What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-02-09 compared with 2020-08-07 · 405 added, 877 removed, 729 unchanged (64% of the section changed)

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The Company and the Bank may from time to time make written or oral "forward-looking statements," including statements contained in documents filed or furnished by the Company with the SEC.

These forward-looking statements may be included in this Quarterly Report on Form 10-Q and the exhibits attached to it, in the Company's reports to stockholders, in the Company's press releases, and in other communications by the Company, which are made in good faith by us pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements may be included in this Quarterly Report on Form 10-Q and the exhibits attached to it, in the Company's reports to stockholders, in the Company's press releases, and in other communications by the Company, which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond our control.

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• our ability to access cost-effective funding;

• the expected cost savings, synergies and other benefits from our acquisition of Capital City Bancshares, Inc.

("CCB") might not be realized within the anticipated time frames or at all;

• our ability to extend the commercial banking and trust asset management expertise acquired from CCB through our existing branch footprint;

• the expected synergies and other benefits from our acquisition activities;

• our ability to extend our commercial banking and trust asset management expertise;

• fluctuations in deposit flows;

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• changes in real estate values, unemployment levels, and the level and direction of loan delinquencies and charge-offs may require changes in the estimates of the adequacy of the ACL, which may adversely affect our business;

• potential adverse impacts of the ongoing COVID-19 pandemic and any governmental or societal responses thereto on the economic conditions in the Company's local market areas and other market areas where the Bank has lending relationships, on other aspects of the Company's business operations and on financial markets;

• potential adverse impacts of the ongoing COVID-19 pandemic and any governmental or societal responses thereto on economic conditions in the Company's local market areas and other market areas where the Bank has lending relationships, on other aspects of the Company's business operations and on financial markets;

• increases in classified and/or non-performing assets, which may require the Bank to increase the ACL, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets;

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The following summary should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section in its entirety.

Response to and Impact of the COVID-19 Pandemic

During the current quarter, the COVID-19 pandemic continued to have an impact on our customers, employees, and business operations.

Management's actions related to COVID-19 and the impact of COVID-19 on certain aspects of the Company's business are summarized below.

Bank operations - In mid-March 2020, preventative health measures were put in place including elimination of business-related travel, implementing mandatory work from home for all employees able to do so, social distancing precautions for all employees in Bank offices, and preventative cleaning at offices and branches.

Lobby services were limited to appointment only while drive-through, mobile, and online banking became the Bank's primary channels of serving customers.

Retail loan closings have been conducted with customers coming to our drive-through facilities and commercial loans have been closed in person only when necessary.

All employees continue to be paid their regular salary and receive full benefits.

In mid-May 2020, lobbies reopened with limitations on the number of customers in a branch at one time.

We also implemented operational measures to promote social distancing when customers visit branches and installed sneeze guards.

There are several other precautions being taken at our locations such as extra cleaning in high traffic/touch areas and providing locations with additional cleaning supplies, hand sanitizer and masks.

In early June 2020, back-office employees started to return to the office in phases.

Due to the increase in COVID-19 cases in late June into July 2020, management rolled back the changes to the lobbies that occurred mid-May and adjusted the return to office phases, where necessary, for back-office employees.

Our lobby services are now again by appointment only.

Management continues to monitor COVID-19 cases and will reopen lobbies when we believe it is appropriate to do so.

Loan modification programs - In late March 2020, the Bank announced loan modification programs to support and provide relief for its borrowers during the COVID-19 pandemic.

Generally, COVID-19 loan modifications for one- to four-family loans and consumer loans consist of a three-month payment forbearance of principal, interest and, in some cases, escrow.

COVID-19 loan modifications of commercial loans mainly consist of a six-month interest-only payment period.

If it is determined that a COVID-19 loan modification is not short-term or the customer does not meet the criteria under authoritative guidance to be excluded from TDR classification, the Bank evaluates the loan modifications under its existing TDR framework.

None of the Bank's COVID-19 loan modifications through June 30, 2020 have been deemed to be TDRs.

As of June 30, 2020, the Bank had processed COVID-19 loan modifications for 896 one- to four-family loans totaling $233.4 million, for which the borrowers had a weighted average credit score of 733, and 94 consumer loans totaling $2.6 million.

Included in these one- to four-family and consumer loan totals are 163 loans with a combined balance of $37.1 million for which the borrowers have requested additional assistance, generally another three-month payment forbearance, and the Bank either completed or was in the process of completing a second modification as of July 31, 2020.

During the month of July 2020, the Bank completed or was in the process of completing a first modification for an additional $6.4 million of one- to four-family and consumer loans.

As of June 30, 2020, the Bank had processed COVID-19 loan modifications for 229 commercial loans with a combined gross loan amount of $392.8 million, which includes undisbursed amounts.

Included in these totals are six loans with a combined gross loan amount, including undisbursed funds, of $30.6 million for which the borrowers have requested an additional three months of payment

deferrals and the Bank was in the process of completing the second modification as of July 31, 2020.

During the month of July 2020, the Bank completed a first modification for one additional commercial loan for $19.2 million.

Small Business Administration ("SBA") Payroll Protection Program ("PPP") loans - As of June 30, 2020, the Bank had originated and funded 700 PPP loans totaling $42.6 million, with a median loan amount of $21 thousand, and received origination fees totaling $1.8 million associated with these loans.

These loans are fully guaranteed by the SBA.

The program ended June 30, 2020, but was extended on July 6, 2020 through August 8, 2020.

Through July 31, 2020, the Bank had originated an additional $738 thousand in PPP loans.

The Bank continues to accept applications for PPP loans.

Correspondent loan activity - In an effort to manage the influx of refinance requests from current customers in our local markets during the initial days of the COVID-19 pandemic, the Bank suspended its acceptance of new applications for correspondent one- to four-family loans in mid-March 2020.

Correspondent applications and commitments in the pipeline at the time of the suspension continued to progress through the approval and funding process.

In mid-June 2020, the Bank resumed accepting new applications for correspondent one- to four-family loans.

Capital, liquidity, and dividends - Management performed stress test scenarios during April 2020.

Based on the Company's existing capital levels, deposit inflows, loan underwriting policies, loan concentration, and geographical diversification, no liquidity or capital concerns were identified as a result of the stress tests.

Management anticipates being able to manage the economic risks and uncertainties associated with the COVID-19 pandemic and remain well capitalized with sufficient liquidity to serve our customers.

Deposit balances have increased due primarily to the economic stimulus payments and PPP loans.

As a result, management is currently faced with the challenge of excess liquidity.

Due to the nature of deposit cash flows, management does not know how long the excess liquidity will be retained.

As such, management has elected, for the time being, to reduce the Bank's level of borrowings using the excess liquidity from the deposit portfolio.

With earnings of $0.34 per share, year-to-date, and a cash balance at the holding company level of $89.0 million, the Company has the resources to continue to pay its regular quarterly dividend of $0.085 per share for the foreseeable future.

Given the state of economic uncertainty and how that may play out with the credit risk exposure in the Bank's loan portfolio, the Company elected to defer the annual True Blue dividend in June 2020 and did not ask for a regulatory non-objection to move capital from the Bank to the Company to pay that dividend.

It is management's intent to ask for a regulatory non-objection at some point in the future and to pay this dividend when economic conditions are more certain.

It remains the Company's intent to pay out 100% of its earnings.

Summary of Financial Condition and Results of Operation

Markets responded to the COVID-19 pandemic in many ways, with a dramatic lowering of interest rates in a short period of time having the most impact on the operations and performance of the Bank.

With the pandemic impacting the United States later in the March 2020 quarter, the opportunity to fully respond in that quarter was somewhat limited.

Since the onset of the pandemic, the Bank lowered its offered rates on deposits and restructured its borrowings.

We have lowered offered rates on all retail deposit products except checking and savings accounts.

Changes in the rates paid on money market accounts have an immediate impact on the cost of our deposits, while the impact of reducing rates offered on our certificate of deposit products lower the cost of deposits only as higher-costing certificates of deposit reprice lower when they mature.

During the prior quarter, the Bank was able to restructure the cost of $350.0 million of its FHLB advances by lowering their cost 72 basis points.

During the current quarter, we realized the full benefit of that restructuring.

As the Bank further monitors rates offered and the cost of borrowings, we anticipate that the average cost of our interest-bearing liabilities will continue to decrease.

During late February 2020 and through much of March 2020, rates offered on our one- to four-family loan products increased in order to control the volume of loans the Bank could process.

During the current quarter, the offered rates on our one- to four-family loans decreased along with local market rates, but our ability to process the loan volumes was maintained.

Given current rates offered on new loans and the recent volume of one- to four-family refinances and endorsements of terms to lower current market rates, the yield on the total loan portfolio is likely to continue to decrease.

Additionally, with significant cash inflows realized due to securities being called and prepayments on MBS increasing, the yields on reinvested funds into new securities are lower than the portfolio yield.

Considering the drastic changes in market rates and the ongoing economic uncertainty, even with the changes the Bank has made to its cost of funding, with the lower rates on new mortgage loans, refinances, endorsements and new securities also at lower rates, our net interest margin could continue to decrease with further downside risk as a result of high levels of prepayments and premium amortization on correspondent loans, as was experienced during the current quarter.

The Federal Reserve, in response to economic risks resulting from the COVID-19 pandemic, returned to a zero-interest rate policy in March 2020 and indicated an intention to stay with this policy at the July 2020 meeting.

This was after most broader market rates decreased significantly in response to evolving news about COVID-19.

Deteriorating economic conditions included more than 20

million people becoming unemployed in the United States in one month's time, with more than 45 million in total filing for unemployment benefits, along with immediate reductions in consumer spending on almost all categories of purchases except groceries and staples, and closure or significantly reduced operations of restaurants, bars, airlines, hotels, and entertainment and hospitality venues, among others, and had a devastating impact on the economy.

Since that time, many areas of consumer spending rebounded during May and June, generally locally and not related to travel and entertainment.

Some economic indices began to show weakness in July.

In the Bank's local markets, governments put stay-at-home orders into effect which only allow for essential businesses to remain open.

Many of these stay-at-home orders have been lifted or greatly reduced.

As previously described, we adjusted our operations in response to the orders and have worked with both our retail and commercial customers to help them manage their debt during this period of economic uncertainty as our regulators or the CARES Act have allowed.

Given the current level of the Company's total assets and the economic and interest rate environment, it is unlikely that the total loan portfolio will increase materially during the remainder of fiscal year 2020.

We have been responding and expect to continue to respond to local market conditions regarding the loan and deposit rates we offer.

There is increasing concern about the longer lasting impact on local business as well as travel and entertainment resulting from the COVID-19 pandemic.

Management's Evolving Response to COVID-19

We continue to be confronted with a significant and unfamiliar degree of uncertainty as to how a COVID-19 resurgence may impact our customers, employees, and operations and how actions taken by governmental authorities and other third parties in response to a resurgence would impact our customers, employees, and operations.

We will continue to monitor COVID-19 cases and will adjust operational plans as necessary.

We will also continue to assist our customers as necessary during these uncertain times.

Impact on Market Interest Rates as a Result of the COVID-19 Pandemic and Company's Response

The FRB, in response to economic risks resulting from the COVID-19 pandemic, returned to a zero-interest rate policy in March 2020.

This was after most broader market rates decreased significantly in response to evolving news about the COVID-19 pandemic.

Many areas of consumer spending, not related to travel and entertainment, have rebounded in recent months.

We adjusted our operations in response to the COVID-19 pandemic and continue to work with both our retail and commercial customers to help them manage their debt during this period of economic uncertainty.

There is uncertainty about the longer lasting impact on local business as well as travel and entertainment resulting from the COVID-19 pandemic.

This could cause a longer recovery time for all sectors of the economy and could make it challenging for sectors that have had better recoveries to maintain that recovery in the long run.

For the quarter ended June 30, 2020, the Company recognized net income of $19.5 million, or $0.14 per share, compared to net income of $22.9 million, or $0.17 per share, for the quarter ended June 30, 2019.

The decrease in net income was due primarily to a decrease in net interest income, partially offset by decreases in non-interest expense and income tax expense.

Since the onset of the COVID-19 pandemic, the Bank has lowered its offered rates on all retail deposit products except checking and savings accounts.

Reducing rates on non-maturity deposits lowers the cost of deposits immediately, while the impact of reducing rates offered on our certificate of deposit products lowers the cost of deposits as certificates of deposit reprice to a lower rate when they mature and as new accounts are opened.

We responded to lower market rates for lending by lowering rates offered on our loan products.

Given current rates offered on new loans, increased prepayments on existing loans, and the volume of one- to four-family refinances and endorsements, the yield on the total loan portfolio is likely to continue to decrease.

With significant cash inflows realized due to investment securities being called and prepayments on loans and MBS increasing, the current yields on reinvested funds into new securities are lower than existing portfolio yields.

We continue to respond to local market conditions regarding the loan and deposit rates we offer.

Given the current level of the Company's total assets and the economic and interest rate environment, it is unlikely that the total loan portfolio will increase materially in the near future.

As noted above, the Bank has lowered rates paid on money market accounts and certificate of deposit products.

Despite this, since March 31, 2020, the Bank's retail deposits increased $408.3 million and business deposits increased $264.6 million.

The Bank secured a new business deposit relationship during the prior fiscal year, which between March 31, 2020 and December 31, 2020 brought $206.4 million of new deposit balances.

Because some of the deposits received from the new relationship are COVID-19-related payments, we do not expect the full balance of deposits received to be retained through fiscal year 2021.

As retail certificates of deposit mature, not all are being renewed.

Rather, customers are moving some of those funds to more liquid deposit options such as the Bank's retail money market accounts.

Considering the drastic changes in market rates and the ongoing economic uncertainty, our net interest margin could continue to decrease, with further downside risk as a result of high levels of prepayments and premium amortization on correspondent one- to four-family loans and MBS.

Summary of Results of Operation and Financial Condition

The Company recognized net income of $18.9 million, or $0.14 per share, for the quarter ended December 31, 2020 compared to net income of $22.5 million, or $0.16 per share, for the quarter ended December 31, 2019.

The decrease in net income was due primarily to a decrease in net interest income compared to the prior year quarter, partially offset by recording a negative provision for credit losses in the current quarter.

Net interest income decreased $4.9 million, or 10.0%, from the prior year quarter to $43.8 million for the current quarter.

The net interest margin decreased 26 basis points, from 2.18% for the prior year quarter to 1.92% for the current quarter.

The decrease in the net interest margin was due mainly to a decrease in the loan portfolio yield, specifically the yield on the correspondent one- to four-family loan portfolio due to an increase in premium amortization as result of an increase in payoff activity.

For the nine months ended June 30, 2020, the Company recognized net income of $46.3 million, or $0.34 per share, a decrease of $25.6 million, or 35.6%, from the nine-month period ended June 30, 2019.

The decrease in net income was due primarily to a $21.9 million increase in provision for credit losses and a decrease in net interest income, partially offset by a decrease in income tax expense.

Net interest income decreased $12.9 million, or 8.3%, from the prior year period to $143.7 million for the current year period.

The net interest margin decreased 15 basis points, from 2.30% for the prior year period to 2.15% for the current period.

The leverage strategy was suspended at certain times during the prior year period and during all of the current year period due to the negative interest rate spreads between the related FHLB borrowings and cash held at the FRB of Kansas City, making the transaction unprofitable.

When the leverage strategy is in place, it increases our net interest income but reduces the net interest margin due to the amount of earnings from the transaction in comparison to the size of the transaction.

Excluding the effects of the leverage strategy, the net interest margin would have decreased 17 basis points, from 2.32% for the prior year period to 2.15% for the current year period.

The decrease in the net interest margin, excluding the effects of the leverage strategy, was due mainly to an increase in the cost of retail/business certificates of deposit, as well as a decrease in the loan portfolio yield, specifically the yield on the correspondent one- to four-family loan portfolio.

Total assets were $9.56 billion at June 30, 2020 compared to $9.34 billion at September 30, 2019.

The $218.8 million, or 2.3% increase was due mainly to an increase in cash and cash equivalents due to deposit growth.

Management elected to keep a higher balance of cash on hand at June 30, 2020 due to the uncertainty surrounding the current economic environment, and in anticipation of paying off certain fixed-rate borrowings scheduled to mature during the fourth quarter of fiscal year 2020, depending on deposit cash flows.

Total loans were $7.39 billion at June 30, 2020 compared to $7.42 billion at September 30, 2019.

The $28.7 million, or 0.4% decrease was primarily in the one- to four-family correspondent and bulk loans, partially offset by an increase in commercial real estate and commercial and industrial loans.

During the current year period, the Bank originated and refinanced $720.0 million of one- to four-family and consumer loans with a weighted average rate of 3.37% and purchased $382.1 million of one- to four-family loans from correspondent lenders with a weighted average rate of 3.34%.

The decrease in the net interest margin was due mainly to a decrease in asset yields, along with a change in asset mix as cash flows from the loan portfolio have been used to purchase lower yielding securities, partially offset by a decrease in the cost of deposits and borrowings.

Total assets increased $119.7 million, or 1.3% from September 30, 2020 to December 31, 2020, due mainly to an increase in securities, partially offset by a decrease in loans receivable.

Securities were purchased with cash flows from the loan portfolio and growth in the deposit portfolio.

Total loans decreased $198.8 million from September 30, 2020 to December 31, 2020.

The decrease was primarily in the one- to four-family correspondent loans and commercial loans.

During the current quarter, the Bank originated and refinanced $329.6 million of one- to four-family and consumer loans with a weighted average rate of 2.76% and purchased $105.8 million of one- to four-family loans from correspondent lenders with a weighted average rate of 2.85%.

The Bank also originated $38.1 million of commercial loans with a weighted average rate of 3.77% and entered into commercial real estate loan participations of $60.0 million at a weighted average rate of 4.00%.

The commercial loan portfolio totaled $812.3 million at June 30, 2020 and was composed of 77% commercial real estate, 12% commercial and industrial, and 11% commercial construction.

Total commercial real estate and commercial construction potential exposure, including undisbursed amounts and outstanding commitments totaling $154.5 million, was $867.1 million at June 30, 2020.

Total commercial and industrial potential exposure, including undisbursed amounts and outstanding commitments of $22.4 million, was $122.2 million at June 30, 2020.

Total deposits were $6.07 billion at June 30, 2020 compared to $5.58 billion at September 30, 2020.

The $487.8 million, or 8.7% increase was primarily in non-maturity deposits which increased $442.3 million, including a $220.8 million increase in checking accounts, a $122.0 million increase in money market accounts, and a $99.4 million increase in savings accounts.

The increase was due in part to Economic Impact Payments from the U.S.

Government to individuals as authorized by the CARES Act, deposits from PPP loans, commercial deposit growth, and a delay in federal income tax payment due dates from April 15 to July 15.

Retail/business certificates of deposit increased $51.9 million due primarily to the President's Day certificate of deposit campaign in February 2020.

Total borrowings at June 30, 2020 were $1.99 billion, a decrease of $250.9 million, or 11.2%, from September 30, 2019.

The decrease was due to not renewing a portion of the FHLB advances that matured during the current year period and repaying the FHLB line of credit balance.

Stockholders' equity was $1.30 billion at June 30, 2020 compared to $1.34 billion at September 30, 2019.

The $35.8 million decrease was due primarily to the payment of $82.1 million in cash dividends, partially offset by net income of $46.3 million during the current year period.

In the long run, management considers a Bank stockholders' equity to total assets ratio of at least 10% an appropriate level of capital.

At June 30, 2020, this ratio was 12.2%.

The cash dividends paid during the current period totaled $0.595 per share and consisted of a $0.34 per share cash true-up dividend related to fiscal year 2019 earnings, paid in December 2019, per the Company's dividend policy, and three regular quarterly cash dividends totaling $0.255 per share.

On July 23, 2020, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.7 million, payable on August 21, 2020 to stockholders of record as of the close of business on August 7, 2020.

At times, the Bank has utilized a leverage strategy to increase earnings.

The leverage strategy involves borrowing up to $2.10 billion either on the Bank's FHLB line of credit or by entering into short-term FHLB advances, depending on the rates offered by FHLB.

The borrowings are repaid at quarter end, or earlier if the strategy is suspended.

The proceeds from the borrowings, net of the required FHLB stock holdings, are deposited at the FRB of Kansas City.

Net income attributable to the leverage strategy is largely derived from the dividends received on FHLB stock holdings, plus the net interest rate spread between the yield on the cash at the FRB of Kansas City and the rate paid on the related FHLB borrowings, less applicable federal insurance premiums and estimated taxes.

The leverage strategy was not in place during the current nine-month period, due to the large negative interest rate spread making the strategy unprofitable.

Management continues to monitor the net interest rate spread and overall profitability of the strategy.

It is expected that the strategy will be reimplemented if it reaches a position that is profitable.

The commercial loan portfolio totaled $763.9 million at December 31, 2020 and was composed of 80% commercial real estate, 9% commercial and industrial, and 11% commercial construction.

Total commercial real estate and commercial construction potential exposure, including undisbursed amounts and outstanding commitments totaling $275.9 million, was $970.4 million at December 31, 2020.

Total commercial and industrial potential exposure, including undisbursed amounts and outstanding commitments of $22.2 million, was $91.6 million at December 31, 2020.

Total securities increased $352.9 million, or 22.6%, from September 30, 2020 to December 31, 2020, including a $278.5 million increase in MBS and a $74.4 million increase in investment securities.

The increase was due primarily to cash flows from the loan portfolio being reinvested into the securities portfolio.

Total deposits increased $219.4 million, or 3.5%, from September 30, 2020 to December 31, 2020.

The increase was in non-maturity deposits, which increased $222.5 million, including a $131.1 million increase in checking accounts, a $69.6 million increase in money market accounts, and a $21.8 million increase in savings accounts.

Retail/business certificates of deposit increased $11.5 million during the quarter, offset by a $14.6 million decrease in public unit certificates of deposit.

Total borrowings at December 31, 2020 were $1.73 billion, a decrease of $55.0 million, or 3.0%, from September 30, 2020.

The decrease was due to not renewing borrowings that matured during the current quarter.

Cash flows from the deposit portfolio were used to pay off maturing borrowings.

Stockholders' equity was $1.28 billion at both December 31, 2020 and September 30, 2020.

During the quarter, the Company paid cash dividends totaling $29.1 million and repurchased common stock totaling $1.5 million, partially offset by net income of $18.9 million.

The cash dividends paid during the current quarter totaled $0.215 per share and consisted of a $0.13 per share cash true-up dividend related to fiscal year 2020 earnings and a regular quarterly cash dividend of $0.085 per share.

On January 26, 2021, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.5 million, payable on February 19, 2021 to stockholders of record as of the close of business on February 5, 2021.

In the long run, management considers the Bank's equity to total assets ratio of at least 10% an appropriate level of capital.

At December 31, 2020, this ratio was 12.2%.

Available Information

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Critical Accounting Policies

Our most critical accounting policies are the methodologies used to determine the ACL and fair value measurements.

Our most critical accounting policies are the methodologies used to determine the ACL and reserve for off-balance sheet credit exposures and fair value measurements.

These policies are important to the presentation of our financial condition and results of operations, involve a high degree of complexity, and require management to make difficult and subjective judgments that may require assumptions or estimates about highly uncertain matters.

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These critical accounting policies and their application are reviewed at least annually by our audit committee.

For a full discussion of our critical accounting policies, see Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019.

The following is a description of our critical accounting policies and an explanation of the methods and assumptions underlying their application.

Allowance for Credit Losses and Reserve for Off-Balance Sheet Credit Exposures.

The ACL is a valuation amount that is deducted from the amortized cost basis of loans and represents management's current expectations of total expected credit losses included in the Company's loan portfolio as of the balance sheet date.

The reserve for off-balance sheet credit exposures represents expected credit losses on unfunded portions of existing loans and commitments to originate or purchase loans that are not unconditionally cancellable by the Company.

The reserve for off-balance sheet credit exposures is reported as a liability and is presented in accounts payable and accrued expenses on the consolidated balance sheet.

The ACL and reserve for off-balance sheet credit exposures is maintained through provisions for credit losses which are either charged or credited to income.

The methodology for determining the ACL is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in forecasted macroeconomic conditions that could result in fluctuations in the amount of the recorded ACL.

The reserve for off-balance sheet credit exposures is calculated using the same methodology as the ACL;

however, the estimate of credit risk for off-balance sheet credit exposures takes into consideration the likelihood that funding of the commitment will occur.

Each quarter end, the Company prepares an ACL model to calculate expected credit losses.

The Company aggregates loans into pools in the ACL model based on similar risk characteristics.

Loans that do not share similar risk characteristics are evaluated on an individual basis and are not included in the ACL model.

The key assumptions in the Company's ACL model include the economic forecast, the forecast and reversion to mean time periods, and prepayment and curtailment assumptions.

Using all of these inputs and assumptions, the ACL model generates aggregated estimated cash flows for the time period that remains for each loan's contractual life.

The cash flows are discounted back to the reporting date using each loan's effective yield, to arrive at the present value of future cash flows.

Each loan pool's ACL is equal to the aggregate shortage, if any, of the present value of the future cash flows compared to the amortized cost basis of the loan pool.

Management considers qualitative factors such as changes in the loan portfolio composition and credit concentrations, changes in lending policies and procedures and underwriting standards, changes in the balances and/or trends in asset quality and or loan credit performance, and/or other external factors such as significant unique events or conditions when evaluating the adequacy of the ACL and reserve for off-balance sheet credit exposures calculated by the ACL model.

Management may increase or decrease the ACL and reserve for off-balance sheet credit exposures based on the evaluation of the qualitative factors.

See "Allowance for Credit Losses" and "Reserve for Off-Balance Sheet Credit Exposures" within "Note 1.

Summary of Significant Accounting Policies" above for additional information.

Fair Value Measurements.

The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with ASC 820 and ASC 825.

The Company groups its financial instruments at fair value in three levels based on the markets in which the instruments are traded and the reliability of the assumptions used to determine fair value, with Level 1 (quoted prices for identical assets in an active market) being considered the most reliable, and Level 3 having the most unobservable inputs and therefore being considered the least reliable.

The Company bases its fair values on the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date.

The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

The Company's AFS securities are measured at fair value on a recurring basis.

Changes in the fair value of AFS securities, not related to credit loss, are recorded, net of tax, as AOCI in stockholders' equity.

The Company primarily uses prices obtained from third-party pricing services to determine the fair value of its AFS securities.

Various modeling techniques are used to determine pricing for the Company's securities, including option pricing, discounted cash flow models, and similar techniques.

The inputs to these models may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data.

All AFS securities are classified as Level 2.

The Company's interest rate swaps are measured at fair value on a recurring basis.

The estimated fair value of the interest rate swaps are obtained from the counterparty and are determined by a discounted cash flow analysis using observable market-based inputs.

Changes in the fair value of the interest rate swaps are recorded, net of tax, as AOCI in stockholders' equity.

The Company did not have any other financial instruments that were measured at fair value on a recurring basis at December 31, 2020 and September 30, 2020.

Financial Condition

The following table presents selected balance sheet information as of the dates indicated.

June 30, March 31, December 31, September 30, June 30,

December 31, September 30, June 30, March 31, December 31,

2020 2020 2020 2020 2019

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AFS securities 1,913,866 1,560,950 1,220,054 1,236,037 1,229,587

HTM securities — — — — 483,858

Loans receivable, net 7,004,094 7,202,851 7,388,090 7,476,805 7,429,207

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Equity to total assets at end of period 13.3 % 13.5 % 13.6 % 13.7 % 14.1 %

Total assets were $9.56 billion at June 30, 2020, an increase of $187.6 million, or 2.0%, from March 31, 2020, due to an increase in cash and cash equivalents, partially offset by a decrease in loans receivable.

The increase in cash and cash equivalents was due mainly to deposit growth.

Total loans were $7.39 billion at June 30, 2020, a decrease of $88.7 million, or 1.2%, from March 31, 2020.

The decrease was mainly in the one- to four-family correspondent loan portfolio, partially offset by an increase in commercial and industrial loans due primarily to the origination of PPP loans.

As noted above, we suspended our acceptance of new applications for correspondent one- to four-family loans during the majority of the current quarter.

During the current quarter, the Bank originated and refinanced $270.0 million of one- to four-family and consumer loans with a weighted average rate of 3.19% and purchased $129.0 million of one- to four-family loans from correspondent lenders with a weighted average rate of 3.18%.

The Bank also originated $68.5 million of commercial loans with a weighted average rate of 2.23%, which included $42.6 million in PPP loans at a rate of 1.00%, and entered into commercial real estate loan participations of $65.2 million at a weighted average rate of 3.95%.

Total deposits were $6.07 billion at June 30, 2020, an increase of $295.1 million, or 5.1%, from March 31, 2020.

The increase was primarily in non-maturity deposits, including a $148.5 million increase in checking accounts and a $112.0 million increase in money market accounts.

The increase in deposits was due in part to Economic Impact Payments from the U.S.

government to individuals as authorized by the CARES Act, deposits from PPP loans, commercial deposit growth, and a delay in federal income tax payment due dates from April 15 to July 15.

Loans Receivable.

The following table presents the balance and weighted average rate of our loan portfolio as of the dates indicated.

Approximately 68% of the one- to four-family loan portfolio balance at June 30, 2020 was comprised of loans that had a balance of $510 thousand or less at the time of origination.

June 30, 2020 March 31, 2020 September 30, 2019

Amount Rate Amount Rate Amount Rate

December 31, 2020 September 30, 2020

Amount Rate Amount Rate

(Dollars in thousands)

24 unchanged sentences

Commercial loan renewals are not included in the activity in the following table unless new funds are disbursed at the time of renewal.

As noted earlier, during the initial days of the COVID-19 pandemic, correspondent one- to four-family loan application acceptance was suspended by the Bank but existing correspondent applications and commitments continued to progress through the approval and funding process.

One- to four-family correspondent new loan application acceptance was resumed in mid-June 2020.

The renewal balance and rate are included in the ending loan portfolio balance and rate.

For the Three Months Ended

June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019

December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020

Amount Rate Amount Rate Amount Rate Amount Rate

9 unchanged sentences

Repayments (664,055) (572,536) (586,434) (328,644)

Principal recoveries/(charge-offs), net 19 (314) (16) (110)

Other — (79) (257) (596)

Ending balance $ 7,407,442 3.64 $ 7,493,280 3.74 $ 7,424,834 3.77 $ 7,412,473 3.81

For the Nine Months Ended

June 30, 2020 June 30, 2019

Amount Rate Amount Rate

(Dollars in thousands)

Beginning balance $ 7,412,473 3.81 % $ 7,507,645 3.74 %

Originated and refinanced:

Fixed 684,488 3.22 316,581 4.39

Adjustable 171,698 4.04 260,058 4.87

Purchased and participations:

Fixed 380,469 3.50 136,974 4.83

Adjustable 95,296 3.50 64,000 4.57

Change in undisbursed loan funds (17,896) 39,927

Repayments (1,318,439) (822,533)

Principal (charge-offs)/recoveries, net (464) 312 19 (314)

1 unchanged sentence

Ending balance $ 7,023,626 3.46 $ 7,224,996 3.55 $ 7,407,442 3.64 $ 7,493,280 3.74

The following tables present loan origination, refinance, and purchase activity for the periods indicated, excluding endorsement activity, along with associated weighted average rates and percent of total.

The following table presents loan origination, refinance, and purchase activity for the periods indicated, excluding endorsement activity, along with associated weighted average rates and percent of total.

Commercial loan renewals are not included in the activity in the following table except to the extent new funds are disbursed at the time of renewal.

1 unchanged sentence

For the Three Months Ended

June 30, 2020 June 30, 2019

Amount Rate % of Total Amount Rate % of Total

(Dollars in thousands)

One- to four-family:

<= 15 years $ 126,378 2.79 % 23.7 % $ 21,097 3.62 % 9.4 %

> 15 years 205,047 3.39 38.5 103,515 4.13 46.1

One- to four-family construction 11,005 3.27 2.1 9,362 3.92 4.2

Commercial real estate 19,333 3.71 3.6 2,813 5.42 1.2

Commercial and industrial 46,609 1.23 8.8 5,058 4.98 2.3

Commercial construction — — — 7,061 5.57 3.1

Home equity 774 5.98 0.1 1,317 6.44 0.6

Other 497 6.76 0.1 1,095 5.94 0.5

Total fixed-rate 409,643 2.98 76.9 151,318 4.20 67.4

Adjustable-rate:

One- to four-family:

<= 36 months 1,610 2.74 0.3 333 3.18 0.1

> 36 months 40,099 2.93 7.5 35,922 3.59 16.0

One- to four-family construction 932 3.06 0.2 3,079 3.48 1.4

Commercial real estate 16,035 4.58 3.0 3,347 5.73 1.5

Commercial and industrial 1,504 3.79 0.3 10,896 5.80 4.8

Commercial construction 50,237 4.03 9.4 1,049 6.38 0.5

Home equity 12,390 4.42 2.3 18,020 6.35 8.0

Other 329 3.48 0.1 713 3.74 0.3

Total adjustable-rate 123,136 3.75 23.1 73,359 4.73 32.6

Total originated, refinanced and purchased $ 532,779 3.16 100.0 % $ 224,677 4.37 100.0 %

Purchased and participation loans included above:

Correspondent - one- to four-family $ 114,039 3.22 $ 23,547 4.43

Participations - commercial 17,700 3.70 5,900 5.50

Total fixed-rate purchased/participations 131,739 3.28 29,447 4.65

Adjustable-rate:

Correspondent - one- to four-family 15,010 2.87 10,018 3.85

Participations - commercial 47,500 4.04 — —

Total adjustable-rate purchased/participations 62,510 3.76 10,018 3.85

Total purchased/participation loans $ 194,249 3.44 $ 39,465 4.44

For the Nine Months Ended

June 30, 2020 June 30, 2019

December 31, 2020 December 31, 2019

Amount Rate % of Total Amount Rate % of Total

34 unchanged sentences

One- to Four-Family Loans - The following table presents, for our portfolio of one- to four-family loans, the amount, percent of total, weighted average credit score, weighted average LTV ratio, and average balance per loan as of the dates presented.

Credit scores are updated at least annually, with the latest update in June 2020, from a nationally recognized consumer rating agency.

Credit scores are updated at least annually, with the latest update in December 2020, from a nationally recognized consumer rating agency.

The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available.

In most cases, the most recent appraisal was obtained at the time of origination.

June 30, 2020 September 30, 2019

December 31, 2020 September 30, 2020

% of Credit Average % of Credit Average

7 unchanged sentences

Included in the "Refinanced by Bank customers" line item are correspondent loans that were refinanced with the Bank.

Of the loans originated during the current year-to-date period, $223.9 million were refinanced from other lenders.

Of the loans originated and refinanced during the current year-to-date period, 77% had loan values of $510 thousand or less.

Of the correspondent loans purchased during the current year-to-date period, 22% had loan values of $510 thousand or less.

Of the loans originated during the current quarter, $101.5 million were refinanced from other lenders.

For the Three Months Ended

June 30, 2020 June 30, 2019

Credit Credit

Amount LTV Score Amount LTV Score

(Dollars in thousands)

Originated $ 173,851 73 % 763 $ 119,600 80 % 761

Refinanced by Bank customers 82,171 67 767 20,143 67 748

Correspondent purchased 129,049 70 771 33,565 74 760

$ 385,071 71 766 $ 173,308 77 759

For the Nine Months Ended

June 30, 2020 June 30, 2019

December 31, 2020 December 31, 2019

Credit Credit

5 unchanged sentences

$ 419,879 69 770 $ 345,402 72 766

The following table presents the amount, percent of total, and weighted average rate, by state, of one- to four-family loan originations and correspondent purchases where originations and purchases in the state exceeded five percent of the total amount originated and purchased during the current year period.

For the Three Months Ended For the Nine Months Ended

June 30, 2020 June 30, 2020

State Amount % of Total Rate Amount % of Total Rate

For the Three Months Ended

December 31, 2020

State Amount % of Total Rate

(Dollars in thousands)

4 unchanged sentences

$ 419,879 100.0 % 2.72

One- to Four-Family Loan Commitments - The following table summarizes our one- to four-family loan origination and refinance commitments and one- to four-family correspondent loan purchase commitments as of June 30, 2020, along with associated weighted average rates.

Loan commitments generally have fixed expiration dates or other termination clauses and may require the payment of a rate lock fee.

As of December 31, 2020, there were $14.2 million of one- to-four family loans with COVID-19 loan modifications that were still in their deferral period.

There was $218.3 million of one- to four-family loans with COVID-19 loan modifications that were out of their deferral period by December 31, 2020.

Of the COVID-19 loan modifications that had completed the deferral period by December 31, 2020, $4.3 million were 30 to 89 days delinquent and $1.5 million were 90 or more days delinquent as of December 31, 2020.

One- to Four-Family Loan Commitments - The following table summarizes our one- to four-family loan origination and refinance commitments and one- to four-family correspondent loan purchase commitments as of December 31, 2020, along with associated weighted average rates.

Loan commitments generally have fixed expiration dates or other termination clauses and may require the

payment of a rate lock fee.

It is expected that some of the loan commitments will expire unfunded, so the amounts reflected in the table below are not necessarily indicative of our future cash needs.

6 unchanged sentences

Rate 2.35 % 2.91 % 2.56 %

Through June 30, 2020, the Bank had processed COVID-19 loan modifications for 896 one- to four-family loans totaling $233.4 million.

These modifications are summarized in the table below, along with the weighted average credit score and weighted average LTV as of June 30, 2020.

Credit scores are updated at least annually, with the latest update in June 2020, from a nationally recognized consumer rating agency.

The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available.

In most cases, the most recent appraisal was obtained at the time of origination.

Count Amount Score LTV

(Dollars in thousands)

Originated 630 $ 116,254 727 67 %

Correspondent purchased 262 115,877 739 68

Bulk purchased 4 1,240 727 71

896 $ 233,371 733 68

Commercial Loans - During the current year-to-date period, the Bank originated $136.1 million of commercial loans, of which $42.6 million were PPP loans, entered into commercial real estate loan participations totaling $93.6 million, and processed commercial loan disbursements, excluding lines of credit, of approximately $188.1 million at a weighted average rate of 3.72%.

The following table presents the Bank's commercial real estate and commercial construction loans and loan commitments by type of primary collateral, as of June 30, 2020.

Included in the gross loan amounts in the table, which does not include outstanding commitments, are fixed-rate loans totaling $528.9 million at a weighted average rate of 4.16% and adjustable-rate loans totaling $329.9 million at a weighted average rate of 4.43%.

The weighted average rate of fixed-rate loans is lower than that of adjustable-rate loans due primarily to the majority of the fixed-rate loans in the portfolio at June 30, 2020 having shorter terms to maturity.

Because the commitments to pay out undisbursed funds are not cancellable by the Bank, unless the loan is in default, we anticipate fully funding the related projects.

Commercial Loans - During the current quarter, the Bank originated $38.1 million of commercial loans and entered into commercial real estate loan participations totaling $60.0 million.

The Bank also processed commercial loan disbursements, excluding lines of credit, of approximately $45.4 million at a weighted average rate of 3.99%.

Early during the current quarter, two large participation loans totaling $57.3 million, with a weighted average rate of 3.93%, were paid off.

Additionally, during the current quarter $25.5 million of PPP loans were paid off, primarily by the U.S.

Small Business Administration ("SBA") following completion of the loan forgiveness process.

The following table presents the Bank's commercial real estate and commercial construction loans and loan commitments by type of primary collateral, as of December 31, 2020.

Because the commitments to pay out undisbursed funds are not cancellable by the Bank, unless the loan is in default, we anticipate fully funding the related project.

Unpaid Undisbursed Gross Loan Outstanding % of

Principal Amount Amount Commitments Total Total

Count Principal Amount Amount Commitments Total Total

(Dollars in thousands)

2 unchanged sentences

Retail building 131 126,963 12,023 138,986 15,113 154,099 15.9

Office building 101 59,008 63,566 122,574 556 123,130 12.7

Multi-family 42 67,792 17,418 85,210 25,052 110,262 11.4

One- to four-family property 380 60,037 4,749 64,786 944 65,730 6.8

Office building 53,720 2,580 56,300 2,454 58,754 6.8

Single use building 22 43,069 5,095 48,164 14,155 62,319 6.4

2 unchanged sentences

Weighted average rate 4.19 % 4.06 % 4.16 % 3.81 % 4.13 %

The following table summarizes the Bank's commercial real estate and commercial construction loans and loan commitments by state as of June 30, 2020.

The following table summarizes the Bank's commercial real estate and commercial construction loans and loan commitments by state as of December 31, 2020.

Unpaid Undisbursed Gross Loan Outstanding % of

Principal Amount Amount Commitments Total Total

Count Principal Amount Amount Commitments Total Total

(Dollars in thousands)

Kansas 624 $ 287,371 $ 21,118 $ 308,489 $ 52,120 $ 360,609 37.2 %

Missouri 218,019 68,416 286,435 548 286,983 33.1

Texas 11 121,514 108,930 230,444 31,777 262,221 27.0

Missouri 146 181,235 45,025 226,260 7,632 233,892 24.1

Nebraska 6 33,745 16 33,761 — 33,761 3.5

3 unchanged sentences

805 $ 694,500 $ 182,838 $ 877,338 $ 93,029 $ 970,367 100.0 %

The following table presents the Bank's commercial and industrial loans and loan commitments by business purpose, as of June 30, 2020.

Including in the working capital loan category are $42.6 million of PPP loans.

The following table presents the Bank's commercial and industrial loans and loan commitments by business purpose, as of December 31, 2020.

Included in the working capital loan category are $17.3 million of PPP loans.

Unpaid Undisbursed Gross Loan Outstanding % of

Principal Amount Amount Commitments Total Total

Count Principal Amount Amount Commitments Total Total

(Dollars in thousands)

1 unchanged sentence

Equipment 124 13,737 302 14,039 2,715 16,754 18.3

Business investment 11,477 80 11,557 76 11,633 9.5

Purchase/lease autos 201 11,962 19 11,981 669 12,650 13.8

Business investment 67 10,232 50 10,282 245 10,527 11.5

Other 22 4,753 2,538 7,291 — 7,291 8.0

983 $ 69,378 $ 18,383 $ 87,761 $ 3,829 $ 91,590 100.0 %

The following table presents the Bank's commercial loan portfolio and outstanding loan commitments, categorized by gross loan amount (unpaid principal plus undisbursed amounts) or outstanding loan commitment amount, as of June 30, 2020.

(Dollars in thousands)

6 unchanged sentences

1,788 $ 1,061,957

The Bank's commercial lending team is working proactively with our commercial customers as the COVID-19 pandemic continues to present challenging operating conditions.

As discussed above, through June 30, 2020, we have modified $392.8 million of commercial loans under our COVID-19 loan modification program.

Through June 30, 2020, we have also processed 700 PPP loans for $42.6 million, for which we received approximately $1.8 million in fees.

Approximately 60% of PPP loans processed were in the following industries:

construction, professional/scientific/technical, health care/social assistance, and retail trade.

The following table presents the gross loan amount, including undisbursed balances, of the Bank's commercial real estate loans by type of primary collateral, and commercial and industrial loans by business purpose, that have been modified, per the Bank's COVID-19 loan modification program, as of June 30, 2020.

The COVID-19 loan modifications for commercial loans mainly consist of a six-month interest-only payment period, but a deferral of principal and interest of up to six months was also offered to our borrowers.

For the majority of the borrowers with principal and interest deferrals, the payment deferral time period was three months and the maturity date for these loans was extended by three months.

The information in the table below is split by type of modification and presented as a percentage of total modifications, as well as by a percentage of the total gross loan amount and undisbursed balances of the related property type or business purpose category.

Included in the payment deferral category in the table below are six loans with a combined gross loan amount, including undisbursed balances, of $30.6 million that have requested additional assistance.

We are in the process of completing a second modification for these loans for another three-month payment deferral time period.

Modification Type % of

Interest Payment % of Property Type/

Only Deferral Total Total Business Purpose

(Dollars in thousands)

Commercial real estate

Senior housing $ 115,082 $ 57,042 $ 172,124 43.8 % 66.9 %

Hotel 76,249 21,679 97,928 24.9 54.3

Retail building 31,174 5,815 36,989 9.4 26.1

Multi-family 7,398 — 7,398 1.9 9.0

One- to four-family property 7,721 335 8,056 2.1 13.0

Office building 16,500 7,012 23,512 6.0 41.8

Single use building 30,472 5,331 35,803 9.1 74.5

Other 2,503 — 2,503 0.6 8.1

287,099 97,214 384,313 97.8 44.7

Commercial and industrial

Working capital 889 — 889 0.2 1.2

Equipment 4,366 — 4,366 1.1 30.8

Business investment 1,752 — 1,752 0.5 13.4

Purchase/lease autos 666 — 666 0.2 6.1

Other 804 — 804 0.2 31.4

8,477 — 8,477 2.2 7.1

Total $ 295,576 $ 97,214 $ 392,790 100.0 % 40.2

The Bank's commercial lending team continues to proactively work with our commercial customers as the COVID-19 pandemic continues to present challenging operating conditions.

As of December 31, 2020, there were commercial loans with a gross balance, including undisbursed amounts, totaling $75.1 million with COVID-19 loan modifications that were still in their deferral period, which includes one loan with a $50.0 million balance.

Approximately 88% of the commercial loan balance with COVID-19 loan modifications during fiscal year 2020 was either out of the deferral period or paid off as of December 31, 2020.

Of the loans that had completed the deferral period by December 31, 2020, one loan for $340 thousand was 30 to 89 days delinquent and none were 90 or more days delinquent as of December 31, 2020.

Asset Quality.

9 unchanged sentences

The amounts in the table represent the unpaid principal balance of the loans less related charge-offs.

Of the loans 30 to 89 days delinquent at June 30, 2020, approximately 59% were 59 days or less delinquent.

Of the loans 30 to 89 days delinquent at December 31, 2020, approximately 76% were 59 days or less delinquent.

Loans Delinquent for 30 to 89 Days at:

June 30, March 31, December 31, September 30, June 30,

December 31, September 30, June 30, March 31, December 31,

2020 2020 2020 2020 2019

16 unchanged sentences

OREO primarily includes assets acquired in settlement of loans.

Over the past 12 months, OREO properties acquired in settlement of one- to four-family loans were owned by the Bank, on average, for approximately three months before the properties were sold.

Over the past 12 months, one- to four-family OREO properties acquired in settlement of one- to four-family loans were owned by the Bank, on average, for approximately four months before the properties were sold.

In late March 2020, the Bank suspended the initiation of foreclosure proceedings for owner-occupied one- to four-family loans.

Non-Performing Loans and OREO at:

June 30, March 31, December 31, September 30, June 30,

December 31, September 30, June 30, March 31, December 31,

2020 2020 2020 2020 2019

24 unchanged sentences

3 $ 129 4 $ 183 4 $ 183 5 $ 187 8 $ 414

Bulk purchased — — — — — — — — — —

Commercial — — — — — — 1 600 1 600

Consumer — — — — — — — — 1 98

4 unchanged sentences

(2) Real estate-related consumer loans where we also hold the first mortgage are included in the one- to four-family category as the underlying collateral is one- to four-family property.

The following table presents the states where the properties securing five percent or more of the total amount of our one- to four-family loans are located and the corresponding balance of loans 30 to 89 days delinquent, 90 or more days delinquent or in foreclosure, and weighted average LTV ratios for loans 90 or more days delinquent or in foreclosure at June 30, 2020.

The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available.

At June 30, 2020, potential losses, after taking into consideration anticipated private mortgage insurance proceeds and estimated selling costs, have been charged-off.

At December 31, 2020, potential losses, after taking into consideration anticipated private mortgage insurance proceeds and estimated selling costs, have been charged-off.

Loans 30 to 89 Loans 90 or More Days Delinquent

8 unchanged sentences

Classified loans - The following table presents loans classified as special mention or substandard at the dates presented.

The amounts in the table represent the unpaid principal balance of the loans less related charge-offs.

At the dates presented, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.

June 30, 2020 March 31, 2020 June 30, 2019

The increase in commercial special mention loans at December 31, 2020 compared to September 30, 2020 was due mainly to the addition of two commercial loans totaling $51.3 million for which the borrowers have been impacted by the COVID-19 pandemic.

Both of these loans were subject to COVID-19 loan modifications during fiscal year 2020 and have since resumed full payments.

There are underlying economic conditions that management is monitoring in association with these loans resulting in the special mention classification during the current quarter.

December 31, 2020 September 30, 2020 December 31, 2019

Special Mention Substandard Special Mention Substandard Special Mention Substandard

4 unchanged sentences

$ 114,714 $ 33,105 $ 63,677 $ 31,133 $ 68,962 $ 31,415

Allowance for credit losses and Provision for credit losses - Management maintains an ACL to absorb inherent losses in the loan portfolio based on quarterly assessments of the loan portfolio.

The ACL is maintained through provisions for credit losses which are either charged to or credited to income.

Each quarter a formula analysis model is prepared which segregates the loan portfolio into categories based on certain risk characteristics.

Historical loss factors and qualitative factors are applied to each loan category in the formula analysis model.

The factors are reviewed by management quarterly to assess whether the factors adequately cover probable and estimable losses inherent in the loan portfolio.

Management considered several factors when evaluating the adequacy of the ACL at June 30, 2020, such as:

economic conditions including the impact of unemployment benefits created through the CARES Act, our commercial lending team's ongoing evaluation of commercial loans, the Bank's COVID-19 loan modification programs, and certain loan credit quality indicators.

There was significant deterioration of economic conditions at March 31, 2020 due to the COVID-19 pandemic which carried into the June 30, 2020 quarter.

Many of the stay-at-home orders issued in March and April have been lifted or significantly reduced which resulted in some people returning to work, while not necessarily at the same level as prior to March 2020, and it benefited consumer spending, which rebounded during May and June, generally locally and not related to travel and entertainment.

Unemployment benefit claims continue to be at historical levels, but the level at which individuals are filing initial unemployment benefit claims has decreased significantly from the late March/early April timeframe and is starting to level-off.

Individuals that are unemployed have benefited from the Federal Pandemic Unemployment Compensation Program ("FPUC") which the CARES Act created.

FPUC provides an additional $600 per week to individuals collecting regular unemployment compensation.

The FPUC is scheduled to expire in late July 2020 which could result in financial strain for some households.

There were other unemployment compensation benefits created under the CARES Act which have benefited individuals that have exhausted their regular unemployment insurance benefits and that are generally not eligible for regular unemployment compensation, like self-employed individuals.

In late March 2020, the commercial lending team closely analyzed the Bank's largest commercial relationships.

Approximately 85% of all commercial loans have been evaluated through June 30, 2020.

The commercial lending team primarily focused on the lending relationships considered most at risk of short-term operational cash flow issues and/or collateral concerns, which totaled $183.4 million at June, 30, 2020, and were primarily in the following categories:

senior housing facilities, hotels, retail buildings, office buildings and single use buildings.

These loan categories were among the categories with the highest usage of the Bank's COVID-19

loan modification program.

The weighted average LTV ratios based on the unpaid principal balance of senior housing, retail building, hotel, office building, and single use building loans were 68%, 69%, 57%, 77%, and 69%, respectively, at June 30, 2020.

We also considered the largest credits in these loan categories.

The evaluation of most of our commercial and industrial loans concluded that many of these loans are to businesses that are deemed essential, which we believe reduces the risk of loss on these loans at this time.

Management was not aware of any construction delays or other issues that would significantly delay or impact funding of commercial construction loans at June 30, 2020.

In late March 2020, the Bank began offering COVID-19 loan modifications for one- to four-family loans and consumer loans consistent with the CARES Act or interagency guidance from the federal banking agencies.

This provides for a three-month payment deferral of principal, interest and, in some cases, escrow payments.

Through June 30, 2020, the Bank processed COVID-19 loan modifications for $233.4 million of one- to four-family loans, or 4% of the one- to four-family loan portfolio.

As of the end of June 2020, some borrowers asked for and received a second deferral of an additional three months of payments and we are anticipating there will be more requests.

While the intent of the CARES Act was to keep customers current on their payments and therefore in their homes during the worst of the economic downturn, it may be masking our actual credit exposure on these loans.

Because of this, it is possible that when the deferral time periods end, the Bank's credit quality indicators may worsen, which may increase the need for additional provisions for credit losses and decrease earnings.

Through June 30, 2020, the Bank processed COVID-19 loan modifications of $392.8 million for commercial loans, or 40% of the commercial loan portfolio, including undisbursed amounts.

The COVID-19 loan modifications for commercial loans mainly consist of a six-month interest-only payment periods, but a deferral of principal and interest of up to six months was also offered to our borrowers.

Some of the borrowers who requested and received a three-month deferral of principal and interest have requested an additional three-month deferral.

We are in the process of completing those second payment deferral requests.

We believe the Bank's COVID-19 loan modification program has been very beneficial to the majority of our borrowers;

however, as is the case with one- to four-family loans, the modifications may be masking our actual credit exposure which could result in worsening credit quality indicators once the payment relief time period ends.

There was no deterioration in credit quality indicators, such as loan delinquencies, asset classification and credit scores, during the current quarter;

however, as noted above, the COVID-19 loan modifications may be masking our actual credit exposure which could result in worsening credit quality indicators once the payment relief time period ends.

Loans 30 to 89 days delinquent were 0.20% of total loans at June 30, 2020 and 0.24% of total loans at March 31, 2020.

Loans 90 days or more delinquent or in foreclosure were 0.12% of total loans at June 30, 2020 and 0.10% of total loans at March 31, 2020.

Loans classified as special mention decreased $2.0 million during the current quarter to $64.7 million at June 30, 2020.

Loans classified as substandard increased $1.2 million during the current quarter to $32.5 million at June 30, 2020.

The weighted average credit score for our one- to four-family loan portfolio was 766 at March 31, 2020 and increased to 768 at June 30, 2020.

We completed a credit score update from a nationally recognized consumer rating agency during the current quarter.

Management believes the ACL at June 30, 2020 was adequate to absorb inherent losses in the loan portfolio at that point in time based on the known facts and circumstances of the economic environment at June 30, 2020.

Allowance for Credit Losses and Reserve for Off-Balance Sheet Credit Exposures - As discussed previously, ASU 2016-13 became effective for the Company on October 1, 2020.

This ASU replaced the incurred loss impairment methodology for calculating ACL under GAAP with a new impairment methodology, commonly known as the CECL methodology.

The new methodology requires the Company to measure, at each reporting date, the expected credit losses for loans and loan commitments over their contractual lives based on historical experience, current conditions, and reasonable and supportable forecasts.

Upon adoption of the ASU, the Company recorded a cumulative-effect adjustment to retained earnings of $2.3 million (net of tax of $739 thousand), which reduced the ACL by $4.8 million, to $26.8 million, and established a reserve for off-balance sheet credit exposures of $7.8 million, which is recorded in accounts payable and accrued expenses in the consolidated balance sheet.

The Bank's off-balance sheet credit exposures are comprised of unfunded portions of existing loans and commitments to originate or purchase new loans that are not unconditionally cancellable by the Bank.

The Bank is utilizing a discounted cash flow approach for estimating expected credit losses for pooled loans and loan commitments.

The credit loss estimate for off-balance sheet credit exposures also takes into consideration the likelihood that the commitment will fund.

The economic indices used for the reasonable and supportable forecasted time period are the national unemployment rate, changes in commercial real estate price index, changes in home values, and changes in the United States gross domestic product.

Management considers several economic forecast scenarios provided by a third party and selects the scenario believed to be the most appropriate considering the facts and circumstances at quarter end.

Management also considers several qualitative factors.

The qualitative factors account for items not included in historical loss rates, the macroeconomic forecast, and/or other model inputs/assumptions.

Any changes to the ACL and reserves on off-balance sheet credit exposures are recorded through increases/decreases in the provision for credit losses on the consolidated statements of income.

The economic forecast scenario selected by management improved at December 31, 2020 compared to October 1, 2020 which resulted in a reduction in the ACL as calculated by the model.

Due to the continued economic uncertainty regarding political party changes in U.S.

government offices, the effectiveness of the latest federal stimulus package, potential additional economic stimulus from the

federal government, increasing COVID-19 cases, limited vaccine distribution as of December 31, 2020, and an increase in commercial special mention loan balances, management applied qualitative factors to account for those uncertainties which mostly offset the reduction in the ACL due to the improvement of the economic forecasts.

Management will continue to closely monitor economic conditions and will work with borrowers as necessary to assist them through this challenging economic climate.

If economic conditions worsen or do not improve in the near term, and if future government programs, if any, do not provide adequate relief to borrowers, it is possible the Bank's ACL will need to increase in future periods, which would have an adverse affect on net income.

See "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Allowance for Credit Losses" and "Part II, Item 8.

Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1.

Summary of Significant Accounting Policies" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019 for a full discussion of our ACL methodology.

Loans Receivable and Allowance for Credit Losses" for additional information on the ACL.

If economic conditions worsen or do not improve in the near term, if COVID-19 cases continue to increase and the vaccine distribution and adoption is more limited than anticipated, or if future government programs, if any, do not provide adequate relief to businesses and individuals, it is possible the Bank's ACL and reserve for off-balance sheet credit exposures will need to increase in future periods.

The following table presents a summary of changes in ACL and reserve for off-balance sheet credit exposures occurring during the quarter ended December 31, 2020.

ACL Reserve for off-balance sheet credit exposures ACL and Reserve for off-balance sheet credit exposures

(Dollars in thousands)

Balance at September 30, 2020 $ 31,527 $ — $ 31,527

Adoption of CECL (4,761) 7,788 3,027

Balance at October 1, 2020 26,766 7,788 34,554

For the quarter ended December 31, 2020:

Charge-offs (532) — (532)

Recoveries 68 — 68

Net charge-offs (464) — (464)

Provision for credit losses (177) (1,355) (1,532)

Balance at December 31, 2020 $ 26,125 $ 6,433 $ 32,558

The negative provision for credit losses related to the ACL was primarily due to a reduction in the correspondent one-to four-family loan portfolio during the current quarter.

It was partially offset by an increase in the commercial loan ACL due to an increase in special mention loans during the current quarter.

The commercial loan portfolio balance decreased during the current quarter, but due to the increase in commercial special mention loans, any reduction in ACL associated with the decrease in the commercial loan portfolio balance was offset by the ACL related to the higher balance of special mention loans at December 31, 2020.

The negative provision for credit losses related to the reserve for off-balance sheet credit exposures was a result of the improvement in the economic forecast since October 1, 2020, after taking into consideration the fact these loans are being underwritten during a challenging economic environment and are still meeting/exceeding the Bank's conservative underwriting requirements.

The balance of off-balance sheet credit exposures increased during the current quarter, but the improvement in the economic forecast as of December 31, 2020 more than offset the impact of the increase in the balance.

The gross balance of off-balance sheet credit exposures was $838.0 million as of December 31, 2020 and $688.0 million as of October 1, 2020.

The following tables present ACL activity and related ratios at the dates and for the periods indicated.

See "Note 4 - Loans Receivable and Allowance for Credit Losses" for additional information related to ACL activity by specific loan categories.

For the Three Months Ended

December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019

(Dollars in thousands)

ACL beginning balance $ 31,527 $ 31,215 $ 31,196 $ 9,435 $ 9,226

Adoption of CECL (4,761) — — — —

Charge-offs (532) (15) (5) (375) (48)

Recoveries 68 327 24 61 32

Provision for credit losses (177) — — 22,075 225

ACL ending balance $ 26,125 $ 31,527 $ 31,215 $ 31,196 $ 9,435

ACL to loans receivable at end of period 0.37 % 0.44 % 0.42 % 0.42 % 0.13 %

ACL to non-performing loans at end of period 184.68 252.42 305.58 353.02 133.11

Ratio of net charge-offs (recoveries) during the

period to average loans outstanding 0.01 — — — —

Ratio of net charge-offs (recoveries) during the

period to average non-performing assets 3.44 (2.70) (0.20) 3.78 0.19

ACL to net charge-offs (annualized) 14.1x N/M (1)

(1) This ratio is not presented for the time periods noted due to loan recoveries exceeding loan charge-offs during these periods.

The distribution of our ACL at the dates indicated is summarized below.

June 30, 2020 September 30, 2019

% of ACL % of % of ACL % of

Amount to Total Total Loans to Amount to Total Total Loans to

of ACL ACL Loans Total Loans of ACL ACL Loans Total Loans

The October 1, 2020 column represents the ACL at the time the Company adopted ASU 2016-13.

The decrease in the ACL on correspondent one- to four-family loans and commercial construction loans since October 1, 2020 was due primarily to a reduction in the loan balance during the current quarter.

The increase in the ACL on commercial real estate loans since October 1, 2020 was due mainly to an increase in special mention loans during the current quarter.

December 31, October 1, September 30, June 30, March 31, December 31,

2020 2020 2020 2020 2020 2019

(Dollars in thousands)

9 unchanged sentences

Total 21,707 21,606 21,800 20,704 20,328 5,418

Consumer loans:

Home equity 377 1.2 107,174 1.4 97 1.1 120,587 1.6

Other consumer 93 0.3 10,033 0.1 68 0.7 11,183 0.2

Total consumer loans 470 1.5 117,207 1.5 165 1.8 131,770 1.8

$ 31,215 100.0 % $ 7,407,442 100.0 % $ 9,226 100.0 % $ 7,412,473 100.0 %

Consumer 270 299 484 470 489 158

Total $ 26,125 $ 26,766 $ 31,527 $ 31,215 $ 31,196 $ 9,435

The ratio of ACL to loans receivable, by loan type, at the dates indicated is summarized below.

The reduction in the commercial and industrial ACL to loans ratio at June 30, 2020 compared to March 31, 2020 was due primarily to the origination of PPP loans.

PPP loans are 100% guaranteed by the SBA so the Bank did not record ACL on those loans at June 30, 2020.

June 30, March 31, December 31, September 30, June 30,

December 31, October 1, September 30, June 30, March 31, December 31,

2020 2020 2020 2020 2020 2019

11 unchanged sentences

Total 0.37 0.37 0.44 0.42 0.42 0.13

The following tables present ACL activity and related ratios at the dates and for the periods indicated.

See "Note 4 - Loans Receivable and Allowance for Credit Losses" for additional information related to ACL activity by specific loan categories.

For the Three Months Ended

June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 June 30, 2019

(Dollars in thousands)

ACL beginning balance $ 31,196 $ 9,435 $ 9,226 $ 9,036 $ 8,619

Charge-offs (5) (375) (48) (133) (61)

Recoveries 24 61 32 23 28

Provision for credit losses — 22,075 225 300 450

ACL ending balance $ 31,215 $ 31,196 $ 9,435 $ 9,226 $ 9,036

ACL to loans receivable at end of period 0.42 % 0.42 % 0.13 % 0.12 % 0.12 %

ACL to non-performing loans at end of period 305.58 353.02 133.11 121.99 90.24

Ratio of net charge-offs (recoveries) during the

period to average loans outstanding — — — — —

Ratio of net charge-offs (recoveries) during the

period to average non-performing assets (0.20) 3.78 0.19 1.09 0.26

ACL to net charge-offs (annualized) N/M (1)

24.9x 144.5x 21.1x 68.1x

For the Nine Months Ended

June 30, 2020 June 30, 2019

The distribution of our reserve for off-balance sheet credit exposures at the dates indicated is summarized below.

The October 1, 2020 column represents the reserve at the time the Company adopted ASU 2016-13.

Prior to October 1, 2020, no such reserve had been recorded.

The $1.4 million reduction in the reserve between October 1, 2020 and December 31, 2020 was recorded as a negative provision for credit losses during the current quarter.

December 31, October 1,

(Dollars in thousands)

ACL beginning balance $ 9,226 $ 8,463

Charge-offs (428) (129)

Recoveries 117 252

Provision for credit losses 22,300 450

ACL ending balance $ 31,215 $ 9,036

Ratio of net charge-offs during the period to

average loans outstanding during the period — % — %

Ratio of net charge-offs during the period to

average non-performing assets during the period 3.22 (1.02)

ACL to net charge-offs (annualized) 75.3x N/M (1)

(1) This ratio is not presented for the time periods noted due to loan recoveries exceeding loan charge-offs during these periods.

One- to four-family $ 131 $ 144

Commercial 6,261 7,584

Consumer 41 60

$ 6,433 $ 7,788

Securities increased $352.9 million, or 22.6%, from September 30, 2020 to December 31, 2020, including a $278.5 million increase in MBS and a $74.4 million increase in investment securities.

The increase was due primarily to cash flows from the loan portfolio being reinvested into the securities portfolio.

The weighted average yield on the securities portfolio decreased 22 basis points, from 1.62% at September 30, 2020 to 1.40% at December 31, 2020, due primarily to purchases at lower market yields.

The following table presents the distribution of our securities portfolio, at amortized cost, at the dates indicated.

Overall, fixed-rate securities comprised 80% of our securities portfolio at June 30, 2020.

Overall, fixed-rate securities comprised 91% of our securities portfolio at December 31, 2020.

The weighted average life ("WAL") is the estimated remaining maturity (in years) after three-month historical prepayment speeds and projected call option assumptions have been applied.

Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.

June 30, 2020 March 31, 2020 September 30, 2019

December 31, 2020 September 30, 2020 December 31, 2019

Amount Yield WAL Amount Yield WAL Amount Yield WAL

9 unchanged sentences

The following table presents the carrying value of MBS in our portfolio by issuer at the dates presented.

June 30, 2020 March 31, 2020 September 30, 2019

December 31, 2020 September 30, 2020 December 31, 2019

(Dollars in thousands)

Federal National Mortgage Association ("FNMA") $ 736,930 $ 735,385 $ 656,799

Federal Home Loan Mortgage Corporation ("FHLMC") 192,670 179,987 208,745

Government National Mortgage Association 52,987 57,946 70,943

FNMA $ 938,387 $ 809,232 $ 681,383

FHLMC 482,173 327,167 192,821

GNMA 38,740 44,404 63,113

$ 1,459,300 $ 1,180,803 $ 937,317

Mortgage-Backed Securities - The balance of MBS, which primarily consists of securities of U.S.

GSEs, increased $46.1 million, from $936.5 million at September 30, 2019, to $982.6 million at June 30, 2020.

The following tables summarize the activity in our portfolio of MBS for the periods presented.

GSEs, increased $278.5 million, from $1.18 billion at September 30, 2020, to $1.46 billion at December 31, 2020.

The following table summarizes the activity in our portfolio of MBS for the periods presented.

The weighted average yields and WALs for purchases are presented as recorded at the time of purchase.

The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yields for the ending balances are as of the last day of the period presented and are generally derived from recent prepayment activity on the securities in the portfolio as of the dates presented.

The beginning and ending WAL are the estimated remaining principal repayment term (in years) after three-month historical prepayment speeds have been applied.

The beginning and ending WALs are the estimated remaining principal repayment terms (in years) after three-month historical prepayment speeds have been applied.

For the Three Months Ended

June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019

December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020

Amount Yield WAL Amount Yield WAL Amount Yield WAL Amount Yield WAL

4 unchanged sentences

Fixed 379,793 1.04 5.4 297,024 1.06 5.9 77,455 1.29 5.0 88,863 1.80 4.5

Valuation transferred from HTM to AFS — — — 3,039

Change in valuation on AFS securities 1,203 (2,358) 7,470 13,184

Ending balance - carrying value $ 1,459,300 1.67 4.0 $ 1,180,803 1.94 3.5 $ 982,587 2.35 3.3 $ 973,318 2.50 3.6

For the Nine Months Ended

June 30, 2020 June 30, 2019

Amount Yield WAL Amount Yield WAL

(Dollars in thousands)

Beginning balance - carrying value $ 936,487 2.67 % 3.5 $ 1,036,990 2.57 % 3.4

Maturities and repayments (213,695) (204,251)

Net amortization of (premiums)/discounts (890) (1,034)

Fixed 240,677 1.71 4.4 52,541 2.82 4.5

Adjustable — — — 84,138 2.74 4.4

Change in valuation on AFS securities 20,008 10,872

Ending balance - carrying value $ 982,587 2.35 3.3 $ 979,256 2.68 3.4

Investment Securities - Investment securities, which consist of U.S.

GSE debentures (primarily issued by FNMA, FHLMC, or Federal Home Loan Banks) and municipal investments, decreased $30.9 million, from $268.4 million at September 30, 2019, to $237.5 million at June 30, 2020.

Municipal investments totaled $11.9 million at June 30, 2020.

The following tables summarize the activity of investment securities for the periods presented.

GSE debentures (primarily issued by FNMA, FHLMC, or Federal Home Loan Banks) and municipal investments, increased $74.4 million, from $380.1 million at September 30, 2020, to $454.6 million at December 31, 2020.

Municipal investments totaled $8.8 million at December 31, 2020.

The following table summarizes the activity of investment securities for the periods presented.

The weighted average yields and WALs for purchases are presented as recorded at the time of purchase.

2 unchanged sentences

For the Three Months Ended

June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019

December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020

Amount Yield WAL Amount Yield WAL Amount Yield WAL Amount Yield WAL

4 unchanged sentences

Fixed 124,987 0.48 3.2 244,975 0.51 3.2 99,990 0.58 1.2 50,097 1.42 0.4

Valuation transferred from HTM to AFS — — — 47

Change in valuation on AFS securities 346 (126) (162) 526

Ending balance - carrying value $ 454,566 0.54 1.0 $ 380,147 0.65 1.7 $ 237,467 1.23 0.8 $ 262,719 1.87 0.3

For the Nine Months Ended

June 30, 2020 June 30, 2019

Amount Yield WAL Amount Yield WAL

(Dollars in thousands)

Beginning balance - carrying value $ 268,376 2.11 % 0.8 $ 289,942 2.05 % 2.2

Maturities, calls and sales (256,300) (169,081)

Net amortization of (premiums)/discounts (109) 75

Fixed 225,087 1.20 1.2 149,809 2.65 0.8

Change in valuation on AFS securities 413 3,250

Ending balance - carrying value $ 237,467 1.23 0.8 $ 273,995 2.30 1.0

Deposits - The following table presents the amount, weighted average rate and percent of total for the components of our deposit portfolio at the dates presented.

June 30, 2020 March 31, 2020 September 30, 2019

Deposits - Total deposits increased $219.4 million, or 3.5%, from September 30, 2020 to December 31, 2020.

Retail/business certificates of deposit increased $11.5 million during the quarter, offset by a $14.6 million decrease in public unit certificates of deposit.

As retail certificates of deposit mature, not all are being renewed.

Rather, customers are moving some of those funds to more liquid deposit options such as the Bank's retail money market accounts.

The following table presents the amount, weighted average rate and percent of total for the components of our deposit portfolio at the dates presented.

December 31, 2020 September 30, 2020 December 31, 2019

% of % of % of

8 unchanged sentences

$ 6,410,842 0.84 100.0 % $ 6,191,408 0.95 100.0 % $ 5,585,851 1.27 100.0 %

The following tables set forth scheduled maturity information for our certificates of deposit, including public unit certificates of deposit, along with associated weighted average rates, as of June 30, 2020.

More than More than

18 unchanged sentences

$ 392,611 $ 437,460 $ 732,278 $ 1,455,809 $ 3,018,158

Borrowings - The following tables present borrowing activity for the periods shown.

Borrowings - Total borrowings at December 31, 2020 were $1.73 billion, a decrease of $55.0 million, or 3.0%, from September 30, 2020.

The decrease was due to not renewing borrowings that matured during the current quarter.

Cash flows from the deposit portfolio were used to pay off maturing borrowings.

The following tables present borrowing activity for the periods shown.

The borrowings presented in the table have original contractual terms of one year or longer or are tied to interest rate swaps with original contractual terms of one year or longer.

Excluded from this table is a $3.0 million FHLB advance that had an original contractual term of less than one year.

FHLB advances are presented at par.

4 unchanged sentences

For the Three Months Ended

June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019

December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020

Effective Effective Effective Effective

4 unchanged sentences

FHLB advances (350,000) 2.40 (440,000) 2.49 (200,000) 2.35 (415,000) 2.45

New FHLB borrowings:

Fixed-rate — — — 350,000 1.70 4.7 100,000 1.96 5.0 100,000 2.14 4.0

Interest rate swaps (1)

100,000 3.20 8.0 65,000 2.61 4.0 200,000 2.57 2.5 275,000 2.70 4.5

Ending balance $ 1,990,000 2.29 2.9 $ 2,090,000 2.25 3.0 $ 2,090,000 2.37 2.6 $ 2,140,000 2.38 2.6

For the Nine Months Ended

June 30, 2020 June 30, 2019

Effective Effective

Amount Rate WAM Amount Rate WAM

(Dollars in thousands)

Beginning balance $ 2,140,000 2.38 % 2.6 $ 2,185,052 2.17 % 2.9

Maturities and prepayments:

FHLB advances (965,000) 2.41 (500,000) 1.88

CCB acquisition - junior subordinated debentures assumed (redeemed) — — — (10,052) 8.76 12.3

Repurchase agreements — — (100,000) 2.53 — — — —

New FHLB borrowings:

5 unchanged sentences

The effective rate and WAM presented include the effect of the interest rate swaps.

Maturities - The following table presents the maturity of term borrowings (which includes FHLB advances, at par, and repurchase agreements), along with associated weighted average contractual and effective rates as of June 30, 2020.

Maturities - The following table presents the maturity of term borrowings which consist entirely of FHLB advances, along with associated weighted average contractual and effective rates as of December 31, 2020.

Subsequent to December 31, 2020, the Bank prepaid a $100.0 million fixed-rate FHLB advance with a rate of 2.25% scheduled to mature in fiscal year 2022, and replaced this advance with a $100.0 million fixed-rate FHLB advance with a term of six years and an effective rate of 1.22%, which includes the impact of deferred prepayment penalties being recognized over the life of the new advance and which is not reflected in the table below.

Term Borrowings Amount

10 unchanged sentences

$ 1,100,000 $ 640,000 $ 1,740,000 1.29 2.26

$ 1,353,000 $ 640,000 $ 1,993,000 1.62 2.29

(1) Represents adjustable-rate FHLB advances for which the Bank has entered into interest rate swaps with a notional amount of $640.0 million to hedge the variability in cash flows associated with the advances.

These advances are presented based on their contractual maturity dates and will be renewed periodically until the maturity or termination of the interest rate swaps.

The expected WAL of the interest rate swaps was 3.7 years at June 30, 2020.

The expected WAL of the interest rate swaps was 3.2 years at December 31, 2020.

(2) The effective rate includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid.

As of June 30, 2020 and throughout the current quarter, the Bank did not have a balance outstanding on its FHLB line of credit.

The average outstanding balance of FHLB line of credit borrowings during the current year period was $61.3 million at an average rate of 1.85%.

During the prior quarter, the Bank began utilizing its FRB of Kansas City line of credit rather than the FHLB line of credit, as the rate at the FRB of Kansas City was lower.

At June 30, 2020, the Bank did not have an outstanding balance on its FRB of Kansas City line of credit.

The average outstanding balance of the FRB of Kansas City line of credit borrowing during the current quarter was $396 thousand at an average rate of 0.45%, and during the current year period was $2.0 million at an average rate of 0.25%.

The following table presents the maturity and weighted average repricing rate, which is also the weighted average effective rate, of certificates of deposit, split between retail/business and public unit amounts, and term borrowings for the next four quarters as of June 30, 2020.

The term borrowings amount of $150.0 million presented in the table below as maturing during the quarter ending March 31, 2021 matured in January 2021 and was not replaced.

Retail/ Business Public Unit Term

Maturity by Certificate Repricing Certificate Repricing Borrowings Repricing Repricing

Quarter End Amount Rate Amount Rate Amount Rate Total Rate

Quarter End Amount Rate Amount Rate Amount (1)

Rate Total Rate

(Dollars in thousands)

September 30, 2020 $ 291,036 1.95 % $ 134,727 0.90 % $ 540,000 2.50 % $ 965,763 2.11 %

December 31, 2020 300,867 1.83 58,261 0.98 253,000 2.44 612,128 2.00

March 31, 2021 $ 315,060 1.73 % $ 77,551 0.66 % $ 150,000 1.97 % $ 542,611 1.64 %

June 30, 2021 366,772 1.43 70,688 0.36 — — 437,460 1.26

September 30, 2021 308,089 1.38 53,451 0.87 75,000 2.99 436,540 1.59

December 31, 2021 341,178 1.22 29,560 0.52 100,000 3.12 470,738 1.58

$ 1,331,099 1.44 $ 231,250 0.60 $ 325,000 2.56 $ 1,887,349 1.53

(1) The maturity date for FHLB advances tied to interest rate swaps is based on the maturity date of the related interest rate swap.

Stockholders' Equity.

Stockholders' equity was $1.30 billion at June 30, 2020 compared to $1.34 billion at September 30, 2019.

The $35.8 million decrease was due primarily to the payment of $82.1 million in cash dividends, partially offset by net income of $46.3 million during the nine months ended June 30, 2020.

In the long run, management considers a Bank stockholders' equity to total assets ratio of at least 10% an appropriate level of capital.

At June 30, 2020, this ratio was 12.2%.

The cash dividends paid during the current year-to-date period totaled $0.595 per share and consisted of a $0.34 per share cash true-up dividend related to fiscal year 2019 earnings, paid in December 2019, per the Company's dividend policy, and three regular quarterly cash dividends totaling $0.255 per share.

At June 30, 2020, Capitol Federal Financial, Inc., at the holding company level, had $89.0 million on deposit at the Bank.

Stockholders' equity was $1.28 billion at both December 31, 2020 and September 30, 2020.

During the quarter, the Company paid cash dividends totaling $29.1 million and repurchased common stock totaling $1.5 million, partially offset by net income of $18.9 million.

In the long run, management considers the Bank's equity to total assets ratio of at least 10% an appropriate level of capital.

At December 31, 2020, this ratio was 12.2%.

At December 31, 2020, Capitol Federal Financial, Inc., at the holding company level, had $66.7 million on deposit at the Bank.

For fiscal year 2021, it is currently the intent of the Board of Directors to continue the payout of 100% of the Company's earnings to the Company's stockholders.

Dividend payments depend upon a number of factors including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company.

There remains $44.7 million authorized under the existing stock repurchase plan for additional purchases of the Company's common stock.

Shares may be repurchased from time to time based upon market conditions, available liquidity and other factors.

This plan has no expiration date;

however, the FRB's approval for the Company to repurchase shares extends through August 2021.

The Company works to find multiple ways to provide stockholder value.

This has primarily been through the payment of cash dividends and historically the Company has also utilized stock buybacks.

This has primarily been through the payment of cash dividends and stock buybacks.

The Company has maintained a policy of paying out 100% of its earnings to stockholders in the form of quarterly cash dividends and an annual cash true-up dividend in December of each year.

In order to provide additional stockholder value, the Company has paid a True Blue Capitol cash dividend of $0.25 per share in June of each of the past six years.

The Company has paid the True Blue Capitol dividend primarily due to excess capital levels at the Company and Bank.

In order to provide additional stockholder value, the Company paid a True Blue Capitol cash dividend of $0.25 per share in June for six consecutive years ending in 2019.

The Company paid the True Blue Capitol dividend primarily due to excess capital levels at the Company and Bank.

The Company considers various business strategies and their impact on capital and asset measures on both a current and future basis, as well as regulatory capital levels and requirements, in determining the amount, if any, and timing of the True Blue dividend.

It is management's intent to ask for a regulatory non-objection at some point in the future and to pay this dividend when economic conditions are more certain.

It remains the Company's intent to pay out 100% of its earnings.

Given the state of economic uncertainty and how that may play out with the credit risk exposure in the Bank's loan portfolio, the Company elected to defer the annual True Blue dividend in June 2020 and did not ask for a regulatory non-objection at that time to move capital from the Bank to the Company to pay that dividend.

It is management's intention to ask for a regulatory non-objection at some point in the future and to pay this dividend when economic conditions are more certain.

The following table presents regular quarterly cash dividends and special cash dividends paid in calendar years 2021, 2020, and 2019.

The amounts represent cash dividends paid during each period.

For the quarter ending September 30, 2020, the amount presented represents the dividend payable on August 21, 2020 to stockholders of record as of the close of business on August 7, 2020.

For the quarter ending March 31, 2021, the amount presented represents the dividend payable on February 19, 2021 to stockholders of record as of the close of business on February 5, 2021.

Calendar Year

10 unchanged sentences

Calendar year-to-date dividends paid $ 11,518 $ 0.085 $ 64,327 $ 0.470 $ 128,230 $ 0.930

The Company has authorized the repurchase of up to $70.0 million of its common stock under its stock repurchase plan.

Shares may be repurchased from time to time based upon market conditions, available liquidity, regulatory requirements and considerations, and other factors.

There is no expiration for this repurchase plan and no shares have been repurchased under this repurchase plan.

Operating Results

The following table presents selected income statement and other information for the quarters indicated.

For the Three Months Ended

June 30, March 31, December 31, September 30, June 30,

December 31, September 30, June 30, March 31, December 31,

2020 2020 2020 2020 2019

22 unchanged sentences

Diluted EPS 0.14 0.13 0.14 0.03 0.16

Comparison of Operating Results for the Nine Months Ended June 30, 2020 and 2019

The Company recognized net income of $46.3 million, or $0.34 per share, for the nine-month period ended June 30, 2020 compared to net income of $71.8 million, or $0.52 per share, for the nine-month period ended June 30, 2019.

The decrease in net income was due primarily to a $21.9 million increase in provision for credit losses and a decrease in net interest income, partially offset by a decrease in income tax expense.

Net interest income decreased $12.9 million, or 8.3%, from the prior year period to $143.7 million for the current year period.

The net interest margin decreased 15 basis points, from 2.30% for the prior year period to 2.15% for the current year period.

See additional discussion regarding the leverage strategy in the "Executive Summary" above.

Excluding the effects of the leverage strategy, the net interest margin would have decreased 17 basis points, from 2.32% for the prior year period to 2.15% for the current year period.

Interest and Dividend Income

The weighted average yield on total interest-earning assets decreased 13 basis points, from 3.61% for the prior year period to 3.48% for the current year period, and the average balance of interest-earning assets decreased $165.9 million.

Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have decreased 14 basis points, from 3.62% for the prior year period to 3.48% for the current year period, and the average balance of interest-earning assets would have decreased $89.0 million.

The decrease in the weighted average yield between periods was due primarily to a decrease in the loan portfolio yield.

The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent.

For the Nine Months Ended

June 30, Change Expressed in:

2020 2019 Dollars Percent

(Dollars in thousands)

INTEREST AND DIVIDEND INCOME:

Loans receivable $ 206,179 $ 213,863 $ (7,684) (3.6) %

MBS 17,584 19,437 (1,853) (9.5)

FHLB stock 4,747 5,667 (920) (16.2)

Investment securities 3,736 4,781 (1,045) (21.9)

Cash and cash equivalents 1,126 2,921 (1,795) (61.5)

Total interest and dividend income $ 233,372 $ 246,669 $ (13,297) (5.4)

The decrease in interest income on loans receivable was due mainly to a decrease in yield resulting from a $4.3 million increase in the amortization of premiums on correspondent loans related to increases in payoff and endorsement activity.

This was partially offset by a shift in the mix of the loan portfolio, as the average balance of lower-yielding one- to four-family loans decreased $155.4 million, or 2.3%, partially offset by a $91.2 million, or 13.3%, increase in the average balance of higher-yielding commercial loans.

The weighted average yield on the loans receivable portfolio decreased 11 basis points, from 3.78% for the prior year period to 3.67% for the current year period.

The decrease in interest income on the MBS portfolio was due primarily to a $60.4 million, or 6.1%, decrease in the average balance of the portfolio due to not reinvesting all the cash flows from the portfolio, along with a 10 basis point decrease in the weighted average yield to 2.52% in the current year period.

The decrease in dividend income on FHLB stock was due mainly to a decrease in the dividend rate paid by FHLB.

The decrease in interest income on cash and cash equivalents was due primarily to the leverage strategy being in place for a portion of the prior year period and not being in place during the current period, along with a decrease in the yield earned on cash held at the FRB of Kansas City.

See additional discussion regarding the leverage strategy in the "Executive Summary" above.

The decrease in interest income on investment securities was due mainly to calls and maturities either being replaced at lower market rates or not being replaced.

Interest Expense

The weighted average rate paid on total interest-bearing liabilities increased one basis point, from 1.51% for the prior year period to 1.52% for the current year period, while the average balance of interest-bearing liabilities decreased $85.5 million.

Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased two basis points, from 1.50% for the prior year period to 1.52% for the current year period, while the average balance of interest-bearing liabilities would have decreased $8.6 million.

The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.

For the Nine Months Ended

June 30, Change Expressed in:

2020 2019 Dollars Percent

(Dollars in thousands)

INTEREST EXPENSE:

Deposits $ 52,299 $ 48,730 $ 3,569 7.3 %

Borrowings 37,421 41,360 (3,939) (9.5)

Total interest expense $ 89,720 $ 90,090 $ (370) (0.4)

The increase in interest expense on deposits was due to an increase in the cost of the retail/business certificate of deposit portfolio.

The weighted average rate of the retail/business certificate of deposit portfolio increased 20 basis points, to 2.08% for the current year period, and the average balance increased $194.7 million, or approximately 8%.

Late in the third quarter of fiscal year 2019, the Bank increased offered rates on short-term and certain intermediate-term certificates of deposit in an effort to encourage customers to move funds to those terms.

During the fourth quarter of fiscal year 2019, the Bank held the unTraditional campaign, resulting in growth in the short-term and certain intermediate-term certificates of deposit.

The borrowings line item in the table above includes interest expense associated and not associated with the leverage strategy.

Interest expense on borrowings not related to the leverage strategy decreased $2.6 million from the prior year period due primarily to a decrease in the average balance of such borrowings, as certain maturing FHLB advances were not renewed and the Bank paid down its FHLB line of credit.

Interest expense on FHLB borrowings associated with the leverage strategy decreased $1.4 million from the prior year period due to the leverage strategy being in place for a portion of the prior year period and not being in place at all during the current year period.

Provision for Credit Losses

The Bank recorded a provision for credit losses during the current period of $22.3 million, compared to $450 thousand during the prior year period.

The $22.3 million provision for credit losses in the current period was primarily related to the deterioration of economic conditions as a result of the COVID-19 pandemic.

See additional discussion regarding management's evaluation of the adequacy of the Bank's ACL at June 30, 2020 in the "Financial Condition - Asset Quality - Allowance for credit losses and Provision for credit losses" section above.

Non-Interest Income

The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.

For the Nine Months Ended

June 30, Change Expressed in:

2020 2019 Dollars Percent

(Dollars in thousands)

NON-INTEREST INCOME:

Deposit service fees $ 8,384 $ 9,581 $ (1,197) (12.5) %

Insurance commissions 1,762 2,072 (310) (15.0)

Other non-interest income 4,468 4,446 22 0.5

Total non-interest income $ 14,614 $ 16,099 $ (1,485) (9.2)

The decrease in deposit service fees was due mainly to the discontinuation of point-of-sale service charges, which the Bank ceased charging in April 2019, along with a decrease in service charge income due primarily to a decrease in consumer activity as a result of the COVID-19 pandemic.

The decrease in insurance commissions was due primarily to a decrease in the amount of annual contingent insurance commissions.

Non-Interest Expense

The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.

For the Nine Months Ended

June 30, Change Expressed in:

2020 2019 Dollars Percent

(Dollars in thousands)

NON-INTEREST EXPENSE:

Salaries and employee benefits $ 39,765 $ 39,205 $ 560 1.4 %

Information technology and related expense 12,694 13,535 (841) (6.2)

Occupancy, net 10,212 9,768 444 4.5

Regulatory and outside services 4,188 4,247 (59) (1.4)

Advertising and promotional 3,773 3,597 176 4.9

Deposit and loan transaction costs 2,086 1,882 204 10.8

Office supplies and related expense 1,586 1,884 (298) (15.8)

Federal insurance premium 287 1,787 (1,500) (83.9)

Other non-interest expense 4,237 4,709 (472) (10.0)

Total non-interest expense $ 78,828 $ 80,614 $ (1,786) (2.2)

The decrease in information technology and related expense was due mainly to the prior year period including costs related to the integration of CCB operations.

The decrease in the federal insurance premium was due mainly to the Bank using an assessment credit from the Federal Deposit Insurance Corporation ("FDIC") during the majority of the current period.

The decrease in other non-interest expense was due primarily to a decrease in debit card fraud losses, as well as a decrease in amortization of deposit intangibles.

The Company's efficiency ratio was 49.81% for the current period compared to 46.68% for the prior year period.

The change in the efficiency ratio was due to lower net interest income in the current period compared to the prior year period.

The efficiency ratio is a measure of a financial institution's total non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income.

A higher value indicates that the financial institution is generating revenue with a proportionally higher level of expense.

Income Tax Expense

Income tax expense was $10.9 million for the current period compared to $19.8 million for the prior year period.

The decrease in income tax expense was due primarily to lower pretax income in the current period.

The effective tax rate was 19.0% for the current period compared to 21.6% for the prior year period.

The lower effective tax rate in the current period compared to the prior year period was due mainly to the Company's permanent differences, which generally lower our tax expense, having a proportionately larger impact given the lower pretax income in the current year period.

Additionally, a discrete benefit was recognized during the current period as a result of favorable federal tax guidance issued during the current period related to certain BOLI policies added in the CCB acquisition.

Management anticipates the effective income tax rate for the fourth quarter of fiscal year 2020 will be approximately 21%, resulting in an effective tax rate of approximately 20% for fiscal year 2020.

Average Balance Sheet

4 unchanged sentences

Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.

For the Nine Months Ended

June 30, 2020 June 30, 2019

Average Interest Average Interest

Outstanding Earned/ Yield/ Outstanding Earned/ Yield/

Amount Paid Rate Amount Paid Rate

For the Three Months Ended

December 31, 2020 September 30, 2020 December 31, 2019

Average Interest Average Interest Average Interest

Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/

Amount Paid Rate Amount Paid Rate Amount Paid Rate

(Dollars in thousands)

10 unchanged sentences

Cash and cash equivalents 201,468 51 0.10 217,475 55 0.10 162,126 687 1.66

166,272 1,126 0.89 169,641 2,921 2.27

Total interest-earning assets 9,120,570 68,207 2.98 8,998,023 71,606 3.17 8,918,328 80,036 3.58

8,923,188 233,372 3.48 9,089,087 246,669 3.61

Other non-interest-earning assets 453,422 466,789 427,858

17 unchanged sentences

Net interest rate spread (6)

1.78 1.87 1.99

Net interest-earning assets $ 1,069,230 $ 1,066,413 $ 1,110,942

Net interest margin (7)

Ratio of interest-earning assets to interest-bearing liabilities 1.13x 1.14x

1.92 2.03 2.18

Ratio of interest-earning assets to interest-bearing liabilities 1.13x 1.13x 1.14x

Selected performance ratios:

Return on average assets (annualized) 0.79 % 0.77 % 0.96 %

0.66 % 1.01 %

Return on average equity (annualized) 5.90 5.60 6.76

1 unchanged sentence

Operating expense ratio (8)

1.13 1.15 1.13

Efficiency ratio (9)

Pre-tax yield on leverage strategy (12)

55.37 53.64 48.89

(1) Balances are adjusted for unearned loan fees and deferred costs.

1 unchanged sentence

(2) AFS securities are adjusted for unamortized purchase premiums or discounts.

(3) The average balance of investment securities includes an average balance of nontaxable securities of $14.7 million and $22.2 million for the nine months ended June 30, 2020 and June 30, 2019, respectively.

(4) There were no cash and cash equivalents related to the leverage strategy during the nine months ended June 30, 2020.

The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $73.5 million for the nine months ended June 30, 2019.

(5) There were no borrowings related to the leverage strategy during the nine months ended June 30, 2020.

Included in this line item, for the nine months ended June 30, 2019, are borrowings related to the leverage strategy with an average outstanding balance of $76.9 million and interest paid of $1.4 million, at a weighted average rate of 2.36%, and FHLB borrowings not related to the leverage strategy with an average outstanding balance of $2.30 billion and interest paid of $40.0 million, at a weighted average rate of 2.32%.

(3) The average balance of investment securities includes an average balance of nontaxable securities of $9.1 million, $10.9 million and $17.3 million for the three months ended December 31, 2020, September 30, 2020 and December 31, 2019, respectively.

(4) The FHLB advance amounts and rates included in this line item include the effect of interest rate swaps and are net of deferred prepayment penalties.

2 unchanged sentences

(6) Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(8) The table below provides a reconciliation between certain performance ratios presented in accordance with GAAP and the performance ratios excluding the effects of the leverage strategy, which are not presented in accordance with GAAP.

Management believes it is important for comparability purposes to provide the performance ratios without the leverage strategy because of the unique nature of the leverage strategy.

The leverage strategy reduces some of our performance ratios due to the small amount of earnings associated with the transaction in comparison to the size of the transaction, while increasing our net income.

For the Nine Months Ended

June 30, 2020 June 30, 2019

Actual Leverage Adjusted Actual Leverage Adjusted

(GAAP) Strategy (Non-GAAP) (GAAP) Strategy (Non-GAAP)

Return on average assets (annualized) 0.66 % — % 0.66 % 1.01 % (0.01) % 1.02 %

Return on average equity (annualized) 4.69 — 4.69 7.01 — 7.01

Net interest margin 2.15 — 2.15 2.30 (0.02) 2.32

Net interest rate spread 1.96 — 1.96 2.10 (0.02) 2.12

Efficiency Ratio 49.81 — 49.81 46.68 — 46.68

(7) Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.

1 unchanged sentence

(9) The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income.

(12) The pre-tax yield on the leverage strategy represents annualized pre-tax income resulting from the transaction as a percentage of the average interest-earning assets associated with the transaction.

Rate/Volume Analysis

2 unchanged sentences

The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.

For the Nine Months Ended

June 30, 2020 vs.

June 30, 2019

Increase (Decrease) Due to

Volume Rate Total

For the Three Months Ended

December 31, 2020 vs.

December 31, 2019 December 31, 2020 vs.

September 30, 2020

Increase (Decrease) Due to Increase (Decrease) Due to

Volume Rate Total Volume Rate Total

(Dollars in thousands)

14 unchanged sentences

Net change in net interest income $ 743 $ (5,627) $ (4,884) $ (608) $ (1,262) $ (1,870)

Comparison of Operating Results for the Three Months Ended June 30, 2020 and 2019

For the quarter ended June 30, 2020, the Company recognized net income of $19.5 million, or $0.14 per share, compared to net income of $22.9 million, or $0.17 per share for the quarter ended June 30, 2019.

The decrease in net income was due to a decrease in net interest income and non-interest income, partially offset by a decrease in non-interest expense and income tax expense.

Comparison of Operating Results for the Three Months Ended December 31, 2020 and 2019

Net interest income decreased $4.9 million, or 10.0%, from the prior year quarter to $43.8 million for the current quarter.

The net interest margin decreased 26 basis points, from 2.18% for the prior year quarter to 1.92% for the current quarter.

Interest and Dividend Income

The weighted average yield on total interest-earning assets decreased 32 basis points, from 3.64% for the prior year quarter to 3.32% for the current quarter, and the average balance of interest-earning assets decreased $55.1 million.

The weighted average yield on total interest-earning assets decreased 60 basis points, from 3.58% for the prior year quarter to 2.98% for the current quarter, while the average balance of interest-earning assets increased $202.2 million.

The decrease in the weighted average yield between periods was due primarily to a decrease in the loan portfolio yield, along with a change in asset mix as cash flows from the loan portfolio have been used to purchase lower yielding securities.

The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent.

For the Three Months Ended

June 30, Change Expressed in:

December 31, Change Expressed in:

2020 2019 Dollars Percent

7 unchanged sentences

Total interest and dividend income $ 68,207 $ 80,036 $ (11,829) (14.8)

The decrease in interest income on loans receivable was due mainly to a 23 basis point decrease in yield, from 3.78% for the prior year quarter to 3.55% for the current quarter, due primarily to a $2.5 million increase in premium amortization related to correspondent loans as a result of an increase in payoff activity.

The decrease in interest income on the MBS portfolio was due primarily to a 24 basis point decrease in the weighted average yield on the portfolio, from 2.64% for the prior year quarter to 2.40% for the current quarter resulting from the purchase of MBS at market rates lower than the existing portfolio, along with a $67.2 million, or 6.7%, decrease in the average balance of the portfolio as a result of not reinvesting all of the cash flows from the portfolio.

The decrease in dividend income on FHLB stock was due mainly to a reduction in the dividend rate paid by FHLB compared to the prior year quarter.

The decrease in interest income on investment securities was due to an 89 basis point decrease in the weighted average yield on the portfolio, from 2.52% for the prior year quarter to 1.63% for the current quarter resulting from calls and maturities being replaced at market rates lower than the existing portfolio, along with an $83.2 million, or 28.6%, decrease in the average balance of the portfolio as a result of not reinvesting all of the cash flows from the portfolio.

The decrease in interest income on cash and cash equivalents was due mainly to a decrease in the yield on cash held at the FRB of Kansas City, partially offset by an increase in the average balance of operating cash.

The decrease in interest income on loans receivable was due mainly to a 34 basis point decrease in the weighted average yield on the portfolio, from 3.75% for the prior year quarter to 3.41% for the current quarter, primarily on correspondent loans related to higher premium amortization resulting from increases in payoff and endorsement activity, as well as adjustable-rate loans repricing to lower market rates, endorsements and refinances of one- to four-family originated loans to lower market rates, and the origination of new loans at lower market rates.

Additionally, the average balance of the portfolio decreased $339.4 million compared to the prior year quarter.

The majority of the decrease in the average balance of the loan portfolio between periods was due to a reduction in the correspondent one-to four-family loan portfolio as we suspended accepting new applications for these loans in mid-March 2020 to mid-June 2020.

This was done to manage the influx of refinance requests from current customers in our local market areas during that time period while also managing changing Bank operations due to the COVID-19 pandemic.

The decrease in interest income on the MBS portfolio was due to an 86 basis point decrease in the weighted average yield to 1.75% in the current quarter as a result of new purchases at lower market yields and the repricing of existing adjustable-rate MBS to lower market yields, partially offset by a $368.6 million increase in the average balance of the portfolio.

The decrease in dividend income on FHLB stock was due mainly to a decrease in the dividend rate paid by FHLB, along with a decrease in the average balance of FHLB stock.

The average balance decreased as the Bank did not replace certain maturing FHLB advances between periods, which reduced the amount of FHLB stock owned by the Bank per FHLB requirements.

The decrease in interest income on investment securities was due to a 149 basis point decrease in the weighted average yield to 0.63% for the current quarter as a result of new purchases at lower market yields, partially offset by a $146.9 million increase in the average balance of the portfolio.

The decrease in interest income on cash and cash equivalents was due to a decrease in the yield earned on cash held at the FRB of Kansas City, partially offset by a $39.3 million increase in the average balance.

Interest Expense

The weighted average rate paid on total interest-bearing liabilities decreased 39 basis points, from 1.59% for the prior year quarter to 1.20% for the current quarter, while the average balance of interest-bearing liabilities increased $244.0 million.

The following table presents the components of interest expense for the periods presented, along with the change measured in dollars and percent.

The increase in the average balance was primarily in checking, savings and money market accounts, partially offset by a decrease in borrowings.

The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.

For the Three Months Ended

June 30, Change Expressed in:

December 31, Change Expressed in:

2020 2019 Dollars Percent

4 unchanged sentences

Total interest expense $ 24,394 $ 31,339 $ (6,945) (22.2)

The decrease in interest expense on deposits was due primarily to a decrease in the weighted average rate paid on the wholesale certificate of deposit portfolio and the money market portfolio, partially offset by an increase in the average balance and weighted average rate paid on the retail/business certificates of deposit.

The weighted average rate of the retail/business certificate of deposit portfolio increased nine basis points, to 2.04% for the current quarter, and the average balance increased $210.7 million, or approximately 8%.

Late in the prior year quarter, the Bank increased offered rates on short-term and certain intermediate-term certificates of deposit in an effort to encourage customers to move funds to those terms and during the fourth quarter of fiscal year 2019, the Bank held the unTraditional campaign, resulting in growth in the short-term and certain intermediate-term certificates of deposit.

The decrease in interest expense on borrowings was due primarily to lower usage of the Bank's FHLB line of credit, along with the replacement of certain FHLB advances at lower market rates and not replacing certain maturing FHLB advances.

The decrease in interest expense on deposits was due mainly to a decrease in the weighted average rate paid on retail/business certificates of deposit, money market accounts, and wholesale certificates of deposit, which decreased by 33 basis points, 38 basis points, and 155 basis points, respectively.

Since the onset of the COVID-19 pandemic, certificates of deposit have been gradually repricing down as they renew or are replaced at lower offered rates and rates on money market accounts have been lowered.

The decrease in interest expense on borrowings was due primarily to a $457.9 million decrease in the average balance, as certain maturing FHLB advances and repurchase agreements were not replaced and the Bank paid down its FHLB line of credit with funds generated from the deposit portfolio.

Provision for Credit Losses

The Bank did not record a provision for credit losses during the current quarter, compared to a provision for credit losses during the prior year quarter of $450 thousand.

For the quarter ended December 31, 2020, the Bank recorded a negative provision for credit losses of $1.5 million, compared to a $225 thousand provision for credit losses during the prior year quarter.

The negative provision in the current quarter was composed of a $177 thousand decrease in the ACL for loans and a $1.4 million decrease in the reserve for off-balance sheet credit exposures.

The $177 thousand decrease in the ACL for loans was due primarily to a reduction in the correspondent one- to four-family loan portfolio, partially offset by a slight increase in the ACL for commercial loans due to an increase in the balance of special mention loans during the current quarter.

The $1.4 million reduction in the reserve for off-balance sheet credit exposures was due primarily to an improved economic forecast during the current quarter with consideration given to the current economic climate in which these loans are being underwritten.

See "Financial Condition - Asset Quality" above for additional discussion regarding management's evaluation of the adequacy of the Bank's ACL and reserve for off-balance sheet credit exposures at December 31, 2020.

Non-Interest Income

1 unchanged sentence

For the Three Months Ended

June 30, Change Expressed in:

December 31, Change Expressed in:

2020 2019 Dollars Percent

5 unchanged sentences

Total non-interest income $ 5,070 $ 5,504 $ (434) (7.9)

The decrease in deposit service fees was due mainly to a decrease in service charge income as a result of a decrease in consumer activity stemming primarily from the COVID-19 pandemic.

The decrease in insurance commissions was due primarily to the receipt of annual contingent insurance commissions and an increase in the related accruals during the prior year quarter, and no such increase in accruals during the current quarter.

The decrease in other non-interest income was due primarily to a decrease in loan fee income, a decrease in income associated with interest rate swap collateral, and a decrease in income from BOLI resulting from a decrease in yield on the Bank's BOLI policies.

The decrease in other non-interest income was mainly the result of a decrease in income from BOLI compared to the prior year quarter due to a reduction in the yield and lower death benefit receipts between the two periods.

Subsequent to December 31, 2020, the Bank sold its Class B VISA shares and expects to recognize a gain of approximately $7 million during the March 31, 2021 quarter.

Non-Interest Expense

1 unchanged sentence

For the Three Months Ended

June 30, Change Expressed in:

December 31, Change Expressed in:

2020 2019 Dollars Percent

7 unchanged sentences

Deposit and loan transaction costs 766 711 55 7.7

Federal insurance premium 621 — 621 N/A

Office supplies and related expense 424 519 (95) (18.3)

Federal insurance premium 287 600 (313) (52.2)

Other non-interest expense 1,083 1,698 (615) (36.2)

Total non-interest expense $ 27,067 $ 26,500 $ 567 2.1

The decrease in information technology and related expense was due mainly to the prior year quarter including costs related to the integration of CCB operations.

The increase in occupancy, net was due primarily to safety measures implemented at the Bank's branches related to the COVID-19 pandemic.

The decrease in advertising and promotional expenses was due mainly to adjustments in advertising schedules and postponements of campaigns during the current quarter as a result of the COVID-19 pandemic.

The decrease in office supplies and related expense was due primarily to the prior year quarter including costs related to the integration of CCB customers and operations.

The decrease in federal insurance premium was due mainly to the Bank utilizing an assessment credit

from the FDIC during the current quarter.

The decrease in other non-interest expense was due primarily to decreases in OREO operations expense, amortization of deposit intangibles, and debit card fraud losses.

The increase in salaries and employee benefits was due primarily to an increase in loan commissions, an increase in full-time equivalent employees, and higher non-officer related bonuses paid in the current quarter.

The increase in regulatory and outside services was due mainly to higher progress billings from our external auditors and other professional service fees.

The decrease in advertising and promotional expenses was due mainly to the timing of campaigns.

The increase in the federal insurance premium was due mainly to the Bank utilizing an assessment credit from the Federal Deposit Insurance Corporation ("FDIC") during the prior year quarter.

The decrease in other non-interest expense was due primarily to a decrease in write-downs of OREO properties in the current quarter compared to the prior year quarter.

The Company's efficiency ratio was 55.37% for the current quarter compared to 48.89% for the prior year quarter.

The change in the efficiency ratio was due mainly to a decrease in net interest income.

The change in the efficiency ratio was due to lower net interest income in the current quarter compared to the prior year quarter.

The efficiency ratio is a measure of a financial institution's total non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income.

A higher value indicates that the financial institution is generating revenue with a proportionally higher level of expense, relative to the net interest margin.

Income Tax Expense

Income tax expense was $5.1 million for the current quarter compared to $6.3 million for the prior year quarter.

The decrease in income tax expense was due primarily to lower pretax income in the current quarter.

The effective tax rate for the current quarter was 20.7% compared to 21.6% for the prior year quarter.

Average Balance Sheet

Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown.

Average outstanding balances are derived from average daily balances.

The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates.

Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.

The following table presents pretax income, income tax expense, and net income for the time periods presented, along with the change measured in dollars and percent.

For the Three Months Ended

June 30, 2020 June 30, 2019

Average Interest Average Interest

Outstanding Earned/ Yield/ Outstanding Earned/ Yield/

Amount Paid Rate Amount Paid Rate

(Dollars in thousands)

Interest-earning assets:

One- to four-family loans $ 6,568,945 $ 55,646 3.39 % $ 6,631,716 $ 59,813 3.61 %

Commercial loans 799,600 9,576 4.74 783,024 9,522 4.81

Consumer loans 121,139 1,430 4.75 133,573 2,099 6.30

Total loans receivable (1)

7,489,684 66,652 3.55 7,548,313 71,434 3.78

934,464 5,616 2.40 1,001,622 6,613 2.64

Investment securities (2)(3)

207,541 847 1.63 290,755 1,835 2.52

FHLB stock 101,588 1,207 4.78 101,408 1,865 7.38

Cash and cash equivalents (4)

231,354 59 0.10 77,603 464 2.36

Total interest-earning assets (1)(2)

8,964,631 74,381 3.32 9,019,701 82,211 3.64

Other non-interest-earning assets 499,291 386,218

Total assets $ 9,463,922 $ 9,405,919

Liabilities and stockholders' equity:

Interest-bearing liabilities:

Checking $ 1,232,611 199 0.06 $ 1,092,612 157 0.06

Savings 404,545 69 0.07 332,269 43 0.05

Money market 1,267,535 1,350 0.43 1,273,559 2,249 0.71

Retail/business certificates 2,734,940 13,882 2.04 2,524,213 12,248 1.95

Wholesale certificates 291,292 1,033 1.43 388,877 2,212 2.28

Total deposits 5,930,923 16,533 1.12 5,611,530 16,909 1.21

Borrowings (5)

2,035,637 11,561 2.27 2,300,222 13,621 2.36

Total interest-bearing liabilities 7,966,560 28,094 1.41 7,911,752 30,530 1.54

Other non-interest-bearing liabilities 200,339 131,796

Stockholders' equity 1,297,023 1,362,371

Total liabilities and stockholders' equity $ 9,463,922 $ 9,405,919

Net interest income (6)

$ 46,287 $ 51,681

Net interest rate spread (7)(8)

Net interest-earning assets $ 998,071 $ 1,107,949

Net interest margin (8)(9)

Ratio of interest-earning assets to interest-bearing liabilities 1.13x 1.14x

Selected performance ratios:

Return on average assets (annualized) (8)

0.82 % 0.97 %

Return on average equity (annualized) (8)

Average equity to average assets 13.70 14.48

Operating expense ratio (10)

Efficiency ratio (8)(11)

(1) Balances are adjusted for unearned loan fees and deferred costs.

Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent.

(2) AFS securities are adjusted for unamortized purchase premiums or discounts.

(3) The average balance of investment securities includes an average balance of nontaxable securities of $11.9 million and $21.1 million for the three months ended June 30, 2020 and June 30, 2019, respectively.

(4) There were no cash and cash equivalents related to the leverage strategy during the quarters ended June 30, 2020 and June 30, 2019.

(5) There were no borrowings related to the leverage strategy during the quarters ended June 30, 2020 and June 30, 2019.

The FHLB advance amounts and rates included in this line include the effect of interest rate swaps and are net of deferred prepayment penalties.

(6) Net interest income represents the difference between interest income earned on interest-earning assets and interest paid on interest-bearing liabilities.

Net interest income depends on the average balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them.

(7) Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(8) The leverage strategy was not in place during the quarters ended June 30, 2020 and June 30, 2019.

(9) Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.

(10) The operating expense ratio represents annualized non-interest expense as a percentage of average assets.

(11) The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income.

Rate/Volume Analysis

The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended June 30, 2020 to the three months ended June 30, 2019.

For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year period.

The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.

For the Three Months Ended June 30,

Increase (Decrease) Due to

Volume Rate Total

December 31, Change Expressed in:

2020 2019 Dollars Percent

(Dollars in thousands)

Interest-earning assets:

Loans receivable $ (550) $ (4,232) $ (4,782)

MBS (427) (570) (997)

Investment securities (442) (546) (988)

FHLB stock 3 (661) (658)

Cash and cash equivalents 326 (731) (405)

Total interest-earning assets (1,090) (6,740) (7,830)

Interest-bearing liabilities:

Checking 22 20 42

Savings 11 15 26

Money market (10) (888) (898)

Certificates of deposit 558 (104) 454

Borrowings (1,144) (916) (2,060)

Total interest-bearing liabilities (563) (1,873) (2,436)

Net change in net interest income $ (527) $ (4,867) $ (5,394)

Comparison of Operating Results for the Three Months Ended June 30, 2020 and March 31, 2020

For the quarter ended June 30, 2020, the Company recognized net income of $19.5 million, or $0.14 per share, compared to net income of $4.3 million, or $0.03 per share, for the quarter ended March 31, 2020.

The increase was due primarily to recording a $22.1 million provision for credit losses during the prior quarter, and no provision for credit losses in the current quarter.

This was partially offset by an increase in income tax expense and a decrease in net interest income compared to the prior quarter.

The net interest

margin decreased 12 basis points, from 2.19% for the prior quarter to 2.07% for the current quarter.

Income before income tax expense $ 23,348 $ 27,476 $ (4,128) (15.0) %

Income tax expense 4,450 4,965 (515) (10.4)

Net income $ 18,898 $ 22,511 $ (3,613) (16.0)

Effective Tax Rate 19.1 % 18.1 %

The decrease in income tax expense was due primarily to lower pretax income in the current quarter, partially offset by an increase in the effective tax rate.

The effective tax rate was lower in the prior year due primarily to a discrete benefit recognized in the prior year quarter related to certain BOLI policies that were acquired in fiscal year 2018.

Management anticipates the effective income tax rate for fiscal year 2021 will be approximately 21% to 22%.

Comparison of Operating Results for the Three Months Ended December 31, 2020 and September 30, 2020

For the quarter ended December 31, 2020, the Company recognized net income of $18.9 million, or $0.14 per share, compared to net income of $18.3 million, or $0.13 per share, for the quarter ended September 30, 2020.

The increase was due primarily to a lower effective tax rate compared to the prior quarter.

The net interest margin decreased 11 basis points, from 2.03% for the prior quarter to 1.92% for the current quarter.

The decrease in the net interest margin was due mainly to a decrease in the loan portfolio and securities portfolio yields, along with a decrease in the average balance of the loan portfolio, partially offset by a decrease in the cost of deposits.

Interest and Dividend Income

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For the Three Months Ended

June 30, March 31, Change Expressed in:

December 31, September 30, Change Expressed in:

2020 2020 Dollars Percent

7 unchanged sentences

Total interest and dividend income $ 68,207 $ 71,606 $ (3,399) (4.7)

The weighted average yield on the loans receivable portfolio decreased 17 basis points, from 3.72% for the prior quarter to 3.55% for the current quarter, due mainly to a $2.1 million increase in premium amortization related to correspondent loans as a result of an increase in payoff activity.

The decrease in interest income on the MBS portfolio and the investment securities portfolio was due primarily to the purchase of securities at market rates lower than the existing portfolios.

The decrease in dividend income on FHLB stock was due mainly to a reduction in the dividend rate paid by FHLB compared to the prior quarter.

The decrease in interest income on cash and cash equivalents was due mainly to a decrease in the yield earned on cash held at the FRB of Kansas City.

The decrease in interest income on loans receivable was due to a $242.0 million decrease in the average balance and eight basis point decrease in the weighted average portfolio yield.

The decrease in the average balance was primarily in the correspondent loan portfolio, as payoff activity outpaced purchases during the current quarter, along with a decrease in the commercial loan portfolio due primarily to the payoff of two large loans at the beginning of the current quarter.

The weighted average yield on the loans receivable portfolio decreased from 3.49% for the prior quarter to 3.41% for the current quarter, due mainly to endorsements and refinances of one- to four-family loans to lower current market rates, along with an increase in premium amortization related to correspondent loan payoff activity.

The increase in interest income on the MBS portfolio was due to a $274.2 million increase in the average balance as a result of purchases, primarily utilizing funds received from loan repayments.

This was partially offset by a 36 basis point decrease in the weighted average yield, to 1.75% for the current quarter, due primarily to purchases at lower market yields, along with an increase in the impact of net premium amortization.

Interest Expense

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For the Three Months Ended

June 30, March 31, Change Expressed in:

December 31, September 30, Change Expressed in:

2020 2020 Dollars Percent

4 unchanged sentences

Total interest expense $ 24,394 $ 25,923 $ (1,529) (5.9)

The decrease in interest expense on deposits was due to a decrease in the weighted average rate paid on money market accounts, wholesale certificates of deposit, and retail/business certificates of deposit, partially offset by an increase in the average balance of deposits.

Management generally reduced deposit offer rates throughout the quarter as discussed above.

The decrease in interest expense on borrowings was due primarily to a full quarter impact of the replacement of certain FHLB advances at lower market rates.

During the prior quarter, the Bank prepaid fixed-rate FHLB advances totaling $350.0 million with a weighted average rate of 2.42%, and replaced these advances with $350.0 million of fixed-rate FHLB advances with a weighted average term of 4.7 years and a weighted average effective rate of 1.70%, which includes the impact of deferred prepayment penalties being recognized over the life of the new advances.

Additionally, the Bank reduced the usage of its FHLB line of credit compared to the prior quarter, and did not replace a $100 million FHLB advance, at a rate of 1.61%, that matured during the current quarter.

The decrease in interest expense on deposits was due primarily to a decrease in the weighted average rate paid on the certificate of deposit portfolio.

Management has generally reduced deposit offer rates as discussed above.

See "Financial Condition - Liabilities" above for additional information on deposits.

The decrease in interest expense on borrowings was due primarily to not replacing term borrowings that matured during the current quarter and prior quarter.

Cash flows from the deposit portfolio were generally utilized to repay maturing term borrowings during the current and prior quarters.

The average balance of borrowings decreased $44.2 million compared to the prior quarter.

Provision for Credit Losses

The Bank did not record a provision for credit losses during the current quarter, compared to a provision for credit losses during the prior quarter of $22.1 million.

The $22.1 million provision for credit losses in the prior quarter was in recognition of the deterioration of economic conditions as a result of the COVID-19 pandemic.

The Bank recorded a negative provision for credit losses during the current quarter of $1.5 million, compared to no provision for credit losses for the quarter ended September 30, 2020.

See the Comparison of Operating Results for the Three Months Ended December 31, 2020 and 2019 above for discussion regarding the negative provision for credit losses in the current quarter.

Non-Interest Income

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For the Three Months Ended

June 30, March 31, Change Expressed in:

December 31, September 30, Change Expressed in:

2020 2020 Dollars Percent

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Total non-interest income $ 5,070 $ 4,985 $ 85 1.7

The decrease in deposit service fees was due mainly to a decrease in service charge income as a result of a decrease in consumer activity stemming primarily from the COVID-19 pandemic.

The increase in insurance commissions was due primarily to the receipt of annual contingent insurance commissions and downward adjustments to the related accruals during the prior quarter, and no such adjustments during the current quarter.

Contingent insurance commissions are performance-based incentives based on certain criteria established by the insurance carriers.

These commissions are accrued based on management's expectations and are adjusted when the funds are received.

The decrease in other non-interest income was due primarily to a decrease in income associated with interest rate swap collateral, a decrease in commercial loan late fees, and a decrease in income from BOLI resulting from a decrease in yield on the Bank's BOLI policies.

Non-Interest Expense

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For the Three Months Ended

June 30, March 31, Change Expressed in:

December 31, September 30, Change Expressed in:

2020 2020 Dollars Percent

7 unchanged sentences

Deposit and loan transaction costs 766 804 (38) (4.7)

Federal insurance premium 621 627 (6) (1.0)

Office supplies and related expense 424 609 (185) (30.4)

Federal insurance premium 287 — 287 N/A

Other non-interest expense 1,083 1,277 (194) (15.2)

Total non-interest expense $ 27,067 $ 27,176 $ (109) (0.4)

The increase in regulatory and outside services was due primarily to the timing of external audit services.

The increase in the federal insurance premium was due mainly to the Bank recognizing a federal insurance premium accrual as the remaining assessment credit from the FDIC was utilized during the current

We anticipate the federal insurance premium for the fourth quarter of fiscal year 2020 will be approximately $620 thousand, or $333 thousand higher than the current quarter.

The increase in salaries and employee benefits was due primarily to non-officer employee bonuses of $313 thousand paid during the current quarter in appreciation of all the hard work and dedication by our non-officer employees during these challenging times, along with an increase in loan commissions.

The decrease in occupancy, net was due mainly to a decrease in utilities and maintenance

during the current quarter.

The decrease in advertising and promotional expenses was due to the timing of campaigns.

The decrease in office supplies and related expenses was due to the timing of supply purchases.

The decrease in other non-interest expense was due to a reduction in customer debit card fraud losses, a decrease in mortgage servicing asset valuation charges related to changes in prepayment speeds, and a decrease in amortization of deposit intangibles.

The Company's efficiency ratio was 55.37% for the current quarter compared to 53.64% for the prior quarter.

1 unchanged sentence

Income Tax Expense

Income tax expense was $5.1 million for the current quarter, compared to $824 thousand for the prior quarter.

The effective tax rate was 20.7% for the current quarter compared to 16.2% for the prior quarter.

The effective tax rate was higher in the current quarter due primarily to the Company's permanent differences, which generally lower our income tax expense, having a proportionately smaller impact given the higher pretax income in the current quarter compared to the prior quarter.

Average Balance Sheet

Average outstanding balances are derived from average daily balances.

The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates.

Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.

For the Three Months Ended

June 30, 2020 March 31, 2020

Average Interest Average Interest

Outstanding Earned/ Yield/ Outstanding Earned/ Yield/

Amount Paid Rate Amount Paid Rate

(Dollars in thousands)

Interest-earning assets:

One- to four-family loans $ 6,568,945 $ 55,646 3.39 % $ 6,594,029 $ 58,838 3.57 %

Commercial loans 799,600 9,576 4.74 759,328 8,994 4.69

Consumer loans 121,139 1,430 4.75 126,710 1,781 5.65

Total loans receivable (1)

7,489,684 66,652 3.55 7,480,067 69,613 3.72

934,464 5,616 2.40 920,419 5,866 2.55

Investment securities (2)(3)

207,541 847 1.63 280,911 1,382 1.97

FHLB stock 101,588 1,207 4.78 99,879 1,714 6.90

Cash and cash equivalents (4)

231,354 59 0.10 105,381 380 1.43

Total interest-earning assets (1)(2)

8,964,631 74,381 3.32 8,886,657 78,955 3.55

Other non-interest-earning assets 499,291 454,687

Total assets $ 9,463,922 $ 9,341,344

Liabilities and stockholders' equity:

Interest-bearing liabilities:

Checking $ 1,232,611 199 0.06 $ 1,107,232 181 0.07

Savings 404,545 69 0.07 365,554 74 0.08

Money market 1,267,535 1,350 0.43 1,208,521 1,981 0.66

Retail/business certificates 2,734,940 13,882 2.04 2,691,029 14,103 2.11

Wholesale certificates 291,292 1,033 1.43 296,828 1,465 1.98

Total deposits 5,930,923 16,533 1.12 5,669,164 17,804 1.26

Borrowings (5)

2,035,637 11,561 2.27 2,176,166 12,483 2.29

Total interest-bearing liabilities 7,966,560 28,094 1.41 7,845,330 30,287 1.55

Other non-interest-bearing liabilities 200,339 183,018

Stockholders' equity 1,297,023 1,312,996

Total liabilities and stockholders' equity $ 9,463,922 $ 9,341,344

Net interest income (6)

$ 46,287 $ 48,668

Net interest rate spread (7)(8)

Net interest-earning assets $ 998,071 $ 1,041,327

Net interest margin (8)(9)

Ratio of interest-earning assets to interest-bearing liabilities 1.13x 1.13x

Selected performance ratios:

Return on average assets (annualized) (8)

0.82 % 0.18 %

Return on average equity (annualized) (8)

Average equity to average assets 13.70 14.06

Operating expense ratio (10)

Efficiency ratio (8)(11)

(1) Balances are adjusted for unearned loan fees and deferred costs.

Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent.

(2) AFS securities are adjusted for unamortized purchase premiums or discounts.

(3) The average balance of investment securities includes an average balance of nontaxable securities of $11.9 million and $15.0 million for the quarters ended June 30, 2020 and March 31, 2020, respectively.

(4) There were no cash and cash equivalents related to the leverage strategy during the quarters ended June 30, 2020 and March 31, 2020.

(5) There were no FHLB borrowings related to the leverage strategy during the quarters ended June 30, 2020 and March 31, 2020.

The FHLB advance amounts and rates included in this line include the effect of interest rate swaps and are net of deferred prepayment penalties.

(6) Net interest income represents the difference between interest income earned on interest-earning assets and interest paid on interest-bearing liabilities.

Net interest income depends on the average balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them.

(7) Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(8) The leverage strategy was not in place during the quarters ended June 30, 2020 and March 31, 2020.

(9) Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.

(10) The operating expense ratio represents annualized non-interest expense as a percentage of average assets.

(11) The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income.

Rate/Volume Analysis

The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.

The following table presents pretax income, income tax expense, and net income for the time periods presented, along with the change measured in dollars and percent.

For the Three Months Ended

June 30, 2020 vs.

March 31, 2020

Increase (Decrease) Due to

Volume Rate Total

December 31, September 30, Change Expressed in:

2020 2020 Dollars Percent

(Dollars in thousands)

Interest-earning assets:

Loans receivable $ 176 $ (3,137) $ (2,961)

MBS 88 (338) (250)

Investment securities (324) (211) (535)

FHLB stock 29 (536) (507)

Cash and cash equivalents 217 (538) (321)

Total interest-earning assets 186 (4,760) (4,574)

Interest-bearing liabilities:

Checking 20 (3) 17

Savings 7 (12) (5)

Money market 93 (723) (630)

Certificates of deposit 198 (851) (653)

Borrowings (495) (427) (922)

Total interest-bearing liabilities (177) (2,016) (2,193)

Net change in net interest income $ 363 $ (2,744) $ (2,381)

Income before income tax expense $ 23,348 $ 23,492 $ (144) (0.6) %

Income tax expense 4,450 5,213 (763) (14.6)

Net income $ 18,898 $ 18,279 $ 619 3.4

Effective Tax Rate 19.1 % 22.2 %

The decrease in income tax expense was due mainly to a lower effective tax rate compared to the prior quarter.

The lower effective tax rate was due primarily to true-ups related to the preparation of the September 30, 2020 federal and state tax returns.

Liquidity and Capital Resources

3 unchanged sentences

The Bank's primary sources of funds are deposits, FHLB borrowings, repurchase agreements, repayments and maturities of outstanding loans and MBS and other short-term investments, and funds provided by operations.

The Bank's long-term borrowings primarily have been used to manage the Bank's interest rate risk with the intent to improve the earnings of the Bank while maintaining capital ratios in excess of regulatory standards for well-capitalized financial institutions.

The Bank's long-term borrowings primarily have been used to manage the Bank's interest rate risk with the intention to improve the earnings of the Bank while maintaining capital ratios in excess of regulatory standards for well-capitalized financial institutions.

In addition, the Bank's focus on managing risk has provided additional liquidity capacity by maintaining a balance of MBS and investment securities available as collateral for borrowings.

3 unchanged sentences

Management also monitors key liquidity statistics related to items such as wholesale funding gaps, borrowings capacity, and available unpledged collateral, as well as various liquidity ratios.

See the "Executive Summary" above for information regarding the impact of the COVID-19 pandemic on our liquidity.

In the event short-term liquidity needs exceed available cash, the Bank has access to a line of credit at FHLB and the FRB of Kansas City's discount window.

Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40% of regulatory total assets without the pre-approval of FHLB senior management.

See "Part I, Item 1.

Business - Sources of Funds" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020 for information regarding limits on the Bank's FHLB borrowings.

The amount that can be borrowed from the FRB of Kansas City's discount window is based upon the fair value of securities pledged as collateral and certain other characteristics of those securities.

Management tests the Bank's access to the FRB of Kansas City's discount window annually with a nominal, overnight borrowing.

If management observes a trend in the amount and frequency of line of credit utilization and/or short-term borrowings that is not in conjunction with a planned strategy, such as the leverage strategy, the Bank will likely utilize long-term wholesale borrowing sources such as FHLB advances and/or repurchase agreements to provide long-term, fixed-rate funding.

If management observes unusual trends in the amount and frequency of line of credit utilization and/or short-term borrowings, the Bank will likely utilize long-term wholesale borrowing sources such as FHLB advances and/or repurchase agreements to provide long-term, fixed-rate funding.

The maturities of these long-term borrowings are generally staggered in order to mitigate the risk of a highly negative cash flow position at maturity.

The Bank's internal policy limits total borrowings to 55% of total assets.

At June 30, 2020, the Bank had total borrowings, at par, of $1.99 billion, or approximately 21% of total assets.

The amount of FHLB borrowings outstanding at June 30, 2020 was $1.89 billion, of which $943.0 million were advances scheduled to mature in the next 12 months, including $640.0 million of one-year floating-rate FHLB advances tied to interest rate swaps.

At December 31, 2020, the Bank had total borrowings, at par, of $1.74 billion, or approximately 18% of total assets, all of which were FHLB advances.

The amount of FHLB borrowings outstanding at December 31, 2020 was $1.74 billion, of which $790.0 million were advances scheduled to mature in the next 12 months, including $640.0 million of one-year floating-rate FHLB advances tied to interest rate swaps.

All FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB.

At June 30, 2020, the ratio of the par value of the Bank's FHLB borrowings to Call Report total assets was 20%.

At June 30, 2020, the Bank had repurchase agreements of $100.0 million, or approximately 1% of total assets, all of which were scheduled to mature during July 2020.

The Bank may enter into additional repurchase agreements as management deems appropriate, not to exceed 15% of total assets, and subject to the total borrowings internal policy limit of 55% as discussed above.

The Bank has pledged securities with an estimated fair value of $106.6 million as collateral for repurchase agreements as of June 30, 2020.

The securities pledged for the repurchase agreements will be delivered back to the Bank when the repurchase agreements mature.

At December 31, 2020, the Bank had no repurchase agreements.

The Bank may enter into repurchase agreements as management deems appropriate, not to exceed 15% of total assets, and subject to the total borrowings internal policy limit of 55% as discussed above.

The Bank could utilize the repayment and maturity of outstanding loans, MBS, and other investments for liquidity needs rather than reinvesting such funds into the related portfolios.

At June 30, 2020, the Bank had $760.1 million of securities that were eligible but unused as collateral for borrowing or other liquidity needs.

At December 31, 2020, the Bank had $1.55 billion of securities that were eligible but unused as collateral for borrowing or other liquidity needs.

The Bank has access to other sources of funds for liquidity purposes, such as brokered and public unit certificates of deposit.

As of June 30, 2020, the Bank's policy allowed for combined brokered and public unit certificates of deposit up to 15% of total deposits.

At June 30, 2020, the Bank did not have any brokered certificates of deposit, and public unit certificates of deposit were approximately 5% of total deposits.

The Bank had pledged securities with an estimated fair value of $340.8 million as collateral for public unit certificates of deposit at June 30, 2020.

As of December 31, 2020, the Bank's policy allowed for combined brokered and public unit certificates of deposit up to 15% of total deposits.

At December 31, 2020, the Bank did not have any brokered certificates of deposit, and public unit certificates of deposit were approximately 4% of total deposits.

The Bank had pledged securities with an estimated fair value of $304.8 million as collateral for public unit certificates of deposit at December 31, 2020.

The securities pledged as collateral for public unit certificates of deposit are held under joint custody with FHLB and generally will be released upon deposit maturity.

At June 30, 2020, $1.46 billion of the Bank's certificate of deposit portfolio was scheduled to mature within the next 12 months, including $254.5 million of public unit certificates of deposit.

At December 31, 2020, $1.56 billion of the Bank's certificate of deposit portfolio was scheduled to mature within the next 12 months, including $231.3 million of public unit certificates of deposit.

Based on our deposit retention experience and our current pricing strategy, we anticipate the majority of the maturing retail certificates of deposit will renew or transfer to other deposit products of the Bank at prevailing rates, although no assurance can be given in this regard.

2 unchanged sentences

To the extent possible, the Bank manages the cash flows of its loan and deposit portfolios by the rates it offers customers.

The following table presents the contractual maturities of our loan, MBS, and investment securities portfolios at June 30, 2020, along with associated weighted average yields.

The following table presents the contractual maturities of our loan, MBS, and investment securities portfolios at December 31, 2020, along with associated weighted average yields.

Loans and securities which have adjustable interest rates are shown as maturing in the period during which the contract is due.

The table does not reflect the effects of possible prepayments or enforcement of due on sale clauses.

As of June 30, 2020, the amortized cost of investment securities in our portfolio which are callable or have pre-refunding dates within one year was $227.8 million.

As of December 31, 2020, the amortized cost of investment securities in our portfolio which are callable or have pre-refunding dates within one year was $252.3 million.

MBS Investment Securities Total

27 unchanged sentences

We anticipate we will continue to have sufficient funds, through repayments and maturities of loans and securities, deposits and borrowings, to meet our current commitments.

The maximum balance of short-term FHLB borrowings outstanding at any month-end during the nine months ended June 30, 2020 was $1.24 billion, and the average balance of short-term FHLB borrowings outstanding during this period was $1.09 billion at a weighted average contractual rate of 1.83%.

The balance of short-term FHLB borrowings outstanding at June 30, 2020 was $943.0 million, at a weighted average contractual rate of 1.17%.

The maximum balance of short-term FHLB borrowings outstanding at any month-end during the three months ended December 31, 2020 was $840.0 million, and the average balance of short-term FHLB borrowings outstanding during this period was $823.4 million at a weighted average contractual rate of 0.72%.

The balance of short-term FHLB borrowings outstanding at December 31, 2020 was $790.0 million, at a weighted average contractual rate of 0.66%.

Short-term FHLB borrowings for this purpose are defined as those with maturity dates within the next 12 months.

1 unchanged sentence

In the normal course of business, the Company and its subsidiary are named defendants in various lawsuits and counter claims.

In the opinion of management, after consultation with legal counsel, none of the currently pending suits had or are expected to have a materially adverse effect on the Company's consolidated financial statements for the quarter ended June 30, 2020, or future periods.

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank per the regulatory framework for prompt corrective action ("PCA").

In September 2019, the regulatory agencies, including the OCC and FRB, adopted a final rule, effective January 1, 2020, creating the CBLR for institutions with total consolidated assets of less than $10 billion and that meet other qualifying criteria.

The CBLR provides for a simple measure of capital adequacy for qualifying institutions.

According to the final rule, qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the capital requirements for the well capitalized category under the agencies' PCA framework.

In April 2020, 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 is a minimum of 8% for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter.

The Bank elected the CBLR framework during the current quarter.

As of June 30, 2020, the Bank's CBLR was 12.4% and the Company's CBLR was 13.8%, which exceeded the minimum requirements.

The following table presents a reconciliation of equity under GAAP to regulatory capital amounts, as of June 30, 2020, for the Bank and the Company (dollars in thousands):

Qualifying institutions that elect to use the CBLR framework, such as the Bank and the Company, that maintain the required minimum leverage ratio will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the capital requirements for the well capitalized category under the agencies' PCA framework.

As of December 31, 2020, the Bank's CBLR was 12.2% and the Company's CBLR was 13.3%, which exceeded the minimum requirements.

See "Part I, Item 1.

Business - Regulation and Supervision - Regulatory Capital Requirements" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020 for additional information related to regulatory capital.

The following table presents a reconciliation of equity under GAAP to regulatory capital amounts, as of December 31, 2020, for the Bank and the Company (dollars in thousands):

Total equity as reported under GAAP $ 1,169,923 $ 1,276,548

3 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis