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, originated commercial loans, and entered into commercial loan participations; • 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; • changes in consumer spending, borrowing and saving habits; and • our success at managing the risks involved in our business. 30 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, 2021 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, 2021, 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 $43.8 million, or $0.32 per share, for the current year six-month period compared to net income of $39.3 million, or $0.29 per share, for the prior year six-month period. The increase in net income was due primarily to an increase in net interest income and a higher negative provision for credit losses in the current year period, partially offset by higher income tax expense. The net interest margin decreased seven basis points, from 1.90% for the prior year period to 1.83% for the current year period. During the current quarter, the Company's leverage strategy, which had not been in place since 2019, was reimplemented. When the leverage strategy is in place, it reduces the net interest margin due to the amount of earnings from the transaction in comparison to the size of the transaction. Excluding the effects of the leverage strategy, the net interest margin would have increased 10 basis points, from 1.90% for the prior year period to 2.00% for the current year period. The increase in net interest margin, excluding the effects of the leverage strategy, was due mainly to a reduction in the weighted average cost of retail certificates of deposit and borrowings, which outpaced the decrease in weighted average asset yields. The Bank's asset quality continued to remain strong, reflected in low delinquency levels and a net recovery during the current year six-month period. At March 31, 2022, loans 30 to 89 days delinquent were 0.15% of total loans receivable, net, and loans 90 or more days delinquent or in foreclosure were 0.16% of total loans receivable, net. During the current year period, net recoveries were $45 thousand. At March 31, 2022, the Bank had a one-year gap position of $(1.46) billion, or (15.3)% of total assets, meaning the amount of interest-bearing liabilities exceeds the amount of interest-earning assets maturing or repricing during the same period. Despite a negative gap position, the net interest income projection increased as of March 31, 2022 compared to December 31, 2021 due to the assumption that the Bank's deposit balances are not expected to reprice to the full extent of the increase in market interest rates. This assumption is based on a historical analysis of the Bank's deposit pricing behavior. Management intends to implement a new core processing system for the Bank by September 2023. The replacement system will better position the Bank for the future and allow for the introduction of new products and services to enhance customer experiences. The implementation of the new core system and related conversion of data may result in increased third party expenses later in fiscal year 2022 and into fiscal year 2023. 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. 31 Critical Accounting Estimates Our most critical accounting estimates are the methodologies used to determine the ACL and reserve for off-balance sheet credit exposures and fair value measurements. These estimates 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 about highly uncertain matters. The use of different judgments, assumptions, and estimates could affect reported results materially. These critical accounting estimates and their application are reviewed at least annually by our audit committee. For a full discussion of our critical accounting estimates, see "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2021. Financial Condition The following table summarizes the Company's financial condition at the dates indicated. Annualized Annualized March 31, December 31, Percent September 30, Percent 2022 2021 Change 2021 Change (Dollars in thousands) Total assets $ 9,531,296 $ 9,609,157 (3.2) % $ 9,631,246 (2.1) % AFS securities 1,780,419 1,890,653 (23.3) 2,014,608 (23.2) Loans receivable, net 7,108,810 7,095,605 0.7 7,081,142 0.8 Deposits 6,614,844 6,648,004 (2.0) 6,597,396 0.5 Borrowings 1,583,747 1,583,303 0.1 1,582,850 0.1 Stockholders' equity 1,174,752 1,216,660 (13.8) 1,242,273 (10.9) Equity to total assets at end of period 12.3 % 12.7 % 12.9 % Average number of basic shares outstanding 135,677 135,627 0.1 135,571 0.2 Average number of diluted shares outstanding 135,677 135,627 0.1 135,571 0.2 The decrease in total assets from September 30, 2021 and December 31, 2021 to March 31, 2022 was due primarily to a decrease in securities, partially offset by an increase in cash and cash equivalents. The decrease in securities and stockholders' equity, specifically AOCI, from September 30, 2021 and December 31, 2021 to March 31, 2022 was due mainly to an increase in unrealized losses on AFS securities as a result of an increase in market yields from the time the securities were purchased. Management anticipates the entire principal balance will be collected as scheduled for the AFS securities and has no current intentions to sell the securities. 32 Loans Receivable. The following table presents the balance and weighted average rate of our loan portfolio as of the dates indicated. March 31, 2022 December 31, 2021 September 30, 2021 Amount Rate Amount Rate Amount Rate (Dollars in thousands) One- to four-family: Originated $ 3,943,327 3.14 % $ 3,941,568 3.15 % $ 3,956,064 3.18 % Correspondent purchased 1,995,167 2.95 1,991,944 2.97 2,003,477 3.02 Bulk purchased 155,657 1.33 165,339 1.52 173,662 1.65 Construction 50,512 2.78 47,508 2.76 39,142 2.82 Total 6,144,663 3.03 6,146,359 3.05 6,172,345 3.09 Commercial: Commercial real estate 671,324 3.94 687,518 3.98 676,908 4.00 Commercial and industrial 78,363 3.92 76,254 3.85 66,497 3.83 Construction 133,597 4.06 105,702 4.04 85,963 4.03 Total 883,284 3.96 869,474 3.98 829,368 3.99 Consumer loans: Home equity 82,878 4.57 84,400 4.59 86,274 4.60 Other 7,858 4.18 7,825 4.13 8,086 4.19 Total 90,736 4.54 92,225 4.55 94,360 4.57 Total loans receivable 7,118,683 3.16 7,108,058 3.18 7,096,073 3.21 Less: ACL 15,312 17,535 19,823 Deferred loan fees/discounts 29,264 29,363 29,556 Premiums/deferred costs (34,703) (34,445) (34,448) Total loans receivable, net $ 7,108,810 $ 7,095,605 $ 7,081,142 Loan Activity - The following table summarizes activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, deferred loan fees/discounts, 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. 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 For the Six Months Ended March 31, 2022 March 31, 2022 March 31, 2021 Amount Rate Amount Rate Amount Rate (Dollars in thousands) Beginning balance $ 7,108,058 3.18 % $ 7,096,073 3.21 % $ 7,224,996 3.55 % Originated and refinanced 268,151 3.37 526,836 3.21 806,689 2.81 Purchased and participations 155,490 2.92 322,706 2.86 367,245 3.01 Change in undisbursed loan funds (23,311) (45,237) (134,248) Repayments (389,719) (781,498) (1,270,989) Principal recoveries/(charge-offs), net 14 45 (534) Other — (242) — Ending balance $ 7,118,683 3.16 $ 7,118,683 3.16 $ 6,993,159 3.34 33 The following table presents loan origination, refinance, and purchase activity for the periods indicated, excluding endorsement activity, along with associated weighted average rates and percent of total. Commercial loan renewals are not included in the activity in the following table except to the extent new funds are disbursed at the time of renewal. Loan originations, purchases, and refinances are reported together. For the Six Months Ended March 31, 2022 March 31, 2021 Amount Rate % of Total Amount Rate % of Total (Dollars in thousands) Fixed-rate: One- to four-family $ 509,180 2.79 % 59.9 % $ 784,597 2.65 % 66.9 % One- to four-family construction 70,323 2.86 8.3 59,840 2.72 5.1 Commercial: Real estate 41,444 3.85 4.9 16,260 3.58 1.4 Commercial and industrial 7,909 3.68 0.9 33,582 2.08 2.8 Construction 68,512 3.26 8.1 41,538 3.65 3.5 Home equity 913 5.17 0.1 945 5.36 0.1 Other 1,473 5.67 0.2 1,278 5.49 0.1 Total fixed-rate 699,754 2.93 82.4 938,040 2.70 79.9 Adjustable-rate: One- to four-family 21,739 2.68 2.5 39,554 2.52 3.4 One- to four-family construction 5,991 2.73 0.7 5,457 2.60 0.5 Commercial: Real estate 57,901 3.99 6.8 71,375 3.67 6.1 Commercial and industrial 26,784 3.80 3.2 5,045 3.62 0.4 Construction 8,786 3.99 1.0 87,620 3.73 7.4 Home equity 27,970 4.40 3.3 26,020 4.41 2.2 Other 617 2.47 0.1 823 3.19 0.1 Total adjustable-rate 149,788 3.79 17.6 235,894 3.55 20.1 Total originated, refinanced and purchased $ 849,542 3.08 100.0 % $ 1,173,934 2.87 100.0 % Purchased and participation loans included above: Fixed-rate: Correspondent purchased - one- to four-family $ 243,509 2.73 $ 254,666 2.72 Participations - commercial 69,057 3.25 38,114 3.62 Total fixed-rate purchased/participations 312,566 2.84 292,780 2.83 Adjustable-rate: Correspondent purchased - one- to four-family 5,140 2.68 14,465 2.51 Participations - commercial 5,000 4.00 60,000 4.00 Total adjustable-rate purchased/participations 10,140 3.33 74,465 3.71 Total purchased/participation loans $ 322,706 2.86 $ 367,245 3.01 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 rate, weighted average credit score, weighted average LTV ratio, and average balance per loan as of March 31, 2022. Credit scores are updated at least annually, with the latest update in March 2022, 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. % of Credit Average Amount Total Rate Score LTV Balance (Dollars in thousands) Originated $ 3,943,327 64.7 % 3.14 % 772 61 % $ 154 Correspondent purchased 1,995,167 32.7 2.95 765 64 411 Bulk purchased 155,657 2.6 1.33 773 58 284 $ 6,094,151 100.0 % 3.03 770 62 197 34 T he following ta ble presents originated and correspondent purchased activity in our one- to four-family loan portfolio, excluding endorsement activity, along with associated weighted average rates, weighted average LTVs, and weighted average credit scores for the periods indicated. For the Three Months Ended For the Six Months Ended March 31, 2022 March 31, 2022 Credit Credit Amount Rate LTV Score Amount Rate LTV Score (Dollars in thousands) Originated $ 164,477 2.96 % 70 % 767 $ 358,584 2.63 % 70 % 766 Correspondent purchased 118,096 2.81 71 768 248,649 2.70 72 772 $ 282,573 2.90 70 768 $ 607,233 2.65 71 768 The following table summarizes our one- to four-family loan origination and refinance commitments and one- to four-family correspondent loan purchase commitments as of March 31, 2022, 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. Amount Rate (Dollars in thousands) Originate/refinance $ 151,633 3.30 % Correspondent 53,515 3.08 $ 205,148 3.24 Commercial Loans - During the six months ended March 31, 2022, the Bank originated $137.3 million of commercial loans and entered into commercial loan participations totaling $74.1 million. During the quarter and six months ended March 31, 2022, the Bank processed commercial loan disbursements, excluding lines of credit, of approximately $103.5 million and $174.1 million, respectively, at a weighted average rate of 3.95% and 3.93%, respectively. As of March 31, 2022, December 31, 2021, and September 30, 2021, the Bank's commercial and industrial gross loan amounts (unpaid principal plus undisbursed amounts) totaled $101.3 million, $99.8 million and $90.7 million, respectively, and commitments of $1.4 million, $6.4 million and $16.9 million respectively. The following table presents the Bank's commercial real estate and commercial construction loans by type of primary collateral as of the dates indicated. As of March 31, 2022, the Bank had commercial real estate and commercial construction loan commitments totaling $28.7 million, at a weighted average rate of 4.35%. 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. March 31, 2022 December 31, 2021 September 30, 2021 Unpaid Undisbursed Gross Loan Gross Loan Gross Loan Count Principal Amount Amount Amount Amount (Dollars in thousands) Senior housing 35 $ 244,786 $ 86,444 $ 331,230 $ 295,929 $ 265,284 Retail building 147 186,325 39,972 226,297 215,593 208,539 Hotel 11 150,735 43,552 194,287 188,472 194,665 Office building 87 50,115 54,672 104,787 109,851 109,987 Multi-family 34 57,764 13,416 71,180 65,839 66,199 One- to four-family property 398 62,626 8,294 70,920 69,292 69,174 Single use building 28 19,410 4,769 24,179 52,471 47,028 Other 95 33,160 2,757 35,917 37,887 36,167 835 $ 804,921 $ 253,876 $ 1,058,797 $ 1,035,334 $ 997,043 Weighted average rate 3.96 % 3.83 % 3.93 % 3.97 % 4.01 % 35 The following table summarizes the Bank's commercial real estate and commercial construction loans and loan commitments by state as of the dates indicated. March 31, 2022 December 31, 2021 September 30, 2021 Unpaid Undisbursed Gross Loan Gross Loan Gross Loan Count Principal Amount Amount Amount Amount (Dollars in thousands) Kansas 630 $ 313,861 $ 52,542 $ 366,403 $ 386,332 $ 348,835 Missouri 169 226,952 54,278 281,230 239,943 232,041 Texas 11 162,660 111,360 274,020 269,772 273,124 Colorado 6 18,722 16,730 35,452 35,552 36,099 Arkansas 3 20,254 13,335 33,589 33,676 33,763 Nebraska 6 33,265 4 33,269 33,370 33,468 Other 10 29,207 5,627 34,834 36,689 39,713 835 $ 804,921 $ 253,876 $ 1,058,797 $ 1,035,334 $ 997,043 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 March 31, 2022. Count Amount (Dollars in thousands) Greater than $30 million 6 $ 246,996 >$15 to $30 million 14 306,167 >$10 to $15 million 7 84,696 >$5 to $10 million 18 112,795 $1 to $5 million 111 249,997 Less than $1 million 1,274 189,611 1,430 $ 1,190,262 As of March 31, 2022 and December 31, 2021, there were commercial loans with an aggregate gross balance, including undisbursed amounts, of $74.3 million and $143.5 million, respectively, with modifications under the Bank's program to support and provide relief to borrowers during the COVID-19 pandemic ("COVID-19 modifications") that were still in their deferral period. The COVID-19 modifications of these loans occurred during fiscal year 2021. Asset Quality Delinquent and nonaccrual loans and OREO. The following table presents the Company's 30 to 89 day delinquent loans at the dates indicated. 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 March 31, 2022, approximately 64% were 59 days or less delinquent. Loans Delinquent for 30 to 89 Days at: March 31, December 31, September 30, 2022 2021 2021 Number Amount Number Amount Number Amount (Dollars in thousands) One- to four-family: Originated 64 $ 6,931 74 $ 7,009 48 $ 4,156 Correspondent purchased 10 2,421 11 5,133 7 2,590 Bulk purchased 2 396 1 154 4 541 Commercial 4 373 2 222 2 37 Consumer 14 215 16 164 25 498 94 $ 10,336 104 $ 12,682 86 $ 7,822 Loans 30 to 89 days delinquent to total loans receivable, net 0.15 % 0.18 % 0.11 % 36 The following table presents the Company's nonaccrual 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. Nonaccrual 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 nonaccrual loans and OREO. Of the one- to four-family loans with COVID-19 modifications that had completed the deferral period by March 31, 2022, $2.9 million were 30 to 89 days delinquent as of March 31, 2022 and included in the table above, and $2.8 million were 90 or more days delinquent or in foreclosure as of March 31, 2022 and included in the table below. Nonaccrual Loans and OREO at: March 31, December 31, September 30, 2022 2021 2021 Number Amount Number Amount Number Amount (Dollars in thousands) Loans 90 or More Days Delinquent or in Foreclosure: One- to four-family: Originated 44 $ 3,999 48 $ 3,943 50 $ 3,693 Correspondent purchased 11 3,967 10 3,115 10 3,210 Bulk purchased 5 1,819 6 1,945 9 2,974 Commercial 6 1,167 6 1,170 6 1,214 Consumer 19 400 25 477 21 498 85 11,352 95 10,650 96 11,589 Loans 90 or more days delinquent or in foreclosure as a percentage of total loans 0.16 % 0.15 % 0.16 % Nonaccrual loans less than 90 Days Delinquent: (1) One- to four-family: Originated 5 $ 505 5 $ 451 7 $ 1,288 Correspondent purchased — — — — — — Bulk purchased — — — — 1 131 Commercial 2 34 3 62 4 419 Consumer 2 27 — — 1 9 9 566 8 513 13 1,847 Total nonaccrual loans 94 11,918 103 11,163 109 13,436 Nonaccrual loans as a percentage of total loans 0.17 % 0.16 % 0.19 % OREO: One- to four-family: Originated (2) — $ — 2 $ 319 3 $ 170 Total non-performing assets 94 $ 11,918 105 $ 11,482 112 $ 13,606 Non-performing assets as a percentage of total assets 0.13 % 0.12 % 0.14 % (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. 37 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 March 31, 2022. 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 March 31, 2022, 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 $ 3,504,169 57.5 % $ 5,476 56.2 % $ 4,161 42.5 % 59 % Missouri 1,027,239 16.9 2,124 21.8 895 9.1 57 Texas 579,694 9.5 440 4.5 1,279 13.1 48 Other states 983,049 16.1 1,708 17.5 3,450 35.3 57 $ 6,094,151 100.0 % $ 9,748 100.0 % $ 9,785 100.0 % 57 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 decrease in commercial special mention loans at March 31, 2022 compared to September 30, 2021 was due mainly to two commercial loans moving to the pass classification during the December 31, 2021 quarter as the underlying economic considerations being monitored by management improved to levels deemed appropriate by the Company. March 31, 2022 September 30, 2021 Special Mention Substandard Special Mention Substandard (Dollars in thousands) One- to four-family $ 13,323 $ 22,494 $ 14,332 $ 23,458 Commercial 47,093 3,493 99,729 3,259 Consumer 306 618 135 718 $ 60,722 $ 26,605 $ 114,196 $ 27,435 Allowance for Credit Losses. The distribution of our ACL and the ratio of ACL to loans receivable, by loan type, at the dates indicated is summarized below. See "Note 4. Loans Receivable and Allowance for Credit Losses" for additional information related to the calculation of ACL as of March 31, 2022. Distribution of ACL Ratio of ACL to Loans Receivable March 31, December 31, September 30, March 31, December 31, September 30, 2022 2021 2021 2022 2021 2021 (Dollars in thousands) One- to four-family: Originated $ 1,677 $ 1,611 $ 1,590 0.04 % 0.04 % 0.04 % Correspondent purchased 2,129 2,082 2,062 0.11 0.10 0.10 Bulk purchased 241 268 304 0.15 0.16 0.18 Construction 32 28 22 0.06 0.06 0.06 Total 4,079 3,989 3,978 0.07 0.06 0.06 Commercial: Real estate 8,991 11,257 13,706 1.34 1.64 2.02 Commercial and industrial 389 376 344 0.50 0.49 0.52 Construction 1,651 1,720 1,602 1.24 1.63 1.86 Total 11,031 13,353 15,652 1.25 1.54 1.89 Consumer 202 193 193 0.22 0.21 0.20 Total $ 15,312 $ 17,535 $ 19,823 0.22 0.25 0.28 38 The following table presents ACL activity and related ratios at the dates and for the periods indicated. The ratio of net charge-offs (recoveries) ("NCOs") during the current year period to average non-performing assets was a negative percentage compared to a positive percentage in the prior year period due to a net recovery in the current year period and a net charge-off in the prior year period. The ACL to nonaccrual loans at end of period ratio and ACL to loans receivable, net at end of period ratio were lower in the current year period compared to the prior year period due primarily to a lower ACL balance at March 31, 2022. See "Note 4. Loans Receivable and Allowance for Credit Losses" for additional information related to ACL activity by specific loan categories. At or For the Six Months Ended March 31, 2022 March 31, 2021 (Dollars in thousands) Balance at beginning of period $ 19,823 $ 31,527 Adoption of CECL — (4,761) Charge-offs (20) (670) Recoveries 65 136 Net recoveries (charge-offs) 45 (534) Provision for credit losses (4,556) (2,835) Balance at end of period $ 15,312 $ 23,397 Ratio of NCOs during the period to average non-performing assets (0.35) % 3.81 % ACL to nonaccrual loans at end of period 128.48 153.51 ACL to loans receivable, net at end of period 0.22 0.33 ACL to NCOs (annualized) N/M (1) 21.9x (1) This ratio is not presented due to loan recoveries exceeding loan charge-offs during the period. The following table presents NCOs, average loans, and NCOs as a percentage of average loans, by loan type, for the periods indicated. For the Six Months Ended March 31, 2022 March 31, 2021 NCOs Average Loans NCOs as a % of Average Loans NCOs Average Loans NCOs as a % of Average Loans (Dollars in thousands) One- to four-family: Originated $ (7) $ 3,925,630 0.00 % $ 33 $ 3,922,917 0.00 % Correspondent — 2,030,928 0.00 — 2,023,781 0.00 Bulk purchased — 165,895 0.00 21 200,918 0.01 Construction — 42,845 0.00 — 30,220 0.00 Total (7) 6,165,298 0.00 54 6,177,836 0.00 Commercial: Real estate (49) 678,036 (0.01) 495 601,500 0.08 Commercial and industrial 10 71,353 0.01 — 78,897 0.00 Construction — 105,668 0.00 — 88,155 0.00 Total (39) 855,057 0.00 495 768,552 0.06 Consumer: Home equity (1) 83,752 0.00 (17) 97,112 (0.02) Other 2 7,821 0.03 2 9,259 0.02 Total 1 91,573 0.00 (15) 106,371 (0.01) $ (45) $ 7,111,928 0.00 $ 534 $ 7,052,759 0.01 39 While management utilizes its best judgment and information available, the adequacy of the ACL is determined by certain factors outside of the Company's control, such as the performance of our portfolios, changes in the economic environment including economic uncertainty, changes in interest rates, and the view of the regulatory authorities toward classification of assets and the level of ACL. Additionally, the level of ACL may fluctuate based on the balance and mix of the loan portfolio. If actual results reflect significant underperformance compared to our assumptions and/or if one or more of our assumptions, such as the economic forecast, represents a more negative outlook in a future period, there could be additions to our ACL and an increase in the provision for credit losses. Securities. The following table presents the distribution of our securities portfolio, at amortized cost, at the dates indicated. Overall, fixed-rate securities comprised 95% of our securities portfolio at March 31, 2022. Weighted average yields on tax-exempt securities are not calculated on a fully tax-equivalent basis. March 31, 2022 December 31, 2021 September 30, 2021 Amount Yield WAL (1) Amount Yield WAL (1) Amount Yield WAL (1) (Dollars in thousands) Fixed-rate securities: MBS $ 1,255,411 1.44 % 4.3 $ 1,266,516 1.29 % 3.4 $ 1,363,645 1.30 % 3.5 GSE debentures 519,974 0.61 3.4 519,972 0.61 3.6 519,971 0.61 3.7 Municipal bonds 750 2.24 0.1 3,344 1.86 0.1 4,274 1.81 0.3 Total fixed-rate securities 1,776,135 1.20 4.0 1,789,832 1.10 3.5 1,887,890 1.11 3.6 Adjustable-rate securities: MBS 99,226 2.08 4.3 109,195 2.07 4.6 120,566 1.99 3.2 Total securities portfolio $ 1,875,361 1.24 4.1 $ 1,899,027 1.15 3.5 $ 2,008,456 1.16 3.5 (1) 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. The following table summarizes the activity in our securities portfolio 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 and ending balances are as of the first and last days of the periods presented and are generally derived from recent prepayment activity on the securities in the portfolio. The beginning and ending WALs are the estimated remaining maturity (in years) after three-month historical prepayment speeds and projected call option assumptions have been applied. For the Six Months Ended March 31, 2022 March 31, 2021 Amount Yield WAL Amount Yield WAL (Dollars in thousands) Beginning balance - carrying value $ 2,014,608 1.16 % 3.5 $ 1,560,950 1.63 % 3.1 Maturities and repayments (188,658) (264,862) Net amortization of (premiums)/discounts (2,983) (2,607) Purchases 58,546 2.26 4.3 828,584 0.99 5.1 Change in valuation on AFS securities (101,094) (26,141) Ending balance - carrying value $ 1,780,419 1.25 4.1 $ 2,095,924 1.28 3.9 40 Liabilities. Total liabilities were $8.36 billion at March 31, 2022 and $8.39 billion at December 31, 2021 and September 30, 2021, respectively. The decrease in liabilities between December 31, 2021 and March 31, 2022 was due primarily to a decrease in deposits and a decrease in other liabilities mainly related to a reduction in the interest rate swap loss position as a result of an increase in market interest rates, along with the funding of low income housing partnership commitments, partially offset by an increase in escrows due to timing of when funds are received and disbursed. The decrease in liabilities between September 30, 2021 and March 31, 2022 was due primarily to a reduction in other liabilities as noted above, partially offset by an increase in deposits. Deposits. The following table presents the amount, weighted average rate and percent of total for the components of our deposit portfolio at the dates presented. The $33.2 million decrease in the deposit portfolio balance between December 31, 2021 and March 31, 2022 was due primarily to a decrease in certificates of deposit, partially offset by an increase in money market and savings accounts. The $17.4 million increase in the deposit portfolio between September 30, 2021 and March 31, 2022 was due primarily to an increase in money market and checking accounts, partially offset by a decrease in certificates of deposit. The decrease in the deposit portfolio rate from September 30, 2021 to March 31, 2022 was due primarily to retail certificates of deposit repricing to lower offered rates as balances renewed and, to a lesser extent, growth in lower costing non-maturity deposits. There is some uncertainty regarding how long the increased balance of non-maturity deposits will be retained by the Bank as customers return to more normal spending habits and/or choose to invest in higher-yielding investment options outside of the Bank. The Bank may be required to replace deposit outflows with higher costing borrowings, which would increase the cost of funds over time, or with cash flows from maturing securities. March 31, 2022 December 31, 2021 September 30, 2021 % of % of % of Amount Rate Total Amount Rate Total Amount Rate Total (Dollars in thousands) Non-interest-bearing checking $ 600,457 — % 9.1 % $ 599,969 — % 9.0 % $ 543,849 — % 8.2 % Interest-bearing checking 1,097,287 0.07 16.6 1,092,342 0.07 16.4 1,037,362 0.07 15.7 Savings 558,337 0.05 8.4 526,714 0.05 7.9 519,069 0.05 7.9 Money market 1,885,873 0.19 28.5 1,840,049 0.19 27.7 1,753,525 0.19 26.6 Retail certificates of deposit 2,213,617 1.22 33.5 2,254,560 1.31 33.9 2,341,531 1.41 35.5 Commercial certificates of deposit 100,739 0.61 1.5 137,419 0.64 2.1 190,215 0.66 2.9 Public unit certificates of deposit 158,534 0.14 2.4 196,951 0.17 3.0 211,845 0.21 3.2 $ 6,614,844 0.49 100.0 % $ 6,648,004 0.53 100.0 % $ 6,597,396 0.59 100.0 % Borrowings. The Bank primarily uses long-term fixed-rate borrowings with no embedded options to lengthen the average life of the Bank's liabilities. The fixed-rate characteristics of these borrowings lock-in the cost until maturity and thus decrease the amount of liabilities repricing as interest rates move higher compared to funding with lower-cost short-term borrowings. These borrowings are laddered in order to prevent large amounts of liabilities repricing in any one period. The following table presents the maturity of term borrowings, which consist entirely of FHLB advances, along with associated weighted average contractual and effective rates as of March 31, 2022. Term Borrowings Amount Maturity by FHLB Interest rate Total Contractual Effective Fiscal Year Advances swaps (1) Amount Rate Rate (2) (Dollars in thousands) 2022 $ 75,000 $ — $ 75,000 0.29 % 0.29 % 2023 300,000 — 300,000 1.70 1.81 2024 150,000 165,000 315,000 1.44 2.46 2025 300,000 100,000 400,000 1.38 2.09 2026 250,000 — 250,000 0.96 1.27 2027 150,000 — 150,000 0.93 1.24 2028 — 100,000 100,000 0.78 3.44 $ 1,225,000 $ 365,000 $ 1,590,000 1.25 1.90 (1) Represents adjustable-rate FHLB advances for which the Bank has entered into interest rate swaps with a notional amount of $365.0 million to hedge the variability in cash flows associated with the advances. Each interest rate swap matures on the same date as the related FHLB advance. The expected WAL of the interest rate swaps was 3.6 years at March 31, 2022. (2) The effective rate includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. 41 The following table presents 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. 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 Six Months Ended March 31, 2022 March 31, 2021 Effective Effective Amount Rate WAM Amount Rate WAM (Dollars in thousands) Beginning balance $ 1,590,000 1.88 % 3.3 $ 1,790,000 2.31 % 3.0 Maturities and prepayments (100,000) 3.14 — (665,000) 2.30 — New FHLB borrowings 100,000 3.44 6.5 465,000 2.00 3.4 Ending balance $ 1,590,000 1.90 2.8 $ 1,590,000 1.94 3.3 During the current quarter, the Bank reimplemented the leverage strategy which involves borrowing up to $2.10 billion either on the Bank's line of credit with FHLB or by entering into short-term FHLB advances, depending on the rates offered by FHLB. These borrowings were repaid prior to March 31, 2022. Maturities of Interest-Bearing Liabilities. 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 March 31, 2022. June 30, September 30, December 31, March 31, 2022 2022 2022 2023 Total (Dollars in thousands) Retail/Commercial Certificates: Amount $ 373,869 $ 460,633 $ 315,308 $ 253,771 $ 1,403,581 Repricing Rate 0.99 % 1.30 % 1.22 % 1.22 % 1.19 % Public Unit Certificates: Amount $ 99,192 $ 29,003 $ 15,000 $ 3,503 $ 146,698 Repricing Rate 0.10 % 0.09 % 0.50 % 0.10 % 0.14 % Term Borrowings: Amount $ — $ 75,000 $ — $ 100,000 $ 175,000 Repricing Rate — % 0.29 % — % 1.46 % 0.95 % Total Amount $ 473,061 $ 564,636 $ 330,308 $ 357,274 $ 1,725,279 Repricing Rate 0.80 % 1.11 % 1.19 % 1.28 % 1.07 % The following table sets forth the WAM information for our certificates of deposit, in years, as of March 31, 2022. Retail certificates of deposit 1.2 Commercial certificates of deposit 0.5 Public unit certificates of deposit 0.3 Total certificates of deposit 1.1 42 Stockholders' Equity. During the six months ended March 31, 2022, the Company paid cash dividends totaling $52.9 million. These cash dividends totaled $0.39 per share and consisted of a $0.22 per share cash true-up dividend related to fiscal year 2021 earnings and two regular quarterly cash dividends of $0.085 per share. On April 20, 2022, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.5 million, payable on May 20, 2022 to stockholders of record as of the close of business on May 6, 2022. In the long run, management considers the Bank's equity to total assets ratio of at least 9% an appropriate level of capital. At March 31, 2022, this ratio was 11.1%. At March 31, 2022, Capitol Federal Financial, Inc., at the holding company level, had $81.1 million in cash on deposit at the Bank. For fiscal year 2022, 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 level. As of March 31, 2022, there remained $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 2022. 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 in 2020, the Company elected to defer the True Blue dividend originally planned for June 2020. In June 2021, the Company paid a True Blue Capitol cash dividend of $0.40 per share. This cash dividend represented a $0.20 per share cash dividend from fiscal year 2020 and a $0.20 per share cash dividend from 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 2022, 2021, and 2020. The amounts represent cash dividends paid during each period. For the quarter ending June 30, 2022, the amount presented represents the dividend payable on May 20, 2022 to stockholders of record as of the close of business on May 6, 2022. Calendar Year 2022 2021 2020 Amount Per Share Amount Per Share Amount Per Share (Dollars in thousands, except per share amounts) Regular quarterly dividends paid Quarter ended March 31 $ 11,535 $ 0.085 $ 11,518 $ 0.085 $ 11,733 $ 0.085 Quarter ended June 30 11,536 0.085 11,516 0.085 11,733 0.085 Quarter ended September 30 — — 11,518 0.085 11,733 0.085 Quarter ended December 31 — — 11,535 0.085 11,514 0.085 True-up dividends paid — — 29,850 0.220 17,614 0.130 True Blue dividends paid — — 54,210 0.400 — — Calendar year-to-date dividends paid $ 23,071 $ 0.170 $ 130,147 $ 0.960 $ 64,327 $ 0.470 43 Operating Results The following table presents selected income statement and other information for the quarters indicated. For the Three Months Ended March 31, December 31, September 30, June 30, March 31, 2022 2021 2021 2021 2021 (Dollars in thousands, except per share data) Interest and dividend income: Loans receivable $ 55,412 $ 55,788 $ 57,139 $ 54,779 $ 57,285 MBS 4,821 4,625 4,900 5,360 5,429 FHLB stock 2,240 1,231 952 944 951 Investment securities 800 808 750 763 629 Cash and cash equivalents 949 14 27 26 40 Total interest and dividend income 64,222 62,466 63,768 61,872 64,334 Interest expense: Deposits 8,389 9,267 10,335 11,475 12,529 Borrowings 8,732 7,585 7,889 7,826 8,732 Total interest expense 17,121 16,852 18,224 19,301 21,261 Net interest income 47,101 45,614 45,544 42,571 43,073 Provision for credit losses (3,188) (3,439) (1,323) (2,691) (2,964) Net interest income (after provision for credit losses) 50,289 49,053 46,867 45,262 46,037 Non-interest income 5,416 5,506 5,303 5,236 12,477 Non-interest expense 27,960 26,694 28,247 27,602 32,653 Income tax expense 6,122 5,679 5,370 4,709 5,417 Net income $ 21,623 $ 22,186 $ 18,553 $ 18,187 $ 20,444 Efficiency ratio 53.24 % 52.22 % 55.55 % 57.73 % 58.78 % Basic EPS $ 0.16 $ 0.16 $ 0.14 $ 0.13 $ 0.15 Diluted EPS 0.16 0.16 0.14 0.13 0.15 44 Comparison of Operating Results for the Three Months Ended March 31, 2022 and December 31, 2021 For the quarter ended March 31, 2022, the Company recognized net income of $21.6 million, or $0.16 per share, compared to net income of $22.2 million, or $0.16 per share, for the quarter ended December 31, 2021. The decrease in net income was due primarily to higher non-interest expense and income tax expense, partially offset by an increase in net interest income. The net interest margin decreased 30 basis points, from 1.99% for the prior quarter to 1.69% for the current quarter. Excluding the effects of the leverage strategy, the net interest margin would have increased two basis points, from 1.99% for the prior quarter to 2.01% for the current quarter. The increase in the net interest margin excluding the effects of the leverage strategy was due mainly to a decrease in the cost of retail certificates of deposit. The leverage strategy during the current quarter involved borrowing up to $2.10 billion either on the Bank's line of credit with FHLB or by entering into short-term FHLB advances, depending on the rates offered by FHLB. The borrowings were repaid prior to quarter end. The proceeds from the borrowings, net of the required FHLB stock holdings which yielded 5.75% from dividends during the current quarter, were deposited at the FRB of Kansas City. Net income attributable to the leverage strategy is largely derived from the dividends received on FHLB stock holdings, plus the net interest rate spread between the yield on the cash deposited at the FRB of Kansas City and the rate paid on the related FHLB borrowings, less applicable federal insurance premiums and estimated taxes. Net income attributable to the leverage strategy was $545 thousand during the current quarter. Management continues to monitor the net interest rate spread and overall profitability of the strategy. It is expected that the strategy will continue to be utilized as long as it remains profitable. Interest and Dividend Income The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent. For the Three Months Ended March 31, December 31, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) INTEREST AND DIVIDEND INCOME: Loans receivable $ 55,412 $ 55,788 $ (376) (0.7) % MBS 4,821 4,625 196 4.2 FHLB stock 2,240 1,231 1,009 82.0 Investment securities 800 808 (8) (1.0) Cash and cash equivalents 949 14 935 6,678.6 Total interest and dividend income $ 64,222 $ 62,466 $ 1,756 2.8 The increase in interest income on MBS was due to a decrease in premium amortization related to a slowdown in prepayment activity. The increase in dividend income on FHLB stock was due mainly to the leverage strategy being utilized during the current quarter, partially offset by a special 1.00% year-end dividend received in the prior quarter. The increase in interest income on cash and cash equivalents was due mainly to the leverage strategy being utilized during the current quarter. Interest Expense The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent. For the Three Months Ended March 31, December 31, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) INTEREST EXPENSE: Deposits $ 8,389 $ 9,267 $ (878) (9.5) % Borrowings 8,732 7,585 1,147 15.1 Total interest expense $ 17,121 $ 16,852 $ 269 1.6 The decrease in interest expense on deposits was due primarily to a decrease in the weighted average rate and the average balance of the retail certificate of deposit portfolio. The increase in interest expense on borrowings was due to the leverage strategy being utilized during the current quarter. 45 Provision for Credit Losses For the quarter ended March 31, 2022, the Bank recorded a negative provision for credit losses of $3.2 million, compared to a negative provision for credit losses of $3.4 million for the prior quarter. The negative provision in the current quarter was comprised of a $2.2 million decrease in the ACL for loans and a $952 thousand decrease in reserves for off-balance sheet credit exposures. The negative provision for credit losses associated with the ACL was due primarily to a reduction in model-calculated ACL for commercial loans due to an increase in projected prepayment speeds as a result of management's outlook for prepayment activity and the composition and nature of our commercial loan portfolio, as well as a decrease in the commercial loan COVID-19 modification qualitative factor due to loans exiting their deferral time periods and resuming full payments per their original contracts during the current quarter. The negative provision for credit losses associated with the reserve for off-balance sheet credit exposures was due primarily to a reduction in the reserve for commercial construction loans due mainly to a reduction in the model-calculated amount as noted for the ACL. Non-Interest Income The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent. For the Three Months Ended March 31, December 31, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) NON-INTEREST INCOME: Deposit service fees $ 3,300 $ 3,430 $ (130) (3.8) % Insurance commissions 543 711 (168) (23.6) Other non-interest income 1,573 1,365 208 15.2 Total non-interest income $ 5,416 $ 5,506 $ (90) (1.6) The decrease in insurance commissions was due primarily to the receipt of annual contingent insurance commissions being lower than the prior year and the adjustments to the related accrual. The increase in other non-interest income was due mainly to a gain on a loan-related financial derivative agreement. Non-Interest Expense The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent. For the Three Months Ended March 31, December 31, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) NON-INTEREST EXPENSE: Salaries and employee benefits $ 14,023 $ 13,728 $ 295 2.1 % Information technology and related expense 4,493 4,432 61 1.4 Occupancy, net 3,493 3,379 114 3.4 Regulatory and outside services 1,272 1,368 (96) (7.0) Advertising and promotional 1,494 1,064 430 40.4 Federal insurance premium 777 639 138 21.6 Deposit and loan transaction costs 689 697 (8) (1.1) Office supplies and related expense 502 468 34 7.3 Other non-interest expense 1,217 919 298 32.4 Total non-interest expense $ 27,960 $ 26,694 $ 1,266 4.7 The increase in advertising and promotional expense was due primarily to the timing of campaigns and sponsorships. The increase in federal insurance premium expense was due mainly to an increase in average assets as a result of the leverage strategy being utilized during the current quarter. The increase in other non-interest expense was due mainly to an increase in debit card and deposit account fraud losses, along with an increase in dues and subscriptions related to annual payments, and an increase in insurance expense due to a premium refund received in the prior quarter. 46 The Company's efficiency ratio was 53.24% for the current quarter compared to 52.22% for the prior quarter. The change in the efficiency ratio was due primarily to higher non-interest expense. The efficiency ratio is a measure of a financial institution's total non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income. A higher value indicates that it is costing the financial institution more money to generate revenue, relative to the net interest margin and non-interest income. Income Tax Expense The following table presents pretax income, income tax expense, and net income for the time periods presented, along with the change measured in dollars and percent. For the Three Months Ended March 31, December 31, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) Income before income tax expense $ 27,745 $ 27,865 $ (120) (0.4) % Income tax expense 6,122 5,679 443 7.8 Net income $ 21,623 $ 22,186 $ (563) (2.5) Effective Tax Rate 22.1 % 20.4 % The increase in income tax expense was due primarily to a higher effective tax rate in the current quarter. The lower effective tax rate in the prior quarter was due primarily to true-ups related to the preparation of the September 30, 2021 tax returns. Management anticipates the effective tax rate for fiscal year 2022 will be approximately 21%. 47 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 March 31, 2022 December 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 $ 3,965,844 $ 31,993 3.23 % $ 3,971,049 $ 32,422 3.27 % Correspondent purchased 2,026,120 13,060 2.58 2,035,631 12,746 2.50 Bulk purchased 161,149 503 1.25 170,537 610 1.43 Total one- to four-family loans 6,153,113 45,556 2.96 6,177,217 45,778 2.96 Commercial loans 869,205 8,851 4.07 841,217 8,943 4.16 Consumer loans 90,326 1,005 4.51 92,794 1,067 4.56 Total loans receivable (1) 7,112,644 55,412 3.12 7,111,228 55,788 3.13 MBS (2) 1,357,693 4,821 1.42 1,435,562 4,625 1.29 Investment securities (2)(3) 522,019 800 0.61 523,931 808 0.62 FHLB stock (4) 158,546 2,240 5.73 73,481 1,231 6.64 Cash and cash equivalents (5) 1,971,341 949 0.19 37,221 14 0.15 Total interest-earning assets 11,122,243 64,222 2.31 9,181,423 62,466 2.71 Other non-interest-earning assets 385,323 412,115 Total assets $ 11,507,566 $ 9,593,538 Liabilities and stockholders' equity: Interest-bearing liabilities: Checking $ 1,069,282 176 0.07 $ 1,052,413 179 0.07 Savings 540,348 71 0.05 520,770 70 0.05 Money market 1,879,799 876 0.19 1,767,134 825 0.19 Retail certificates 2,241,080 7,012 1.27 2,298,678 7,835 1.35 Commercial certificates 116,181 183 0.64 169,200 272 0.64 Wholesale certificates 197,335 71 0.15 199,692 86 0.17 Total deposits 6,044,025 8,389 0.56 6,007,887 9,267 0.61 Borrowings (6) 3,499,010 8,732 1.01 1,589,258 7,585 1.88 Total interest-bearing liabilities 9,543,035 17,121 0.73 7,597,145 16,852 0.88 Non-interest-bearing deposits 577,989 550,492 Other non-interest-bearing liabilities 177,995 209,890 Stockholders' equity 1,208,547 1,236,011 Total liabilities and stockholders' equity $ 11,507,566 $ 9,593,538 Net interest income (7) $ 47,101 $ 45,614 Net interest-earning assets $ 1,579,208 $ 1,584,278 Net interest margin (8)(9) 1.69 1.99 Ratio of interest-earning assets to interest-bearing liabilities 1.17x 1.21x Selected performance ratios: Return on average assets (annualized) (9) 0.75 % 0.93 % Return on average equity (annualized) (9) 7.16 7.18 Average equity to average assets 10.50 12.88 Operating expense ratio (annualized) (10) 0.97 1.11 Efficiency ratio (9)(11) 53.24 52.22 Pre-tax yield on leverage strategy (12) 0.14 — 48 (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 $2.0 million and $4.0 million for the quarters ended March 31, 2022 and December 31, 2021, respectively. (4) Included in this line, for the quarter ended March 31, 2022, is FHLB stock related to the leverage strategy with an average outstanding balance of $86.2 million and dividend income of $1.2 million at a weighted average yield of 5.75%, and FHLB stock not related to the leverage strategy with an average outstanding balance of $72.3 million and dividend income of $1.0 million at a weighted average yield of 5.71%. There was no FHLB stock related to the leverage strategy during the quarter ended December 31, 2021. (5) The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $1.83 billion during the quarter ended March 31, 2022. There were no cash and cash equivalents related to the leverage strategy during the quarter ended December 31, 2021. (6) Included in this line, for the quarter ended March 31, 2022, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $1.92 billion and interest paid of $1.3 million, at a weighted average rate of 0.26%, and FHLB borrowings not related to the leverage strategy with an average outstanding balance of $1.58 billion and interest paid of $7.5 million, at a weighted average rate of 1.90%. There were no FHLB borrowings related to the leverage strategy during the quarter ended December 31, 2021. The FHLB advance amounts and rates included in this line include the effect of interest rate swaps and are net of deferred prepayment penalties. (7) 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. (8) Net interest margin represents annualized net interest income as a percentage of average interest-earning assets. (9) The table below provides a reconciliation between certain performance ratios presented in accordance with GAAP and the performance ratios excluding the effects of the leverage strategy, which are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide the performance ratios without the leverage strategy because of the unique nature of the leverage strategy. The leverage strategy reduces some of our performance ratios due to the amount of earnings associated with the transaction in comparison to the size of the transaction, while increasing our net income. For the Three Months Ended March 31, 2022 December 31, 2021 Actual Leverage Adjusted Actual Leverage Adjusted (GAAP) Strategy (Non-GAAP) (GAAP) Strategy (Non-GAAP) Yield on interest-earning assets 2.31 % (0.39) % 2.70 % 2.71 % — % 2.71 % Cost of interest-bearing liabilities 0.73 (0.11) 0.84 0.88 — 0.88 Return on average assets (annualized) 0.75 (0.13) 0.88 0.93 — 0.93 Return on average equity (annualized) 7.16 0.18 6.98 7.18 — 7.18 Net interest margin 1.69 (0.32) 2.01 1.99 — 1.99 Efficiency Ratio 53.24 (0.58) 53.82 52.22 — 52.22 (10) The operating expense ratio represents annualized non-interest expense as a percentage of average assets. (11) The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income. (12) The pre-tax yield on the leverage strategy represents annualized pre-tax income resulting from the transaction as a percentage of the average interest-earning assets associated with the transaction. 49 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 March 31, 2022 to the three months ended December 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 March 31, 2022 vs. December 31, 2021 Increase (Decrease) Due to Volume (1) Rate Total (Dollars in thousands) Interest-earning assets: Loans receivable $ 25 $ (401) $ (376) MBS (260) 456 196 Investment securities (3) (5) (8) FHLB stock 1,198 (189) 1,009 Cash and cash equivalents 930 5 935 Total interest-earning assets 1,890 (134) 1,756 Interest-bearing liabilities: Checking 1 (4) (3) Savings 1 (1) — Money market 39 12 51 Certificates of deposit (410) (516) (926) Borrowings 1,263 (116) 1,147 Total interest-bearing liabilities 894 (625) 269 Net change in net interest income $ 996 $ 491 $ 1,487 (1) The increases attributable to changes in volume related to FHLB stock, cash and cash equivalents, and borrowings were due primarily to the leverage strategy being utilized during the current quarter and not being utilized during the prior quarter. Comparison of Operating Results for the Six Months Ended March 31, 2022 and 2021 The Company recognized net income of $43.8 million, or $0.32 per share, for the current year period compared to net income of $39.3 million, or $0.29 per share, for the prior year period. The increase in net income was due primarily to an increase in net interest income and a higher negative provision for credit losses in the current year period, partially offset by higher income tax expense. The net interest margin decreased seven basis points, from 1.90% for the prior year period to 1.83% for the current year period. Excluding the effects of the leverage strategy, the net interest margin would have increased 10 basis points, from 1.90% for the prior year period to 2.00% for the current year period. The increase in net interest margin excluding the effects of the leverage strategy was due mainly to a reduction in the weighted average cost of retail certificates of deposit and borrowings, which outpaced the decrease in weighted average asset yields. 50 Interest and Dividend Income 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 Six Months Ended March 31, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) INTEREST AND DIVIDEND INCOME: Loans receivable $ 111,200 $ 117,979 $ (6,779) (5.7) % MBS 9,446 11,139 (1,693) (15.2) FHLB stock 3,471 2,020 1,451 71.8 Investment securities 1,608 1,312 296 22.6 Cash and cash equivalents 963 91 872 958.2 Total interest and dividend income $ 126,688 $ 132,541 $ (5,853) (4.4) The decrease in interest income on loans receivable was due primarily to a decrease in the weighted average rate on the originated and correspondent one- to four-family loan portfolio, partially offset by a reduction in premium amortization for correspondent one- to four-family loans and an increase in the average balance of the loan portfolio. The decrease in the weighted average rate was due to endorsements and refinances to lower market rates and the origination and purchase of new loans at lower market rates between periods. Premium amortization related to the one- to four-family correspondent loan portfolio decreased significantly compared to the prior year period due to the slow-down in prepayments and endorsements, which more than offset the decrease in the weighted average rate and resulted in an increase in interest income for this loan category. The decrease in interest income on the MBS portfolio was due to a decrease in the weighted average yield as a result of purchases at lower market yields between periods, along with higher premium amortization related to prepayment activity. The increase in dividend income on FHLB stock and the increase in interest income on cash and cash equivalents were due mainly to the leverage strategy being utilized during the current year period. The increase in interest income on investment securities was due primarily to an increase in the average balance of the portfolio. Interest Expense 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 Six Months Ended March 31, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) INTEREST EXPENSE: Deposits $ 17,656 $ 26,596 $ (8,940) (33.6) % Borrowings 16,317 19,059 (2,742) (14.4) Total interest expense $ 33,973 $ 45,655 $ (11,682) (25.6) The decrease in interest expense on deposits was due mainly to a decrease in the weighted average rate paid on retail certificates of deposit, wholesale certificates of deposit, and money market accounts. Retail certificates of deposit continue to reprice downward as they renew or are replaced at lower offered rates, and rates on money market accounts were also lowered between periods. The decrease in interest expense on borrowings was due primarily to lowering the cost of FHLB advances by terminating or not renewing certain interest rate swap agreements, not replacing certain maturing FHLB advances, and prepaying certain advances during fiscal year 2021. Cash flows from the deposit portfolio were used to pay down certain FHLB advances. This was partially offset by the leverage strategy being utilized during the current year period and not being utilized during the prior year period. 51 Provision for Credit Losses The Bank recorded a negative provision for credit losses during the current year period of $6.6 million, compared to a negative provision for credit losses of $4.5 million during the prior year period. The negative provision in the current year period was comprised of a $4.6 million decrease in the ACL for loans and a $2.0 million decrease in reserves for off-balance sheet credit exposures. The negative provision for credit losses associated with the ACL in the current year period was due to (1) a reduction in the large-dollar special mention commercial loan qualitative factor due to two large-dollar special mention commercial loans moving to the pass classification during the December 31, 2021 quarter, (2) a reduction in model-calculated ACL for commercial loans due to an increase in projected prepayment speeds as a result management's outlook for prepayment activity and the composition and nature of our commercial loan portfolio, (3) a decrease in the commercial loan COVID-19 modification qualitative factor due to loans exiting their deferral time periods and resuming full payments per their original contracts during the current quarter, and (4) a decrease in the economic uncertainty qualitative factor for commercial loans due to improvement in economic conditions through March 31, 2022. The negative provision for credit losses associated with the reserve for off-balance sheet credit exposures in the current year period was due primarily to a reduction in the commercial loan economic uncertainty qualitative factor and to a reduction in the reserves for commercial construction loans due mainly to a reduction in the model-calculated amount as noted for the ACL. 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 Six Months Ended March 31, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) NON-INTEREST INCOME: Deposit service fees $ 6,730 $ 5,761 $ 969 16.8 % Insurance commissions 1,254 1,526 (272) (17.8) Gain on sale of Visa Class B shares — 7,386 (7,386) (100.0) Other non-interest income 2,938 2,874 64 2.2 Total non-interest income $ 10,922 $ 17,547 $ (6,625) (37.8) The increase in deposit service fees was due primarily to an increase in debit card income as a result of higher transaction and settlement volume, in addition to an increase in the average transaction amount. The decrease in insurance commissions was due primarily to the receipt of annual contingent insurance commissions being lower than the prior year and the adjustments to the related accrual. During the prior year period, the Bank sold its Visa Class B shares, resulting in a $7.4 million gain, with no similar transaction during the current year period. 52 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 Six Months Ended March 31, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) NON-INTEREST EXPENSE: Salaries and employee benefits $ 27,751 $ 27,535 $ 216 0.8 % Information technology and related expense 8,925 8,832 93 1.1 Occupancy, net 6,872 6,902 (30) (0.4) Regulatory and outside services 2,640 2,819 (179) (6.3) Advertising and promotional 2,558 2,322 236 10.2 Federal insurance premium 1,416 1,255 161 12.8 Deposit and loan transaction costs 1,386 1,430 (44) (3.1) Office supplies and related expense 970 887 83 9.4 Loss on interest rate swap termination — 4,752 (4,752) (100.0) Other non-interest expense 2,136 2,986 (850) (28.5) Total non-interest expense $ 54,654 $ 59,720 $ (5,066) (8.5) The increase in advertising and promotional expense was due mainly to adjustments to advertising schedules during the prior year related to the COVID-19 pandemic. During the prior year period, the Bank terminated $200.0 million of interest rate swaps, resulting in a loss of $4.8 million which was reclassified out of AOCI to earnings. The decrease in other non-interest expense was due primarily to the write-down during the prior year period of a property that had previously served as one of the Bank's branch locations. The Company's efficiency ratio was 52.74% for the current year period compared to 57.19% for the prior year period. The improvement in the efficiency ratio was due primarily to lower non-interest expense and higher net interest income, partially offset by lower non-interest income. 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 Six Months Ended March 31, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) Income before income tax expense $ 55,610 $ 49,209 $ 6,401 13.0 % Income tax expense 11,801 9,867 1,934 19.6 Net income $ 43,809 $ 39,342 $ 4,467 11.4 Effective Tax Rate 21.2 % 20.1 % The increase in income tax expense was due primarily to higher pretax income in the current year period. Additionally, the effective tax rate increased slightly compared to the prior year period, and is in line with management's anticipation of an effective tax rate of approximately 21% for fiscal year 2022. 53 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 Six Months Ended March 31, 2022 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 $ 3,968,475 $ 64,415 3.25 % $ 3,953,137 $ 70,755 3.58 % Correspondent purchased 2,030,928 25,805 2.54 2,023,781 24,757 2.45 Bulk purchased 165,895 1,114 1.34 200,918 2,045 2.04 Total one- to four-family loans 6,165,298 91,334 2.96 6,177,836 97,557 3.16 Commercial loans 855,057 17,794 4.12 768,552 17,963 4.62 Consumer loans 91,573 2,072 4.54 106,371 2,459 4.64 Total loans receivable (1) 7,111,928 111,200 3.12 7,052,759 117,979 3.34 MBS (2) 1,397,056 9,446 1.35 1,372,531 11,139 1.62 Investment securities (2)(3) 522,986 1,608 0.61 448,595 1,312 0.58 FHLB stock (4) 115,546 3,471 6.02 81,332 2,020 4.98 Cash and cash equivalents (5) 993,653 963 0.19 180,242 91 0.10 Total interest-earning assets 10,141,169 126,688 2.49 9,135,459 132,541 2.90 Other non-interest-earning assets 398,355 449,883 Total assets $ 10,539,524 $ 9,585,342 Liabilities and stockholders' equity: Interest-bearing liabilities: Checking $ 1,060,755 355 0.07 $ 929,976 407 0.09 Savings 530,451 141 0.05 460,252 136 0.06 Money market 1,822,848 1,701 0.19 1,508,935 2,222 0.30 Retail certificates 2,270,195 14,847 1.31 2,565,182 22,293 1.74 Commercial certificates 142,982 455 0.64 184,414 801 0.87 Wholesale certificates 198,527 157 0.16 256,123 737 0.58 Total deposits 6,025,758 17,656 0.59 5,904,882 26,596 0.90 Borrowings (6) 2,533,641 16,317 1.28 1,690,363 19,059 2.25 Total interest-bearing liabilities 8,559,399 33,973 0.79 7,595,245 45,655 1.20 Non-interest-bearing deposits 564,089 479,894 Other non-interest-bearing liabilities 193,606 227,189 Stockholders' equity 1,222,430 1,283,014 Total liabilities and stockholders' equity $ 10,539,524 $ 9,585,342 Net interest income (7) $ 92,715 $ 86,886 Net interest-earning assets $ 1,581,770 $ 1,540,214 Net interest margin (8)(9) 1.83 1.90 Ratio of interest-earning assets to interest-bearing liabilities 1.18x 1.20x Selected performance ratios: Return on average assets (annualized) (9) 0.83 % 0.82 % Return on average equity (annualized) (9) 7.17 6.13 Average equity to average assets 11.60 13.39 Operating expense ratio (annualized) (10) 1.04 1.25 Efficiency ratio (9)(11) 52.74 57.19 Pre-tax yield on leverage strategy (12) 0.15 — 54 (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 $3.0 million and $8.3 million for the six months ended March 31, 2022 and March 31, 2021, respectively. (4) Included in this line, for the six months ended March 31, 2022, is FHLB stock related to the leverage strategy with an average outstanding balance $42.6 million and dividend income of $1.2 million at a weighted average yield of 5.75%, and FHLB stock not related to the leverage strategy with an average outstanding balance of $72.9 million and dividend income of $2.2 million at a weighted average yield of 6.18%. There was no FHLB stock related to the leverage strategy during the six months ended March 31, 2021. (5) The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $904.6 million during the six months ended March 31, 2022. There were no cash and cash equivalents related to the leverage strategy during the six months ended March 31, 2021. (6) Included in this line, for the six months ended March 31, 2022, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $947.3 million and interest paid of $1.3 million, at a weighted average rate of 0.26%, and FHLB borrowings not related to the leverage strategy with an average outstanding balance of $1.59 billion and interest paid of $15.1 million, at a weighted average rate of 1.89%. There were no FHLB borrowings related to the leverage strategy during the six months ended March 31, 2021. 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. (7) 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. (8) Net interest margin represents annualized net interest income as a percentage of average interest-earning assets. (9) The table below provides a reconciliation between certain performance ratios presented in accordance with GAAP and the performance ratios excluding the effects of the leverage strategy, which are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide the performance ratios without the leverage strategy because of the unique nature of the leverage strategy. The leverage strategy reduces some of our performance ratios due to the amount of earnings associated with the transaction in comparison to the size of the transaction, while increasing our net income. For the Six Months Ended March 31, 2022 March 31, 2021 Actual Leverage Adjusted Actual Leverage Adjusted (GAAP) Strategy (Non-GAAP) (GAAP) Strategy (Non-GAAP) Yield on interest-earning assets 2.49 % (0.22) % 2.71 % 2.90 % — % 2.90 % Cost of interest-bearing liabilities 0.79 (0.07) 0.86 1.20 — 1.20 Return on average assets (annualized) 0.83 (0.07) 0.90 0.82 — 0.82 Return on average equity (annualized) 7.17 0.09 7.08 6.13 — 6.13 Net interest margin 1.83 (0.17) 2.00 1.90 — 1.90 Efficiency Ratio 52.74 (0.29) 53.03 57.19 — 57.19 (10) The operating expense ratio represents annualized non-interest expense as a percentage of average assets. (11) The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income. (12) The pre-tax yield on the leverage strategy represents annualized pre-tax income resulting from the transaction as a percentage of the average interest-earning assets associated with the transaction. 55 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 Six Months Ended March 31, 2022 vs. March 31, 2021 Increase (Decrease) Due to Volume (1) Rate Total (Dollars in thousands) Interest-earning assets: Loans receivable $ 1,451 $ (8,230) $ (6,779) MBS 196 (1,889) (1,693) Investment securities 226 70 296 FHLB stock 969 482 1,451 Cash and cash equivalents 724 148 872 Total interest-earning assets 3,566 (9,419) (5,853) Interest-bearing liabilities: Checking 52 (104) (52) Savings 20 (15) 5 Money market 401 (922) (521) Certificates of deposit (2,854) (5,518) (8,372) Borrowings 168 (2,910) (2,742) Total interest-bearing liabilities (2,213) (9,469) (11,682) Net change in net interest income $ 5,779 $ 50 $ 5,829 (1) The increases attributable to changes in volume related to FHLB stock, cash and cash equivalents, and borrowings were due primarily to the leverage strategy being utilized during the current year period and not being utilized during the prior year period. Comparison of Operating Results for the Three Months Ended March 31, 2022 and 2021 For the quarter ended March 31, 2022, the Company recognized net income of $21.6 million, or $0.16 per share, compared to net income of $20.4 million, or $0.15 per share for the quarter ended March 31, 2021. The increase in net income was due primarily to a an increase in net interest income and a decrease in non-interest expense, partially offset by a decrease in non-interest income. The net interest margin decreased 19 basis points, from 1.88% for the prior year quarter to 1.69% for the current quarter. Excluding the effects of the leverage strategy, the net interest margin would have increased 13 basis points, from 1.88% for the prior year quarter to 2.01% for the current quarter. The increase in the net interest margin excluding the effects of the leverage strategy was due mainly to a decrease in the weighted average cost of retail certificates of deposit and borrowings, which outpaced the decrease in weighted average asset yields. 56 Interest and Dividend Income The following table presents the components of interest and dividend income for the time periods presented along with the change measured in dollars and percent. For the Three Months Ended March 31, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) INTEREST AND DIVIDEND INCOME: Loans receivable $ 55,412 $ 57,285 $ (1,873) (3.3) % MBS 4,821 5,429 (608) (11.2) FHLB stock 2,240 951 1,289 135.5 Investment securities 800 629 171 27.2 Cash and cash equivalents 949 40 909 2,272.5 Total interest and dividend income $ 64,222 $ 64,334 $ (112) (0.2) The decrease in interest income on loans receivable was due primarily to a decrease in the weighted average rate on the originated and correspondent one- to four-family loan portfolio, partially offset by a reduction in premium amortization for correspondent one- to four-family loans and an increase in the average balance of the loan portfolio. The decrease in the weighted average rate was due to endorsements and refinances to lower market rates and the origination and purchase of new loans at lower market rates between periods. Premium amortization related to the one- to four-family correspondent loan portfolio decreased significantly compared to the prior year quarter due to the slow-down in prepayments and endorsements, which more than offset the decrease in the weighted average rate and resulted in an increase in interest income for this loan category. The decrease in interest income on MBS was due mainly to a decrease in the average balance of the portfolio, as well as a decrease in the weighted average yield as a result of purchases at lower market rates between periods. The increase in dividend income on FHLB stock and the increase in income on cash and cash equivalents were due mainly to the leverage strategy being utilized during the current quarter. Interest Expense 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 March 31, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) INTEREST EXPENSE: Deposits $ 8,389 $ 12,529 $ (4,140) (33.0) % Borrowings 8,732 8,732 — — Total interest expense $ 17,121 $ 21,261 $ (4,140) (19.5) The decrease in interest expense on deposits was due mainly to a decrease in the weighted average rate and the average balance of the retail certificate of deposit portfolio. Interest expense on borrowings not associated with the leverage strategy decreased compared to the prior year quarter due primarily to lowering the cost of FHLB advances by terminating or not renewing certain interest rate swap agreements during fiscal year 2021. This decrease was offset by the leverage strategy being utilized during the current quarter and not being utilized during the prior year quarter. Provision for Credit Losses The Bank recorded a negative provision for credit losses during the current quarter of $3.2 million, compared to a negative provision for credit losses of $3.0 million during the prior year quarter. See "Comparison of Operating Results for the Three Months Ended March 31, 2022 and December 31, 2021" above for additional discussion regarding the negative provision for credit losses during the current quarter. 57 Non-Interest Income The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent. For the Three Months Ended March 31, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) NON-INTEREST INCOME: Deposit service fees $ 3,300 $ 2,814 $ 486 17.3 % Insurance commissions 543 888 (345) (38.9) Gain on sale of Visa Class B shares — 7,386 (7,386) (100.0) Other non-interest income 1,573 1,389 184 13.2 Total non-interest income $ 5,416 $ 12,477 $ (7,061) (56.6) The increase in deposit service fees was due primarily to an increase in debit card income as a result of higher transaction and settlement volume, in addition to an increase in the average transaction amount. The decrease in insurance commissions was due primarily to the receipt of annual contingent insurance commissions being lower than the prior year quarter and the related accrual adjustments in the current quarter. During the prior year quarter, the Bank sold its Visa Class B shares, resulting in a $7.4 million gain, with no similar transaction during the current 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 March 31, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) NON-INTEREST EXPENSE: Salaries and employee benefits $ 14,023 $ 13,397 $ 626 4.7 % Information technology and related expense 4,493 4,599 (106) (2.3) Occupancy, net 3,493 3,523 (30) (0.9) Regulatory and outside services 1,272 1,234 38 3.1 Advertising and promotional 1,494 1,484 10 0.7 Federal insurance premium 777 634 143 22.6 Deposit and loan transaction costs 689 664 25 3.8 Office supplies and related expense 502 463 39 8.4 Loss on interest rate swap termination — 4,752 (4,752) (100.0) Other non-interest expense 1,217 1,903 (686) (36.0) Total non-interest expense $ 27,960 $ 32,653 $ (4,693) (14.4) The increase in salaries and employee benefits was due primarily to higher anticipated incentive compensation compared to the prior year quarter. The increase in the federal insurance premium was due mainly to an increase in average assets as a result of the leverage strategy being utilized during the current quarter. During the prior year quarter, the Bank terminated $200.0 million of interest rate swaps, resulting in a loss of $4.8 million which was reclassified out of AOCI to earnings. The decrease in other non-interest expense was due primarily to the write-down during the prior year quarter of a property that had previously served as one of the Bank's branch locations. The Company's efficiency ratio was 53.24% for the current quarter compared to 58.78% for the prior year quarter. The improvement in the efficiency ratio was due primarily to higher net interest income in the current quarter. 58 Income Tax Expense The following table presents pretax income, income tax expense, and net income for the time periods presented, along with the change measured in dollars and percent. For the Three Months Ended March 31, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) Income before income tax expense $ 27,745 $ 25,861 $ 1,884 7.3 % Income tax expense 6,122 5,417 705 13.0 Net income $ 21,623 $ 20,444 $ 1,179 5.8 Effective Tax Rate 22.1 % 20.9 % The increase in income tax expense was due primarily to higher pretax income in the current quarter. Additionally, the effective tax rate increased slightly compared to the prior year quarter, and is in line with management's anticipation of an effective tax rate of approximately 21% for fiscal year 2022. 59 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 March 31, 2022 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 $ 3,965,844 $ 31,993 3.23 % $ 3,956,867 $ 34,794 3.52 % Correspondent purchased 2,026,120 13,060 2.58 1,981,735 11,826 2.39 Bulk purchased 161,149 503 1.25 195,925 932 1.90 Total one- to four-family loans 6,153,113 45,556 2.96 6,134,527 47,552 3.10 Commercial loans 869,205 8,851 4.07 766,972 8,559 4.46 Consumer loans 90,326 1,005 4.51 102,613 1,174 4.64 Total loans receivable (1) 7,112,644 55,412 3.12 7,004,112 57,285 3.27 MBS (2) 1,357,693 4,821 1.42 1,444,554 5,429 1.50 Investment securities (2)(3) 522,019 800 0.61 466,077 629 0.54 FHLB stock (4) 158,546 2,240 5.73 77,391 951 4.98 Cash and cash equivalents (5) 1,971,341 949 0.19 158,544 40 0.10 Total interest-earning assets 11,122,243 64,222 2.31 9,150,678 64,334 2.81 Other non-interest-earning assets 385,323 446,265 Total assets $ 11,507,566 $ 9,596,943 Liabilities and stockholders' equity: Interest-bearing liabilities: Checking $ 1,069,282 176 0.07 $ 959,928 183 0.08 Savings 540,348 71 0.05 477,985 69 0.06 Money market 1,879,799 876 0.19 1,543,911 1,038 0.27 Retail certificates 2,241,080 7,012 1.27 2,538,783 10,499 1.68 Commercial certificates 116,181 183 0.64 214,656 418 0.79 Wholesale certificates 197,335 71 0.15 260,712 322 0.50 Total deposits 6,044,025 8,389 0.56 5,995,975 12,529 0.85 Borrowings (6) 3,499,010 8,732 1.01 1,603,459 8,732 2.19 Total interest-bearing liabilities 9,543,035 17,121 0.73 7,599,434 21,261 1.13 Non-interest-bearing deposits 577,989 500,036 Other non-interest-bearing liabilities 177,995 213,602 Stockholders' equity 1,208,547 1,283,871 Total liabilities and stockholders' equity $ 11,507,566 $ 9,596,943 Net interest income (7) $ 47,101 $ 43,073 Net interest-earning assets $ 1,579,208 $ 1,551,244 Net interest margin (8)(9) 1.69 1.88 Ratio of interest-earning assets to interest-bearing liabilities 1.17x 1.20x Selected performance ratios: Return on average assets (annualized) (9) 0.75 % 0.85 % Return on average equity (annualized) (9) 7.16 6.37 Average equity to average assets 10.50 13.38 Operating expense ratio (annualized) (10) 0.97 1.36 Efficiency ratio (9)(11) 53.24 58.78 Pre-tax yield on leverage strategy (12) 0.14 — 60 (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 $2.0 million and $7.5 million for the three months ended March 31, 2022 and March 31, 2021, respectively. (4) Included in this line, for the three months ended March 31, 2022, is FHLB stock related to the leverage strategy with an average outstanding balance of $86.2 million and dividend income of $1.2 million at a weighted average yield of 5.75%, and FHLB stock not related to the leverage strategy with an average outstanding balance of $72.3 million and dividend income of $1.0 million at a weighted average yield of 5.71%. There was no FHLB stock related to the leverage strategy during the three months ended March 31, 2021. (5) The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $1.83 billion during the three months ended March 31, 2022. There were no cash and cash equivalents related to the leverage strategy during the three months ended March 31, 2021. (6) Included in this line, for the three months ended March 31, 2022, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $1.92 billion and interest paid of $1.3 million, at a weighted average rate of 0.26%, and FHLB borrowings not related to the leverage strategy with an average outstanding balance of $1.58 billion and interest paid of $7.5 million, at a weighted average rate of 1.90%. There were no FHLB borrowings related to the leverage strategy during the three months ended March 31, 2021. The FHLB advance amounts and rates included in this line include the effect of interest rate swaps and are net of deferred prepayment penalties. (7) 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. (8) Net interest margin represents annualized net interest income as a percentage of average interest-earning assets. (9) The table below provides a reconciliation between certain performance ratios presented in accordance with GAAP and the performance ratios excluding the effects of the leverage strategy, which are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide the performance ratios without the leverage strategy because of the unique nature of the leverage strategy. The leverage strategy reduces some of our performance ratios due to the amount of earnings associated with the transaction in comparison to the size of the transaction, while increasing our net income. For the Three Months Ended March 31, 2022 March 31, 2021 Actual Leverage Adjusted Actual Leverage Adjusted (GAAP) Strategy (Non-GAAP) (GAAP) Strategy (Non-GAAP) Yield on interest-earning assets 2.31 % (0.39) % 2.70 % 2.81 % — % 2.81 % Cost of interest-bearing liabilities 0.73 (0.11) 0.84 1.13 — 1.13 Return on average assets (annualized) 0.75 (0.13) 0.88 0.85 — 0.85 Return on average equity (annualized) 7.16 0.18 6.98 6.37 — 6.37 Net interest margin 1.69 (0.32) 2.01 1.88 — 1.88 Efficiency Ratio 53.24 (0.58) 53.82 58.78 — 58.78 (10) The operating expense ratio represents annualized non-interest expense as a percentage of average assets. (11) The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income. (12) The pre-tax yield on the leverage strategy represents annualized pre-tax income resulting from the transaction as a percentage of the average interest-earning assets associated with the transaction. 61 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 March 31, 2022 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 March 31, 2022 vs. 2021 Increase (Decrease) Due to Volume (1) Rate Total (Dollars in thousands) Interest-earning assets: Loans receivable $ 1,116 $ (2,989) $ (1,873) MBS (317) (291) (608) Investment securities 80 91 171 FHLB stock 1,127 162 1,289 Cash and cash equivalents 841 68 909 Total interest-earning assets 2,847 (2,959) (112) Interest-bearing liabilities: Checking 20 (27) (7) Savings 8 (6) 2 Money market 197 (359) (162) Certificates of deposit (1,555) (2,418) (3,973) Borrowings 1,156 (1,156) — Total interest-bearing liabilities (174) (3,966) (4,140) Net change in net interest income $ 3,021 $ 1,007 $ 4,028 (1) The increases attributable to changes in volume related to FHLB stock, cash and cash equivalents, and borrowings were due primarily to the leverage strategy being utilized during the current quarter and not being utilized during the prior year quarter. 62 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, 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. Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40% of Bank Call Report total assets without the pre-approval of FHLB senior management. The Bank's borrowing limit was 50% of Bank Call Report total assets as of March 31, 2022, as approved by the president of FHLB. When the leverage strategy is in place, the Bank maintains the resulting excess cash reserves from the FHLB borrowings at the FRB of Kansas City, which can be used to meet any short-term liquidity needs. Additionally, FHLB borrowings may be in excess of 40% of Bank Call Report total assets as long as the Bank continues its leverage strategy and FHLB senior management continues to approve the Bank's borrowing limit being in excess of 40% of Call Report total assets. All or a portion of the short-term FHLB borrowings in conjunction with the leverage strategy can be repaid at maturity, if necessary or desired. 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 that is not in conjunction with a planned strategy, such as the leverage strategy, the Bank will likely utilize long-term wholesale borrowing sources such as FHLB advances and/or repurchase agreements to provide long-term, fixed-rate funding. 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 March 31, 2022, the Bank had total borrowings, at par, of $1.59 billion, or approximately 17% of total assets, all of which were FHLB advances. Of this amount, $175.0 million were advances scheduled to mature in the next 12 months. All FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB. At March 31, 2022, 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 March 31, 2022, the Bank had $1.54 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 March 31, 2022, the Bank's policy allowed for combined brokered and public unit certificates of deposit up to 15% of total deposits. At March 31, 2022, the Bank did not have any brokered certificates of deposit, and public unit certificates of deposit were approximately 2% of total deposits. The Bank had pledged securities with an estimated fair value of $210.9 million as collateral for public unit certificates of deposit at March 31, 2022. 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 March 31, 2022, $1.55 billion of the Bank's certificate of deposit portfolio was scheduled to mature within the next 12 months, including $146.7 million of public unit certificates of deposit and $88.4 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. Due to the nature of commercial certificates of deposit, retention rates are not as predictable as for retail certificates of deposit. 63 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 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. We anticipate we will continue to have sufficient funds, through the repayments and maturities of loans and securities, deposits and borrowings, to meet our current commitments. 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, which is currently 9%), 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. Regulatory 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 of 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the capital requirements for the well capitalized category under the agencies' PCA framework. As of March 31, 2022, the Bank's CBLR was 9.7% and the Company's CBLR was 10.7%, which exceeded the minimum requirements. As of December 31, 2021, the Bank's CBLR was 11.6% and the Company's CBLR was 12.8%. The decrease in the CBLR compared to the prior quarter was due to the reimplementation of the leverage strategy during the current quarter, which increased average assets. 64