other income increased$1.0 million compared to the prior year period. In the 2022 period, a gain of$1.1 million was recognized on sales
of fixed assets. 58 For the six months endedJune 30, 2022 , non-interest income decreased$826,000 to$18.5 million when compared to the six months endedJune 30, 2021 , primarily as a result of the following items: Net gains on loan sales: Net gains on loan sales decreased$3.7 million compared to the prior year period. The decrease was due to a decrease in originations of fixed-rate single-family mortgage loans during the 2022 period compared to the 2021 period for the same reasons noted above. Point-of-sale and ATM fees: Point-of-sale and ATM fees increased$739,000 compared to the prior year period. This increase was almost entirely due to increased customer debit card transactions in the 2022 period compared to the 2021 first quarter. In the latter half of 2021 and in the first half of 2022, debit card usage by customers rebounded and was back to normal levels, and in many cases, increased levels of activity. Overdraft and insufficient funds fees: Overdraft and insufficient funds fees increased$781,000 compared to the prior year period. It appears that consumers have continued to spend significantly in 2022, but some may have lower account balances as prices for goods and services have increased and government stimulus payments received by consumers in 2020 and 2021 have now been exhausted. Other income: Other income increased$1.3 million compared to the prior year period. In the 2022 period, a gain of$1.1 million was recognized on sales of fixed assets. Also in the 2022 period, the Company recorded a one-time bonus of$500,000 from its card processor as a result of achieving certain benchmarks related to debit card activity.
Non-interest Expense
For the three months endedJune 30, 2022 , non-interest expense increased$2.8 million to$33.0 million when compared to the three months endedJune 30, 2021 , primarily as a result of the following item: Salaries and employee benefits: Salaries and employee benefits increased$1.5 million from the prior year period. Most significantly contributing to the increase, inJune 2022 , the Company paid a special cash bonus to all employees totaling$1.1 million in response to the rapid and significant increases in prices for many goods and services. A portion of this increase also related to normal annual merit increases in various lending and operations areas. In 2022, many of these increases were larger than in previous years due to the current employment environment. In addition, the newPhoenix loan office was opened in the first quarter of 2022 and the newCharlotte, North Carolina loan office was opened in the second quarter of 2022. Lastly, certain loan origination compensation costs were deferred under accounting standards that related primarily to the origination of PPP loans; therefore, more costs were deferred in the 2021 period versus the 2022 period. Legal, Audit and Other Professional Fees: Legal, audit and other professional fees increased$665,000 from the prior year period, to$1.2 million . In the 2022 period, the Company expensed a total of$580,000 related to training and implementation costs for the upcoming core systems conversion and professional fees to consultants engaged to support the Company's transition of core and ancillary software and information technology systems.
For the six months ended
Salaries and employee benefits: Salaries and employee benefits increased
Legal, Audit and Other Professional Fees: Legal, audit and other professional fees increased$823,000 from the prior year period, to$2.0 million , for the same reason noted above. The Company's efficiency ratio for the three months endedJune 30, 2022 , was 56.76% compared to 55.63% for the same period in 2021. The Company's efficiency ratio for the six months endedJune 30, 2022 , was 58.12% compared to 55.98% for the same period in 2021. In the three- and six-month periods endedJune 30, 2022 , the higher efficiency ratio was primarily due to an increase in non-interest expense, for the reasons noted above. The Company's ratio of non-interest expense to average assets was 2.43% and 2.16% for the three months endedJune 30, 2022 and 2021, respectively. The Company's ratio of non-interest expense to average assets was 2.39% and 2.19% for the six months endedJune 30, 2022 and 2021, respectively. Average assets for the three months endedJune 30, 2022 , decreased$153.2 million , or 2.7%, from the three months endedJune 30, 2021 , primarily due to decreases in interest-bearing cash equivalents and net loans receivable, partially offset by an increase in investment securities. Average assets for the six months endedJune 30, 2022 , decreased$137.6 million , or 2.5%, from the six months endedJune 30, 2021 , primarily due to decreases in interest-bearing cash equivalents and net loans receivable, partially offset by an increase in investment securities. 59
Provision for Income Taxes
For the three months endedJune 30, 2022 and 2021, the Company's effective tax rate was 20.5% and 20.8%, respectively. For the six months endedJune 30, 2022 and 2021, the Company's effective tax rate was 20.5% and 20.9%, respectively. These effective rates were at or below the statutory federal tax rate of 21%, due primarily to the utilization of certain investment tax credits and the Company's tax-exempt investments and tax-exempt loans, which reduced the Company's effective tax rate. 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. The Company's effective income tax rate is currently generally expected to remain near the statutory federal tax rate due primarily to the factors noted above. The Company currently expects its effective tax rate (combined federal and state) will be approximately 20.5% to 21.5% in future periods.
Average Balances, Interest Rates and Yields
The following tables present, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Average balances of loans receivable include the average balances of non-accrual loans for each period. Interest income on loans includes interest received on non-accrual 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 fees included in interest income were$1.3 million and$2.5 million for the three months endedJune 30, 2022 and 2021, respectively. Net fees included in interest income were$3.1 million and$5.0 million for the six months endedJune 30, 2022 and 2021, respectively. Tax-exempt income was not calculated on a tax equivalent basis. The table does not reflect any effect
of income taxes. 60 June 30, Three Months Ended Three Months Ended 2022 June 30, 2022 June 30, 2021 Yield/ Average Yield/ Average Yield/ Rate Balance Interest Rate Balance Interest Rate (Dollars in Thousands) Interest-earning assets: Loans receivable: One- to four-family residential 3.24 %$ 772,326 $ 6,534 3.39 %$ 675,562 $ 6,361 3.78 % Other residential 4.50 851,031 9,637 4.54 1,017,578 11,216 4.42 Commercial real estate 4.37 1,576,285 17,120 4.36 1,580,335 16,857 4.28 Construction 4.55 623,117 7,722 4.97 580,277 6,529 4.51 Commercial business 4.45 288,452 3,371 4.69 291,902 3,545 4.87 Other loans 4.91
198,543 2,217 4.48 222,004 2,644 4.78 Industrial revenue bonds(1)
4.80 13,345 163 4.89 14,509 208 5.74 Total loans receivable 4.37
4,323,099 46,764 4.34 4,382,167 47,360 4.33
Investment securities(1) 2.69
741,401 5,720 3.09 459,959 2,961 2.58 Interest-earning deposits in other banks
1.64 115,456 214 0.74 514,681 131
0.10
Total interest-earning assets 4.10 5,179,956 52,698 4.08 5,356,807 50,452 3.78 Non-interest-earning assets: Cash and cash equivalents 95,819 99,333 Other non-earning assets 155,822 128,702 Total assets$ 5,431,597 $ 5,584,842 Interest-bearing liabilities: Interest-bearing demand and savings 0.14$ 2,389,086 830 0.14$ 2,312,284 1,038 0.18 Time deposits 0.82 914,556 1,528 0.67 1,212,900 2,419 0.80 Total deposits 0.35
3,303,642 2,358 0.29 3,525,184 3,457 0.39 Securities sold under reverse repurchase agreements 0.04 135,536
8 0.02 141,971 10
0.03
Short-term borrowings, overnight FHLBank borrowings and other interest-bearing liabilities
1.73 73,337 236 1.29 1,600 - - Subordinated debentures issued to capital trusts 2.89 25,774 159 2.47 25,774 113 1.76 Subordinated notes 5.96 74,098 1,106 5.99 148,676 2,188 5.90 Total interest-bearing liabilities 0.52 3,612,387 3,867 0.43 3,843,205 5,768 0.60 Non-interest-bearing liabilities: Demand deposits 1,188,967 1,071,441 Other liabilities 57,027 43,402 Total liabilities 4,858,381 4,958,048 Stockholders' equity 573,216 626,794 Total liabilities and stockholders' equity$ 5,431,597 $ 5,584,842 Net interest income: Interest rate spread 3.58 %$ 48,831 3.65 %$ 44,684 3.18 % Net interest margin* 3.78 % 3.35 % Average interest-earning assets to average interest- bearing liabilities 143.4 % 139.4 %
* 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
months ended
tax-exempt loans and industrial revenue bonds were
Interest income on tax-exempt assets included in this table was
Interest income net of disallowed interest expense related to tax-exempt
assets was$386,000 and$419,000 for the three months endedJune 30, 2022 and 2021, respectively. 61 June 30, Six Months Ended Six Months Ended 2022 June 30, 2022 June 30, 2021 Yield/ Average Yield/ Average Yield/ Rate Balance Interest Rate Balance Interest Rate (Dollars in Thousands) Interest-earning assets: Loans receivable: One- to four-family residential 3.24 %$ 737,024 $ 12,575
3.44 %$ 670,092 $ 12,878 3.88 % Other residential 4.50 805,579 18,054 4.52 1,008,387 22,143 4.43 Commercial real estate 4.37 1,533,263 32,466 4.27 1,571,561 33,441 4.29 Construction 4.55 645,544 15,251 4.76 592,263 13,259 4.51 Commercial business 4.45 288,839 6,697 4.68 307,579 7,433 4.87 Other loans 4.91 201,510 4,461 4.46 229,709 5,535 4.86
Industrial revenue bonds(1) 4.80 13,662 325
4.78 14,715 380 5.21 Total loans receivable 4.37 4,225,421 89,829 4.29 4,394,306 95,069 4.36
Investment securities(1) 2.69 638,262 9,131 2.88 437,452 5,778 2.66 Interest-earning deposits in other banks 1.64 286,102 412
0.29 467,317 238 0.10
Total interest-earning assets 4.10 5,149,785 99,372 3.89 5,299,075 101,085 3.85 Non-interest-earning assets: Cash and cash equivalents 93,217 96,786 Other non-earning assets 146,313 131,059 Total assets$ 5,389,315 $ 5,526,920 Interest-bearing liabilities: Interest-bearing demand and savings 0.14$ 2,382,551 1,607 0.14$ 2,250,972 2,232 0.20 Time deposits 0.82 922,775 2,925 0.64 1,262,220 5,447 0.87 Total deposits 0.35 3,305,326 4,532 0.28 3,513,192 7,679 0.44 Securities sold under reverse repurchase agreements 0.04 131,920 18 0.03 143,222 19 0.03 Short-term borrowings, overnight FHLBank borrowings and other interest-bearing liabilities 1.73 38,675 237 1.24 1,630 - - Subordinated debentures issued to capital trusts 2.89 25,774 277 2.17 25,774 226 1.77 Subordinated notes 5.96 74,059 2,211 6.02 148,595 4,388 5.95 Total interest-bearing liabilities 0.52 3,575,754 7,275 0.41 3,832,413 12,312 0.65 Non-interest-bearing liabilities: Demand deposits 1,174,570 1,027,525 Other liabilities 47,519 43,645 Total liabilities 4,797,843 4,903,583 Stockholders' equity 591,472 623,337 Total liabilities and stockholders' equity$ 5,389,315 $ 5,526,920 Net interest income: Interest rate spread 3.58 %$ 92,097 3.48 %$ 88,773 3.20 % Net interest margin* 3.61 % 3.38 % Average interest-earning assets to average interest-bearing liabilities 144.0 % 138.3 %
* 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
ended
loans and industrial revenue bonds were
tax-exempt assets included in this table was
six months ended
disallowed interest expense related to tax-exempt assets was
$822,000 for the six months endedJune 30, 2022 and 2021, respectively. 62 Rate/Volume Analysis The following tables present the dollar amounts of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities for the periods shown. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in rate (i.e., changes in rate multiplied by old volume) and (ii) changes in volume (i.e., changes in volume multiplied by old rate). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to volume and rate. Tax-exempt income was not calculated on
a tax equivalent basis. Three Months Ended June 30, 2022 vs. 2021 Increase (Decrease) Total Due to Increase Rate Volume (Decrease) (Dollars in Thousands) Interest-earning assets: Loans receivable$ 43 $ (639) $ (596) Investment securities 676 2,083 2,759
Interest-earning deposits in other banks 95 (12) 83 Total interest-earning assets 814 1,432 2,246 Interest-bearing liabilities: Demand deposits (241) 33 (208) Time deposits (354) (537) (891) Total deposits (595) (504) (1,099)
Securities sold under reverse repurchase agreements (2) - (2)
Short-term borrowings, overnight FHLBank borrowings and other interest-bearing liabilities
50 186 236 Subordinated debentures issued to capital trust 46 - 46 Subordinated notes 32 (1,114) (1,082) Total interest-bearing liabilities (469) (1,432) (1,901) Net interest income$ 1,283 $ 2,864 $ 4,147 Six Months Ended June 30, 2022 vs. 2021 Increase (Decrease) Total Due to Increase Rate Volume (Decrease) (Dollars in Thousands) Interest-earning assets: Loans receivable$ (1,630) $ (3,610) $ (5,240) Investment securities 514 2,839 3,353 Interest-earning deposits in other banks 221 (47) 174 Total interest-earning assets (895) (818) (1,713) Interest-bearing liabilities: Demand deposits (749) 124 (625) Time deposits (1,253) (1,269) (2,522) Total deposits (2,002) (1,145) (3,147)
Securities sold under reverse repurchase agreements - (1) (1)
Short-term borrowings, overnight FHLBank borrowings and other interest-bearing liabilities
79 158 237 Subordinated debentures issued to capital trust 51 - 51 Subordinated notes 49 (2,226) (2,177) Total interest-bearing liabilities (1,823) (3,214) (5,037) Net interest income$ 928 $ 2,396 $ 3,324 Liquidity
Liquidity is a measure of the Company's ability to generate sufficient cash to meet present and future financial obligations in a timely manner through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. These 63 obligations include the credit needs of customers, funding deposit withdrawals, and the day-to-day operations of the Company. Liquid assets include cash, interest-bearing deposits with financial institutions and certain investment securities and loans. As a result of the Company's management of the ability to generate liquidity primarily through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its borrowers' credit needs. AtJune 30, 2022 , the Company had commitments of approximately$173.4 million to fund loan originations,$1.82 billion of unused lines of credit and unadvanced loans, and$13.8 million of outstanding letters of credit.
Loan commitments and the unfunded portion of loans at the dates indicated were as follows (In Thousands):
June 30, March 31, December
31,
2022 2022 2021 2020 2019 2018 Closed non-construction loans with unused available lines Secured by real estate (one- to four-family)$ 190,637 $ 185,101 $ 175,682 $ 164,480 $ 155,831 $ 150,948 Secured by real estate (not one- to four-family) - - 23,752 22,273 19,512 11,063 Not secured by real estate - commercial business 87,556 89,252 91,786 77,411 83,782 87,480 Closed construction loans with unused available lines Secured by real estate (one-to four-family) 93,892 75,214 74,501 42,162 48,213 37,162 Secured by real estate (not one-to four-family) 1,331,986 1,089,844 1,092,029 823,106 798,810 906,006 Loan commitments not closed Secured by real estate (one-to four-family) 88,153 109,472 53,529 85,917 69,295 24,253 Secured by real estate (not one-to four-family) 134,600 212,264 146,826 45,860 92,434 104,871 Not secured by real estate - commercial business 14,335 8,223 12,920 699 - 405$ 1,941,159 $ 1,769,370 $ 1,671,025 $ 1,261,908 $ 1,267,877 $ 1,322,188 The Company's primary sources of funds are customer deposits, FHLBank advances, other borrowings, loan repayments, unpledged securities, proceeds from sales of loans and available-for-sale securities and funds provided from operations. The Company utilizes particular sources of funds based on the comparative costs and availability at the time. The Company has from time to time chosen not to pay rates on deposits as high as the rates paid by certain of its competitors and, when believed to be appropriate, supplements deposits with less expensive alternative sources of funds.
At
June 30, 2022 December 31, 2021 Federal Home Loan Bank line$ 727.4 million $ 756.5 million Federal Reserve Bank line$ 374.6 million $ 352.4 million Cash and cash equivalents$ 195.7 million $ 717.3 million
Unpledged securities - Available-for-sale
-
Statements of Cash Flows. During the six months endedJune 30, 2022 and 2021, the Company had positive cash flows from operating activities and positive cash flows from financing activities. The Company had negative cash flows from investing activities during the six months endedJune 30, 2022 and positive cash flows from investing activities during the six months endedJune 30, 2021 . Cash flows from operating activities for the periods covered by the Statements of Cash Flows have been primarily related to changes in accrued and deferred assets, credits and other liabilities, the provision for credit losses, depreciation and amortization, realized gains on sales of loans and the amortization of deferred loan origination fees and discounts (premiums) on loans and investments, all of which are non-cash or non-operating adjustments to operating cash flows. Net income adjusted for non-cash and non-operating items and the origination and sale of loans held for sale were the primary source of cash flows from operating activities. Operating activities provided cash flows of$36.8 million and$54.8 million during the six months endedJune 30, 2022 and 2021, respectively. During the six months endedJune 30, 2022 and 2021, investing activities used cash of$647.2 million and provided cash of$33.5 million , respectively. Investing activities in the 2022 period used cash primarily due to the purchase of investment securities, the purchases of loans and the net origination of loans, partially offset by payments received on investment securities. Investing activities in the 2021 period provided cash primarily due to the payments received on investment securities and the net repayments of loans, partially offset by the purchase of investment securities and the purchases of loans.
Changes in cash flows from financing activities during the periods covered by the Statements of Cash Flows were due to changes in deposits after interest credited and changes in short-term borrowings, as well as advances from borrowers for taxes and insurance, dividend payments to stockholders, repurchases of the Company's common stock and the exercise of common stock options.
64 Financing activities provided cash of$88.9 million and$29.8 million during the six months endedJune 30, 2022 and 2021, respectively. In the 2022 six-month period, financing activities provided cash primarily as a result of net increases in short-term borrowings and increases in time deposits, partially offset by decreases in checking and savings deposits, the repurchase of the Company's common stock and dividends paid to stockholders. In the 2021 six-month period, financing activities provided cash primarily as a result of net increases in checking and savings account balances, partially offset by decreases in time deposits, decreases in short-term borrowings, dividends paid to stockholders and the purchase of the Company's common stock.
Capital Resources
Management continuously reviews the capital position of the Company and the Bank to ensure compliance with minimum regulatory requirements, as well as to explore ways to increase capital either by retained earnings or other means. AtJune 30, 2022 , the Company's total stockholders' equity and common stockholders' equity were each$549.6 million , or 9.9% of total assets, equivalent to a book value of$44.53 per common share. As ofDecember 31, 2021 , total stockholders' equity and common stockholders' equity were each$616.8 million , or 11.3% of total assets, equivalent to a book value of$46.98 per common share. AtJune 30, 2022 , the Company's tangible common equity to tangible assets ratio was 9.7%, compared to 11.2% atDecember 31, 2021 (See Non-GAAP Financial Measures below). Included in stockholders' equity atJune 30, 2022 andDecember 31, 2021 , were unrealized gains (losses) (net of taxes) on the Company's available-for-sale investment securities totaling$(28.4 million) and$9.1 million , respectively. This decrease in unrealized gains primarily resulted from rising market interest rates, which decreased the fair value of investment securities. Also included in stockholders' equity atJune 30, 2022 , were unrealized gains (net of taxes) on the Company's held-to-maturity investment securities totaling$249,000 . Approximately$227 million of investment securities which were previously included in available-for-sale were transferred to held-to-maturity during the first quarter of 2022. In addition, included in stockholders' equity atJune 30, 2022 , were realized gains (net of taxes) on the Company's terminated cash flow hedge (interest rate swap), totaling$20.5 million . This amount, plus associated deferred taxes, is expected to be accreted to interest income over the remaining term of the original interest rate swap contract, which was to end inOctober 2025 . AtJune 30, 2022 , the remaining pre-tax amount to be recorded in interest income was$26.6 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 atJune 30, 2022 , was an unrealized loss (net of taxes) on the Company's outstanding cash flow hedge (interest rate swap) totaling$5.7 million . Anticipated higher market interest rates have caused the fair value of this interest rate swap to decrease. As noted above, total stockholders' equity decreased$67.2 million , from$616.8 million atDecember 31, 2021 to$549.6 million atJune 30, 2022 . Accumulated other comprehensive income decreased$46.1 million during the six months endedJune 30, 2022 , primarily due to decreases in the fair value of available-for-sale investment securities and the fair value of cash flow hedges. Stockholders' equity also decreased due to repurchases of the Company's common stock totaling$50.4 million and dividends declared on common stock of$9.5 million . The Company recorded net income of$35.2 million for the six months endedJune 30, 2022 . In addition, stockholders' equity increased$3.7 million due to stock option exercises. Banks are required to maintain minimum risk-based capital ratios. These ratios compare capital, as defined by the risk-based regulations, to assets adjusted for their relative risk as defined by the regulations. Under current guidelines, which became effectiveJanuary 1, 2015 , banks must have a minimum common equity Tier 1 capital ratio of 4.50%, a minimum Tier 1 risk-based capital ratio of 6.00%, a minimum total risk-based capital ratio of 8.00%, and a minimum Tier 1 leverage ratio of 4.00%. 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%. OnJune 30, 2022 , the Bank's common equity Tier 1 capital ratio was 12.2%, its Tier 1 capital ratio was 12.2%, its total capital ratio was 13.4% and its Tier 1 leverage ratio was 11.7%. As a result, as ofJune 30, 2022 , the Bank was well capitalized, with capital ratios in excess of those required to qualify as such. OnDecember 31, 2021 , the Bank's common equity Tier 1 capital ratio was 14.1%, its Tier 1 capital ratio was 14.1%, its total capital ratio was 15.4% and its Tier 1 leverage ratio was 11.9%. As a result, as ofDecember 31, 2021 , the Bank was well capitalized, with capital ratios in excess of those required to qualify as such. The FRB has established capital regulations for bank holding companies that generally parallel the capital regulations for banks. OnJune 30, 2022 , the Company's common equity Tier 1 capital ratio was 10.8%, its Tier 1 capital ratio was 11.3%, its total capital ratio was 13.9% and its Tier 1 leverage ratio was 10.7%. To be considered well capitalized, a bank holding company must have
a Tier 1 65 risk-based capital ratio of at least 6.00% and a total risk-based capital ratio of at least 10.00%. As ofJune 30, 2022 , the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such. OnDecember 31, 2021 , the Company's common equity Tier 1 capital ratio was 12.9%, its Tier 1 capital ratio was 13.4%, its total capital ratio was 16.3% and its Tier 1 leverage ratio was 11.3%. As ofDecember 31, 2021 , the Company was considered well capitalized, with capital ratios in excess of those required to qualify as such. In addition to the minimum common equity Tier 1 capital ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio, the Company and the Bank have to maintain a capital conservation buffer consisting of additional common equity Tier 1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. AtJune 30, 2022 , the Company and the Bank both had additional common equity Tier 1 capital in excess of the buffer amount. OnAugust 15, 2021 , the Company completed the redemption, at par, of all$75.0 million aggregate principal amount of its 5.25% subordinated notes dueAugust 15, 2026 . The Company utilized cash on hand for the redemption payment. The annual combined interest expense and amortization of deferred issuance costs on these subordinated notes was approximately$4.3 million . These subordinated notes were included as capital in the Company's calculation of its total capital ratio. Dividends. During the three months endedJune 30, 2022 , the Company declared a common stock cash dividend of$0.40 per share, or 28% of net income per diluted common share for that three month period, and paid a common stock cash dividend of$0.36 per share (which was declared inMarch 2022 ). During the three months endedJune 30, 2021 , the Company declared a common stock cash dividend of$0.34 per share, or 23% of net income per diluted common share for that three month period, and paid a common stock cash dividend of$0.34 per share (which was declared inMarch 2021 ). During the six months endedJune 30, 2022 , the Company declared common stock cash dividends totaling$0.76 per share, or 28% of net income per diluted common share for that six month period, and paid common stock cash dividends of$0.70 per share. During the six months endedJune 30, 2021 , the Company declared common stock cash dividends of$0.68 per share, or 24% of net income per diluted common share for that six month period, and paid common stock cash dividends of$0.68 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 ofJune 30, 2022 , was paid to stockholders inJuly 2022 . Common Stock Repurchases and Issuances. The Company has been in various buy-back programs sinceMay 1990 . During the three months endedJune 30, 2022 , the Company repurchased 430,100 shares of its common stock at an average price of$58.27 per share and issued 12,577 shares of common stock at an average price of$40.74 per share to cover stock option exercises. During the three months endedJune 30, 2021 , the Company repurchased 67,514 shares of its common stock at an average price of$54.50 per share and issued 33,227 shares of stock at an average price of$44.36 per share to cover stock option exercises. During the six months endedJune 30, 2022 , the Company repurchased 849,315 shares of its common stock at an average price of$59.32 per share and issued 64,271 shares of common stock at an average price of$46.17 per share to cover stock option exercises. During the six months endedJune 30, 2021 , the Company repurchased 142,379 shares of its common stock at an average price of$52.39 per share and issued 49,131 shares of stock at an average price of$42.66 per share to cover stock option exercises. OnJanuary 19, 2022 , the Company's Board of Directors authorized management to purchase up to one million shares of the Company's outstanding common stock, under a program of open market purchases or privately negotiated transactions. The authorization of this program became effective during the three months endedMarch 31, 2022 and does not have an expiration date. Management has historically utilized stock buy-back programs from time to time as long as management believed that repurchasing the Company's common stock would contribute to the overall growth of shareholder value. The number of shares that will be repurchased at any particular time and the prices that will be paid are subject to many factors, several of which are outside of the control of the Company. 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.
Non-GAAP Financial Measures
This document contains certain financial information determined by methods other than in accordance with accounting principles generally accepted inthe United States ("GAAP"), specifically, the ratio of tangible common equity to tangible assets. In calculating the ratio of tangible common equity to tangible assets, we subtract period-end intangible assets from common equity and from total assets. Management believes that the presentation of this measure excluding the impact of intangible assets provides useful supplemental information that is helpful in understanding our financial condition and results of operations, as it provides a method to assess management's success in utilizing our tangible capital as well as our capital strength. Management also believes that providing a measure that excludes balances of intangible assets, which are subjective components of valuation, facilitates the 66
comparison of our performance with the performance of our peers. In addition, management believes that this is a standard financial measure used in the banking industry to evaluate performance.
This non-GAAP financial measurement is supplemental and is not a substitute for any analysis based on GAAP financial measures. Because not all companies use the same calculation of non-GAAP measures, this presentation may not be comparable to similarly titled measures as calculated by other companies. Non-GAAP Reconciliation: Ratio of Tangible Common Equity to Tangible Assets
June 30, 2022 December 31, 2021 (Dollars in Thousands) Common equity at period end$ 549,644 $ 616,752
Less: Intangible assets at period end 11,246
6,081
Tangible common equity at period end (a)
610,671
Total assets at period end$ 5,551,996 $
5,449,944
Less: Intangible assets at period end 11,246
6,081
Tangible assets at period end (b)$ 5,540,750 $
5,443,863
Tangible common equity to tangible assets (a) / (b) 9.72 %
11.22 %
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