Capitol Federal Financial, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company and the Bank may from time to time make written or oral "forward-looking statements," including statements contained in documents filed or furnished by the Company with the SEC. These forward-looking statements may be included in this Quarterly Report on Form 10-Q and the exhibits attached to it, in the Company's reports to stockholders, in the Company's press releases, and in other communications by the Company, which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause our future results to differ materially from the beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in the forward-looking statements: • our ability to maintain overhead costs at reasonable levels; • our ability to originate and purchase a sufficient volume of one- to four-family loans in order to maintain the balance of that portfolio at a level desired by management; • our ability to invest funds in wholesale or secondary markets at favorable yields compared to the related funding source; • our ability to access cost-effective funding 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; • our ability to extend our commercial banking and trust asset management expertise across our market areas; • fluctuations in deposit flows; • the future earnings and capital levels of the Bank and the continued non-objection by our primary federal banking regulators, to the extent required, to distribute capital from the Bank to the Company, which could affect the ability of the Company to pay dividends in accordance with its dividend policy; • the strength of the U.S. economy in general and the strength and/or the availability of labor in the local economies in which we conduct operations, including areas where we have purchased large amounts of correspondent loans, originated commercial loans, and entered into commercial loan participations; • changes in real estate values, unemployment levels, and the level and direction of loan delinquencies and charge-offs may require changes in the estimates of the adequacy of the ACL, which may adversely affect our business; • increases in classified and/or non-performing assets, which may require the Bank to increase the ACL, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets; • results of examinations of the Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our ACL; • changes in accounting principles, policies, or guidelines; • the effects of, and changes in, monetary and interest rate policies of the Board of Governors of the Federal Reserve System ("FRB"); • the effects of, and changes in, trade and fiscal policies and laws of the United States government; • the effects of, and changes in, foreign and military policies of the United States government; • inflation, interest rate, market, monetary, and currency fluctuations and the effects of a potential economic recession or slower economic growth; • the timely development and acceptance of new products and services and the perceived overall value of these products and services by users, including the features, pricing, and quality compared to competitors' products and services; • the willingness of users to substitute competitors' products and services for our products and services; • our success in gaining regulatory approval of our products and services and branching locations, when required; • the impact of interpretations of, and changes in, financial services laws and regulations, including laws concerning taxes, banking, securities, consumer protection, trust and insurance and the impact of other governmental initiatives affecting the financial services industry; • implementing business initiatives may be more difficult or expensive than anticipated; • significant litigation; • technological changes; • our ability to maintain the security of our financial, accounting, technology, and other operating systems and facilities, including the ability to withstand cyber-attacks; • changes in consumer spending, borrowing and saving habits; and • our success at managing the risks involved in our business. This list of factors is not all inclusive. For a discussion of risks and uncertainties related to our business that could adversely impact our operations and/or financial results, see "Part I, Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the 28 fiscal year ended September 30, 2022 and Part II, Item 1A. Risk Factors within this Quarterly Report on Form 10-Q. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank. As used in this Form 10-Q, unless we specify or the context indicates otherwise, "the Company," "we," "us," and "our" refer to Capitol Federal Financial, Inc. a Maryland corporation, and its subsidiaries. "Capitol Federal Savings," and "the Bank," refer to Capitol Federal Savings Bank, a federal savings bank and the wholly-owned subsidiary of Capitol Federal Financial, Inc. The following discussion and analysis is intended to assist in understanding the financial condition, results of operations, liquidity, and capital resources of the Company. The Bank comprises almost all of the consolidated assets and liabilities of the Company and the Company is dependent primarily upon the performance of the Bank for the results of its operations. Because of this relationship, references to management actions, strategies and results of actions apply to both the Bank and the Company except where the context indicates otherwise. This discussion and analysis should be read in conjunction with Management's Discussion and Analysis included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2022, filed with the SEC. Executive Summary The following summary should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section in its entirety. The Company recognized net income of $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 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 29 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, 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. Available Information Financial and other Company information, including press releases, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports can be obtained free of charge from our investor relations website, http://ir.capfed.com. SEC filings are available on our website immediately after they are electronically filed with or furnished to the SEC, and are also available on the SEC's website at www.sec.gov. Critical Accounting Estimates Our most critical accounting estimates are the methodologies used to determine the ACL and reserve for off-balance sheet credit exposures and fair value measurements. These estimates are important to the presentation of our financial condition and results of operations, involve a high degree of complexity, and require management to make difficult and subjective judgments that may require assumptions about highly uncertain matters. The use of different judgments, assumptions, and estimates could affect reported results materially. These critical accounting estimates and their application are reviewed at least annually by our audit committee. For a full discussion of our critical accounting estimates, see "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2022. Financial Condition The following table summarizes the Company's financial condition at the dates indicated. Annualized Annualized March 31, December 31, Percent September 30, Percent 2023 2022 Change 2022 Change (Dollars and shares in thousands) Total assets $ 10,085,770 $ 9,929,760 6.3 % $ 9,624,897 9.6 % AFS securities 1,505,808 1,528,686 (6.0) 1,563,307 (7.4) Loans receivable, net 7,958,567 7,783,358 9.0 7,464,208 13.2 Deposits 6,144,435 6,074,549 4.6 6,194,866 (1.6) Borrowings 2,696,604 2,645,195 7.8 2,132,154 52.9 Stockholders' equity 1,072,034 1,054,795 6.5 1,096,499 (4.5) Equity to total assets at end of period 10.6 % 10.6 % 11.4 % Average number of basic shares outstanding 133,150 134,641 (4.4) 135,773 (3.9) Average number of diluted shares outstanding 133,150 134,641 (4.4) 135,773 (3.9) 30 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. 31 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 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) One- to four-family: Originated $ 4,003,823 3.28 % $ 4,007,596 3.25 % $ 3,988,469 3.20 % Correspondent purchased 2,468,647 3.39 2,353,335 3.25 2,201,886 3.10 Bulk purchased 142,527 1.36 145,209 1.31 147,939 1.24 Construction 68,355 3.21 70,869 3.01 66,164 2.90 Total 6,683,352 3.28 6,577,009 3.20 6,404,458 3.12 Commercial: Commercial real estate 874,718 4.48 833,444 4.34 745,301 4.30 Commercial and industrial 90,200 5.40 88,327 5.21 79,981 4.30 Construction 216,685 6.30 188,516 5.97 141,062 5.34 Total 1,181,603 4.89 1,110,287 4.69 966,344 4.45 Consumer loans: Home equity 92,506 8.17 95,352 7.55 92,203 6.28 Other 8,664 4.66 9,022 4.43 8,665 4.21 Total 101,170 7.87 104,374 7.28 100,868 6.10 Total loans receivable 7,966,125 3.57 7,791,670 3.47 7,471,670 3.33 Less: ACL 19,889 19,189 16,371 Deferred loan fees/discounts 30,830 30,513 29,736 Premiums/deferred costs (43,161) (41,390) (38,645) Total loans receivable, net $ 7,958,567 $ 7,783,358 $ 7,464,208 Loan Activity - The following table summarizes activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, deferred loan fees/discounts, and premiums/deferred costs. Loans that were paid off as a result of refinances are included in repayments. Loan endorsements are not included in the activity in the following table because a new loan is not generated at the time of the endorsement. The endorsed balance and rate are included in the ending loan portfolio balance and rate. Commercial loan renewals are not included in the activity in the following table unless new funds are disbursed at the time of renewal. The renewal balance and rate are included in the ending loan portfolio balance and rate. For the Three Months Ended For the Six Months Ended March 31, 2023 March 31, 2023 March 31, 2022 Amount Rate Amount Rate Amount Rate (Dollars in thousands) Beginning balance $ 7,791,670 3.47 % $ 7,471,670 3.33 % $ 7,096,073 3.21 % Originated and refinanced 181,011 5.97 545,398 5.41 526,836 3.21 Purchased and participations 215,600 5.59 550,905 5.41 322,706 2.86 Change in undisbursed loan funds (24,949) (146,184) (45,237) Repayments (197,193) (449,992) (781,498) Principal recoveries/(charge-offs), net (14) (16) 45 Other — (5,656) (242) Ending balance $ 7,966,125 3.57 $ 7,966,125 3.57 $ 7,118,683 3.16 32 The following table presents loan origination, refinance, and purchase activity for the periods indicated, excluding endorsement activity, along with associated weighted average rates and percent of total. Commercial loan renewals are not included in the activity in the following table except to the extent new funds are disbursed at the time of renewal. Loan originations, purchases, and refinances are reported together. For the Six Months Ended March 31, 2023 March 31, 2022 Amount Rate % of Total Amount Rate % of Total (Dollars in thousands) Fixed-rate: One- to four-family $ 270,613 5.22 % 24.7 % $ 509,180 2.79 % 59.9 % One- to four-family construction 23,045 5.28 2.1 70,323 2.86 8.3 Commercial: Real estate 10,628 6.02 1.0 41,444 3.85 4.9 Commercial and industrial 15,634 6.52 1.4 7,909 3.68 0.9 Construction 68,600 4.87 6.3 68,512 3.26 8.1 Home equity 2,587 7.70 0.2 913 5.17 0.1 Other 2,124 6.69 0.2 1,473 5.67 0.2 Total fixed-rate 393,231 5.26 35.9 699,754 2.93 82.4 Adjustable-rate: One- to four-family 268,836 4.85 24.5 21,739 2.68 2.5 One- to four-family construction 15,414 4.67 1.4 5,991 2.73 0.7 Commercial: Real estate 202,727 5.34 18.5 57,901 3.99 6.8 Commercial and industrial 34,514 7.15 3.1 26,784 3.80 3.2 Construction 151,326 6.10 13.8 8,786 3.99 1.0 Home equity 29,548 7.89 2.7 27,970 4.40 3.3 Other 707 3.75 0.1 617 2.47 0.1 Total adjustable-rate 703,072 5.50 64.1 149,788 3.79 17.6 Total originated, refinanced and purchased $ 1,096,303 5.41 100.0 % $ 849,542 3.08 100.0 % Purchased and participation loans included above: Fixed-rate: Correspondent purchased - one- to four-family $ 169,653 5.21 $ 243,509 2.73 Participations and purchases - commercial 3,016 6.40 69,057 3.25 Total fixed-rate purchased/participations 172,669 5.23 312,566 2.84 Adjustable-rate: Correspondent purchased - one- to four-family 197,038 4.87 5,140 2.68 Participations and purchases - commercial 181,198 6.18 5,000 4.00 Total adjustable-rate purchased/participations 378,236 5.50 10,140 3.33 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 March 31, 2023. Credit scores are updated at least annually, with the latest update in September 2022, from a nationally recognized consumer rating agency. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. In most cases, the most recent appraisal was obtained at the time of origination. % of Credit Average Amount Total Rate Score LTV Balance (Dollars in thousands) Originated $ 4,003,823 60.5 % 3.28 % 771 60 % $ 162 Correspondent purchased 2,468,647 37.3 3.39 767 65 420 Bulk purchased 142,527 2.2 1.36 771 56 288 $ 6,614,997 100.0 % 3.28 769 62 212 33 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. 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) Originated $ 84,709 5.22 % 74 % 769 $ 211,217 5.04 % 75 % 766 Correspondent purchased 167,220 5.21 76 770 366,691 5.03 77 769 $ 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 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. Amount Rate (Dollars in thousands) Originate/refinance $ 86,153 5.67 % Correspondent 14,870 4.59 $ 101,023 5.51 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. 34 The following table presents the Bank's commercial real estate and commercial construction loans by type of primary collateral as of the dates indicated. As of March 31, 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 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) 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 Multi-family 39 71,941 161,557 233,498 210,255 122,735 Office building 87 104,968 26,730 131,698 114,844 109,653 One- to four-family property 390 62,405 9,299 71,704 72,339 68,907 Warehouse/manufacturing 40 43,469 10,030 53,499 42,496 10,891 Other 101 69,550 23,323 92,873 87,532 84,071 852 $ 1,091,403 $ 396,783 $ 1,488,186 $ 1,396,539 $ 1,136,215 Weighted average rate 4.84 % 5.95 % 5.14 % 4.91 % 4.56 % The following table summarizes the Bank's commercial real estate and commercial construction loans by state as of the dates indicated. 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 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 Tennessee 2 22,093 20,475 42,568 43,258 — Nebraska 8 33,810 4,057 37,867 37,817 32,992 Other 14 60,418 19,637 80,055 68,428 67,766 852 $ 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 March 31, 2023. Count Amount (Dollars in thousands) Greater than $30 million 9 $ 438,526 >$15 to $30 million 20 423,808 >$10 to $15 million 11 131,234 >$5 to $10 million 28 200,785 $1 to $5 million 140 333,354 Less than $1 million 1,238 189,375 1,446 $ 1,717,082 35 Asset Quality Delinquent and nonaccrual loans and OREO. The following table presents the Company's 30 to 89 day delinquent loans at the dates indicated. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. Of the loans 30 to 89 days delinquent at March 31, 2023, approximately 79% were 59 days or less delinquent. Loans Delinquent for 30 to 89 Days at: March 31, December 31, September 30, 2023 2022 2022 Number Amount Number Amount Number Amount (Dollars in thousands) One- to four-family: Originated 45 $ 4,116 56 $ 4,708 48 $ 4,134 Correspondent purchased 10 3,436 4 1,216 7 1,104 Bulk purchased 3 287 3 865 3 913 Commercial 5 389 6 191 — — Consumer 22 352 24 626 24 345 85 $ 8,580 93 $ 7,606 82 $ 6,496 Loans 30 to 89 days delinquent to total loans receivable, net 0.11 % 0.10 % 0.09 % 36 The following table presents the Company's nonaccrual loans and OREO at the dates indicated. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. Nonaccrual loans are loans that are 90 or more days delinquent or in foreclosure and other loans required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements and/or internal policies, even if the loans are current. At all dates presented, there were no loans 90 or more days delinquent that were still accruing interest. Non-performing assets include nonaccrual loans and OREO. Nonaccrual Loans and OREO at: March 31, December 31, September 30, 2023 2022 2022 Number Amount Number Amount Number Amount (Dollars in thousands) Loans 90 or More Days Delinquent or in Foreclosure: One- to four-family: Originated 15 $ 1,084 13 $ 1,034 29 $ 2,919 Correspondent purchased 7 1,803 14 4,126 12 3,737 Bulk purchased 3 1,212 4 1,492 3 1,148 Commercial 7 1,152 7 1,152 8 1,167 Consumer 7 51 11 126 9 154 39 5,302 49 7,930 61 9,125 Loans 90 or more days delinquent or in foreclosure as a percentage of total loans 0.07 % 0.10 % 0.12 % Nonaccrual loans less than 90 Days Delinquent: (1) One- to four-family: Originated 2 $ 187 3 $ 219 3 $ 222 Correspondent purchased — — — — — — Bulk purchased 1 257 — — — — Commercial 3 104 2 84 1 77 Consumer — — — — 1 19 6 548 5 303 5 318 Total nonaccrual loans 45 5,850 54 8,233 66 9,443 Nonaccrual loans as a percentage of total loans 0.07 % 0.11 % 0.13 % OREO: One- to four-family: Originated (2) 2 $ 160 2 $ 161 4 $ 307 Consumer — — 1 21 1 21 2 160 3 182 5 328 Total non-performing assets 47 $ 6,010 57 $ 8,415 71 $ 9,771 Non-performing assets as a percentage of total assets 0.06 % 0.08 % 0.10 % (1) Includes loans required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements and/or internal policies, even if the loans are current. (2) Real estate-related consumer loans where we also hold the first mortgage are included in the one- to four-family category as the underlying collateral is one- to four-family property. 37 The following table presents the states where the properties securing 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 March 31, 2023. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. At March 31, 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 One- to Four-Family Days Delinquent or in Foreclosure State Amount % of Total Amount % of Total Amount % of Total LTV (Dollars in thousands) Kansas $ 3,574,768 54.0 % $ 3,757 47.9 % $ 913 22.3 % 53 % Missouri 1,127,878 17.1 1,135 14.5 419 10.2 43 Other states 1,912,351 28.9 2,947 37.6 2,767 67.5 46 $ 6,614,997 100.0 % $ 7,839 100.0 % $ 4,099 100.0 % 47 Classified loans. The following table presents loans classified as special mention or substandard at the dates presented. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. The increase in commercial special mention loans at 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) One- to four-family $ 17,368 $ 15,636 $ 16,471 $ 18,301 $ 12,950 $ 19,953 Commercial 28,441 1,881 28,441 2,413 565 2,733 Consumer 296 237 234 318 306 354 $ 46,105 $ 17,754 $ 45,146 $ 21,032 $ 13,821 $ 23,040 Allowance for Credit Losses. The distribution of our ACL and the ratio of ACL to loans receivable, by loan type, at the dates indicated is summarized below. 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. See "Note 4. 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 (Dollars in thousands) One- to four-family: Originated $ 2,081 $ 2,097 $ 2,012 0.05 % 0.05 % 0.05 % Correspondent purchased 3,074 2,987 2,734 0.12 0.13 0.12 Bulk purchased 221 216 206 0.16 0.15 0.14 Construction 58 62 54 0.08 0.09 0.08 Total 5,434 5,362 5,006 0.08 0.08 0.08 Commercial: Real estate 11,219 10,799 8,729 1.28 1.30 1.17 Commercial and industrial 520 491 490 0.58 0.56 0.61 Construction 2,483 2,294 1,901 1.15 1.22 1.35 Total 14,222 13,584 11,120 1.20 1.22 1.15 Consumer 233 243 245 0.23 0.23 0.24 Total $ 19,889 $ 19,189 $ 16,371 0.25 0.25 0.22 38 The following table presents ACL activity and related ratios at the dates and for the periods indicated. 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. See "Note 4. Loans Receivable and Allowance for Credit Losses" for additional information related to ACL activity by specific loan categories. At or For the Six Months Ended March 31, 2023 March 31, 2022 (Dollars in thousands) Balance at beginning of period $ 16,371 $ 19,823 Charge-offs (20) (20) Recoveries 4 65 Net recoveries (charge-offs) (16) 45 Provision for credit losses 3,534 (4,556) Balance at end of period $ 19,889 $ 15,312 Ratio of NCOs during the period to average non-performing assets 0.20 % (0.35) % ACL to nonaccrual loans at end of period 339.98 128.48 ACL to loans receivable, net at end of period 0.25 0.22 ACL to NCOs (annualized) 620x N/M The following table presents NCOs, average loans, and NCOs as a percentage of average loans, by loan type, for the periods indicated. For the Six Months Ended March 31, 2023 March 31, 2022 NCOs Average Loans % of Average Loans NCOs Average Loans % of Average Loans (Dollars in thousands) One- to four-family: Originated $ (1) $ 3,985,665 — % $ (7) $ 3,925,630 — % Correspondent — 2,383,295 — — 2,030,928 — Bulk purchased — 145,779 — — 165,895 — Construction — 64,484 — — 42,845 — Total (1) 6,579,223 — (7) 6,165,298 — Commercial: Real estate (1) 817,179 — (49) 678,036 (0.01) Commercial and industrial — 84,181 — 10 71,353 0.01 Construction — 184,510 — — 105,668 — Total (1) 1,085,870 — (39) 855,057 — Consumer: Home equity 8 93,902 0.01 (1) 83,752 — Other 10 8,803 0.11 2 7,821 0.03 Total 18 102,705 0.02 1 91,573 — $ 16 $ 7,767,798 — $ (45) $ 7,111,928 — 39 While management utilizes its best judgment and information available, the adequacy of the ACL is determined by certain factors outside of the Company's control, such as the performance of our portfolios, changes in the economic environment including economic uncertainty, changes in interest rates, and the views of regulatory authorities toward classification of assets and the level of ACL. Additionally, the level of ACL may fluctuate based on the balance and mix of the loan portfolio. If actual results reflect significant underperformance compared to our assumptions and/or if one or more of our assumptions, such as the economic forecast, represents a more negative outlook in a future period, there could be additions to our ACL and an increase in the provision for credit losses. Securities. The following table presents the distribution of our securities portfolio, at amortized cost, at the dates indicated. Overall, fixed-rate securities comprised 95% of our securities portfolio at 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. March 31, 2023 December 31, 2022 September 30, 2022 Amount Yield WAL Amount Yield WAL Amount Yield WAL (Dollars in thousands) MBS $ 1,146,526 1.63% 5.2 $ 1,191,597 1.59% 5.0 $ 1,243,270 1.57% 4.7 GSE debentures 519,981 0.64 2.4 519,979 0.64 2.6 519,977 0.61 2.9 Corporate bonds 4,000 5.12 9.1 4,000 5.12 9.4 4,000 5.12 9.6 Municipal bonds 1,031 2.55 4.9 1,032 2.55 5.1 1,243 2.63 6.5 $ 1,671,538 1.33% 4.3 $ 1,716,608 1.31% 4.3 $ 1,768,490 1.29% 4.2 The following table summarizes the activity in our securities portfolio for the periods presented. The weighted average yields for the beginning and ending balances are as of the first and last days of the periods presented and are generally derived from recent prepayment activity on the securities in the portfolio. The beginning and ending WALs are the estimated remaining principal repayment terms (in years) after three-month historical prepayment speeds and projected call option assumptions have been applied. For the Six Months Ended March 31, 2023 March 31, 2022 Amount Yield WAL Amount Yield WAL (Dollars in thousands) Beginning balance - carrying value $ 1,563,307 1.29 % 4.2 $ 2,014,608 1.16 % 3.5 Maturities and repayments (95,393) (188,658) 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 40 Liabilities. 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. Deposits. The following table presents the amount, weighted average rate and percent of total for the components of our deposit portfolio at the dates presented. The 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) Non-interest-bearing checking $ 594,265 — % 9.7 % $ 597,247 — % 9.8 % $ 591,387 — % 9.5 % Interest-bearing checking 1,001,559 0.16 16.3 1,024,806 0.13 16.9 1,027,222 0.07 16.6 Savings 539,428 0.07 8.8 543,514 0.08 9.0 552,743 0.06 8.9 Money market 1,535,234 0.80 25.0 1,694,504 0.80 27.9 1,819,761 0.47 29.4 Retail certificates of deposit 2,299,829 2.54 37.4 2,073,633 1.83 34.1 2,073,542 1.34 33.5 Commercial certificates of deposit 43,590 2.71 0.7 33,134 1.55 0.5 36,275 0.97 0.6 Public unit certificates of deposit 130,530 4.01 2.1 107,711 3.17 1.8 93,936 1.61 1.5 $ 6,144,435 1.29 100.0 % $ 6,074,549 0.94 100.0 % $ 6,194,866 0.63 100.0 % 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. Borrowings. 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. 41 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 March 31, 2023. 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 Fiscal Year Amount Rate Rate (1) (Dollars in thousands) 2023 $ 200,000 1.98 % 1.98 % 2024 490,000 3.73 2.84 2025 600,000 3.13 2.84 2026 525,000 2.69 2.85 2027 400,000 2.97 3.10 2028 150,000 4.87 3.58 $ 2,365,000 3.14 2.86 (1) The effective rate includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. The following table presents borrowing activity for the periods shown. The borrowings presented in the table have original contractual terms of one year or longer or are tied to interest rate swaps with original contractual terms of one year or longer. The effective rate is shown as a weighted average and includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. The WAM is the remaining weighted average contractual term in years. The beginning and ending WAMs represent the remaining maturity at each date presented. For new borrowings, the WAMs presented are as of the date of issue. For the Three Months Ended 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) Beginning balance $ 2,505,082 2.80 % 2.4 $ 2,062,500 2.44 % 2.5 $ 1,590,000 1.88 % 3.3 Maturities and repayments (107,418) 1.64 (114,836) 1.80 (100,000) 3.14 New FHLB borrowings 100,000 4.85 3.5 550,000 4.52 3.3 100,000 3.44 6.5 Ending balance $ 2,497,664 2.93 2.3 $ 2,497,664 2.93 2.3 $ 1,590,000 1.90 2.8 42 Maturities of Interest-Bearing Liabilities. The following table presents the maturity and weighted average repricing rate, which is also the weighted average effective rate, of certificates of deposit, split between retail/commercial and public unit amounts, and non-amortizing term borrowings for the next four quarters as of March 31, 2023. June 30, September 30, December 31, March 31, 2023 2023 2023 2024 Total (Dollars in thousands) Retail/Commercial Certificates: Amount $ 201,179 $ 253,690 $ 258,274 $ 270,075 $ 983,218 Repricing Rate 1.05 % 1.72 % 2.50 % 2.79 % 2.08 % Public Unit Certificates: Amount $ 17,984 $ 28,758 $ 39,718 $ 15,250 $ 101,710 Repricing Rate 3.78 % 3.44 % 4.27 % 4.22 % 3.94 % Term Borrowings: Amount $ 100,000 $ 100,000 $ 150,000 $ 65,000 $ 415,000 Repricing Rate 1.82 % 2.14 % 3.42 % 2.65 % 2.61 % Total Amount $ 319,163 $ 382,448 $ 447,992 $ 350,325 $ 1,499,928 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 March 31, 2023. Retail certificates of deposit 1.6 Commercial certificates of deposit 1.2 Public unit certificates of deposit 0.7 Total certificates of deposit 1.5 43 Stockholders' Equity. 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. 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. Shares may be repurchased from time to time based upon market conditions, available liquidity and other factors. This plan has no expiration date; however, the Federal Reserve Bank's existing approval for the Company to repurchase shares expires in August 2023. 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. The Company works to find multiple ways to provide stockholder value. This has primarily been through the payment of cash dividends and stock repurchases. The Company has maintained a policy of paying out 100% of its earnings to stockholders in the form of quarterly cash dividends and an annual cash true-up dividend in December of each year. In order to provide additional stockholder value, the Company 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 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 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 2023 2022 2021 Amount Per Share Amount Per Share Amount Per Share (Dollars in thousands, except per share amounts) Regular quarterly dividends paid Quarter ended March 31 $ 11,319 $ 0.085 $ 11,535 $ 0.085 $ 11,518 $ 0.085 Quarter ended June 30 11,321 0.085 11,534 0.085 11,516 0.085 Quarter ended September 30 — — 11,534 0.085 11,518 0.085 Quarter ended December 31 — — 11,508 0.085 11,535 0.085 True-up dividends paid — — 37,701 0.280 29,850 0.220 True Blue Capitol dividends paid — — 27,143 0.200 54,210 0.400 Calendar year-to-date dividends paid $ 22,640 $ 0.170 $ 110,955 $ 0.820 $ 130,147 $ 0.960 44 Operating Results The following table presents selected income statement and other information for the quarters indicated. For the Three Months Ended March 31, December 31, September 30, June 30, March 31, 2023 2022 2022 2022 2022 (Dollars in thousands, except per share data) Interest and dividend income: Loans receivable $ 69,319 $ 64,819 $ 60,445 $ 56,886 $ 55,412 Cash and cash equivalents 10,977 16,671 13,373 3,968 949 MBS 4,748 4,811 4,912 5,048 4,821 FHLB stock 3,607 4,158 3,865 2,695 2,240 Investment securities 895 881 845 815 800 Total interest and dividend income 89,546 91,340 83,440 69,412 64,222 Interest expense: Borrowings 31,447 33,608 24,529 11,644 8,732 Deposits 16,140 11,904 9,013 7,787 8,389 Total interest expense 47,587 45,512 33,542 19,431 17,121 Net interest income 41,959 45,828 49,898 49,981 47,101 Provision for credit losses 891 3,660 1,060 937 (3,188) Net interest income (after provision for credit losses) 41,068 42,168 48,838 49,044 50,289 Non-interest income 5,083 5,352 5,793 6,115 5,416 Non-interest expense 28,631 27,773 29,807 28,390 27,960 Income tax expense 3,331 3,507 5,332 5,617 6,122 Net income $ 14,189 $ 16,240 $ 19,492 $ 21,152 $ 21,623 Efficiency ratio 60.86 % 54.27 % 53.52 % 50.61 % 53.24 % Basic EPS $ 0.11 $ 0.12 $ 0.14 $ 0.16 $ 0.16 Diluted EPS 0.11 0.12 0.14 0.16 0.16 45 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 46 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 47 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. 48 Average Balance Sheet The following table presents the average balances of our assets, liabilities, and stockholders' equity, and the related annualized weighted average yields and rates on our interest-earning assets and interest-bearing liabilities for the periods indicated, as well as selected performance ratios and other information for the periods shown. Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis. For the Three Months Ended March 31, 2023 December 31, 2022 Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Amount Paid Rate Amount Paid Rate Assets: (Dollars in thousands) Interest-earning assets: One- to four-family loans: Originated $ 4,050,515 $ 33,660 3.32 % $ 4,049,790 $ 33,364 3.29 % Correspondent purchased 2,462,960 19,380 3.15 2,305,362 17,261 2.99 Bulk purchased 144,438 413 1.14 147,091 434 1.18 Total one- to four-family loans 6,657,913 53,453 3.21 6,502,243 51,059 3.14 Commercial loans 1,147,681 13,924 4.85 1,025,402 11,993 4.58 Consumer loans 102,649 1,942 7.67 102,760 1,767 6.82 Total loans receivable (1) 7,908,243 69,319 3.51 7,630,405 64,819 3.38 MBS (2) 1,173,366 4,748 1.62 1,221,035 4,811 1.58 Investment securities (2)(3) 525,012 895 0.68 525,081 881 0.67 FHLB stock (4) 167,567 3,607 8.73 197,577 4,158 8.35 Cash and cash equivalents (5) 967,586 10,977 4.54 1,801,493 16,671 3.62 Total interest-earning assets 10,741,774 89,546 3.34 11,375,591 91,340 3.19 Other non-interest-earning assets 263,916 248,022 Total assets $ 11,005,690 $ 11,623,613 Liabilities and stockholders' equity: Interest-bearing liabilities: Checking $ 989,440 368 0.15 $ 1,007,569 289 0.11 Savings 541,324 101 0.08 545,885 100 0.07 Money market 1,620,451 3,184 0.80 1,759,804 3,035 0.68 Retail certificates 2,176,103 11,115 2.07 2,064,929 7,767 1.49 Commercial certificates 38,575 197 2.07 34,298 104 1.20 Wholesale certificates 127,037 1,175 3.75 97,828 609 2.47 Total deposits 5,492,930 16,140 1.19 5,510,313 11,904 0.86 Borrowings (6) 3,700,022 31,447 3.42 4,260,685 33,608 3.10 Total interest-bearing liabilities 9,192,952 47,587 2.09 9,770,998 45,512 1.84 Non-interest-bearing deposits 574,495 576,519 Other non-interest-bearing liabilities 172,481 191,474 Stockholders' equity 1,065,762 1,084,622 Total liabilities and stockholders' equity $ 11,005,690 $ 11,623,613 Net interest income (7) $ 41,959 $ 45,828 Net interest-earning assets $ 1,548,822 $ 1,604,593 Net interest margin (8)(9) 1.56 1.61 Ratio of interest-earning assets to interest-bearing liabilities 1.17x 1.16x Selected performance ratios: Return on average assets (annualized) (9) 0.52 % 0.56 % Return on average equity (annualized) (9) 5.33 5.99 Average equity to average assets 9.68 9.33 Operating expense ratio (annualized) (10) 1.04 0.96 Efficiency ratio (9)(11) 60.86 54.27 Pre-tax yield on leverage strategy (12) 0.06 0.20 49 (1) Balances are adjusted for unearned loan fees and deferred costs. Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent. (2) AFS securities are adjusted for unamortized purchase premiums or discounts. (3) The average balance of investment securities includes an average balance of nontaxable securities of $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. Net interest income depends on the average balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them. (8) Net interest margin represents annualized net interest income as a percentage of average interest-earning assets. (9) The table below provides a reconciliation between certain performance ratios presented in accordance with GAAP and the performance ratios excluding the effects of the leverage strategy, which are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide the performance ratios without the leverage strategy because of the unique nature of the leverage strategy. The leverage strategy reduces some of our performance ratios due to the amount of earnings associated with the transaction in comparison to the size of the transaction, while increasing our net income. For the Three Months Ended March 31, 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 % Cost of interest-bearing liabilities 2.09 0.30 1.79 1.84 0.42 1.42 Return on average assets (annualized) 0.52 (0.04) 0.56 0.56 (0.07) 0.63 Return on average equity (annualized) 5.33 0.05 5.28 5.99 0.28 5.71 Net interest margin 1.56 (0.15) 1.71 1.61 (0.27) 1.88 Efficiency Ratio 60.86 (0.07) 60.93 54.27 (0.87) 55.14 (10) The operating expense ratio represents annualized non-interest expense as a percentage of average assets. (11) The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income. (12) The pre-tax yield on the leverage strategy represents annualized pre-tax income resulting from the transaction as a percentage of the average interest-earning assets associated with the transaction. 50 Rate/Volume Analysis The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended March 31, 2023 to the three months ended December 31, 2022. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. For the Three Months Ended March 31, 2023 vs. December 31, 2022 Increase (Decrease) Due to Volume Rate Total (Dollars in thousands) Interest-earning assets: Loans receivable $ 2,510 $ 1,990 $ 4,500 MBS (192) 129 (63) Investment securities — 14 14 FHLB stock (709) 158 (551) Cash and cash equivalents (9,019) 3,325 (5,694) Total interest-earning assets (7,410) 5,616 (1,794) Interest-bearing liabilities: Checking (6) 84 78 Savings (1) 2 1 Money market (269) 418 149 Certificates of deposit 552 3,456 4,008 Borrowings (6,736) 4,575 (2,161) Total interest-bearing liabilities (6,460) 8,535 2,075 Net change in net interest income $ (950) $ (2,919) $ (3,869) 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. 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. 51 Interest and Dividend Income The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent. For the Six Months Ended March 31, Change Expressed in: 2023 2022 Dollars Percent (Dollars in thousands) INTEREST AND DIVIDEND INCOME: Loans receivable $ 134,138 $ 111,200 $ 22,938 20.6 % Cash and cash equivalents 27,648 963 26,685 2,771.0 MBS 9,559 9,446 113 1.2 FHLB stock 7,765 3,471 4,294 123.7 Investment securities 1,776 1,608 168 10.4 Total interest and dividend income $ 180,886 $ 126,688 $ 54,198 42.8 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 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 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. For the Six Months Ended March 31, Change Expressed in: 2023 2022 Dollars Percent (Dollars in thousands) INTEREST EXPENSE: Borrowings $ 65,055 $ 16,317 $ 48,738 298.7 % Deposits 28,044 17,656 10,388 58.8 Total interest expense $ 93,099 $ 33,973 $ 59,126 174.0 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 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. 52 Non-Interest Income The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent. For the Six Months Ended March 31, Change Expressed in: 2023 2022 Dollars Percent (Dollars in thousands) NON-INTEREST INCOME: Deposit service fees $ 6,583 $ 6,730 $ (147) (2.2) % Insurance commissions 1,672 1,254 418 33.3 Other non-interest income 2,180 2,938 (758) (25.8) Total non-interest income $ 10,435 $ 10,922 $ (487) (4.5) 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 Six Months Ended March 31, Change Expressed in: 2023 2022 Dollars Percent (Dollars in thousands) NON-INTEREST EXPENSE: Salaries and employee benefits $ 26,487 $ 27,751 $ (1,264) (4.6) % Information technology and related expense 10,859 8,925 1,934 21.7 Occupancy, net 7,042 6,872 170 2.5 Regulatory and outside services 2,838 2,640 198 7.5 Advertising and promotional 2,166 2,558 (392) (15.3) Federal insurance premium 2,058 1,416 642 45.3 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 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 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. 53 Income Tax Expense The following table presents pretax income, income tax expense, and net income for the time periods presented, along with the change measured in dollars and percent and effective tax rate. For the Six Months Ended March 31, Change Expressed in: 2023 2022 Dollars Percent (Dollars in thousands) Income before income tax expense $ 37,267 $ 55,610 $ (18,343) (33.0) % Income tax expense 6,838 11,801 (4,963) (42.1) Net income $ 30,429 $ 43,809 $ (13,380) (30.5) Effective Tax Rate 18.3 % 21.2 % 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. 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 to the overall effective 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%. 54 Average Balance Sheet The following table presents the average balances of our assets, liabilities, and stockholders' equity, and the related annualized weighted average yields and rates on our interest-earning assets and interest-bearing liabilities for the periods indicated, as well as selected performance ratios and other information for the periods shown. Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis. For the 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 Assets: (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 MBS (2) 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) 1.59 1.83 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) 5.66 7.17 Average equity to average assets 9.50 11.60 Operating expense ratio (annualized) (10) 1.00 1.04 Efficiency ratio (9)(11) 57.43 52.74 Pre-tax yield on leverage strategy (12) 0.15 0.15 55 (1) Balances are adjusted for unearned loan fees and deferred costs. Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent. (2) AFS securities are adjusted for unamortized purchase premiums or discounts. (3) The average balance of investment securities includes an average balance of nontaxable securities of $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. 56 Rate/Volume Analysis The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous period's average rate, and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. For the 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. 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. Interest and Dividend Income The following table presents the components of interest and dividend income for the time periods presented along with the change measured in dollars and percent. For the Three Months Ended March 31, Change Expressed in: 2023 2022 Dollars Percent (Dollars in thousands) INTEREST AND DIVIDEND INCOME: Loans receivable $ 69,319 $ 55,412 $ 13,907 25.1 % Cash and cash equivalents 10,977 949 10,028 1,056.7 MBS 4,748 4,821 (73) (1.5) FHLB stock 3,607 2,240 1,367 61.0 Investment securities 895 800 95 11.9 Total interest and dividend income $ 89,546 $ 64,222 $ 25,324 39.4 57 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 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 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 periods presented, along with the change measured in dollars and percent. For the Three Months Ended March 31, Change Expressed in: 2023 2022 Dollars Percent (Dollars in thousands) INTEREST EXPENSE: Borrowings $ 31,447 $ 8,732 $ 22,715 260.1 % Deposits 16,140 8,389 7,751 92.4 Total interest expense $ 47,587 $ 17,121 $ 30,466 177.9 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. 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 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 The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent. For the Three Months Ended March 31, Change Expressed in: 2023 2022 Dollars Percent (Dollars in thousands) NON-INTEREST INCOME: Deposit service fees $ 3,122 $ 3,300 $ (178) (5.4) % Insurance commissions 877 543 334 61.5 Other non-interest income 1,084 1,573 (489) (31.1) Total non-interest income $ 5,083 $ 5,416 $ (333) (6.1) 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 quarter. 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. 58 Non-Interest Expense The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent. For the Three Months Ended March 31, Change Expressed in: 2023 2022 Dollars Percent (Dollars in thousands) NON-INTEREST EXPENSE: Salaries and employee benefits $ 12,789 $ 14,023 $ (1,234) (8.8) % Information technology and related expense 5,789 4,493 1,296 28.8 Occupancy, net 3,568 3,493 75 2.1 Regulatory and outside services 1,305 1,272 33 2.6 Advertising and promotional 1,333 1,494 (161) (10.8) Federal insurance premium 1,246 777 469 60.4 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 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 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 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 the effective tax rate. For the Three Months Ended March 31, Change Expressed in: 2023 2022 Dollars Percent (Dollars in thousands) Income before income tax expense $ 17,520 $ 27,745 $ (10,225) (36.9) % Income tax expense 3,331 6,122 (2,791) (45.6) Net income $ 14,189 $ 21,623 $ (7,434) (34.4) Effective Tax Rate 19.0 % 22.1 % The decrease in income tax expense was due primarily to lower pretax income in the current quarter, along with a decrease in the effective tax rate. 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 to the overall effective rate. 59 Average Balance Sheet The following table presents the average balances of our assets, liabilities, and stockholders' equity, and the related annualized weighted average yields and rates on our interest-earning assets and interest-bearing liabilities for the periods indicated, as well as selected performance ratios and other information for the periods shown. Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis. For the Three Months Ended March 31, 2023 March 31, 2022 Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Amount Paid Rate Amount Paid Rate Assets: (Dollars in thousands) Interest-earning assets: One- to four-family loans: Originated $ 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 MBS (2) 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) 1.56 1.69 Ratio of interest-earning assets to interest-bearing liabilities 1.17x 1.17x Selected performance ratios: Return on average assets (annualized) (9) 0.52 % 0.75 % Return on average equity (annualized) (9) 5.33 7.16 Average equity to average assets 9.68 10.50 Operating expense ratio (annualized) (10) 1.04 0.97 Efficiency ratio (9)(11) 60.86 53.24 Pre-tax yield on leverage strategy (12) 0.06 0.14 60 (1) Balances are adjusted for unearned loan fees and deferred costs. Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent. (2) AFS securities are adjusted for unamortized purchase premiums or discounts. (3) The average balance of investment securities includes an average balance of nontaxable securities of $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. (9) The table below provides a reconciliation between certain performance ratios presented in accordance with GAAP and the performance ratios excluding the effects of the leverage strategy, which are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide the performance ratios without the leverage strategy because of the unique nature of the leverage strategy. The leverage strategy reduces some of our performance ratios due to the amount of earnings associated with the transaction in comparison to the size of the transaction, while increasing our net income. For the Three Months Ended March 31, 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. (12) The pre-tax yield on the leverage strategy represents annualized pre-tax income resulting from the transaction as a percentage of the average interest-earning assets associated with the transaction. 61 Rate/Volume Analysis The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended March 31, 2023 to the three months ended March 31, 2022. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. For the Three Months Ended March 31, 2023 vs. 2022 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) 62 Liquidity and Capital Resources Liquidity refers to our ability to generate sufficient cash to fund ongoing operations, to repay maturing certificates of deposit and other deposit withdrawals, to repay maturing borrowings, and to fund loan commitments. Liquidity management is both a daily and long-term function of our business management. The Company's most available liquid assets are represented by cash and cash equivalents, AFS securities, and short-term investment securities. The Bank's primary sources of funds are deposits, FHLB borrowings, repayments and maturities of outstanding loans and MBS and other short-term investments, and funds provided by operations. The Bank's long-term borrowings primarily have been used to manage long-term liquidity needs and the Bank's interest rate risk with the intention to improve the earnings of the Bank while maintaining capital ratios that meet or exceed the regulatory standards for well-capitalized financial institutions. In addition, the Bank's focus on managing risk has provided additional liquidity capacity by maintaining a balance of MBS and investment securities available as collateral for borrowings. We generally intend to manage cash reserves sufficient to meet short-term liquidity needs, which are routinely forecasted for 10, 30, and 365 days. Additionally, on a monthly basis, we perform a liquidity stress test in accordance with the Interagency Policy Statement on Funding and Liquidity Risk Management. The liquidity stress test incorporates both short-term and long-term liquidity scenarios in order to identify and to quantify liquidity risk. Management also monitors key liquidity statistics related to items such as wholesale funding gaps, borrowings capacity, and available unpledged collateral, as well as various liquidity ratios. In the event short-term liquidity needs exceed available cash, the Bank has access to a line of credit at FHLB, 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 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. Additionally, FHLB borrowings may exceed 40% of Bank Call Report total assets as long as the Bank continues its leverage strategy and FHLB senior management continues to approve the Bank's borrowing limit being in excess of 40% of Call Report total assets. All or a portion of the short-term FHLB borrowings in conjunction with the leverage strategy can be repaid at maturity, if necessary or desired. The amount that can be borrowed from the FRB of Kansas City's discount window is based upon the fair value of securities pledged as collateral and certain other characteristics of those securities. Management tests the Bank's access to the FRB of Kansas City's discount window annually with a nominal, overnight borrowing, 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. The maturities of these long-term borrowings are generally staggered in order to mitigate the risk of a highly negative cash flow position at maturity. The Bank's internal policy limits total borrowings to 55% of total assets. At March 31, 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. 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. The Bank has access to other sources of funds for liquidity purposes, such as brokered and public unit certificates of deposit. As of March 31, 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 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. Due 63 to the nature of public unit certificates of deposit and commercial certificates of deposit, retention rates are not as predictable as for retail certificates of deposit. While scheduled payments from the amortization of loans and MBS and payments on short-term investments are relatively predictable sources of funds, deposit flows, prepayments on loans and MBS, and calls of investment securities are greatly influenced by general interest rates, economic conditions, and competition, and are less predictable sources of funds. To the extent possible, the Bank manages the cash flows of its loan and deposit portfolios by the rates it offers customers. We anticipate we will continue to have sufficient funds, through the repayments and maturities of loans and securities, deposits and borrowings, to meet our current commitments. Limitations on Dividends and Other Capital Distributions Office of the Comptroller of the Currency ("OCC") regulations impose restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Under FRB and OCC safe harbor regulations, savings institutions generally may make capital distributions during any calendar year equal to earnings of the previous two calendar years and current year-to-date earnings (to the extent not previously distributed). A savings institution that is a subsidiary of a savings and loan holding company, such as the Company, that proposes to make a capital distribution must submit written notice to the OCC and FRB 30 days prior to such distribution. The OCC and FRB may object to the distribution during that 30-day period based on safety and soundness or other concerns. Savings institutions that desire to make a larger capital distribution, are under special restrictions, or are not, or would not be, sufficiently capitalized following a proposed capital distribution must obtain regulatory non-objection prior to making such a distribution. The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company. So long as the Bank remains well capitalized after each capital distribution (as evidenced by maintaining a CBLR greater than the required percentage, which is currently 9.0%), and operates in a safe and sound manner, it is management's belief that the OCC and FRB will continue to allow the Bank to distribute its earnings to the Company, although no assurance can be given in this regard. Regulatory Capital Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank per the regulatory framework for prompt corrective action ("PCA"). Qualifying institutions that elect to use the CBLR framework, such as the Bank and the Company, that maintain the required minimum leverage ratio of 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the capital requirements for the well capitalized category under the agencies' PCA framework. As of March 31, 2023, the Bank's CBLR was 9.7% and the Company's CBLR was 10.6%, which exceeded the minimum requirements. 64