What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-11-23 compared with 2021-11-24 · 265 added, 219 removed, 698 unchanged (41% of the section changed)

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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.

Because of this relationship, references to management actions, strategies and results of actions apply to both the Bank and the Company except where the context indicates otherwise.

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.

Net income for fiscal year 2021 increased $11.5 million, or 17.9% compared to the prior year, due primarily to recording a $22.3 million provision for credit losses during the prior year compared to recording a negative provision for credit losses of $8.5 million in the current year, as a result of improvements in economic conditions between periods.

This was partially offset by a decrease in net interest income and an increase in income tax expense.

The net interest margin was 1.90% for the current year compared to 2.12% in the prior year.

The decrease in the net interest margin was due primarily to a reduction in asset yields due to the low interest rate environment, partially offset by a decrease in the cost of deposits and borrowings.

Additionally, cash flows from the one-to four-family loan portfolio not reinvested into loans were used to purchase lower yielding securities, which also decreased the overall asset yield.

During the latter portion of the current year, the pace of loan refinance and payoff activity slowed, resulting in lower premium amortization related to correspondent one- to four-family loans compared to earlier in the year, and there was a reduction in the purchases of lower-yielding securities as cash flows from the loan and deposit portfolios slowed, all of which helped stabilize the net interest margin.

As discussed above, the Bank experienced high levels of loan refinance and payoff activity for the majority of the current year, before slowing later in the year.

This was a trend continued from the last half of the prior year.

Additionally, there was significant deposit growth during the latter part of the prior year and the first half of the current year due to a reduction in customer spending and high levels of government assistance.

The loan portfolio decreased $121.7 million, or 1.7%, during the current year, primarily in the correspondent one-to four-family loan portfolio, while the securities portfolio increased $453.7 million, or 29.1%.

Deposit growth during the current year was used to pay down certain maturing advances and purchase securities.

The deposit portfolio increased $406.0 million, or 6.6%, during the current year, while borrowings decreased $206.5 million, or 11.5%.

The deposit growth was primarily in non-maturity deposit accounts, partially offset by a decrease in retail certificates of deposit as customers moved some of the funds from maturing certificates into more liquid investment options such as the Bank's retail money market accounts.

There is some uncertainty regarding how long the increased balance of non-maturity deposits will be retained by the Bank as customers return to more normal spending habits and/or choose to invest in higher-yielding investment options outside of the Bank.

The Bank may be required to replace deposit outflows with higher costing borrowings, which would increase the cost of funds over time.

The Company recognized net income of $84.5 million, or $0.62 per share, for fiscal year 2022 compared to net income of $76.1 million, or $0.56 per share, for the prior fiscal year.

The $8.4 million, or 11.0%, 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 was 1.79% for the current year compared to 1.90% for the prior year.

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 been 2.04% in the current year, a 14 basis point increase from the prior year.

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.

During the latter portion of the current year, as market interest rates increased, the Bank's cost of borrowings and deposits began increasing at a faster pace than the yield on assets.

Management anticipates this may continue in the near term.

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

The leverage strategy during the current year involved borrowing up to $2.60 billion by entering into short-term FHLB advances.

The borrowings were repaid prior to each quarter end.

The proceeds from the borrowings, net of the required FHLB stock holdings which yielded 6.75% during the current year, were deposited at the Federal Reserve Bank of Kansas City ("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 $3.1 million during the current year.

Management continuously monitors the net interest rate spread and overall profitability of the strategy.

It is expected that the strategy will be utilized as long as it remains profitable and/or the borrowing capacity and available capital does not need to be used for other operational purposes.

Total assets were $9.62 billion at September 30, 2022, a decrease of $6.3 million from September 30, 2021.

Loans receivable increased $383.1 million, or 5.4%, during the current year to $7.46 billion at September 30, 2022.

The loan growth was primarily in the one-to four-family correspondent and commercial loan portfolios.

This growth was funded by cash flows from the securities portfolio and FHLB borrowings.

The deposit portfolio decreased $402.5 million during the current year, to $6.19 billion at September 30, 2022.

The decrease was primarily in the certificate of deposit portfolio, partially offset by increases in the retail checking, savings and money market accounts.

During the third quarter of fiscal year 2022, management began increasing offered rates on certificates of deposit, which slowed the runoff in this portfolio.

Due to deposit outflows and loan growth, the Bank entered into additional FHLB borrowings during the second half of the current fiscal year.

FHLB borrowings increased $549.3 million during the year, to $2.13 billion at September 30, 2022.

If deposit outflows continue, the Bank will likely increase FHLB borrowings.

If that occurs, the leverage strategy transaction amount may decrease due to borrowing, collateral capacity and capital levels.

Stockholder's equity was $1.10 billion at September 30, 2022, a decrease of $145.8 million from September 30, 2021.

The decrease was due almost entirely 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 during the year.

The unrealized losses on AFS securities increased $211.3 million, resulting in a $159.8 million reduction in AOCI, net of tax.

The Bank's asset quality continued to remain strong during the current fiscal year, reflected in low delinquency and charge-off ratios.

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The ratio of net charge-offs (recoveries) ("NCOs") during the current year to average loans outstanding during the current year was 0.00%.

In March 2020, the Bank initiated loan modification programs to support and provide relief to borrowers during the COVID-19 pandemic ("COVID-19 modifications").

As of September 30, 2021, $2.7 million of one- to four-family loans and $146.4 million of commercial loans with COVID-19 modifications were still in their deferral period, compared to $39.8 million and $367.4 million, respectively, as of September 30, 2020.

We have observed very low delinquency rates for loans that were previously subject to COVID-19 modifications and have since resumed full payments.

Additionally, in March 2020, the Bank suspended the initiation of foreclosure proceedings for owner-occupied one- to four-family loans, and this suspension remained in place at September 30, 2021.

Approximately 75% of non-performing one- to four family loans at September 30, 2021 either had foreclosure proceedings initiated prior to the foreclosure suspension or would have had foreclosure proceedings initiated if the suspension were not in place.

At September 30, 2021, the Bank had a one-year gap position of $(664.1) million, or (6.9)% 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 the negative gap, net interest income is projected to increase in a rising interest rate environment due to the assumption that the Bank's deposit balances are not expected to reprice to the full extent of the interest rate change.

This assumption is based on a historical analysis of the Bank's deposit pricing behavior.

At September 30, 2022, the Bank had a one-year gap position of $(1.14) billion, or (11.9)% of total assets, meaning the amount of interest-bearing liabilities exceeds the amount of interest-earning assets maturing or repricing during the same period.

See additional discussion in "Part II, Item 7A.

Quantitative and Qualitative Disclosures About Market Risk."

Management is in the process of implementing a new core processing system ("digital transformation") for the Bank, which is expected to be operational by September 2023.

We expect the new platform will allow us to introduce new products and services quickly to drive better efficiencies and provide a more personalized experience for our customers.

Our customers will experience a more modern internet banking experience, including both desktop and mobile.

Internet banking will deliver real-time alerts and provide our customers the ability to manage their own debit cards.

Our customers will also have multiple options for real-time payments, which positions the Bank for faster payment channels in the future.

Management anticipates information technology and related expenses will increase in fiscal year 2023 in conjunction with the digital transformation.

See additional discussion in the "Comparison of Operating Results for the Years Ended September 30, 2022 and 2021" section below.

Critical Accounting Estimates

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The cash flows are discounted back to the balance sheet date using each loan's effective yield, to arrive at a present value of future cash flows, which is compared to the amortized cost basis of the loan pool to determine the amount of ACL required by the calculation.

Management then considers qualitative factors when accessing the overall level of ACL.

Management then considers qualitative factors when assessing the overall level of ACL.

See "Allowance for Credit Losses on Loans Receivable" and "Reserve for Off-Balance Sheet Credit Exposures" within "Part II, Item 8.

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One of the most significant judgments used in projecting loss rates when estimating the ACL and reserves for off-balance sheet credit exposures is the macro-economic forecast provided by a third party.

The economic indices sourced from the macro-economic forecast and used in projecting loss rates are national unemployment rate, changes in commercial real estate prices, changes in home values, and changes in the United States gross domestic product.

The economic indices sourced from the macro-economic forecast and used in projecting loss rates are the national unemployment rate, changes in commercial real estate prices, changes in home values, and changes in the United States gross domestic product.

The economic index used in the calculation to which the calculation is most sensitive is the national unemployment rate.

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Other key assumptions in the calculation of the ACL and reserve for off-balance sheet credit exposures estimates include the forecast and reversion to mean time periods and prepayment and curtailment assumptions.

The calculation is much less sensitive to these assumptions than the macro-economic forecasts.

The calculation is less sensitive to these assumptions than the macro-economic forecasts.

The macro-economic forecast is applied for a reasonable and supportable time period before reverting to long-term historical averages for each economic index.

The forecast and reversion to mean time period used for each economic index at September 30, 2022 was four quarters.

Prepayment and curtailment assumptions are based on the Company's historical experience over the trailing 12 months and are adjusted by management as deemed necessary.

Prepayment and

curtailment assumptions are based on the Company's historical experience and are adjusted by management as deemed necessary.

The prepayment and curtailment assumptions vary based on loan product type.

The ACL and reserves for off-balance sheet credit exposures may be materially affected by qualitative factors, especially during periods of economic uncertainty, for items not reflected in the lifetime credit loss calculation, but which are deemed appropriate by management's current assessment of the risks related to the loan portfolio and/or external factors.

of other external factors such as significant unique events or conditions, and actual and/or expected change in economic conditions, real estate values, and/or other economic developments.

The qualitative factors applied by management at September 30, 2021 were (1) the balance and trending of large-dollar special mention loans, (2) economic uncertainties related to the job market and the unevenness of the recovery in certain industries, and (3) COVID-19 loan modifications related to commercial real estate loans.

The ACL and reserves for off-balance sheet credit exposures may be materially affected by qualitative factors, especially during periods of economic uncertainty, for items not reflected in the economic forecast and/or discounted cash flow model, but which are deemed appropriate by management's current assessment of the risks related to the loan portfolio and/or external factors.

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

The qualitative factors applied by management at September 30, 2022 were (1) economic uncertainty that may not be adequately captured in the third party economic forecast scenarios and (2) other management considerations related to commercial loans to account for credit risks not fully reflected in the discounted cash flow model.

The qualitative factors applied at September 30, 2022, and the importance and levels of the qualitative factors applied, may change in future periods depending on the level of changes to items such as the uncertainty of economic conditions and management's assessment of the level of credit risk within the loan portfolio as a result of such changes, compared to the amount of ACL calculated by the model.

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Loans Receivable and Allowance for Credit Losses - Allowance for Credit Losses" for additional information regarding the qualitative factors applied at September 30, 2022.

The ACL and the reserves for off balance sheet credit exposures was $19.8 million and $5.7 million, respectively at September 30, 2021, compared to $26.8 million and $7.8 million, respectively, at October 1, 2020, which was the date we adopted Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses:

Measurement of Credit Losses on Financial Instruments .

The $7.0 million decrease in the ACL and $2.0 million decrease in the reserves for off-balance sheet credit exposures was primarily attributable to the improved economic conditions between time periods, specifically in the national unemployment rate.

The average national unemployment rate during the four-quarter macro-economic forecast selected by management as of October 1, 2020 was 10.8%, compared to 3.8% during the four-quarter macro-economic forecast selected at September 30, 2021.

The ACL and the reserves for off-balance sheet credit exposures was $16.4 million and $4.8 million, respectively at September 30, 2022, compared to $19.8 million and $5.7 million, respectively, at September 30, 2021.

The $3.5 million decrease in the ACL and $992 thousand decrease in the reserves for off-balance sheet credit exposures was primarily attributable to a reduction in commercial loan qualitative factors, partially offset by an increase related to (1) growth in the loan portfolio and an increase in the balance of off-balance sheet credit exposures and (2) a less favorable economic forecast compared to the prior year.

See "Part II, Item 8.

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

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

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

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

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2022 2021 Dollars Percent

(Dollars in thousands)

(Dollars and shares in thousands)

Total assets $ 9,624,897 $ 9,631,246 $ (6,349) (0.1) %

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Average number of diluted shares outstanding 135,700 135,496 204 0.2

Total assets increased due mainly to an increase in the securities portfolio, partially offset by decreases in cash and cash equivalents and loans receivable.

Cash flows from the deposit portfolio were used to purchase securities and pay down certain maturing borrowings.

Loans Receivable.

Total loans, net at September 30, 2022 was $7.46 billion, an increase of $383.1 million from September 30, 2021.

The increase was primarily due to growth in the one- to four-family correspondent loan portfolio and commercial real estate and construction loan portfolio, along with a slow down in one- to four-family prepayment speeds due to higher market interest rates.

Originating and purchasing loans secured by one- to four-family residential properties is the Bank's primary lending business, resulting in a concentration in residential first mortgage loans secured by properties located in Kansas and Missouri.

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If a loan pays off before the scheduled maturity date, the remaining premium is recognized as reduction in interest income.

During the current fiscal year, the Bank recognized a significant amount of premium amortization due to payoffs and endorsements.

During fiscal year 2021, the Bank recognized a significant amount of premium amortization due to prepayment and endorsement activity.

Prepayment and endorsement activity slowed significantly during the last half of the current fiscal year due to the increase in market interest rates.

In the past, the Bank has also purchased one- to four-family loans from correspondent and nationwide lenders in bulk loan packages ("bulk purchased").

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The majority of these loans are secured by property located within the Bank's Kansas City market area.

The Bank's owner-occupied construction-to-permanent loan program combines the construction loan and the permanent loan into one loan, allowing the borrower to secure the same interest rate structure throughout the construction period and the permanent loan term.

The Bank's owner-occupied construction-to-permanent loan program combines the construction loan and the permanent loan into one loan,

allowing the borrower to secure the same interest rate structure throughout the construction period and the permanent loan term.

As of September 30, 2022, there were $178.0 million of adjustable-rate one- to four-family loans in the portfolio for which the repricing index was tied to LIBOR, which is being discontinued and will no longer be available after June 30, 2023.

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

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

The Bank offers a variety of secured consumer loans, including home equity loans and lines of credit, home improvement loans, vehicle loans, and loans secured by savings deposits.

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

Total loans receivable increased $375.6 million, or 5.3%, during the current year.

The rate on the portfolio increased 12 basis points during the current year due primarily to upward repricing of existing loans as a result of an increase in market interest rates, as well as originations and purchases at interest rates higher than the overall portfolio rate.

September 30, 2022 September 30, 2021

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ACL 16,371 19,823

Discounts/unearned loan fees 29,556 29,190

Deferred loan fees/discounts 29,736 29,556

Premiums/deferred costs (38,645) (34,448)

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The following table presents the contractual maturity of our loan portfolio, along with associated weighted average yields, at September 30, 2022.

Loans which have adjustable interest rates are shown as maturing in the period during which the contract is due.

Loans that have adjustable interest rates are shown as maturing in the period during which the contract is due.

The table does not reflect the effects of possible prepayments or enforcement of due on sale clauses.

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Total loans receivable $ 109,879 5.71 $ 364,693 4.01 $ 2,320,244 3.10 $ 4,676,854 3.33 7,471,670 3.33

Discounts/unearned loan fees 29,556

Deferred loan fees/discounts 29,736

Premiums/deferred costs (38,645)

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Total loans receivable $ 6,138,205 $ 1,223,586 $ 7,361,791

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, discounts/unearned loan fees, and premiums/deferred costs.

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.

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Correspondent purchased - one- to four-family $ 452,093 3.35 $ 671,077 2.65

Participations - commercial 40,314 3.66 46,126 4.29

Purchases and participations - commercial 87,365 3.47 40,314 3.66

Total fixed-rate purchased/participations 539,458 3.37 711,391 2.70

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Correspondent purchased - one- to four-family 129,216 3.49 18,450 2.45

Participations - commercial 94,400 4.36 47,500 4.04

Purchases and participations - commercial 33,000 4.87 94,400 4.36

Total adjustable-rate purchased/participations 162,216 3.77 112,850 4.05

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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 September 30, 2022, along with associated weighted average rates.

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

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

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$ 221,341 4.46

Commercial Loans - During fiscal year 2021, the Bank originated $251.5 million of commercial loans, including $22.8 million of Paycheck Protection Program ("PPP") loans, and entered into commercial loan participations totaling $134.7 million.

The Bank also processed commercial loan disbursements, excluding lines of credit, of approximately $270.0 million at a weighted average rate of 3.59%.

Additionally, during the current fiscal year, $63.5 million of PPP loans were paid off, primarily by the U.S.

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

The following table presents the Bank's commercial real estate and commercial construction loans and loan commitments by type of primary collateral, as of September 30, 2021.

Commercial Loans - During fiscal year 2022, the Bank originated $267.8 million of commercial loans and entered into commercial loan participations totaling $120.4 million.

The Bank processed commercial loan disbursements, excluding lines of credit, of approximately $342.7 million at a weighted average rate of 4.26%.

As of September 30, 2022 and September 30, 2021, the Bank's commercial and industrial gross loan amounts (unpaid principal plus undisbursed amounts) totaled $100.4 million and $90.7 million, respectively, and commitments totaled $458 thousand 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 September 30, 2022, the Bank had 25 commercial real estate and commercial construction loan commitments totaling $98.7 million, at a weighted average rate of 4.78%, which are not included in the table below.

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

Unpaid Undisbursed Gross Loan Outstanding % of

Count Principal Amount Amount Commitments Total Total

Of the total commercial undisbursed amounts and commitments outstanding as of September 30, 2022, management anticipates approximately $90 million will be funded during the December 2022 quarter, $60 million during the March 2023 quarter, $50 million during the June 2023 quarter, and $46 million during the September 2023 quarter.

September 30, 2022 September 30, 2021

Unpaid Undisbursed Gross Loan Gross Loan

Count Principal Amount Amount Amount

(Dollars in thousands)

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Hotel 10 152,332 29,214 181,546 194,665

Multi-family 36 80,538 42,197 122,735 66,199

Office building 84 68,114 41,539 109,653 109,987

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Single use building 24 21,272 20,636 41,908 47,028

Multi-family 38 53,173 13,026 66,199 690 66,889 6.3

Other 103 47,737 5,317 53,054 36,167

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Weighted average rate 4.46 % 4.90 % 4.56 % 4.01 %

The following table summarizes the Bank's commercial real estate and commercial construction loans and loan commitments by state as of September 30, 2021.

Unpaid Undisbursed Gross Loan Outstanding % of

Count Principal Amount Amount Commitments Total Total

The following table summarizes the Bank's commercial real estate and commercial construction loans by state as of the dates indicated.

September 30, 2022 September 30, 2021

Unpaid Undisbursed Gross Loan Gross Loan

Count Principal Amount Amount Amount

(Dollars in thousands)

Kansas 602 $ 368,816 $ 54,981 $ 423,797 $ 348,835

Texas 11 135,644 137,480 273,124 — 273,124 25.7

Missouri 160 232,655 63,788 296,443 232,041

Texas 12 180,278 100,562 280,840 273,124

Colorado 6 20,867 13,510 34,377 36,099

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

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

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

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Non-performing assets include nonaccrual loans and OREO.

OREO primarily includes assets acquired in settlement of loans.

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

At September 30, 2021, there were $7.4 million of nonaccrual one- to four-family loans for which foreclosure proceedings either had been initiated prior to the foreclosure suspension or would have been initiated if the foreclosure suspension were not in place.

September 30,

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4 $ 307 3 $ 170

Consumer 1 21 — —

Total non-performing assets 71 $ 9,771 112 $ 13,606

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(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.

Of the one- to four-family COVID-19 loan modifications that had completed the deferral period by September 30, 2021, $2.2 million were 30 to 89 days delinquent and $2.8 million were 90 or more days delinquent as of September 30, 2021.

Of the commercial COVID-19 loan modifications that had completed the deferral period by September 30, 2021, $3 thousand were 30 to 89 days delinquent and none were 90 or more days delinquent as of September 30, 2021.

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 September 30, 2022.

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

The increase in commercial special mention loans at September 30, 2021 compared to September 30, 2020 was due mainly to the addition of two commercial loans for which the borrowers have been impacted by the COVID-19 pandemic.

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

Subsequent to September 30, 2021, the underlying economic considerations being monitored for these two loans returned to levels deemed appropriate by the Company, and the loans were removed from special mention, resulting in a $49.4 million reduction in the balance of special mention loans.

The special mention ACL associated with these two loans at September 30, 2021 was approximately $2.2 million.

The decrease in commercial special mention loans at September 30, 2022 compared to September 30, 2021 was due mainly to three commercial loans moving to the pass classification during the year as the underlying economic conditions being monitored by management improved to levels deemed appropriate by the Company.

September 30, 2022 September 30, 2021

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

The Company adopted ASU 2016-13, Financial Instruments - Credit Losses:

Measurement of Credit Losses on Financial Instruments on October 1, 2020.

The ASU, as amended, replaces the incurred loss methodology in accounting principles generally accepted in the United States of America ("GAAP"), which required credit losses to be recognized when it is probable that a loss has been incurred, with an expected credit loss methodology, which is commonly known as the current expected credit loss ("CECL") methodology.

Information as of October 1, 2020 is included in the tables below for comparability purposes.

September 30, 2021 October 1, 2020 September 30, 2020

% of % of % of

Amount Loans to Amount Loans to Amount Loans to

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

September 30, 2022 September 30, 2021

Amount Loans to Amount Loans to

of ACL Total Loans of ACL Total Loans

(Dollars in thousands)

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

September 30, October 1, September 30,

2021 2020 2020

The reduction in the ratio of ACL to loans receivable for commercial real estate loans and commercial construction loans from September 30, 2021 to September 30, 2022 was due to a reduction in commercial loan qualitative factors.

September 30, September 30,

One- to four-family:

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

The current year NCOs were primarily in the commercial loan portfolio.

The ratio of NCOs during the current year to average non-performing assets was higher than the prior year due to higher NCOs in the current year compared to a net recovery in the prior year.

The ACL to nonaccrual loans at end of period ratio and ACL to loans receivable, net at end of period ratio were lower in the current year compared to the prior year due primarily to a lower ACL balance at September 30, 2021.

As discussed above, on October 1, 2020, the Company adopted CECL, which is a different credit loss estimate methodology than the methodology applicable at September 30, 2020.

Year Ended September 30,

On October 1, 2020, the Bank adopted ASU 2016-13, Financial Instruments - Credit Losses:

Measurement of Credit Losses on Financial Instruments ("CECL").

The current year net recovery was due primarily to recoveries on one- to four-family originated loans and commercial real estate loans.

The ratio of NCOs during the current year to average non-performing assets was lower than the prior year due to a net recovery in the current year compared to a net charge-off in the prior year.

The ratio of ACL to nonaccrual loans was higher in the current year compared to the prior year due mainly to a lower balance of nonaccrual loans compared to the prior year period, partially offset by lower ACL at September 30, 2022.

The ratio of ACL to loans receivable, net was lower in the current year compared to the prior year due primarily to a reduction in ACL.

At or For the Year Ended September 30,

2022 2021 2020

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Recoveries 256 237 444

Net (charge-offs) recoveries (478) 1 13

Net recoveries (charge-offs) 186 (478) 1

Provision for credit losses (3,638) (6,465) 22,300

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ACL to loans receivable, net at end of period 0.22 0.28 0.44

ACL to NCOs 41.5x N/M (1)

ACL to NCOs N/M (1)

41.5x N/M (1)

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

The following table presents NCOs, average loans, and NCOs as a percentage of average loans, by loan type, for the periods indicated.

Year Ended September 30,

For the Year Ended September 30,

2022 2021 2020

NCOs Average Loans NCOs as a % of Average Loans NCOs Average Loans NCOs as a % of Average Loans NCOs Average Loans NCOs as a % of Average Loans

NCOs Average Loans % of Average Loans NCOs Average Loans % of Average Loans NCOs Average Loans % of Average Loans

(Dollars in thousands)

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Overall, fixed-rate securities comprised 95% of our securities portfolio at September 30, 2022.

During the current fiscal year purchases exceeded maturities and repayments, resulting in a $453.7 million increase in the balance.

Securities were purchased with cash flows from the loan portfolio and growth in the deposit portfolio that was not used to pay down maturing borrowings.

The portfolio weighted average yield decreased due to purchases of securities at yields lower than the existing portfolio due to the low interest rate environment during the current year.

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

The balance of securities decreased during the current fiscal year as cash flows from the securities portfolio were generally used to fund loan portfolio growth.

The increase in the yield during the current year was due to purchases at yields higher than the overall portfolio and upward repricing of the adjustable-rate portion of the portfolio as a result of higher market interest rates.

The increase in the WAL in the current year was also due primarily to higher market interest rates which lengthened the life of the securities by decreasing the amount of prepayments.

September 30, 2022 September 30, 2021

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(Dollars in thousands)

Fixed-rate securities:

MBS $ 1,243,270 1.57 % 4.7 $ 1,484,211 1.35 % 3.5

Government-sponsored enterprises ("GSE") debentures 519,977 0.61 2.9 519,971 0.61 3.7

Corporate bonds 4,000 5.12 9.6 — — —

Municipal bonds 1,243 2.63 6.5 4,274 1.81 0.3

Total fixed-rate securities 1,887,890 1.11 3.6 1,325,115 1.49 3.1

Adjustable-rate securities:

MBS 120,566 1.99 3.2 204,490 2.49 2.9

Total securities portfolio $ 2,008,456 1.16 3.5 $ 1,529,605 1.62 3.1

$ 1,768,490 1.29 4.2 $ 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 composition and maturities of the investment and MBS portfolio at September 30, 2021 are indicated in the following table by remaining contractual maturity, without consideration of call features or pre-refunding dates, along with associated weighted average yields.

The composition and maturities of the securities portfolio at September 30, 2022 is indicated in the following table by remaining contractual maturity, without consideration of call features or pre-refunding dates, along with associated weighted average yields.

The weighted average yields were calculated by multiplying each carrying value by its yield and dividing the sum of these results by the total carrying values.

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GSE debentures — — 469,827 0.61 — — — — 469,827 0.61

Corporate bonds — — — — 3,695 5.12 — — 3,695 5.12

Municipal bonds 210 3.00 — — 951 2.55 — — 1,161 2.63

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

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

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

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 Year Ended

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Ending balance - carrying value $ 1,563,307 1.29 4.2 $ 2,014,608 1.16 3.5

Total liabilities increased $186.6 million, or 2.3% during the current year, due to an increase in deposits, partially offset by a decrease in borrowings, as cash flows from deposit growth were used to pay off maturing borrowings.

Total liabilities were $8.53 billion at September 30, 2022, compared to $8.39 billion at September 30, 2021.

The increase in liabilities between September 30, 2021 and September 30, 2022 was due primarily to an increase in FHLB borrowings to fund deposit outflows and loan growth.

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

The decrease in the deposit portfolio rate during the current year was due to a reduction in offered rates due to the low interest rate environment, which resulted in certificates of deposit repricing to lower offered rates as balances renewed, along with growth in lower costing non-maturity deposits.

At September 30,

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$ 6,194,866 0.63 100.0 % $ 6,597,396 0.59 100.0 %

The following table sets forth the weighted average maturity ("WAM") information for our certificates of deposit, in years, as of September 30, 2021.

Retail certificates of deposit 1.3

Commercial certificates of deposit 0.5

Public unit certificates of deposit 0.5

Total certificates of deposit 1.1

Deposits decreased $402.5 million during the current year.

The decrease was primarily in the certificate of deposit portfolio, partially offset by an increase in retail checking, savings and money market accounts.

Retail certificates of deposit decreased $268.0 million, with the decrease occurring in the medium-term and long-term categories.

Commercial certificates of deposit decreased $153.9 million, which was primarily related to one commercial customer for which the reduction in the current year was anticipated.

During the third quarter of the current year, the Bank began increasing rates offered on retail certificates of deposit and money market accounts.

Even with the increase in offered rates, management anticipates continued retail deposit outflows in future periods, primarily in transaction accounts, due to strong consumer spending, along with competition from other financial institutions and/or brokerage firms that may offer alternative higher yielding investment options.

As of September 30, 2022 and 2021, approximately $721.8 million and $866.0 million, respectively, of our deposit portfolio was uninsured.

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Over 12 months 125,350

Total borrowings at September 30, 2022 were $2.13 billion, an increase of $549.3 million from September 30, 2021.

The $2.13 billion was composed of $1.70 billion in fixed-rate FHLB advances, $365.0 million in variable-rate advances tied to interest rate swaps, and $75.0 million on the FHLB line of credit.

The increase in borrowings was a result of deposit outflows, loan growth and a slow-down in loan prepayment speeds due to an increase in market interest rates.

If deposit outflows continue, the Bank will likely enter into additional FHLB borrowings.

During the current year, the Bank reimplemented the leverage strategy, as discussed in the "Executive Summary" section above.

These borrowings were repaid prior to September 30, 2022.

If the Bank enters into additional FHLB borrowings

during fiscal year 2023 to provide sufficient liquidity for operations, the amount of the leverage strategy transaction may decrease compared to the fiscal year 2022 amount due to borrowing and collateral capacity levels.

The Bank primarily uses long-term fixed-rate borrowings with no embedded options to lengthen the average life of the Bank's liabilities.

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These borrowings are laddered in order to prevent large amounts of liabilities repricing in any one period.

The following table presents the maturity of term borrowings, which consist entirely of FHLB advances, along with associated weighted average contractual and effective rates as of September 30, 2021.

Maturity by FHLB Interest rate Contractual Effective

Fiscal Year Advances swaps (1)

Rate Rate (2)

The following table presents the maturity of non-amortizing term borrowings, which consist entirely of FHLB advances, along with associated weighted average contractual and effective rates as of September 30, 2022.

In addition to the borrowings in the table below, there were two straight-line amortizing FHLB advances outstanding at September 30, 2022, including a $47.5 million advance at a rate of 3.50% with quarterly payments of $2.5 million through June 2027 and a $100.0 million advance at a rate of 4.45% with quarterly payments of $4.9 million through October 2027.

Maturity by Contractual Effective

Fiscal Year Amount Rate Rate (1)

(Dollars in thousands)

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$ 1,915,000 2.29 2.31

(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.

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

The expected WAL of the interest rate swaps was 4.1 years at September 30, 2021.

(1) 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 with borrowings being reported at par.

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 decrease in total borrowings during the current year was due to not renewing borrowings that matured.

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

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 decrease in the effective rate during the current year was due primarily to terminating certain interest rate swaps, prepaying certain advances, and replacing maturing advances at lower market interest rates.

The WAM is the remaining weighted average contractual term in years.

The weighted average maturity ("WAM") is the remaining weighted average contractual term in years.

The beginning and ending WAMs represent the remaining maturity at each date presented.

For new borrowings, the WAMs presented are as of the date of issue.

For the Year Ended

September 30, 2021 September 30, 2020

For the Year Ended September 30,

Effective Effective

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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 September 30, 2021.

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 non-amortizing term borrowings for the next four quarters as of September 30, 2022.

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

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Repricing Rate 1.19 % 1.26 % 1.15 % 1.61 % 1.31 %

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

The following table sets forth the WAM information for our certificates of deposit, in years, as of September 30, 2022.

Retail certificates of deposit 1.4

Commercial certificates of deposit 0.9

Public unit certificates of deposit 0.5

Total certificates of deposit 1.4

Stockholders' Equity.

During the current year, the Company paid cash dividends totaling $117.9 million and repurchased common stock totaling $1.5 million.

The cash dividends paid during the current year totaled $0.87 per share and consisted of a $0.40 per share True Blue Capitol cash dividend, a $0.13 per share cash true-up dividend related to fiscal year 2020 earnings, and four regular quarterly cash dividends of $0.085 per share, totaling $0.34 per share.

Total stockholders' equity at September 30, 2022 was $1.10 billion, a $145.8 million decrease from September 30, 2021.

The decrease was almost entirely related to a reduction in AOCI as a result of unrealized losses on AFS securities due to an increase in market interest rates.

During the current year, the Company paid cash dividends totaling $103.1 million.

These cash dividends totaled $0.76 per share and consisted of a $0.20 per share True Blue Capitol cash dividend, a $0.22 per share cash true-up dividend related to fiscal year 2021 earnings, and four regular quarterly cash dividends of $0.085 per share, totaling $0.34 per share.

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

At September 30, 2022, this ratio was 9.9%.

The increase in unrealized losses on AFS securities and the related impact on AOCI reduced the Bank's ratio of equity to total assets by approximately 150 basis points.

For additional information, see "Part II, Item 8.

Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 15.

Accumulated Other Comprehensive Income."

On October 25, 2022, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.6 million, payable on November 18, 2022 to stockholders of record as of the close of business on November 4, 2022.

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The cash true-up dividend is payable on December 2, 2022 to stockholders of record as of the close of business on November 18, 2022, and is the result of the Board of Directors' commitment to distribute to stockholders 100% of the annual earnings of the Company for fiscal year 2022.

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

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

This plan has no expiration date;

however, the FRB's existing approval for the Company to repurchase shares extends through August 2022.

At October 1, 2021, Capitol Federal Financial, Inc., at the holding company level, had $93.8 million on deposit at the Bank.

At September 30, 2022, Capitol Federal Financial, Inc., at the holding company level, had $104.0 million in cash on deposit at the Bank.

For fiscal year 2023, 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.

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It is anticipated that the fiscal year 2023 cash true-up dividend will be paid in December 2023.

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.

As of September 30, 2022, there was $44.7 million authorized under an existing stock repurchase plan for purchases of the Company's common stock.

This plan has no expiration date;

however, the FRB's existing approval for the Company to repurchase shares extends through August 2023.

On October 27, 2022, the Company announced its intention to resume repurchasing shares under the existing plan.

The amount and timing of the stock repurchases is dependent on the market price of the Company's common stock.

Subsequent to September 30, 2022 and through November 17, 2022, the Company repurchased 1,368,805 shares at an average price of $8.09 per share.

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

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

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

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

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

Given the state of economic uncertainty, the Company elected to defer the annual True Blue dividend in June 2020.

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.

The $0.40 per share True Blue Capitol 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.

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.

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True-up dividends paid 37,701 0.280 29,850 0.220 17,614 0.130

True Blue dividends paid 54,210 0.400 — — 34,446 0.250

True Blue Capitol dividends paid 27,143 0.200 54,210 0.400 — —

Calendar year-to-date dividends paid $ 110,955 $ 0.820 $ 130,147 $ 0.960 $ 64,327 $ 0.470

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 fiscal years 2022 to 2021.

For the comparison of fiscal years 2021 to 2020, see "Part II, Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended September 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.

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 Year Ended September 30,

Increase (Decrease) Due to

(Dollars in thousands)

Interest-earning assets:

Loans receivable $ 5,333 $ (6,699) $ (1,366)

MBS (1,338) (655) (1,993)

Investment securities 246 197 443

FHLB stock 4,530 1,585 6,115

Cash and cash equivalents 9,569 8,591 18,160

Total interest-earning assets 18,340 3,019 21,359

Interest-bearing liabilities:

Checking 63 (82) (19)

Savings 31 (11) 20

Money market 606 (156) 450

Certificates of deposit (6,461) (7,940) (14,401)

Borrowings 19,856 (2,140) 17,716

Total interest-bearing liabilities 14,095 (10,329) 3,766

Net change in net interest income $ 4,245 $ 13,348 $ 17,593

(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 and not being utilized during the prior year.

Average Balance Sheets .

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FHLB stock (4)

149,236 10,031 6.72 77,250 3,916 5.07

Cash and cash equivalents (5)

1,562,274 18,304 1.16 131,798 144 0.11

Total interest-earning assets 10,783,526 279,540 2.59 9,196,045 258,181 2.80

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Money market 1,840,898 4,578 0.25 1,598,838 4,128 0.26

Retail/commercial certificates 2,688,811 42,034 1.56 2,716,945 55,238 2.03

Retail certificates 2,203,452 27,664 1.26 2,491,427 40,475 1.62

Commercial certificates 103,865 666 0.64 197,384 1,559 0.79

Wholesale certificates 150,689 497 0.33 252,623 1,192 0.47

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Total interest-bearing liabilities 9,187,164 86,946 0.94 7,636,737 83,180 1.09

Non-interest-bearing deposits 573,954 509,778

Other non-interest-bearing liabilities 178,526 219,328

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$ 192,594 $ 175,001

Net interest rate spread (6)

Net interest-earning assets $ 1,596,362 $ 1,559,308

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(3) The average balance of investment securities includes an average balance of nontaxable securities of $1.7 million and $6.6 million for the years ended September 30, 2022 and 2021, respectively.

(4) Included in this line, for the year ended September 30, 2022, is FHLB stock related to the leverage strategy with an average outstanding balance $71.0 million and dividend income of $4.8 million at a weighted average yield of 6.75%, and FHLB stock not related to the leverage strategy with an average outstanding balance of $78.2 million and dividend income of $5.2 million at a weighted average yield of 6.69%.

There was no FHLB stock related to the leverage strategy during the year ended September 30, 2021.

(5) The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $1.51 billion during the year ended September 30, 2022.

There were no cash and cash equivalents related to the leverage strategy during the year ended September 30, 2021.

(6) Included in this line, for the year ended September 30, 2022, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $1.58 billion and interest paid of $18.5 million, at a weighted average rate of 1.15%, and FHLB borrowings not related to the leverage strategy with an average outstanding balance of $1.71 billion and interest paid of $34.0 million, at a weighted average rate of 1.98%.

There were no FHLB borrowings related to the leverage strategy during the year ended September 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.

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Net interest income depends on the average balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them.

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

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

Rate/Volume Analysis.

For the comparison of fiscal years 2020 to 2019, see "Part II, Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020.

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.

(9) The table below provides a reconciliation between certain performance ratios presented in accordance with accounting principles generally accepted in the United States of America ("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.

The pre-tax yield on the leverage strategy was 0.25% for the year ended September 30, 2022.

For the Year Ended September 30,

Increase (Decrease) Due to

Volume Rate Total

(Dollars in thousands)

Interest-earning assets:

Loans receivable $ (13,055) $ (27,542) $ (40,597)

MBS 9,247 (10,857) (1,610)

Investment securities 2,261 (3,903) (1,642)

FHLB stock (1,235) (676) (1,911)

Cash and cash equivalents (250) (787) (1,037)

Total interest-earning assets (3,032) (43,765) (46,797)

Interest-bearing liabilities:

Checking 172 (163) 9

Savings 65 (77) (12)

Money market 1,495 (4,014) (2,519)

Certificates of deposit (1,154) (15,516) (16,670)

Borrowings (7,892) (5,379) (13,271)

Total interest-bearing liabilities (7,314) (25,149) (32,463)

Net change in net interest income $ 4,282 $ (18,616) $ (14,334)

Actual Leverage Adjusted Actual Leverage Adjusted

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

Yield on interest-earning assets 2.59 % (0.19) % 2.78 % 2.80 % — % 2.80 %

Cost of interest-bearing liabilities 0.94 0.04 0.90 1.09 — 1.09

Net interest margin 1.79 (0.25) 2.04 1.90 — 1.90

Comparison of Operating Results for the Years Ended September 30, 2022 and 2021

The Company recognized net income of $76.1 million, or $0.56 per share, for fiscal year 2021 compared to net income of $64.5 million, or $0.47 per share, for fiscal year 2020.

The increase in net income was due primarily to recording a $22.3 million provision for credit losses during the prior year compared to recording a negative provision for credit losses of $8.5 million in the current year, partially offset by a decrease in net interest income and an increase in income tax expense.

Net interest income decreased $14.3 million, or 7.6%, from the prior year to $175.0 million for the current year.

The Company recognized net income of $84.5 million, or $0.62 per share, for the current year compared to net income of $76.1 million, or $0.56 per share, for the prior year.

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 11 basis points, from 1.90% for the prior year to 1.79% for the current year.

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

Excluding the effects of the leverage strategy, the net interest margin would have increased 14 basis points, from 1.90% for the prior year to 2.04% for the current year.

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.

Interest and Dividend Income

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MBS 19,406 21,399 (1,993) (9.3)

Cash and cash equivalents 18,304 144 18,160 12,611.1

FHLB stock 10,031 3,916 6,115 156.2

Investment securities 3,268 2,825 443 15.7

Cash and cash equivalents 144 1,181 (1,037) (87.8)

Total interest and dividend income $ 279,540 $ 258,181 $ 21,359 8.3

The decrease in interest income on loans receivable was due mainly to a decrease in the weighted average yield, primarily in the one- to four-family loan portfolio.

The decrease in the weighted average yield on the one- to four-family loan portfolio was due to endorsements and refinances to lower market rates, higher premium amortization related to correspondent one- to four-family loans due to high payoff and endorsement activity, along with adjustable-rate loans repricing to lower market rates, and the origination and purchase of new loans at lower market rates.

Additionally, the average balance of the portfolio decreased compared to the prior year due primarily to a reduction in the correspondent one-to four-family loan portfolio.

See "Average Balance Sheets" above.

The decrease in interest income on the MBS portfolio was due to a decrease in the weighted average yield as a result of purchases at lower market yields and the repricing of existing adjustable-rate MBS to lower market yields, partially offset by an increase in the average balance of the portfolio.

Cash flows from the loan portfolio were used to purchase securities during the current fiscal year.

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

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

The decrease in interest income on investment securities was due to a decrease in the weighted average yield as a result of purchases at lower market yields, partially offset by an increase in the average balance of the portfolio.

The decrease in interest income on cash and cash equivalents was due primarily to a decrease in the yield earned on cash held at the Federal Reserve Bank of Kansas City ("FRB of Kansas City").

The decrease in interest income on loans receivable was due to a lower weighted average rate on the originated and correspondent one- to four-family loan portfolio during the current year, mostly offset by an increase in the average balance of the loan portfolio.

The lower weighted average rate was due to endorsements, refinances, originations and purchases at lower market rates at the time of the transactions in the prior fiscal year, 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 due to the slow-down in prepayments and endorsements resulting from the increase in market interest rates during the last half of the current fiscal year, partially offsetting the reduction in interest income related to a lower weighted average rate on the one- to four-family portfolio mentioned above.

The decrease in interest income on the MBS portfolio was due primarily to a decrease in the average balance of the portfolio, as repayments were primarily used to fund loan growth.

The increase in interest income on cash and cash equivalents and the increase in dividend income on FHLB stock were due mainly to the leverage strategy being utilized during the current year and not being utilized during the prior year.

Additionally, market interest rates increased during the year resulting in an increase in the yield on cash, and FHLB increased the dividend rate paid during the year.

The increase in interest income on investment securities was due primarily to an increase in the average balance of the portfolio, along with an increase in the yield due to purchases at higher market yields during the current year.

Interest Expense

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INTEREST EXPENSE:

Deposits $ 48,406 $ 67,598 $ (19,192) (28.4) %

Borrowings $ 52,490 $ 34,774 $ 17,716 50.9 %

Deposits 34,456 48,406 (13,950) (28.8)

Total interest expense $ 86,946 $ 83,180 $ 3,766 4.5

The decrease in interest expense on deposits was due mainly to a decrease in the weighted average rate paid on retail certificates of deposit, money market accounts, and wholesale certificates of deposit.

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

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

The decrease in interest expense on borrowings was also a result of lowering the cost of FHLB advances by prepaying certain advances during the current and prior years.

The increase in interest expense on borrowings was due to the leverage strategy being utilized during a portion of the current year and not being utilized during the prior year.

Interest expense on borrowings associated with the leverage strategy totaled $18.5 million during the current year.

Interest expense on FHLB borrowings not associated with the leverage strategy was lower in the current year due to terminating or not renewing certain interest rate swap agreements, not replacing some maturing FHLB advances and prepaying certain advances during fiscal year 2021, partially offset by an increase in the average balance due to an increase in FHLB borrowings to fund operational needs during the latter portion of the current year.

The decrease in interest expense on deposits was due mainly to a decrease in the weighted average rate paid and the average balance of the retail certificate of deposit portfolio.

Retail certificates of deposit repriced downward during the prior year and first half of the current year as they were renewed or were replaced at lower offered rates at the time of the renewal, along with some certificates of deposit not renewing.

During the third quarter of fiscal year 2022, management began to increase rates offered on retail certificates of deposit and money market accounts to help reduce the outflow from these portfolios.

Provision for Credit Losses

The Bank recorded a negative provision for credit losses during the current year of $8.5 million, compared to a $22.3 million provision for credit losses during the prior year.

The negative provision in the current fiscal year was composed of a $6.5 million decrease in the ACL for loans and a $2.0 million decrease in reserves for off-balance sheet credit exposures.

The negative provision for credit losses in the current fiscal year was due primarily to favorable forecasted economic outlooks during the year, largely related to commercial loans.

The Bank recorded a negative provision for credit losses during the current year of $4.6 million, compared to a negative provision for credit losses of $8.5 million during the prior year.

The negative provision in the current year was comprised of a $3.6 million decrease in the ACL for loans and a $992 thousand decrease in reserves for off-balance sheet credit exposures.

The negative provision for credit losses associated with the ACL in the current year 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 and a less favorable economic forecast compared to the prior year.

The negative provision for credit losses associated with the reserve for off-balance sheet credit exposures in the current year was due primarily to a reduction in commercial loan qualitative factors, partially offset by growth in commercial construction exposures.

See additional discussion regarding the Bank's ACL and reserve for off-balance sheet credit exposures at September 30, 2022 in the "Asset Quality" section and in the "Critical Accounting Estimates - Allowance for Credit Losses and Reserve for Off-Balance Sheet Credit Exposures" section above.

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Deposit service fees $ 13,798 $ 12,282 $ 1,516 12.3 %

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

Insurance commissions 2,947 3,030 (83) (2.7)

Gain on sale of Visa Class B shares — 7,386 (7,386) (100.0)

Other non-interest income 6,085 5,388 697 12.9

Total non-interest income $ 22,830 $ 28,086 $ (5,256) (18.7)

The increase in deposit service fees was due primarily to an increase in debit card income as a result of higher transaction volume.

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

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

The decrease in other non-interest income was primarily related to lower income from bank-

owned life insurance ("BOLI"), due to a reduction in the yield as a result of lower market rates and reduced death benefit receipts.

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.

During the prior year, the Bank sold its Visa Class B shares, resulting in a $7.4 million gain, with no similar transaction during the current year.

The increase in other non-interest income was due primarily to a gain on a loan-related financial derivative agreement.

Non-Interest Expense

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Advertising and promotional 5,178 5,133 45 0.9

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

Deposit and loan transaction costs 2,761 2,890 (129) (4.5)

Federal insurance premium 3,020 2,545 475 18.7

Deposit and loan transaction costs 2,797 2,761 36 1.3

Office supplies and related expense 1,951 1,715 236 13.8

Loss on interest rate swap termination — 4,752 (4,752) (100.0)

Other non-interest expense 4,432 4,930 (498) (10.1)

Total non-interest expense $ 112,851 $ 115,569 $ (2,718) (2.4)

The increase in salaries and employee benefits was due primarily to an increase in incentive compensation, as well as an increase in loan commissions related to higher loan origination activity.

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

During the current fiscal year, the Bank terminated interest rate swaps designated as cash flow hedges with a notional amount of $200.0 million resulting in the reclassification of unrealized losses totaling $4.8 million from AOCI into earnings.

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

The increase in salaries and employee benefits was due primarily to merit increases and higher benefits expense, partially offset by a lower employee count during the current year.

The increase in regulatory and outside services was due to higher consulting expenses related to the Bank's upcoming digital transformation project.

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.

During the prior year, the Bank terminated $200.0 million of interest rate swaps, resulting in a loss of $4.8 million, with no similar transaction in the current fiscal year.

The decrease in other non-interest expense was due primarily to the write-down during the prior year of a property that had previously served as one of the Bank's branch locations, partially offset by higher debit card fraud losses in the current year.

The Company's efficiency ratio was 52.39% for the current year compared to 56.91% for the prior year.

The change in the efficiency ratio was due to lower net interest income and higher non-interest expense, partially offset by higher non-interest income.

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

A higher value indicates that the financial institution is generating revenue with a proportionally higher level of expense, relative to the net interest margin and non-interest income.

Management continues to strive to control operating costs.

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

The improvement in the efficiency ratio was due primarily to higher net interest income.

Management anticipates information technology and related expenses will be approximately $6 million higher in fiscal year 2023 due to the digital transformation.

In addition, it is expected there will be approximately $1 million more of information technology and related expenses in fiscal year 2023 associated with projects outside of the digital transformation and due to general cost increases.

Overall, it is anticipated information technology and related expenses will be approximately $7 million higher in fiscal year 2023, or approximately $25 million for the year.

Salaries and employee benefits is expected to be approximately $3.5 million higher in fiscal year 2023 due primarily to merit increases and salary adjustments.

Federal insurance premium expense is anticipated to be approximately $2 million higher in fiscal year 2023, due to the increase in the assessment rate beginning in January 2023, and reflecting the anticipation that leverage strategy utilization in fiscal year 2023 will be lower than fiscal year 2022.

In fiscal year 2024, information technology and related expense is expected to decrease approximately $3 million from fiscal year 2023 levels due to a reduction in professional service costs.

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.

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 Year Ended

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Effective Tax Rate 21.2 % 20.8 %

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

The effective tax rate was lower in the prior year due primarily to a discrete benefit recognized in the prior year related to certain previously acquired BOLI policies.

Management anticipates the effective income tax rate for fiscal year 2022 will be approximately 21% to 22%, absent any tax law changes.

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

Management anticipates the effective tax rate for fiscal year 2023 will be approximately 20% to 21%.

Comparison of Operating Results for the Years Ended September 30, 2021 and 2020

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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.

The Bank's long-term borrowings primarily have been used to manage long-term liquidity needs and the Bank's interest rate risk with the intention to improve the earnings of the Bank while maintaining capital ratios that meet the 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.

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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 during the current year, as approved by the president of FHLB.

The Bank's FHLB borrowing limit was 50% of Bank Call Report total assets as of September 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 exceed 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, the Bank will likely utilize long-term wholesale borrowing sources such as FHLB advances and/or repurchase agreements to provide long-term, fixed-rate funding.

If management observes unusual trends in the amount and frequency of line of credit utilization and/or short-term borrowings 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 September 30, 2021, the Bank had total borrowings, at par, of $1.59 billion, or approximately 16% of total assets, all of which were FHLB advances.

The amount of FHLB borrowings outstanding at September 30, 2021 was $1.59 billion, of which $175.0 million were advances scheduled to mature in the next 12 months, all of which were one-year floating-rate FHLB advances tied to interest rate swaps.

All FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB.

At September 30, 2022, the Bank had total borrowings, at par, of $2.14 billion, or approximately 22% of total assets, all of which were FHLB borrowings.

Of this amount, $329.7 million were advances scheduled to mature in the next 12 months.

FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB.

Additionally, the Bank had pledged securities with an estimated fair value of $572.9 million as collateral for FHLB borrowings at September 30, 2022.

At September 30, 2022, the Bank had no repurchase agreements.

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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 September 30, 2021, the Bank had $1.68 billion of securities that were eligible but unused as collateral for borrowing or other liquidity needs.

At September 30, 2022, the Bank had $863.0 million 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.

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At September 30, 2022, the Bank did not have any brokered certificates of deposit and public unit certificates of deposit were approximately 2% of total deposits.

The Bank had pledged securities with an estimated fair value of $264.9 million as collateral for public unit certificates of deposit at September 30, 2021.

The Bank had pledged securities with an estimated fair value

of $125.5 million as collateral for public unit certificates of deposit at September 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.

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Based on our deposit retention experience and our current pricing strategy, we anticipate the majority of the maturing retail certificates of deposit will renew or transfer to other deposit products of the Bank at prevailing rates, although no assurance can be given in this regard.

The same is anticipated for our commercial certificates of deposit;

however, due to the nature of these funds, retention rates are not as predictable as for retail certificates of deposit.

We also anticipate the majority of the maturing public unit certificates of deposit will be replaced with similar wholesale funding products, depending on availability and pricing.

Due to the nature of commercial certificates of deposit, retention rates are not as predictable as for retail certificates of deposit.

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis