Capitol Federal Financial, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company and the Bank may from time to time make written or oral "forward-looking statements," including statements contained in documents filed or furnished by the Company with the SEC. These forward-looking statements may be included in this Quarterly Report on Form 10-Q and the exhibits attached to it, in the Company's reports to stockholders, in the Company's press releases, and in other communications by the Company, which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause our future results to differ materially from the beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in the forward-looking statements: • our ability to maintain overhead costs at reasonable levels; • our ability to originate and purchase a sufficient volume of one- to four-family loans in order to maintain the balance of that portfolio at a level desired by management; • our ability to invest funds in wholesale or secondary markets at favorable yields compared to the related funding source; • our ability to access cost-effective funding; • the expected synergies and other benefits from our acquisition activities; • our ability to extend our commercial banking and trust asset management expertise; • fluctuations in deposit flows; • the future earnings and capital levels of the Bank and the continued non-objection by our primary federal banking regulators, to the extent required, to distribute capital from the Bank to the Company, which could affect the ability of the Company to pay dividends in accordance with its dividend policy; • the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations, including areas where we have purchased large amounts of correspondent loans; • changes in real estate values, unemployment levels, and the level and direction of loan delinquencies and charge-offs may require changes in the estimates of the adequacy of the ACL, which may adversely affect our business; • potential adverse impacts of the ongoing COVID-19 pandemic and any governmental or societal responses thereto on economic conditions in the Company's local market areas and other market areas where the Bank has lending relationships, on other aspects of the Company's business operations and on financial markets; • increases in classified and/or non-performing assets, which may require the Bank to increase the ACL, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets; • results of examinations of the Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our ACL; • changes in accounting principles, policies, or guidelines; • the effects of, and changes in, monetary and interest rate policies of the Board of Governors of the Federal Reserve System ("FRB"); • the effects of, and changes in, trade and fiscal policies and laws of the United States government; • the effects of, and changes in, foreign and military policies of the United States government; • inflation, interest rate, market, monetary, and currency fluctuations; • the timely development and acceptance of new products and services and the perceived overall value of these products and services by users, including the features, pricing, and quality compared to competitors' products and services; • the willingness of users to substitute competitors' products and services for our products and services; • our success in gaining regulatory approval of our products and services and branching locations, when required; • the impact of interpretations of, and changes in, financial services laws and regulations, including laws concerning taxes, banking, securities, consumer protection, trust and insurance and the impact of other governmental initiatives affecting the financial services industry; • implementing business initiatives may be more difficult or expensive than anticipated; • significant litigation; • technological changes; • our ability to maintain the security of our financial, accounting, technology, and other operating systems and facilities, including the ability to withstand cyber-attacks; • acquisitions and dispositions; • changes in consumer spending, borrowing and saving habits; and • our success at managing the risks involved in our business. 37 This list of important factors is not all inclusive. For a discussion of risks and uncertainties related to our business that could adversely impact our operations and/or financial results, see "Part I, Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020 and Part II, Item 1A. Risk Factors within this Quarterly Report on Form 10-Q. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank. As used in this Form 10-Q, unless we specify or the context indicates otherwise, "the Company," "we," "us," and "our" refer to Capitol Federal Financial, Inc. a Maryland corporation, and its subsidiaries. "Capitol Federal Savings," and "the Bank," refer to Capitol Federal Savings Bank, a federal savings bank and the wholly-owned subsidiary of Capitol Federal Financial, Inc. The following discussion and analysis is intended to assist in understanding the financial condition, results of operations, liquidity, and capital resources of the Company. The Bank comprises almost all of the consolidated assets and liabilities of the Company and the Company is dependent primarily upon the performance of the Bank for the results of its operations. Because of this relationship, references to management actions, strategies and results of actions apply to both the Bank and the Company. This discussion and analysis should be read in conjunction with Management's Discussion and Analysis included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020, filed with the SEC. Executive Summary 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. The Company recognized net income of $57.5 million, or $0.42 per share, for the nine month period ended June 30, 2021 compared to net income of $46.3 million, or $0.34 per share, for the nine month period ended June 30, 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 $7.2 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 $14.2 million, or 9.9%, from the prior year period to $129.5 million for the current year period. Net interest margin decreased 27 basis points, from 2.15% for the prior year period to 1.88% 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. Total assets were $9.65 billion at June 30, 2021, an increase of $162.4 million, or 1.7% from September 30, 2020, due mainly to an increase in securities, partially offset by decreases in loans receivable and cash and cash equivalents. 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 $454.7 million, or 29.1%, from September 30, 2020 to June 30, 2021, including a $338.2 million increase in MBS and a $116.5 million increase in investment securities. Total loans were $7.03 billion at June 30, 2021, a decrease of $169.0 million from September 30, 2020. The decrease was primarily in the one- to four-family correspondent loan portfolio. During the current year nine month period, the Bank originated and refinanced $948.6 million of one- to four-family and consumer loans with a weighted average rate of 2.75% and purchased $505.0 million of one- to four-family loans from correspondent lenders with a weighted average rate of 2.63%. The Bank also originated $208.5 million of commercial loans with a weighted average rate of 3.30% and entered into commercial loan participations of $115.1 million at a weighted average rate of 4.17%. The commercial loan portfolio totaled $815.0 million at June 30, 2021 and was composed of 84% commercial real estate loans, 9% 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 $267.0 million, was $1.01 billion at June 30, 2021. Total commercial and industrial potential exposure, including undisbursed amounts and outstanding commitments of $23.7 million, was $97.4 million at June 30, 2021, of which $18.3 million related to PPP loans. Total deposits were $6.64 billion at June 30, 2021, an increase of $446.9 million, or 7.2%, from September 30, 2020. The increase was primarily in non-maturity deposits, which increased $586.6 million, along with a $71.8 million increase in commercial certificates of deposit, partially offset by a $210.5 million decrease in retail certificates of deposit. Total borrowings at June 30, 2021 were $1.58 billion, a decrease of $206.9 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 deposit growth were used to pay off maturing borrowings. Stockholders' equity at June 30, 2021 was $1.24 billion, a decrease of $47.2 million, or 3.7%, from September 30, 2020. During the current year nine month period, the Company paid cash dividends totaling $106.4 million and repurchased common stock totaling $1.5 million, partially offset by net income of $57.5 million. The cash dividends paid during the current year nine month period totaled 38 $0.785 per share and consisted of a $0.40 per share True Blue Capitol cash dividend, a $0.13 per share cash true-up dividend related to fiscal year 2020 earnings and three regular quarterly cash dividends of $0.085 per share. On July 20, 2021, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.5 million, payable on August 20, 2021 to stockholders of record as of the close of business on August 6, 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 June 30, 2021, this ratio was 11.5%. Available Information Financial and other Company information, including press releases, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports can be obtained free of charge from our investor relations website, http://ir.capfed.com. SEC filings are available on our website immediately after they are electronically filed with or furnished to the SEC, and are also available on the SEC's website at www.sec.gov. Critical Accounting Policies Our most critical accounting policies are the methodologies used to determine the ACL and reserve for off-balance sheet credit exposures and fair value measurements. These policies are important to the presentation of our financial condition and results of operations, involve a high degree of complexity, and require management to make difficult and subjective judgments that may require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could affect reported results materially. These critical accounting policies and their application are reviewed at least annually by our audit committee. The following is a description of our critical accounting policies and an explanation of the methods and assumptions underlying their application. Allowance for Credit Losses and Reserve for Off-Balance Sheet Credit Exposures. The ACL is a valuation amount that is deducted from the amortized cost basis of loans and represents management's current expectations of total expected credit losses included in the Company's loan portfolio as of the balance sheet date. The reserve for off-balance sheet credit exposures represents expected credit losses on unfunded portions of existing loans and commitments to originate or purchase loans that are not unconditionally cancellable by the Company. The reserve for off-balance sheet credit exposures is reported as a liability and is presented in 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. The methodology for determining the ACL is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in forecasted macroeconomic conditions that could result in fluctuations in the amount of the recorded ACL. The reserve for off-balance sheet credit exposures is calculated using the same methodology as the ACL; however, the estimate of credit risk for off-balance sheet credit exposures takes into consideration the likelihood that funding of the commitment will occur. 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. Loans that do not share similar risk characteristics are evaluated on an individual basis and are not included in the ACL model. The key assumptions in the Company's ACL model include the economic forecast, the forecast and reversion to mean time periods, and prepayment and curtailment assumptions. Using all of these inputs and assumptions, the ACL model generates aggregated estimated cash flows for the time period that remains for each loan's contractual life. The cash flows are discounted back to the reporting date using each loan's effective yield, to arrive at the present value of future cash flows. Each loan pool's ACL is equal to the aggregate shortage, if any, of the present value of the future cash flows compared to the amortized cost basis of the loan pool. Management considers qualitative factors 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. 39 See "Allowance for Credit Losses" and "Reserve for Off-Balance Sheet Credit Exposures" within "Note 1. Summary of Significant Accounting Policies" above for additional information. Fair Value Measurements. The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with ASC 820 and ASC 825. The Company groups its financial instruments at fair value in three levels based on the markets in which the instruments are traded and the reliability of the assumptions used to determine fair value, with Level 1 (quoted prices for identical assets in an active market) being considered the most reliable, and Level 3 having the most unobservable inputs and therefore being considered the least reliable. The Company bases its fair values on the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company's AFS securities are measured at fair value on a recurring basis. Changes in the fair value of AFS securities, not related to credit loss, are recorded, net of tax, as AOCI in stockholders' equity. The Company primarily uses prices obtained from third-party pricing services to determine the fair value of its AFS securities. Various modeling techniques are used to determine pricing for the Company's securities, including option pricing, discounted cash flow models, and similar techniques. The inputs to these models may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. All AFS securities are classified as Level 2. The Company's interest rate swaps are measured at fair value on a recurring basis. The estimated fair value of the interest rate swaps are obtained from the counterparty and are determined by a discounted cash flow analysis using observable market-based inputs. Changes in the fair value of the interest rate swaps are recorded, net of tax, as AOCI in stockholders' equity. The Company did not have any other financial instruments that were measured at fair value on a recurring basis at June 30, 2021 or September 30, 2020. 40 Financial Condition The following table presents selected balance sheet information as of the dates indicated. June 30, March 31, December 31, September 30, June 30, 2021 2021 2020 2020 2020 (Dollars in thousands) Total assets $ 9,649,665 $ 9,698,019 $ 9,606,964 $ 9,487,218 $ 9,558,814 Cash and cash equivalents 95,305 139,472 168,032 185,148 396,219 AFS securities 2,015,705 2,095,924 1,913,866 1,560,950 1,220,054 Loans receivable, net 7,033,827 6,973,536 7,004,094 7,202,851 7,388,090 FHLB stock, at cost 73,630 74,464 84,693 93,862 102,782 Deposits 6,638,294 6,650,865 6,410,842 6,191,408 6,069,684 Borrowings 1,582,400 1,581,955 1,734,275 1,789,313 1,989,089 Stockholders' equity 1,237,624 1,278,595 1,276,548 1,284,859 1,300,520 Equity to total assets at end of period 12.8 % 13.2 % 13.3 % 13.5 % 13.6 % Total assets were $9.65 billion at June 30, 2021, a decrease of $48.4 million, or 0.5%, from March 31, 2021, due primarily to decreases in securities and cash, partially offset by an increase in loans receivable. The Company paid $65.7 million in dividends during the current quarter which reduced excess operating cash. Cash flows from the securities portfolio were generally used to fund loan growth during the current quarter. Total loans were $7.03 billion at June 30, 2021, an increase of $60.3 million, or 0.9%, from March 31, 2021. The increase was mainly in the one- to four-family correspondent loan portfolio and commercial real estate portfolio. During the current quarter, the Bank originated and refinanced $299.2 million of one- to four-family and consumer loans with a weighted average rate of 2.85% and purchased $235.8 million of one- to four-family loans from correspondent lenders with a weighted average rate of 2.54%. The Bank also originated $51.2 million of commercial loans with a weighted average rate of 3.48% and entered into commercial loan participations of $17.0 million at a weighted average rate of 6.00%. Total deposits were $6.64 billion at June 30, 2021, a decrease of $12.6 million, or 0.2%, from March 31, 2021. The decrease was due primarily to a $100.0 million decrease in retail certificates of deposit, partially offset by an $85.8 million increase in money market accounts, as customers moved some of the funds from maturing certificates to more liquid investment options such as the Bank's retail money market accounts. 41 Loans Receivable. The following table presents the balance and weighted average rate of our loan portfolio as of the dates indicated. June 30, 2021 March 31, 2021 September 30, 2020 Amount Rate Amount Rate Amount Rate (Dollars in thousands) One- to four-family: Originated $ 3,977,129 3.23 % $ 3,967,008 3.29 % $ 3,937,310 3.50 % Correspondent purchased 1,953,185 3.09 1,915,027 3.27 2,101,082 3.49 Bulk purchased 179,019 1.90 188,733 2.09 208,427 2.41 Construction 30,325 2.96 28,582 3.11 34,593 3.30 Total 6,139,658 3.14 6,099,350 3.24 6,281,412 3.46 Commercial: Commercial real estate 680,664 3.99 664,533 4.04 626,588 4.29 Commercial and industrial 73,713 3.24 77,210 3.08 97,614 2.79 Construction 60,614 4.11 53,271 4.25 105,458 4.04 Total 814,991 3.93 795,014 3.96 829,660 4.08 Consumer loans: Home equity 88,587 4.63 90,052 4.64 103,838 4.66 Other 8,389 4.26 8,743 4.36 10,086 4.40 Total 96,976 4.60 98,795 4.61 113,924 4.64 Total loans receivable 7,051,625 3.26 6,993,159 3.34 7,224,996 3.55 Less: ACL 20,724 23,397 31,527 Discounts/unearned loan fees 30,593 30,295 29,190 Premiums/deferred costs (33,519) (34,069) (38,572) Total loans receivable, net $ 7,033,827 $ 6,973,536 $ 7,202,851 42 Loan Activity - The following tables summarize activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, discounts/unearned loan fees, and premiums/deferred costs. Loans that were paid off as a result of refinances are included in repayments. Loan endorsements are not included in the activity in the following table because a new loan is not generated at the time of the endorsement. 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 $699.2 million of one- to four-family loans, reducing the average rate on those loans by 93 basis points ($285.2 million were endorsed during the December 31, 2020 quarter, reducing the average rate on those loans by 87 basis points, $242.3 million were endorsed during the March 31, 2021 quarter, reducing the average rate on those loans by 96 basis points, and $171.7 million were endorsed during the June 30, 2021 quarter, reducing the average rate on those loans by 98 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. The renewal balance and rate are included in the ending loan portfolio balance and rate. For the Three Months Ended June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Amount Rate Amount Rate Amount Rate Amount Rate (Dollars in thousands) Beginning balance $ 6,993,159 3.34 % $ 7,023,626 3.46 % $ 7,224,996 3.55 % $ 7,407,442 3.64 % Originated and refinanced: Fixed 279,170 2.78 326,570 2.54 318,690 2.75 265,424 2.98 Adjustable 71,216 3.58 112,483 3.43 48,946 3.60 44,625 3.68 Purchased and participations: Fixed 232,335 2.54 192,262 2.82 100,518 2.86 61,435 3.07 Adjustable 20,499 5.36 9,150 2.42 65,315 3.89 4,396 2.76 Change in undisbursed loan funds (33,512) (63,925) (70,323) 13,898 Repayments (511,222) (606,937) (664,052) (572,536) Principal recoveries/(charge-offs), net 52 (70) (464) 312 Other (72) — — — Ending balance $ 7,051,625 3.26 $ 6,993,159 3.34 $ 7,023,626 3.46 $ 7,224,996 3.55 For the Nine Months Ended June 30, 2021 June 30, 2020 Amount Rate Amount Rate (Dollars in thousands) Beginning balance $ 7,224,996 3.55 % $ 7,412,473 3.81 % Originated and refinanced: Fixed 924,430 2.69 684,488 3.22 Adjustable 232,645 3.51 171,698 4.04 Purchased and participations: Fixed 525,115 2.70 380,469 3.50 Adjustable 94,964 4.07 95,296 3.50 Change in undisbursed loan funds (167,760) (17,896) Repayments (1,782,211) (1,318,439) Principal charge-offs, net (482) (311) Other (72) (336) Ending balance $ 7,051,625 3.26 $ 7,407,442 3.64 43 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. Loan originations, purchases, and refinances are reported together. For the Three Months Ended June 30, 2021 June 30, 2020 Amount Rate % of Total Amount Rate % of Total (Dollars in thousands) Fixed-rate: One- to four-family: (1) <= 15 years $ 112,335 2.18 % 18.6 % $ 126,378 2.79 % 23.7 % > 15 years 346,115 2.79 57.4 205,047 3.39 38.5 One- to four-family construction 39,012 2.83 6.5 11,005 3.27 2.1 Commercial: Commercial real estate 2,221 3.94 0.4 19,333 3.71 3.6 Commercial and industrial 9,000 2.72 1.5 46,609 1.23 8.8 Commercial construction 627 3.75 0.1 — — — Home equity 1,150 5.55 0.2 774 5.98 0.1 Other 1,045 5.35 0.2 497 6.76 0.1 Total fixed-rate 511,505 2.67 84.9 409,643 2.98 76.9 Adjustable-rate: One- to four-family: (2) <= 36 months 1,133 2.34 0.2 1,610 2.74 0.3 > 36 months 12,786 2.50 2.1 40,099 2.93 7.5 One- to four-family construction 5,612 2.68 0.9 932 3.06 0.2 Commercial: Commercial real estate 33,973 3.57 5.6 16,035 4.58 3.0 Commercial and industrial 4,447 3.96 0.7 1,504 3.79 0.3 Commercial construction 17,935 5.91 3.0 50,237 4.03 9.4 Home equity 15,187 4.47 2.5 12,390 4.42 2.3 Other 642 3.77 0.1 329 3.48 0.1 Total adjustable-rate 91,715 3.98 15.1 123,136 3.75 23.1 Total originated, refinanced and purchased $ 603,220 2.87 100.0 % $ 532,779 3.16 100.0 % Purchased and participation loans included above: Fixed-rate: Correspondent - one- to four-family $ 232,335 2.54 $ 114,039 3.22 Participations - commercial — — 17,700 3.70 Total fixed-rate purchased/participations 232,335 2.54 131,739 3.28 Adjustable-rate: Correspondent - one- to four-family 3,499 2.24 15,010 2.87 Participations - commercial 17,000 6.00 47,500 4.04 Total adjustable-rate purchased/participations 20,499 5.36 62,510 3.76 Total purchased/participation loans $ 252,834 2.77 $ 194,249 3.44 44 For the Nine Months Ended June 30, 2021 June 30, 2020 Amount Rate % of Total Amount Rate % of Total (Dollars in thousands) Fixed-rate: One- to four-family: (1) <= 15 years $ 394,798 2.26 % 22.2 % $ 279,441 2.88 % 21.0 % > 15 years 848,249 2.83 47.7 613,890 3.50 46.1 One- to four-family construction 98,852 2.76 5.6 36,107 3.38 2.7 Commercial: Commercial real estate 18,481 3.62 1.1 32,605 4.23 2.5 Commercial and industrial 42,582 2.22 2.4 60,648 1.84 4.6 Commercial construction 42,165 3.65 2.4 36,253 4.72 2.7 Home equity 2,095 5.47 0.1 3,261 5.91 0.2 Other 2,323 5.43 0.1 2,752 5.76 0.2 Total fixed-rate 1,449,545 2.69 81.6 1,064,957 3.32 80.0 Adjustable-rate: One- to four-family: (2) <= 36 months 2,245 2.31 0.1 5,279 2.82 0.4 > 36 months 51,228 2.52 2.9 106,407 2.99 8.0 One- to four-family construction 11,069 2.64 0.6 10,929 3.03 0.8 Commercial: Commercial real estate 105,348 3.63 5.9 42,557 4.62 3.2 Commercial and industrial 9,492 3.78 0.5 5,979 4.75 0.4 Commercial construction 105,555 4.10 6.0 51,724 4.07 3.9 Home equity 41,207 4.43 2.3 42,359 5.16 3.2 Other 1,465 3.45 0.1 1,760 3.94 0.1 Total adjustable-rate 327,609 3.67 18.4 266,994 3.85 20.0 Total originated, refinanced and purchased $ 1,777,154 2.87 100.0 % $ 1,331,951 3.42 100.0 % Purchased and participation loans included above: Fixed-rate: Correspondent - one- to four-family $ 487,001 2.63 $ 334,343 3.39 Participations - commercial 38,114 3.62 46,126 4.29 Total fixed-rate purchased/participations 525,115 2.70 380,469 3.50 Adjustable-rate: Correspondent - one- to four-family 17,964 2.46 47,796 2.96 Participations - commercial 77,000 4.44 47,500 4.04 Total adjustable-rate purchased/participations 94,964 4.07 95,296 3.50 Total purchased/participation loans $ 620,079 2.91 $ 475,765 3.50 (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. (2) The adjustable-rate one- to four-family loans less than or equal to 36 months have a term to first reset of less than or equal to 36 months at origination and adjustable-rate one- to four-family loans greater than 36 months have a term to first reset of greater than 36 months at origination. 45 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 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. June 30, 2021 September 30, 2020 % of Credit Average % of Credit Average Amount Total Score LTV Balance Amount Total Score LTV Balance (Dollars in thousands) Originated $ 3,977,129 65.1 % 772 61 % $ 150 $ 3,937,310 63.0 % 771 62 % $ 145 Correspondent purchased 1,953,185 32.0 766 63 396 2,101,082 33.6 765 64 379 Bulk purchased 179,019 2.9 773 59 295 208,427 3.4 767 60 300 $ 6,109,333 100.0 % 770 62 191 $ 6,246,819 100.0 % 768 63 187 T he following ta bles present originated, refinanced, and correspondent purchased activity in our one- to four-family loan portfolio, excluding endorsement activity, along with associated weighted average LTVs and weighted average credit scores for the periods indicated. Included in the "Refinanced by Bank customers" line item are correspondent loans that were refinanced with the Bank. Of the loans originated during the current year nine month period, $287.8 million were refinanced from other lenders. For the Three Months Ended June 30, 2021 June 30, 2020 Credit Credit Amount LTV Score Amount LTV Score (Dollars in thousands) Originated $ 207,706 73 % 766 $ 173,851 73 % 763 Refinanced by Bank customers 73,453 67 761 82,171 67 767 Correspondent purchased 235,834 68 773 129,049 70 771 $ 516,993 70 769 $ 385,071 71 766 For the Nine Months Ended June 30, 2021 June 30, 2020 Credit Credit Amount LTV Score Amount LTV Score (Dollars in thousands) Originated $ 613,068 71 % 768 $ 479,751 74 % 765 Refinanced by Bank customers 288,408 66 767 190,163 68 763 Correspondent purchased 504,965 69 774 382,139 71 768 $ 1,406,441 69 770 $ 1,052,053 72 766 46 The following table presents the amount, percent of total, and weighted average rate, by state, of one- to four-family loan originations and correspondent purchases where originations and purchases in the state exceeded five percent of the total amount originated and purchased during the current year period. For the Three Months Ended For the Nine Months Ended June 30, 2021 June 30, 2021 State Amount % of Total Rate Amount % of Total Rate (Dollars in thousands) Kansas $ 237,868 46.0 % 2.74 % $ 767,443 54.6 % 2.67 % Missouri 79,200 15.3 2.72 236,666 16.8 2.67 Texas 54,766 10.6 2.50 105,370 7.5 2.61 Pennsylvania 44,959 8.7 2.50 89,420 6.4 2.54 Tennessee 29,063 5.6 2.53 77,992 5.5 2.65 Other states 71,137 13.8 2.53 129,550 9.2 2.61 $ 516,993 100.0 % 2.65 $ 1,406,441 100.0 % 2.65 As of June 30, 2021, there were $5.3 million of one- to-four family loans with COVID-19 loan modifications that were still in their deferral period. There were $195.5 million of one- to four-family loans with COVID-19 loan modifications that were out of their deferral period by June 30, 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 June 30, 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. Fixed-Rate 15 years More than Adjustable- Total or less 15 years Rate Amount Rate (Dollars in thousands) Originate/refinance $ 23,472 $ 77,739 $ 4,617 $ 105,828 2.81 % Correspondent 23,105 117,205 1,604 141,914 2.63 $ 46,577 $ 194,944 $ 6,221 $ 247,742 2.71 Rate 2.25 % 2.82 % 2.52 % Commercial Loans - During the current year nine-month period, the Bank originated $208.5 million of commercial loans, including $22.8 million of PPP loans, and entered into commercial loan participations totaling $115.1 million. The Bank also processed commercial loan disbursements, excluding lines of credit, of approximately $208.7 million at a weighted average rate of 3.45%. Additionally, during the current year nine-month period, $48.3 million of PPP loans were paid off, primarily by the U.S. Small Business Administration ("SBA") following completion of the loan forgiveness process. 47 The following table presents the Bank's commercial real estate and commercial construction loans and loan commitments by type of primary collateral, as of June 30, 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 Count Principal Amount Amount Commitments Total Total (Dollars in thousands) Senior housing 34 $ 221,351 $ 43,271 $ 264,622 $ 2,200 $ 266,822 26.5 % Hotel 10 135,255 59,887 195,142 — 195,142 19.3 Retail building 130 149,313 43,123 192,436 750 193,186 19.2 Office building 95 51,200 60,462 111,662 520 112,182 11.1 Multi-family 42 52,642 13,431 66,073 14,583 80,656 8.0 One- to four-family property 379 58,298 7,587 65,885 618 66,503 6.6 Single use building 23 42,383 4,927 47,310 9,005 56,315 5.6 Other 100 30,836 3,910 34,746 2,677 37,423 3.7 813 $ 741,278 $ 236,598 $ 977,876 $ 30,353 $ 1,008,229 100.0 % Weighted average rate 4.00 % 4.03 % 4.01 % 4.15 % 4.01 % The following table summarizes the Bank's commercial real estate and commercial construction loans and loan commitments by state as of June 30, 2021. Unpaid Undisbursed Gross Loan Outstanding % of Count Principal Amount Amount Commitments Total Total (Dollars in thousands) Kansas 637 $ 323,816 $ 20,705 $ 344,521 $ 14,541 $ 359,062 35.6 % Texas 11 126,557 131,063 257,620 — 257,620 25.6 Missouri 138 201,517 30,674 232,191 14,312 246,503 24.4 Colorado 7 14,197 22,000 36,197 — 36,197 3.6 Arkansas 3 9,309 24,539 33,848 — 33,848 3.4 Nebraska 6 33,560 4 33,564 — 33,564 3.3 Other 11 32,322 7,613 39,935 1,500 41,435 4.1 813 $ 741,278 $ 236,598 $ 977,876 $ 30,353 $ 1,008,229 100.0 % The following table presents the Bank's commercial and industrial loans and loan commitments by business purpose, as of June 30, 2021. Included in the working capital line item are $18.3 million of PPP loans. Unpaid Undisbursed Gross Loan Outstanding % of Count Principal Amount Amount Commitments Total Total (Dollars in thousands) Working capital 529 $ 29,483 $ 17,140 $ 46,623 $ — $ 46,623 47.9 % Purchase/lease autos 249 17,153 49 17,202 — 17,202 17.6 Equipment 116 13,161 406 13,567 1,424 14,991 15.4 Business investment 57 7,350 214 7,564 450 8,014 8.2 Other 26 6,566 4,017 10,583 — 10,583 10.9 977 $ 73,713 $ 21,826 $ 95,539 $ 1,874 $ 97,413 100.0 % 48 The following table presents the Bank's commercial loan portfolio and outstanding loan commitments, categorized by gross loan amount (unpaid principal plus undisbursed amounts) or outstanding loan commitment amount, as of June 30, 2021. Count Amount (Dollars in thousands) Greater than $30 million 3 $ 150,000 >$15 to $30 million 15 347,216 >$10 to $15 million 6 69,055 >$5 to $10 million 14 88,662 $1 to $5 million 108 243,940 Less than $1 million 1,644 206,769 1,790 $ 1,105,642 As of June 30, 2021, there were commercial loans with an aggregate gross balance, including undisbursed amounts, of $133.9 million with COVID-19 loan modifications that were still in their deferral period and making interest-only payments. There were $261.9 million of commercial loans with COVID-19 loan modifications that were out of their deferral period by June 30, 2021. See "Asset Quality" below for additional information regarding the performance of loans that have exited the deferral period. 49 Asset Quality. The Bank's traditional one- to four-family underwriting guidelines have provided the Bank with generally low delinquencies and low levels of non-performing assets within this loan category compared to national levels. Of particular importance is the complete and full documentation required for each loan the Bank originates, participates in or purchases. This allows the Bank to make an informed credit decision based upon a thorough assessment of the borrower's ability to repay the loan. The Bank performs more extensive due diligence when underwriting commercial loans than loans secured by one- to four-family residential properties due to the larger loan amounts, the more complex sources of repayment and the riskier nature of such loans. When participating in a commercial loan, the Bank performs the same underwriting procedures as if the loan was being originated by the Bank. See additional discussion regarding underwriting standards in "Part I, Item 1. 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 - Of the one- to four-family COVID-19 loan modifications that had completed the deferral period by June 30, 2021, $4.4 million were 30 to 89 days delinquent and $2.1 million were 90 or more days delinquent as of June 30, 2021. None of the commercial COVID-19 loan modifications that had completed the deferral period by June 30, 2021 were delinquent as of June 30, 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, if any. Of the loans 30 to 89 days delinquent at June 30, 2021, approximately 78% were 59 days or less delinquent. Loans Delinquent for 30 to 89 Days at: June 30, March 31, December 31, September 30, June 30, 2021 2021 2020 2020 2020 Number Amount Number Amount Number Amount Number Amount Number Amount (Dollars in thousands) One- to four-family: Originated 51 $ 5,141 45 $ 4,151 62 $ 5,844 42 $ 3,012 57 $ 5,085 Correspondent purchased 9 3,650 9 2,910 13 4,694 8 3,123 10 2,919 Bulk purchased 6 958 5 352 9 1,750 12 2,532 19 4,536 Commercial 1 35 5 806 8 1,047 2 45 9 1,543 Consumer 25 354 17 287 30 515 26 398 21 431 92 $ 10,138 81 $ 8,506 122 $ 13,850 90 $ 9,110 116 $ 14,514 Loans 30 to 89 days delinquent to total loans receivable, net 0.14 % 0.12 % 0.20 % 0.13 % 0.20 % 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, if any. Non-performing loans are loans that are 90 or more days delinquent or in foreclosure and other loans required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements and/or internal policies, even if the loans are current. At all dates presented, there were no loans 90 or more days delinquent that were still accruing interest. Non-performing assets include non-performing loans and OREO. OREO primarily includes assets acquired in settlement of loans. In late March 2020, the Bank suspended the initiation of foreclosure proceedings for owner-occupied one- to four-family loans. At June 30, 2021, there were $7.8 million of non-performing one- to four-family loans for which foreclosure proceedings either had been initiated prior to the foreclosure suspension or would have been initiated if the foreclosure suspension were not in place. 50 Non-Performing Loans and OREO at: June 30, March 31, December 31, September 30, June 30, 2021 2021 2020 2020 2020 Number Amount Number Amount Number Amount Number Amount Number Amount (Dollars in thousands) Loans 90 or More Days Delinquent or in Foreclosure: One- to four-family: Originated 53 $ 3,696 55 $ 4,433 51 $ 4,370 51 $ 4,362 47 $ 4,026 Correspondent purchased 12 4,230 10 3,749 9 3,371 6 2,397 7 2,740 Bulk purchased 7 2,596 10 3,172 13 3,724 12 2,903 3 1,291 Commercial 7 1,278 6 1,068 5 820 5 1,360 4 709 Consumer 23 445 26 531 26 473 14 304 23 278 102 12,245 107 12,953 104 12,758 88 11,326 84 9,044 Loans 90 or more days delinquent or in foreclosure as a percentage of total loans 0.17 % 0.19 % 0.18 % 0.16 % 0.12 % Nonaccrual loans less than 90 Days Delinquent: (1) One- to four-family: Originated 7 $ 1,392 9 $ 1,646 9 $ 968 9 $ 691 14 $ 1,132 Correspondent purchased — — — — — — — — — — Bulk purchased 1 131 — — — — — — — — Commercial 3 403 4 642 3 411 3 464 1 6 Consumer — — — — 1 9 1 9 1 33 11 1,926 13 2,288 13 1,388 13 1,164 16 1,171 Total non-performing loans 113 14,171 120 15,241 117 14,146 101 12,490 100 10,215 Non-performing loans as a percentage of total loans 0.20 % 0.22 % 0.20 % 0.17 % 0.14 % OREO: One- to four-family: Originated (2) 3 $ 177 2 $ 105 3 $ 129 4 $ 183 4 $ 183 Total non-performing assets 116 $ 14,348 122 $ 15,346 120 $ 14,275 105 $ 12,673 104 $ 10,398 Non-performing assets as a percentage of total assets 0.15 % 0.16 % 0.15 % 0.13 % 0.11 % (1) Includes loans required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements and/or internal policies, even if the loans are current. (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. 51 The following table presents the states where the properties securing five percent or more of the total amount of our one- to four-family loans are located and the corresponding balance of loans 30 to 89 days delinquent, 90 or more days delinquent or in foreclosure, and weighted average LTV ratios for loans 90 or more days delinquent or in foreclosure at June 30, 2021. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. At June 30, 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 One- to Four-Family Days Delinquent or in Foreclosure State Amount % of Total Amount % of Total Amount % of Total LTV (Dollars in thousands) Kansas $ 3,534,330 57.8 % $ 5,126 52.6 % $ 3,757 35.7 % 56 % Missouri 1,042,747 17.1 1,667 17.1 825 7.9 39 Texas 578,503 9.5 — — 2,550 24.2 58 Other states 953,753 15.6 2,956 30.3 3,390 32.2 65 $ 6,109,333 100.0 % $ 9,749 100.0 % $ 10,522 100.0 % 58 Classified loans - The following table presents loans classified as special mention or substandard at the dates presented. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. The increase in commercial special mention loans at June 30, 2021 compared to September 30, 2020 was due mainly to the addition of two commercial loans totaling $50.0 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 considerations that management is monitoring in association with these loans resulting in the special mention classification. June 30, 2021 September 30, 2020 June 30, 2020 Special Mention Substandard Special Mention Substandard Special Mention Substandard (Dollars in thousands) One- to four-family $ 14,885 $ 24,439 $ 11,339 $ 25,630 $ 12,309 $ 26,788 Commercial 100,019 4,057 52,006 4,914 52,054 5,128 Consumer 237 670 332 589 320 564 $ 115,141 $ 29,166 $ 63,677 $ 31,133 $ 64,683 $ 32,480 Allowance for Credit Losses and Reserve for Off-Balance Sheet Credit Exposures - As discussed previously, ASU 2016-13 became effective for the Company on October 1, 2020. This ASU replaced the incurred loss impairment methodology for calculating ACL under GAAP with a new impairment methodology, commonly known as the CECL methodology. The new methodology requires the Company to measure, at each reporting date, the expected credit losses for loans and loan commitments over their contractual lives based on historical experience, current conditions, and reasonable and supportable forecasts. Upon adoption of the ASU, the Company recorded a cumulative-effect adjustment to retained earnings of $2.3 million (net of tax of $739 thousand), which reduced the ACL by $4.8 million, to $26.8 million, and established a reserve for off-balance sheet credit exposures of $7.8 million, which is recorded in 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. The Bank is utilizing a discounted cash flow approach for estimating expected credit losses for pooled loans and loan commitments. The credit loss estimate for off-balance sheet credit exposures also takes into consideration the likelihood that the commitment will be funded. The economic indices used for the reasonable and supportable forecasted time period are the national unemployment rate, changes in commercial real estate price index, changes in home values, and changes in the United States gross domestic product. Management considers several economic forecast scenarios provided by a third party and selects the scenario(s) believed to be the most appropriate considering the facts and circumstances at quarter end. Management also considers several qualitative factors. The qualitative factors account for items not included in historical loss rates, the macroeconomic forecast, and/or other model inputs/assumptions. Any changes to the ACL and reserves on off-balance sheet credit exposures are recorded through increases/decreases in the provision for credit losses on the consolidated statements of income. The economic forecast scenarios selected by management improved at June 30, 2021 compared to March 31, 2021 which resulted in a reduction in the ACL calculated by the model. Management applied qualitative factors at both June 30, 2021 and March 31, 2021 to account for the continued economic uncertainties, along with the balance and trending of large-dollar special mention commercial 52 loans. The total ACL amount assigned to these qualitative factors also decreased at June 30, 2021 compared to March 31, 2021. The economic uncertainties were 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 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, and (3) the unevenness of the recovery in certain industries. The following table presents a summary of changes in ACL and reserve for off-balance sheet credit exposures occurring during the quarter ended June 30, 2021. ACL Reserve for off-balance sheet credit exposures ACL and Reserve for off-balance sheet credit exposures (Dollars in thousands) Balance at March 31, 2021 $ 23,397 $ 6,127 $ 29,524 Charge-offs (19) — (19) Recoveries 71 — 71 Net charge-offs 52 — 52 Provision for credit losses (2,725) 34 (2,691) Balance at June 30, 2021 $ 20,724 $ 6,161 $ 26,885 The negative provision for credit losses in the current quarter was due primarily to a reduction in the commercial loan ACL related to a decrease in the commercial loan economic uncertainty qualitative factor due to improved economic conditions compared to March 31, 2021. 53 The following tables present ACL activity and related ratios at the dates and for the periods indicated. See "Note 4 - Loans Receivable and Allowance for Credit Losses" for additional information related to ACL activity by specific loan categories. For the Three Months Ended June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 (Dollars in thousands) ACL beginning balance $ 23,397 $ 26,125 $ 31,527 $ 31,215 $ 31,196 Adoption of CECL — — (4,761) — — Charge-offs (19) (138) (532) (15) (5) Recoveries 71 68 68 327 24 Provision for credit losses (2,725) (2,658) (177) — — ACL ending balance $ 20,724 $ 23,397 $ 26,125 $ 31,527 $ 31,215 ACL to loans receivable at end of period 0.29 % 0.33 % 0.37 % 0.44 % 0.42 % ACL to non-performing loans at end of period 146.23 153.51 184.68 252.42 305.58 Ratio of net charge-offs (recoveries) during the period to average loans outstanding — — 0.01 — — Ratio of net charge-offs (recoveries) during the period to average non-performing assets (0.35) 0.47 3.44 (2.70) (0.20) ACL to net charge-offs (annualized) N/M (1) 83.8x 14.1x N/M (1) N/M (1) For the Nine Months Ended June 30, 2021 June 30, 2020 (Dollars in thousands) ACL beginning balance $ 31,527 $ 9,226 Adoption of CECL (4,761) — Charge-offs (689) (428) Recoveries 207 117 Provision for credit losses (5,560) 22,300 ACL ending balance $ 20,724 $ 31,215 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 3.56 3.22 ACL to net charge-offs (annualized) 32.3x 75.3x (1) This ratio is not presented for the time periods noted due to loan recoveries exceeding loan charge-offs during these periods. 54 The distribution of our ACL at the dates indicated is summarized below. The October 1, 2020 column represents the ACL at the time the Company adopted ASU 2016-13. At June 30, March 31, December 31, October 1, September 30, June 30, 2021 2021 2020 2020 2020 2020 (Dollars in thousands) One- to four-family: Originated $ 1,515 $ 1,517 $ 1,516 $ 1,609 $ 6,044 $ 6,298 Correspondent purchased 1,739 1,705 1,758 2,324 2,691 3,189 Bulk purchased 674 747 852 903 467 506 Construction 20 19 22 25 41 48 Total 3,948 3,988 4,148 4,861 9,243 10,041 Commercial: Commercial real estate 14,784 17,016 17,813 16,595 16,869 16,353 Commercial and industrial 345 445 553 559 1,451 1,465 Construction 1,404 1,696 3,341 4,452 3,480 2,886 Total 16,533 19,157 21,707 21,606 21,800 20,704 Consumer 243 252 270 299 484 470 Total $ 20,724 $ 23,397 $ 26,125 $ 26,766 $ 31,527 $ 31,215 The ratio of ACL to loans receivable, by loan type, at the dates indicated is summarized below. At June 30, March 31, December 31, October 1, September 30, June 30, 2021 2021 2020 2020 2020 2020 One- to four-family: Originated 0.04 % 0.04 % 0.04 % 0.04 % 0.15 % 0.16 % Correspondent purchased 0.09 0.09 0.09 0.11 0.13 0.14 Bulk purchased 0.38 0.40 0.43 0.43 0.22 0.23 Construction 0.07 0.07 0.07 0.07 0.12 0.13 Total 0.06 0.07 0.07 0.08 0.15 0.16 Commercial: Commercial real estate 2.17 2.56 2.92 2.65 2.69 2.62 Commercial and industrial 0.47 0.58 0.80 0.57 1.49 1.47 Construction 2.32 3.18 3.95 4.22 3.30 3.30 Total 2.03 2.41 2.84 2.60 2.63 2.55 Consumer 0.25 0.26 0.25 0.26 0.42 0.40 Total 0.29 0.33 0.37 0.37 0.44 0.42 The distribution of our reserve for off-balance sheet credit exposures at the dates indicated is summarized below. The October 1, 2020 column represents the reserve at the time the Company adopted ASU 2016-13. Prior to October 1, 2020, no such reserve had been recorded. At June 30, March 31, December 31, October 1, 2021 2021 2020 2020 (Dollars in thousands) One- to four-family $ 229 $ 197 $ 131 $ 144 Commercial 5,880 5,887 6,261 7,584 Consumer 52 43 41 60 $ 6,161 $ 6,127 $ 6,433 $ 7,788 55 Securities. Securities increased $454.7 million, or 29.1%, from September 30, 2020, composed of a $338.2 million increase in MBS and a $116.5 million increase in investment securities. The weighted average yield on the securities portfolio decreased 38 basis points, from 1.62% at September 30, 2020 to 1.24% at June 30, 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 93% of our securities portfolio at June 30, 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. June 30, 2021 March 31, 2021 September 30, 2020 Amount Yield WAL Amount Yield WAL Amount Yield WAL (Dollars in thousands) Fixed-rate securities: MBS $ 1,365,635 1.39 % 3.9 $ 1,384,982 1.46 % 4.1 $ 945,432 1.82 % 3.7 GSE debentures 494,968 0.59 3.9 544,966 0.55 3.6 369,967 0.62 1.7 Municipal bonds 5,133 1.79 0.4 5,447 1.79 0.5 9,716 1.69 0.7 Total fixed-rate securities 1,865,736 1.18 3.9 1,935,395 1.20 3.9 1,325,115 1.49 3.1 Adjustable-rate securities: MBS 137,221 2.05 3.4 155,325 2.24 3.2 204,490 2.49 2.9 Total securities portfolio $ 2,002,957 1.24 3.8 $ 2,090,720 1.28 3.9 $ 1,529,605 1.62 3.1 The following table presents the carrying value of MBS in our portfolio by issuer at the dates presented. June 30, 2021 March 31, 2021 September 30, 2020 (Dollars in thousands) FNMA $ 924,039 $ 972,833 $ 809,232 FHLMC 564,984 542,502 327,167 GNMA 30,005 34,566 44,404 $ 1,519,028 $ 1,549,901 $ 1,180,803 56 Mortgage-Backed Securities - The balance of MBS, which primarily consists of securities of U.S. GSEs, increased $338.2 million, from $1.18 billion at September 30, 2020, to $1.52 billion at June 30, 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. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yields for the ending balances are as of the last day of the period presented and are generally derived from recent prepayment activity on the securities in the portfolio as of the dates presented. The beginning and ending WALs are the estimated remaining principal repayment terms (in years) after three-month historical prepayment speeds have been applied. For the Three Months Ended June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Amount Yield WAL Amount Yield WAL Amount Yield WAL Amount Yield WAL (Dollars in thousands) Beginning 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 Maturities and repayments (110,996) (109,141) (101,496) (95,842) Net amortization of (premiums)/discounts (1,689) (1,572) (1,003) (608) Purchases: Fixed-rate 75,234 1.36 5.5 223,804 1.31 5.9 379,793 1.04 5.4 297,024 1.06 5.9 Change in valuation on AFS securities 6,578 (22,490) 1,203 (2,358) Ending balance - carrying value $ 1,519,028 1.45 3.8 $ 1,549,901 1.54 4.0 $ 1,459,300 1.67 4.0 $ 1,180,803 1.94 3.5 For the Nine Months Ended June 30, 2021 June 30, 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 (321,633) (213,695) Net amortization of (premiums)/discounts (4,264) (890) Purchases: Fixed-rate 678,831 1.16 5.6 240,677 1.71 4.4 Change in valuation on AFS securities (14,709) 20,008 Ending balance - carrying value $ 1,519,028 1.45 3.8 $ 982,587 2.35 3.3 57 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 $116.5 million, from $380.1 million at September 30, 2020, to $496.7 million at June 30, 2021. Municipal investments totaled $5.1 million at June 30, 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. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yields for the ending balances are as of the last day of the period presented. The beginning and ending WALs represent the estimated remaining principal repayment terms (in years) of the securities after projected call dates have been considered, based upon market rates at each date presented. For the Three Months Ended June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Amount Yield WAL Amount Yield WAL Amount Yield WAL Amount Yield WAL (Dollars in thousands) Beginning 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 Maturities, calls and sales (100,300) (3,325) (50,900) (102,115) Net amortization of (premiums)/discounts (12) (18) (14) (54) Purchases: Fixed-rate 50,000 0.73 3.2 100,000 0.70 4.6 124,987 0.48 3.2 244,975 0.51 3.2 Change in valuation on AFS securities 966 (5,200) 346 (126) Ending balance - carrying value $ 496,677 0.60 3.8 $ 546,023 0.56 3.6 $ 454,566 0.54 1.0 $ 380,147 0.65 1.7 For the Nine Months Ended June 30, 2021 June 30, 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 (154,525) (256,300) Net amortization of (premiums)/discounts (44) (109) Purchases: Fixed-rate 274,987 0.60 3.7 225,087 1.20 1.2 Change in valuation on AFS securities (3,888) 413 Ending balance - carrying value $ 496,677 0.60 3.8 $ 237,467 1.23 0.8 58 Liabilities Deposits - Total deposits were $6.64 billion, an increase of $446.9 million, or 7.2%, from September 30, 2020. The increase was in non-maturity deposits, which increased $586.6 million, including a $269.2 million increase in money market accounts, a $238.2 million increase in checking accounts, and a $79.2 million increase in savings accounts. Retail certificates of deposit decreased $210.5 million from September 30, 2020, which was partially offset by a $71.8 million increase in commercial certificates of deposit. 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. June 30, 2021 March 31, 2021 September 30, 2020 % of % of % of Amount Rate Total Amount Rate Total Amount Rate Total (Dollars in thousands) Non-interest-bearing checking $ 540,669 — % 8.2 % $ 549,158 — % 8.2 % $ 451,394 — % 7.3 % Interest-bearing checking 1,014,665 0.08 15.3 1,009,096 0.07 15.2 865,782 0.10 14.0 Savings 513,054 0.06 7.7 511,014 0.06 7.7 433,808 0.06 7.0 Money market 1,688,337 0.25 25.4 1,602,573 0.24 24.1 1,419,180 0.37 22.9 Retail certificates of deposit 2,412,806 1.50 36.4 2,512,791 1.62 37.8 2,623,336 1.88 42.4 Commercial certificates of deposit 214,956 0.71 3.2 217,563 0.77 3.3 143,125 1.05 2.3 Public unit certificates of deposit 253,807 0.36 3.8 248,670 0.45 3.7 254,783 0.74 4.1 $ 6,638,294 0.66 100.0 % $ 6,650,865 0.73 100.0 % $ 6,191,408 0.95 100.0 % The following tables set forth scheduled maturity information for our certificates of deposit, along with associated weighted average rates, as of June 30, 2021. Amount Due More than More than 1 year 1 year to 2 years to 3 More than Total Rate range or less 2 years years 3 years Amount Rate (Dollars in thousands) Retail certificates of deposit: 0.00 – 0.99% $ 550,417 $ 179,058 $ 67,469 $ 84,122 $ 881,066 0.52 % 1.00 – 1.99% 343,680 170,719 111,402 77,336 703,137 1.69 2.00 – 2.99% 246,706 388,924 161,803 30,914 828,347 2.40 3.00 – 3.99% — 256 — — 256 3.00 Commercial certificates of deposit: 0.00 – 0.99% 172,807 4,795 464 781 178,847 0.54 1.00 – 1.99% 19,503 10,104 343 907 30,857 1.41 2.00 – 2.99% 2,016 2,401 662 172 5,251 2.31 Public unit certificates of deposit: 0.00 – 0.99% 196,575 25,501 — — 222,076 0.10 1.00 – 1.99% 16,096 — — — 16,096 1.69 2.00 – 2.99% 15,307 — 329 — 15,636 2.65 $ 1,563,107 $ 781,758 $ 342,472 $ 194,232 $ 2,881,569 1.34 Percent of total 54.3 % 27.1 % 11.9 % 6.7 % Weighted average rate 1.07 1.71 1.80 1.25 Weighted average maturity (in years) 0.5 1.4 2.5 3.8 1.2 Weighted average maturity for the retail portfolio (in years) 1.3 Weighted average maturity for the commercial portfolio (in years) 0.6 Weighted average maturity for the public unit portfolio (in years) 0.4 59 Amount Due Over Over 3 months 3 to 6 6 to 12 Over or less months months 12 months Total (Dollars in thousands) Retail certificates of deposit less than $100,000 $ 168,367 $ 167,204 $ 326,201 $ 740,425 $ 1,402,197 Retail certificates of deposit of $100,000 or more 128,925 128,177 221,929 531,578 1,010,609 Commercial certificates of deposit less than $100,000 2,961 3,025 4,377 4,223 14,586 Commercial certificates of deposit of $100,000 or more 39,299 78,560 66,105 16,406 200,370 Public unit certificates of deposit of $100,000 or more 98,464 74,062 55,451 25,830 253,807 $ 438,016 $ 451,028 $ 674,063 $ 1,318,462 $ 2,881,569 60 Borrowings - Total borrowings at June 30, 2021 were $1.58 billion, a decrease of $206.9 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 deposit growth were used to pay off maturing borrowings. The following tables present borrowing activity for the periods shown. The borrowings presented in the table have original contractual terms of one year or longer or are tied to interest rate swaps with original contractual terms of one year or longer. FHLB advances are presented at par. The effective rate is shown as a weighted average and includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. The weighted average maturity ("WAM") is the remaining weighted average contractual term in years. The beginning and ending WAMs represent the remaining maturity at each date presented. For new borrowings, the WAMs presented are as of the date of issue. For the Three Months Ended June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Effective Effective Effective Effective Amount Rate WAM Amount Rate WAM Amount Rate WAM Amount Rate WAM (Dollars in thousands) Beginning 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 Maturities and prepayments: FHLB advances (300,000) 1.30 (315,000) 2.20 (350,000) 2.40 (440,000) 2.49 Repurchase agreements — — — — — — (100,000) 2.53 New FHLB borrowings: Fixed-rate 200,000 0.90 4.5 100,000 1.24 6.0 100,000 1.09 5.0 — — — Interest rate swaps (1) 100,000 3.14 7.0 65,000 2.65 3.1 200,000 2.63 1.5 340,000 2.73 3.5 Ending balance $ 1,590,000 2.00 3.5 $ 1,590,000 1.94 3.3 $ 1,740,000 2.26 3.0 $ 1,790,000 2.31 3.0 For the Nine Months Ended June 30, 2021 June 30, 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 (965,000) 1.99 (965,000) 2.41 New FHLB borrowings: Fixed-rate 400,000 1.03 5.0 450,000 1.76 4.8 Interest rate swaps (1) 365,000 2.77 3.3 365,000 2.75 4.3 Ending balance $ 1,590,000 2.00 3.5 $ 1,990,000 2.29 2.9 (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. 61 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 June 30, 2021. Term Borrowings Amount Maturity by FHLB Interest rate Total Contractual Effective Fiscal Year Advances swaps (1) Amount Rate Rate (2) (Dollars in thousands) 2021 $ — $ 340,000 $ 340,000 0.28 % 2.73 % 2022 — 100,000 100,000 0.24 3.14 2023 300,000 — 300,000 1.70 1.81 2024 150,000 — 150,000 2.44 2.44 2025 300,000 — 300,000 1.66 1.75 2026 250,000 — 250,000 0.96 1.27 2027 150,000 — 150,000 0.93 1.24 $ 1,150,000 $ 440,000 $ 1,590,000 1.18 2.00 (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 3.6 years at June 30, 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/commercial and public unit amounts, and term borrowings for the next four quarters as of June 30, 2021. Retail/Commercial Public Unit Term Maturity by Certificate Repricing Certificate Repricing Borrowings Repricing Repricing Quarter End Amount Rate Amount Rate Amount (1) Rate Total Rate (Dollars in thousands) September 30, 2021 $ 339,552 1.26 % $ 98,464 0.51 % $ 75,000 2.99 % $ 513,016 1.37 % December 31, 2021 376,966 1.12 74,062 0.26 — — 451,028 0.98 March 31, 2022 299,872 1.24 24,876 0.65 — — 324,748 1.19 June 30, 2022 318,740 1.15 30,575 0.09 — — 349,315 1.06 $ 1,335,130 1.19 $ 227,977 0.39 $ 75,000 2.99 $ 1,638,107 1.16 (1) The maturity date for FHLB advances tied to interest rate swaps is based on the maturity date of the related interest rate swap. 62 Stockholders' Equity. Stockholders' equity at June 30, 2021 was $1.24 billion, a decrease of $47.2 million, or 3.7%, from September 30, 2020. During the current year nine month period, the Company paid cash dividends totaling $106.4 million and repurchased common stock totaling $1.5 million, partially offset by net income of $57.5 million. The cash dividends paid during the current year nine month period totaled $0.785 per share and consisted of a $0.40 per share True Blue Capitol cash dividend, a $0.13 per share cash true-up dividend related to fiscal year 2020 earnings and three regular quarterly cash dividends of $0.085 per share. On July 20, 2021, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.5 million, payable on August 20, 2021 to stockholders of record as of the close of business on August 6, 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 June 30, 2021, this ratio was 11.5%. At June 30, 2021, Capitol Federal Financial, Inc., at the holding company level, had $84.7 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. There remains $44.7 million authorized under the existing stock repurchase plan for additional purchases of the Company's common stock. Shares may be repurchased from time to time based upon market conditions, available liquidity and other factors. This plan has no expiration date; however, the FRB's existing approval for the Company to repurchase shares extends through August 2021. The Company plans to request a further extension of the FRB's approval. The Company works to find multiple ways to provide stockholder value. This has primarily been through the payment of cash dividends and stock buybacks. The Company has maintained a policy of paying out 100% of its earnings to stockholders in the form of quarterly cash dividends and an annual cash true-up dividend in December of each year. In order to provide additional stockholder value, the Company 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, the Company elected to defer the annual True Blue dividend in June 2020. In June 2021, the Company paid a True Blue Capitol cash dividend of $0.40 per share. The $0.40 per share True Blue Capitol cash dividend represents a $0.20 per share cash dividend from fiscal year 2020 and a $0.20 per share cash dividend for fiscal year 2021. The Company has 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. The following table presents regular quarterly cash dividends and special cash dividends paid in calendar years 2021, 2020, and 2019. The amounts represent cash dividends paid during each period. For the quarter ending September 30, 2021, the amount presented represents the dividend payable on August 20, 2021 to stockholders of record as of the close of business on August 6, 2021. Calendar Year 2021 2020 2019 Amount Per Share Amount Per Share Amount Per Share (Dollars in thousands, except per share amounts) Regular quarterly dividends paid Quarter ended March 31 $ 11,518 $ 0.085 $ 11,733 $ 0.085 $ 11,700 $ 0.085 Quarter ended June 30 11,516 0.085 11,733 0.085 11,708 0.085 Quarter ended September 30 11,520 0.085 11,733 0.085 11,713 0.085 Quarter ended December 31 — — 11,514 0.085 11,731 0.085 True-up dividends paid — — 17,614 0.130 46,932 0.340 True Blue dividends paid 54,210 0.400 — — 34,446 0.250 Calendar year-to-date dividends paid $ 88,764 $ 0.655 $ 64,327 $ 0.470 $ 128,230 $ 0.930 63 Operating Results The following table presents selected income statement and other information for the quarters indicated. For the Three Months Ended June 30, March 31, December 31, September 30, June 30, 2021 2021 2020 2020 2020 (Dollars in thousands, except per share data) Interest and dividend income: Loans receivable $ 54,779 $ 57,285 $ 60,694 $ 64,315 $ 66,652 MBS 5,360 5,429 5,710 5,425 5,616 FHLB stock 944 951 1,069 1,080 1,207 Investment securities 763 629 683 731 847 Cash and cash equivalents 26 40 51 55 59 Total interest and dividend income 61,872 64,334 68,207 71,606 74,381 Interest expense: Deposits 11,475 12,529 14,067 15,299 16,533 Borrowings 7,826 8,732 10,327 10,624 11,561 Total interest expense 19,301 21,261 24,394 25,923 28,094 Net interest income 42,571 43,073 43,813 45,683 46,287 Provision for credit losses (2,691) (2,964) (1,532) — — Net interest income (after provision for credit losses) 45,262 46,037 45,345 45,683 46,287 Non-interest income 5,236 12,477 5,070 4,985 4,439 Non-interest expense 27,602 32,653 27,067 27,176 26,164 Income tax expense 4,709 5,417 4,450 5,213 5,088 Net income $ 18,187 $ 20,444 $ 18,898 $ 18,279 $ 19,474 Efficiency ratio 57.73 % 58.78 % 55.37 % 53.64 % 51.58 % Basic EPS $ 0.13 $ 0.15 $ 0.14 $ 0.13 $ 0.14 Diluted EPS 0.13 0.15 0.14 0.13 0.14 64 Comparison of Operating Results for the Three Months Ended June 30, 2021 and March 31, 2021 For the quarter ended June 30, 2021, the Company recognized net income of $18.2 million, or $0.13 per share, compared to net income of $20.4 million, or $0.15 per share, for the quarter ended March 31, 2021. The decrease in net income was due primarily to a decrease in non-interest income due mainly to the prior quarter including a $7.4 million gain on the sale of the Bank's Visa Class B shares, partially offset by a decrease in non-interest expense due mainly to a $4.8 million loss in the prior quarter due to the Bank terminating $200.0 million of its interest rate swaps. Net interest margin decreased four basis points, from 1.88% for the prior quarter to 1.84% for the current quarter. The decrease in net interest margin was due mainly to a decrease in the loan portfolio average yield, partially offset by a decrease in the average 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. Interest and Dividend Income The weighted average yield on total interest-earning assets decreased 15 basis points, from 2.81% for the prior quarter to 2.66% for the current quarter, while the average balance of interest-earning assets increased $125.8 million between the two periods. The decrease in the weighted average yield was due primarily to a decrease in the one- to four-family loan portfolio yield. The increase in the average balance was due primarily to a $152.1 million increase in the average balance of the MBS and investment securities portfolios and a $38.0 million increase in the average balance of the loans receivable portfolio, partially offset by a $60.7 million decrease in the average balance of cash and cash equivalents. The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent. For the Three Months Ended June 30, March 31, Change Expressed in: 2021 2021 Dollars Percent (Dollars in thousands) INTEREST AND DIVIDEND INCOME: Loans receivable $ 54,779 $ 57,285 $ (2,506) (4.4) % MBS 5,360 5,429 (69) (1.3) FHLB stock 944 951 (7) (0.7) Investment securities 763 629 134 21.3 Cash and cash equivalents 26 40 (14) (35.0) Total interest and dividend income $ 61,872 $ 64,334 $ (2,462) (3.8) The decrease in interest income on loans receivable was due to a 16 basis point decrease in the weighted average portfolio yield, partially offset by a $38.0 million increase in the average balance. The weighted average yield on the loans receivable portfolio decreased from 3.27% for the prior quarter to 3.11% for the current quarter, due mainly to an increase in one- to four-family correspondent loan endorsement activity, which increased the amount of premium amortization related to these loans, along with a reduction in one- to four-family originated loan endorsement activity, which decreased the amount of deferred fee recognition related to these loans. Additionally, the yield decreased due to the origination and purchase of one- to four-family loans at rates lower than the overall portfolio. One- to four-family correspondent loan payoff activity in the current quarter was lower than 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. 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. The decrease in interest income on MBS was due to a 10 basis point decrease in the weighted average portfolio yield, which was largely offset by an $85.1 million increase in the average balance of the portfolio. The increase in interest income on investment securities was due primarily to a $67.0 million increase in the average balance of the portfolio. 65 Interest Expense The weighted average rate paid on interest-bearing liabilities decreased 12 basis points, from 1.06% for the prior quarter to 0.94% for the current quarter, while the average balance of interest-bearing liabilities increased $121.1 million between the two periods due to an increase in the average balance of checking, savings and money market accounts, partially offset by a decrease in the average balance of retail/commercial certificates of deposit and a decrease in the average balance of borrowings. The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent. For the Three Months Ended June 30, March 31, Change Expressed in: 2021 2021 Dollars Percent (Dollars in thousands) INTEREST EXPENSE: Deposits $ 11,475 $ 12,529 $ (1,054) (8.4) % Borrowings 7,826 8,732 (906) (10.4) Total interest expense $ 19,301 $ 21,261 $ (1,960) (9.2) The decrease in interest expense on deposits was due primarily to a decrease in the weighted average rate paid on and a decrease in the average balance of the retail/commercial certificate of deposit portfolio. The weighted average rate on the retail/commercial certificate of deposit portfolio decreased 12 basis points, to 1.49% for the current quarter, and the average balance decreased $74.5 million. During the prior quarter, the Bank terminated interest rate swaps designated as cash flow hedges with a notional amount of $200.0 million which were tied to variable-rate FHLB advances totaling $200.0 million. During the current quarter, the Bank prepaid the aforementioned variable-rate FHLB advances and replaced them with $200.0 million of fixed-rate FHLB advances. The decrease in interest expense on borrowings compared to the prior quarter was due primarily to a full quarterly impact of this activity and the related reduction in the effective cost of these borrowings. Provision for Credit Losses For the quarter ended June 30, 2021, the Bank recorded a negative provision for credit losses of $2.7 million, compared to a negative provision for credit losses of $3.0 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, partially offset by a $34 thousand increase in reserves for off-balance sheet credit exposures. The $2.7 million negative provision for credit losses in the current quarter was due primarily to more favorable economic conditions at June 30, 2021 compared to March 31, 2021, largely related to commercial loans. See "Financial Condition - Asset Quality" above for additional discussion regarding the Bank's ACL and reserves for off-balance sheet credit exposures at June 30, 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 June 30, March 31, Change Expressed in: 2021 2021 Dollars Percent (Dollars in thousands) NON-INTEREST INCOME: Deposit service fees $ 3,227 $ 2,814 $ 413 14.7 % Gain on sale of Visa Class B shares — 7,386 (7,386) (100.0) Insurance commissions 723 888 (165) (18.6) Other non-interest income 1,286 1,389 (103) (7.4) Total non-interest income $ 5,236 $ 12,477 $ (7,241) (58.0) The increase in deposit service fees was due primarily to increases in debit card income and service charge income as a result of higher transaction volume in the current quarter. During the prior quarter, the Bank sold all of its Visa Class B shares, resulting in a $7.4 million gain. The decrease in insurance commissions was due primarily to the receipt of annual contingent insurance commissions during the prior quarter, which were higher than what was anticipated and accrued. 66 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 June 30, March 31, Change Expressed in: 2021 2021 Dollars Percent (Dollars in thousands) NON-INTEREST EXPENSE: Salaries and employee benefits $ 13,867 $ 13,397 $ 470 3.5 % Information technology and related expense 4,736 4,599 137 3.0 Occupancy, net 3,504 3,523 (19) (0.5) Loss on interest rate swap termination — 4,752 (4,752) (100.0) Regulatory and outside services 1,469 1,234 235 19.0 Advertising and promotional 1,407 1,484 (77) (5.2) Deposit and loan transaction costs 693 664 29 4.4 Federal insurance premium 633 634 (1) (0.2) Office supplies and related expense 402 463 (61) (13.2) Other non-interest expense 891 1,903 (1,012) (53.2) Total non-interest expense $ 27,602 $ 32,653 $ (5,051) (15.5) The increase in salaries and employee benefits was due primarily to merit increases during the current quarter. During the prior quarter, the Bank terminated interest rate swaps designated as cash flow hedges with a notional amount of $200.0 million resulting in the reclassification of unrealized losses totaling $4.8 million from AOCI into earnings. The increase in regulatory and outside services was due mainly to the timing of external audit expenses. The decrease in other non-interest expense was due primarily to the write-down of a property during the prior quarter that previously served as one of the Bank's branch locations, as management intends to sell the property. During the current quarter there was a partial reversal of the write-down due to receiving updated pricing information for the property. The Company's efficiency ratio was 57.73% for the current quarter compared to 58.78% for the prior quarter. The improvement in the efficiency ratio was due primarily to lower non-interest expense, partially offset by a decrease 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 lower value indicates that the financial institution is generating revenue with a proportionally lower 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 June 30, March 31, Change Expressed in: 2021 2021 Dollars Percent (Dollars in thousands) Income before income tax expense $ 22,896 $ 25,861 $ (2,965) (11.5) % Income tax expense 4,709 5,417 (708) (13.1) Net income $ 18,187 $ 20,444 $ (2,257) (11.0) Effective Tax Rate 20.6 % 20.9 % The decrease in income tax expense was due mainly to a decrease in pretax income. Management anticipates the effective income tax rate for fiscal year 2021 will be approximately 20%. 67 Average Balance Sheet Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis. For the Three Months Ended June 30, 2021 March 31, 2021 Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Amount Paid Rate Amount Paid Rate Assets: (Dollars in thousands) Interest-earning assets: One- to four-family loans: Originated $ 3,982,990 $ 33,727 3.39 % $ 3,956,867 $ 34,794 3.52 % Correspondent purchased 1,971,209 10,367 2.10 1,981,735 11,826 2.39 Bulk purchased 185,198 826 1.78 195,925 932 1.90 Total one- to four-family loans 6,139,397 44,920 2.93 6,134,527 47,552 3.10 Commercial loans 805,721 8,744 4.29 766,972 8,559 4.46 Consumer loans 96,980 1,115 4.61 102,613 1,174 4.64 Total loans receivable (1) 7,042,098 54,779 3.11 7,004,112 57,285 3.27 MBS (2) 1,529,679 5,360 1.40 1,444,554 5,429 1.50 Investment securities (2)(3) 533,076 763 0.57 466,077 629 0.54 FHLB stock 73,689 944 5.14 77,391 951 4.98 Cash and cash equivalents 97,890 26 0.11 158,544 40 0.10 Total interest-earning assets 9,276,432 61,872 2.66 9,150,678 64,334 2.81 Other non-interest-earning assets 430,639 446,265 Total assets $ 9,707,071 $ 9,596,943 Liabilities and stockholders' equity: Interest-bearing liabilities: Checking $ 1,546,665 182 0.05 $ 1,459,964 183 0.05 Savings 513,528 72 0.06 477,985 69 0.06 Money market 1,646,970 998 0.24 1,543,911 1,038 0.27 Retail/commercial certificates 2,678,914 9,938 1.49 2,753,439 10,917 1.61 Wholesale certificates 251,571 285 0.45 260,712 322 0.50 Total deposits 6,637,648 11,475 0.69 6,496,011 12,529 0.78 Borrowings (4) 1,582,905 7,826 1.97 1,603,459 8,732 2.19 Total interest-bearing liabilities 8,220,553 19,301 0.94 8,099,470 21,261 1.06 Other non-interest-bearing liabilities 203,532 213,602 Stockholders' equity 1,282,986 1,283,871 Total liabilities and stockholders' equity $ 9,707,071 $ 9,596,943 Net interest income (5) $ 42,571 $ 43,073 Net interest rate spread (6) 1.72 1.75 Net interest-earning assets $ 1,055,879 $ 1,051,208 Net interest margin (7) 1.84 1.88 Ratio of interest-earning assets to interest-bearing liabilities 1.13x 1.13x Selected performance ratios: Return on average assets (annualized) 0.75 % 0.85 % Return on average equity (annualized) 5.67 6.37 Average equity to average assets 13.22 13.38 Operating expense ratio (8) 1.14 1.36 Efficiency ratio (9) 57.73 58.78 68 (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 $5.1 million and $7.5 million for the quarters ended June 30, 2021 and March 31, 2021, 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 The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended June 30, 2021 to the three months ended March 31, 2021. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. For the Three Months Ended June 30, 2021 vs. March 31, 2021 Increase (Decrease) Due to Volume Rate Total (Dollars in thousands) Interest-earning assets: Loans receivable $ 422 $ (2,928) $ (2,506) MBS 310 (379) (69) Investment securities 94 40 134 FHLB stock (40) 33 (7) Cash and cash equivalents (16) 2 (14) Total interest-earning assets 770 (3,232) (2,462) Interest-bearing liabilities: Checking 11 (14) (3) Savings 6 (2) 4 Money market 71 (110) (39) Certificates of deposit (275) (741) (1,016) Borrowings (103) (803) (906) Total interest-bearing liabilities (290) (1,670) (1,960) Net change in net interest income $ 1,060 $ (1,562) $ (502) 69 Comparison of Operating Results for the Nine Months Ended June 30, 2021 and 2020 The Company recognized net income of $57.5 million, or $0.42 per share, for the nine month period ended June 30, 2021 compared to net income of $46.3 million, or $0.34 per share, for the nine month period ended June 30, 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 $7.2 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 $14.2 million, or 9.9%, from the prior year period to $129.5 million for the current year period. Net interest margin decreased 27 basis points, from 2.15% for the prior year period to 1.88% 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. Interest and Dividend Income The weighted average yield on total interest-earning assets decreased 66 basis points, from 3.48% for the prior year period to 2.82% for the current year period, while the average balance of interest-earning assets increased $259.3 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 Nine Months Ended June 30, Change Expressed in: 2021 2020 Dollars Percent (Dollars in thousands) INTEREST AND DIVIDEND INCOME: Loans receivable $ 172,758 $ 206,179 $ (33,421) (16.2) % MBS 16,499 17,584 (1,085) (6.2) FHLB stock 2,964 4,747 (1,783) (37.6) Investment securities 2,075 3,736 (1,661) (44.5) Cash and cash equivalents 117 1,126 (1,009) (89.6) Total interest and dividend income $ 194,413 $ 233,372 $ (38,959) (16.7) The decrease in interest income on loans receivable was due mainly to a 41 basis point decrease in the weighted average yield on the portfolio, from 3.67% for the prior year period to 3.26% 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 endorsements and refinances of one- to four-family originated loans to lower market rates, adjustable-rate loans repricing to lower market rates, and the origination and purchase of new loans at lower market rates. Additionally, the average balance of the portfolio decreased $420.5 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 98 basis point decrease in the weighted average yield to 1.54% for the current year period as a result of the purchase of MBS at market rates lower than the existing portfolio and an increase in the impact of premium amortization, partially offset by a $495.5 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 135 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 $219.0 million increase in the average balance of the portfolio. The decrease in interest income on cash and cash equivalents was due primarily to a decrease in the yield earned on cash held at the FRB of Kansas City. 70 Interest Expense The weighted average rate paid on total interest-bearing liabilities decreased 45 basis points, from 1.52% for the prior year period to 1.07% for the current period, while the average balance of interest-bearing liabilities increased $250.8 million. The increase in the average balance was primarily in money market and checking accounts, partially offset by a decrease in the average balance of 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 Nine Months Ended June 30, Change Expressed in: 2021 2020 Dollars Percent (Dollars in thousands) INTEREST EXPENSE: Deposits $ 38,071 $ 52,299 $ (14,228) (27.2) % Borrowings 26,885 37,421 (10,536) (28.2) Total interest expense $ 64,956 $ 89,720 $ (24,764) (27.6) The decrease in interest expense on deposits was due mainly to a decrease in the weighted average rate paid on retail/commercial certificates of deposit, money market accounts, and wholesale certificates of deposit, which decreased by 46 basis points, 31 basis points, and 133 basis points, respectively. Since the onset of the COVID-19 pandemic, retail/commercial certificates of deposit have been 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 $494.1 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 liquidity 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 The Bank recorded a negative provision for credit losses during the current year period of $7.2 million, compared to a $22.3 million provision for credit losses during the prior year period. See "Financial Condition - Asset Quality" above for additional discussion regarding the Bank's ACL and reserves for off-balance sheet credit exposures at June 30, 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 Nine Months Ended June 30, Change Expressed in: 2021 2020 Dollars Percent (Dollars in thousands) NON-INTEREST INCOME: Deposit service fees $ 8,988 $ 8,384 $ 604 7.2 % Gain on sale of Visa Class B shares 7,386 — 7,386 N/A Insurance commissions 2,249 1,762 487 27.6 Other non-interest income 4,160 4,468 (308) (6.9) Total non-interest income $ 22,783 $ 14,614 $ 8,169 55.9 The increase in deposit service fees was due primarily to an increase in debit card income as a result of higher transaction volume. 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 higher annual contingent insurance commissions received in the current year period compared to the prior year period. The decrease in other non-interest income was mainly the result of lower income from BOLI compared to the prior year period due to a reduction in the yield due to lower market rates and lower death benefit receipts between the two periods. 71 Non-Interest Expense The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent. For the Nine Months Ended June 30, Change Expressed in: 2021 2020 Dollars Percent (Dollars in thousands) NON-INTEREST EXPENSE: Salaries and employee benefits $ 41,402 $ 39,765 $ 1,637 4.1 % Information technology and related expense 13,568 12,694 874 6.9 Occupancy, net 10,406 10,212 194 1.9 Loss on interest rate swap termination 4,752 — 4,752 N/A Regulatory and outside services 4,288 4,188 100 2.4 Advertising and promotional 3,729 3,773 (44) (1.2) Deposit and loan transaction costs 2,123 2,086 37 1.8 Federal insurance premium 1,888 287 1,601 557.8 Office supplies and related expense 1,289 1,586 (297) (18.7) Other non-interest expense 3,877 4,237 (360) (8.5) Total non-interest expense $ 87,322 $ 78,828 $ 8,494 10.8 The increase in salaries and employee benefits was due primarily to an increase in officer bonus accruals, as well as an increase in loan commissions related to higher loan origination activity. The increase in information technology and related expense was due mainly to an increase in software licensing expense and information technology professional services expense. As discussed previously, during the current year period, the Bank terminated interest rate swaps designated as cash flow hedges with a notional amount of $200.0 million resulting in the reclassification of unrealized losses totaling $4.8 million from AOCI into earnings. 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 57.36% for the current period compared to 49.81% for the prior year period. The change in the efficiency ratio was due to higher non-interest expense and lower net interest income, partially offset by an increase in 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 year period related to higher non-interest expense was due primarily to the loss on the termination of interest rate swaps, which was a unique transaction during the current year 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 Nine Months Ended June 30, Change Expressed in: 2021 2020 Dollars Percent (Dollars in thousands) Income before income tax expense $ 72,105 $ 57,138 $ 14,967 26.2 % Income tax expense 14,576 10,877 3,699 34.0 Net income $ 57,529 $ 46,261 $ 11,268 24.4 Effective Tax Rate 20.2 % 19.0 % 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. 72 Average Balance Sheet Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis. For the Nine Months Ended June 30, 2021 June 30, 2020 Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Amount Paid Rate Amount Paid Rate Assets: (Dollars in thousands) Interest-earning assets: One- to four-family loans: Originated $ 3,963,088 $ 104,482 3.52 % $ 3,946,543 $ 113,228 3.83 % Correspondent purchased 2,006,257 35,124 2.33 2,386,194 54,780 3.06 Bulk purchased 195,678 2,870 1.96 235,928 4,837 2.73 Total one- to four-family loans 6,165,023 142,476 3.08 6,568,665 172,845 3.51 Commercial loans 780,941 26,707 4.51 775,021 28,228 4.79 Consumer loans 103,241 3,575 4.63 126,049 5,106 5.41 Total loans receivable (1) 7,049,205 172,758 3.26 7,469,735 206,179 3.67 MBS (2) 1,424,914 16,499 1.54 929,458 17,584 2.52 Investment securities (2)(3) 476,755 2,075 0.58 257,778 3,736 1.93 FHLB stock 78,784 2,964 5.03 99,945 4,747 6.34 Cash and cash equivalents 152,792 117 0.10 166,272 1,126 0.89 Total interest-earning assets 9,182,450 194,413 2.82 8,923,188 233,372 3.48 Other non-interest-earning assets 443,370 459,877 Total assets $ 9,625,820 $ 9,383,065 Liabilities and stockholders' equity: Interest-bearing liabilities: Checking $ 1,455,468 588 0.05 $ 1,141,682 550 0.06 Savings 478,011 209 0.06 375,858 222 0.08 Money market 1,554,947 3,220 0.28 1,216,377 5,395 0.59 Retail/commercial certificates 2,726,035 33,032 1.62 2,702,272 42,096 2.08 Wholesale certificates 254,606 1,022 0.54 287,977 4,036 1.87 Total deposits 6,469,067 38,071 0.79 5,724,166 52,299 1.22 Borrowings (4) 1,654,544 26,885 2.16 2,148,687 37,421 2.31 Total interest-bearing liabilities 8,123,611 64,956 1.07 7,872,853 89,720 1.52 Other non-interest-bearing liabilities 219,204 195,957 Stockholders' equity 1,283,005 1,314,255 Total liabilities and stockholders' equity $ 9,625,820 $ 9,383,065 Net interest income (5) $ 129,457 $ 143,652 Net interest rate spread (6) 1.75 1.96 Net interest-earning assets $ 1,058,839 $ 1,050,335 Net interest margin (7) 1.88 2.15 Ratio of interest-earning assets to interest-bearing liabilities 1.13x 1.13x Selected performance ratios: Return on average assets (annualized) 0.80 % 0.66 % Return on average equity (annualized) 5.98 4.69 Average equity to average assets 13.33 14.01 Operating expense ratio (8) 1.21 1.12 Efficiency ratio (9) 57.36 49.81 73 (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 $7.2 million and $14.7 million for the nine months ended June 30, 2021 and June 30, 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 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. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. For the Nine Months Ended June 30, 2021 vs. June 30, 2020 Increase (Decrease) Due to Volume Rate Total (Dollars in thousands) Interest-earning assets: Loans receivable $ (10,905) $ (22,516) $ (33,421) MBS 7,269 (8,354) (1,085) Investment securities 1,956 (3,617) (1,661) FHLB stock (906) (877) (1,783) Cash and cash equivalents (85) (924) (1,009) Total interest-earning assets (2,671) (36,288) (38,959) Interest-bearing liabilities: Checking 134 (96) 38 Savings 52 (65) (13) Money market 1,216 (3,390) (2,174) Certificates of deposit (149) (11,930) (12,079) Borrowings (6,751) (3,785) (10,536) Total interest-bearing liabilities (5,498) (19,266) (24,764) Net change in net interest income $ 2,827 $ (17,022) $ (14,195) Comparison of Operating Results for the Three Months Ended June 30, 2021 and 2020 For the quarter ended June 30, 2021, the Company recognized net income of $18.2 million, or $0.13 per share, compared to net income of $19.5 million, or $0.14 per share for the quarter ended June 30, 2020. The decrease in net income was due primarily to a decrease in net interest income, partially offset by a negative provision for credit losses of $2.7 million in the current quarter. Net interest margin decreased 23 basis points, from 2.07% for the prior year quarter to 1.84% for the current quarter. The decrease in 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 were used to purchase lower yielding securities, partially offset by a decrease in the cost of deposits and borrowings. 74 Interest and Dividend Income The weighted average yield on total interest-earning assets decreased 66 basis points, from 3.32% for the prior year quarter to 2.66% for the current quarter, while the average balance of interest-earning assets increased $311.8 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 June 30, Change Expressed in: 2021 2020 Dollars Percent (Dollars in thousands) INTEREST AND DIVIDEND INCOME: Loans receivable $ 54,779 $ 66,652 $ (11,873) (17.8) % MBS 5,360 5,616 (256) (4.6) FHLB stock 944 1,207 (263) (21.8) Investment securities 763 847 (84) (9.9) Cash and cash equivalents 26 59 (33) (55.9) Total interest and dividend income $ 61,872 $ 74,381 $ (12,509) (16.8) The decrease in interest income on loans receivable was due mainly to a 44 basis point decrease in the weighted average yield, from 3.55% for the prior year quarter to 3.11% for the current quarter, along with a $447.6 million decrease in the average balance. The decrease in the weighted average yield was due primarily to endorsements and refinances of one- to four-family originated loans to lower market rates, an increase in premium amortization related to correspondent loans as a result of an increase in payoff and endorsement activity, and the origination and purchase of new loans at lower market rates. 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 100 basis point decrease in the weighted average yield on the portfolio, from 2.40% for the prior year quarter to 1.40% for the current quarter resulting from the purchase of MBS at market rates lower than the existing portfolio and an increase in the impact of premium amortization, partially offset by a $595.2 million, or 63.7%, increase in the average balance of the portfolio. The decrease in dividend income on FHLB stock was due to 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. Interest Expense The weighted average rate paid on total interest-bearing liabilities decreased 47 basis points, from 1.41% for the prior year quarter to 0.94% for the current quarter, while the average balance of interest-bearing liabilities increased $254.0 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 June 30, Change Expressed in: 2021 2020 Dollars Percent (Dollars in thousands) INTEREST EXPENSE: Deposits $ 11,475 $ 16,533 $ (5,058) (30.6) % Borrowings 7,826 11,561 (3,735) (32.3) Total interest expense $ 19,301 $ 28,094 $ (8,793) (31.3) The decrease in interest expense on deposits was due mainly to a decrease in the weighted average rate paid on retail/commercial certificates of deposit, money market accounts, and wholesale certificates of deposit, which decreased by 55 basis points, 19 basis points, and 98 basis points, respectively. Since the onset of the COVID-19 pandemic, retail/commercial certificates of deposit have been 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 $452.7 million decrease in the average balance, as certain maturing FHLB advances and repurchase agreements were not replaced. Additionally, the decrease in interest expense on borrowings was due to the impact of the termination of interest rate swaps associated with $200.0 million of FHLB advances, as previously discussed. 75 Provision for Credit Losses The Bank recorded a negative provision for credit losses during the current quarter of $2.7 million, compared to no provision for credit losses during the prior year quarter. See "Financial Condition - Asset Quality" above for additional discussion regarding the Bank's ACL and reserves for off-balance sheet credit exposures at June 30, 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 June 30, Change Expressed in: 2021 2020 Dollars Percent (Dollars in thousands) NON-INTEREST INCOME: Deposit service fees $ 3,227 $ 2,539 $ 688 27.1 % Insurance commissions 723 671 52 7.7 Other non-interest income 1,286 1,229 57 4.6 Total non-interest income $ 5,236 $ 4,439 $ 797 18.0 The increase in deposit service fees was due primarily to an increase in debit card income as a result of higher transaction volume compared to the prior year quarter. 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 June 30, Change Expressed in: 2021 2020 Dollars Percent (Dollars in thousands) NON-INTEREST EXPENSE: Salaries and employee benefits $ 13,867 $ 13,059 $ 808 6.2 % Information technology and related expense 4,736 4,285 451 10.5 Occupancy, net 3,504 3,556 (52) (1.5) Regulatory and outside services 1,469 1,548 (79) (5.1) Advertising and promotional 1,407 1,004 403 40.1 Deposit and loan transaction costs 693 697 (4) (0.6) Federal insurance premium 633 287 346 120.6 Office supplies and related expense 402 475 (73) (15.4) Other non-interest expense 891 1,253 (362) (28.9) Total non-interest expense $ 27,602 $ 26,164 $ 1,438 5.5 The increase in salaries and employee benefits was due primarily to an increase in officer bonus accruals, as well as to merit increases during the current quarter. The increase in information technology and related expense was due mainly to an increase in software licensing expense. The increase in advertising and promotional expense was due to the timing of campaigns. 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 decrease in other non-interest expense was due primarily to a partial reversal of a write-down of a property that previously served as one of the Bank's branch locations. The Company's efficiency ratio was 57.73% for the current quarter compared to 51.58% for the prior year quarter. The change in the efficiency ratio was due primarily to lower net interest income, along with an increase in non-interest expense. 76 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 June 30, Change Expressed in: 2021 2020 Dollars Percent (Dollars in thousands) Income before income tax expense $ 22,896 $ 24,562 $ (1,666) (6.8) % Income tax expense 4,709 5,088 (379) (7.4) Net income $ 18,187 $ 19,474 $ (1,287) (6.6) Effective Tax Rate 20.6 % 20.7 % The decrease in income tax expense was due primarily to lower pretax income in the current quarter. 77 Average Balance Sheet Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis. For the Three Months Ended June 30, 2021 June 30, 2020 Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Amount Paid Rate Amount Paid Rate Assets: (Dollars in thousands) Interest-earning assets: One- to four-family loans: Originated $ 3,982,990 $ 33,727 3.39 % $ 3,966,034 $ 37,701 3.80 % Correspondent purchased 1,971,209 10,367 2.10 2,376,900 16,436 2.77 Bulk purchased 185,198 826 1.78 226,011 1,509 2.67 Total one- to four-family loans 6,139,397 44,920 2.93 6,568,945 55,646 3.39 Commercial loans 805,721 8,744 4.29 799,600 9,576 4.74 Consumer loans 96,980 1,115 4.61 121,139 1,430 4.75 Total loans receivable (1) 7,042,098 54,779 3.11 7,489,684 66,652 3.55 MBS (2) 1,529,679 5,360 1.40 934,464 5,616 2.40 Investment securities (2)(3) 533,076 763 0.57 207,541 847 1.63 FHLB stock 73,689 944 5.14 101,588 1,207 4.78 Cash and cash equivalents 97,890 26 0.11 231,354 59 0.10 Total interest-earning assets 9,276,432 61,872 2.66 8,964,631 74,381 3.32 Other non-interest-earning assets 430,639 499,291 Total assets $ 9,707,071 $ 9,463,922 Liabilities and stockholders' equity: Interest-bearing liabilities: Checking $ 1,546,665 182 0.05 $ 1,232,611 199 0.06 Savings 513,528 72 0.06 404,545 69 0.07 Money market 1,646,970 998 0.24 1,267,535 1,350 0.43 Retail/commercial certificates 2,678,914 9,938 1.49 2,734,940 13,882 2.04 Wholesale certificates 251,571 285 0.45 291,292 1,033 1.43 Total deposits 6,637,648 11,475 0.69 5,930,923 16,533 1.12 Borrowings (4) 1,582,905 7,826 1.97 2,035,637 11,561 2.27 Total interest-bearing liabilities 8,220,553 19,301 0.94 7,966,560 28,094 1.41 Other non-interest-bearing liabilities 203,532 200,339 Stockholders' equity 1,282,986 1,297,023 Total liabilities and stockholders' equity $ 9,707,071 $ 9,463,922 Net interest income (5) $ 42,571 $ 46,287 Net interest rate spread (6) 1.72 1.91 Net interest-earning assets $ 1,055,879 $ 998,071 Net interest margin (7) 1.84 2.07 Ratio of interest-earning assets to interest-bearing liabilities 1.13x 1.13x Selected performance ratios: Return on average assets (annualized) 0.75 % 0.82 % Return on average equity (annualized) 5.67 6.01 Average equity to average assets 13.22 13.70 Operating expense ratio (8) 1.14 1.11 Efficiency ratio (9) 57.73 51.58 78 (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 $5.1 million and $11.9 million for the three months ended June 30, 2021 and June 30, 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 The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended June 30, 2021 to the three months ended June 30, 2020. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. For the Three Months Ended June 30, 2021 vs. 2020 Increase (Decrease) Due to Volume Rate Total (Dollars in thousands) Interest-earning assets: Loans receivable $ (3,695) $ (8,178) $ (11,873) MBS 2,676 (2,932) (256) Investment securities 719 (803) (84) FHLB stock (352) 89 (263) Cash and cash equivalents (36) 3 (33) Total interest-earning assets (688) (11,821) (12,509) Interest-bearing liabilities: Checking 44 (61) (17) Savings 17 (14) 3 Money market 333 (685) (352) Certificates of deposit (458) (4,234) (4,692) Borrowings (2,079) (1,656) (3,735) Total interest-bearing liabilities (2,143) (6,650) (8,793) Net change in net interest income $ 1,455 $ (5,171) $ (3,716) 79 Liquidity and Capital Resources Liquidity refers to our ability to generate sufficient cash to fund ongoing operations, to repay maturing certificates of deposit and other deposit withdrawals, to repay maturing borrowings, and to fund loan commitments. Liquidity management is both a daily and long-term function of our business management. The Company's most available liquid assets are represented by cash and cash equivalents, AFS securities, and short-term investment securities. The Bank's primary sources of funds are deposits, FHLB borrowings, repurchase agreements, repayments and maturities of outstanding loans and MBS and other short-term investments, and funds provided by operations. The Bank's long-term borrowings primarily have been used to manage the Bank's interest rate risk with the intention to improve the earnings of the Bank while maintaining capital ratios in excess of regulatory standards for well-capitalized financial institutions. In addition, the Bank's focus on managing risk has provided additional liquidity capacity by maintaining a balance of MBS and investment securities available as collateral for borrowings. We generally intend to manage cash reserves sufficient to meet short-term liquidity needs, which are routinely forecasted for 10, 30, and 365 days. Additionally, on a monthly basis, we perform a liquidity stress test in accordance with the Interagency Policy Statement on Funding and Liquidity Risk Management. The liquidity stress test incorporates both short-term and long-term liquidity scenarios in order to identify and to quantify liquidity risk. 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. 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. See "Part I, Item 1. Business - Sources of Funds" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020 for information regarding limits on the Bank's FHLB borrowings. The amount that can be borrowed from the FRB of Kansas City's discount window is based upon the fair value of securities pledged as collateral and certain other characteristics of those securities. Management tests the Bank's access to the FRB of Kansas City's discount window annually with a nominal, overnight borrowing. If management observes unusual trends in the amount and frequency of line of credit utilization and/or short-term borrowings, the Bank will likely utilize long-term wholesale borrowing sources such as FHLB advances and/or repurchase agreements to provide long-term, fixed-rate funding. The maturities of these long-term borrowings are generally staggered in order to mitigate the risk of a highly negative cash flow position at maturity. The Bank's internal policy limits total borrowings to 55% of total assets. At June 30, 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 June 30, 2021 was $1.59 billion, of which $440.0 million were advances scheduled to mature in the next 12 months, all of which were one-year floating-rate FHLB advances tied to interest rate swaps. All FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB. At June 30, 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 June 30, 2021, the Bank had $1.64 billion of securities that were eligible but unused as collateral for borrowing or other liquidity needs. The Bank has access to other sources of funds for liquidity purposes, such as brokered and public unit certificates of deposit. As of June 30, 2021, the Bank's policy allowed for combined brokered and public unit certificates of deposit up to 15% of total deposits. At June 30, 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 $303.3 million as collateral for public unit certificates of deposit at June 30, 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 June 30, 2021, $1.56 billion of the Bank's certificate of deposit portfolio was scheduled to mature within the next 12 months, including $228.0 million of public unit certificates of deposit and $194.3 million of commercial 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. The same is anticipated for our commercial certificates of deposit; however, due to the nature of these funds, retention rates are not as predictable as for retail certificates of deposit. We also anticipate the majority of the maturing public unit certificates of deposit will be replaced with similar wholesale funding products, depending on availability and pricing. While scheduled payments from the amortization of loans and MBS and payments on short-term investments are relatively predictable sources of funds, deposit flows, prepayments on loans and MBS, and calls of investment securities are greatly influenced by general 80 interest rates, economic conditions, and competition, and are less predictable sources of funds. To the extent possible, the Bank manages the cash flows of its loan and deposit portfolios by the rates it offers customers. The following table presents the contractual maturities of our loan, MBS, and investment securities portfolios at June 30, 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 June 30, 2021, the amortized cost of investment securities in our portfolio which are callable or have pre-refunding dates within one year was $302.0 million. Loans (1) MBS Investment Securities Total Amount Yield Amount Yield Amount Yield Amount Yield (Dollars in thousands) Amounts due: Within one year $ 171,672 3.83 % $ 622 2.62 % $ 4,448 1.77 % $ 176,742 3.77 % After one year: Over one to two years 110,445 3.82 13,549 1.63 714 1.94 124,708 3.57 Over two to three years 65,355 4.45 7,844 1.84 24,968 0.32 98,167 3.19 Over three to five years 148,675 4.16 46,236 2.80 441,662 0.58 636,573 1.58 Over five to ten years 747,141 3.60 278,592 1.73 24,885 0.96 1,050,618 3.04 Over ten to fifteen years 1,654,269 2.87 899,029 1.20 — — 2,553,298 2.28 After fifteen years 4,154,068 3.30 273,156 1.78 — — 4,427,224 3.20 Total due after one year 6,879,953 3.27 1,518,406 1.45 492,229 0.59 8,890,588 2.81 $ 7,051,625 3.28 $ 1,519,028 1.45 $ 496,677 0.60 $ 9,067,330 2.83 (1) The maturity date for home equity loans, including those that do not have a stated maturity date, assumes the customer always makes the required minimum payment. All other loans that do not have a stated maturity date and overdraft loans are included in the amounts due within one year. Construction loans are presented based on the estimated term to complete construction. Limitations on Dividends and Other Capital Distributions Office of the Comptroller of the Currency ("OCC") regulations impose restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Under FRB and OCC safe harbor regulations, savings institutions generally may make capital distributions during any calendar year equal to earnings of the previous two calendar years and current year-to-date earnings (to the extent not previously distributed). A savings institution that is a subsidiary of a savings and loan holding company, such as the Company, that proposes to make a capital distribution must submit written notice to the OCC and FRB 30 days prior to such distribution. The OCC and FRB may object to the distribution during that 30-day period based on safety and soundness or other concerns. Savings institutions that desire to make a larger capital distribution, are under special restrictions, or are not, or would not be, sufficiently capitalized following a proposed capital distribution must obtain regulatory non-objection prior to making such a distribution. The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company. So long as the Bank remains well capitalized after each capital distribution (as evidenced by maintaining a Community Bank Leverage Ratio ("CBLR") greater than the required percentage), and operates in a safe and sound manner, it is management's belief that the OCC and FRB will continue to allow the Bank to distribute its earnings to the Company, although no assurance can be given in this regard. Off-Balance Sheet Arrangements, Commitments and Contractual Obligations The Company, in the normal course of business, makes commitments to buy or sell assets, to extend credit, or to incur or fund liabilities. There have been no material changes in commitments, contractual obligations or off-balance sheet arrangements from September 30, 2020. For additional information, see "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Off-Balance Sheet Arrangements, Commitments and Contractual Obligations" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020. 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. 81 The maximum balance of short-term FHLB borrowings outstanding at any month-end during the nine months ended June 30, 2021 was $840.0 million, and the average balance of short-term FHLB borrowings outstanding during this period was $657.0 million at a weighted average contractual rate of 0.50%. The balance of short-term FHLB borrowings outstanding at June 30, 2021 was $440.0 million, at a weighted average contractual rate of 0.27%. Short-term FHLB borrowings for this purpose are defined as those with maturity dates within the next 12 months. Contingencies In the normal course of business, the Company and its subsidiary are named defendants in various lawsuits and counter claims. In the opinion of management, after consultation with legal counsel, none of the currently pending suits had or are expected to have a materially adverse effect on the Company's consolidated financial statements for the quarter ended June 30, 2021, or future periods. Capital 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 June 30, 2021, the Bank's CBLR was 11.5% and the Company's CBLR was 12.8%, 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 June 30, 2021, for the Bank and the Company (dollars in thousands): Bank Company Total equity as reported under GAAP $ 1,112,326 $ 1,237,624 AOCI 13,338 13,338 Goodwill and other intangibles, net of associated deferred taxes (12,651) (12,651) Total tier 1 capital $ 1,113,013 $ 1,238,311 82