What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-10 compared with 2021-02-09 · 699 added, 292 removed, 842 unchanged (54% of the section changed)

49 unchanged sentences

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.

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.

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.

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

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

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

Many areas of consumer spending have rebounded in recent months, but some segments, such as travel and entertainment, are lagging.

We 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 the travel and entertainment industries, resulting from the COVID-19 pandemic.

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

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

The impact of reducing rates offered on our certificate of deposit products has been to lower the cost of deposits as certificates of deposit reprice to a lower rate when they mature and as new accounts are opened.

Additionally, certain borrowings were repaid or restructured over the past year using funds obtained through deposit growth, which reduced interest expense on borrowings.

Over this time, we lowered rates for our loan products.

In late February 2021, as market interest rates began to increase, we began to increase our offered loan rates in our market areas.

Despite this recent increase, the yield on the loan portfolio will likely continue to decrease in the near term due to the high levels of prepayments, refinances and endorsements, but not at the same magnitude as the past year.

With significant cash inflows realized due to investment securities being called and prepayments on loans and MBS over the past year and the current yields on reinvested funds into new securities being lower than existing portfolio yields, the yield on our investments has been reduced significantly.

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 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 $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.

During the six month period ended March 31, 2021, the Bank completed three unique transactions that impacted operating results.

• Sold all its Visa Class B shares and recognized a gain of $7.4 million.

• Terminated $200.0 million of fixed-pay interest rate swaps with an average cost at termination of 2.62% and realized a loss of $4.8 million.

The estimated earn-back period of the loss is approximately 15 months.

• Wrote down the value of a branch, which management intends to sell, by $1.2 million.

The Company recognized net income of $39.3 million, or $0.29 per share, for the six month period ended March 31, 2021 compared to net income of $26.8 million, or $0.19 per share, for the six month period ended March 31, 2020.

The increase in net income was due primarily to recording a $22.3 million provision for credit losses during the prior year period compared to recording a negative provision for credit losses of $4.5 million in the current year period, partially offset by a decrease in net interest income and an increase in income tax expense.

Net interest income decreased $10.5 million, or 10.8%, from the prior year period to $86.9 million for the current year period.

The net interest margin decreased 29 basis points, from 2.19% for the prior year period to 1.90% for the current year period.

The decrease in net interest income and 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.

Our net interest margin could continue to decrease if our interest-earning assets

continue to reprice to lower market rates at a faster pace than our deposits and borrowings, and if we continue investing in lower yielding securities rather than reinvesting cash flows into the loan portfolio.

Total assets at March 31, 2021 were $9.70 billion, an increase of $210.8 million, or 2.2% from September 30, 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 that was not used to pay down maturing borrowings.

Total securities increased $535.0 million, or 34.3%, from $1.56 billion at September 30, 2020 to $2.10 billion at March 31, 2021, including a $369.1 million increase in MBS and a $165.9 million increase in investment securities.

Total loans at March 31, 2021 were $6.97 billion, a decrease of $229.3 million from September 30, 2020.

The decrease was primarily in the one- to four-family correspondent loan portfolio as payoffs exceeded purchases.

During the current year six month period, the Bank originated and refinanced $649.4 million of one- to four-family and consumer loans with a weighted average rate of 2.71% and purchased $269.1 million of one- to four-family loans from correspondent lenders with a weighted average rate of 2.70%.

The Bank also originated $157.3 million of commercial loans with a weighted average rate of 3.24% and entered into commercial loan participations of $98.1 million at a weighted average rate of 3.85%.

The commercial loan portfolio totaled $795.0 million at March 31, 2021 and was composed of 83% commercial real estate loans, 10% commercial and industrial loans, and 7% commercial construction loans.

Total commercial real estate and commercial construction potential exposure, including undisbursed amounts and outstanding commitments totaling $258.2 million, was $976.0 million at March 31, 2021.

Total commercial and industrial potential exposure, including undisbursed amounts and outstanding commitments of $23.1 million, was $100.3 million at March 31, 2021, of which $25.3 million related to PPP loans.

Total deposits were $6.65 billion at March 31, 2021, an increase of $459.5 million, or 7.4%, from September 30, 2020.

The increase was in non-maturity deposits, which increased $501.7 million, including a $241.1 million increase in checking accounts, a $183.4 million increase in money market accounts, and a $77.2 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.

Retail/business certificates of deposit and public unit certificates of deposit decreased $36.1 million and $6.1 million, respectively, during the current year period.

Total borrowings were $1.58 billion at March 31, 2021, a decrease of $207.4 million, or 11.6%, from September 30, 2020.

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

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

Stockholders' equity was $1.28 billion at both March 31, 2021 and September 30, 2020.

During the current year six month period, the Company paid cash dividends totaling $40.6 million and repurchased common stock totaling $1.5 million, partially offset by net income of $39.3 million.

The cash dividends paid during the current year six month period totaled $0.30 per share and consisted of a $0.13 per share cash true-up dividend related to fiscal year 2020 earnings and two regular quarterly cash dividends of $0.085 per share.

On April 20, 2021, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.5 million, payable on May 21, 2021 to stockholders of record as of the close of business on May 7, 2021.

In the long run, management considers the Bank's equity to total assets ratio of at least 9% an appropriate level of capital.

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

At March 31, 2021, this ratio was 12.0%.

Transition from London Interbank Offered Rates ("LIBOR")

LIBOR is used extensively in the United States as a reference rate for various financial contracts, including adjustable-rate loans, asset-backed securities, and interest rate swaps.

In July 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit LIBOR rates.

The availability of three-month, six-month and one-year LIBOR rates is currently expected to cease in June 2023.

As of March 31, 2021, the Company has identified $375.6 million of adjustable-rate one- to four-family loans in its portfolio for which the repricing index was tied to six-month or one-year LIBOR and the loan maturity date is after June 30, 2023.

Our one- to four-family loan agreements generally allow the Bank to choose a new alternative reference rate based upon comparable information if the current index is no longer available.

During the June 30, 2019 quarter, the Bank discontinued the use of LIBOR for the origination of adjustable-rate one- to four-family loans and no longer purchases correspondent one- to four-family loans that use LIBOR.

The Bank began using the one-year Constant Maturity Treasury ("CMT") index for newly originated and correspondent purchased one- to four-family adjustable-rate loans, and currently plans to replace LIBOR with the one-year CMT index for existing loans when LIBOR is no longer available.

At March 31, 2021, none of the Bank's consumer or commercial loans use a repricing index tied to LIBOR.

The Bank has interest rate swaps with a notional amount of $440.0 million at March 31, 2021 that are tied to three-month LIBOR.

The related FHLB advances for which the adjustable-rate cash flows are being hedged by these interest rate swaps are also tied to the three-month LIBOR.

All of the advances tied to the interest rate swaps mature during calendar year 2021.

The Bank intends to replace the advances at maturity with advances tied to the Secured Overnight Finance Rate ("SOFR").

Additionally, the Bank intends to work with the interest rate swap counterparties to replace LIBOR with SOFR at the same time.

Available Information

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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 reserve for off-balance sheet credit exposures is reported as a liability and is presented in other liabilities 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.

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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.

At 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.

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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 considers qualitative factors when evaluating the adequacy of the ACL and reserve for off-balance sheet credit exposures calculated by the ACL model.

The qualitative factors considered include such items as:

changes in the Bank's loan portfolio composition and credit concentrations, changes in the balances and/or trends in asset quality and/or loan credit performance, changes in lending underwriting standards, the effect of other external factors such as significant unique events or conditions, and actual and/or expected changes in economic conditions, real estate values, and/or other economic developments in which the Bank operates.

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

While management utilizes its best judgment and information available, the adequacy of the ACL and reserve for off-balance sheet credit exposures is determined by certain factors outside of the Company's control, such as the performance of our portfolios, changes in the economic environment, changes in interest rates, and the view of the regulatory authorities toward classification of assets and the level of ACL and reserves for off-balance sheet credit exposures.

Additionally, the level of ACL and reserves for off-balance sheet credit exposures may fluctuate based on the balance and mix of the loan portfolio and off-balance sheet credit exposures.

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

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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.

The Company did not have any other financial instruments that were measured at fair value on a recurring basis at March 31, 2021 and September 30, 2020.

Financial Condition

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

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

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

2021 2020 2020 2020 2020

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Equity to total assets at end of period 13.2 % 13.3 % 13.5 % 13.6 % 13.7 %

Total assets were $9.70 billion at March 31, 2021, an increase of $91.1 million, or 0.9%, from December 31, 2020, due to an increase in securities, partially offset by a decrease in loans receivable and cash and cash equivalents.

Excess operating cash and cash flows from the loan portfolio and funds from deposit growth were generally used to purchase securities during the current quarter.

Total loans were $6.97 billion at March 31, 2021, a decrease of $30.6 million, or 0.4%, from December 31, 2020.

The decrease was mainly in the one- to four-family correspondent loan portfolio as payoffs exceeded purchases during the current quarter.

During the current quarter, the Bank originated and refinanced $319.8 million of one- to four-family and consumer loans with a weighted average rate of 2.66% and purchased $163.3 million of one- to four-family loans from correspondent lenders with a weighted average rate of 2.61%.

The Bank also originated $119.2 million of commercial loans with a weighted average rate of 3.07% and entered into commercial loan participations of $38.1 million at a weighted rate of 3.62%.

The Bank endorsed $285.2 million of loans during the December 31, 2020 quarter, reducing the average rate on those loans by 87 basis points, and $242.3 million of loans during the March 31, 2021 quarter, reducing the average rate on those loans by 96 basis points.

Total deposits were $6.65 billion at March 31, 2021, an increase of $240.0 million, or 3.7%, from December 31, 2020.

The increase was primarily in non-maturity deposits, including a $113.8 million increase in money market accounts and a $110.0 million increase in checking accounts.

Between mid-March 2021 and March 31, 2021, the Bank processed approximately $113 million of Economic Impact Payments, the majority of which were retained by the Bank as of March 31, 2021.

Retail/business certificates of deposit decreased $47.6 million from December 31, 2020.

Customers moved some of the funds from maturing certificates to more liquid investment options such as the Bank's retail money market accounts.

Total borrowings decreased $152.3 million, or 8.8%, from December 31, 2020 to March 31, 2021.

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

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

Stockholders' equity was $1.28 billion at both March 31, 2021 and December 31, 2020.

During the current quarter, net income totaled $20.4 million, offset by the payment of cash dividends totaling $11.5 million and a decrease in AOCI of $7.6 million.

Loans Receivable.

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

December 31, 2020 September 30, 2020

Amount Rate Amount Rate

March 31, 2021 December 31, 2020 September 30, 2020

Amount Rate Amount Rate Amount Rate

(Dollars in thousands)

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

During the current year-to-date period, the Bank endorsed $285.2 million of one- to four-family loans, reducing the average rate on those loans by 87 basis points.

During the current year-to-date period, the Bank endorsed $527.5 million of one- to four-family loans, reducing the average rate on those loans by 91 basis points ($285.2 million were endorsed during the December 31, 2020 quarter, reducing the average rate on those loans by 87 basis points, and $242.3 million were endorsed during the March 31, 2021 quarter, reducing the average rate on those loans by 96 basis points).

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

1 unchanged sentence

For the Three Months Ended

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

March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020

Amount Rate Amount Rate Amount Rate Amount Rate

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Principal (charge-offs)/recoveries, net (70) (464) 312 19

Ending balance $ 6,993,159 3.34 $ 7,023,626 3.46 $ 7,224,996 3.55 $ 7,407,442 3.64

For the Six Months Ended

March 31, 2021 March 31, 2020

Amount Rate Amount Rate

(Dollars in thousands)

Beginning balance $ 7,224,996 3.55 % $ 7,412,473 3.81 %

Originated and refinanced:

Fixed 645,260 2.64 406,584 3.48

Adjustable 161,429 3.48 111,072 4.20

Purchased and participations:

Fixed 292,780 2.83 248,730 3.61

Adjustable 74,465 3.71 32,786 3.00

Change in undisbursed loan funds (134,248) 14,306

Repayments (1,270,989) (732,005)

Principal charge-offs, net (534) (330)

Other — (336)

Ending balance $ 6,993,159 3.34 $ 7,493,280 3.74

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.

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.

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.

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For the Three Months Ended

December 31, 2020 December 31, 2019

March 31, 2021 March 31, 2020

Amount Rate % of Total Amount Rate % of Total

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Total purchased/participation loans $ 201,412 2.80 $ 144,597 3.40

For the Six Months Ended

March 31, 2021 March 31, 2020

Amount Rate % of Total Amount Rate % of Total

(Dollars in thousands)

One- to four-family:

<= 15 years $ 282,463 2.30 % 24.1 % $ 153,063 2.96 % 19.1 %

> 15 years 502,134 2.85 42.8 408,843 3.56 51.2

One- to four-family construction 59,840 2.72 5.1 25,102 3.42 3.1

Commercial real estate 16,260 3.58 1.4 13,272 5.00 1.7

Commercial and industrial 33,582 2.08 2.8 14,039 3.90 1.8

Commercial construction 41,538 3.65 3.5 36,253 4.72 4.5

Home equity 945 5.36 0.1 2,487 5.88 0.3

Other 1,278 5.49 0.1 2,255 5.55 0.3

Total fixed-rate 938,040 2.70 79.9 655,314 3.53 82.0

Adjustable-rate:

One- to four-family:

<= 36 months 1,112 2.28 0.1 3,669 2.86 0.5

> 36 months 38,442 2.53 3.3 66,308 3.02 8.3

One- to four-family construction 5,457 2.60 0.5 9,997 3.03 1.2

Commercial real estate 71,375 3.67 6.1 26,522 4.65 3.3

Commercial and industrial 5,045 3.62 0.4 4,475 5.08 0.6

Commercial construction 87,620 3.73 7.4 1,487 5.53 0.2

Home equity 26,020 4.41 2.2 29,969 5.47 3.7

Other 823 3.19 0.1 1,431 4.04 0.2

Total adjustable-rate 235,894 3.55 20.1 143,858 3.93 18.0

Total originated, refinanced and purchased $ 1,173,934 2.87 100.0 % $ 799,172 3.60 100.0 %

Purchased and participation loans included above:

Correspondent - one- to four-family $ 254,666 2.72 $ 220,304 3.48

Participations - commercial 38,114 3.62 28,426 4.65

Total fixed-rate purchased/participations 292,780 2.83 248,730 3.61

Adjustable-rate:

Correspondent - one- to four-family 14,465 2.51 32,786 3.00

Participations - commercial 60,000 4.00 — —

Total adjustable-rate purchased/participations 74,465 3.71 32,786 3.00

Total purchased/participation loans $ 367,245 3.01 $ 281,516 3.54

(1) The fixed-rate one- to four-family loans less than or equal to 15 years have an original maturity at origination of less than or equal to 15 years, while fixed-rate one- to four-family loans greater than 15 years have an original maturity at origination of greater than 15 years.

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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 December 2020, from a nationally recognized consumer rating agency.

Credit scores are updated at least annually, with the latest update in March 2021, 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.

December 31, 2020 September 30, 2020

March 31, 2021 September 30, 2020

% of Credit Average % of Credit Average

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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 quarter, $101.5 million were refinanced from other lenders.

Of the loans originated during the current year six-month period, $209.3 million were refinanced from other lenders.

For the Three Months Ended

December 31, 2020 December 31, 2019

March 31, 2021 March 31, 2020

Credit Credit

5 unchanged sentences

$ 469,569 69 771 $ 321,580 73 764

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 quarter.

For the Three Months Ended

December 31, 2020

State Amount % of Total Rate

For the Six Months Ended

March 31, 2021 March 31, 2020

Credit Credit

Amount LTV Score Amount LTV Score

(Dollars in thousands)

Originated $ 405,362 70 % 769 $ 305,900 75 % 766

Refinanced by Bank customers 214,955 65 769 107,992 68 760

Correspondent purchased 269,131 69 775 253,090 71 767

$ 889,448 69 771 $ 666,982 72 765

For the Three Months Ended For the Six Months Ended

March 31, 2021 March 31, 2021

State Amount % of Total Rate Amount % of Total Rate

(Dollars in thousands)

Kansas $ 264,895 56.4 % 2.58 % $ 529,575 59.5 % 2.64 %

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Texas 26,302 5.6 2.59 50,604 5.7 2.72

Tennessee 32,066 6.8 2.64 48,929 5.5 2.73

Pennsylvania 33,989 7.3 2.55 44,461 5.0 2.59

Other states 33,001 7.0 2.61 58,413 6.6 2.72

$ 469,569 100.0 % 2.59 $ 889,448 100.0 % 2.65

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.

As of March 31, 2021, there were $7.8 million of one- to-four family loans with COVID-19 loan modifications that were still in their deferral period.

There were $208.9 million of one- to four-family loans with COVID-19 loan modifications that were out of their deferral period by March 31, 2021.

See "Asset Quality" below for additional information regarding the performance of loans that have exited the deferral period.

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 March 31, 2021, 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 2.16 % 2.73 % 2.47 %

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.

Commercial Loans - During the current year six month period, the Bank originated $157.3 million of commercial loans, including $19.5 million of PPP loans, and entered into commercial loan participations totaling $98.1 million.

The Bank also processed commercial loan disbursements, excluding lines of credit, of approximately $152.3 million at a weighted average rate of 3.42%.

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.

Additionally, during the current year, $39.0 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.

The following table presents the Bank's commercial real estate and commercial construction loans and loan commitments by type of primary collateral, as of March 31, 2021.

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

Unpaid Undisbursed Gross Loan Outstanding % of

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Senior housing 33 $ 215,364 $ 50,255 $ 265,619 $ — $ 265,619 27.2 %

Hotel 9 132,194 46,717 178,911 — 178,911 18.4

Retail building 133 133,738 44,808 178,546 18,868 197,414 20.2

Hotel 9 133,818 44,705 178,523 — 178,523 18.3

Office building 98 55,029 61,874 116,903 — 116,903 12.0

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

One- to four-family property 367 58,613 5,170 63,783 250 64,033 6.6

Multi-family 39 48,184 14,524 62,708 272 62,980 6.4

Single use building 20 42,612 4,644 47,256 7,000 54,256 5.6

2 unchanged sentences

Weighted average rate 4.05 % 3.88 % 4.01 % 3.63 % 4.00 %

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

The following table summarizes the Bank's commercial real estate and commercial construction loans and loan commitments by state as of March 31, 2021.

Unpaid Undisbursed Gross Loan Outstanding % of

4 unchanged sentences

Missouri 132 180,446 36,701 217,147 18,000 235,147 24.1

Colorado 6 13,451 22,755 36,206 — 36,206 3.7

Arkansas 3 7,461 26,395 33,856 — 33,856 3.5

Nebraska 6 33,655 4 33,659 — 33,659 3.4

Kentucky 1 25,559 — 25,559 — 25,559 2.6

California 3 5,810 4,300 10,110 1,500 11,610 1.2

Other 11 32,504 7,725 40,229 1,500 41,729 4.3

796 $ 717,804 $ 229,173 $ 946,977 $ 28,987 $ 975,964 100.0 %

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

The following table presents the Bank's commercial and industrial loans and loan commitments by business purpose, as of March 31, 2021.

Included in the working capital loan category are $25.3 million of PPP loans.

8 unchanged sentences

1,063 $ 77,210 $ 20,047 $ 97,257 $ 3,052 $ 100,309 100.0 %

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 December 31, 2020.

(Dollars in thousands)

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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.

As of March 31, 2021, there were commercial loans with a gross balance, including undisbursed amounts, totaling $134.0 million with COVID-19 loan modifications that were still in their deferral period.

There were $270.7 million of commercial loans with COVID-19 loan modifications that were out of their deferral period by March 31, 2021.

See "Asset Quality" below for additional information regarding the performance of loans that have exited the deferral period.

Asset Quality.

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Business - Lending Practices and Underwriting Standards" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020.

Delinquent and non-performing loans and OREO - The following table presents the Company's 30 to 89 day delinquent loans at the dates indicated.

Delinquent and non-performing loans and OREO - Of the one- to four-family COVID-19 loan modifications that had completed the deferral period by March 31, 2021, $2.3 million were 30 to 89 days delinquent and $1.8 million were 90 or more days delinquent as of March 31, 2021.

Of the commercial COVID-19 loan modifications that had completed the deferral period by March 31, 2021, one loan for $150 thousand was 30 to 89 days delinquent and none were 90 or more days delinquent as of March 31, 2021.

The following table presents the Company's 30 to 89 day delinquent loans at the dates indicated.

Loans subject to payment forbearance under the Bank's COVID-19 loan modification program are not reported as delinquent during the forbearance time period.

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 December 31, 2020, approximately 76% were 59 days or less delinquent.

Of the loans 30 to 89 days delinquent at March 31, 2021, approximately 74% were 59 days or less delinquent.

Loans Delinquent for 30 to 89 Days at:

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

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

2021 2020 2020 2020 2020

10 unchanged sentences

to total loans receivable, net 0.12 % 0.20 % 0.13 % 0.20 % 0.24 %

The table below presents the Company's non-performing loans and OREO at the dates indicated.

The following table presents the Company's non-performing loans and OREO at the dates indicated.

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

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OREO primarily includes assets acquired in settlement of loans.

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.

At March 31, 2021, there were approximately $8.8 million of non-performing one- to four-family loans for which foreclosure proceedings either had been initiated prior to the foreclosure suspension or may have been initiated if the foreclosure suspension had not been in place.

Non-Performing Loans and OREO at:

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

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

2021 2020 2020 2020 2020

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2 $ 105 3 $ 129 4 $ 183 4 $ 183 5 $ 187

Consumer — — — — — — — — 1 98

3 129 4 183 4 183 5 187 9 512

Total non-performing assets 122 $ 15,346 120 $ 14,275 105 $ 12,673 104 $ 10,398 103 $ 9,024

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

At March 31, 2021, 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

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

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.

The increase in commercial special mention loans at March 31, 2021 compared to September 30, 2020 was due mainly to the addition of two commercial loans totaling $50.7 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

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

March 31, 2021 September 30, 2020 March 31, 2020

Special Mention Substandard Special Mention Substandard Special Mention Substandard

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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.

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 other liabilities 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.

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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.

The economic forecast scenario selected by management improved at March 31, 2021 compared to December 31, 2020 which resulted in a reduction in the ACL and reserve for off-balance sheet credit exposures calculated by the model.

Management applied qualitative factors to account for the continued economic uncertainties, along with the balance and trending of large-dollar special mention

commercial loans.

These qualitative factors partially offset the reduction in the ACL related to the improvement in the economic forecast.

The economic uncertainties related to (1) the job market, specifically the unemployment rate, labor participation rate and the effectiveness of the latest federal stimulus package to the unemployed and the economic stimulus payments to qualifying households, (2) the unevenness of the recovery in certain industries, and (3) the impact to the housing market as a result of the foreclosure moratorium and how the housing market may react when the foreclosure moratorium is eventually lifted.

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, 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.

The following table presents a summary of changes in ACL and reserve for off-balance sheet credit exposures occurring during the quarter ended March 31, 2021.

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:

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

Charge-offs (138) — (138)

2 unchanged sentences

Provision for credit losses (2,658) (306) (2,964)

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.

Balance at March 31, 2021 $ 23,397 $ 6,127 $ 29,524

The negative provision for credit losses was due primarily to a reduction in commercial loan ACL and reserves for off-balance sheet credit exposures as a result of improvements in the economic forecast used in the model, partially offset by an increase in qualitative factors, primarily the economic uncertainty qualitative factor, as discussed above.

The gross balance of off-balance sheet credit exposures was $907.2 million as of March 31, 2021 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.

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For the Three Months Ended

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

March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020

(Dollars in thousands)

11 unchanged sentences

period to average non-performing assets 0.47 3.44 (2.70) (0.20) 3.78

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

ACL to net charge-offs (annualized) 83.8x 14.1x N/M (1)

For the Six Months Ended

March 31, 2021 March 31, 2020

(Dollars in thousands)

ACL beginning balance $ 31,527 $ 9,226

Adoption of CECL (4,761) —

Charge-offs (670) (423)

Recoveries 136 93

Provision for credit losses (2,835) 22,300

ACL ending balance $ 23,397 $ 31,196

Ratio of net charge-offs during the period to

average loans outstanding 0.01 % — %

Ratio of net charge-offs during the period to

average non-performing assets 3.81 3.68

ACL to net charge-offs (annualized) 21.9x 47.3x

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

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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,

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

2021 2020 2020 2020 2020 2020

13 unchanged sentences

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

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

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

2021 2020 2020 2020 2020 2020

14 unchanged sentences

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,

March 31, December 31, October 1,

2021 2020 2020

(Dollars in thousands)

3 unchanged sentences

$ 6,127 $ 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.

Securities increased $535.0 million, or 34.3%, from September 30, 2020 to March 31, 2021, including a $369.1 million increase in MBS and a $165.9 million increase in investment securities.

The weighted average yield on the securities portfolio decreased 34 basis points, from 1.62% at September 30, 2020 to 1.28% at March 31, 2021, 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 91% of our securities portfolio at December 31, 2020.

Overall, fixed-rate securities comprised 93% of our securities portfolio at March 31, 2021.

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.

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

March 31, 2021 December 31, 2020 September 30, 2020

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.

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

March 31, 2021 December 31, 2020 September 30, 2020

(Dollars in thousands)

4 unchanged sentences

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

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.

GSEs, increased $369.1 million, from $1.18 billion at September 30, 2020, to $1.55 billion at March 31, 2021.

The following tables summarize 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.

2 unchanged sentences

For the Three Months Ended

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

March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020

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

3 unchanged sentences

Net amortization of (premiums)/discounts (1,572) (1,003) (608) (363)

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

Fixed-rate 223,804 1.31 5.9 379,793 1.04 5.4 297,024 1.06 5.9 77,455 1.29 5.0

Change in valuation on AFS securities (22,490) 1,203 (2,358) 7,470

Ending balance - carrying value $ 1,549,901 1.54 4.0 $ 1,459,300 1.67 4.0 $ 1,180,803 1.94 3.5 $ 982,587 2.35 3.3

For the Six Months Ended

March 31, 2021 March 31, 2020

Amount Yield WAL Amount Yield WAL

(Dollars in thousands)

Beginning balance - carrying value $ 1,180,803 1.94 % 3.5 $ 936,487 2.67 % 3.5

Maturities and repayments (210,637) (138,402)

Net amortization of (premiums)/discounts (2,575) (527)

Fixed-rate 603,597 1.14 5.6 163,222 1.91 4.2

Change in valuation on AFS securities (21,287) 12,538

Ending balance - carrying value $ 1,549,901 1.54 4.0 $ 973,318 2.50 3.6

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

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.

GSE debentures (primarily issued by FNMA, FHLMC, or Federal Home Loan Banks) and municipal investments, increased $165.9 million, from $380.1 million at September 30, 2020, to $546.0 million at March 31, 2021.

Municipal investments totaled $5.4 million at March 31, 2021.

The following tables summarize 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

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

March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020

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

3 unchanged sentences

Net amortization of (premiums)/discounts (18) (14) (54) (80)

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

Fixed-rate 100,000 0.70 4.6 124,987 0.48 3.2 244,975 0.51 3.2 99,990 0.58 1.2

Change in valuation on AFS securities (5,200) 346 (126) (162)

Ending balance - carrying value $ 546,023 0.56 3.6 $ 454,566 0.54 1.0 $ 380,147 0.65 1.7 $ 237,467 1.23 0.8

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

For the Six Months Ended

March 31, 2021 March 31, 2020

Amount Yield WAL Amount Yield WAL

(Dollars in thousands)

Beginning balance - carrying value $ 380,147 0.65 % 1.7 $ 268,376 2.11 % 0.8

Maturities, calls and sales (54,225) (131,300)

Net amortization of (premiums)/discounts (32) (29)

Fixed-rate 224,987 0.58 3.8 125,097 1.71 1.2

Change in valuation on AFS securities (4,854) 575

Ending balance - carrying value $ 546,023 0.56 3.6 $ 262,719 1.87 0.3

Deposits - Total deposits increased $459.5 million, or 7.4%, from September 30, 2020 to March 31, 2021.

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.

Retail/business certificates of deposit and public unit certificates of deposit decreased $36.1 million and $6.1 million, respectively, during the current year period.

Customers moved some of the funds from maturing certificates to more liquid investment 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

March 31, 2021 December 31, 2020 September 30, 2020

% of % of % of

8 unchanged sentences

$ 6,650,865 0.73 100.0 % $ 6,410,842 0.84 100.0 % $ 6,191,408 0.95 100.0 %

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 December 31, 2020.

More than More than

18 unchanged sentences

$ 457,297 $ 421,387 $ 710,622 $ 1,389,718 $ 2,979,024

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.

Borrowings - Total borrowings at March 31, 2021 were $1.58 billion, a decrease of $207.4 million, or 11.6%, from September 30, 2020.

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

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

7 unchanged sentences

For the Three Months Ended

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

March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020

Effective Effective Effective Effective

10 unchanged sentences

Ending balance $ 1,590,000 1.94 3.3 $ 1,740,000 2.26 3.0 $ 1,790,000 2.31 3.0 $ 1,990,000 2.29 2.9

For the Six Months Ended

March 31, 2021 March 31, 2020

Effective Effective

Amount Rate WAM Amount Rate WAM

(Dollars in thousands)

Beginning balance $ 1,790,000 2.31 % 3.0 $ 2,140,000 2.38 % 2.6

Maturities and prepayments:

FHLB advances (665,000) 2.30 (765,000) 2.43

New FHLB borrowings:

Fixed-rate 200,000 1.16 5.5 450,000 1.76 4.8

Interest rate swaps (1)

265,000 2.63 1.9 265,000 2.58 2.9

Ending balance $ 1,590,000 1.94 3.3 $ 2,090,000 2.25 3.0

(1) Represents adjustable-rate FHLB advances for which the Bank has entered into interest rate swaps to hedge the variability in cash flows associated with the advances.

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 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.

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 March 31, 2021.

As discussed previously, the Bank terminated interest rate swaps with a notional amount of $200.0 million during the quarter ended March 31, 2021.

In the table below, the $200.0 million of adjustable-rate FHLB advances previously tied to these terminated interest rate swaps are presented in the FHLB advances column as maturing in fiscal year 2022.

Subsequent to March 31, 2021, the Bank prepaid $100.0 million of adjustable-rate FHLB advances that were related to the terminated swaps and replaced them with $100.0 million of fixed-rate FHLB advances with a weighted average rate of 0.69% and a weighted average term of 3.5 years.

Term Borrowings Amount

Maturity by Interest rate Total Contractual Effective

Fiscal Year Fixed-rate swaps (1)

Maturity by FHLB Interest rate Total Contractual Effective

Fiscal Year Advances swaps (1)

Amount Rate Rate (2)

7 unchanged sentences

2027 100,000 — 100,000 0.76 1.24

$ 1,150,000 $ 440,000 $ 1,590,000 1.12 1.94

(1) Represents adjustable-rate FHLB advances for which the Bank has entered into interest rate swaps with a notional amount of $440.0 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 3.2 years at December 31, 2020.

The expected WAL of the interest rate swaps was 3.9 years at March 31, 2021.

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

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 December 31, 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

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(Dollars in thousands)

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

June 30, 2021 $ 370,606 1.41 % $ 86,691 0.31 % $ — — % $ 457,297 1.20 %

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December 31, 2021 345,989 1.20 49,561 0.35 200,000 0.35 595,550 0.84

March 31, 2022 297,696 1.26 17,376 0.89 — — 315,072 1.24

$ 1,347,720 1.29 $ 241,586 0.45 $ 275,000 1.07 $ 1,864,306 1.15

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

The term borrowings maturing in the December 31, 2021 quarter with a repricing rate of 0.35% are adjustable-rate advances that were previously tied to the terminated interest rate swaps discussed above.

Of the $200.0 million maturing in the December 31, 2021 quarter, $100.0 million was prepaid in April 2021 and replaced with $100.0 million of advances with a weighted average rate of 0.69% and a weighted average term of 3.5 years.

Management may prepay the remaining $100.0 million during the June 30, 2021 quarter.

Stockholders' Equity.

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.

Stockholders' equity was $1.28 billion at both March 31, 2021 and September 30, 2020.

During the current year six month period, the Company paid cash dividends totaling $40.6 million and repurchased common stock totaling $1.5 million, partially offset by net income of $39.3 million.

In the long run, management considers the Bank's equity to total assets ratio of at least 9% 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.

At March 31, 2021, this ratio was 12.0%.

At March 31, 2021, Capitol Federal Financial, Inc., at the holding company level, had $73.9 million in cash on deposit at the Bank.

For fiscal year 2021, it is the intention 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.

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This plan has no expiration date;

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

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

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

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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.

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 to pay some level of this dividend when economic conditions are more certain.

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 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 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.

For the quarter ending June 30, 2021, the amount presented represents the dividend payable on May 21, 2021 to stockholders of record as of the close of business on May 7, 2021.

Calendar Year

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

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

For the Three Months Ended

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

2021 2020 2020 2020 2020

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Diluted EPS 0.15 0.14 0.13 0.14 0.03

Comparison of Operating Results for the Three Months Ended March 31, 2021 and December 31, 2020

For the quarter ended March 31, 2021, the Company recognized net income of $20.4 million, or $0.15 per share, compared to net income of $18.9 million, or $0.14 per share, for the quarter ended December 31, 2020.

The increase was due primarily to an increase in non-interest income resulting mainly from the sale of Visa Class B shares, partially offset by an increase in non-interest expense due to the termination of $200.0 million of interest rate swaps.

The net interest margin decreased four basis points, from 1.92% for the prior quarter to 1.88% for the current quarter.

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

Our net interest margin could continue to decrease if our interest-earning assets continue to reprice to lower market rates at a faster pace than our deposits and borrowings, and if we continue investing in lower yielding securities rather than reinvesting cash flows into the loan portfolio.

Interest and Dividend Income

The weighted average yield on total interest-earning assets decreased 17 basis points, from 2.98% for the prior quarter to 2.81% for the current quarter, while the average balance of interest-earning assets increased $30.1 million between the two periods.

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

March 31, December 31, Change Expressed in:

2021 2020 Dollars Percent

(Dollars in thousands)

INTEREST AND DIVIDEND INCOME:

Loans receivable $ 57,285 $ 60,694 $ (3,409) (5.6) %

MBS 5,429 5,710 (281) (4.9)

FHLB stock 951 1,069 (118) (11.0)

Investment securities 629 683 (54) (7.9)

Cash and cash equivalents 40 51 (11) (21.6)

Total interest and dividend income $ 64,334 $ 68,207 $ (3,873) (5.7)

The decrease in interest income on loans receivable was due to a 14 basis point decrease in the weighted average portfolio yield and a $96.2 million decrease in the average balance.

The weighted average yield on the loans receivable portfolio decreased from 3.41% for the prior quarter to 3.27% for the current quarter, due mainly to loans repricing to lower current market rates as a result of endorsements, refinances and adjustable-rate loan rate changes, along with a decrease in commercial loan deferred fee and discount recognition related to PPP loans and other commercial loan activity.

One- to four-family correspondent loan payoff activity decreased during the current quarter compared to the prior quarter;

thereby reducing the amount of premium amortization and reduction in the loan portfolio yield.

Correspondent loan payoff activity remains at elevated levels compared to historical norms which was the primary reason for the decrease in the average balance of the loan portfolio during the current quarter.

The decrease in interest income on the MBS portfolio was due to a 25 basis point decrease in the weighted average yield, to 1.50% for the current quarter, due primarily to an increase in the impact of net premium amortization, along with purchases at lower market yields.

This was partially offset by a $142.5 million increase in the average balance as a result of purchases, primarily utilizing excess cash flows from the loan portfolio and operating cash, along with funds from growth in the deposit portfolio that were not used to pay down borrowings.

Interest Expense

The weighted average rate paid on interest-bearing liabilities decreased 14 basis points, from 1.20% for the prior quarter to 1.06% for the current quarter, while the average balance of interest-bearing liabilities increased $48.1 million between the two periods.

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

March 31, December 31, Change Expressed in:

2021 2020 Dollars Percent

(Dollars in thousands)

INTEREST EXPENSE:

Deposits $ 12,529 $ 14,067 $ (1,538) (10.9) %

Borrowings 8,732 10,327 (1,595) (15.4)

Total interest expense $ 21,261 $ 24,394 $ (3,133) (12.8)

The decrease in interest expense on deposits was due primarily to a decrease in the weighted average rate paid on the retail/business certificate of deposit portfolio.

The weighted average rate on the retail/business certificate of deposit portfolio decreased 15 basis points, to 1.61% for the current quarter.

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, along with prepaying certain advances and replacing them at lower rates.

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 $171.9 million compared to the prior quarter.

Provision for Credit Losses

For the quarter ended March 31, 2021, the Bank recorded a negative provision for credit losses of $3.0 million, compared to a negative provision for credit losses of $1.5 million for the prior quarter.

The negative provision in the current quarter was composed of a $2.7 million decrease in the ACL for loans and a $305 thousand decrease in reserves for off-balance sheet credit exposures.

The $3.0 million negative provision for credit losses was due primarily to continued improvements in the economic forecast used in the model.

See "Financial Condition - Asset Quality" above for additional discussion regarding management's evaluation of the adequacy of the Bank's ACL and reserves for off-balance sheet credit exposures at March 31, 2021.

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 Three Months Ended

March 31, December 31, Change Expressed in:

2021 2020 Dollars Percent

(Dollars in thousands)

NON-INTEREST INCOME:

Gain on sale of Visa Class B shares $ 7,386 $ — $ 7,386 N/A

Deposit service fees 2,814 2,947 (133) (4.5) %

Insurance commissions 888 638 250 39.2

Other non-interest income 1,389 1,485 (96) (6.5)

Total non-interest income $ 12,477 $ 5,070 $ 7,407 146.1

During the current quarter, the Bank sold all of its Visa Class B shares, resulting in a $7.4 million gain.

The increase in insurance commissions was due primarily to the receipt of annual contingent insurance commissions which were higher than what was anticipated and accrued.

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 Three Months Ended

March 31, December 31, Change Expressed in:

2021 2020 Dollars Percent

(Dollars in thousands)

NON-INTEREST EXPENSE:

Salaries and employee benefits $ 13,397 $ 14,138 $ (741) (5.2) %

Information technology and related expense 4,599 4,233 366 8.6

Occupancy, net 3,523 3,379 144 4.3

Loss on interest rate swap termination 4,752 — 4,752 N/A

Regulatory and outside services 1,234 1,585 (351) (22.1)

Advertising and promotional 1,484 838 646 77.1

Deposit and loan transaction costs 664 766 (102) (13.3)

Federal insurance premium 634 621 13 2.1

Office supplies and related expense 463 424 39 9.2

Other non-interest expense 1,903 1,083 820 75.7

Total non-interest expense $ 32,653 $ 27,067 $ 5,586 20.6

The decrease in salaries and employee benefits was due primarily to non-officer employee bonuses of $313 thousand paid during the prior quarter in appreciation of the hard work and dedication by our non-officer employees during these challenging times, along with a decrease in the number of working days compared to the prior quarter.

The increase in information technology and related expense was due primarily to an increase in information technology professional services expense.

As discussed previously, during the current quarter, the Bank terminated $200.0 million of interest rate swaps resulting in a loss of $4.8 million.

The decrease in regulatory and outside services was due mainly to the timing of external audit expenses.

The increase in advertising and promotional expenses was due to the timing of campaigns.

The increase in other non-interest expense was due primarily to the write-down of a property that previously served as one of the Bank's branch locations, as management intends to sell the property.

The Company's efficiency ratio was 58.78% for the current quarter compared to 55.37% for the prior quarter.

The change in the efficiency ratio was due primarily to higher non-interest expense, partially offset by an increase in non-interest income.

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

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

March 31, December 31, Change Expressed in:

2021 2020 Dollars Percent

(Dollars in thousands)

Income before income tax expense $ 25,861 $ 23,348 $ 2,513 10.8 %

Income tax expense 5,417 4,450 967 21.7

Net income $ 20,444 $ 18,898 $ 1,546 8.2

Effective Tax Rate 20.9 % 19.1 %

The increase in income tax expense was due mainly to a higher effective tax rate compared to the prior quarter, as well as an increase in pretax income.

The lower effective tax rate in the prior quarter was due primarily to true-ups related to the preparation of the September 30, 2020 federal and state tax returns.

Average Balance Sheet

The following table presents the average balances of our assets, liabilities, and stockholders' equity, and the related annualized weighted average yields and rates on our interest-earning assets and interest-bearing liabilities for the periods indicated, as well as selected performance ratios and other information, for the periods indicated.

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.

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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

March 31, 2021 December 31, 2020

Average Interest Average Interest

Outstanding Earned/ Yield/ Outstanding Earned/ Yield/

Amount Paid Rate Amount Paid Rate

(Dollars in thousands)

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Net interest rate spread (6)

1.78 1.87 1.99

Net interest-earning assets $ 1,051,208 $ 1,069,230

Net interest margin (7)

1.92 2.03 2.18

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

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

Selected performance ratios:

3 unchanged sentences

Operating expense ratio (8)

1.13 1.15 1.13

Efficiency ratio (9)

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 $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.

(3) The average balance of investment securities includes an average balance of nontaxable securities of $7.5 million and $9.1 million for the quarters ended March 31, 2021 and December 31, 2020, respectively.

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

(5) Net interest income represents the difference between interest income earned on interest-earning assets and interest paid on interest-bearing liabilities.

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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 periods indicated.

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 period's average rate, and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous period.

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

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

March 31, 2021 vs.

December 31, 2020

Increase (Decrease) Due to

Volume Rate Total

(Dollars in thousands)

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Net change in net interest income $ 543 $ (1,283) $ (740)

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.

Comparison of Operating Results for the Six Months Ended March 31, 2021 and 2020

Net interest income decreased $10.5 million, or 10.8%, from the prior year period to $86.9 million for the current year period.

The net interest margin decreased 29 basis points, from 2.19% for the prior year period to 1.90% for the current year period.

Interest and Dividend Income

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 weighted average yield on total interest-earning assets decreased 66 basis points, from 3.56% for the prior year period to 2.90% for the current year period, while the average balance of interest-earning assets increased $232.9 million.

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

December 31, Change Expressed in:

For the Six Months Ended

March 31, Change Expressed in:

2021 2020 Dollars Percent

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Total interest and dividend income $ 132,541 $ 158,991 $ (26,450) (16.6)

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 interest income on loans receivable was due mainly to a 39 basis point decrease in the weighted average yield on the portfolio, from 3.73% for the prior year period to 3.34% for the current year period, primarily on correspondent one- to four-family loans related to higher premium amortization due to 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 $407.1 million compared to the prior year period.

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.

We suspended accepting new applications for these loans from mid-March 2020 to mid-June 2020, in part, to manage the influx of refinance requests from existing customers in our local market areas during that time period while also managing underwriting concerns on correspondent loans early in the COVID-19 pandemic.

Additionally, after lifting the suspension, there were, and continues to be, historically high levels of prepayments due to refinance activity.

The decrease in interest income on the MBS portfolio was due to a 96 basis point decrease in the weighted average yield to 1.62% for the current year period 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 $445.6 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 investment securities was due to a 146 basis point decrease in the weighted average yield to 0.58% for the current year period as a result of new purchases at lower market yields, partially offset by a $165.8 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 $46.3 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 increase in the average balance was primarily in checking, savings and money market accounts, partially offset by a decrease in borrowings.

The weighted average rate paid on total interest-bearing liabilities decreased 44 basis points, from 1.57% for the prior year period to 1.13% for the current period, while the average balance of interest-bearing liabilities increased $248.9 million.

The increase in the average balance was primarily in money market and checking 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

December 31, Change Expressed in:

For the Six Months Ended

March 31, Change Expressed in:

2021 2020 Dollars Percent

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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 42 basis points, 38 basis points, and 152 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.

Since the onset of the COVID-19 pandemic, retail/business certificates of deposit have been gradually repricing downward 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 $514.5 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.

Additionally, the decrease in interest expense on borrowings was due to the impact of prepaying certain FHLB advances during the current and prior periods.

Provision for Credit Losses

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.

The Bank recorded a negative provision for credit losses during the current year period of $4.5 million, compared to a $22.3 million provision for credit losses during the prior year period.

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 Three Months Ended

December 31, Change Expressed in:

For the Six Months Ended

March 31, Change Expressed in:

2021 2020 Dollars Percent

1 unchanged sentence

NON-INTEREST INCOME:

Gain on sale of Visa Class B shares $ 7,386 $ — $ 7,386 N/A

Deposit service fees 5,761 5,845 (84) (1.4) %

2 unchanged sentences

Total non-interest income $ 17,547 $ 10,175 $ 7,372 72.5

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.

During the current year period, the Bank sold its Visa Class B Shares, resulting in a $7.4 million gain.

The increase in insurance commissions was due primarily to an increase in annual contingent insurance commissions received compared to the prior year period.

The decrease in other non-interest income was mainly the result of a decrease in income from BOLI compared to the prior year period due to a reduction in the yield and lower death benefit receipts between the two periods.

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 Three Months Ended

December 31, Change Expressed in:

For the Six Months Ended

March 31, Change Expressed in:

2021 2020 Dollars Percent

4 unchanged sentences

Occupancy, net 6,902 6,656 246 3.7

Loss on interest rate swap termination 4,752 — 4,752 N/A

Regulatory and outside services 2,819 2,640 179 6.8

5 unchanged sentences

Total non-interest expense $ 59,720 $ 52,664 $ 7,056 13.4

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 increase in information technology and related expense was due mainly to an increase in information technology professional services expense.

During the current year period, the Bank terminated interest rate swaps designated as cash flow hedges with a notional amount of $200.0 million which were tied to FHLB advances totaling $200.0 million.

Since it was management's intention to prepay the related FHLB advances, the previously-forecasted transactions subject to the cash flow hedges are no longer expected to occur.

Therefore, the termination of the interest rate swaps resulted in the reclassification of unrealized losses totaling $4.8 million from AOCI into earnings.

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 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.

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 period.

The Company's efficiency ratio was 57.19% for the current period compared to 48.97% for the prior year period.

The change in the efficiency ratio was due to higher non-interest expense, partially offset by an increase non-interest income in the current year period compared to the prior year period.

Management continues to strive to control operating costs.

The increase in the efficiency ratio in the current period was due primarily to the loss on the termination of interest rate swaps, which was a unique transaction during the current period, along with higher federal insurance premium expense as the Bank utilized an assessment credit from the FDIC during the prior year period.

Income Tax Expense

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

December 31, Change Expressed in:

For the Six Months Ended

March 31, Change Expressed in:

2021 2020 Dollars Percent

4 unchanged sentences

Effective Tax Rate 20.1 % 17.8 %

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.

The increase in income tax expense was due primarily to higher pretax income in the current year period, as well as a higher effective tax rate compared to the prior year period.

The effective tax rate was lower in the prior year period due primarily to a discrete benefit recognized in the prior year period 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%.

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 Six Months Ended

March 31, 2021 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 $ 6,177,836 $ 97,557 3.16 % $ 6,568,525 $ 117,199 3.57 %

Commercial loans 768,552 17,963 4.62 762,799 18,652 4.81

Consumer loans 106,371 2,459 4.64 128,491 3,676 5.72

Total loans receivable (1)

7,052,759 117,979 3.34 7,459,815 139,527 3.73

1,372,531 11,139 1.62 926,969 11,968 2.58

Investment securities (2)(3)

448,595 1,312 0.58 282,759 2,889 2.04

FHLB stock 81,332 2,020 4.98 99,128 3,540 7.14

Cash and cash equivalents 180,242 91 0.10 133,908 1,067 1.57

Total interest-earning assets 9,135,459 132,541 2.90 8,902,579 158,991 3.56

Other non-interest-earning assets 449,883 441,199

Total assets $ 9,585,342 $ 9,343,778

Liabilities and stockholders' equity:

Interest-bearing liabilities:

Checking $ 1,409,870 407 0.06 $ 1,096,466 351 0.06

Savings 460,252 136 0.06 361,592 153 0.08

Money market 1,508,935 2,222 0.30 1,190,938 4,044 0.68

Retail/business certificates 2,749,596 23,094 1.68 2,686,028 28,215 2.10

Wholesale certificates 256,123 737 0.58 286,328 3,003 2.10

Total deposits 6,384,776 26,596 0.84 5,621,352 35,766 1.27

Borrowings (4)

1,690,363 19,059 2.25 2,204,903 25,860 2.33

Total interest-bearing liabilities 8,075,139 45,655 1.13 7,826,255 61,626 1.57

Other non-interest-bearing liabilities 227,189 194,698

Stockholders' equity 1,283,014 1,322,825

Total liabilities and stockholders' equity $ 9,585,342 $ 9,343,778

Net interest income (5)

$ 86,886 $ 97,365

Net interest rate spread (6)

Net interest-earning assets $ 1,060,320 $ 1,076,324

Net interest margin (7)

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

Selected performance ratios:

Return on average assets (annualized) 0.82 % 0.57 %

Return on average equity (annualized) 6.13 4.05

Average equity to average assets 13.39 14.16

Operating expense ratio (8)

Efficiency ratio (9)

(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 $8.3 million and $16.1 million for the six months ended March 31, 2021 and March 31, 2020, 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.

(5) 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.

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

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

(8) The operating expense ratio represents annualized non-interest expense as a percentage of average assets.

(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.

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.

For the Six Months Ended

March 31, 2021 vs.

March 31, 2020

Increase (Decrease) Due to

Volume Rate Total

(Dollars in thousands)

Interest-earning assets:

Loans receivable $ (7,196) $ (14,352) $ (21,548)

MBS 4,547 (5,376) (829)

Investment securities 1,149 (2,726) (1,577)

FHLB stock (568) (952) (1,520)

Cash and cash equivalents 273 (1,249) (976)

Total interest-earning assets (1,795) (24,655) (26,450)

Interest-bearing liabilities:

Checking 91 (36) 55

Savings 35 (51) (16)

Money market 872 (2,694) (1,822)

Certificates of deposit 337 (7,724) (7,387)

Borrowings (4,689) (2,112) (6,801)

Total interest-bearing liabilities (3,354) (12,617) (15,971)

Net change in net interest income $ 1,559 $ (12,038) $ (10,479)

Comparison of Operating Results for the Three Months Ended March 31, 2021 and 2020

For the quarter ended March 31, 2021, the Company recognized net income of $20.4 million, or $0.15 per share, compared to net income of $4.3 million, or $0.03 per share for the quarter ended March 31, 2020.

The increase in net income was due to recording a $22.1 million provision for credit losses during the prior year quarter compared to recording a negative provision for credit losses of $3.0 million in the current quarter, partially offset by a decrease in net interest income and an increase in income tax expense.

The net interest margin decreased 31 basis points, from 2.19% for the prior year quarter to 1.88% for the current quarter.

Interest and Dividend Income

The weighted average yield on total interest-earning assets decreased 19 basis points, from 3.17% for the prior quarter to 2.98% for the current quarter, while the average balance of interest-earning assets increased $122.5 million between the two periods.

The weighted average yield on total interest-earning assets decreased 74 basis points, from 3.55% for the prior year quarter to 2.81% for the current quarter, while the average balance of interest-earning assets increased $264.0 million.

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

December 31, September 30, Change Expressed in:

March 31, Change Expressed in:

2021 2020 Dollars Percent

7 unchanged sentences

Total interest and dividend income $ 64,334 $ 78,955 $ (14,621) (18.5)

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.

The decrease in interest income on loans receivable was due mainly to a 45 basis point decrease in the weighted average yield, from 3.72% for the prior year quarter to 3.27% for the current quarter, along with a $476.0 million decrease in the average balance.

The decrease in the weighted average yield was due primarily to an increase in premium amortization related to correspondent loans as a result of an increase in payoff and endorsement activity.

The decrease in the average balance was due primarily to a decrease in the balance of correspondent one- to four-family loans.

The decrease in interest income on the MBS portfolio was due primarily to a 105 basis point decrease in the weighted average yield on the portfolio, from 2.55% for the prior year quarter to 1.50% for the current quarter resulting from the purchase of MBS at market rates lower than the existing portfolio and the repricing of existing adjustable-rate MBS to lower market yields, partially offset by a $524.1 million, or 56.9%, increase in the average balance of the portfolio.

The decrease in dividend income on FHLB stock was due 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 143 basis point decrease in the weighted average yield on the portfolio, from 1.97% for the prior year quarter to 0.54% for the current quarter as a result of new purchases at lower market yields, partially offset by a $185.2 million increase in the average balance of 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.

Interest Expense

The weighted average rate paid on total interest-bearing liabilities decreased 10 basis points, from 1.30% for the prior quarter to 1.20% for the current quarter, while the average balance of interest-bearing liabilities increased $119.7 million between the two periods.

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

The weighted average rate paid on total interest-bearing liabilities decreased 49 basis points, from 1.55% for the prior year quarter to 1.06% for the current quarter, while the average balance of interest-bearing liabilities increased $254.1 million.

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

For the Three Months Ended

December 31, September 30, Change Expressed in:

March 31, Change Expressed in:

2021 2020 Dollars Percent

4 unchanged sentences

Total interest expense $ 21,261 $ 30,287 $ (9,026) (29.8)

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.

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 50 basis points, 39 basis points, and 148 basis points, respectively.

Since the onset of the COVID-19 pandemic, retail/business certificates of deposit have been

gradually repricing downward 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 $572.7 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.

Additionally, the decrease in interest expense on borrowings was due to the impact of prepaying certain FHLB advances and replacing them at lower rates.

Provision for Credit Losses

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.

The Bank recorded a negative provision for credit losses during the current quarter of $3.0 million, compared to a $22.1 million provision for credit losses during the prior year quarter.

Non-Interest Income

1 unchanged sentence

For the Three Months Ended

December 31, September 30, Change Expressed in:

March 31, Change Expressed in:

2021 2020 Dollars Percent

1 unchanged sentence

NON-INTEREST INCOME:

Gain on sale of Visa Class B shares $ 7,386 $ — $ 7,386 N/A

Deposit service fees 2,814 2,783 31 1.1 %

2 unchanged sentences

Total non-interest income $ 12,477 $ 4,671 $ 7,806 167.1

During the current quarter, the Bank sold its Visa Class B Shares, resulting in a $7.4 million gain.

The increase in insurance commissions was due primarily to an increase in annual contingent insurance commissions received compared to the prior year quarter.

Non-Interest Expense

1 unchanged sentence

For the Three Months Ended

December 31, September 30, Change Expressed in:

March 31, Change Expressed in:

2021 2020 Dollars Percent

4 unchanged sentences

Occupancy, net 3,523 3,449 74 2.1

Loss on interest rate swap termination 4,752 — 4,752 N/A

Regulatory and outside services 1,234 1,297 (63) (4.9)

1 unchanged sentence

Deposit and loan transaction costs 664 678 (14) (2.1)

Federal insurance premium 621 627 (6) (1.0)

Federal insurance premium 634 — 634 N/A

Office supplies and related expense 463 592 (129) (21.8)

1 unchanged sentence

Total non-interest expense $ 32,653 $ 26,164 $ 6,489 24.8

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.

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

The increase in information technology and related expense was due mainly to an increase in information technology professional services expense.

As discussed previously, during the current quarter, the Bank terminated $200.0 million of interest rate swaps resulting in a loss of $4.8 million.

The increase in the federal insurance premium was due mainly to the Bank utilizing an assessment credit from the FDIC during the prior year quarter.

The increase in other non-interest expense was due primarily to the write-down of a property that previously served as one of the Bank's branch locations, as management intends to sell the property.

The Company's efficiency ratio was 58.78% for the current quarter compared to 49.05% for the prior year quarter.

The change in the efficiency ratio was due primarily to higher non-interest expense, partially offset by an increase in non-interest income.

Income Tax Expense

1 unchanged sentence

For the Three Months Ended

December 31, September 30, Change Expressed in:

March 31, Change Expressed in:

2021 2020 Dollars Percent

4 unchanged sentences

Effective Tax Rate 20.9 % 16.2 %

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.

The increase in income tax expense was due primarily to higher pretax income in the current 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

March 31, 2021 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 $ 6,134,527 $ 47,552 3.10 % $ 6,594,029 $ 58,838 3.57 %

Commercial loans 766,972 8,559 4.46 759,328 8,994 4.69

Consumer loans 102,613 1,174 4.64 126,710 1,781 5.65

Total loans receivable (1)

7,004,112 57,285 3.27 7,480,067 69,613 3.72

1,444,554 5,429 1.50 920,419 5,866 2.55

Investment securities (2)(3)

466,077 629 0.54 280,911 1,382 1.97

FHLB stock 77,391 951 4.98 99,879 1,714 6.90

Cash and cash equivalents 158,544 40 0.10 105,381 380 1.43

Total interest-earning assets 9,150,678 64,334 2.81 8,886,657 78,955 3.55

Other non-interest-earning assets 446,265 454,687

Total assets $ 9,596,943 $ 9,341,344

Liabilities and stockholders' equity:

Interest-bearing liabilities:

Checking $ 1,459,964 183 0.05 $ 1,107,232 181 0.07

Savings 477,985 69 0.06 365,554 74 0.08

Money market 1,543,911 1,038 0.27 1,208,521 1,981 0.66

Retail/business certificates 2,753,439 10,917 1.61 2,691,029 14,103 2.11

Wholesale certificates 260,712 322 0.50 296,828 1,465 1.98

Total deposits 6,496,011 12,529 0.78 5,669,164 17,804 1.26

Borrowings (4)

1,603,459 8,732 2.19 2,176,166 12,483 2.29

Total interest-bearing liabilities 8,099,470 21,261 1.06 7,845,330 30,287 1.55

Other non-interest-bearing liabilities 213,602 183,018

Stockholders' equity 1,283,871 1,312,996

Total liabilities and stockholders' equity $ 9,596,943 $ 9,341,344

Net interest income (5)

$ 43,073 $ 48,668

Net interest rate spread (6)

Net interest-earning assets $ 1,051,208 $ 1,041,327

Net interest margin (7)

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

Selected performance ratios:

Return on average assets (annualized) 0.85 % 0.18 %

Return on average equity (annualized) 6.37 1.30

Average equity to average assets 13.38 14.06

Operating expense ratio (8)

Efficiency ratio (9)

(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 $7.5 million and $15.0 million for the three months ended March 31, 2021 and March 31, 2020, respectively.

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

(5) 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.

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

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

(8) The operating expense ratio represents annualized non-interest expense as a percentage of average assets.

(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.

Rate/Volume Analysis

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 March 31,

Increase (Decrease) Due to

Volume Rate Total

(Dollars in thousands)

Interest-earning assets:

Loans receivable $ (4,183) $ (8,145) $ (12,328)

MBS 2,544 (2,981) (437)

Investment securities 596 (1,349) (753)

FHLB stock (342) (421) (763)

Cash and cash equivalents 126 (466) (340)

Total interest-earning assets (1,259) (13,362) (14,621)

Interest-bearing liabilities:

Checking 48 (46) 2

Savings 19 (24) (5)

Money market 434 (1,377) (943)

Certificates of deposit 129 (4,458) (4,329)

Borrowings (2,750) (1,001) (3,751)

Total interest-bearing liabilities (2,120) (6,906) (9,026)

Net change in net interest income $ 861 $ (6,456) $ (5,595)

Liquidity and Capital Resources

9 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.

6 unchanged sentences

The Bank's internal policy limits total borrowings to 55% of total assets.

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.

At March 31, 2021, the Bank had total borrowings, at par, of $1.59 billion, or approximately 16% of total assets, all of which were FHLB advances.

The amount of FHLB borrowings outstanding at March 31, 2021 was $1.59 billion, of which $640.0 million were advances scheduled to mature in the next 12 months, including $440.0 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 December 31, 2020, the Bank had no repurchase agreements.

At March 31, 2021, 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 December 31, 2020, the Bank had $1.55 billion of securities that were eligible but unused as collateral for borrowing or other liquidity needs.

At March 31, 2021, the Bank had $1.72 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 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.

As of March 31, 2021, the Bank's policy allowed for combined brokered and public unit certificates of deposit up to 15% of total deposits.

At March 31, 2021, 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 $311.5 million as collateral for public unit certificates of deposit at March 31, 2021.

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 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.

At March 31, 2021, $1.59 billion of the Bank's certificate of deposit portfolio was scheduled to mature within the next 12 months, including $241.6 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 December 31, 2020, along with associated weighted average yields.

The following table presents the contractual maturities of our loan, MBS, and investment securities portfolios at March 31, 2021, 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 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.

As of March 31, 2021, the amortized cost of investment securities in our portfolio which are callable or have pre-refunding dates within one year was $377.0 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 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%.

The maximum balance of short-term FHLB borrowings outstanding at any month-end during the six months ended March 31, 2021 was $840.0 million, and the average balance of short-term FHLB borrowings outstanding during this period was $731.7 million at a weighted average contractual rate of 0.56%.

The balance of short-term FHLB borrowings outstanding at March 31, 2021 was $640.0 million, at a weighted average contractual rate of 0.34%.

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 December 31, 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").

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.

As of March 31, 2021, the Bank's CBLR was 12.2% and the Company's CBLR was 13.4%, 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):

The following table presents a reconciliation of equity under GAAP to regulatory capital amounts, as of March 31, 2021, for the Bank and the Company (dollars in thousands):

Total equity as reported under GAAP $ 1,164,295 $ 1,278,595

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