What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-10 compared with 2023-02-08 · 627 added, 286 removed, 674 unchanged (58% of the section changed)

8 unchanged sentences

• 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;

• our ability to access cost-effective funding and maintain sufficient liquidity;

• the expected synergies and other benefits from our acquisition activities might not be realized to the extent anticipated, within the anticipated time frames, or at all;

11 unchanged sentences

• 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;

• inflation, interest rate, market, monetary, and 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;

23 unchanged sentences

The following summary should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section in its entirety.

The Company recognized net income of $16.2 million, or $0.12 per share, for the current quarter compared to net income of $22.2 million, or $0.16 per share, for the prior year quarter.

The decrease in net income was due primarily to recording a provision for credit losses of $3.7 million for the current quarter compared to a $3.4 million release of provision for the prior year quarter, partially offset by lower income tax expense.

The net interest margin decreased 38 basis points, from 1.99% for the prior year quarter to 1.61% for the current quarter.

Excluding the effects of the leverage strategy, the net interest margin decreased 11 basis points, from 1.99% for the prior year quarter to 1.88% for the current quarter.

The decrease in the net interest margin excluding the effects of the leverage strategy was due mainly to an increase in the cost of borrowings and deposits, partially offset by an increase in loan yields due to higher market interest rates and a shift in the mix of interest-earning assets towards higher-yielding loans.

Total assets were $9.93 billion at December 31, 2022, a $304.9 million increase from September 30, 2022.

The increase in assets was primarily a result of loan growth, primarily in the correspondent one- to four-family and commercial loan portfolios.

Total deposits were $6.07 billion at December 31, 2022, a decrease of $120.3 million from September 30, 2022.

The decrease was mainly in money market accounts as depositors likely moved funds to higher yielding investment products outside of the Bank and/or used funds to support spending.

As a result of loan growth and a decrease in deposit balances during the current quarter, FHLB borrowings increased $513.0 million, to $2.65 billion at December 31, 2022.

Stockholders' equity was $1.05 billion at December 31, 2022, a $41.7 million decrease from September 30, 2022.

The decrease was due primarily to the payment of dividends and repurchase of shares during the current quarter.

The rapid increase in short-term rates led by the FRB and the impact of higher long-term rates compared to September 30, 2022 has led to decreases in the Bank's net interest margin.

There has been a runoff in deposit balances and management has increased certificate of deposit and money market account rates to stem the outflow.

The higher loan rates have made homes less affordable and reduced the turnover of housing inventory, which lowers the likelihood of existing one- to four-family loans at lower rates being paid off with the proceeds being used to fund higher rate loans.

These dynamics have caused our balance sheet to change faster than what would occur in more stable rate environments.

Net interest margin compression is anticipated to continue, and the margin may compress more in the near term, due to the shape of the yield curve and the pace at which liabilities are repricing compared to assets, along with lower costing deposits being replaced with higher costing borrowings in order to fund loan growth.

Loan growth is occurring at market interest rates that are higher than the overall loan portfolio rate;

however, the shift to higher-costing borrowings and the pace at which the interest rate increase is occurring for liabilities is more than offsetting the benefit of the higher loan rates.

Management continues to evaluate funding options and plans to continue using shorter term advances, as necessary, with the anticipation that when rates begin to decrease, those borrowings can be repriced more quickly to lower cost alternatives.

The Company recognized net income of $30.4 million, or $0.23 per share, for the current year period compared to net income of $43.8 million, or $0.32 per share, for the prior year period.

The decrease in net income was due primarily to recording a provision for credit losses of $4.6 million for the current year period compared to a $6.6 million release of provision for the prior year period.

The net interest margin decreased 24 basis points, from 1.83% for the prior year period to 1.59% for the current year period.

Excluding the effects of the leverage strategy, the net interest margin decreased 21 basis points, from 2.00% for the prior year period to 1.79% for the current year period.

The decrease in the net interest margin excluding the effects of the leverage strategy was due mainly to an increase in the cost of borrowings and deposits, which exceeded the increase in loan yields.

Net interest margin compression is anticipated to continue, and the margin is expected to compress more in the near term, due to the shape of the yield curve and with liabilities repricing faster than assets, along with higher costing borrowings in order to fund loan growth, increasing the Bank's money market rates in response to competitor pricing, and deposit funds moving from lower costing deposit accounts to higher costing certificates of deposit.

See additional discussion in the "Fiscal Year 2023 Outlook" section below.

Total assets were $10.09 billion at March 31, 2023, a $460.9 million increase from September 30, 2022.

The increase in assets was primarily a result of loan growth, mainly in the correspondent one- to four-family and commercial real estate loan portfolios.

Total deposits were $6.14 billion at March 31, 2023, a decrease of $50.4 million from September 30, 2022.

The decrease was mainly in money market account balances, which decreased $284.5 million, partially offset by a $226.3 million increase in retail certificates of deposit since September 30, 2022.

The decrease in money market accounts was likely due to customers moving funds to alternative, higher yielding investment products, including certificates of deposit offered by the Bank, and/or withdrawing funds for customer spending.

The growth in the loan portfolio and decrease in deposits resulted in an increase in FHLB borrowings by $578.4 million during the current year period.

The Bank exceeded $10 billion in total assets at March 31, 2023 and may again at June 30, 2023.

It is management's expectation that the Bank will be under $10 billion in total assets at September 30, 2023.

There are increased direct costs, additional regulatory burdens with indirect costs, and lost revenue, mainly related to interchange fees, associated with the Bank being over $10 billion in total assets at certain points in time and for consecutive periods of time.

Being over $10 billion in total assets at March 31, 2023 did not result in any additional regulatory requirements, increased direct or indirect costs, or lost revenues.

We continue to work on limiting the growth in total assets by reducing new correspondent one- to four-family purchases to near zero, along with limiting additional use of FHLB advances for operating needs, and evaluating other balance sheet management opportunities.

The Bank's asset quality remained strong, reflected in low delinquency and charge-off ratios.

At December 31, 2022, loans 30 to 89 days delinquent were 0.10% of total loans receivable, net, and loans 90 or more days delinquent or in foreclosure were 0.10% of total loans receivable, net.

During the current quarter, net charge-offs ("NCOs") were $2 thousand.

At December 31, 2022, the Bank had a one-year gap position of $(1.02) billion, or (10.3)% of total assets, meaning the amount of interest-bearing liabilities exceeds the amount of interest-earning assets maturing or repricing during the same period.

This was compared to $(1.14) billion, or (11.9%) of total assets at September 30, 2022.

The change in the one-year gap amount was primarily a result of a decrease in the amount of liability cash flows coming due in one year at December 31, 2022 compared to September 30, 2022.

At March 31, 2023, loans 30 to 89 days delinquent were 0.11% of total loans receivable, net, and loans 90 or more days delinquent or in foreclosure were 0.07% of total loans receivable, net.

During the current quarter and current year periods, net charge-offs ("NCOs") were $14 thousand and $16 thousand, respectively.

For short-term liquidity needs, the Bank has access to a line of credit at the FHLB in addition to the FRB of Kansas City discount window and the newly established FRB Bank Term Funding Program ("BTFP").

The Bank's FHLB borrowing limit was 50% of the Bank's Call Report total assets as of March 31, 2023.

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 the amount that can be borrowed through the BTFP is based upon the par value of securities pledged as collateral.

Management estimated that the Bank had $2.85 billion in additional liquidity

available at March 31, 2023 based on the Bank's blanket collateral agreement with FHLB and the par value of unencumbered securities.

At March 31, 2023, the Bank had a one-year gap position of $(803.5) million, or (8.0)% of total assets, meaning the amount of interest-bearing liabilities exceeds the amount of interest-earning assets maturing or repricing during the next year.

This was compared to a one-year gap position of $(1.02) billion, or (10.3)% of total assets, at December 31, 2022.

The change in the one-year gap amount was due primarily to a decrease in the amount of liability cash flows coming due in one year at March 31, 2023 compared to December 31, 2022 and an increase in the amount of asset cash flows coming due for the same time periods.

This was primarily attributable to a decrease in the amount of non-maturity deposits projected by the Bank's interest rate risk model to mature within one year as of March 31, 2023 compared to December 31, 2022, partially offset by an increase in cash flows projected to be received on loans as of March 31, 2023.

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 experience a more modern internet banking experience, including both desktop and mobile, which will offer real-time alerts.

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 "Fiscal Year 2023 Projections" section below.

Available Information

9 unchanged sentences

The following table summarizes the Company's financial condition at the dates indicated.

December 31, September 30, Percent

2022 2022 Change

Annualized Annualized

March 31, December 31, Percent September 30, Percent

2023 2022 Change 2022 Change

(Dollars and shares in thousands)

8 unchanged sentences

Average number of diluted shares outstanding 133,150 134,641 (4.4) 135,773 (3.9)

During the current quarter, total assets increased by $304.9 million, which was primarily driven by loan growth, mainly in the correspondent one- to four-family and commercial loan portfolios.

The one- to four-family correspondent loan portfolio increased $151.4 million, or 6.9%, primarily as a result of purchasing loans that were in the pipeline as of September 30, 2022, while new applications received have tapered off.

Also, during the current quarter we experienced a reduction in prepayment speeds on the one- to four-family loan portfolio.

The commercial loan portfolio increased $143.9 million, or 14.9%, during the current quarter, as funding for construction loans continued and new commercial real estate loans were added.

Total liabilities increased $346.6 million due to new borrowings, partially offset by a decrease in deposits.

The decrease in deposit balances was due primarily to a reduction in money market account balances, which decreased $125.3 million during the current quarter as depositors likely moved funds to alternative, higher yielding investment products and/or used balances accumulated over the past several years to support spending.

The increase in loan balances and the decrease in deposit balances made it necessary to enter into new FHLB borrowings totaling $520.0 million during the current quarter.

The new FHLB borrowings were comprised of $450.0

million of new advances with a weighted average maturity of 3.3 years and $70.0 million on the FHLB line of credit.

The overall loan growth during the quarter exceeded management's expectations as of September 30, 2022.

While it is still management's expectation that we will stay under $10 billion in total assets at September 30, 2023, it is likely that we will exceed that threshold at several quarter-ends this year.

We are working to limit the growth in assets and to limit additional use of FHLB advances for operating needs.

During the current quarter, total assets increased by $156.0 million, which was primarily driven by loan growth of $175.2 million, mainly in the correspondent one- to four-family and commercial real estate loan portfolios.

The one- to four-family correspondent loan portfolio increased $115.3 million, or 4.9%, primarily as a result of purchasing loans that were in the pipeline as of December 31, 2022 as the Bank continues to work towards reducing new correspondent purchases to near zero.

Commercial loans increased $71.3 million, or 6.4%, during the current quarter, due to $42.0 million in commercial real estate originations and purchases along with $35.0 million in funding on existing construction loans.

Total liabilities increased $138.8 million during the current quarter due to an increase in deposits of $69.9 million, along with new borrowings of $58.4 million.

The increase in deposit balances was due primarily to retail/commercial certificates of deposit, which increased $236.7 million, partially offset by a decrease in money market account balances, which decreased $159.3 million during the current quarter.

The decrease in money market account balances was likely due to depositors moving funds to alternative, higher yield investment products and/or withdrawing funds for customer spending.

Additionally, the Bank held a certificate of deposit promotional campaign during the current quarter which resulted in $177.3 million in new certificates of deposit at a weighted average rate of 4.34%;

the majority of these funds were from customer transfers of existing deposits within the Bank.

See additional discussion regarding net interest margin compression in "Fiscal Year 2023 Outlook" section below.

During the current fiscal year, loan balances increased $494.4 million and deposit balances decreased $50.4 million, which made it necessary to increase FHLB borrowings by $578.4 million during that time.

The loan growth was primarily in the correspondent loan portfolio, as the Bank worked through its existing pipeline of applications, and commercial loan portfolio, which increased $266.8 million and $215.3 million, respectively.

The decrease in deposits was primarily in the money market portfolio, partially offset by an increase in certificates of deposit.

The FHLB borrowing increase was composed of $550.0 million of new advances with a weighted average maturity ("WAM") of 3.3 years and $128.4 million on the Bank's FHLB line of credit, partially offset by $100.0 million in FHLB advances that matured during the current year period.

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.

During the current quarter and current year periods, the average outstanding balance of leverage strategy borrowings was $979.2 million and $1.43 billion, respectively.

The borrowings were repaid prior to March 31, 2023.

The proceeds from the borrowings, net of the required FHLB stock holdings, which yielded 8.75% and 8.58% during the current quarter and current year periods, respectively, 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 $110 thousand during the current quarter, compared to $763 thousand for the quarter ended December 31, 2022.

The decrease in net income was due to a lower net interest rate spread associated with the leverage strategy and a reduction in the size of the leverage strategy transaction because the borrowing capacity was needed for operational purposes.

Net income attributable to the leverage strategy during the current year period was $873 thousand, compared to $545 thousand for the prior year period.

Net income was higher in the current year period than the prior year period as the leverage strategy was utilized more in the current year period.

Management continues to monitor the net interest rate spread and overall profitability of the strategy.

It is expected that the strategy will continue to be utilized when it is profitable and/or the borrowing capacity does not need to be used for other purposes.

When the leverage strategy is in place, it reduces the net interest margin due to the amount of earnings from the transaction in comparison to the size of the transaction.

Loans Receivable.

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

The loan portfolio rate increased 14 basis points from September 30, 2022 to December 31, 2022, due primarily to one- to four-family correspondent and commercial loan growth, disbursements on higher rate commercial construction loans, and repricing of existing commercial loans to higher market interest rates.

The average prepayment speed on one- to four-family loans was 5% during the quarter ended December 31, 2022 compared to 7% during the quarter ended September 30, 2022.

December 31, 2022 September 30, 2022

Amount Rate Amount Rate

The loan portfolio rate increased 10 basis points during the current quarter and 24 basis points during the current year period, due primarily to one- to four-family correspondent and commercial loan growth at interest rates higher than the existing portfolios, disbursements on higher rate commercial construction loans, and repricing of existing commercial loans to higher market interest rates.

The average prepayment speed on one- to four-family loans was approximately 5% during the current quarter and prior quarter, and 7% during the quarter ended September 30, 2022.

March 31, 2023 December 31, 2022 September 30, 2022

Amount Rate Amount Rate Amount Rate

(Dollars in thousands)

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

For the Three Months Ended

December 31, 2022 December 31, 2021

Amount Rate Amount Rate

For the Three Months Ended For the Six Months Ended

March 31, 2023 March 31, 2023 March 31, 2022

Amount Rate Amount Rate Amount Rate

(Dollars in thousands)

10 unchanged sentences

Loan originations, purchases, and refinances are reported together.

For the Three Months Ended

December 31, 2022 December 31, 2021

For the Six Months Ended

March 31, 2023 March 31, 2022

Amount Rate % of Total Amount Rate % of Total

27 unchanged sentences

Total purchased/participation loans $ 550,905 5.41 $ 322,706 2.86

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 December 31, 2022.

Credit scores are updated at least annually, with the latest update in September 2022, from a nationally recognized consumer rating agency.

9 unchanged sentences

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 current year-to-date period.

Many of the correspondent loans purchased during the current quarter were from applications received during the prior quarter.

The Bank is working towards reducing new correspondent purchases to near zero, but continues to work through the loans currently in the pipeline.

Amount Rate LTV Score

The majority of the correspondent loans purchased during the current quarter were from applications in the pipeline at December 31, 2022 as the Bank continues to work to reduce correspondent purchases to near zero.

For the Three Months Ended For the Six Months Ended

March 31, 2023 March 31, 2023

Credit Credit

Amount Rate LTV Score Amount Rate LTV Score

(Dollars in thousands)

2 unchanged sentences

$ 251,929 5.22 75 770 $ 577,908 5.03 76 768

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 December 31, 2022, along with associated weighted average rates.

The following table summarizes our one- to four-family loan origination and refinance commitments and one- to four-family correspondent loan purchase commitments as of March 31, 2023, 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.

3 unchanged sentences

$ 101,023 5.51

Commercial Loans - During the quarter ended December 31, 2022, the Bank originated $219.3 million of commercial loans and entered into commercial loan participations totaling $135.8 million.

The Bank also processed commercial loan disbursements, excluding lines of credit, of approximately $207.8 million at a weighted average rate of 5.05%.

As of December 31, 2022, September 30, 2022, and December 31, 2021, the Bank's commercial and industrial gross loan amounts (unpaid principal plus undisbursed amounts) totaled $113.2 million, $100.4 million and $99.8 million, respectively, and commitments totaled $5.1 million, $458 thousand and $6.4 million respectively.

Commercial Loans - During the current quarter and six months ended March 31, 2023, the Bank originated $79.9 million and $299.2 million of commercial loans, respectively, and entered into commercial loan participations totaling $48.4 million and $184.2 million, respectively.

The Bank also processed commercial loan disbursements, excluding lines of credit, during the current quarter and six months ended March 31, 2023 of approximately $98.9 million and $306.7 million, respectively, at a weighted average rate of 6.27% and 5.45%, respectively.

As of March 31, 2023, December 31, 2022, and September 30, 2022, the Bank's commercial and industrial gross loan amounts (unpaid principal plus undisbursed amounts) totaled $130.3 million, $113.2 million and $100.4 million, respectively, and commitments totaled $7.0 million, $5.1 million and $458 thousand, 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 December 31, 2022, the Bank had 18 commercial real estate and commercial construction loan commitments totaling $71.5 million, at a weighted average rate of 5.91%.

As of March 31, 2023, the Bank had 11 commercial real estate and commercial construction loan commitments, totaling $91.6 million, at a weighted average rate of 6.78%.

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.

Of the total commercial undisbursed amounts and commitments outstanding as of December 31, 2022, management anticipates approximately $110 million will be funded during the March 2023 quarter, $65 million during the June 2023 quarter, $82 million during the September 2023 quarter, and $74 million during the December 2023 quarter.

December 31, 2022 September 30, 2022

Unpaid Undisbursed Gross Loan Gross Loan

Count Principal Amount Amount Amount

Of the total commercial undisbursed amounts and commitments outstanding as of March 31, 2023, management anticipates approximately $85 million will be funded during the June 2023 quarter, $84 million during the September 2023 quarter, $89 million during the December 2023 quarter, and $63 million during the March 2024 quarter.

March 31, 2023 December 31, 2022 September 30, 2022

Unpaid Undisbursed Gross Loan Gross Loan Gross Loan

Count Principal Amount Amount Amount Amount

(Dollars in thousands)

Senior housing 35 $ 270,614 $ 56,800 $ 327,414 $ 328,259

Retail building 147 $ 248,467 $ 95,258 $ 343,725 $ 325,055 $ 230,153

Senior housing 35 281,352 44,123 325,475 327,414 328,259

Hotel 13 209,251 26,463 235,714 216,604 181,546

2 unchanged sentences

One- to four-family property 390 62,405 9,299 71,704 72,339 68,907

Single use building 26 22,981 20,471 43,452 41,908

Warehouse/manufacturing 40 43,469 10,030 53,499 42,496 10,891

Other 101 69,550 23,323 92,873 87,532 84,071

2 unchanged sentences

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

December 31, 2022 September 30, 2022

Unpaid Undisbursed Gross Loan Gross Loan

Count Principal Amount Amount Amount

March 31, 2023 December 31, 2022 September 30, 2022

Unpaid Undisbursed Gross Loan Gross Loan Gross Loan

Count Principal Amount Amount Amount Amount

(Dollars in thousands)

Kansas 626 $ 441,411 $ 131,935 $ 573,346 $ 519,419 $ 423,797

Texas 15 224,792 111,720 336,512 280,840

Missouri 179 253,277 110,155 363,432 335,400 296,443

Texas 15 240,237 95,487 335,724 336,512 280,840

Colorado 8 40,157 15,037 55,194 55,705 34,377

3 unchanged sentences

852 $ 1,091,403 $ 396,783 $ 1,488,186 $ 1,396,539 $ 1,136,215

The following table presents the Bank's commercial loan portfolio and outstanding loan commitments, categorized by gross loan amount (unpaid principal plus undisbursed amounts) or outstanding loan commitment amount, as of December 31, 2022.

(Dollars in thousands)

10 unchanged sentences

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 December 31, 2022, approximately 76% were 59 days or less delinquent.

Of the loans 30 to 89 days delinquent at March 31, 2023, approximately 79% were 59 days or less delinquent.

Loans Delinquent for 30 to 89 Days at:

December 31, September 30,

Number Amount Number Amount

March 31, December 31, September 30,

2023 2022 2022

Number Amount Number Amount Number Amount

(Dollars in thousands)

14 unchanged sentences

Nonaccrual Loans and OREO at:

December 31, September 30,

Number Amount Number Amount

March 31, December 31, September 30,

2023 2022 2022

Number Amount Number Amount Number Amount

(Dollars in thousands)

16 unchanged sentences

Consumer — — — — 1 19

6 548 5 303 5 318

Total nonaccrual loans 45 5,850 54 8,233 66 9,443

4 unchanged sentences

Consumer — — 1 21 1 21

2 160 3 182 5 328

Total non-performing assets 47 $ 6,010 57 $ 8,415 71 $ 9,771

2 unchanged sentences

(2) Real estate-related consumer loans where we also hold the first mortgage are included in the one- to four-family category as the underlying collateral is one- to four-family property.

The following table presents the states where the properties securing ten percent or more of the total amount of our one- to four-family loans are located and the corresponding balance of loans 30 to 89 days delinquent, 90 or more days delinquent or in foreclosure, and weighted average LTV ratios for loans 90 or more days delinquent or in foreclosure at December 31, 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 December 31, 2022, potential losses, after taking into consideration anticipated private mortgage insurance proceeds and estimated selling costs, have been charged-off.

At March 31, 2023, 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

9 unchanged sentences

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 December 31, 2022 compared to September 30, 2022 was due mainly to two loans in a single commercial relationship moving to special mention during the quarter as certain underlying economic considerations being monitored by management showed signs of deterioration.

December 31, 2022 September 30, 2022

Special Mention Substandard Special Mention Substandard

The increase in commercial special mention loans at March 31, 2023 compared to September 30, 2022 was due mainly to two loans in a single commercial relationship moving to special mention during the December 31, 2022 quarter as certain underlying economic considerations being monitored by management showed signs of deterioration.

March 31, 2023 December 31, 2022 September 30, 2022

Special Mention Substandard Special Mention Substandard Special Mention Substandard

(Dollars in thousands)

5 unchanged sentences

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

The ACL increased during the current quarter due primarily to growth in the commercial loan portfolio and a slowdown in portfolio prepayment speeds, which reduced the projected prepayment speeds used in the model for generally all loan categories.

The increase in the commercial real estate ACL to loans receivable ratio during the current quarter was due mainly to the slow down of prepayment speeds used in the model and the classification of two loans as special mention.

Loans Receivable and Allowance for Credit Losses" for additional information related to the calculation of ACL as of December 31, 2022.

Distribution of ACL Ratio of ACL to

Loans Receivable

December 31, September 30, December 31, September 30,

The ACL increased compared to September 30, 2022, due primarily to growth in the commercial loan portfolio, along with a reduction in prepayment speeds for all loan categories.

Loans Receivable and Allowance for Credit Losses" for additional information related to the calculation of ACL as of March 31, 2023.

Distribution of ACL Ratio of ACL to Loans Receivable

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

2023 2022 2022 2023 2022 2022

13 unchanged sentences

The following table presents ACL activity and related ratios at the dates and for the periods indicated.

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

The ratio of ACL to nonaccrual loans was higher at the end of the current quarter compared to the end of the prior year quarter due mainly to a lower balance of nonaccrual loans compared to the prior year period, along with higher ACL at December 31, 2022.

The ratio of ACL to NCOs was higher in the current quarter compared to the prior year quarter due primarily a net charge-off in the current quarter compared to a net recovery in the prior year quarter, along with an increase in ACL.

The ratio of NCOs to average non-performing assets during the current year period was positive due to charge-offs exceeding recoveries, while the prior year period was negative due to recoveries exceeding charge-offs.

The ratio of ACL to nonaccrual loans was higher at the end of the current year period compared to the end of the prior year period due mainly to a lower balance of nonaccrual loans compared to the prior year period, along with higher ACL at March 31, 2023.

The ratio of ACL to NCOs for the prior year period was not meaningful as recoveries exceeded loan charge-offs, compared to the current year period where loan charge-offs exceeded recoveries.

Loans Receivable and Allowance for Credit Losses" for additional information related to ACL activity by specific loan categories.

At or For the Three Months Ended

December 31, 2022 December 31, 2021

At or For the Six Months Ended

March 31, 2023 March 31, 2022

(Dollars in thousands)

10 unchanged sentences

ACL to NCOs (annualized) 620x N/M

(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 Three Months Ended

December 31, 2022 December 31, 2021

For the Six Months Ended

March 31, 2023 March 31, 2022

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

18 unchanged sentences

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 December 31, 2022.

Overall, fixed-rate securities comprised 95% of our securities portfolio at March 31, 2023.

The weighted average life ("WAL") is the estimated remaining maturity (in years) after three-month historical prepayment speeds and projected call option assumptions have been applied.

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

December 31, 2022 September 30, 2022

Amount Yield WAL Amount Yield WAL

March 31, 2023 December 31, 2022 September 30, 2022

Amount Yield WAL Amount Yield WAL Amount Yield WAL

(Dollars in thousands)

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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 Three Months Ended

December 31, 2022 December 31, 2021

For the Six Months Ended

March 31, 2023 March 31, 2022

Amount Yield WAL Amount Yield WAL

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Net amortization of (premiums)/discounts (1,559) (2,983)

Purchases — — — 58,546 2.26 4.3

Change in valuation on AFS securities 39,453 (101,094)

Ending balance - carrying value $ 1,505,808 1.33 4.3 $ 1,780,419 1.24 4.1

Total liabilities were $8.87 billion at December 31, 2022, compared to $8.53 billion at September 30, 2022.

Total liabilities were $9.01 billion at March 31, 2023, compared to $8.53 billion at September 30, 2022.

The increase was due to new borrowings, partially offset by a decrease in 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.

Deposits decreased $120.3 million during the current quarter.

The decrease was mainly in the money market portfolio.

The balance of the retail certificate of deposit portfolio remained relatively unchanged during the current quarter;

however, the mix within the portfolio changed slightly.

There was growth in the medium-term category, generally with terms 18 to 35 months, while the short-term and long-term categories decreased.

The rate on the deposit portfolio increased 31 basis points during the current quarter due primarily to retail certificates of deposit repricing to higher offered rates as balances renewed, as well as an increase in rates offered on money market accounts.

December 31, 2022 September 30, 2022

Amount Rate Total Amount Rate Total

The weighted average rate on the deposit portfolio increased 35 basis points during the current quarter and 66 basis points during the current year due primarily to retail certificates of deposit repricing to higher offered rates, as well as an increase in rates offered on money market accounts and public unit certificates of deposit.

Total commercial deposits were $274.6 million, or 4.5%, of total deposits at March 31, 2023.

March 31, 2023 December 31, 2022 September 30, 2022

% of % of % of

Amount Rate Total Amount Rate Total Amount Rate Total

(Dollars in thousands)

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$ 6,144,435 1.29 100.0 % $ 6,074,549 0.94 100.0 % $ 6,194,866 0.63 100.0 %

Total borrowings at December 31, 2022 were $2.65 billion, an increase of $513.0 million from September 30, 2022.

The $2.65 billion was comprised of $2.14 billion in fixed-rate FHLB advances, $365.0 million in variable-rate advances tied to interest rate swaps, and $145.0 million on the FHLB line of credit.

Borrowings increased during the current quarter to fund loan growth and offset deposit outflows.

During the current quarter, the Bank utilized the leverage strategy, as discussed in the "Comparison of Operating Results for the Three Months Ended December 31, 2022 and September 30, 2022" section below.

These borrowings were repaid prior to December 31, 2022.

If the Bank continues to enter into additional FHLB borrowings during the remainder of fiscal year 2023 to fund operations, the amount of the leverage strategy transaction may continue to 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.

The fixed-rate characteristics of these borrowings lock-in the cost until maturity and thus decrease the amount of liabilities repricing as interest rates move higher compared to funding with lower-cost short-term borrowings.

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

The following table presents the maturity of non-amortizing term borrowings, which consist entirely of FHLB advances, along with associated weighted average contractual and effective rates as of December 31, 2022.

In addition to the borrowings in the table below, there were two straight-line amortizing FHLB advances outstanding at December 31, 2022 including a $45.0 million advance at a rate of 3.50% with quarterly payments of $2.5 million through June 2027 and a $95.1 million advance at a rate of 4.45% with quarterly payments of $4.9 million through October 2027.

The $69.9 million increase in deposits during the current quarter was mainly in the retail/commercial certificate of deposit portfolio, partially offset by a decrease in the money market account balances.

The increase in retail certificates of deposit was primarily in the short-term category, followed by the intermediate-term category.

The long-term certificate of deposit category decreased during the current quarter.

On average, approximately 78% of the retail certificates of deposits that matured over the past 12 months were retained by the Bank.

The $50.4 million decrease in deposits between September 30, 2022 and March 31, 2023 was due primarily to a reduction in money market accounts, partially offset by an increase in retail certificates of deposit.

The decrease in money market accounts was likely due to customers moving funds to alternative, higher yielding investment products, including a certificate of deposit promotional campaign offered by the Bank, and/or withdrawing funds for customer spending.

During the third quarter of the prior fiscal year, the Bank began increasing money market interest rates in response to competitor pricing to help stem the outflow of those funds.

The change in the composition of retail certificate of deposit portfolio categories during the current year mirrored the current quarter change.

As of March 31, 2023, approximately $634.7 million of the Bank's deposit portfolio was uninsured, or approximately 10% of the Bank's Call Report deposit balance, of which approximately $348.0 million related to commercial and retail deposit accounts and the remainder was mainly comprised of fully collateralized public unit deposits and intercompany accounts.

The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements.

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

The new borrowings during the current fiscal year had a weighted average maturity of 3.3 years, which is generally a shorter term than what management has selected in prior periods in anticipation that, when rates begin to decrease, these borrowings can be repaid or repriced to lower cost options.

In consideration of the current interest rate environment, management intends to continue selecting shorter-term borrowings in the near term.

The fixed-rate borrowings are laddered in order to prevent large amounts of liabilities repricing in any one period.

Total borrowings at March 31, 2023 were $2.70 billion, an increase of $51.4 million and $564.5 million from December 31, 2022 and September 30, 2022, respectively.

The increase in borrowings from December 31, 2022 was due mainly to a $58.4 million increase in the drawn amount on the FHLB line of credit during the current quarter.

The increase in borrowings from September 30, 2022 was composed of $550.0 million of new advances with a WAM of 3.3 years and $128.4 million on the Bank's FHLB line of credit, partially offset by $100.0 million in FHLB advances that matured during the current year period.

The $2.70 billion balance at March 31, 2023 was comprised of $2.13 billion in fixed-rate FHLB advances, $365.0 million in variable-rate advances tied to interest rate swaps, and $203.4 million on the FHLB line of credit.

Borrowings increased during the current year period to fund loan growth and deposit outflows.

Subsequent to March 31, 2023, the Bank repaid its borrowings on the FHLB line of credit and borrowed $500.0 million under the FRB BTFP, as the rate was more favorable than the rates offered on the FHLB line of credit or the rate on a one-year FHLB advance at that point in time.

See additional discussion in "Liquidity and Capital Resources" below.

In addition to the borrowings in the table below, there were two straight-line amortizing FHLB advances outstanding at March 31, 2023 including a $42.5 million advance at a rate of 3.50% with quarterly payments of $2.5 million through June 2027 and a $90.2 million advance at a rate of 4.45% with quarterly payments of $4.9 million through October 2027, and there was an outstanding balance of $203.4 million on the Bank's line of credit with FHLB at March 31, 2023.

See additional discussion in "Fiscal Year 2023 Outlook" below.

Maturity by Contractual Effective

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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 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 new FHLB borrowings added during the current quarter had a WAM of 3.3 years, which is generally a shorter term than what management has selected in prior periods.

The shorter terms were selected with the anticipation that when rates begin to decrease, the borrowings can be repriced more quickly to lower cost alternatives.

For the Three Months Ended

December 31, 2022 December 31, 2021

Effective Effective

Amount Rate WAM Amount Rate WAM

For the Three Months Ended For the Six Months Ended

March 31, 2023 March 31, 2023 March 31, 2022

Effective Effective Effective

Amount Rate WAM Amount Rate WAM Amount Rate WAM

(Dollars in thousands)

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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 non-amortizing term borrowings for the next four quarters as of December 31, 2022.

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

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

2023 2023 2023 2024 Total

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Repricing Rate 1.45 % 1.96 % 2.97 % 2.83 % 2.35 %

The following table sets forth the WAM information for our certificates of deposit, in years, as of December 31, 2022.

The following table sets forth the WAM information for our certificates of deposit, in years, as of March 31, 2023.

Retail certificates of deposit 1.6

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Stockholders' Equity.

Stockholders' equity at December 31, 2022 was $1.05 billion, a decrease of $41.7 million from September 30, 2022.

The decrease was due primarily to the payment of $49.2 million in cash dividends and $22.2 million in share repurchases during the current quarter, partially offset by net income and the decrease in accumulated other comprehensive loss during the quarter.

Cash dividends paid during the current quarter totaled $0.365 per share and consisted of a $0.28 per share cash true-up dividend related to fiscal year 2022 earnings and a regular quarterly cash dividend of $0.085 per share.

On January 24, 2023, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.3 million, payable on February 17, 2023 to stockholders of record as of the close of business on February 3, 2023.

At December 31, 2022, the Company's ratio of equity to assets was 10.6%.

Stockholders' equity at March 31, 2023 was $1.07 billion, a decrease of $24.5 million from September 30, 2022.

During the six months ended March 31, 2023, the Company paid cash dividends totaling $60.5 million.

These cash dividends totaled $0.45 per share and consisted of a $0.28 per share cash true-up dividend related to fiscal year 2022 earnings and two regular quarterly cash dividends of $0.085 per share.

Accumulated other comprehensive loss was $118.6 million at March 31, 2023, which was composed of $125.3 million attributable to unrealized losses on AFS securities, partially offset by $6.6 million of unrealized gains on derivatives.

The unrealized loss on AFS securities improved at March 31, 2023 from $142.1 million at December 31, 2022, due mainly to changes in market interest rates.

On April 25, 2023, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.3 million, payable on May 19, 2023 to stockholders of record as of the close of business on May 5, 2023.

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

At March 31, 2023, this ratio was 9.7%.

Excluding the impact of unrealized losses on AFS securities, this ratio would have been approximately 110 basis points higher.

In the long run, management considers the Bank's Community Bank Leverage Ratio ("CBLR") of at least 9%, which is currently the required percentage under regulatory guidelines, to be an appropriate level of capital.

At December 31, 2022, this ratio was 9.2%.

During the current quarter, the Company repurchased 2,729,159 shares of common stock at an average price of $8.13 per share.

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank in accordance with regulatory standards.

As of March 31, 2023, the Bank's community bank leverage ratio ("CBLR") was 9.7%, which exceeded the minimum requirement of 9.0%.

The CBLR is based on average assets.

The leverage strategy increases average assets which in turn reduces the Bank's CBLR.

As of March, 31, 2023 the Bank exceeded all internal policy thresholds for sensitivity to changes in interest rates, and the Bank's risk-based tier 1 capital ratio was 19.2%.

There remains $22.5 million authorized under the existing stock repurchase plan for additional purchases of the Company's common stock.

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however, the Federal Reserve Bank's existing approval for the Company to repurchase shares expires in August 2023.

At December 31, 2022, Capitol Federal Financial, Inc., at the holding company level, had $51.8 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.

At March 31, 2023, Capitol Federal Financial, Inc., at the holding company level, had $56.4 million in cash on deposit at the Bank.

The balance of cash at the holding company level has been accumulating over the past several years and is available for the Company to utilize for dividend payments, share repurchases, or for other business strategies at the discretion of the Company.

For fiscal year 2023, it is the intention of the Board of Directors to pay out the regular quarterly cash dividend of $0.085 per share, as well as any of the Company's earnings in excess of that amount.

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.

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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.

In order to provide additional stockholder value, the Company has paid a True Blue Capital dividend in years past.

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 Capitol dividend.

The Company considers various business strategies and their impact on capital and asset measures on both a current and future basis, as well as Company earnings and regulatory capital levels and the related requirements, in determining the amount, if any, and timing of the True Blue Capitol dividend.

The following table presents regular quarterly cash dividends and special cash dividends paid in calendar years 2023, 2022, and 2021.

The amounts represent cash dividends paid during each period.

For the quarter ending March 31, 2023, the amount presented represents the dividend payable on February 17, 2023 to stockholders of record as of the close of business on February 3, 2023.

For the quarter ending June 30, 2023, the amount presented represents the dividend payable on May 19, 2023 to stockholders of record as of the close of business on May 5, 2023.

Calendar Year

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For the Three Months Ended

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

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

2023 2022 2022 2022 2022

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Diluted EPS 0.11 0.12 0.14 0.16 0.16

Comparison of Operating Results for the Three Months Ended March 31, 2023 and December 31, 2022

For the quarter ended March 31, 2023, the Company recognized net income of $14.2 million, or $0.11 per share, compared to net income of $16.2 million, or $0.12 per share, for the quarter ended December 31, 2022.

The decrease in net income was due primarily to lower net interest income in the current quarter.

The net interest margin decreased five basis points, from 1.61% for the prior quarter to 1.56% for the current quarter.

Excluding the effects of the leverage strategy discussed below, the net interest margin decreased 17 basis points, from 1.88% for the prior quarter to 1.71% for the current quarter.

The decrease in the net interest margin excluding the effects of the leverage strategy was due mainly to an increase in the cost of deposits and borrowings, partially offset by an increase in loan yields due to higher market interest rates and an increase in the average balance of loans.

Management anticipates the reduction in the net interest margin will continue in the near term.

See additional discussion in "Fiscal Year 2023 Outlook" below.

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 13 basis points and the weighted average yield on MBS increased four basis points compared to the prior quarter.

For the Three Months Ended

March 31, December 31, Change Expressed in:

2023 2022 Dollars Percent

(Dollars in thousands)

INTEREST AND DIVIDEND INCOME:

Loans receivable $ 69,319 $ 64,819 $ 4,500 6.9 %

Cash and cash equivalents 10,977 16,671 (5,694) (34.2)

MBS 4,748 4,811 (63) (1.3)

FHLB stock 3,607 4,158 (551) (13.3)

Investment securities 895 881 14 1.6

Total interest and dividend income $ 89,546 $ 91,340 $ (1,794) (2.0)

The increase in interest income on loans receivable was due to growth in the loan portfolio, along with an increase in the weighted average yield.

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

The increase in the weighted average yield was due primarily to originations and purchases at higher market yields, as well as disbursements on commercial construction loans at rates higher than the overall portfolio rate and upward repricing of existing adjustable-rate loans due to higher market interest rates.

The decrease in interest income on cash and cash equivalents was due mainly to a decrease in the average balance of cash associated with the leverage strategy compared to the prior quarter due to a reduction in the leverage strategy usage in the current quarter, partially offset by an increase in the yield earned on balances held at the FRB of Kansas City due to higher market interest rates.

The decrease in dividend income on FHLB stock was due mainly to a decrease in the average balance of FHLB stock associated with the leverage strategy, partially offset by an increase in the dividend rate paid by FHLB.

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 increased 33 basis points and the weighted average rate paid on borrowings not associated with the leverage strategy increased 30 basis points compared to the prior quarter.

For the Three Months Ended

March 31, December 31, Change Expressed in:

2023 2022 Dollars Percent

(Dollars in thousands)

INTEREST EXPENSE:

Borrowings $ 31,447 $ 33,608 $ (2,161) (6.4) %

Deposits 16,140 11,904 4,236 35.6

Total interest expense $ 47,587 $ 45,512 $ 2,075 4.6

The decrease in interest expense on borrowings was due primarily to a decrease in the average balance of borrowings associated with the leverage strategy compared to the prior quarter, partially offset by an increase in the average balance of borrowings not associated

with the leverage strategy to fund operational needs.

The increase in interest expense on deposits was due primarily to increases in the weighted average rate paid and average balance of the certificate of deposit portfolio.

Provision for Credit Losses

For the quarter ended March 31, 2023, the Bank recorded a provision for credit losses of $891 thousand, compared to a provision for credit losses of $3.7 million for the prior quarter.

The provision for credit losses in the current quarter was comprised of a $714 thousand increase in the ACL for loans and a $177 thousand increase in reserves for off-balance sheet credit exposures.

The provision for credit losses associated with the ACL was due primarily to a reduction in prepayment speeds related to the commercial loan portfolio along with commercial loan growth, partially offset by a slightly improved economic forecast.

The provision for credit losses associated with the reserves for off-balance sheet credit exposures was primarily related to the commercial loan portfolio for the same reasons noted above for the ACL.

Non-Interest Income

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

For the Three Months Ended

March 31, December 31, Change Expressed in:

2023 2022 Dollars Percent

(Dollars in thousands)

NON-INTEREST INCOME:

Deposit service fees $ 3,122 $ 3,461 $ (339) (9.8) %

Insurance commissions 877 795 82 10.3

Other non-interest income 1,084 1,096 (12) (1.1)

Total non-interest income $ 5,083 $ 5,352 $ (269) (5.0)

The decrease in deposit service fees was due mainly to decreases in debit card income and service charges as a result of lower transaction activity during the current quarter.

Non-Interest Expense

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

For the Three Months Ended

March 31, December 31, Change Expressed in:

2023 2022 Dollars Percent

(Dollars in thousands)

NON-INTEREST EXPENSE:

Salaries and employee benefits $ 12,789 $ 13,698 $ (909) (6.6) %

Information technology and related expense 5,789 5,070 719 14.2

Occupancy, net 3,568 3,474 94 2.7

Regulatory and outside services 1,305 1,533 (228) (14.9)

Advertising and promotional 1,333 833 500 60.0

Federal insurance premium 1,246 812 434 53.4

Deposit and loan transaction costs 690 611 79 12.9

Office supplies and related expense 631 633 (2) (0.3)

Other non-interest expense 1,280 1,109 171 15.4

Total non-interest expense $ 28,631 $ 27,773 $ 858 3.1

The decrease in salaries and employee benefits was attributable mainly to a decrease in incentive compensation.

The increase in information technology and related expense was due primarily to third-party project management expenses associated with the Bank's ongoing digital transformation project and an increase in software licensing.

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

The increase in advertising and promotional expense was due mainly to the timing of campaigns and sponsorships.

The increase in federal insurance premium

expense was due mainly to an increase in the Federal Deposit Insurance Corporation ("FDIC") assessment rate effective January 1, 2023, which affected all insured depository institutions.

The Company's efficiency ratio was 60.86% for the current quarter compared to 54.27% for the prior quarter.

The change in the efficiency ratio was due primarily to lower 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 higher value indicates that it is costing the financial institution more money to generate revenue, relative to the net interest margin and non-interest income.

Income Tax Expense

The following table presents pretax income, income tax expense, and net income for the time periods presented, along with the change measured in dollars and percent and the effective tax rate.

For the Three Months Ended

March 31, December 31, Change Expressed in:

2023 2022 Dollars Percent

(Dollars in thousands)

Income before income tax expense $ 17,520 $ 19,747 $ (2,227) (11.3) %

Income tax expense 3,331 3,507 (176) (5.0)

Net income $ 14,189 $ 16,240 $ (2,051) (12.6)

Effective Tax Rate 19.0 % 17.8 %

The decrease in income tax expense was due primarily to lower pretax income in the current quarter, partially offset by an increase in the effective tax rate.

The lower effective tax rate in the prior quarter was due primarily to true-ups related to the preparation of the September 30, 2022 tax returns.

Average Balance Sheet

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For the Three Months Ended

December 31, 2022 September 30, 2022 December 31, 2021

Average Interest Average Interest Average Interest

Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/

Amount Paid Rate Amount Paid Rate Amount Paid Rate

March 31, 2023 December 31, 2022

Average Interest Average Interest

Outstanding Earned/ Yield/ Outstanding Earned/ Yield/

Amount Paid Rate Amount Paid Rate

(Dollars in thousands)

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Net interest margin (8)(9)

1.61 1.71 1.99

Ratio of interest-earning assets to interest-bearing liabilities 1.16x 1.16x 1.21x

Ratio of interest-earning assets to interest-bearing liabilities 1.17x 1.16x

Selected performance ratios:

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Return on average equity (annualized) (9)

5.99 6.83 7.18

Average equity to average assets 9.68 9.33

Operating expense ratio (annualized) (10)

0.96 0.99 1.11

Efficiency ratio (9)(11)

54.27 53.52 52.22

Pre-tax yield on leverage strategy (12)

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(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 $1.1 million, $569 thousand, and $4.0 million for the three months ended December 31, 2022, September 30, 2022, and December 31, 2021, respectively.

(4) Included in this line, for the three months ended December 31, 2022 and September 30, 2022 respectively, is FHLB stock related to the leverage strategy with an average outstanding balance $84.3 million and $108.8 million, and dividend income of $1.8 million and $2.1 million at a weighted average yield of 8.49% and 7.75% and FHLB stock not related to the leverage strategy with an average outstanding balance of $113.3 million and $89.6 million and dividend income of $2.4 million and $1.7 million at a weighted average yield of 8.24% and 7.70%.

There was no FHLB stock related to the leverage strategy during the three months ended December 31, 2021.

(5) The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $1.79 billion and $2.31 billion during the three months ended December 31, 2022 and September 30, 2022, respectively.

There were no cash and cash equivalents related to the leverage strategy during the three months ended December 31, 2021.

(6) Included in this line, for the three months ended December 31, 2022 and September 30, 2022 respectively, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $1.87 billion and $2.42 billion, with interest paid of $17.3 million and $13.5 million, at a weighted average rate of 3.61% and 2.19%, and FHLB borrowings not related to the leverage strategy with an average outstanding balance of $2.39 billion and $1.97 billion and interest paid of $16.3 million and $11.0 million, at a weighted average rate of 2.70% and 2.20%.

There were no FHLB borrowings related to the leverage strategy during the three months ended December 31, 2021.

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

(3) The average balance of investment securities includes an average balance of nontaxable securities of $1.0 million and $1.1 million for the quarters ended March 31, 2023 and December 31, 2022, respectively.

(4) Included in this line, for the quarter ended March 31, 2023, is FHLB stock related to the leverage strategy with an average outstanding balance of $44.1 million and dividend income of $951 thousand at a weighted average yield of 8.75%, and FHLB stock not related to the leverage strategy with an average outstanding balance of $123.5 million and dividend income of $2.7 million at a weighted average yield of 8.72%.

Included in this line for the quarter ended December 31, 2022 is FHLB stock related to the leverage strategy with an average outstanding balance of $84.3 million and dividend income of $1.8 million, at a weighted average yield of 8.49%, and FHLB stock not related to the leverage strategy with an average outstanding balance of $113.3 million and dividend income of $2.4 million, at a weighted average yield of 8.24%.

(5) The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $935.1 million and $1.79 billion during the quarters ended March 31, 2023 and December 31, 2022 respectively.

(6) Included in this line, for the quarter ended March 31, 2023, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $979.2 million and interest paid of $11.3 million, at a weighted average rate of 4.60%, and FHLB borrowings not related to the leverage strategy with an average outstanding balance of $2.72 billion and interest paid of $20.2 million, at a weighted average rate of 3.00%.

Included in this line for the quarter ended December 31, 2022 are FHLB borrowings related to the leverage strategy with an average outstanding balance of $1.87 billion and interest paid of $17.3 million at a weighted average rate of 3.61%, and FHLB borrowings not related to the leverage strategy with an average outstanding balance of $2.39 billion and interest paid of $16.3 million at a weighted average rate of 2.70%.

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.

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For the Three Months Ended

December 31, 2022 September 30, 2022 December 31, 2021

Actual Leverage Adjusted Actual Leverage Adjusted Actual Leverage Adjusted

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

March 31, 2023 December 31, 2022

Actual Leverage Adjusted Actual Leverage Adjusted

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

Yield on interest-earning assets 3.34 % 0.14 % 3.20 % 3.19 % 0.13 % 3.06 %

8 unchanged sentences

Rate/Volume Analysis

The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the periods indicated.

For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous period's average rate, and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous period.

For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year period.

The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.

For the Three Months Ended

December 31, 2022 vs.

September 30, 2022 December 31, 2022 vs.

March 31, 2023 vs.

December 31, 2022

Increase (Decrease) Due to Increase (Decrease) Due to

Volume Rate Total Volume (1)

Increase (Decrease) Due to

Volume Rate Total

(Dollars in thousands)

14 unchanged sentences

Net change in net interest income $ (950) $ (2,919) $ (3,869)

(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.

Comparison of Operating Results for the Three Months Ended December 31, 2022 and September 30, 2022

For the quarter ended December 31, 2022, the Company recognized net income of $16.2 million, or $0.12 per share, compared to net income of $19.5 million, or $0.14 per share, for the quarter ended September 30, 2022.

The decrease in net income was due primarily to lower net interest income in the current quarter.

The net interest margin decreased 10 basis points, from 1.71% for the prior quarter to 1.61% for the current quarter.

Excluding the effects of the leverage strategy discussed below, the net interest margin decreased 19 basis points, from 2.07% for the prior quarter to 1.88% for the current quarter.

As discussed in the "Executive Summary" above, management anticipates net interest margin compression may continue in the near term.

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

During the current quarter, the average outstanding balance of leverage strategy borrowings was $1.87 billion.

The borrowings were repaid prior to quarter end.

The proceeds from the borrowings, net of the required FHLB stock holdings, which yielded 8.50% during the current quarter, were deposited at the FRB of Kansas City.

Net income attributable to the leverage strategy is largely derived from 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.

When the leverage strategy is in place, it reduces the net interest margin due to the amount of earnings from the transaction in comparison to the size of the transaction.

Net income attributable to the leverage strategy was $763 thousand during the current quarter, compared to $1.3 million for the prior quarter.

The decrease was due to a reduction in the size of the leverage strategy transaction because the borrowing capacity was needed for operational liquidity purposes.

Management continues to monitor the net interest rate spread and overall profitability of the strategy.

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

Comparison of Operating Results for the Six Months Ended March 31, 2023 and 2022

The Company recognized net income of $30.4 million, or $0.23 per share, for the current year period compared to net income of $43.8 million, or $0.32 per share, for the prior year period.

The decrease in net income was due primarily to recording a provision for credit losses of $4.6 million for the current year period compared to a release of provision of $6.6 million for the prior year period.

The net interest margin decreased 24 basis points, from 1.83% for the prior year period to 1.59% for the current year period.

Excluding the effects of the leverage strategy, the net interest margin decreased 21 basis points, from 2.00% for the prior year period to 1.79% for the current year period.

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 11 basis points and the weighted average yield on MBS increased four basis points compared to the prior quarter.

For the Three Months Ended

December 31, September 30, Change Expressed in:

For the Six Months Ended

March 31, Change Expressed in:

2023 2022 Dollars Percent

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Total interest and dividend income $ 180,886 $ 126,688 $ 54,198 42.8

The increase in interest income on loans receivable was due to growth in the loan portfolio, along with an increase in the weighted average yield.

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

The increase in interest income on loans receivable was due to an increase in the average balance and weighted average yield of the loan portfolio.

The increase in the average balance was mainly in the correspondent one-to four-family and commercial real estate loan portfolios.

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.

The increase in dividend income on FHLB stock was due to an increase in the dividend rate paid by FHLB.

The increase in interest income on cash and cash equivalents was due mainly to a higher yield on cash related to an increase in FRB interest rates.

The increase in dividend income on FHLB stock was due mainly to an increase in the average balance of FHLB stock, along with a higher FHLB dividend rate compared to the prior year period.

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 increased 23 basis points and the weighted average rate paid on borrowings not associated with the leverage strategy increased 50 basis points compared to the prior quarter.

For the Three Months Ended

December 31, September 30, Change Expressed in:

For the Six Months Ended

March 31, Change Expressed in:

2023 2022 Dollars Percent

4 unchanged sentences

Total interest expense $ 93,099 $ 33,973 $ 59,126 174.0

The increase in interest expense on borrowings was due primarily to new borrowings added during the current quarter and near the end of the prior quarter, at market interest rates higher than the overall portfolio rate, to fund operational liquidity needs.

See additional discussion in the "Financial Condition" section above.

Additionally, interest expense on borrowings increased due to an increase in the rate paid on the short-term borrowings associated with the leverage strategy, due to higher market interest rates.

The increase in interest expense on deposits was due primarily to an increase in the weighted average rate paid on certificates of deposit and money market accounts, partially offset by a decrease in the average balance of those deposit types.

The increase in interest expense on borrowings was due primarily to an increase in the weighted average rate on the borrowings associated with the leverage strategy compared to the prior year period along with an increase in the average balance and weighted average rate on borrowings not associated with the leverage strategy.

Interest expense on borrowings associated with the leverage strategy increased $27.3 million compared to the prior year period.

Interest expense on FHLB borrowings not associated with the leverage strategy increased due to new borrowings added between periods, at market interest rates higher than the overall portfolio rate, to fund operational needs.

The increase in interest expense on deposits was due to an increase in the weighted average rate paid on the deposit portfolio, primarily certificates of deposit and money market accounts, partially offset by a decrease in the average balance of these portfolios.

Provision for Credit Losses

For the quarter ended December 31, 2022, the Bank recorded a provision for credit losses of $3.7 million, compared to a provision for credit losses of $1.1 million for the prior quarter.

The provision for credit losses in the current quarter was comprised of a $2.8 million increase in the ACL for loans and an $840 thousand increase in reserves for off-balance sheet credit exposures.

The provision for credit losses associated with both the ACL and reserves for off-balance sheet credit exposures was primarily a result of growth in the commercial loan portfolio and the balance of commercial construction off-balance sheet credit exposures, along with a slowdown in portfolio prepayment speeds, which reduced the projected prepayment speeds used in the model for generally all loan categories.

The Bank recorded a provision for credit losses during the current year period of $4.6 million, compared to a release of provision of $6.6 million during the prior year period.

The provision for credit losses in the current year period was comprised of a $3.6 million increase in the ACL for loans and a $1.0 million increase in reserves for off-balance sheet credit exposures.

The provision for credit losses associated with both the ACL and reserves for off-balance sheet credit exposures in the current year period was due primarily to growth in the commercial loan portfolio and commercial construction off-balance sheet credit exposures, along with a reduction in the projected prepayment speeds used in the model for all loan categories.

Non-Interest Income

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

For the Three Months Ended

December 31, September 30, Change Expressed in:

For the Six Months Ended

March 31, Change Expressed in:

2023 2022 Dollars Percent

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Total non-interest income $ 10,435 $ 10,922 $ (487) (4.5)

The decrease in other non-interest income was due mainly to the prior quarter including higher gains on a loan-related financial derivative agreement, which are generally driven by changes in market interest rates.

The increase in insurance commissions was due primarily to annual contingent insurance commissions received being higher than anticipated and the related accrual adjustments, along with overall commissions being higher in the current year.

The decrease in other non-interest income was due mainly to the prior year period including gains on a loan-related financial derivative agreement, with no such gains in the current year period.

Non-Interest Expense

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

For the Three Months Ended

December 31, September 30, Change Expressed in:

For the Six Months Ended

March 31, Change Expressed in:

2023 2022 Dollars Percent

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Federal insurance premium 2,058 1,416 642 45.3

Office supplies and related expense 633 487 146 30.0

Deposit and loan transaction costs 1,301 1,386 (85) (6.1)

Office supplies and related expense 1,264 970 294 30.3

Other non-interest expense 2,389 2,136 253 11.8

Total non-interest expense $ 56,404 $ 54,654 $ 1,750 3.2

The decrease in salaries and employee benefits was due mainly to a decrease in loan commissions, as well as one fewer working day in the current quarter compared to the prior quarter.

The decrease in occupancy, net was due mainly to lower utility expenses and building maintenance expenses.

The decrease in regulatory and outside services was due primarily to lower consulting expenses related to the Bank's ongoing digital transformation project as those third-party services are now directly related to the project and are included in information technology and related expenses.

The decrease in salaries and employee benefits was attributable mainly to a decrease in incentive compensation.

The increase in information technology and related expenses was due mainly to third-party project management expenses associated with the Bank's ongoing digital transformation project, along with higher software licensing expenses.

The increase in regulatory and outside services was due primarily to an increase in outside consulting services.

The decrease in advertising and promotional expense was due mainly to the timing of campaigns and sponsorships.

The increase in federal insurance premium expense was due mainly to an increase in the FDIC assessment rate for all insured depository institutions, along with the leverage strategy being utilized during the majority of the current year period and being utilized for only three months during the prior year period.

The increase in office supplies and related expense was due primarily to the write-off of the Bank's remaining inventory of unissued non-contactless debit cards, which have now become obsolete.

The decrease in deposit and loan transaction costs was mainly due to loan-related activities.

The Company's efficiency ratio was 54.27% for the current quarter compared to 53.52% for the prior quarter.

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

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

A higher value indicates that it is costing the financial institution more money to generate revenue, relative to the net interest margin and non-interest income.

The increase in other non-interest expense was due mainly to expenses associated with the collateral received on the Bank's interest rate swap agreements.

The Company's efficiency ratio was 57.43% for the current year period compared to 52.74% for the prior year period.

The change in the efficiency ratio was due primarily to lower net interest income and higher non-interest expense in the current year quarter.

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

December 31, September 30, Change Expressed in:

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 Six Months Ended

March 31, Change Expressed in:

2023 2022 Dollars Percent

4 unchanged sentences

Effective Tax Rate 18.3 % 21.2 %

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.

The decrease in the effective tax rate was due primarily to lower projected pretax income in the current year, as the Company's permanent differences, which generally reduce our tax rate, have a larger impact on the overall effective rate.

Comparison of Operating Results for the Three Months Ended December 31, 2022 and 2021

The Company recognized net income of $16.2 million, or $0.12 per share, for the current quarter compared to net income of $22.2 million, or $0.16 per share, for the prior year quarter.

The decrease in income tax expense was due primarily to lower pretax income in the current year period, along with a decrease in the effective tax rate.

Fiscal Year 2023 Outlook

The rapid increase in short-term rates led by the FRB and the inverted yield curve has led to decreases in the Bank's net interest margin.

There has been a runoff in some deposit product balances and management has increased certificate of deposit and money market account rates to help mitigate the outflow.

The higher loan rates have made the purchase of homes less affordable and reduced the turnover of housing inventory, which lowers the likelihood of existing one- to four-family loans at lower rates being paid off as a result of housing turnover.

These dynamics have caused our balance sheet to change faster than what would occur in more stable rate environments.

Net interest margin compression is anticipated to continue, and the margin is expected to compress more in the near term, due to the shape of the yield curve and the pace at which liabilities are repricing compared to assets, along with lower costing deposits being replaced with higher costing borrowings in order to fund loan growth, and deposit funds moving from lower costing deposit accounts to certificates of deposit.

Loan growth is occurring at market interest rates that are higher than the overall loan portfolio rate;

however, the shift to higher-costing borrowings and the pace at which the interest rate increase is occurring for liabilities is more than offsetting the benefit of the higher loan rates.

As with managing the size of the balance sheet, management continues to evaluate funding options and plans to continue using shorter term borrowings, as necessary, with the anticipation that when rates begin to decrease, those borrowings can be repaid or repriced to lower cost alternatives faster.

Subsequent to March 31, 2023, management increased the rates offered on the Bank's money market accounts in response to competitor pricing.

This increase, in combination with the full-quarter impact of the Bank's certificate of deposit promotional campaign and the ongoing repricing of the Bank's certificate of deposit and FHLB advance portfolios, offset by growth in the yield on loans, is expected to reduce the net interest margin by approximately 20 basis points during the June 2023 quarter, excluding the impact of the leverage strategy.

Management intends to implement a new core processing system ("digital transformation") for the Bank by September 2023.

The digital transformation is expected to better position the Bank for the future and allow for the introduction of new products and services to enhance customer experiences.

Management anticipates information technology and related expenses will be approximately $5 million higher in fiscal year 2023 compared to fiscal year 2022 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 related to projects outside of the digital transformation and due to general cost increases.

Overall, it is anticipated that information technology and related expenses will be approximately $6 million higher in fiscal year 2023 compared to fiscal year 2022, or approximately $24 million for the year.

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.

Previously, management expected an increase in salaries and benefits of $3.5 million in fiscal year 2023 and now expect salaries and benefits to remain flat in fiscal year 2023.

This is due to several factors such as open positions remaining unfilled, reduced incentive compensation expectations, and a lower merit increase than was projected at September 30, 2022.

Federal insurance premium expense is anticipated to be approximately $1.3 million higher in fiscal year 2023 compared to fiscal year 2022, due to the increase in the assessment rate that began in January 2023 for all insured depository institutions.

Management anticipates the effective tax rate for fiscal year 2023 will be approximately 19%.

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 Six Months Ended

March 31, 2023 March 31, 2022

Average Interest Average Interest

Outstanding Earned/ Yield/ Outstanding Earned/ Yield/

Amount Paid Rate Amount Paid Rate

(Dollars in thousands)

Interest-earning assets:

One- to four-family loans:

Originated $ 4,050,149 $ 67,024 3.31 % $ 3,968,475 $ 64,415 3.25 %

Correspondent purchased 2,383,295 36,642 3.07 2,030,928 25,805 2.54

Bulk purchased 145,779 847 1.16 165,895 1,114 1.34

Total one- to four-family loans 6,579,223 104,513 3.18 6,165,298 91,334 2.96

Commercial loans 1,085,870 25,917 4.72 855,057 17,794 4.12

Consumer loans 102,705 3,708 7.24 91,573 2,072 4.54

Total loans receivable (1)

7,767,798 134,138 3.45 7,111,928 111,200 3.12

1,197,462 9,559 1.60 1,397,056 9,446 1.35

Investment securities (2)(3)

525,047 1,776 0.68 522,986 1,608 0.61

FHLB stock (4)

182,737 7,765 8.52 115,546 3,471 6.02

Cash and cash equivalents (5)

1,389,121 27,648 3.94 993,653 963 0.19

Total interest-earning assets 11,062,165 180,886 3.26 10,141,169 126,688 2.49

Other non-interest-earning assets 255,882 398,355

Total assets $ 11,318,047 $ 10,539,524

Liabilities and stockholders' equity:

Interest-bearing liabilities:

Checking $ 998,604 657 0.13 $ 1,060,755 355 0.07

Savings 543,630 201 0.07 530,451 141 0.05

Money market 1,690,893 6,218 0.74 1,822,848 1,701 0.19

Retail certificates 2,119,905 18,882 1.79 2,270,195 14,847 1.31

Commercial certificates 36,413 301 1.66 142,982 455 0.64

Wholesale certificates 112,272 1,785 3.19 198,527 157 0.16

Total deposits 5,501,717 28,044 1.02 6,025,758 17,656 0.59

Borrowings (6)

3,983,434 65,055 3.25 2,533,641 16,317 1.28

Total interest-bearing liabilities 9,485,151 93,099 1.96 8,559,399 33,973 0.79

Non-interest-bearing deposits 575,518 564,089

Other non-interest-bearing liabilities 182,083 193,606

Stockholders' equity 1,075,295 1,222,430

Total liabilities and stockholders' equity $ 11,318,047 $ 10,539,524

Net interest income (7)

$ 87,787 $ 92,715

Net interest-earning assets $ 1,577,014 $ 1,581,770

Net interest margin (8)(9)

Ratio of interest-earning assets to interest-bearing liabilities 1.17x 1.18x

Selected performance ratios:

Return on average assets (annualized) (9)

0.54 % 0.83 %

Return on average equity (annualized) (9)

Average equity to average assets 9.50 11.60

Operating expense ratio (annualized) (10)

Efficiency ratio (9)(11)

Pre-tax yield on leverage strategy (12)

(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 $1.1 million and $3.0 million for the six months ended March 31, 2023 and March 31, 2022, respectively.

(4) Included in this line, for the six months ended March 31, 2023 and March 31, 2022, respectively, is FHLB stock related to the leverage strategy with an average outstanding balance of $64.4 million and $42.6 million, and dividend income of $2.8 million and $1.2 million at a weighted average yield of 8.58% and 5.75% and FHLB stock not related to the leverage strategy with an average outstanding balance of $118.4 million and $72.9 million and dividend income of $5.0 million and $2.2 million at a weighted average yield of 8.49% and 6.18%, respectively.

(5) The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $1.37 billion and $904.6 million during the six months ended March 31, 2023 and March 31, 2022, respectively.

(6) Included in this line, for the six months ended March 31, 2023 and March 31, 2022 respectively, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $1.43 billion and $947.3 million, with interest paid of $28.6 million and $1.3 million, at a weighted average rate of 3.95% and 0.26%, and FHLB borrowings not related to the leverage strategy with an average outstanding balance of $2.55 billion and $1.59 billion and interest paid of $36.5 million and $15.1 million, at a weighted average rate of 2.86% and 1.89%.

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

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

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

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

(9) The table below provides a reconciliation between certain performance ratios presented in accordance with GAAP and the performance ratios excluding the effects of the leverage strategy, which are not presented in accordance with GAAP.

Management believes it is important for comparability purposes to provide the performance ratios without the leverage strategy because of the unique nature of the leverage strategy.

The leverage strategy reduces some of our performance ratios due to the amount of earnings associated with the transaction in comparison to the size of the transaction, while increasing our net income.

For the Six Months Ended

March 31, 2023 March 31, 2022

Actual Leverage Adjusted Actual Leverage Adjusted

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

Yield on interest-earning assets 3.26 % 0.13 % 3.13 % 2.49 % (0.22) % 2.71 %

Cost of interest-bearing liabilities 1.96 0.36 1.60 0.79 (0.07) 0.86

Return on average assets (annualized) 0.54 (0.06) 0.60 0.83 (0.07) 0.90

Return on average equity (annualized) 5.66 0.16 5.50 7.17 0.09 7.08

Net interest margin 1.59 (0.20) 1.79 1.83 (0.17) 2.00

Efficiency Ratio 57.43 (0.50) 57.93 52.74 (0.29) 53.03

(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.

Rate/Volume Analysis

The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.

For the Six Months Ended

March 31, 2023 vs.

March 31, 2022

Increase (Decrease) Due to

Volume Rate Total

(Dollars in thousands)

Interest-earning assets:

Loans receivable $ 11,860 $ 11,078 $ 22,938

MBS (1,457) 1,570 113

Investment securities 6 162 168

FHLB stock 2,507 1,787 4,294

Cash and cash equivalents 533 26,152 26,685

Total interest-earning assets 13,449 40,749 54,198

Interest-bearing liabilities:

Checking (22) 324 302

Savings 4 56 60

Money market (132) 4,649 4,517

Certificates of deposit (2,247) 7,756 5,509

Borrowings 12,380 36,358 48,738

Total interest-bearing liabilities 9,983 49,143 59,126

Net change in net interest income $ 3,466 $ (8,394) $ (4,928)

Comparison of Operating Results for the Three Months Ended March 31, 2023 and 2022

For the quarter ended March 31, 2023, the Company recognized net income of $14.2 million, or $0.11 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 decrease in net interest income along with a higher provision for credit losses, partially offset by lower income tax expense.

The net interest margin decreased 13 basis points, from 1.69% for the prior year quarter to 1.56% for the current quarter.

Excluding the effects of the leverage strategy, the net interest margin decreased 30 basis points, from 2.01% for the prior year quarter to 1.71% for the current quarter.

Interest and Dividend Income

1 unchanged sentence

For the Three Months Ended

December 31, Change Expressed in:

March 31, Change Expressed in:

2023 2022 Dollars Percent

2 unchanged sentences

Loans receivable $ 69,319 $ 55,412 $ 13,907 25.1 %

Cash and cash equivalents 16,671 14 16,657 N/M

Cash and cash equivalents 10,977 949 10,028 1,056.7

MBS 4,748 4,821 (73) (1.5)

2 unchanged sentences

Total interest and dividend income $ 89,546 $ 64,222 $ 25,324 39.4

The increase in interest income on loans receivable was due to an increase in the average balance and weighted average yield of the loan portfolio.

The increase in the average balance was mainly in the correspondent one-to four-family and commercial loan portfolios.

The increase in interest income on loans receivable was due primarily to an increase in the average balance of the loan portfolio and an increase in the weighted average yield.

The increase in the average balance was primarily in the correspondent one-to four-family and commercial real estate loan portfolios.

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 quarter and not being utilized during the prior year quarter.

Additionally, market interest rates increased between periods resulting in an increase in the yield on cash due to an increase in FRB interest rates, and FHLB increased the dividend rate paid compared to the prior year quarter.

The increase in interest income on cash and cash equivalents was due to a higher yield on cash related to an increase in FRB interest rates.

The increase in dividend income on FHLB stock was due mainly to a higher FHLB dividend rate compared to the prior year quarter.

Interest Expense

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

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

For the Three Months Ended

December 31, Change Expressed in:

March 31, Change Expressed in:

2023 2022 Dollars Percent

4 unchanged sentences

Total interest expense $ 47,587 $ 17,121 $ 30,466 177.9

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

Interest expense on borrowings associated with the leverage strategy totaled $17.3 million during the current quarter.

Interest expense on FHLB borrowings not associated with the leverage strategy also increased due to new borrowings added between periods, at market interest rates higher than the overall portfolio rate, to fund operational liquidity needs.

See additional discussion in the "Financial Condition" section above.

The increase in interest expense on deposits was due to an increase in the weighted average rate paid on the deposit portfolio, primarily money market accounts and certificates of deposit, partially offset by a decrease in the average balance of certificates of deposit.

The increase in interest expense on borrowings was due primarily to an increase in the average balance and weighted average rate on borrowings not associated with the leverage strategy to fund loan growth and a reduction in deposits, along with an increase in the weighted average rate on the borrowings associated with the leverage strategy compared to the prior year quarter.

Provision for Credit Losses

The Bank recorded a provision for credit losses during the current quarter of $3.7 million, compared to a $3.4 million release of provision during the prior year quarter.

See "Comparison of Operating Results for the Three Months Ended December 31, 2022 and September 30, 2022" above for additional information regarding the provision for credit losses for the current quarter.

The Bank recorded a provision for credit losses during the current quarter of $891 thousand, compared to a release of provision of $3.2 million during the prior year quarter.

See "Comparison of Operating Results for the Three Months Ended March 31, 2023 and December 31, 2022" above for additional discussion regarding the provision for credit losses during the current quarter.

Non-Interest Income

1 unchanged sentence

For the Three Months Ended

December 31, Change Expressed in:

March 31, Change Expressed in:

2023 2022 Dollars Percent

5 unchanged sentences

Total non-interest income $ 5,083 $ 5,416 $ (333) (6.1)

The decrease in other non-interest income was due mainly to the prior year quarter including higher gains on a loan-related financial derivative agreement, along with a decrease in income from bank-owned life insurance.

The decrease in other non-interest income was due mainly to the prior year quarter including gains on a loan-related financial derivative agreement, with no such gains in the current quarter.

Non-Interest Expense

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For the Three Months Ended

December 31, Change Expressed in:

March 31, Change Expressed in:

2023 2022 Dollars Percent

7 unchanged sentences

Federal insurance premium 1,246 777 469 60.4

Office supplies and related expense 633 468 165 35.3

Deposit and loan transaction costs 690 689 1 0.1

Office supplies and related expense 631 502 129 25.7

Other non-interest expense 1,280 1,217 63 5.2

Total non-interest expense $ 28,631 $ 27,960 $ 671 2.4

The increase in information technology and related expenses was due mainly to higher software licensing expenses, as well as third-party project management expenses associated with the Bank's ongoing digital transformation project.

The increase in regulatory and outside services was due primarily to an increase in outside consulting services.

The decrease in advertising and promotional expense was due mainly to the timing of campaigns and sponsorships.

The increase in federal insurance premium expense was due to the leverage strategy being utilized during the current quarter and not being utilized during the prior year quarter.

The increase in office supplies and related expense was due primarily to the write-off of the Bank's remaining inventory of unissued non-contactless debit cards, which have now become obsolete.

The increase in other non-interest expense was due mainly to expenses associated with the collateral received on the Bank's interest rate swap agreements and higher deposit-related fraud losses in the current quarter.

The decrease in salaries and employee benefits was attributable mainly to a decrease in incentive compensation.

The increase in federal insurance premium expense was due mainly to an increase in the FDIC assessment rate effective January 1, 2023 for all insured depository institutions.

The increase in office supplies and related expense was timing related.

The Company's efficiency ratio was 60.86% for the current quarter compared to 53.24% for the prior year quarter.

The change in the efficiency ratio was due primarily to higher non-interest expense in the current quarter.

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

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.

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

December 31, Change Expressed in:

March 31, Change Expressed in:

2023 2022 Dollars Percent

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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.

Fiscal Year 2023 Projections

As discussed in the "Executive Summary" section above, the rapid increase in short-term rates led by the FRB and the impact of higher long-term rates has resulted in a decrease in our net interest margin.

Net interest margin compression is anticipated to continue, and may compress more in the near term, due to the shape of the yield curve and the pace at which liabilities are repricing compared to assets and the replacement of lower cost deposits with higher costing borrowings which are being used to fund loan growth.

Management anticipates information technology and related expenses will be approximately $5.5 million higher in fiscal year 2023 compared to fiscal year 2022 due to the digital transformation.

Overall, it is anticipated that information technology and related expenses will be approximately $6.5 million higher in fiscal year 2023 compared to fiscal year 2022, or approximately $24.5 million for the year.

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.

Salaries and employee benefits are 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.

Management anticipates the effective tax rate for fiscal year 2023 will be approximately 19%.

This is lower than the original projection of 20% to 21% previously provided, due mainly to lower projected pretax income as the Company's permanent differences, which generally reduce our tax rate, have a larger impact on the overall effective rate.

Average Balance Sheet

Average outstanding balances are derived from average daily balances.

The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates.

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

For the Three Months Ended

March 31, 2023 March 31, 2022

Average Interest Average Interest

Outstanding Earned/ Yield/ Outstanding Earned/ Yield/

Amount Paid Rate Amount Paid Rate

(Dollars in thousands)

Interest-earning assets:

One- to four-family loans:

Originated $ 4,050,515 $ 33,660 3.32 % $ 3,965,844 $ 31,993 3.23 %

Correspondent purchased 2,462,960 19,380 3.15 2,026,120 13,060 2.58

Bulk purchased 144,438 413 1.14 161,149 503 1.25

Total one- to four-family loans 6,657,913 53,453 3.21 6,153,113 45,556 2.96

Commercial loans 1,147,681 13,924 4.85 869,205 8,851 4.07

Consumer loans 102,649 1,942 7.67 90,326 1,005 4.51

Total loans receivable (1)

7,908,243 69,319 3.51 7,112,644 55,412 3.12

1,173,366 4,748 1.62 1,357,693 4,821 1.42

Investment securities (2)(3)

525,012 895 0.68 522,019 800 0.61

FHLB stock (4)

167,567 3,607 8.73 158,546 2,240 5.73

Cash and cash equivalents (5)

967,586 10,977 4.54 1,971,341 949 0.19

Total interest-earning assets 10,741,774 89,546 3.34 11,122,243 64,222 2.31

Other non-interest-earning assets 263,916 385,323

Total assets $ 11,005,690 $ 11,507,566

Liabilities and stockholders' equity:

Interest-bearing liabilities:

Checking $ 989,440 368 0.15 $ 1,069,282 176 0.07

Savings 541,324 101 0.08 540,348 71 0.05

Money market 1,620,451 3,184 0.80 1,879,799 876 0.19

Retail certificates 2,176,103 11,115 2.07 2,241,080 7,012 1.27

Commercial certificates 38,575 197 2.07 116,181 183 0.64

Wholesale certificates 127,037 1,175 3.75 197,335 71 0.15

Total deposits 5,492,930 16,140 1.19 6,044,025 8,389 0.56

Borrowings (6)

3,700,022 31,447 3.42 3,499,010 8,732 1.01

Total interest-bearing liabilities 9,192,952 47,587 2.09 9,543,035 17,121 0.73

Non-interest-bearing deposits 574,495 577,989

Other non-interest-bearing liabilities 172,481 177,995

Stockholders' equity 1,065,762 1,208,547

Total liabilities and stockholders' equity $ 11,005,690 $ 11,507,566

Net interest income (7)

$ 41,959 $ 47,101

Net interest-earning assets $ 1,548,822 $ 1,579,208

Net interest margin (8)(9)

Ratio of interest-earning assets to interest-bearing liabilities 1.17x 1.17x

Selected performance ratios:

Return on average assets (annualized) (9)

0.52 % 0.75 %

Return on average equity (annualized) (9)

Average equity to average assets 9.68 10.50

Operating expense ratio (annualized) (10)

Efficiency ratio (9)(11)

Pre-tax yield on leverage strategy (12)

(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 $1.0 million and $2.0 million for the three months ended March 31, 2023 and March 31, 2022, respectively.

(4) Included in this line, for the three months ended March 31, 2023 and March 31, 2022, respectively, is FHLB stock related to the leverage strategy with an average outstanding balance of $44.1 million and $86.2 million, respectively, and dividend income of $951 thousand and $1.2 million, respectively, at a weighted average yield of 8.75% and 5.75%, respectively, and FHLB stock not related to the leverage strategy with an average outstanding balance of $123.5 million and $72.3 million, respectively, and dividend income of $2.7 million and $1.0 million, respectively, at a weighted average yield of 8.72% and 5.71%, respectively.

(5) The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $935.1 million and $1.83 billion during the three months ended March 31, 2023 and March 31, 2022, respectively.

(6) Included in this line, for the three months ended March 31, 2023 and March 31, 2022, respectively, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $979.2 million and $1.92 billion, respectively, and interest paid of $11.3 million and $1.3 million, respectively, at a weighted average rate of 4.60% and 0.26%, respectively, and FHLB borrowings not related to the leverage strategy with an average outstanding balance of $2.72 billion and $1.58 billion, respectively, and interest paid of $20.2 million and $7.5 million, respectively, at a weighted average rate of 3.00% and 1.90%, respectively.

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.

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.

For the Three Months Ended

March 31, 2023 March 31, 2022

Actual Leverage Adjusted Actual Leverage Adjusted

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

Yield on interest-earning assets 3.34 % 0.14 % 3.20 % 2.31 % (0.39) % 2.70 %

Cost of interest-bearing liabilities 2.09 0.30 1.79 0.73 (0.11) 0.84

Return on average assets (annualized) 0.52 (0.04) 0.56 0.75 (0.13) 0.88

Return on average equity (annualized) 5.33 0.05 5.28 7.16 0.18 6.98

Net interest margin 1.56 (0.15) 1.71 1.69 (0.32) 2.01

Efficiency Ratio 60.86 (0.07) 60.93 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.

Rate/Volume Analysis

For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year period.

The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.

For the Three Months Ended March 31,

Increase (Decrease) Due to

Volume Rate Total

(Dollars in thousands)

Interest-earning assets:

Loans receivable $ 7,203 $ 6,704 $ 13,907

MBS (700) 627 (73)

Investment securities 5 90 95

FHLB stock 134 1,233 1,367

Cash and cash equivalents (724) 10,752 10,028

Total interest-earning assets 5,918 19,406 25,324

Interest-bearing liabilities:

Checking (14) 206 192

Savings — 30 30

Money market (137) 2,445 2,308

Certificates of deposit (652) 5,873 5,221

Borrowings 6,807 15,908 22,715

Total interest-bearing liabilities 6,004 24,462 30,466

Net change in net interest income $ (86) $ (5,056) $ (5,142)

Liquidity and Capital Resources

9 unchanged sentences

Management also monitors key liquidity statistics related to items such as wholesale funding gaps, borrowings capacity, and available unpledged collateral, as well as various liquidity ratios.

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.

In the event short-term liquidity needs exceed available cash, the Bank has access to a line of credit at FHLB, the FRB of Kansas City's discount window, and the newly established BTFP.

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 FHLB borrowing limit was 50% of Bank Call Report total assets as of December 31, 2022, as approved by the president of FHLB.

The Bank's FHLB borrowing limit was 50% of Bank Call Report total assets as of March 31, 2023, 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.

2 unchanged sentences

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.

Management tests the Bank's access to the FRB of Kansas City's discount window annually with a nominal, overnight borrowing, which was completed during the first quarter of fiscal year 2023.

There were no borrowings from the discount window during the current quarter.

The amount that can be borrowed under the BTFP is based upon the par value of securities pledged as collateral, the term can be up to one year in length, and the borrowings can be prepaid without penalty.

There were no BTFP borrowings during the current quarter.

Subsequent to March 31, 2023, the Bank repaid its borrowings on the FHLB line of credit and borrowed $500.0 million under the BTFP as the rate was more favorable than the rates offered on the FHLB line of credit or the rate on a one-year FHLB advance at that point in time.

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.

1 unchanged sentence

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

At December 31, 2022, the Bank had total borrowings, at par, of $2.65 billion, or approximately 27% of total assets, all of which were FHLB borrowings.

At March 31, 2023, the Bank had total borrowings, at par, of $2.70 billion, or approximately 27% of total assets, all of which were FHLB borrowings.

Of this amount, $444.7 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 $572.1 million as collateral for FHLB borrowings at December 31, 2022.

At December 31, 2022, the Bank had no repurchase agreements.

Management estimated that the Bank had $2.85 billion in additional liquidity available at March 31, 2023 based on the Bank's blanket collateral agreement with FHLB and unencumbered securities.

At March 31, 2023, the Bank had no repurchase agreements.

The Bank may enter into repurchase agreements as management deems appropriate, not to exceed 15% of total assets, and subject to the total borrowings internal policy limit of 55% as discussed above.

The Bank could utilize the repayment and maturity of outstanding loans, MBS, and other investments for liquidity needs rather than reinvesting such funds into the related portfolios.

At December 31, 2022, the Bank had $817.3 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.

As of December 31, 2022, the Bank's policy allowed for combined brokered and public unit certificates of deposit up to 15% of total deposits.

At December 31, 2022, the Bank did not have any brokered certificates of deposit, and public unit certificates of deposit were approximately 2% of total deposits.

The Bank had pledged securities with an estimated fair value of $137.6 million as collateral for public unit certificates of deposit at December 31, 2022.

As of March 31, 2023, the Bank's policy allowed for combined brokered and public unit certificates of deposit up to 15% of total deposits.

At March 31, 2023, 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 $155.9 million as collateral for public unit certificates of deposit at March 31, 2023.

The securities pledged as collateral for public unit certificates of deposit are held under joint custody with FHLB and generally will be released upon deposit maturity.

At December 31, 2022, $1.05 billion of the Bank's certificate of deposit portfolio was scheduled to mature within the next 12 months, including $88.1 million of public unit certificates of deposit and $22.1 million of commercial certificates of deposit.

At March 31, 2023, $1.08 billion of the Bank's certificate of deposit portfolio was scheduled to mature within the next 12 months, including $101.7 million of public unit certificates of deposit and $27.8 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.

14 unchanged sentences

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 December 31, 2022, the Bank's CBLR was 9.2% and the Company's CBLR was 10.0%, which exceeded the minimum requirements.

As of March 31, 2023, the Bank's CBLR was 9.7% and the Company's CBLR was 10.6%, which exceeded the minimum requirements.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis