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 and/or the availability of labor in 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 COVID-19 endemic disease 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, currency fluctuations and the effects of a potential economic recession or slower economic growth; • 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 $65.0 million, or $0.48 per share, for the current year nine-month period compared to net income of $57.5 million, or $0.42 per share, for the prior year nine-month period. The increase in net income was due to an increase in net interest income, partially offset by higher income tax expense and a lower negative provision for credit losses. The net interest margin decreased six basis points, from 1.88% for the prior year period to 1.82% for the current year period. Excluding the effects of the leverage strategy, the net interest margin would have increased 16 basis points, from 1.88% for the prior year period to 2.04% 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. Total assets were $9.48 billion at June 30, 2022, a decrease of $155.2 million from September 30, 2021. During the current year period, cash and/or securities were partially reinvested in the loan portfolio, which increased 2.9% on an annualized basis. Total deposits were $6.33 billion at June 30, 2022, a decrease of $267.5 million from September 30, 2021. The majority of the decrease occurred during the current quarter. Deposit outflows were replaced with FHLB advances. The Bank's asset quality remained strong, reflected in low delinquency levels and a net recovery during the current year nine-month period. At June 30, 2022, loans 30 to 89 days delinquent were 0.16% of total loans receivable, net, and loans 90 or more days delinquent or in foreclosure were 0.12% of total loans receivable, net. During the current year period, net recoveries were $220 thousand. At June 30, 2022, the Bank had a one-year gap position of $(1.33) billion, or (14.0)% 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 June 30, 2022 compared to September 30, 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 is expected to 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 in the remainder of fiscal year 2022 and during 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 June 30, March 31, Percent September 30, Percent 2022 2022 Change 2021 Change (Dollars in thousands) Total assets $ 9,476,053 $ 9,531,296 (2.3) % $ 9,631,246 (2.1) % AFS securities 1,694,160 1,780,419 (19.4) 2,014,608 (21.2) Loans receivable, net 7,236,196 7,108,810 7.2 7,081,142 2.9 Deposits 6,329,883 6,614,844 (17.2) 6,597,396 (5.4) Borrowings 1,869,897 1,583,747 72.3 1,582,850 24.2 Stockholders' equity 1,131,740 1,174,752 (14.6) 1,242,273 (11.9) Equity to total assets at end of period 11.9 % 12.3 % 12.9 % Average number of basic shares outstanding 135,725 135,677 0.1 135,571 0.2 Average number of diluted shares outstanding 135,725 135,677 0.1 135,571 0.2 During the current quarter and current year period, cash flows from the securities portfolio and/or excess operating cash were partially reinvested into the loan portfolio. Loans receivable, net, increased $155.1 million during the current year period due primarily to a $74.5 million increase in commercial loans and a $74.0 million increase in one- to four-family loans. The majority of the deposit outflows during the current year period occurred during the current quarter and were replaced with FHLB advances. The Bank has begun to increase offered rates on certificates of deposit and money market accounts, which has reduced the runoff in these portfolios. The decreases in stockholders' equity from September 30, 2021 and March 31, 2022 to June 30, 2022 were due mainly to a reduction in AOCI as a result of changes in the fair value of AFS securities due to an increase in market interest rates, along with the payment of a $0.20 per share True Blue Capitol dividend in June 2022. 32 Loans Receivable. The following table presents the balance and weighted average rate of our loan portfolio as of the dates indicated. June 30, 2022 March 31, 2022 September 30, 2021 Amount Rate Amount Rate Amount Rate (Dollars in thousands) One- to four-family: Originated $ 3,963,608 3.16 % $ 3,943,327 3.14 % $ 3,956,064 3.18 % Correspondent purchased 2,070,822 2.99 1,995,167 2.95 2,003,477 3.02 Bulk purchased 151,461 1.27 155,657 1.33 173,662 1.65 Construction 60,426 2.84 50,512 2.78 39,142 2.82 Total 6,246,317 3.05 6,144,663 3.03 6,172,345 3.09 Commercial: Commercial real estate 717,947 4.09 671,324 3.94 676,908 4.00 Commercial and industrial 70,932 3.98 78,363 3.92 66,497 3.83 Construction 115,031 4.33 133,597 4.06 85,963 4.03 Total 903,910 4.11 883,284 3.96 829,368 3.99 Consumer loans: Home equity 87,235 5.03 82,878 4.57 86,274 4.60 Other 8,289 4.14 7,858 4.18 8,086 4.19 Total 95,524 4.96 90,736 4.54 94,360 4.57 Total loans receivable 7,245,751 3.21 7,118,683 3.16 7,096,073 3.21 Less: ACL 16,283 15,312 19,823 Deferred loan fees/discounts 29,470 29,264 29,556 Premiums/deferred costs (36,198) (34,703) (34,448) Total loans receivable, net $ 7,236,196 $ 7,108,810 $ 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 Nine Months Ended June 30, 2022 June 30, 2022 June 30, 2021 Amount Rate Amount Rate Amount Rate (Dollars in thousands) Beginning balance $ 7,118,683 3.16 % $ 7,096,073 3.21 % $ 7,224,996 3.55 % Originated and refinanced 260,799 3.88 787,635 3.44 1,157,075 2.85 Purchased and participations 153,362 3.50 476,068 3.06 620,079 2.91 Change in undisbursed loan funds 122 (45,115) (167,760) Repayments (287,123) (1,068,621) (1,782,211) Principal recoveries/(charge-offs), net 175 220 (482) Other (267) (509) (72) Ending balance $ 7,245,751 3.21 $ 7,245,751 3.21 $ 7,051,625 3.26 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 Nine Months Ended June 30, 2022 June 30, 2021 Amount Rate % of Total Amount Rate % of Total (Dollars in thousands) Fixed-rate: One- to four-family $ 726,704 3.09 % 57.5 % $ 1,243,047 2.65 % 69.9 % One- to four-family construction 106,636 3.07 8.4 98,852 2.76 5.6 Commercial: Real estate 43,939 3.91 3.5 18,481 3.62 1.1 Commercial and industrial 13,039 3.77 1.0 42,582 2.22 2.4 Construction 68,998 3.27 5.5 42,165 3.65 2.4 Home equity 3,984 5.40 0.3 2,095 5.47 0.1 Other 2,826 5.53 0.2 2,323 5.43 0.1 Total fixed-rate 966,126 3.17 76.4 1,449,545 2.69 81.6 Adjustable-rate: One- to four-family 104,354 3.13 8.3 53,473 2.51 3.0 One- to four-family construction 15,255 2.95 1.2 11,069 2.64 0.6 Commercial: Real estate 79,851 4.08 6.3 105,348 3.63 5.9 Commercial and industrial 31,413 3.81 2.5 9,492 3.78 0.5 Construction 19,742 4.02 1.6 105,555 4.10 6.0 Home equity 45,686 4.53 3.6 41,207 4.43 2.3 Other 1,276 2.89 0.1 1,465 3.45 0.1 Total adjustable-rate 297,577 3.72 23.6 327,609 3.67 18.4 Total originated, refinanced and purchased $ 1,263,703 3.30 100.0 % $ 1,777,154 2.87 100.0 % Purchased and participation loans included above: Fixed-rate: Correspondent purchased - one- to four-family $ 346,462 2.99 $ 487,001 2.63 Participations - commercial 69,057 3.25 38,114 3.62 Total fixed-rate purchased/participations 415,519 3.04 525,115 2.70 Adjustable-rate: Correspondent purchased - one- to four-family 47,549 3.10 17,964 2.46 Participations - commercial 13,000 3.85 77,000 4.44 Total adjustable-rate purchased/participations 60,549 3.26 94,964 4.07 Total purchased/participation loans $ 476,068 3.06 $ 620,079 2.91 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 June 30, 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 $ 3,963,608 64.1 % 3.16 % 772 61 % $ 157 Correspondent purchased 2,070,822 33.5 2.99 765 64 412 Bulk purchased 151,461 2.4 1.27 773 57 285 $ 6,185,891 100.0 % 3.06 770 62 200 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 Nine Months Ended June 30, 2022 June 30, 2022 Credit Credit Amount Rate LTV Score Amount Rate LTV Score (Dollars in thousands) Originated $ 200,354 3.70 % 74 % 766 $ 558,938 3.15 % 71 % 766 Correspondent purchased 145,362 3.48 75 767 394,011 3.01 73 770 $ 345,716 3.61 74 767 $ 952,949 3.09 72 768 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 June 30, 2022, along with associated weighted average rates. 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 $ 182,662 4.16 % Correspondent 77,156 3.82 $ 259,818 4.06 Commercial Loans - During the nine months ended June 30, 2022, the Bank originated $174.9 million of commercial loans and entered into commercial loan participations totaling $82.1 million. During the quarter and nine months ended June 30, 2022, the Bank processed commercial loan disbursements, excluding lines of credit, of approximately $57.8 million and $232.0 million, respectively, at a weighted average rate of 4.37% and 4.04%, respectively. As of June 30, 2022, March 31, 2022, and September 30, 2021, the Bank's commercial and industrial gross loan amounts (unpaid principal plus undisbursed amounts) totaled $95.2 million, $101.3 million and $90.7 million, respectively, and commitments totaled $440 thousand, $1.4 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 June 30, 2022, the Bank had 26 commercial real estate and commercial construction loan commitments totaling $65.5 million, at a weighted average rate of 4.17%. 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. June 30, 2022 March 31, 2022 September 30, 2021 Unpaid Undisbursed Gross Loan Gross Loan Gross Loan Count Principal Amount Amount Amount Amount (Dollars in thousands) Senior housing 34 $ 248,787 $ 79,334 $ 328,121 $ 331,230 $ 265,284 Retail building 138 196,903 35,551 232,454 226,297 208,539 Hotel 11 160,521 32,380 192,901 194,287 194,665 Office building 85 52,738 50,305 103,043 104,787 109,987 Multi-family 34 59,840 19,706 79,546 71,180 66,199 One- to four-family property 372 62,191 8,235 70,426 70,920 69,174 Single use building 23 19,019 4,773 23,792 24,179 47,028 Other 94 32,979 2,993 35,972 35,917 36,167 791 $ 832,978 $ 233,277 $ 1,066,255 $ 1,058,797 $ 997,043 Weighted average rate 4.13 % 4.32 % 4.17 % 3.93 % 4.01 % 35 The following table summarizes the Bank's commercial real estate and commercial construction loans by state as of the dates indicated. June 30, 2022 March 31, 2022 September 30, 2021 Unpaid Undisbursed Gross Loan Gross Loan Gross Loan Count Principal Amount Amount Amount Amount (Dollars in thousands) Kansas 600 $ 320,063 $ 57,888 $ 377,951 $ 366,403 $ 348,835 Missouri 157 227,027 53,343 280,370 281,230 232,041 Texas 11 182,086 90,688 272,774 274,020 273,124 Colorado 5 19,832 14,139 33,971 35,452 36,099 Arkansas 3 21,884 11,618 33,502 33,589 33,763 Nebraska 6 33,088 4 33,092 33,269 33,468 Other 9 28,998 5,597 34,595 34,834 39,713 791 $ 832,978 $ 233,277 $ 1,066,255 $ 1,058,797 $ 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 June 30, 2022. Count Amount (Dollars in thousands) Greater than $30 million 6 $ 246,066 >$15 to $30 million 16 335,698 >$10 to $15 million 6 71,174 >$5 to $10 million 20 131,051 $1 to $5 million 112 254,323 Less than $1 million 1,262 189,051 1,422 $ 1,227,363 As of June 30, 2022 and March 31, 2022, there were commercial loans with an aggregate gross balance, including undisbursed amounts, of $73.6 million and $74.3 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 June 30, 2022, approximately 61% were 59 days or less delinquent. Loans Delinquent for 30 to 89 Days at: June 30, March 31, December 31, 2022 2022 2021 Number Amount Number Amount Number Amount (Dollars in thousands) One- to four-family: Originated 64 $ 6,035 64 $ 6,931 74 $ 7,009 Correspondent purchased 9 3,467 10 2,421 11 5,133 Bulk purchased 4 755 2 396 1 154 Commercial 6 706 4 373 2 222 Consumer 16 256 14 215 16 164 99 $ 11,219 94 $ 10,336 104 $ 12,682 Loans 30 to 89 days delinquent to total loans receivable, net 0.16 % 0.15 % 0.18 % 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. Nonaccrual Loans and OREO at: June 30, March 31, December 31, 2022 2022 2021 Number Amount Number Amount Number Amount (Dollars in thousands) Loans 90 or More Days Delinquent or in Foreclosure: One- to four-family: Originated 36 $ 2,585 44 $ 3,999 48 $ 3,943 Correspondent purchased 9 2,659 11 3,967 10 3,115 Bulk purchased 5 1,807 5 1,819 6 1,945 Commercial 7 1,184 6 1,167 6 1,170 Consumer 9 174 19 400 25 477 66 8,409 85 11,352 95 10,650 Loans 90 or more days delinquent or in foreclosure as a percentage of total loans 0.12 % 0.16 % 0.15 % Nonaccrual loans less than 90 Days Delinquent: (1) One- to four-family: Originated 2 $ 207 5 $ 505 5 $ 451 Correspondent purchased — — — — — — Bulk purchased — — — — — — Commercial 1 4 2 34 3 62 Consumer 1 19 2 27 — — 4 230 9 566 8 513 Total nonaccrual loans 70 8,639 94 11,918 103 11,163 Nonaccrual loans as a percentage of total loans 0.12 % 0.17 % 0.16 % OREO: One- to four-family: Originated (2) 2 $ 237 — $ — 2 $ 319 Consumer 1 21 — — — — 3 258 — — 2 319 Total non-performing assets 73 $ 8,897 94 $ 11,918 105 $ 11,482 Non-performing assets as a percentage of total assets 0.09 % 0.13 % 0.12 % (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 June 30, 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 June 30, 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 $ 3,530,724 57.1 % $ 5,169 50.4 % $ 2,328 33.0 % 51 % Missouri 1,053,438 17.0 2,511 24.5 1,364 19.4 63 Texas 577,347 9.3 1,088 10.6 663 9.4 40 Other states 1,024,382 16.6 1,489 14.5 2,696 38.2 53 $ 6,185,891 100.0 % $ 10,257 100.0 % $ 7,051 100.0 % 53 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 June 30, 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. The commercial special mention loan balance at June 30, 2022 was comprised of a single loan which continues to show improvement in its cash flow from operations and other operating metrics. June 30, 2022 September 30, 2021 Special Mention Substandard Special Mention Substandard (Dollars in thousands) One- to four-family $ 14,172 $ 19,319 $ 14,332 $ 23,458 Commercial 46,366 3,078 99,729 3,259 Consumer 288 383 135 718 $ 60,826 $ 22,780 $ 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 June 30, 2022. Distribution of ACL Ratio of ACL to Loans Receivable June 30, March 31, December 31, June 30, March 31, December 31, 2022 2022 2021 2022 2022 2021 (Dollars in thousands) One- to four-family: Originated $ 1,861 $ 1,677 $ 1,611 0.05 % 0.04 % 0.04 % Correspondent purchased 2,437 2,129 2,082 0.12 0.11 0.10 Bulk purchased 224 241 268 0.15 0.15 0.16 Construction 43 32 28 0.07 0.06 0.06 Total 4,565 4,079 3,989 0.07 0.07 0.06 Commercial: Real estate 9,720 8,991 11,257 1.35 1.34 1.64 Commercial and industrial 408 389 376 0.58 0.50 0.49 Construction 1,362 1,651 1,720 1.18 1.24 1.63 Total 11,490 11,031 13,353 1.27 1.25 1.54 Consumer 228 202 193 0.24 0.22 0.21 Total $ 16,283 $ 15,312 $ 17,535 0.22 0.22 0.25 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 was higher at June 30, 2022 compared to June 30, 2021 due to a lower balance of nonaccrual loans at June 30, 2022. The ACL to loans receivable, net at end of period ratio was lower at June 30, 2022 compared to June 30, 2021 due primarily to a lower ACL balance at June 30, 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 Nine Months Ended June 30, 2022 June 30, 2021 (Dollars in thousands) Balance at beginning of period $ 19,823 $ 31,527 Adoption of CECL — (4,761) Charge-offs (30) (689) Recoveries 250 207 Net recoveries (charge-offs) 220 (482) Provision for credit losses (3,760) (5,560) Balance at end of period $ 16,283 $ 20,724 Ratio of NCOs during the period to average non-performing assets (1.96) % 3.56 % ACL to nonaccrual loans at end of period 188.48 146.23 ACL to loans receivable, net at end of period 0.22 0.29 ACL to NCOs (annualized) N/M (1) 32.3x (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 Nine Months Ended June 30, 2022 June 30, 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 $ (133) $ 3,928,131 0.00 % $ 2 $ 3,933,932 0.00 % Correspondent — 2,040,934 0.00 — 2,006,257 0.00 Bulk purchased — 162,151 0.00 21 195,678 0.01 Construction — 45,053 0.00 — 29,156 0.00 Total (133) 6,176,269 0.00 23 6,165,023 0.00 Commercial: Real estate (101) 678,705 (0.01) 477 625,505 0.08 Commercial and industrial 10 73,550 0.01 — 78,186 0.00 Construction — 114,601 0.00 — 77,250 0.00 Total (91) 866,856 (0.01) 477 780,941 0.06 Consumer: Home equity (2) 84,135 0.00 (18) 94,291 (0.02) Other 6 7,844 0.08 — 8,950 0.00 Total 4 91,979 0.00 (18) 103,241 (0.02) $ (220) $ 7,135,104 0.00 $ 482 $ 7,049,205 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 views of 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 June 30, 2022. Weighted average yields on tax-exempt securities are not calculated on a fully tax-equivalent basis. June 30, 2022 March 31, 2022 September 30, 2021 Amount Yield WAL (1) Amount Yield WAL (1) Amount Yield WAL (1) (Dollars in thousands) Fixed-rate securities: MBS $ 1,216,144 1.48 % 4.5 $ 1,255,411 1.44 % 4.3 $ 1,363,645 1.30 % 3.5 GSE debentures 519,976 0.61 3.1 519,974 0.61 3.4 519,971 0.61 3.7 Municipal bonds 210 3.00 0.1 750 2.24 0.1 4,274 1.81 0.3 Total fixed-rate securities 1,736,330 1.22 4.1 1,776,135 1.20 4.0 1,887,890 1.11 3.6 Adjustable-rate securities: MBS 89,932 2.38 4.1 99,226 2.08 4.3 120,566 1.99 3.2 Corporate bonds 4,000 5.12 7.4 — — — — — — Total adjustable-rate securities 93,932 2.49 4.2 99,226 2.08 4.3 120,566 1.99 3.2 Total securities portfolio $ 1,830,262 1.29 4.1 $ 1,875,361 1.24 4.1 $ 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 principal repayment terms (in years) after three-month historical prepayment speeds and projected call option assumptions have been applied. For the Nine Months Ended June 30, 2022 June 30, 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 (261,160) (476,158) Net amortization of (premiums)/discounts (4,027) (4,308) Purchases 86,993 2.56 4.3 953,818 1.00 5.1 Change in valuation on AFS securities (142,254) (18,597) Ending balance - carrying value $ 1,694,160 1.29 4.1 $ 2,015,705 1.24 3.8 40 Liabilities. Total liabilities were $8.34 billion at June 30, 2022, compared to $8.36 billion at March 31, 2022 and $8.39 billion at September 30, 2021. The decrease in liabilities between March 31, 2022 and June 30, 2022 was due primarily to a decrease in deposits, along with a decrease in escrows due to timing of when funds are received and disbursed, largely offset by an increase in borrowings. The decrease in liabilities between September 30, 2021 and June 30, 2022 was due primarily to a reduction in deposits, along with 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 and the funding of low income housing partnership commitments, along with a decrease in escrows due to timing of when funds are received and disbursed, largely offset by an increase in borrowings. Deposits. The following table presents the amount, weighted average rate and percent of total for the components of our deposit portfolio at the dates presented. June 30, 2022 March 31, 2022 September 30, 2021 % of % of % of Amount Rate Total Amount Rate Total Amount Rate Total (Dollars in thousands) Non-interest-bearing checking $ 580,385 — % 9.2 % $ 600,457 — % 9.1 % $ 543,849 — % 8.2 % Interest-bearing checking 1,047,336 0.08 16.6 1,097,287 0.07 16.6 1,037,362 0.07 15.7 Savings 557,832 0.05 8.8 558,337 0.05 8.4 519,069 0.05 7.9 Money market 1,867,991 0.23 29.5 1,885,873 0.19 28.5 1,753,525 0.19 26.6 Retail certificates of deposit 2,129,734 1.16 33.6 2,213,617 1.22 33.5 2,341,531 1.41 35.5 Commercial certificates of deposit 55,076 0.68 0.9 100,739 0.61 1.5 190,215 0.66 2.9 Public unit certificates of deposit 91,529 0.57 1.4 158,534 0.14 2.4 211,845 0.21 3.2 $ 6,329,883 0.49 100.0 % $ 6,614,844 0.49 100.0 % $ 6,597,396 0.59 100.0 % There is some uncertainty regarding how long the increased balance of retail deposits will be retained by the Bank as depositors return to spending more and/or choose to invest in higher-yielding investment options outside of the Bank. This was the case in the current quarter and led to a reduction in retail checking account balances and continued reduction in retail certificates of deposit. The decrease in our retail certificates of deposit during the current year was generally in accounts with terms of 18 months or longer. Retail certificates of deposit with terms less than 18 months increased during the current year. The Bank has begun to increase offered rates on certificates of deposit and money market accounts, which has reduced the runoff in these portfolios. The decrease in commercial certificates of deposit during the current year was expected, as certain maturities of deposits received in prior fiscal years were anticipated to be used to fund operations at the depositors' related businesses during the current year. The decrease in public unit deposits was due to rapidly increasing costs of available funds in this category, to the point that rates were in excess of other funding sources available to the Bank. During the current quarter, FHLB advances were entered into in response to deposit outflows. The Bank may be required to continue to replace deposit outflows with higher costing borrowings, which would increase the cost of funds over time. 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. 41 The following table presents the maturity of term borrowings, which consist entirely of FHLB advances, along with associated weighted average contractual and effective rates as of June 30, 2022. In addition to the term borrowings in the table below, the Bank had an outstanding balance of $35.7 million on its line of credit with FHLB as of June 30, 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 300,000 165,000 465,000 2.55 2.80 2025 350,000 100,000 450,000 1.89 2.25 2026 250,000 — 250,000 0.96 1.27 2027 200,000 — 200,000 1.57 1.81 2028 — 100,000 100,000 2.02 3.45 $ 1,475,000 $ 365,000 $ 1,840,000 1.81 2.12 (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 and related advances was 3.3 years at June 30, 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. 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. The increase in the balance of FHLB advances during the current quarter was due to funding needs primarily in response to deposit outflows. For the Three Months Ended For the Nine Months Ended June 30, 2022 June 30, 2022 June 30, 2021 Effective Effective Effective Amount Rate WAM Amount Rate WAM Amount Rate WAM (Dollars in thousands) Beginning balance $ 1,590,000 1.90 % 2.8 $ 1,590,000 1.88 % 3.3 $ 1,790,000 2.31 % 3.0 Maturities and prepayments — — — (100,000) 3.14 — (965,000) 1.99 — New FHLB borrowings 250,000 3.51 2.7 350,000 3.49 3.8 765,000 1.86 4.2 Ending balance $ 1,840,000 2.12 2.6 $ 1,840,000 2.12 2.6 $ 1,590,000 2.00 3.5 During the current year-to-date period, the Bank reimplemented the leverage strategy which 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. These borrowings were repaid prior to June 30, 2022. In July 2022, the level of borrowings associated with the leverage strategy was increased to $2.60 billion to further increase earnings, in response to the increase in the dividend rate paid by FHLB. 42 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 June 30, 2022. September 30, December 31, March 31, June 30, 2022 2022 2023 2023 Total (Dollars in thousands) Retail/Commercial Certificates: Amount $ 481,348 $ 344,684 $ 251,665 $ 205,645 $ 1,283,342 Repricing Rate 1.25 % 1.14 % 1.22 % 0.81 % 1.14 % Public Unit Certificates: Amount $ 36,503 $ 25,500 $ 13,516 $ 3,674 $ 79,193 Repricing Rate 0.23 % 1.28 % 0.11 % 0.27 % 0.55 % Term Borrowings: Amount $ 75,000 $ — $ 100,000 $ 100,000 $ 275,000 Repricing Rate 0.29 % — % 1.46 % 1.82 % 1.27 % Total Amount $ 592,851 $ 370,184 $ 365,181 $ 309,319 $ 1,637,535 Repricing Rate 1.07 % 1.15 % 1.24 % 1.13 % 1.14 % The following table sets forth the WAM information for our certificates of deposit, in years, as of June 30, 2022. Retail certificates of deposit 1.1 Commercial certificates of deposit 0.6 Public unit certificates of deposit 0.5 Total certificates of deposit 1.1 43 Stockholders' Equity. During the nine months ended June 30, 2022, the Company paid cash dividends totaling $91.6 million. These cash dividends totaled $0.675 per share and consisted of a $0.22 per share cash true-up dividend related to fiscal year 2021 earnings, a $0.20 per share True Blue Capitol cash dividend, and three regular quarterly cash dividends of $0.085 per share. On July 19, 2022, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.5 million, payable on August 19, 2022 to stockholders of record as of the close of business on August 5, 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 June 30, 2022, this ratio was 10.6%. At June 30, 2022, Capitol Federal Financial, Inc., at the holding company level, had $91.9 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 June 30, 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 plans to request a further extension of the FRB's approval. The Company works to find multiple ways to provide stockholder value. This has primarily been through the payment of cash dividends and stock buybacks. The Company has maintained a policy of paying out 100% of its earnings to stockholders in the form of quarterly cash dividends and an annual cash true-up dividend in December of each year. In order to provide additional stockholder value, the Company paid a True Blue Capitol cash dividend of $0.25 per share in June for six consecutive years ending in 2019. Given the state of economic uncertainty 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. In June 2022, the Company paid a True Blue Capitol cash dividend of $0.20 per share. 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 September 30, 2022, the amount presented represents the dividend payable on August 19, 2022 to stockholders of record as of the close of business on August 5, 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 11,534 0.085 11,516 0.085 11,733 0.085 Quarter ended September 30 11,536 0.085 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 27,143 0.200 54,210 0.400 — — Calendar year-to-date dividends paid $ 61,748 $ 0.455 $ 130,147 $ 0.960 $ 64,327 $ 0.470 44 Operating Results The following table presents selected income statement and other information for the quarters indicated. For the Three Months Ended June 30, March 31, December 31, September 30, June 30, 2022 2022 2021 2021 2021 (Dollars in thousands, except per share data) Interest and dividend income: Loans receivable $ 56,886 $ 55,412 $ 55,788 $ 57,139 $ 54,779 MBS 5,048 4,821 4,625 4,900 5,360 FHLB stock 2,695 2,240 1,231 952 944 Cash and cash equivalents 3,968 949 14 27 26 Investment securities 815 800 808 750 763 Total interest and dividend income 69,412 64,222 62,466 63,768 61,872 Interest expense: Borrowings 11,644 8,732 7,585 7,889 7,826 Deposits 7,787 8,389 9,267 10,335 11,475 Total interest expense 19,431 17,121 16,852 18,224 19,301 Net interest income 49,981 47,101 45,614 45,544 42,571 Provision for credit losses 937 (3,188) (3,439) (1,323) (2,691) Net interest income (after provision for credit losses) 49,044 50,289 49,053 46,867 45,262 Non-interest income 6,115 5,416 5,506 5,303 5,236 Non-interest expense 28,390 27,960 26,694 28,247 27,602 Income tax expense 5,617 6,122 5,679 5,370 4,709 Net income $ 21,152 $ 21,623 $ 22,186 $ 18,553 $ 18,187 Efficiency ratio 50.61 % 53.24 % 52.22 % 55.55 % 57.73 % Basic EPS $ 0.16 $ 0.16 $ 0.16 $ 0.14 $ 0.13 Diluted EPS 0.16 0.16 0.16 0.14 0.13 45 Comparison of Operating Results for the Three Months Ended June 30, 2022 and March 31, 2022 For the quarter ended June 30, 2022, the Company recognized net income of $21.2 million, or $0.16 per share, compared to net income of $21.6 million, or $0.16 per share, for the quarter ended March 31, 2022. The decrease in net income was due primarily to a higher provision for credit losses, partially offset by an increase in net interest income and lower income tax expense. The net interest margin increased 10 basis points, from 1.69% for the prior quarter to 1.79% for the current quarter. When the leverage strategy discussed below 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 2.01% for the prior quarter to 2.11% for the current quarter. The increase in the net interest margin excluding the effects of the leverage strategy was due mainly to an increase in asset yields and a change in the mix of interest-earning assets, as cash was used to fund loan growth. At times, the Bank has utilized a leverage strategy to increase earnings. The leverage strategy during the current quarter involved borrowing up to $2.10 billion by entering into short-term FHLB advances. The borrowings were repaid prior to quarter end. The proceeds from the borrowings, net of the required FHLB stock holdings which yielded 6.5% 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 $1.2 million during the current quarter and $1.8 million during the current year-to-date period. Management continues to monitor the net interest rate spread and overall profitability of the strategy. In July 2022, the Bank increased the level of borrowings associated with the leverage strategy to $2.60 billion to further increase earnings in response to the increase in the dividend rate paid by FHLB. 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. The weighted average yield on loans receivable increased four basis points and the weighted average yield on MBS increased eight basis points compared to the prior quarter. For the Three Months Ended June 30, March 31, Change Expressed in: 2022 2022 Dollars Percent (Dollars in thousands) INTEREST AND DIVIDEND INCOME: Loans receivable $ 56,886 $ 55,412 $ 1,474 2.7 % MBS 5,048 4,821 227 4.7 FHLB stock 2,695 2,240 455 20.3 Cash and cash equivalents 3,968 949 3,019 318.1 Investment securities 815 800 15 1.9 Total interest and dividend income $ 69,412 $ 64,222 $ 5,190 8.1 The increase in interest income on loans receivable was due primarily to a decrease in correspondent loan premium amortization related to a reduction in payoff activity, as well as growth in the correspondent loan portfolio. The increase in interest income on MBS was due mainly 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 an increase in the dividend rate paid by FHLB. The increase in interest income on cash and cash equivalents was due to an increase in the yield earned on balances held at the FRB of Kansas City, the majority of which were related to the leverage strategy, due to an increase in market interest rates. 46 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. The weighted average rate paid on deposits and the weighted average rate paid on borrowings not associated with the leverage strategy each decreased three basis points compared to the prior quarter. For the Three Months Ended June 30, March 31, Change Expressed in: 2022 2022 Dollars Percent (Dollars in thousands) INTEREST EXPENSE: Borrowings $ 11,644 $ 8,732 $ 2,912 33.3 % Deposits 7,787 8,389 (602) (7.2) Total interest expense $ 19,431 $ 17,121 $ 2,310 13.5 The increase in interest expense on borrowings was due primarily to an increase in the rate paid on the short-term borrowings associated with the leverage strategy during the current quarter, due to higher market interest rates. Additionally, the average balance of borrowings not associated with the leverage strategy increased compared to the prior quarter due to new borrowings added near the end of the quarter, totaling $250.0 million at a weighted average rate of 3.51%, which contributed to the increase in interest expense. The decrease in interest expense on deposits was due primarily to a decrease in the weighted average rate paid on retail certificates of deposit and a decrease in the average balance of the portfolio, as maturing accounts either were not renewed or were replaced at offered rates, which were lower than the existing portfolio. Provision for Credit Losses For the quarter ended June 30, 2022, the Bank recorded a provision for credit losses of $937 thousand, compared to a negative provision for credit losses of $3.2 million for the prior quarter. The provision for credit losses in the current quarter was comprised of a $796 thousand increase in the ACL for loans and a $141 thousand increase in reserves for off-balance sheet credit exposures. The provision for credit losses was due primarily to selecting a weighted economic forecast to incorporate a recessionary outlook into the model, as well as commercial loan growth. Non-Interest Income The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent. For the Three Months Ended June 30, March 31, Change Expressed in: 2022 2022 Dollars Percent (Dollars in thousands) NON-INTEREST INCOME: Deposit service fees $ 3,601 $ 3,300 $ 301 9.1 % Insurance commissions 788 543 245 45.1 Other non-interest income 1,726 1,573 153 9.7 Total non-interest income $ 6,115 $ 5,416 $ 699 12.9 The increase in deposit service fees was due mainly to increases in debit card income and service charges as a result of higher transaction activity. The increase in insurance commissions was due primarily to the receipt of annual contingent insurance commissions in the prior quarter, which were lower than expected, and the related accrual adjustments. The increase in other non-interest income was due mainly to an increase in income on BOLI related to the receipt of death benefits. 47 Non-Interest Expense The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent. For the Three Months Ended June 30, March 31, Change Expressed in: 2022 2022 Dollars Percent (Dollars in thousands) NON-INTEREST EXPENSE: Salaries and employee benefits $ 14,581 $ 14,023 $ 558 4.0 % Information technology and related expense 4,343 4,493 (150) (3.3) Occupancy, net 3,721 3,493 228 6.5 Regulatory and outside services 1,572 1,272 300 23.6 Advertising and promotional 1,068 1,494 (426) (28.5) Federal insurance premium 784 777 7 0.9 Deposit and loan transaction costs 664 689 (25) (3.6) Office supplies and related expense 494 502 (8) (1.6) Other non-interest expense 1,163 1,217 (54) (4.4) Total non-interest expense $ 28,390 $ 27,960 $ 430 1.5 The increase in salaries and employee benefits was due mainly to an increase in commissions due to an increase in loan origination activity, along with annual merit increases during the current quarter. The increase in regulatory and outside services was due primarily to the timing of external audit expenses, as well as an increase in consulting expenses related to the Bank's upcoming implementation of a new core processing system. The decrease in advertising and promotional expense was due primarily to the timing of campaigns and sponsorships. The Company's efficiency ratio was 50.61% for the current quarter compared to 53.24% for the prior quarter. The improvement in the efficiency ratio was due primarily to higher net interest income. The efficiency ratio is a measure of a financial institution's total non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income. A lower value indicates that it is costing the financial institution less 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 and the effective tax rate. For the Three Months Ended June 30, March 31, Change Expressed in: 2022 2022 Dollars Percent (Dollars in thousands) Income before income tax expense $ 26,769 $ 27,745 $ (976) (3.5) % Income tax expense 5,617 6,122 (505) (8.2) Net income $ 21,152 $ 21,623 $ (471) (2.2) Effective Tax Rate 21.0 % 22.1 % The decrease in income tax expense was due primarily to lower pretax income in the current quarter, along with a decrease in the effective tax rate as a result of higher deductible expenses associated with dividends paid on allocated ESOP shares due to the True Blue Capitol dividend paid in June 2022. Management anticipates the effective tax rate for fiscal year 2022 will be approximately 21%. 48 Average Balance Sheet The following table presents the average balances of our assets, liabilities, and stockholders' equity, and the related annualized weighted average yields and rates on our interest-earning assets and interest-bearing liabilities for the periods indicated, as well as selected performance ratios and other information for the periods shown. Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis. For the Three Months Ended June 30, 2022 March 31, 2022 Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Amount Paid Rate Amount Paid Rate Assets: (Dollars in thousands) Interest-earning assets: One- to four-family loans: Originated $ 3,982,602 $ 32,168 3.23 % $ 3,965,844 $ 31,993 3.23 % Correspondent purchased 2,060,947 14,027 2.72 2,026,120 13,060 2.58 Bulk purchased 154,663 464 1.20 161,149 503 1.25 Total one- to four-family loans 6,198,212 46,659 3.01 6,153,113 45,556 2.96 Commercial loans 890,455 9,104 4.05 869,205 8,851 4.07 Consumer loans 92,790 1,123 4.85 90,326 1,005 4.51 Total loans receivable (1) 7,181,457 56,886 3.16 7,112,644 55,412 3.12 MBS (2) 1,343,891 5,048 1.50 1,357,693 4,821 1.42 Investment securities (2)(3) 522,147 815 0.62 522,019 800 0.61 FHLB stock (4) 166,879 2,695 6.48 158,546 2,240 5.73 Cash and cash equivalents (5) 1,930,539 3,968 0.81 1,971,341 949 0.19 Total interest-earning assets 11,144,913 69,412 2.49 11,122,243 64,222 2.31 Other non-interest-earning assets 293,882 385,323 Total assets $ 11,438,795 $ 11,507,566 Liabilities and stockholders' equity: Interest-bearing liabilities: Checking $ 1,068,329 180 0.07 $ 1,069,282 176 0.07 Savings 556,553 74 0.05 540,348 71 0.05 Money market 1,861,302 952 0.21 1,879,799 876 0.19 Retail certificates 2,169,262 6,383 1.18 2,241,080 7,012 1.27 Commercial certificates 84,231 129 0.61 116,181 183 0.64 Wholesale certificates 113,101 69 0.24 197,335 71 0.15 Total deposits 5,852,778 7,787 0.53 6,044,025 8,389 0.56 Borrowings (6) 3,687,592 11,644 1.26 3,499,010 8,732 1.01 Total interest-bearing liabilities 9,540,370 19,431 0.81 9,543,035 17,121 0.73 Non-interest-bearing deposits 586,876 577,989 Other non-interest-bearing liabilities 147,938 177,995 Stockholders' equity 1,163,611 1,208,547 Total liabilities and stockholders' equity $ 11,438,795 $ 11,507,566 Net interest income (7) $ 49,981 $ 47,101 Net interest-earning assets $ 1,604,543 $ 1,579,208 Net interest margin (8)(9) 1.79 1.69 Ratio of interest-earning assets to interest-bearing liabilities 1.17x 1.17x Selected performance ratios: Return on average assets (annualized) (9) 0.74 % 0.75 % Return on average equity (annualized) (9) 7.27 7.16 Average equity to average assets 10.17 10.50 Operating expense ratio (annualized) (10) 0.99 0.97 Efficiency ratio (9)(11) 50.61 53.24 Pre-tax yield on leverage strategy (12) 0.31 0.14 49 (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 $326 thousand and $2.0 million for the quarters ended June 30, 2022 and March 31, 2022, respectively. (4) Included in this line, for the quarter ended June 30, 2022, is FHLB stock related to the leverage strategy with an average outstanding balance of $89.4 million and dividend income of $1.4 million at a weighted average yield of 6.48%, and FHLB stock not related to the leverage strategy with an average outstanding balance of $77.5 million and dividend income of $1.3 million at a weighted average yield of 6.48%. 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%. (5) The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $1.89 billion and $1.83 billion during the quarters ended June 30, 2022 and March 31, 2022 respectively. (6) Included in this line, for the quarter ended June 30, 2022, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $1.99 billion and interest paid of $3.7 million, at a weighted average rate of 0.73%, and FHLB borrowings not related to the leverage strategy with an average outstanding balance of $1.70 billion and interest paid of $8.0 million, at a weighted average rate of 1.87%. 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%. 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 June 30, 2022 March 31, 2022 Actual Leverage Adjusted Actual Leverage Adjusted (GAAP) Strategy (Non-GAAP) (GAAP) Strategy (Non-GAAP) Yield on interest-earning assets 2.49 % (0.30) % 2.79 % 2.31 % (0.39) % 2.70 % Cost of interest-bearing liabilities 0.81 (0.03) 0.84 0.73 (0.11) 0.84 Return on average assets (annualized) 0.74 (0.10) 0.84 0.75 (0.13) 0.88 Return on average equity (annualized) 7.27 0.42 6.85 7.16 0.18 6.98 Net interest margin 1.79 (0.32) 2.11 1.69 (0.32) 2.01 Efficiency Ratio 50.61 (1.31) 51.92 53.24 (0.58) 53.82 (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. 50 Rate/Volume Analysis The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended June 30, 2022 to the three months ended March 31, 2022. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. For the Three Months Ended June 30, 2022 vs. March 31, 2022 Increase (Decrease) Due to Volume Rate Total (Dollars in thousands) Interest-earning assets: Loans receivable $ 631 $ 843 $ 1,474 MBS (49) 276 227 Investment securities — 15 15 FHLB stock 131 324 455 Cash and cash equivalents (20) 3,039 3,019 Total interest-earning assets 693 4,497 5,190 Interest-bearing liabilities: Checking — 5 5 Savings 3 — 3 Money market (7) 83 76 Certificates of deposit (473) (213) (686) Borrowings 644 2,268 2,912 Total interest-bearing liabilities 167 2,143 2,310 Net change in net interest income $ 526 $ 2,354 $ 2,880 51 Comparison of Operating Results for the Nine Months Ended June 30, 2022 and 2021 The Company recognized net income of $65.0 million, or $0.48 per share, for the current year period compared to net income of $57.5 million, or $0.42 per share, for the prior year period. The increase in net income was due to an increase in net interest income, partially offset by higher income tax expense and a lower negative provision for credit losses. The net interest margin decreased six basis points, from 1.88% for the prior year period to 1.82% for the current year period. Excluding the effects of the leverage strategy, the net interest margin would have increased 16 basis points, from 1.88% for the prior year period to 2.04% 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. 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 Nine Months Ended June 30, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) INTEREST AND DIVIDEND INCOME: Loans receivable $ 168,086 $ 172,758 $ (4,672) (2.7) % MBS 14,494 16,499 (2,005) (12.2) FHLB stock 6,166 2,964 3,202 108.0 Cash and cash equivalents 4,931 117 4,814 4,114.5 Investment securities 2,423 2,075 348 16.8 Total interest and dividend income $ 196,100 $ 194,413 $ 1,687 0.9 The decrease in interest income on loans receivable was due to a decrease in the weighted average rate on the originated and correspondent one- to four-family loan portfolio, partially offset by the increase in the average balance of the loan portfolio. The decrease in the weighted average rate was due to endorsements, refinances, originations and purchases at lower market rates at the time of the transactions between periods, which are being fully reflected in the current year. 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 resulting from an increase in market interest rates, partially offsetting the decrease in the weighted average rate. The decrease in interest income on the MBS portfolio was due primarily to a decrease in the weighted average yield as a result of purchases at lower market yields between periods, along with a decrease in the average balance of the portfolio. 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 and not being utilized during the prior 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 Nine Months Ended June 30, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) INTEREST EXPENSE: Borrowings $ 27,961 $ 26,885 $ 1,076 4.0 % Deposits 25,443 38,071 (12,628) (33.2) Total interest expense $ 53,404 $ 64,956 $ (11,552) (17.8) 52 The increase in interest expense on borrowings was due to the leverage strategy being utilized during a portion of the current year period and not being utilized during the prior year period. Interest expense on borrowings associated with the leverage strategy totaled $4.9 million during the current year period. This was partially offset by a lower cost of FHLB borrowings not associated with the leverage strategy due primarily to terminating or not renewing certain interest rate swap agreements, not replacing certain maturing FHLB advances, and prepaying certain advances during fiscal year 2021. The decrease in interest expense on deposits was due mainly to a decrease in the weighted average rate paid on retail certificates of deposit, along with a decrease in the average balance of the portfolio. Retail certificates of deposit repriced downward between periods as they were renewed or were replaced at lower offered rates, along with some certificates of deposit not renewing. Provision for Credit Losses The Bank recorded a negative provision for credit losses during the current year period of $5.7 million, compared to a negative provision for credit losses of $7.2 million during the prior year period. The negative provision in the current year period was comprised of a $3.8 million decrease in the ACL for loans and a $1.9 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 primarily to a reduction in commercial loan qualitative factors, partially offset by an increase in ACL related to loan growth during the current year period. The negative provision for credit losses associated with the reserve for off-balance sheet credit exposures in the current year period was also due primarily to a reduction in commercial loan qualitative factors. Non-Interest Income The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent. For the Nine Months Ended June 30, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) NON-INTEREST INCOME: Deposit service fees $ 10,331 $ 8,988 $ 1,343 14.9 % Insurance commissions 2,042 2,249 (207) (9.2) Gain on sale of Visa Class B shares — 7,386 (7,386) (100.0) Other non-interest income 4,664 4,160 504 12.1 Total non-interest income $ 17,037 $ 22,783 $ (5,746) (25.2) The increase in deposit service fees was due primarily to an increase in debit card income and service charges 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, which were lower than expected, and the related accrual adjustments. 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. The increase in other non-interest income was due primarily to a gain on a loan-related financial derivative agreement. 53 Non-Interest Expense The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent. For the Nine Months Ended June 30, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) NON-INTEREST EXPENSE: Salaries and employee benefits $ 42,332 $ 41,402 $ 930 2.2 % Information technology and related expense 13,268 13,568 (300) (2.2) Occupancy, net 10,593 10,406 187 1.8 Regulatory and outside services 4,212 4,288 (76) (1.8) Advertising and promotional 3,626 3,729 (103) (2.8) Federal insurance premium 2,200 1,888 312 16.5 Deposit and loan transaction costs 2,050 2,123 (73) (3.4) Office supplies and related expense 1,464 1,289 175 13.6 Loss on interest rate swap termination — 4,752 (4,752) (100.0) Other non-interest expense 3,299 3,877 (578) (14.9) Total non-interest expense $ 83,044 $ 87,322 $ (4,278) (4.9) The increase in salaries and employee benefits was due primarily to merit increases and an increase in incentive compensation, partially offset by a decrease in commissions due to a reduction in loan origination activity compared to the prior year period. 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 year period. 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 51.99% for the current year period compared to 57.36% for the prior year period. The improvement in the efficiency ratio was due primarily to higher net 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 and effective tax rate. For the Nine Months Ended June 30, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) Income before income tax expense $ 82,379 $ 72,105 $ 10,274 14.2 % Income tax expense 17,418 14,576 2,842 19.5 Net income $ 64,961 $ 57,529 $ 7,432 12.9 Effective Tax Rate 21.1 % 20.2 % 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. 54 Average Balance Sheet The following table presents the average balances of our assets, liabilities, and stockholders' equity, and the related annualized weighted average yields and rates on our interest-earning assets and interest-bearing liabilities for the periods indicated, as well as selected performance ratios and other information for the periods shown. Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis. For the Nine Months Ended June 30, 2022 June 30, 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 $ 3,973,184 $ 96,583 3.24 % $ 3,963,088 $ 104,482 3.52 % Correspondent purchased 2,040,934 39,832 2.60 2,006,257 35,124 2.33 Bulk purchased 162,151 1,578 1.30 195,678 2,870 1.96 Total one- to four-family loans 6,176,269 137,993 2.98 6,165,023 142,476 3.08 Commercial loans 866,856 26,898 4.09 780,941 26,707 4.51 Consumer loans 91,979 3,195 4.64 103,241 3,575 4.63 Total loans receivable (1) 7,135,104 168,086 3.14 7,049,205 172,758 3.26 MBS (2) 1,379,334 14,494 1.40 1,424,914 16,499 1.54 Investment securities (2)(3) 522,706 2,423 0.62 476,755 2,075 0.58 FHLB stock (4) 132,657 6,166 6.21 78,784 2,964 5.03 Cash and cash equivalents (5) 1,305,949 4,931 0.50 152,792 117 0.10 Total interest-earning assets 10,475,750 196,100 2.49 9,182,450 194,413 2.82 Other non-interest-earning assets 362,229 443,370 Total assets $ 10,837,979 $ 9,625,820 Liabilities and stockholders' equity: Interest-bearing liabilities: Checking $ 1,063,280 535 0.07 $ 955,731 588 0.08 Savings 539,152 215 0.05 478,011 209 0.06 Money market 1,835,666 2,653 0.19 1,554,947 3,220 0.28 Retail certificates 2,236,551 21,230 1.27 2,530,969 31,824 1.68 Commercial certificates 123,398 584 0.63 195,066 1,208 0.83 Wholesale certificates 170,051 226 0.18 254,606 1,022 0.54 Total deposits 5,968,098 25,443 0.57 5,969,330 38,071 0.85 Borrowings (6) 2,918,291 27,961 1.27 1,654,544 26,885 2.16 Total interest-bearing liabilities 8,886,389 53,404 0.80 7,623,874 64,956 1.14 Non-interest-bearing deposits 571,685 499,737 Other non-interest-bearing liabilities 177,081 219,204 Stockholders' equity 1,202,824 1,283,005 Total liabilities and stockholders' equity $ 10,837,979 $ 9,625,820 Net interest income (7) $ 142,696 $ 129,457 Net interest-earning assets $ 1,589,361 $ 1,558,576 Net interest margin (8)(9) 1.82 1.88 Ratio of interest-earning assets to interest-bearing liabilities 1.18x 1.20x Selected performance ratios: Return on average assets (annualized) (9) 0.80 % 0.80 % Return on average equity (annualized) (9) 7.20 5.98 Average equity to average assets 11.10 13.33 Operating expense ratio (annualized) (10) 1.02 1.21 Efficiency ratio (9)(11) 51.99 57.36 Pre-tax yield on leverage strategy (12) 0.23 — 55 (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 $2.1 million and $7.2 million for the nine months ended June 30, 2022 and June 30, 2021, respectively. (4) Included in this line, for the nine months ended June 30, 2022, is FHLB stock related to the leverage strategy with an average outstanding balance $58.2 million and dividend income of $2.7 million at a weighted average yield of 6.12%, and FHLB stock not related to the leverage strategy with an average outstanding balance of $74.5 million and dividend income of $3.5 million at a weighted average yield of 6.29%. There was no FHLB stock related to the leverage strategy during the nine months ended June 30, 2021. (5) The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $1.23 billion during the nine months ended June 30, 2022. There were no cash and cash equivalents related to the leverage strategy during the nine months ended June 30, 2021. (6) Included in this line, for the nine months ended June 30, 2022, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $1.30 billion and interest paid of $4.9 million, at a weighted average rate of 0.50%, and FHLB borrowings not related to the leverage strategy with an average outstanding balance of $1.62 billion and interest paid of $23.0 million, at a weighted average rate of 1.89%. There were no FHLB borrowings related to the leverage strategy during the nine months ended June 30, 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 Nine Months Ended June 30, 2022 June 30, 2021 Actual Leverage Adjusted Actual Leverage Adjusted (GAAP) Strategy (Non-GAAP) (GAAP) Strategy (Non-GAAP) Yield on interest-earning assets 2.49 % (0.25) % 2.74 % 2.82 % — % 2.82 % Cost of interest-bearing liabilities 0.80 (0.05) 0.85 1.14 — 1.14 Return on average assets (annualized) 0.80 (0.08) 0.88 0.80 — 0.80 Return on average equity (annualized) 7.20 0.20 7.00 5.98 — 5.98 Net interest margin 1.82 (0.22) 2.04 1.88 — 1.88 Efficiency Ratio 51.99 (0.65) 52.64 57.36 — 57.36 (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. 56 Rate/Volume Analysis The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous period's average rate, and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. For the Nine Months Ended June 30, 2022 vs. June 30, 2021 Increase (Decrease) Due to Volume (1) Rate Total (Dollars in thousands) Interest-earning assets: Loans receivable $ 2,731 $ (7,403) $ (4,672) MBS (515) (1,490) (2,005) Investment securities 207 141 348 FHLB stock 2,382 820 3,202 Cash and cash equivalents 3,167 1,647 4,814 Total interest-earning assets 7,972 (6,285) 1,687 Interest-bearing liabilities: Checking 62 (114) (52) Savings 25 (19) 6 Money market 516 (1,083) (567) Certificates of deposit (4,673) (7,342) (12,015) Borrowings 4,418 (3,342) 1,076 Total interest-bearing liabilities 348 (11,900) (11,552) Net change in net interest income $ 7,624 $ 5,615 $ 13,239 (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. 57 Comparison of Operating Results for the Three Months Ended June 30, 2022 and 2021 For the quarter ended June 30, 2022, the Company recognized net income of $21.2 million, or $0.16 per share, compared to net income of $18.2 million, or $0.13 per share for the quarter ended June 30, 2021. The increase in net income was due primarily to an increase in net interest income, partially offset by a higher provision for credit losses and higher income tax expense. The net interest margin decreased five basis points, from 1.84% for the prior year quarter to 1.79% for the current quarter. Excluding the effects of the leverage strategy, the net interest margin would have increased 27 basis points, from 1.84% for the prior year quarter to 2.11% 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, a change in the mix of interest-earning assets as cash was used to fund loan growth, and higher asset yields. 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 June 30, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) INTEREST AND DIVIDEND INCOME: Loans receivable $ 56,886 $ 54,779 $ 2,107 3.8 % MBS 5,048 5,360 (312) (5.8) FHLB stock 2,695 944 1,751 185.5 Cash and cash equivalents 3,968 26 3,942 15,161.5 Investment securities 815 763 52 6.8 Total interest and dividend income $ 69,412 $ 61,872 $ 7,540 12.2 The increase in interest income on loans receivable was due primarily to an increase in the average balance of the loan portfolio related to commercial loan growth, which has a greater impact on interest income than other loan types due to higher yields, along with growth in the one- to four-family correspondent loan portfolio. Additionally, 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 contributed to the increase in interest income on loans receivable. The decrease in interest income on MBS was due to a decrease in the average balance of the portfolio, partially offset by a decrease in premium amortization related to a slowdown in prepayment activity. 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 and not being utilized during the prior year 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 June 30, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) INTEREST EXPENSE: Borrowings $ 11,644 $ 7,826 $ 3,818 48.8 % Deposits 7,787 11,475 (3,688) (32.1) Total interest expense $ 19,431 $ 19,301 $ 130 0.7 The increase in interest expense on borrowings was due mainly to the leverage strategy being utilized during the current quarter and not being utilized during the prior year quarter. The decrease in interest expense on deposits was due primarily to a decrease in the average balance and the weighted average rate of the retail certificate of deposit portfolio. 58 Provision for Credit Losses The Bank recorded a provision for credit losses during the current quarter of $937 thousand, compared to a negative provision for credit losses of $2.7 million during the prior year quarter. See "Comparison of Operating Results for the Three Months Ended June 30, 2022 and March 31, 2022" above for additional discussion regarding the provision for credit losses during the current quarter. Non-Interest Income The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent. For the Three Months Ended June 30, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) NON-INTEREST INCOME: Deposit service fees $ 3,601 $ 3,227 $ 374 11.6 % Insurance commissions 788 723 65 9.0 Other non-interest income 1,726 1,286 440 34.2 Total non-interest income $ 6,115 $ 5,236 $ 879 16.8 The increase in deposit service fees was due primarily to an increase in debit card income and service charges as a result of higher transaction and settlement volume, in addition to an increase in the average transaction amount. The increase in other non-interest income was due mainly to an increase in income on BOLI related to the receipt of death benefits. Non-Interest Expense The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent. For the Three Months Ended June 30, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) NON-INTEREST EXPENSE: Salaries and employee benefits $ 14,581 $ 13,867 $ 714 5.1 % Information technology and related expense 4,343 4,736 (393) (8.3) Occupancy, net 3,721 3,504 217 6.2 Regulatory and outside services 1,572 1,469 103 7.0 Advertising and promotional 1,068 1,407 (339) (24.1) Federal insurance premium 784 633 151 23.9 Deposit and loan transaction costs 664 693 (29) (4.2) Office supplies and related expense 494 402 92 22.9 Other non-interest expense 1,163 891 272 30.5 Total non-interest expense $ 28,390 $ 27,602 $ 788 2.9 The increase in salaries and employee benefits was due primarily to an increase in incentive compensation and annual merit increases during the current quarter. The decrease in information technology and related expense was due mainly to a decrease in professional services and software maintenance. The decrease in advertising and promotional expense was due primarily to the timing of campaigns and sponsorships. The increase in other non-interest expense was due mainly to the prior year quarter including a partial reversal of a write-down of a property that previously served as one of the Bank's branch locations, due to receiving updated pricing information for the property. The Company's efficiency ratio was 50.61% for the current quarter compared to 57.73% for the prior year quarter. The improvement in the efficiency ratio was due primarily to higher net interest income in the current quarter. 59 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 and the effective tax rate. For the Three Months Ended June 30, Change Expressed in: 2022 2021 Dollars Percent (Dollars in thousands) Income before income tax expense $ 26,769 $ 22,896 $ 3,873 16.9 % Income tax expense 5,617 4,709 908 19.3 Net income $ 21,152 $ 18,187 $ 2,965 16.3 Effective Tax Rate 21.0 % 20.6 % The increase in income tax expense was due primarily to higher pretax income in the current quarter. 60 Average Balance Sheet The following table presents the average balances of our assets, liabilities, and stockholders' equity, and the related annualized weighted average yields and rates on our interest-earning assets and interest-bearing liabilities for the periods indicated, as well as selected performance ratios and other information for the periods shown. Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis. For the Three Months Ended June 30, 2022 June 30, 2021 Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Amount Paid Rate Amount Paid Rate Assets: (Dollars in thousands) Interest-earning assets: One- to four-family loans: Originated $ 3,982,602 $ 32,168 3.23 % $ 3,982,990 $ 33,727 3.39 % Correspondent purchased 2,060,947 14,027 2.72 1,971,209 10,367 2.10 Bulk purchased 154,663 464 1.20 185,198 826 1.78 Total one- to four-family loans 6,198,212 46,659 3.01 6,139,397 44,920 2.93 Commercial loans 890,455 9,104 4.05 805,721 8,744 4.29 Consumer loans 92,790 1,123 4.85 96,980 1,115 4.61 Total loans receivable (1) 7,181,457 56,886 3.16 7,042,098 54,779 3.11 MBS (2) 1,343,891 5,048 1.50 1,529,679 5,360 1.40 Investment securities (2)(3) 522,147 815 0.62 533,076 763 0.57 FHLB stock (4) 166,879 2,695 6.48 73,689 944 5.14 Cash and cash equivalents (5) 1,930,539 3,968 0.81 97,890 26 0.11 Total interest-earning assets 11,144,913 69,412 2.49 9,276,432 61,872 2.66 Other non-interest-earning assets 293,882 430,639 Total assets $ 11,438,795 $ 9,707,071 Liabilities and stockholders' equity: Interest-bearing liabilities: Checking $ 1,068,329 180 0.07 $ 1,007,242 182 0.07 Savings 556,553 74 0.05 513,528 72 0.06 Money market 1,861,302 952 0.21 1,646,970 998 0.24 Retail certificates 2,169,262 6,383 1.18 2,462,543 9,531 1.55 Commercial certificates 84,231 129 0.61 216,371 407 0.75 Wholesale certificates 113,101 69 0.24 251,571 285 0.45 Total deposits 5,852,778 7,787 0.53 6,098,225 11,475 0.75 Borrowings (6) 3,687,592 11,644 1.26 1,582,905 7,826 1.97 Total interest-bearing liabilities 9,540,370 19,431 0.81 7,681,130 19,301 1.01 Non-interest-bearing deposits 586,876 539,423 Other non-interest-bearing liabilities 147,938 203,532 Stockholders' equity 1,163,611 1,282,986 Total liabilities and stockholders' equity $ 11,438,795 $ 9,707,071 Net interest income (7) $ 49,981 $ 42,571 Net interest-earning assets $ 1,604,543 $ 1,595,302 Net interest margin (8)(9) 1.79 1.84 Ratio of interest-earning assets to interest-bearing liabilities 1.17x 1.21x Selected performance ratios: Return on average assets (annualized) (9) 0.74 % 0.75 % Return on average equity (annualized) (9) 7.27 5.67 Average equity to average assets 10.17 13.22 Operating expense ratio (annualized) (10) 0.99 1.14 Efficiency ratio (9)(11) 50.61 57.73 Pre-tax yield on leverage strategy (12) 0.31 — 61 (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 $326 thousand and $5.1 million for the three months ended June 30, 2022 and June 30, 2021, respectively. (4) Included in this line, for the three months ended June 30, 2022, is FHLB stock related to the leverage strategy with an average outstanding balance of $89.4 million and dividend income of $1.4 million at a weighted average yield of 6.48%, and FHLB stock not related to the leverage strategy with an average outstanding balance of $77.5 million and dividend income of $1.3 million at a weighted average yield of 6.48%. There was no FHLB stock related to the leverage strategy during the three months ended June 30, 2021. (5) The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $1.89 billion during the three months ended June 30, 2022. There were no cash and cash equivalents related to the leverage strategy during the three months ended June 30, 2021. (6) Included in this line, for the three months ended June 30, 2022, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $1.99 billion and interest paid of $3.7 million, at a weighted average rate of 0.73%, and FHLB borrowings not related to the leverage strategy with an average outstanding balance of $1.70 billion and interest paid of $8.0 million, at a weighted average rate of 1.87%. There were no FHLB borrowings related to the leverage strategy during the three months ended June 30, 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 June 30, 2022 June 30, 2021 Actual Leverage Adjusted Actual Leverage Adjusted (GAAP) Strategy (Non-GAAP) (GAAP) Strategy (Non-GAAP) Yield on interest-earning assets 2.49 % (0.30) % 2.79 % 2.66 % — % 2.66 % Cost of interest-bearing liabilities 0.81 (0.03) 0.84 1.01 — 1.01 Return on average assets (annualized) 0.74 (0.10) 0.84 0.75 — 0.75 Return on average equity (annualized) 7.27 0.42 6.85 5.67 — 5.67 Net interest margin 1.79 (0.32) 2.11 1.84 — 1.84 Efficiency Ratio 50.61 (1.31) 51.92 57.73 — 57.73 (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. 62 Rate/Volume Analysis The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended June 30, 2022 to the three months ended June 30, 2021. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. For the Three Months Ended June 30, 2022 vs. 2021 Increase (Decrease) Due to Volume (1) Rate Total (Dollars in thousands) Interest-earning assets: Loans receivable $ 1,276 $ 831 $ 2,107 MBS (680) 368 (312) Investment securities (16) 68 52 FHLB stock 1,452 299 1,751 Cash and cash equivalents 2,909 1,033 3,942 Total interest-earning assets 4,941 2,599 7,540 Interest-bearing liabilities: Checking 11 (12) (1) Savings 6 (4) 2 Money market 121 (167) (46) Certificates of deposit (1,773) (1,870) (3,643) Borrowings 4,185 (367) 3,818 Total interest-bearing liabilities 2,550 (2,420) 130 Net change in net interest income $ 2,391 $ 5,019 $ 7,410 (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. 63 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 June 30, 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 June 30, 2022, the Bank had total borrowings, at par, of $1.88 billion, or approximately 20% of total assets, all of which were FHLB borrowings. Of this amount, $275.0 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 June 30, 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 June 30, 2022, the Bank had $1.55 billion of securities that were eligible but unused as collateral for borrowing or other liquidity needs. The Bank has access to other sources of funds for liquidity purposes, such as brokered and public unit certificates of deposit. As of June 30, 2022, the Bank's policy allowed for combined brokered and public unit certificates of deposit up to 15% of total deposits. At June 30, 2022, the Bank did not have any brokered certificates of deposit, and public unit certificates of deposit were approximately 1% of total deposits. The Bank had pledged securities with an estimated fair value of $123.9 million as collateral for public unit certificates of deposit at June 30, 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 June 30, 2022, $1.36 billion of the Bank's certificate of deposit portfolio was scheduled to mature within the next 12 months, including $79.2 million of public unit certificates of deposit and $46.7 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. 64 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 June 30, 2022, the Bank's CBLR was 9.4% and the Company's CBLR was 10.6%, which exceeded the minimum requirements. 65