What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-02-07 compared with 2023-08-09 · 338 added, 667 removed, 626 unchanged (62% 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, 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;

10 unchanged sentences

• the impact of interpretations of, and changes in, financial services laws and regulations, including laws concerning taxes, banking, securities, consumer protection, trust and insurance and the impact of other governmental initiatives affecting the financial services industry;

• the ability to attract and retain skilled employees;

• implementing business initiatives may be more difficult or expensive than anticipated;

1 unchanged sentence

• technological changes;

• our ability to maintain the security of our financial, accounting, technology, and other operating systems and facilities, including the ability to withstand cyber-attacks;

• our ability to maintain the security of our financial, accounting, technology, and other operating systems and facilities, including the ability to withstand cyberattacks;

• changes in consumer spending, borrowing and saving habits;

14 unchanged sentences

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

The Company recognized net income of $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 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 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 $10.29 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 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.

During the current quarter, the Company completed a strategic securities transaction ("securities strategy") by selling $1.30 billion of securities with a weighted average yield of 1.22% and an average duration of 3.6 years and purchased $632.0 million of securities yielding 5.75% and paid down $500.0 million of borrowings with a cost of 4.70%.

The Company plans to hold the remaining cash associated with the securities strategy at the FRB of Kansas City earning interest at the reserve balances rate, until such time as it can be used to fund commercial loan activity or other Bank operations.

The Company recognized net interest margin benefits in the current quarter associated with the securities strategy and total assets were reduced below $10.0 billion at December 31, 2023.

Since the Company did not have the intent to hold the $1.30 billion of securities to maturity at September 30, 2023, the Company recognized an impairment loss on those securities, $192.6 million of which was reflected in the Company's financial statements for the quarter ended September 30, 2023.

During the current quarter, $10.0 million after tax, or $0.08 per share, of additional loss related to the sale of the securities was recorded, which reflected the market value loss on these securities from October 1, 2023 until the sale of such securities.

The Company recognized net income of $2.5 million, or $0.02 per share, for the current quarter compared to net income of $16.2 million, or $0.12 per share, for the prior year quarter.

The lower net income in the current quarter was primarily a result of the $13.3 million net loss associated with the securities strategy, along with higher interest expense, partially offset by lower provision for credit losses and an income tax benefit in the current quarter.

Excluding the effects of the securities strategy, EPS would have been $0.10 for the current quarter.

The net interest margin was 1.71% for the current quarter, an increase of ten basis points from 1.61% for the prior year quarter.

Excluding the effects of the leverage strategy discussed in the "Financial Condition - Borrowings" section below, the net interest margin decreased 17 basis points, from 1.88% for the prior year quarter to 1.71% for the current quarter.

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

The Company's efficiency ratio was 92.86% for the current quarter compared to 54.27% for the prior year quarter.

Excluding the net losses from the securities strategy, the efficiency ratio would have been 64.73% for the current quarter.

The change in the efficiency ratio, excluding the securities strategy, was due primarily to lower net interest income in the current quarter compared to the prior year quarter.

The Company's operating expense ratio for the current quarter was 1.18% compared to 0.96% for the prior year quarter, due mainly to lower average assets in the current quarter.

Total assets were $9.58 billion at December 31, 2023, a $601.4 million decrease from September 30, 2023, due primarily to the securities strategy.

The loan portfolio was $7.95 billion at December 31, 2023, a $23.4 million decrease from September 30, 2023.

The loan portfolio mix continued to shift from one- to four-family loans to commercial loans during the current quarter.

Total deposits were $6.02 billion at December 31, 2023, a decrease of $29.6 million from September 30, 2023.

The decrease in deposits was primarily in non-maturity deposits and public unit certificates of deposit, partially offset by an increase in retail

certificates of deposit.

The increase in retail certificates of deposit was in certificates with terms of 14 months as management continues to competitively price certain short-term retail certificate of deposit products so that if rates were to decrease in the near future, the Bank would be able to more quickly reprice those balances to lower market rates at maturity.

Total borrowings were $2.37 billion at December 31, 2023, a decrease of $506.1 million from September 30, 2023.

The decrease was due primarily to $500.0 million of borrowings under the BTFP that were paid off during the current quarter in conjunction with the securities strategy.

Management estimates that the Bank had $2.70 billion in additional liquidity available at December 31, 2023, based on the Bank's blanket collateral agreement with FHLB and unencumbered securities.

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

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.

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 should better position the Bank for faster payment channels in the future.

At December 31, 2023, loans 30 to 89 days delinquent were 0.24% of total loans receivable, net, and loans 90 or more days delinquent or in foreclosure were 0.13% of total loans receivable, net.

During the current quarter, net charge-offs ("NCOs") were $1 thousand.

At December 31, 2023, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(679.7) million, or (7.1)% of total assets, compared to $(1.19) billion, or (11.7)% of total assets, at September 30, 2023.

The change in the one-year gap amount was due to both an increase in the amount of interest-earning assets cash flows coming due in one year at December 31, 2023 and a decrease in the amount of liability cash flows coming due in one year, compared to September 30, 2023.

These changes were due, in part, to the securities strategy, which decreased the amount of borrowings coming due in one year, increased the balance of cash, and increased the amount of securities projected to reprice within one year, partially offset by an increase in the amount of certificates of deposit scheduled to mature within one year, as management continues to competitively price certain short-term retail certificate of deposit products.

Available Information

9 unchanged sentences

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

Annualized Annualized

June 30, March 31, Percent September 30, Percent

2023 2023 Change 2022 Change

December 31, September 30, Percent

2023 2023 Change

(Dollars and shares in thousands)

8 unchanged sentences

Average number of diluted shares outstanding 132,353 133,225 (2.6)

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.

During the current quarter, total assets decreased $601.4 million, to $9.58 billion at December 31, 2023, due primarily to the securities strategy.

The loan portfolio decreased $23.4 million, or 1.2% annualized, during the current quarter.

The loan portfolio mix continued to shift from one- to four-family loans to commercial loans during the current quarter, with a $66.4 million decrease in one- to four-family loans, including a $45.1 million decrease in one- to four-family correspondent loans, partially offset by a $42.1 million increase in commercial loans.

The Bank continues to reduce purchases of correspondent loans, with the intention of minimizing correspondent purchases, which will continue to decrease the balance of that portfolio.

Total liabilities decreased $591.5 million during the current quarter as $500.0 million of BTFP borrowings were paid off as part of the securities strategy, along with a $38.1 million decrease in advances by borrowers due to the payment of property taxes during the current quarter and a $29.6 million decrease in deposits.

The decrease in deposits was primarily in non-maturity deposits and public unit certificates of deposit, partially offset by an increase in retail certificates of deposit.

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 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

The loan portfolio rate increased six basis points during the current quarter due primarily to originations at higher market rates and one- to four-family adjustable-rate loans repricing to higher market interest rates, as well as disbursements on commercial construction loans at rates higher than the overall portfolio rate.

December 31, 2023 September 30, 2023

Amount Rate Amount Rate

(Dollars in thousands)

22 unchanged sentences

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

Commercial loan renewals are not included in the activity in the following table unless new funds are disbursed at the time of renewal.

Commercial loan renewals are not included in the activity presented in the following table unless new funds are disbursed at the time of renewal.

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

For the Three Months Ended For the Nine Months Ended

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

Amount Rate Amount Rate Amount Rate

The decrease in the amount of loans originated and refinanced as well as purchased and participations in the current quarter was driven by the decrease in single family loan volume in our local markets and our minimizing single-family loan purchases.

The change in undisbursed loan funds between periods was due to disbursements on construction loans outpacing new construction loan activity during the current quarter, while new construction loan activity outpaced construction loan disbursements on existing loans during the quarter ended December 31, 2022.

For the Three Months Ended

December 31, 2023 December 31, 2022

Amount Rate Amount Rate

(Dollars in thousands)

10 unchanged sentences

Loan originations, purchases, and refinances are reported together.

For the Nine Months Ended

June 30, 2023 June 30, 2022

For the Three Months Ended

December 31, 2023 December 31, 2022

Amount Rate % of Total Amount Rate % of Total

27 unchanged sentences

Total purchased/participation loans $ 3,497 5.91 $ 335,305 5.30

One- to Four-Family Loans - The following table presents, for our portfolio of one- to four-family loans, the amount, percent of total, weighted average rate, weighted average credit score, weighted average LTV ratio, and average balance per loan as of June 30, 2023.

One- to Four-Family Loans - The following table presents, for our portfolio of one- to four-family loans, excluding construction loans, the amount, percent of total, weighted average rate, weighted average credit score, weighted average LTV ratio, and average balance per loan as of December 31, 2023.

Credit scores are updated at least annually, with the latest update in September 2023, from a nationally recognized consumer rating agency.

8 unchanged sentences

$ 6,481,826 100.0 % 3.42 770 61 214

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

Amount Rate LTV Score Amount Rate LTV Score

The majority of the correspondent loans purchased during the current quarter were from applications in the pipeline at September 30, 2023, as the Bank continues to minimize correspondent purchases.

For the Three Months Ended

December 31, 2023

Amount Rate LTV Score

(Dollars in thousands)

2 unchanged sentences

$ 73,001 6.79 74 765

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)

Originate/refinance $ 75,445 5.98 %

Correspondent 3,156 5.77

$ 78,601 5.97

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.

As of December 31, 2023 the Bank had one- to four-family loan origination and refinance commitments of $20.7 million at a weighted average rate of 6.75%.

There were no one- to four-family correspondent loan purchase commitments at December 31, 2023.

Commercial Loans - During the quarter ended December 31, 2023, the Bank originated $20.3 million of commercial loans.

The Bank did not enter into any commercial loan participations during the current quarter.

The Bank also processed commercial loan disbursements, excluding lines of credit, during the quarter ended December 31, 2023 of $64.6 million at a weighted average rate of 6.27%.

As of December 31, 2023, September 30, 2023, and December 31, 2022, the Bank's commercial and industrial gross loan amounts (unpaid principal plus undisbursed amounts) totaled $157.2 million, $158.5 million and $113.2 million, respectively, and commitments totaled $2.4 million, $2.6 million and $5.1 million, respectively.

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

As of June 30, 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%.

As of December 31, 2023, the Bank had seven commercial real estate and commercial construction loan commitments, totaling $100.4 million, at a weighted average rate of 7.52%.

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 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

Count Principal Amount Amount Amount Amount

Of the total commercial real estate and commercial construction undisbursed amounts and commitments outstanding as of December 31, 2023, management anticipates funding approximately $94 million during the March 2024 quarter, $84 million during the June 2024 quarter, $77 million during the September 2024 quarter, and $137 million during the December 2024 quarter or later.

December 31, 2023 September 30, 2023

Unpaid Undisbursed Gross Loan Gross Loan

Count Principal Amount Amount Amount

(Dollars in thousands)

10 unchanged sentences

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

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

Unpaid Undisbursed Gross Loan Gross Loan Gross Loan

Count Principal Amount Amount Amount Amount

December 31, 2023 September 30, 2023

Unpaid Undisbursed Gross Loan Gross Loan

Count Principal Amount Amount Amount

(Dollars in thousands)

Kansas 602 $ 486,440 $ 176,316 $ 662,756 $ 670,498

Missouri 177 249,706 88,662 338,368 363,432 296,443

Texas 17 280,034 67,791 347,825 348,707

Missouri 159 275,153 51,440 326,593 332,610

Colorado 8 43,223 6,205 49,428 49,385

3 unchanged sentences

810 $ 1,215,924 $ 325,071 $ 1,540,995 $ 1,562,938

The following table presents the Bank's commercial loan portfolio and outstanding loan commitments, categorized by gross loan amount (unpaid principal plus undisbursed amounts) or outstanding loan commitment amount, as of June 30, 2023.

(Dollars in thousands)

10 unchanged sentences

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

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

Of the loans 30 to 89 days delinquent at December 31, 2023, 82% were 59 days or less delinquent.

The increase in correspondent and bulk purchased one- to four-family loans 30 to 89 days delinquent and in nonaccrual one- to four-family loans was due mainly to delinquencies returning to more historical levels as government payment assistance programs expired.

The increase in commercial loans 30 to 89 days delinquent was a mix of several different borrowers and property types.

There was not one underlying reason for the increase in commercial loan delinquencies from September 30, 2023.

Management is working closely with the borrowers to address payment issues.

Loans Delinquent for 30 to 89 Days at:

June 30, March 31, September 30,

2023 2023 2022

Number Amount Number Amount Number Amount

December 31, September 30,

Number Amount Number Amount

(Dollars in thousands)

3 unchanged sentences

Bulk purchased 4 583 1 149

Construction — — 4 1,123

Commercial 14 3,809 5 94

9 unchanged sentences

Nonaccrual Loans and OREO at:

June 30, March 31, September 30,

2023 2023 2022

Number Amount Number Amount Number Amount

December 31, September 30,

Number Amount Number Amount

(Dollars in thousands)

16 unchanged sentences

Consumer — — — —

7 618 6 548 5 318

Total nonaccrual loans 55 10,187 60 9,409

3 unchanged sentences

2 $ 225 — $ —

Consumer — — — — 1 21

— — 2 160 5 328

Correspondent purchased 1 219 1 219

Total non-performing assets 58 $ 10,631 61 $ 9,628

2 unchanged sentences

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

The following table presents the states where the properties securing ten percent or more of the total amount of our one- to four-family loans are located and the corresponding balance of loans 30 to 89 days delinquent, 90 or more days delinquent or in foreclosure, and weighted average LTV ratios for loans 90 or more days delinquent or in foreclosure at June 30, 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 June 30, 2023, potential losses, after taking into consideration anticipated private mortgage insurance proceeds and estimated selling costs, have been charged-off.

At December 31, 2023, potential losses, after taking into consideration anticipated private mortgage insurance proceeds and estimated selling costs, have been charged-off.

Loans 30 to 89 Loans 90 or More Days Delinquent

9 unchanged sentences

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

The increase in commercial special mention loans at 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

December 31, 2023 September 30, 2023

Special Mention Substandard Special Mention Substandard

(Dollars in thousands)

5 unchanged sentences

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

The 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.

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

Distribution of ACL Ratio of ACL to Loans Receivable

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

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

2023 2023 2023 2023

13 unchanged sentences

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

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

The ratio of ACL to nonaccrual loans was higher at the end of the current year period compared to the end of the prior year period due mainly to 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 Nine Months Ended

June 30, 2023 June 30, 2022

On October 1, 2023, the Company adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02"), which eliminates the accounting guidance for TDRs by creditors.

The Company applied ASU 2022-02 on a prospective basis, except for the amendments impacting the measurement of the ACL for TDRs, which were adopted on a modified retrospective basis, resulting in a cumulative-effect adjustment that is reflected in the table below ("ASU 2022-02 Adoption").

Summary of Significant Accounting Policies" for additional information regarding the adoption of ASU 2022-02.

At or For the Three Months Ended

December 31, 2023 December 31, 2022

(Dollars in thousands)

Balance at beginning of period $ 23,759 $ 16,371

ASU 2022-02 Adoption 20 —

Charge-offs (7) (4)

Recoveries 6 2

Net recoveries (charge-offs) (26) 220

Net (charge-offs) recoveries (1) (2)

Provision for credit losses 400 2,820

4 unchanged sentences

ACL to loans receivable, net at end of period 0.30 0.25

ACL to NCOs (annualized) 667x N/M

ACL to NCOs (annualized) 6,474x 3,032x

The ratio of ACL to nonaccrual loans was higher at the end of the current quarter compared to the end of the prior year quarter due mainly to higher ACL at December 31, 2023, partially offset by a higher balance of nonaccrual loans compared to the prior year quarter.

The ratio of ACL to loans receivable, net was higher at the end of the current quarter compared to the end of the prior year quarter due to a higher commercial loan ACL balance at December 31, 2023.

The ratio of ACL to NCOs was higher for the end of the current quarter compared to the end of the prior year quarter due mainly to lower net charge-offs, along with a higher ACL balance.

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

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

For the Nine Months Ended

June 30, 2023 June 30, 2022

For the Three Months Ended

December 31, 2023 December 31, 2022

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

14 unchanged sentences

$ 1 $ 7,988,923 — $ 2 $ 7,630,405 —

While management utilizes its best judgment and information available, the adequacy of the ACL is determined by certain factors outside of the Company's control, such as the performance of our portfolios, changes in the economic environment including economic uncertainty, changes in interest rates, and the views of regulatory authorities toward classification of assets and the level of ACL.

While management utilizes its best judgment and information available, the adequacy of the ACL is determined by certain factors outside of the Company's control, such as the performance of our loan portfolio, changes in the economic environment including economic uncertainty, changes in interest rates, and the views of regulatory authorities toward classification of assets and the level of ACL.

Additionally, the level of ACL may fluctuate based on the balance and mix of the loan portfolio.

1 unchanged sentence

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

Overall, fixed-rate securities comprised 96% of our securities portfolio at June 30, 2023.

The majority of our securities are government guaranteed or issued by GSEs.

Overall, fixed-rate securities comprised 93% of our securities portfolio at December 31, 2023.

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

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

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

Amount Yield WAL Amount Yield WAL Amount Yield WAL

The change in the portfolio yield at December 31, 2023 compared to September 30, 2023 was primarily related to the securities strategy.

December 31, 2023 September 30, 2023

Amount Yield WAL Amount Yield WAL

(Dollars in thousands)

MBS $ 503,912 5.76 % 5.4 $ 901,440 1.71 % 4.7

Treasury bills 213,700 5.48 0.1 — — —

GSE debentures — — — 479,610 0.64 1.9

5 unchanged sentences

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

For the Nine Months Ended

June 30, 2023 June 30, 2022

For the Three Months Ended

December 31, 2023 December 31, 2022

Amount Yield WAL Amount Yield WAL

2 unchanged sentences

Maturities and repayments (49,604) (51,045)

Proceeds from sale (1,272,512) —

Net amortization of (premiums)/discounts 2,771 (837)

Purchases 668,310 5.72 3.8 — — —

Net loss from securities transactions (13,345) —

Change in valuation on AFS securities 20,360 17,261

Ending balance - carrying value $ 740,462 5.67 3.9 $ 1,528,686 1.31 4.3

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.

Total liabilities were $8.54 billion at December 31, 2023, compared to $9.13 billion at September 30, 2023.

The decrease was due primarily to $500.0 million of BTFP borrowings that were paid off in the current quarter as part of the securities strategy, along with a $38.1 million decrease in advances by borrowers due to the payment of property taxes during the current quarter and a $29.6 million decrease in deposits.

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

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 $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

Amount Rate Total Amount Rate Total Amount Rate Total

The $29.6 million decrease in deposits during the current quarter was mainly in public unit certificates of deposit and money market account balances, partially offset by an increase in the retail certificate of deposit portfolio.

The weighted average rate on the deposit portfolio increased 13 basis points during the current quarter due mainly to higher rates on retail certificates of deposit.

December 31, 2023 September 30, 2023

Amount Rate Total Amount Rate Total

(Dollars in thousands)

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$ 6,021,595 2.20 100.0 % $ 6,051,220 2.07 100.0 %

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 $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 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 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.

Total borrowings at December 31, 2023 were $2.37 billion, which was comprised of $2.01 billion in fixed-rate FHLB advances, $365.0 million in variable-rate advances tied to interest rate swaps, and $974 thousand in finance leases.

The following table presents the maturity of term borrowings, which consist of FHLB advances, along with associated weighted average contractual and effective rates as of December 31, 2023.

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

8 unchanged sentences

$ 2,375,410 3.50 3.13

$ 2,990,246 3.55 3.30

(1) The effective rate includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid.

1 unchanged sentence

The borrowings presented in the table have original contractual terms of one year or longer or are tied to interest rate swaps with original contractual terms of one year or longer.

Line of credit borrowings and finance leases are excluded from the table.

The effective rate is shown as a weighted average and includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid.

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

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

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

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

For the Three Months Ended For the Nine Months Ended

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

Effective Effective Effective

Amount Rate WAM Amount Rate WAM Amount Rate WAM

During the current quarter, BTFP borrowings were paid off with the proceeds received from the securities strategy.

For the Three Months Ended

December 31, 2023 December 31, 2022

Effective Effective

Amount Rate WAM Amount Rate WAM

(Dollars in thousands)

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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.

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

The borrowings are repaid prior to quarter end, or earlier if the strategy is suspended.

The leverage strategy was not in place during the current quarter due to the strategy being unprofitable, but it was in place at points during the September 2023 quarter and December 2022 quarter.

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.

Management continues to monitor the net interest rate spread and overall profitability of the leverage 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 June 30, 2023.

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

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 FHLB advances for the next four quarters as of December 31, 2023.

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

2024 2024 2024 2024 Total

11 unchanged sentences

Repricing Rate 2.94 % 3.55 % 3.99 % 4.01 % 3.72 %

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

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

Retail certificates of deposit 1.1

3 unchanged sentences

Stockholders' Equity.

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 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.

Stockholders' equity totaled $1.03 billion at December 31, 2023, a decrease of $9.9 million from September 30, 2023.

The decrease in stockholders' equity during the current quarter was due to a $12.0 million decrease in additional paid-in capital, due mainly to share repurchases, and a $8.8 million decrease in retained earnings, due primarily to dividend payments, partially offset by a $10.5 million increase in accumulated other comprehensive income.

During the quarter ended December 31, 2023, the Company paid a regular quarterly cash dividend totaling $11.3 million, or $0.085 per share.

On January 23, 2024, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.1 million, payable on February 16, 2024 to stockholders of record as of the close of business on February 2, 2024.

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 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 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.

As of December 31, 2023, the Bank's capital ratios exceeded the well-capitalized requirements and the Bank exceeded all internal policy thresholds for sensitivity to changes in interest rates.

See "Liquidity and Capital Resources" below for additional information regarding the Bank's regulatory capital requirements.

As of December 31, 2023, the Bank's tier 1 leverage ratio was 8.9%, which exceeded the minimum requirement.

At December 31, 2023, Capitol Federal Financial, Inc., at the holding company level, had $63.2 million in cash on deposit at the Bank.

For fiscal year 2024, it is the intention of the Board of Directors to pay out the regular quarterly cash dividend of $0.085 per share, totaling $0.34 per share for the year.

To the extent that earnings in fiscal year 2024 exceed $0.34 per share, the Board of Directors will consider the payment of additional dividends.

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.

During the current quarter, the Company repurchased 2,034,000 shares of common stock at an average price of $5.79 per share.

Subsequent to December 31, 2023 and through February 2, 2024, the Company repurchased 199,400 shares at an average price of $6.53 per share.

There remains $8.1 million authorized under the existing stock repurchase plan for additional purchases of the Company's common stock.

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

This plan has no expiration date;

however, the FRB of Kansas City's existing approval for the Company to repurchase shares expires in August 2024.

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.

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.

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

The Company has paid the True Blue Capitol dividend primarily due to excess capital levels at the Company and Bank.

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

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

The amounts represent cash dividends paid during each period.

For the quarter ending 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

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

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

2023 2023 2023 2023 2022

2 unchanged sentences

Loans receivable $ 75,941 $ 74,031 $ 71,918 $ 69,319 $ 64,819

Cash and cash equivalents 10,009 10,977 16,671 13,373 3,968

MBS 5,859 4,399 4,562 4,748 4,811

Cash and cash equivalents 4,778 6,139 10,009 10,977 16,671

FHLB stock 2,586 2,796 3,260 3,607 4,158

11 unchanged sentences

Non-interest expense 28,508 28,194 29,336 28,631 27,773

Income tax expense 1,602 3,331 3,507 5,332 5,617

Net income $ 8,302 $ 14,189 $ 16,240 $ 19,492 $ 21,152

Income tax (benefit) expense (475) (45,736) 1,602 3,331 3,507

Net income (loss) $ 2,543 $ (140,390) $ 8,302 $ 14,189 $ 16,240

Efficiency ratio 92.86 % (17.96 %) 72.32 % 60.86 % 54.27 %

1 unchanged sentence

Diluted EPS 0.02 (1.05) 0.06 0.11 0.12

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.

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

Interest and Dividend Income

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

The weighted average yield on loans receivable increased 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

June 30, March 31, Change Expressed in:

2023 2023 Dollars Percent

(Dollars in thousands)

INTEREST AND DIVIDEND INCOME:

Loans receivable $ 71,918 $ 69,319 $ 2,599 3.7 %

Cash and cash equivalents 10,009 10,977 (968) (8.8)

MBS 4,562 4,748 (186) (3.9)

FHLB stock 3,260 3,607 (347) (9.6)

Investment securities 895 895 — —

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

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.

Interest Expense

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

The weighted average rate paid on deposits increased 59 basis points and the weighted average rate paid on borrowings not associated with the leverage strategy increased 23 basis points compared to the prior quarter.

For the Three Months Ended

June 30, March 31, Change Expressed in:

2023 2023 Dollars Percent

(Dollars in thousands)

INTEREST EXPENSE:

Borrowings $ 31,449 $ 31,447 $ 2 — %

Deposits 24,445 16,140 8,305 51.5

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

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 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

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

For the Three Months Ended

June 30, March 31, Change Expressed in:

2023 2023 Dollars Percent

(Dollars in thousands)

NON-INTEREST INCOME:

Deposit service fees $ 3,404 $ 3,122 $ 282 9.0 %

Insurance commissions 888 877 11 1.3

Other non-interest income 1,522 1,084 438 40.4

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

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

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

For the Three Months Ended

June 30, March 31, Change Expressed in:

2023 2023 Dollars Percent

(Dollars in thousands)

NON-INTEREST EXPENSE:

Salaries and employee benefits $ 13,200 $ 12,789 $ 411 3.2 %

Information technology and related expense 6,118 5,789 329 5.7

Occupancy, net 3,556 3,568 (12) (0.3)

Regulatory and outside services 1,436 1,305 131 10.0

Advertising and promotional 1,447 1,333 114 8.6

Federal insurance premium 1,231 1,246 (15) (1.2)

Deposit and loan transaction costs 615 690 (75) (10.9)

Office supplies and related expense 546 631 (85) (13.5)

Other non-interest expense 1,187 1,280 (93) (7.3)

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

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.

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

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

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

Income Tax Expense

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

For the Three Months Ended

June 30, March 31, Change Expressed in:

2023 2023 Dollars Percent

(Dollars in thousands)

Income before income tax expense $ 9,904 $ 17,520 $ (7,616) (43.5) %

Income tax expense 1,602 3,331 (1,729) (51.9)

Net income $ 8,302 $ 14,189 $ (5,887) (41.5)

Effective Tax Rate 16.2 % 19.0 %

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

June 30, 2023 March 31, 2023

Average Interest Average Interest

Outstanding Earned/ Yield/ Outstanding Earned/ Yield/

Amount Paid Rate Amount Paid Rate

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

Average Interest Average Interest Average Interest

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

Amount Paid Rate Amount Paid Rate Amount Paid Rate

(Dollars in thousands)

39 unchanged sentences

Net interest margin (8)(9)

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

1.71 1.21 1.61

Ratio of interest-earning assets to interest-bearing liabilities 1.17x 1.18x 1.16x

Selected performance ratios:

2 unchanged sentences

Return on average equity (annualized) (9)

0.98 (52.82) 5.99

Average equity to average assets 10.68 10.19 9.33

Operating expense ratio (annualized) (10)

1.18 1.08 0.96

Efficiency ratio (9)(11)

92.86 (17.96) 54.27

Pre-tax yield on leverage strategy (12)

2 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 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%.

(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%.

(3) The average balance of investment securities includes an average balance of nontaxable securities of $201 thousand, $1.0 million and $1.1 million for the quarters ended December 31, 2023, September 30, 2023, and December 31, 2022, respectively.

(4) There was no FHLB stock related to the leverage strategy for the quarter ended December 31, 2023.

Included in this line, for the quarters ended September 30, 2023 and December 31, 2022, respectively, is FHLB stock related to the leverage strategy with an average outstanding balance of $10.8 million and $84.3 million, respectively, and dividend income of $251 thousand and $1.8 million, respectively, at a weighted average yield of 9.25% and 8.49%, respectively.

Included in this line for the quarters ended December 31, 2023, September 30, 2023, and December 31, 2022, respectively, is FHLB stock not related to the leverage strategy with an average outstanding balance of $108.6 million, $109.4 million and $113.3 million, respectively, and dividend income of $2.6 million, $2.5 million, and $2.4 million respectively, at a weighted average yield of 9.44%, 9.23%, and 8.24%, respectively.

(5) There was no cash and cash equivalents related to the leverage strategy during the quarter ended December 31, 2023.

The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $228.4 million and $1.79 billion during the quarters ended September 30, 2023 and December 31, 2022, respectively.

(6) There were no borrowings related to the leverage strategy during the quarter ended December 31, 2023.

Included in this line, for the quarters ended September 30, 2023 and December 31, 2022, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $239.1 million and $1.87 billion, respectively, and interest paid of $3.3 million and $17.3 million, respectively, at a weighted average rate of 5.33% and 3.61% respectively.

Included in this line for the quarters ended December 31, 2023, September 30, 2023, and December 31, 2022 were borrowings not related to the leverage strategy with an average outstanding balance of $2.47 billion, $2.91 billion, and $2.39 billion respectively, and interest paid of $19.7 million, $24.5 million, and $16.3 million respectively, at a weighted average rate of 3.15%, 3.33%, and 2.70% 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.

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

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

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

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

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

Management believes it is important for comparability purposes to provide the performance measures without the leverage strategy because of the unique nature of the leverage strategy and without the securities transactions due to the non-recurring nature of the securities strategy.

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

The leverage strategy was not in place for the quarter ended December 31, 2023.

The Excluding Leverage Strategy (Non-GAAP) columns and the Excluding Securities Strategy (Non-GAAP) columns each begin with Actual (GAAP) before applying the respective strategy adjustments.

For the Three Months Ended

June 30, 2023 March 31, 2023

Actual Leverage Adjusted Actual Leverage Adjusted

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

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

Excluding Excluding Excluding Excluding

Securities Leverage Securities Leverage

Actual Securities Strategy Actual Leverage Strategy Securities Strategy Actual Leverage Strategy

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

Yield on interest-earning assets 3.95 % 3.45 % 0.05 % 3.40 % 3.19 % 0.13 % 3.06 %

Cost of interest-bearing liabilities 2.61 2.64 0.08 2.56 1.84 0.42 1.42

Return on average assets (annualized) 0.31 (0.01) 0.32 0.52 (0.04) 0.56

Return on average equity (annualized) 3.09 0.03 3.06 5.33 0.05 5.28

Return on average assets 0.10 (0.42) % 0.52 % (5.38) 0.13 (5.51) (5.58) % 0.20 % 0.56 (0.07) 0.63

Return on average equity 0.98 (3.89) 4.87 (52.82) 0.01 (52.83) (54.79) 1.97 5.99 0.28 5.71

Net interest margin 1.71 1.21 (0.03) 1.24 1.61 (0.27) 1.88

Efficiency ratio 92.86 28.13 64.73 (17.96) (0.03) (17.93) (97.04) 79.08 54.27 (0.87) 55.14

EPS $ 0.02 $ (0.08) $ 0.10 $ (1.05) $ (1.09) $ 0.04

(10) The operating expense ratio represents annualized non-interest expense as a percentage of average assets.

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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 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.

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

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

For the Three Months Ended

June 30, 2023 vs.

March 31, 2023

Increase (Decrease) Due to

Volume Rate Total

December 31, 2023 vs.

September 30, 2023 December 31, 2023 vs.

December 31, 2022

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

Volume Rate Total Volume Rate Total

(Dollars in thousands)

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Net change in net interest income $ 3,016 $ 5,842 $ 8,858 $ (5,157) $ (1,078) $ (6,235)

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 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 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 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.

Comparison of Operating Results for the Three Months Ended December 31, 2023 and September 30, 2023

For the quarter ended December 31, 2023, the Company recognized net income of $2.5 million, or $0.02 per share, compared to a net loss of $140.4 million, or $(1.05) per share, for the quarter ended September 30, 2023.

The net loss for the prior quarter was due to the securities strategy.

Excluding the securities strategy, EPS would have been $0.10 for the current quarter and $0.04 for the prior quarter.

The increase in EPS, excluding the securities strategy, was due primarily to an increase in the net interest margin resulting from securities and borrowings activity related to the securities strategy.

The net interest margin increased 50 basis points, from 1.21% for the prior quarter to 1.71% for the current quarter.

Excluding the effects of the leverage strategy during the prior quarter, the net interest margin increased 47 basis points, from 1.24% for the prior quarter to 1.71% for the current quarter.

The leverage strategy was in place during a portion of the prior quarter and was not in place during the current quarter.

Interest and Dividend Income

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

For the Nine Months Ended

June 30, Change Expressed in:

The weighted average yield on MBS increased 282 basis points and the weighted average yield on investment securities increased 311 basis points compared to the prior quarter as a result of the securities strategy.

For the Three Months Ended

December 31, September 30, Change Expressed in:

2023 2023 Dollars Percent

2 unchanged sentences

Loans receivable $ 75,941 $ 74,031 $ 1,910 2.6 %

Cash and cash equivalents 37,657 4,931 32,726 663.7

MBS 5,859 4,399 1,460 33.2

Cash and cash equivalents 4,778 6,139 (1,361) (22.2)

FHLB stock 2,586 2,796 (210) (7.5)

1 unchanged sentence

Total interest and dividend income $ 91,692 $ 88,259 $ 3,433 3.9

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

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

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

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

The increase in dividend income on FHLB stock was due mainly to 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.

The increase in interest income on loans receivable was due to an increase in the weighted average yield of the portfolio, along with an increase in the average balance of commercial loans, which also contributed to the increase in the overall portfolio yield.

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

The increase in interest income on MBS and investment securities was due to an increase in the weighted average yield of the portfolios due to the securities strategy, partially offset by a decrease in the average balance as not all of the proceeds from the securities sales were reinvested into the securities portfolio.

The decrease in interest income on cash and cash equivalents and FHLB stock was due mainly to the leverage strategy being in place for a portion of the prior quarter, and not being in place during the current quarter.

Excluding the leverage strategy, the average balance of cash and cash equivalents increased during the current quarter as a result of the securities strategy.

Interest Expense

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

For the Nine Months Ended

June 30, Change Expressed in:

The weighted average rate paid on deposits increased 21 basis points and the weighted average rate paid on borrowings not associated with the leverage strategy decreased 18 basis points compared to the prior quarter.

For the Three Months Ended

December 31, September 30, Change Expressed in:

2023 2023 Dollars Percent

1 unchanged sentence

INTEREST EXPENSE:

Borrowings $ 96,504 $ 27,961 $ 68,543 245.1 %

Deposits $ 32,443 $ 29,778 $ 2,665 8.9 %

Borrowings 19,656 27,746 (8,090) (29.2)

Total interest expense $ 52,099 $ 57,524 $ (5,425) (9.4)

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.

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.

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

The growth in the retail certificate of deposit portfolio was in certificates with terms of 14 months.

During the current quarter, interest expense on borrowings not associated with the leverage strategy decreased

$4.9 million, due primarily to the pay down of $500.0 million of borrowings under the BTFP, as part of the securities strategy.

Interest expense on borrowings associated with the leverage strategy decreased $3.2 million due to the leverage strategy being in place during a portion of the prior quarter and not being in place during the current quarter.

Provision for Credit Losses

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 $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.

For the quarter ended December 31, 2023, the Bank recorded a provision for credit losses of $123 thousand, compared to a provision for credit losses of $963 thousand for the prior quarter.

The provision for credit losses in the current quarter was comprised of a $400 thousand increase in the ACL for loans, partially offset by a $277 thousand decrease in the reserve for off-balance sheet credit exposures.

The provision for credit losses associated with the ACL was due primarily to commercial loan growth.

The release of provision for credit losses associated with the reserve for off-balance sheet credit exposures was due primarily to commercial construction loans converting to permanent loans.

Non-Interest Income

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

For the Nine Months Ended

June 30, Change Expressed in:

For the Three Months Ended

December 31, September 30, Change Expressed in:

2023 2023 Dollars Percent

3 unchanged sentences

Insurance commissions 863 927 (64) (6.9)

Net loss from securities transactions (13,345) (192,622) 179,277 93.1

Other non-interest income 1,013 1,233 (220) (17.8)

Total non-interest income $ (8,894) $ (187,704) $ 178,810 95.3

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.

The net loss from securities transactions in the current quarter and prior quarter relate to the securities strategy.

The decrease in other non-interest income was due mainly to a decrease in loan fees during the current quarter, along with several other miscellaneous non-interest income items.

Non-Interest Expense

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

For the Nine Months Ended

June 30, Change Expressed in:

For the Three Months Ended

December 31, September 30, Change Expressed in:

2023 2023 Dollars Percent

4 unchanged sentences

Occupancy, net 3,372 3,638 (266) (7.3)

Federal insurance premium 1,860 1,167 693 59.4

Regulatory and outside services 1,643 1,765 (122) (6.9)

Advertising and promotional 988 692 296 42.8

Federal insurance premium 3,289 2,200 1,089 49.5

Deposit and loan transaction costs 542 778 (236) (30.3)

2 unchanged sentences

Total non-interest expense $ 28,508 $ 28,194 $ 314 1.1

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 in the current year period.

The increase in salaries and employee benefits was mainly related to accruals associated with the Bank's short-term performance plan for fiscal year 2024 as the prior quarter included a reversal of the entire fiscal year 2023 accrual because the plan does not allow for the payment of incentive compensation if, as was the case for fiscal year 2023, the Company has a net loss for the fiscal year.

The decrease in information technology and related expense was due primarily to a reduction in IT professional services and software

maintenance expenses due mainly to costs associated with the Company's implementation of a new core processing system ("digital transformation") during the prior quarter.

The increase in the federal insurance premium was due mainly to an increase in the Federal Deposit Insurance Corporation ("FDIC") assessment rate as a result of the way the rate is adjusted for the occurrence of a net loss.

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

The decrease in deposit and loan transaction costs was due primarily to lower electronic banking expenses due mainly to non-recurring fees paid during the prior quarter associated with the digital transformation.

The decrease in office supplies and related expense was due mainly to postage expense associated with the digital transformation mailings in the prior quarter.

The Company's efficiency ratio was 92.86% for the current quarter compared to (17.96)% for the prior quarter.

Excluding the net losses from the securities strategy, the efficiency ratio would have been 64.73% for the current quarter and 79.08% for the prior quarter.

The improvement in the efficiency ratio, excluding the securities strategy, was due primarily to higher net interest income.

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

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

Income Tax Expense

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

For the Nine Months Ended

June 30, Change Expressed in:

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

For the Three Months Ended

December 31, September 30, Change Expressed in:

2023 2023 Dollars Percent

(Dollars in thousands)

Income before income tax expense $ 47,171 $ 82,379 $ (35,208) (42.7) %

Income tax expense 8,440 17,418 (8,978) (51.5)

Net income $ 38,731 $ 64,961 $ (26,230) (40.4)

Income (loss) before income tax (benefit) $ 2,068 $ (186,126) $ 188,194 (101.1) %

Income tax (benefit) (475) (45,736) 45,261 (99.0)

Net income (loss) $ 2,543 $ (140,390) $ 142,933 (101.8)

Effective Tax Rate (23.0 %) 24.6 %

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.

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

Fiscal Year 2023 Outlook

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 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.

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

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

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

In fiscal year 2024, information technology and related expense is expected to decrease approximately $3 million from fiscal year 2023 levels due 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.

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

The following table presents the average balances of our assets, liabilities, and stockholders' equity, and the related annualized weighted average yields and rates on our interest-earning assets and interest-bearing liabilities for the periods indicated, as well as selected performance ratios and other information for the periods shown.

Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown.

Average outstanding balances are derived from average daily balances.

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

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

For the Nine Months Ended

June 30, 2023 June 30, 2022

Average Interest Average Interest

Outstanding Earned/ Yield/ Outstanding Earned/ Yield/

Amount Paid Rate Amount Paid Rate

(Dollars in thousands)

Interest-earning assets:

One- to four-family loans:

Originated $ 4,051,068 $ 101,249 3.33 % $ 3,973,184 $ 96,583 3.24 %

Correspondent purchased 2,419,202 56,578 3.12 2,040,934 39,832 2.60

Bulk purchased 144,514 1,374 1.27 162,151 1,578 1.30

Total one- to four-family loans 6,614,784 159,201 3.21 6,176,269 137,993 2.98

Commercial loans 1,117,549 41,089 4.85 866,856 26,898 4.09

Consumer loans 102,600 5,766 7.51 91,979 3,195 4.64

Total loans receivable (1)

7,834,933 206,056 3.50 7,135,104 168,086 3.14

1,173,959 14,121 1.60 1,379,334 14,494 1.40

Investment securities (2)(3)

525,035 2,671 0.68 522,706 2,423 0.62

FHLB stock (4)

170,652 11,025 8.64 132,657 6,166 6.21

Cash and cash equivalents (5)

1,182,559 37,657 4.20 1,305,949 4,931 0.50

Total interest-earning assets 10,887,138 271,530 3.32 10,475,750 196,100 2.49

Other non-interest-earning assets 261,221 362,229

Total assets $ 11,148,359 $ 10,837,979

Liabilities and stockholders' equity:

Interest-bearing liabilities:

Checking $ 982,372 1,056 0.14 $ 1,063,280 535 0.07

Savings 536,363 343 0.09 539,152 215 0.05

Money market 1,622,486 12,513 1.03 1,835,666 2,653 0.19

Retail certificates 2,193,096 34,567 2.11 2,236,551 21,230 1.27

Commercial certificates 38,970 608 2.09 123,398 584 0.63

Wholesale certificates 126,567 3,402 3.59 170,051 226 0.18

Total deposits 5,499,854 52,489 1.28 5,968,098 25,443 0.57

Borrowings (6)

3,829,154 96,504 3.35 2,918,291 27,961 1.27

Total interest-bearing liabilities 9,329,008 148,993 2.13 8,886,389 53,404 0.80

Non-interest-bearing deposits 569,239 571,685

Other non-interest-bearing liabilities 175,176 177,081

Stockholders' equity 1,074,936 1,202,824

Total liabilities and stockholders' equity $ 11,148,359 $ 10,837,979

Net interest income (7)

$ 122,537 $ 142,696

Net interest-earning assets $ 1,558,130 $ 1,589,361

Net interest margin (8)(9)

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

Selected performance ratios:

Return on average assets (annualized) (9)

0.46 % 0.80 %

Return on average equity (annualized) (9)

Average equity to average assets 9.64 11.10

Operating expense ratio (annualized) (10)

Efficiency ratio (9)(11)

Pre-tax yield on leverage strategy (12)

(1) Balances are adjusted for unearned loan fees and deferred costs.

Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent.

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

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

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

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

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

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

For the Nine Months Ended

June 30, 2023 June 30, 2022

Actual Leverage Adjusted Actual Leverage Adjusted

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

Yield on interest-earning assets 3.32 % 0.13 % 3.19 % 2.49 % (0.25) % 2.74 %

Cost of interest-bearing liabilities 2.13 0.29 1.84 0.80 (0.05) 0.85

Return on average assets (annualized) 0.46 (0.04) 0.50 0.80 (0.08) 0.88

Return on average equity (annualized) 4.80 0.11 4.69 7.20 0.20 7.00

Net interest margin 1.50 (0.16) 1.66 1.82 (0.22) 2.04

Efficiency Ratio 61.78 (0.42) 62.20 51.99 (0.65) 52.64

(10) The operating expense ratio represents annualized non-interest expense as a percentage of average assets.

(11) The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income.

(12) The pre-tax yield on the leverage strategy represents annualized pre-tax income resulting from the transaction as a percentage of the average interest-earning assets associated with the transaction.

Rate/Volume Analysis

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

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

For the Nine Months Ended

June 30, 2023 vs.

June 30, 2022

Increase (Decrease) Due to

Volume Rate Total

(Dollars in thousands)

Interest-earning assets:

Loans receivable $ 19,170 $ 18,800 $ 37,970

MBS (2,316) 1,943 (373)

Investment securities 11 237 248

FHLB stock 2,057 2,802 4,859

Cash and cash equivalents (509) 33,235 32,726

Total interest-earning assets 18,413 57,017 75,430

Interest-bearing liabilities:

Checking (44) 564 520

Savings (1) 129 128

Money market (343) 10,203 9,860

Certificates of deposit (1,587) 18,125 16,538

Borrowings 18,242 50,301 68,543

Total interest-bearing liabilities 16,267 79,322 95,589

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

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.

The income tax benefit in the current quarter was a result of treating the $13.3 million net loss associated with the securities strategy as a discrete tax benefit in the current quarter.

The tax benefit related to the net loss was $3.3 million.

Excluding the $3.3 million benefit, income tax expense would have been $2.8 million and the effective tax rate, excluding the $13.3 million net loss, would have been 18.0% for the current quarter.

The income tax benefit in the prior quarter was a result of the pretax loss.

The pretax loss, combined with the Company's permanent differences, contributed to the increase in the effective tax rate.

Generally, the Company's permanent differences lower the effective tax rate when the Company has pretax income and tax expense, but as a result of the prior quarter pretax loss, the Company's permanent differences have the impact of raising the effective tax rate.

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

The Company recognized net income of $2.5 million, or $0.02 per share, for the current quarter, compared to net income of $16.2 million, or $0.12 per share, for the prior year quarter.

The lower net income for the current quarter was primarily a result of the $13.3 million net loss associated with securities strategy, along with higher interest expense, partially offset by a lower provision for credit losses and the income tax benefit in the current quarter.

Excluding the effects of the securities strategy, EPS would have been $0.10 for the current quarter.

The net interest margin increased ten basis points, from 1.61% for the prior year quarter to 1.71% for the current quarter.

The leverage strategy was in place during the prior year quarter and not in place during the current quarter.

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.

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

Interest and Dividend Income

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For the Three Months Ended

June 30, Change Expressed in:

December 31, Change Expressed in:

2023 2022 Dollars Percent

2 unchanged sentences

Loans receivable $ 75,941 $ 64,819 $ 11,122 17.2 %

Cash and cash equivalents 10,009 3,968 6,041 152.2

MBS 5,859 4,811 1,048 21.8

Cash and cash equivalents 4,778 16,671 (11,893) (71.3)

FHLB stock 2,586 4,158 (1,572) (37.8)

2 unchanged sentences

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 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.

The increase in the weighted average yield was due primarily to originations and purchases at higher market yields between periods, 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 the average balance was mainly in the commercial real estate and correspondent one-to four-family loan portfolios.

The increase in interest income on MBS and investment securities was due mainly to an increase in the weighted average yield, partially offset by a decrease in the average balance, both a result of the securities strategy.

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

Excluding the leverage strategy, the average balance of cash and cash equivalents increased during the current quarter as a result of the securities strategy.

Interest Expense

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

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 Three Months Ended

June 30, Change Expressed in:

December 31, Change Expressed in:

2023 2022 Dollars Percent

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INTEREST EXPENSE:

Borrowings $ 31,449 $ 11,644 $ 19,805 170.1 %

Deposits $ 32,443 $ 11,904 $ 20,539 172.5 %

Borrowings 19,656 33,608 (13,952) (41.5)

Total interest expense $ 52,099 $ 45,512 $ 6,587 14.5

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.

The increase in interest expense on deposits was due almost entirely to an increase in the weighted average rate paid on the deposit portfolio, specifically retail certificates of deposit and money market accounts.

Interest expense on borrowings associated with the leverage strategy decreased $17.3 million compared to the prior year quarter due to the leverage strategy being in place during the

prior year quarter and not being in place during the current quarter.

Interest expense on borrowings not associated with the leverage strategy increased $3.3 million due to new borrowings being added between periods, at market interest rates higher than the overall portfolio rate, to replace maturing advances and to fund operational needs.

Provision for Credit Losses

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.

The Bank recorded a provision for credit losses during the current quarter of $123 thousand, compared to a provision for credit losses of $3.7 million during the prior year quarter.

See "Comparison of Operating Results for the Three Months Ended December 31, 2023 and September 30, 2023" above for additional information regarding the provision for credit losses for the current quarter.

Non-Interest Income

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For the Three Months Ended

June 30, Change Expressed in:

December 31, Change Expressed in:

2023 2022 Dollars Percent

3 unchanged sentences

Insurance commissions 863 795 68 8.6

Net loss from securities transactions (13,345) — (13,345) N/A

Other non-interest income 1,013 1,096 (83) (7.6)

Total non-interest income $ (8,894) $ 5,352 $ (14,246) (266.2)

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.

The decrease in deposit service fees was due primarily to a change in the fee structure of certain deposit products after the digital transformation.

The net loss from securities transactions relates to the securities strategy.

Non-Interest Expense

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For the Three Months Ended

June 30, Change Expressed in:

December 31, Change Expressed in:

2023 2022 Dollars Percent

4 unchanged sentences

Occupancy, net 3,372 3,474 (102) (2.9)

Federal insurance premium 1,860 812 1,048 129.1

Regulatory and outside services 1,643 1,533 110 7.2

Advertising and promotional 988 833 155 18.6

Federal insurance premium 1,231 784 447 57.0

Deposit and loan transaction costs 542 611 (69) (11.3)

2 unchanged sentences

Total non-interest expense $ 28,508 $ 27,773 $ 735 2.6

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 decrease in salaries and employee benefits was a result of a decrease in full-time equivalent employees between the two quarter ends as a result of management's decision to not backfill non-critical employees through natural attrition.

During fiscal year 2023, the Bank moved to a new branch staffing model comprised of decision makers and well-rounded employees that is intended to add an elevated experience for customers who choose in-person banking activities.

The increase in information technology and related expenses was due mainly to higher software licensing expenses resulting from new agreements associated with the digital transformation, partially offset by lower software maintenance and third-party project management expenses provided in association with the Bank's digital transformation project during the prior year quarter.

The increase in the federal insurance premium was due to an increase in the FDIC assessment rate as a result of the way the rate is adjusted for the occurrence of a net loss, along with an FDIC

rule that increased the FDIC initial base deposit assessment rate two basis points on January 1, 2023.

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

The decrease 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 during the prior year quarter, which had become obsolete, along with lower postage expense.

The increase in other non-interest expense was due mainly to an increase in fraud losses and other miscellaneous expenses.

The Company's efficiency ratio was 92.86% for the current quarter compared to 54.27% for the prior year quarter.

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

Excluding the net losses from the securities strategy, the efficiency ratio would have been 64.73% for the current quarter.

The change in the efficiency ratio, excluding the securities strategy, was due primarily to lower net interest income in the current quarter compared to the prior year quarter.

Income Tax Expense

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

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 Three Months Ended

June 30, Change Expressed in:

December 31, Change Expressed in:

2023 2022 Dollars Percent

(Dollars in thousands)

Income before income tax expense $ 9,904 $ 26,769 $ (16,865) (63.0) %

Income tax expense 1,602 5,617 (4,015) (71.5)

Income before income tax (benefit) expense $ 2,068 $ 19,747 $ (17,679) (89.5) %

Income tax (benefit) expense (475) 3,507 (3,982) (113.5)

Net income $ 2,543 $ 16,240 $ (13,697) (84.3)

Effective Tax Rate (23.0 %) 17.8 %

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

Average outstanding balances are derived from average daily balances.

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

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

For the Three Months Ended

June 30, 2023 June 30, 2022

Average Interest Average Interest

Outstanding Earned/ Yield/ Outstanding Earned/ Yield/

Amount Paid Rate Amount Paid Rate

(Dollars in thousands)

Interest-earning assets:

One- to four-family loans:

Originated $ 4,052,906 $ 34,224 3.38 % $ 3,982,602 $ 32,168 3.23 %

Correspondent purchased 2,491,016 19,937 3.20 2,060,947 14,027 2.72

Bulk purchased 141,985 527 1.49 154,663 464 1.20

Total one- to four-family loans 6,685,907 54,688 3.27 6,198,212 46,659 3.01

Commercial loans 1,180,906 15,172 5.08 890,455 9,104 4.05

Consumer loans 102,390 2,058 8.06 92,790 1,123 4.85

Total loans receivable (1)

7,969,203 71,918 3.60 7,181,457 56,886 3.16

1,126,953 4,562 1.62 1,343,891 5,048 1.50

Investment securities (2)(3)

525,012 895 0.68 522,147 815 0.62

FHLB stock (4)

146,482 3,260 8.93 166,879 2,695 6.48

Cash and cash equivalents (5)

769,434 10,009 5.15 1,930,539 3,968 0.81

Total interest-earning assets 10,537,084 90,644 3.43 11,144,913 69,412 2.49

Other non-interest-earning assets 271,898 293,882

Total assets $ 10,808,982 $ 11,438,795

Liabilities and stockholders' equity:

Interest-bearing liabilities:

Checking $ 949,909 398 0.17 $ 1,068,329 180 0.07

Savings 521,831 143 0.11 556,553 74 0.05

Money market 1,485,672 6,295 1.70 1,861,302 952 0.21

Retail certificates 2,339,477 15,685 2.69 2,169,262 6,383 1.18

Commercial certificates 44,083 307 2.80 84,231 129 0.61

Wholesale certificates 155,157 1,617 4.18 113,101 69 0.24

Total deposits 5,496,129 24,445 1.78 5,852,778 7,787 0.53

Borrowings (6)

3,520,594 31,449 3.57 3,687,592 11,644 1.26

Total interest-bearing liabilities 9,016,723 55,894 2.48 9,540,370 19,431 0.81

Non-interest-bearing deposits 556,682 586,876

Other non-interest-bearing liabilities 161,360 147,938

Stockholders' equity 1,074,217 1,163,611

Total liabilities and stockholders' equity $ 10,808,982 $ 11,438,795

Net interest income (7)

$ 34,750 $ 49,981

Net interest-earning assets $ 1,520,361 $ 1,604,543

Net interest margin (8)(9)

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

Selected performance ratios:

Return on average assets (annualized) (9)

0.31 % 0.74 %

Return on average equity (annualized) (9)

Average equity to average assets 9.94 10.17

Operating expense ratio (annualized) (10)

Efficiency ratio (9)(11)

Pre-tax yield on leverage strategy (12)

(1) Balances are adjusted for unearned loan fees and deferred costs.

Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent.

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

(3) The average balance of investment securities includes an average balance of nontaxable securities of $1.0 million and $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.

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

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

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

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

For the Three Months Ended

June 30, 2023 June 30, 2022

Actual Leverage Adjusted Actual Leverage Adjusted

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

Yield on interest-earning assets 3.43 % 0.11 % 3.32 % 2.49 % (0.30) % 2.79 %

Cost of interest-bearing liabilities 2.48 0.20 2.28 0.81 (0.03) 0.84

Return on average assets (annualized) 0.31 (0.01) 0.32 0.74 (0.10) 0.84

Return on average equity (annualized) 3.09 0.03 3.06 7.27 0.42 6.85

Net interest margin 1.32 (0.07) 1.39 1.79 (0.32) 2.11

Efficiency Ratio 72.32 (0.12) 72.44 50.61 (1.31) 51.92

(10) The operating expense ratio represents annualized non-interest expense as a percentage of average assets.

(11) The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income.

Rate/Volume Analysis

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

For the Three Months Ended June 30,

Increase (Decrease) Due to

Volume Rate Total

(Dollars in thousands)

Interest-earning assets:

Loans receivable $ 7,321 $ 7,711 $ 15,032

MBS (858) 372 (486)

Investment securities 5 75 80

FHLB stock (360) 925 565

Cash and cash equivalents (3,676) 9,717 6,041

Total interest-earning assets 2,432 18,800 21,232

Interest-bearing liabilities:

Checking (22) 240 218

Savings (5) 73 68

Money market (230) 5,573 5,343

Certificates of deposit 512 10,517 11,029

Borrowings 3,123 16,682 19,805

Total interest-bearing liabilities 3,378 33,085 36,463

Net change in net interest income $ (946) $ (14,285) $ (15,231)

The income tax benefit in the current quarter was a result of treating the $13.3 million net loss associated with the securities strategy as a discrete tax benefit in the current quarter.

The tax benefit related to the net loss was $3.3 million.

Excluding the $3.3 million benefit, income tax expense would have been $2.8 million and the effective tax rate, excluding the $13.3 million net loss, would have been 18.0% for the current quarter.

Fiscal Year 2024 Outlook

The federal insurance premium is anticipated to be approximately $1.5 million higher in fiscal year 2024 compared to fiscal year 2023 due to the increase in the FDIC assessment rate as discussed above.

Management anticipates the effective tax rate for fiscal year 2024 will be approximately 18%.

Liquidity and Capital Resources

9 unchanged sentences

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

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

In the event short-term liquidity needs exceed available cash, the Bank has access to a line of credit at the FHLB, in addition to the FRB of Kansas City's discount window, as well as the BTFP through March 2024.

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 June 30, 2023, as approved by the president of FHLB.

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

Additionally, FHLB borrowings may exceed 40% of Bank Call Report total assets as long as the Bank continues its leverage strategy and FHLB senior management continues to approve the Bank's borrowing limit being in excess of 40% of Call Report total assets.

Additionally, FHLB borrowings may exceed 40% of Bank Call Report total assets if the Bank continues its leverage strategy and FHLB senior management continues to approve the Bank's borrowing limit being in excess of 40% of Call Report total assets.

All or a portion of the short-term FHLB borrowings in conjunction with the leverage strategy can be repaid at maturity, if necessary or desired.

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

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 from the FRB of Kansas City's discount window is based upon the fair value of securities pledged as collateral.

At December 31, 2023, the amount of securities pledged for the discount window was $124.3 million.

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

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.

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 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.

At December 31, 2023, the Bank had total borrowings, at par, of $2.38 billion, or approximately 25% of total assets.

The borrowings balance was composed of FHLB advances.

Of this amount, $362.3 million is scheduled to mature in the next 12 months.

Management estimated that the Bank had $2.70 billion in additional liquidity available at December 31, 2023 based on the Bank's blanket collateral agreement with FHLB and unencumbered securities.

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

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

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

The Bank has access to other sources of funds for liquidity purposes, such as brokered and public unit certificates of deposit.

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

At December 31, 2023, the Bank had $467.8 million of securities that were eligible but unused as collateral for borrowing or other liquidity needs.

The Bank also has access to other sources of funds for liquidity purposes, such as brokered and public unit certificates of deposit.

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

At December 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 $148.3 million as collateral for public unit certificates of deposit at December 31, 2023.

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

At 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.

At December 31, 2023, $1.71 billion of the Bank's certificate of deposit portfolio was scheduled to mature within the next 12 months, including $112.7 million of public unit certificates of deposit and $35.4 million of commercial certificates of deposit.

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

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

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.

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The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company.

So long as the Bank remains well capitalized after each capital distribution (as evidenced by maintaining a CBLR greater than the required percentage, which is currently 9.0%), and operates in a safe and sound manner, it is management's belief that the OCC and FRB will continue to allow the Bank to distribute its earnings to the Company, although no assurance can be given in this regard.

So long as the Bank remains well capitalized after each capital distribution (as evidenced by maintaining regulatory capital ratios greater than the required percentages) and operates in a safe and sound manner, it is management's belief that the OCC and FRB will continue to allow the Bank to distribute its earnings to the Company, although no assurance can be given in this regard.

Regulatory Capital

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank per the regulatory framework for prompt corrective action ("PCA").

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

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

As of December 31, 2023, the Bank and Company exceeded all regulatory capital requirements.

The following table presents the regulatory capital ratios of the Bank and Company at December 31, 2023.

Requirement For

Minimum Well-Capitalized

Bank Company Regulatory Status of Bank

Ratios Ratios Requirement Under PCA Provisions

Tier 1 leverage ratio 8.9 % 9.9 % 4.0 % 5.0 %

Common equity tier 1 capital ratio 15.9 17.7 4.5 6.5

Tier 1 capital ratio 15.9 17.7 6.0 8.0

Total capital ratio 16.4 18.3 8.0 10.0

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