What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-10 · 281 added, 289 removed, 1012 unchanged (36% of the section changed)

15 unchanged sentences

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;

• changes in real estate values, unemployment levels, general economic trends, 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;

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• inflation, interest rate, market, monetary, and currency fluctuations and the effects of a potential economic recession or slower economic growth;

• the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor or depositor sentiment;

• 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;

10 unchanged sentences

For a discussion of risks and uncertainties related to our business that could adversely impact our operations and/or financial results, see "Part I, Item 1A.

Risk Factors" in the Company's Annual Report on Form 10-K for the

fiscal year ended September 30, 2022 and Part II, Item 1A.

Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2022 and Part II, Item 1A.

Risk Factors within this Quarterly Report on Form 10-Q.

10 unchanged sentences

The Company recognized net income of $38.7 million, or $0.29 per share, for the current year period compared to net income of $65.0 million, or $0.48 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 decrease in net income was due primarily to lower net interest income, along with recording a provision for credit losses of $5.9 million for the current year period compared to a release of provision of $5.7 million for the prior year period, partially offset by lower income tax expense.

The net interest margin decreased 32 basis points, from 1.82% for the prior year period to 1.50% 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.

Excluding the effects of the leverage strategy discussed in the "Financial Condition - Borrowings" section below, the net interest margin decreased 38 basis points, from 2.04% for the prior year period to 1.66% for the current year period.

The decrease in the net interest margin 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.

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.

Total assets were $10.29 billion at June 30, 2023, a $669.2 million increase from September 30, 2022.

The increase was mainly composed of a $499.2 million increase in the loan portfolio and a $280.2 million increase in operating cash, partially offset by a $118.4 million decrease in securities.

The growth in assets was funded with additional borrowings.

The increase in the loan portfolio was primarily in one- to four-family correspondent loans and commercial real estate loans.

Total deposits were $6.09 billion at June 30, 2023, a decrease of $102.0 million from September 30, 2022.

The decrease in deposits since September 30, 2022 was mainly in non-maturity deposits, largely money market accounts, partially offset by an increase in retail certificates of deposit and public unit certificates of deposit.

Total borrowings were $2.99 billion at June 30, 2023, an increase of $854.0 million from September 30, 2022.

The increase in borrowings was composed of $500.0 million in borrowings from the Federal Reserve's Bank Term Funding Program ("BTFP") with a term of one year and a net increase of $354.0 million in FHLB borrowings.

While it is still management's expectation that we will stay under $10 billion in total assets at September 30, 2023, that threshold was exceeded at both March 31, 2023 and June 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.

Being over $10 billion in total assets at both June 30, 2023 and March 31, 2023 did not result in any additional regulatory requirements, increased direct or indirect costs, or lost revenues.

We are working to limit the growth in total assets and are evaluating funding options as FHLB borrowings mature and assessing other balance sheet management opportunities.

We expect to reduce the size of the one- to four-family correspondent loan portfolio over the coming months and use that cash to pay down borrowings.

Slower growth or no growth in our one- to four-family originated loan portfolio will help to conserve cash as well.

There were $75.4 million and $86.2 million in one-to four-family originated commitments at June 30, 2023 and March 31, 2023 respectively, and $3.2 million and $14.9 million of one-to four-family correspondent commitments at June 30, 2023 and March 31, 2023 respectively.

The Bank continues to receive good commercial loan opportunities from strong borrowers and as these opportunities present themselves, we may sell select securities at a loss to provide capacity in the balance sheet to fund these loan opportunities and/or to help stay under $10 billion in assets.

At June 30, 2023, there was $418.2 million of undisbursed funds related to commercial real estate and construction loans and $17.8 million of commercial real estate and construction commitments.

Funding deposit run-off continues to be a challenge and could require the use of longer-term funding.

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.

At June 30, 2023, loans 30 to 89 days delinquent were 0.18% 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 $10 thousand and $26 thousand, respectively.

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

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

The amount that can be borrowed from the FRB of Kansas City's discount window is based upon the fair value of securities pledged as collateral and the amount that can be borrowed through the BTFP is based upon the par value of securities pledged as collateral.

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

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

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

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

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

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

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

At June 30, 2023, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(1.00) billion, or (9.7)% of total assets, compared to $(803.5) million, or (8.0)% of total assets, at March 31, 2023.

The change in the one-year gap amount was due primarily to an increase in the amount of liability cash flows coming due in one year at June 30, 2023 compared to March 31, 2023, partially offset by an increase in the amount of asset cash flows coming due for the same time period.

This was due primarily to an increase in the amount of certificates of deposit and borrowings scheduled to mature within one year as of June 30, 2023 compared to March 31, 2023.

Management implemented a new core processing system ("digital transformation") for the Bank in early August 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.

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

Available Information

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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.

These critical accounting estimates and their application are reviewed at least annually by the audit committee of our Board of Directors.

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.

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Annualized Annualized

March 31, December 31, Percent September 30, Percent

June 30, March 31, Percent September 30, Percent

2023 2023 Change 2022 Change

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Average number of diluted shares outstanding 133,199 133,150 0.1 135,773 (2.5)

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.

During the current quarter, total assets increased by $208.4 million largely due to an increase in operating cash related to proceeds from BTFP borrowings being held in cash as management evaluates funding and balance sheet management options.

While the total loan portfolio balance remained relatively unchanged during the current quarter, there was a shift in the mix as commercial loans

increased $42.5 million, partially offset by a $36.1 million decrease in one- to four-family loans, including a $26.9 million decrease in one- to four-family correspondent loans.

The Bank continues to reduce purchases of correspondent loans with the intention of correspondent purchases being near zero, which will further reduce the balance of that portfolio.

The securities portfolio decreased $60.9 million during the current quarter as cash flows from securities were used for other operational needs.

Total deposits decreased $51.6 million during the current quarter, due primarily to a $217.6 million decrease in non-maturity deposits, partially offset by a $123.8 million increase in retail certificates of deposit and a $41.9 million increase in public unit certificates of deposit.

Total borrowings increased $289.6 million during the current quarter.

The increase in borrowings was due primarily to proceeds from new BTFP borrowings totaling $500.0 million, partially offset by a reduction in FHLB borrowings as the FHLB line of credit balance was paid off and a maturing $100.0 million FHLB advance was not renewed.

Management continues to evaluate funding and balance sheet management options and may pay down additional maturing FHLB advances using proceeds from BTFP borrowings.

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

The loan portfolio rate increased 10 basis points and 34 basis points during the current quarter and current year nine-month period, respectively, 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 6% during the current quarter, 5% during the quarter ended March 31, 2023, and 7% during the quarter ended September 30, 2022.

June 30, 2023 March 31, 2023 September 30, 2022

Amount Rate Amount Rate Amount Rate

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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

For the Three Months Ended For the Nine Months Ended

June 30, 2023 June 30, 2023 June 30, 2022

Amount Rate Amount Rate Amount Rate

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Repayments (289,200) (739,192) (1,068,621)

Principal recoveries/(charge-offs), net (14) (16) 45

Principal (charge-offs)/recoveries, net (10) (26) 220

Other — (5,656) (509)

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Loan originations, purchases, and refinances are reported together.

For the Six Months Ended

March 31, 2023 March 31, 2022

For the Nine Months Ended

June 30, 2023 June 30, 2022

Amount Rate % of Total Amount Rate % of Total

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Total purchased/participation loans $ 613,274 5.54 $ 476,068 3.06

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.

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$ 6,574,073 100.0 % 3.32 769 62 213

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

The following table presents originated and correspondent purchased activity in our one- to four-family loan portfolio, excluding endorsement activity, along with associated weighted average rates, weighted average LTVs and weighted average credit scores for the periods indicated.

The majority of the correspondent loans purchased during the current quarter were from applications in the pipeline at March 31, 2023 as the Bank continues to reduce correspondent purchases to near zero.

For the Three Months Ended For the Nine Months Ended

June 30, 2023 June 30, 2023

Credit Credit

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$ 133,765 5.47 76 768 $ 711,673 5.12 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.

The following table summarizes our one- to four-family loan origination and refinance commitments and one- to four-family correspondent loan purchase commitments as of June 30, 2023, along with associated weighted average rates.

It is expected that some of the loan commitments will expire unfunded;

accordingly, the amounts reflected in the table below are not necessarily indicative of our future cash needs.

(Dollars in thousands)

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$ 78,601 5.97

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.

Commercial Loans - During the current quarter and nine months ended June 30, 2023, the Bank originated $117.7 million and $416.9 million of commercial loans, respectively, and entered into commercial loan participations totaling $26.9 million and $211.1 million, respectively.

The Bank also processed commercial loan disbursements, excluding lines of credit, during the current quarter and nine months ended June 30, 2023 of $105.8 million and $402.3 million, respectively, at a weighted average rate of 7.27% and 5.90%, respectively.

As of June 30, 2023, March 31, 2023, and September 30, 2022, the Bank's commercial and industrial gross loan amounts (unpaid principal plus undisbursed amounts) totaled $144.8 million, $130.3 million and $100.4 million, respectively, and commitments totaled $230 thousand, $7.0 million and $458 thousand, respectively.

The following table presents the Bank's commercial real estate and commercial construction loans by type of primary collateral as of the dates indicated.

As of 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%.

As of June 30, 2023, the Bank had four commercial real estate and commercial construction loan commitments, totaling $17.8 million, at a weighted average rate of 6.83%.

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

Of the total commercial real estate and commercial construction undisbursed amounts and commitments outstanding as of June 30, 2023, management anticipates funding approximately $89 million during the September 2023 quarter, $97 million during the December 2023 quarter, $64 million during the March 2024 quarter, and $167 million during the June 2024 quarter or later.

June 30, 2023 March 31, 2023 September 30, 2022

Unpaid Undisbursed Gross Loan Gross Loan Gross Loan

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Senior housing 35 280,453 30,139 310,592 325,475 328,259

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

Multi-family 41 75,242 234,381 309,623 233,498 122,735

Hotel 13 213,444 21,419 234,863 235,714 181,546

Office building 85 116,251 18,066 134,317 131,698 109,653

One- to four-family property 384 63,697 7,289 70,986 71,704 68,907

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

Single use building 29 30,043 16,434 46,477 43,171 41,908

Other 116 80,557 4,978 85,535 103,201 53,054

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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

June 30, 2023 March 31, 2023 September 30, 2022

Unpaid Undisbursed Gross Loan Gross Loan Gross Loan

9 unchanged sentences

846 $ 1,117,450 $ 418,172 $ 1,535,622 $ 1,488,186 $ 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.

(Dollars in thousands)

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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.

Of the loans 30 to 89 days delinquent at June 30, 2023, approximately 76% were 59 days or less delinquent.

Loans Delinquent for 30 to 89 Days at:

March 31, December 31, September 30,

June 30, March 31, September 30,

2023 2023 2022

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Nonaccrual Loans and OREO at:

March 31, December 31, September 30,

June 30, March 31, September 30,

2023 2023 2022

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

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.

At June 30, 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

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

The increase in commercial special mention loans at 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

The increase in commercial special mention loans at June 30, 2023 compared to March 31, 2023 was due mainly to three loans in a single commercial relationship where the borrower has experienced some performance issues, but is beginning to trend in a positive direction.

The increase in commercial special mention loans between September 30, 2022 and March 31, 2023 was due mainly to two loans in a single commercial relationship, unrelated to the relationship discussed above, with certain underlying economic considerations showing signs of deterioration.

Management continues to closely monitor the borrower's performance for both lending relationships.

June 30, 2023 March 31, 2023 September 30, 2022

Special Mention Substandard Special Mention Substandard Special Mention Substandard

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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.

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

The increase in commercial ACL to loans receivable ratio during the current quarter was due primarily to a forecast reflecting worse economic conditions compared to the forecast utilized in the model in the prior quarter and a slow down in prepayment speeds, which lengthen the remaining term of the portfolio.

Loans Receivable and Allowance for Credit Losses" for additional information related to the calculation of ACL as of June 30, 2023.

Distribution of ACL Ratio of ACL to Loans Receivable

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

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

2023 2023 2022 2023 2023 2022

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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 nonaccrual loans was higher at the end of the current year period compared to the end of the prior year period due mainly to higher ACL at June 30, 2023, along with a lower balance of nonaccrual loans compared to the prior year period.

The ratio of ACL to loans receivable, net was higher at the end of the current year period compared to the end of the prior year due to a higher ACL balance, mainly related to commercial loans.

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

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

At or For the Six Months Ended

March 31, 2023 March 31, 2022

At or For the Nine Months Ended

June 30, 2023 June 30, 2022

(Dollars in thousands)

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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

For the Nine Months Ended

June 30, 2023 June 30, 2022

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

18 unchanged sentences

The following table presents the distribution of our securities portfolio, at amortized cost, at the dates indicated.

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

Overall, fixed-rate securities comprised 96% of our securities portfolio at June 30, 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

June 30, 2023 March 31, 2023 September 30, 2022

Amount Yield WAL Amount Yield WAL Amount Yield WAL

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

For the Six Months Ended

March 31, 2023 March 31, 2022

For the Nine Months Ended

June 30, 2023 June 30, 2022

Amount Yield WAL Amount Yield WAL

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Ending balance - carrying value $ 1,444,867 1.33 4.0 $ 1,694,160 1.29 4.1

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

Total liabilities were $9.23 billion at June 30, 2023, compared to $8.53 billion at September 30, 2022.

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

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The weighted average rate on the deposit portfolio increased 54 basis points during the current quarter and 120 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

Total commercial deposits were $273.3 million, or 4.5%, of total deposits at June 30, 2023.

June 30, 2023 March 31, 2023 September 30, 2022

% of % of % of

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$ 6,092,840 1.83 100.0 % $ 6,144,435 1.29 100.0 % $ 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.

The $51.6 million decrease in deposits during the current quarter was mainly in money market and interest-bearing checking account balances, partially offset by an increase in the retail certificate of deposit portfolio and public unit certificate of deposit portfolio.

Early during the current quarter, management increased the rates offered on the Bank's money market accounts in an effort to slow the outflow of these balances, which appears to have been successful when comparing the money market account outflows for the current quarter to the previous two quarters during fiscal year 2023.

The increase in retail certificates of deposit was primarily in the short-term and intermediate-term categories while the long-term certificate of deposit category (36 months or greater) decreased during the current quarter.

A large portion of the growth in retail certificates of deposit was from customer transfers from existing deposits within the Bank.

On average, approximately 81% 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 $102.0 million decrease in deposits between September 30, 2022 and June 30, 2023 was due primarily to a reduction in non-maturity deposits which decreased $538.2 million, largely money market accounts, partially offset by a $350.1 million increase in retail certificates of deposit and a $78.5 million increase in public unit certificates of deposit.

During the March 2023 quarter, the Bank held a certificate of deposit promotional campaign which resulted in $177.3 million in new retail certificates of deposit with the majority of the funds coming from customer transfers from existing deposits within the Bank.

The additional decrease in non-maturity deposit balances was likely due to customers moving funds to alternative, higher yielding investment products, and/or withdrawing funds for customer spending.

As of June 30, 2023, approximately $676.8 million of the Bank's deposit portfolio was uninsured, or approximately 11% of the Bank's Call Report deposit balance, of which approximately $311.8 million related to commercial and retail deposit accounts and the remainder was mainly comprised of fully collateralized public unit deposits and intercompany accounts.

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

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

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

The new FHLB borrowings during the current fiscal year had a weighted average maturity ("WAM") of 3.2 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.

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.

Total borrowings at June 30, 2023 were $2.99 billion, which was comprised of $2.13 billion in fixed-rate FHLB advances, $365.0 million in variable-rate advances tied to interest rate swaps, and $500.0 million in BTFP borrowings.

Borrowings at June 30, 2023 increased $289.6 million and $854.0 million from March 31, 2023 and September 30, 2022, respectively, to fund loan growth and deposit outflows.

The increase in borrowings from March 31, 2023 was due mainly to proceeds from new BTFP borrowings totaling $500.0 million with a term of one year and a rate of 4.70%, partially offset by a reduction in FHLB borrowings as the FHLB line of

credit was paid off and a $100.0 million FHLB advance was not renewed.

The increase in borrowings from September 30, 2022 was composed of $500.0 million in BTFP borrowings and a net increase of $354.0 million in FHLB borrowings.

The following table presents the maturity of term borrowings, which consist of FHLB advances and BTFP borrowings, along with associated weighted average contractual and effective rates as of June 30, 2023.

Amortizing FHLB advances are presented based on their maturity dates versus their quarterly scheduled repayment dates.

Maturity by Contractual Effective

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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

For the Three Months Ended For the Nine Months Ended

June 30, 2023 June 30, 2023 June 30, 2022

Effective Effective Effective

4 unchanged sentences

New FHLB borrowings 100,000 4.17 2.5 650,000 4.47 3.2 350,000 3.49 3.8

BTFP, net 500,000 4.70 1.0 500,000 4.70 1.0 — — —

Ending balance $ 2,990,246 3.30 2.0 $ 2,990,246 3.30 2.0 $ 1,840,000 2.12 2.6

Leverage Strategy

At times during the current year period, the Bank has utilized a leverage strategy to increase earnings which entails entering into short-term FHLB advances and depositing the proceeds from these borrowings, net of the required FHLB stock holdings, at the FRB of Kansas City.

The borrowings were repaid prior to quarter end.

The average balance of leverage strategy borrowings was $604.4 million and $979.2 million during the quarters ended June 30, 2023 and March 31, 2023, respectively, and $1.16 billion for the nine months ended June 30, 2023.

At times during the current quarter, the leverage strategy was not profitable and therefore was not utilized, resulting in a decrease in the average outstanding balance of leverage strategy borrowings compared to the prior quarter.

Net income attributable to the leverage strategy was $86 thousand and $959 thousand for the quarter and nine months ended June 30, 2023, respectively.

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.

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

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,

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

2023 2023 2024 2024 Total

11 unchanged sentences

Repricing Rate 1.98 % 3.01 % 2.87 % 4.03 % 3.27 %

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

The following table sets forth the WAM information for our certificates of deposit, in years, as of June 30, 2023.

Retail certificates of deposit 1.5

3 unchanged sentences

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.

Stockholders' equity at June 30, 2023 was $1.06 billion, a decrease of $35.2 million from September 30, 2022.

During the nine months ended June 30, 2023, the Company paid cash dividends totaling $71.8 million.

These cash dividends totaled $0.535 per share and consisted of a $0.28 per share cash true-up dividend related to fiscal year 2022 earnings and three regular quarterly cash dividends of $0.085 per share.

Accumulated other comprehensive loss was $126.7 million at June 30, 2023, of which $136.1 million was attributable to unrealized losses on AFS securities, partially offset by $9.4 million of unrealized gains on derivatives.

Unrealized loss on AFS securities changed at June 30, 2023 from $125.3 million at March 31, 2023 and $155.1 million at September 30, 2022, due mainly to changes in market interest rates.

On July 25, 2023, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.3 million, payable on August 18, 2023 to stockholders of record as of the close of business on August 4, 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%.

At June 30, 2023, this ratio was 9.1%.

Excluding the impact of unrealized losses on AFS securities, this ratio would have been approximately 120 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%.

As of June 30, 2023, the Bank's community bank leverage ratio ("CBLR") was 9.6%, 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.

The leverage strategy increases average assets.

which in turn reduces the Bank's CBLR.

As of June 30, 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 18.6%.

There remains $22.5 million authorized under the Company's existing stock repurchase plan.

Shares of the Company's common stock 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.

however, the FRB of Kansas City's existing approval for the Company to repurchase shares expires in August 2023.

The Company has requested a further extension of the FRB's approval.

At June 30, 2023, Capitol Federal Financial, Inc., at the holding company level, had $87.3 million in cash on deposit at the Bank.

The balance of cash at the holding company level is available for the Company to utilize for dividend payments, share repurchases, or for other business strategies at the discretion of the Company.

The Company seeks to maintain an amount of cash at the holding company level that exceeds the total of two consecutive regular quarterly dividends.

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 seeks multiple ways to provide stockholder value.

This has been done primarily 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.

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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.

For the quarter ending September 30, 2023, the amount presented represents the dividend payable on August 18, 2023 to stockholders of record as of the close of business on August 4, 2023.

Calendar Year

13 unchanged sentences

For the Three Months Ended

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

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

2023 2023 2022 2022 2022

22 unchanged sentences

Diluted EPS 0.06 0.11 0.12 0.14 0.16

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

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

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

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

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

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

Comparison of Operating Results for the Three Months Ended June 30, 2023 and March 31, 2023

For the quarter ended June 30, 2023, the Company recognized net income of $8.3 million, or $0.06 per share, compared to net income of $14.2 million, or $0.11 per share, for the quarter ended March 31, 2023.

The decrease in net income was due primarily to higher deposit interest expense in the current quarter, partially offset by lower income tax expense.

The net interest margin decreased 24 basis points, from 1.56% for the prior quarter to 1.32% for the current quarter.

Excluding the effects of the leverage strategy discussed in the Financial Condition - Borrowings" section above, the net interest margin decreased 32 basis points, from 1.71% for the prior quarter to 1.39% 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.

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

2 unchanged sentences

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.

The weighted average yield on loans receivable increased nine basis points and the weighted average yield on cash and cash equivalents increased 61 basis points compared to the prior quarter.

For the Three Months Ended

March 31, December 31, Change Expressed in:

June 30, March 31, Change Expressed in:

2023 2023 Dollars Percent

7 unchanged sentences

Total interest and dividend income $ 90,644 $ 89,546 $ 1,098 1.2

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 increase in interest income on loans receivable was due to an increase in the weighted average yield, along with an increase in the average balance of commercial loans and correspondent one-to four-family loans.

The increase in the weighted average yield was due primarily to originations and purchases/participations 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 average balance of operating cash, as proceeds from the BTFP have been held in cash as management evaluates funding and balance sheet management options, and 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.

3 unchanged sentences

For the Three Months Ended

March 31, December 31, Change Expressed in:

June 30, March 31, Change Expressed in:

2023 2023 Dollars Percent

4 unchanged sentences

Total interest expense $ 55,894 $ 47,587 $ 8,307 17.5

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

with the leverage strategy to fund operational needs.

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

During the current quarter, interest expense on borrowings associated with the leverage strategy decreased $3.3 million due to a reduction in usage of the leverage strategy.

This was almost entirely offset by an increase in interest expense on borrowings not

associated with the leverage strategy, due primarily to BTFP borrowings, which have been held in cash as management evaluates funding and balance sheet management options.

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 and an increase in the weighted average rate paid on money market accounts.

Early in the current quarter, management increased the rates offered on the Bank's money market accounts in an effort to slow the outflow of deposit balances.

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.

For the quarter ended June 30, 2023, the Bank recorded a provision for credit losses of $1.3 million, compared to a provision for credit losses of $891 thousand for the prior quarter.

The provision for credit losses in the current quarter was comprised of a $2.5 million increase in the ACL for loans, partially offset by a $1.2 million decrease in the reserve for off-balance sheet credit exposures.

The provision for credit losses associated with the ACL was due primarily to worsening economic forecast conditions compared to the prior quarter, commercial loan growth, and a reduction in prepayment speeds related to the commercial loan portfolio.

The release of provision for credit losses associated with the reserve for off-balance sheet credit exposures was due primarily to refining our methodology to account for the estimated credit losses on unfunded commercial construction-to-permanent loans and commitments for the time period after construction is expected to be completed.

Non-Interest Income

1 unchanged sentence

For the Three Months Ended

March 31, December 31, Change Expressed in:

June 30, March 31, Change Expressed in:

2023 2023 Dollars Percent

5 unchanged sentences

Total non-interest income $ 5,814 $ 5,083 $ 731 14.4

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.

The increase in other non-interest income was due mainly to an increase in income on BOLI related to the receipt of death benefits during the current quarter.

Non-Interest Expense

1 unchanged sentence

For the Three Months Ended

March 31, December 31, Change Expressed in:

June 30, March 31, Change Expressed in:

2023 2023 Dollars Percent

11 unchanged sentences

Total non-interest expense $ 29,336 $ 28,631 $ 705 2.5

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

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

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

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

The increase in federal insurance premium

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

The increase in salaries and employee benefits was mainly related to merit increases during the current quarter.

The increase in information technology and related expense was due primarily to an increase in professional services related to the Company's digital transformation, discussed below, and other technology-related projects.

The Company's efficiency ratio was 72.32% for the current quarter compared to 60.86% for the prior quarter.

5 unchanged sentences

For the Three Months Ended

March 31, December 31, Change Expressed in:

June 30, March 31, Change Expressed in:

2023 2023 Dollars Percent

4 unchanged sentences

Effective Tax Rate 16.2 % 19.0 %

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.

The decrease in income tax expense was due primarily to lower pretax income in the current quarter and partially to a lower effective tax rate.

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

Average Balance Sheet

5 unchanged sentences

For the Three Months Ended

March 31, 2023 December 31, 2022

June 30, 2023 March 31, 2023

Average Interest Average Interest

54 unchanged sentences

(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.

(3) The average balance of investment securities includes an average balance of nontaxable securities of $1.0 million for each of the quarters ended June 30, 2023 and March 31, 2023, respectively.

(4) Included in this line, for the quarter ended June 30, 2023, is FHLB stock related to the leverage strategy with an average outstanding balance of $27.2 million and dividend income of $610 thousand at a weighted average yield of 9.00%, and FHLB stock not related to the leverage strategy with an average outstanding balance of $119.3 million and dividend income of $2.7 million at a weighted average yield of 8.91%.

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%.

(5) The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $577.2 million and $935.1 million during the quarters ended June 30, 2023 and March 31, 2023 respectively.

(6) Included in this line, for the quarter ended June 30, 2023, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $604.4 million and interest paid of $7.9 million, at a weighted average rate of 5.20%, and borrowings not related to the leverage strategy with an average outstanding balance of $2.92 billion and interest paid of $23.5 million, at a weighted average rate of 3.23%.

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 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%.

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

6 unchanged sentences

For the Three Months Ended

March 31, 2023 December 31, 2022

June 30, 2023 March 31, 2023

Actual Leverage Adjusted Actual Leverage Adjusted

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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.

The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended June 30, 2023 to the three months ended March 31, 2023.

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.

1 unchanged sentence

For the Three Months Ended

March 31, 2023 vs.

December 31, 2022

June 30, 2023 vs.

March 31, 2023

Increase (Decrease) Due to

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Net change in net interest income $ 1,392 $ (8,601) $ (7,209)

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

Comparison of Operating Results for the Nine Months Ended June 30, 2023 and 2022

The Company recognized net income of $38.7 million, or $0.29 per share, for the current year period compared to net income of $65.0 million, or $0.48 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 32 basis points, from 1.82% for the prior year period to 1.50% for the current year period.

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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:

For the Nine Months Ended

June 30, Change Expressed in:

2023 2022 Dollars Percent

11 unchanged sentences

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.

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

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:

For the Nine Months Ended

June 30, Change Expressed in:

2023 2022 Dollars Percent

4 unchanged sentences

Total interest expense $ 148,993 $ 53,404 $ 95,589 179.0

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.

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, along with an increase in the weighted average rate on the borrowings associated with the leverage strategy compared to the prior year period.

Interest expense on 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.

Interest expense on borrowings associated with the leverage strategy increased $31.6 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.

1 unchanged sentence

The Bank recorded a provision for credit losses during the current year period of $5.9 million, compared to a release of provision of $5.7 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.

The provision for credit losses in the current year period was comprised of a $6.1 million increase in the ACL for loans and a $179 thousand decrease in reserves for off-balance sheet credit exposures.

The provision for credit losses associated with the ACL was due primarily to worsening economic forecast conditions, along with a reduction in the projected prepayment speeds used in the model for all loan categories.

Non-Interest Income

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

For the Six Months Ended

March 31, Change Expressed in:

For the Nine Months Ended

June 30, Change Expressed in:

2023 2022 Dollars Percent

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Total non-interest income $ 16,249 $ 17,037 $ (788) (4.6)

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.

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 due mainly to growth and strong retention on personal policies and continued success growing our commercial policies.

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, along with a decrease in income on BOLI compared to the prior year period due to a reduction in the yield and death benefits received between the two periods.

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:

For the Nine Months Ended

June 30, Change Expressed in:

2023 2022 Dollars Percent

11 unchanged sentences

Total non-interest expense $ 85,740 $ 83,044 $ 2,696 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 decrease in salaries and employee benefits was attributable mainly to a decrease in incentive compensation, along with a reduction in loan commissions due to a reduction in loan origination activity, and an increase in capitalized payroll costs related to the digital transformation project.

The increase in information technology and related expenses was due mainly to third-party project management expenses associated with the digital transformation project, along with higher software licensing expenses due to agreement renewals at higher costs.

The increase in federal insurance premium expense was due mainly to an increase in the Federal Deposit Insurance Corporation ("FDIC") assessment rate.

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, as well as to an increase in supplies and postage expense.

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 61.78% for the current year period compared to 51.99% 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.

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

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:

For the Nine Months Ended

June 30, Change Expressed in:

2023 2022 Dollars Percent

4 unchanged sentences

Effective Tax Rate 17.9 % 21.1 %

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.

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

Fiscal Year 2023 Outlook

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

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

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

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

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

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

There has been a runoff in deposit balances, so management increased certificate of deposit and money market account rates prior to June 30, 2023 to help mitigate the outflow.

Higher mortgage loan rates have made the purchase of homes less affordable, 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 typically 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, possibly up to 10 basis points during the September 30, 2023 quarter.

The continued net interest margin compression is due to the Federal Reserve continuing to increase short-term interest rates, which is impacting the shape of the yield curve, the pace at which liabilities are repricing compared to assets, 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.

however, the pace at which the interest rate increases are occurring for liabilities is more than offsetting the benefit of the higher loan rates.

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

Management implemented a digital transformation for the Bank in early August 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.

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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.

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

Previously, management expected salaries and employee benefits to be approximately $1 million lower in fiscal year 2023 compared to fiscal year 2022 and now salaries and employee benefits are expected to be approximately $3 million lower 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 18%.

This is lower than the previously provided projection of 19%, due mainly to lower projected pretax income as the Company's permanent differences, which generally reduce our tax rate, have a larger impact on the overall effective rate.

Average Balance Sheet

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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

For the Nine Months Ended

June 30, 2023 June 30, 2022

Average Interest Average Interest

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(2) AFS securities are adjusted for unamortized purchase premiums or discounts.

(3) The average balance of investment securities includes an average balance of nontaxable securities of $1.1 million 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%.

(3) The average balance of investment securities includes an average balance of nontaxable securities of $1.1 million and $2.1 million for the nine months ended June 30, 2023 and June 30, 2022, respectively.

(4) Included in this line, for the nine months ended June 30, 2023 and June 30, 2022, respectively, is FHLB stock related to the leverage strategy with an average outstanding balance of $52.0 million and $58.2 million, and dividend income of $3.4 million and $2.7 million at a weighted average yield of 8.65% and 6.12% and FHLB stock not related to the leverage strategy with an average outstanding balance of $118.7 million and $74.5 million and dividend income of $7.7 million and $3.5 million at a weighted average yield of 8.63% and 6.29%, respectively.

(5) The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $1.10 billion and $1.23 billion during the nine months ended June 30, 2023 and June 30, 2022, respectively.

(6) Included in this line, for the nine months ended June 30, 2023 and June 30, 2022 respectively, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $1.16 billion and $1.30 billion, with interest paid of $36.5 million and $4.9 million, at a weighted average rate of 4.17% and 0.50%, and borrowings not related to the leverage strategy with an average outstanding balance of $2.67 billion and $1.62 billion and interest paid of $60.0 million and $23.0 million, at a weighted average rate of 2.99% 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.

5 unchanged sentences

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

For the Nine Months Ended

June 30, 2023 June 30, 2022

Actual Leverage Adjusted Actual Leverage Adjusted

13 unchanged sentences

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

For the Nine Months Ended

June 30, 2023 vs.

June 30, 2022

Increase (Decrease) Due to

16 unchanged sentences

Net change in net interest income $ 2,146 $ (22,305) $ (20,159)

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.

Comparison of Operating Results for the Three Months Ended June 30, 2023 and 2022

For the quarter ended June 30, 2023, the Company recognized net income of $8.3 million, or $0.06 per share, compared to net income of $21.2 million, or $0.16 per share for the quarter ended June 30, 2022.

The decrease in net income was due primarily to a decrease in net interest income partially offset by lower income tax expense.

The net interest margin decreased 47 basis points, from 1.79% for the prior year quarter to 1.32% for the current quarter.

Excluding the effects of the leverage strategy, the net interest margin decreased 72 basis points, from 2.11% for the prior year quarter to 1.39% 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, which exceeded the increase in loan yields.

Interest and Dividend Income

1 unchanged sentence

For the Three Months Ended

March 31, Change Expressed in:

June 30, Change Expressed in:

2023 2022 Dollars Percent

7 unchanged sentences

Total interest and dividend income $ 90,644 $ 69,412 $ 21,232 30.6

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

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

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

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.

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

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, partially offset by a lower average balance.

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

Interest Expense

1 unchanged sentence

For the Three Months Ended

March 31, Change Expressed in:

June 30, Change Expressed in:

2023 2022 Dollars Percent

4 unchanged sentences

Total interest expense $ 55,894 $ 19,431 $ 36,463 187.7

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 borrowings was due primarily to an increase in the weighted average rate and average balance on borrowings not associated with the leverage strategy, 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 primarily to an increase in the weighted average rate paid on the deposit portfolio, mainly certificates of deposit and money market accounts.

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.

The Bank recorded a provision for credit losses during the current quarter of $1.3 million, compared to a of provision of $937 thousand during the prior year quarter.

See "Comparison of Operating Results for the Three Months Ended June 30, 2023 and March 31, 2023" above for additional discussion regarding the provision for credit losses during the current quarter.

Non-Interest Income

1 unchanged sentence

For the Three Months Ended

March 31, Change Expressed in:

June 30, Change Expressed in:

2023 2022 Dollars Percent

5 unchanged sentences

Total non-interest income $ 5,814 $ 6,115 $ (301) (4.9)

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.

2 unchanged sentences

For the Three Months Ended

March 31, Change Expressed in:

June 30, Change Expressed in:

2023 2022 Dollars Percent

11 unchanged sentences

Total non-interest expense $ 29,336 $ 28,390 $ 946 3.3

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

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

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

The decrease in salaries and employee benefits was attributable mainly to lower incentive compensation, along with lower loan commissions due to a reduction in loan origination activity in the current year.

The increase in information technology and related expenses was due mainly to third-party project management expenses and other expenses associated with the digital transformation project, along with higher software licensing expenses due to agreement renewals at higher costs.

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

The increase in federal insurance premium expense was due mainly to an increase in the FDIC assessment rate.

The Company's efficiency ratio was 72.32% for the current quarter compared to 50.61% for the prior year quarter.

3 unchanged sentences

For the Three Months Ended

March 31, Change Expressed in:

June 30, Change Expressed in:

2023 2022 Dollars Percent

5 unchanged sentences

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, as the Company's permanent differences, which generally reduce our tax rate, have a larger impact on the overall effective rate.

Average Balance Sheet

5 unchanged sentences

For the Three Months Ended

March 31, 2023 March 31, 2022

June 30, 2023 June 30, 2022

Average Interest Average Interest

54 unchanged sentences

(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.

(3) The average balance of investment securities includes an average balance of nontaxable securities of $1.0 million and $326 thousand for the three months ended June 30, 2023 and June 30, 2022, respectively.

(4) Included in this line, for the three months ended June 30, 2023 and June 30, 2022, respectively, is FHLB stock related to the leverage strategy with an average outstanding balance of $27.2 million and $89.4 million, respectively, and dividend income of $610 thousand and $1.4 million, respectively, at a weighted average yield of 9.00% and 6.48%, respectively, and FHLB stock not related to the leverage strategy with an average outstanding balance of $119.3 million and $77.5 million, respectively, and dividend income of $2.7 million and $1.3 million, respectively, at a weighted average yield of 8.91% and 6.48%, respectively.

(5) The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $577.2 million and $1.89 billion during the three months ended June 30, 2023 and June 30, 2022, respectively.

(6) Included in this line, for the three months ended June 30, 2023 and June 30, 2022, respectively, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $604.4 million and $1.99 billion, respectively, and interest paid of $7.9 million and $3.7 million, respectively, at a weighted average rate of 5.20% and 0.73%, respectively, and borrowings not related to the leverage strategy with an average outstanding balance of $2.92 billion and $1.70 billion, respectively, and interest paid of $23.5 million and $8.0 million, respectively, at a weighted average rate of 3.23% and 1.87%, 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.

6 unchanged sentences

For the Three Months Ended

March 31, 2023 March 31, 2022

June 30, 2023 June 30, 2022

Actual Leverage Adjusted Actual Leverage Adjusted

10 unchanged sentences

Rate/Volume Analysis

The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended June 30, 2023 to the three months ended June 30, 2022.

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,

For the Three Months Ended June 30,

Increase (Decrease) Due to

19 unchanged sentences

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 Company's most available liquid assets are represented by cash and cash equivalents and AFS 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.

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Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40% of Bank Call Report total assets without the pre-approval of FHLB senior management.

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

The Bank's FHLB borrowing limit was 50% of Bank Call Report total assets as of June 30, 2023, as approved by the president of FHLB.

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

When the leverage strategy is in place, the Bank maintains the resulting excess cash reserves from the FHLB borrowings at the FRB of Kansas City, which can be used to meet any short-term liquidity needs.

2 unchanged sentences

The amount that can be borrowed from the FRB of Kansas City's discount window is based upon the fair value of securities pledged as collateral and certain other characteristics of those securities.

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

At June 30, 2023, the fair value of securities pledged for the discount window was $149.8 million.

Management tests the Bank's access to the FRB of Kansas City's discount window annually with a nominal, overnight borrowing, which was last 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.

At June 30, 2023, the amount of securities pledged, at par, for the BTFP was $615.2 million.

During the quarter ended June 30, 2023, the Bank repaid its borrowings on the FHLB line of credit and borrowed $500.0 million under the BTFP as the BTFP rate was more favorable than the rates offered on the FHLB line of credit or the rate on a one-year FHLB advance at that point in time.

If management observes unusual trends in the amount and frequency of line of credit utilization and/or short-term borrowings that is not in conjunction with a planned strategy, such as the leverage strategy, the Bank will likely utilize long-term wholesale borrowing sources such as FHLB advances and/or repurchase agreements to provide long-term, fixed-rate funding.

1 unchanged sentence

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

At 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.

At June 30, 2023, the Bank had total borrowings, at par, of $2.99 billion, or approximately 29% of total assets.

The borrowings balance was composed of $2.49 billion of FHLB advances and $500.0 million related to the BTFP.

Of this amount, $444.7 million of FHLB advances and all BTFP borrowings were scheduled to mature in the next 12 months.

Management estimated that the Bank had $2.68 billion in additional liquidity available at June 30, 2023 based on the Bank's blanket collateral agreement with FHLB and unencumbered securities.

At June 30, 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.

1 unchanged sentence

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.

As of June 30, 2023, the Bank's policy allowed for combined brokered and public unit certificates of deposit up to 15% of total deposits.

At June 30, 2023, the Bank did not have any brokered certificates of deposit, and public unit certificates of deposit were approximately 3% of total deposits.

The Bank had pledged securities with an estimated fair value of $204.7 million as collateral for public unit certificates of deposit at June 30, 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.

At June 30, 2023, $1.27 billion of the Bank's certificate of deposit portfolio was scheduled to mature within the next 12 months, including $117.1 million of public unit certificates of deposit and $26.9 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.

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.

Due 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.

12 unchanged sentences

Qualifying institutions that elect to use the CBLR framework, such as the Bank and the Company, that maintain the required minimum leverage ratio of 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the capital requirements for the well capitalized category under the agencies' PCA framework.

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

As of June 30, 2023, the Bank's CBLR was 9.6% and the Company's CBLR was 10.7%, both of which exceeded the minimum requirements.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis