CFFN filing — read by section

Item 2. Management’s Discussion and Analysis

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 
 
 
 
 The Company and the Bank may from time to time make written or oral "forward-looking statements," including statements contained in documents filed or furnished by the Company with the SEC. These forward-looking statements may be included in this Quarterly Report on Form 10-Q and the exhibits attached to it, in the Company's reports to stockholders, in the Company's press releases, and in other communications by the Company, which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. 
 
 
 These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause our future results to differ materially from the beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in the forward-looking statements: 
 
 
 • our ability to maintain overhead costs at reasonable levels; 
 • our ability to originate and purchase a sufficient volume of one- to four-family loans in order to maintain the balance of that portfolio at a level desired by management; 
 • our ability to invest funds in wholesale or secondary markets at favorable yields compared to the related funding source; 
 • our ability to access cost-effective funding and maintain sufficient liquidity; 
 • the expected synergies and other benefits from our acquisition activities might not be realized to the extent anticipated, within the anticipated time frames, or at all; 
 • our ability to extend our commercial banking and trust asset management expertise across our market areas; 
 • fluctuations in deposit flows; 
 • the future earnings and capital levels of the Bank and the continued non-objection by our primary federal banking regulators, to the extent required, to distribute capital from the Bank to the Company, which could affect the ability of the Company to pay dividends in accordance with its dividend policy; 
 • the strength of the U.S. economy in general and the strength and/or the availability of labor in the local economies in which we conduct operations, including areas where we have purchased large amounts of correspondent loans, originated commercial loans, and entered into commercial loan participations; 
 • changes in real estate values, unemployment levels, 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 and may adversely affect our business; 
 • increases in classified and/or non-performing assets, which may require the Bank to increase the ACL, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets; 
 • results of examinations of the Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our ACL; 
 • changes in accounting principles, policies, or guidelines; 
 • the effects of, and changes in, monetary and interest rate policies of the Board of Governors of the Federal Reserve System ("FRB"); 
 • the effects of, and changes in, trade and fiscal policies and laws of the United States government; 
 • the effects of, and changes in, foreign and military policies of the United States government; 
 • inflation, interest rate, market, monetary, and currency fluctuations and the effects of a potential economic recession or slower economic growth; 
 • the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor or depositor sentiment; 
 • the timely development and acceptance of new products and services and the perceived overall value of these products and services by users, including the features, pricing, and quality compared to competitors' products and services; 
 • the willingness of users to substitute competitors' products and services for our products and services; 
 • our success in gaining regulatory approval of our products and services and branching locations, when required; 
 • the impact of interpretations of, and changes in, financial services laws and regulations, including laws concerning taxes, banking, securities, consumer protection, trust and insurance and the impact of other governmental initiatives affecting the financial services industry; 
 • the ability to attract and retain skilled employees; 
 • implementing business initiatives may be more difficult or expensive than anticipated; 
 • significant litigation; 
 • technological changes; 
 • our ability to maintain the security of our financial, accounting, technology, and other operating systems and facilities, including the ability to withstand cyberattacks; 
 • changes in consumer spending, borrowing and saving habits; and 
 29 

 
 

 • our success at managing the risks involved in our business. 
 
 
 This list of factors is not all inclusive. For a discussion of risks and uncertainties related to our business that could adversely impact our operations and/or financial results, see "Part I, Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2023 and Part II, Item 1A. Risk Factors within this Quarterly Report on Form 10-Q. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank. 
 
 
 As used in this Form 10-Q, unless we specify or the context indicates otherwise, "the Company," "we," "us," and "our" refer to Capitol Federal Financial, Inc. a Maryland corporation, and its subsidiaries. "Capitol Federal Savings," and "the Bank," refer to Capitol Federal Savings Bank, a federal savings bank and the wholly-owned subsidiary of Capitol Federal Financial, Inc. 
 
 
 The following discussion and analysis is intended to assist in understanding the financial condition, results of operations, liquidity, and capital resources of the Company. The Bank comprises almost all of the consolidated assets and liabilities of the Company and the Company is dependent primarily upon the performance of the Bank for the results of its operations. Because of this relationship, references to management actions, strategies and results of actions apply to both the Bank and the Company except where the context indicates otherwise. This discussion and analysis should be read in conjunction with Management's Discussion and Analysis included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2023, filed with the SEC. 
 
 
 
 Executive Summary 
 The following summary should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section in its entirety. 
 
 
 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 
 30 

 
 

 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 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 
 Financial and other Company information, including press releases, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports can be obtained free of charge from our investor relations website, http://ir.capfed.com. SEC filings are available on our website immediately after they are electronically filed with or furnished to the SEC, and are also available on the SEC's website at www.sec.gov. 
 
 
 
 Critical Accounting Estimates 
 Our most critical accounting estimates are the methodologies used to determine the ACL and reserve for off-balance sheet credit exposures and fair value measurements. These estimates are important to the presentation of our financial condition and results of operations, involve a high degree of complexity, and require management to make difficult and subjective judgments that may require assumptions about highly uncertain matters. The use of different judgments, assumptions, and estimates could affect reported results materially. These critical accounting estimates and their application are reviewed at least annually by the audit committee of our Board of Directors. For a full discussion of our critical accounting estimates, see "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2023. 
 
 
 31 

 
 
 

 Financial Condition 
 The following table summarizes the Company's financial condition at the dates indicated. 
 
 Annualized 
 December 31, September 30, Percent 
 2023 2023 Change 
 (Dollars and shares in thousands) 
 Total assets $ 9,576,064 $ 10,177,461 (23.6) % 
 AFS securities 740,462 1,384,482 (186.1) 
 Loans receivable, net 7,947,510 7,970,949 (1.2) 
 Deposits 6,021,595 6,051,220 (2.0) 
 Borrowings 2,373,064 2,879,125 (70.3) 
 Stockholders' equity 1,034,121 1,044,054 (3.8) 
 Equity to total assets at end of period 10.8 % 10.3 % 
 Average number of basic shares outstanding 132,353 133,225 (2.6) 
 Average number of diluted shares outstanding 132,353 133,225 (2.6) 

 
 
 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. 
 
 32 

 
 
 

 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 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) 
 One- to four-family: 
 Originated $ 3,986,479 3.44 % $ 3,978,837 3.39 % 
 Correspondent purchased 2,360,843 3.45 2,405,911 3.44 
 Bulk purchased 134,504 2.10 137,193 1.85 
 Construction 43,631 4.47 69,974 3.68 
 Total 6,525,457 3.42 6,591,915 3.38 
 Commercial: 
 Commercial real estate 1,019,431 5.27 995,788 5.29 
 Commercial and industrial 113,686 6.46 112,953 6.36 
 Construction 196,493 5.41 178,746 5.01 
 Total 1,329,610 5.39 1,287,487 5.35 
 Consumer loans: 
 Home equity 96,952 8.84 95,723 8.83 
 Other 9,670 5.32 9,256 5.20 
 Total 106,622 8.52 104,979 8.51 
 Total loans receivable 7,961,689 3.82 7,984,381 3.76 
 
 Less: 
 ACL 24,178 23,759 
 Deferred loan fees/discounts 30,653 31,335 
 Premiums/deferred costs (40,652) (41,662) 
 Total loans receivable, net $ 7,947,510 $ 7,970,949 

 
 
 33 

 
 

 Loan Activity - The following table summarizes activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, deferred loan fees/discounts, and premiums/deferred costs. Loans that were paid off as a result of refinances are included in repayments. Loan endorsements are not included in the activity in the following table because a new loan is not generated at the time of the endorsement. The endorsed balance and rate are included in the ending loan portfolio balance and rate. Commercial loan renewals are not included in the activity 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. 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) 
 Beginning balance $ 7,984,381 3.76 % $ 7,471,670 3.33 % 
 Originated and refinanced 101,402 7.00 364,387 5.13 
 Purchased and participations 3,497 5.91 335,305 5.30 
 Change in undisbursed loan funds 83,246 (121,235) 
 Repayments (210,611) (252,799) 
 Principal (charge-offs)/recoveries, net (1) (2) 
 Other (225) (5,656) 
 Ending balance $ 7,961,689 3.82 $ 7,791,670 3.47 

 34 

 
 

 The following table presents loan origination, refinance, and purchase activity for the periods indicated, excluding endorsement activity, along with associated weighted average rates and percent of total. Commercial loan renewals are not included in the activity in the following table except to the extent new funds are disbursed at the time of renewal. Loan originations, purchases, and refinances are reported together. 
 
 For the Three Months Ended 
 December 31, 2023 December 31, 2022 
 Amount Rate % of Total Amount Rate % of Total 
 (Dollars in thousands) 
 Fixed-rate: 
 One- to four-family $ 37,167 6.89 % 35.5 % $ 167,439 5.10 % 23.9 % 
 One- to four-family construction 9,308 6.84 8.9 14,914 5.23 2.1 
 Commercial: 
 Real estate 747 7.76 0.7 4,903 5.25 0.7 
 Commercial and industrial 2,605 7.06 2.5 7,895 5.94 1.1 
 Construction 132 9.00 0.1 68,600 4.87 9.8 
 Home equity 2,630 9.01 2.5 1,381 7.06 0.2 
 Other 1,084 6.83 1.0 1,165 6.58 0.2 
 Total fixed-rate 53,673 7.01 51.2 266,297 5.09 38.0 
 
 Adjustable-rate: 
 One- to four-family 18,486 6.65 17.6 136,603 4.62 19.6 
 One- to four-family construction 8,040 6.60 7.7 7,023 4.48 1.0 
 Commercial: 
 Real estate 9,350 5.00 8.9 163,621 5.08 23.4 
 Commercial and industrial 3,555 7.88 3.4 19,017 7.04 2.7 
 Construction 3,947 8.41 3.8 91,079 5.99 13.0 
 Home equity 7,179 9.39 6.8 15,632 7.34 2.2 
 Other 669 4.65 0.6 420 3.62 0.1 
 Total adjustable-rate 51,226 6.92 48.8 433,395 5.28 62.0 
 
 Total originated, refinanced and purchased $ 104,899 6.96 100.0 % $ 699,692 5.21 100.0 % 
 
 Purchased and participation loans included above: 
 Fixed-rate: 
 Correspondent purchased - one- to four-family $ 2,978 6.43 $ 101,958 5.11 
 
 Participations and purchases - commercial — — 870 6.60 
 
 Total fixed-rate purchased/participations 2,978 6.43 102,828 5.12 
 
 Adjustable-rate: 
 Correspondent purchased - one- to four-family 519 2.93 97,513 4.62 
 
 Participations and purchases - commercial — — 134,964 5.93 
 
 Total adjustable-rate purchased/participations 519 2.93 232,477 5.38 
 Total purchased/participation loans $ 3,497 5.91 $ 335,305 5.30 

 
 
 35 

 
 

 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. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. In most cases, the most recent appraisal was obtained at the time of origination. 
 
 
 % of Credit Average 
 Amount Total Rate Score LTV Balance 
 (Dollars in thousands) 
 Originated $ 3,986,479 61.5 % 3.44 % 771 60 % $ 165 
 Correspondent purchased 2,360,843 36.4 3.45 767 64 412 
 Bulk purchased 134,504 2.1 2.10 771 55 287 
 $ 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 period indicated. 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 
 Credit 
 Amount Rate LTV Score 
 (Dollars in thousands) 
 Originated $ 69,504 6.83 % 75 % 765 
 Correspondent purchased 3,497 5.91 70 765 
 
 $ 73,001 6.79 74 765 

 
 
 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. 
 
 
 36 

 
 

 The following table presents the Bank's commercial real estate and commercial construction loans by type of primary collateral as of the dates indicated. As of December 31, 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 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) 
 Retail building 139 $ 269,399 $ 79,629 $ 349,028 $ 352,499 
 Senior housing 36 317,630 12,447 330,077 331,207 
 Multi-family 42 105,657 197,251 302,908 308,846 
 Hotel 13 214,082 17,905 231,987 233,012 
 Office building 79 127,741 1,607 129,348 130,921 
 One- to four-family property 360 60,016 5,567 65,583 70,265 
 Single use building 30 36,260 7,555 43,815 47,193 
 Other 111 85,139 3,110 88,249 88,995 
 810 $ 1,215,924 $ 325,071 $ 1,540,995 $ 1,562,938 
 
 Weighted average rate 5.29 % 6.01 % 5.44 % 5.47 % 

 
 
 The following table summarizes the Bank's commercial real estate and commercial construction loans by state as of the dates indicated. 
 
 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 
 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 
 Tennessee 2 26,132 13,437 39,569 42,136 
 Nebraska 8 36,678 1,121 37,799 37,609 
 Other 14 68,264 8,761 77,025 81,993 
 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 December 31, 2023. 
 
 Count Amount 
 (Dollars in thousands) 
 Greater than $30 million 10 $ 493,952 
 >$15 to $30 million 20 417,774 
 >$10 to $15 million 12 142,942 
 >$5 to $10 million 30 222,228 
 $1 to $5 million 142 340,059 
 Less than $1 million 1,201 184,112 
 1,415 $ 1,801,067 

 
 
 37 

 
 
 

 Asset Quality 
 
 
 Delinquent and nonaccrual loans and OREO. The following table presents the Company's 30 to 89 day delinquent loans at the dates indicated. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. Of the loans 30 to 89 days delinquent at 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: 
 December 31, September 30, 
 2023 2023 
 Number Amount Number Amount 
 (Dollars in thousands) 
 One- to four-family: 
 Originated 77 $ 7,746 88 $ 9,078 
 Correspondent purchased 16 6,049 17 5,192 
 Bulk purchased 4 583 1 149 
 Construction — — 4 1,123 
 Commercial 14 3,809 5 94 
 Consumer 40 766 30 730 
 151 $ 18,953 145 $ 16,366 
 
 Loans 30 to 89 days delinquent 
 to total loans receivable, net 0.24 % 0.21 % 

 
 
 38 

 
 

 The following table presents the Company's nonaccrual loans and OREO at the dates indicated. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. Nonaccrual loans are loans that are 90 or more days delinquent or in foreclosure and other loans required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements and/or internal policies, even if the loans are current. At all dates presented, there were no loans 90 or more days delinquent that were still accruing interest. Non-performing assets include nonaccrual loans and OREO. 
 
 Nonaccrual Loans and OREO at: 
 December 31, September 30, 
 2023 2023 
 Number Amount Number Amount 
 (Dollars in thousands) 
 Loans 90 or More Days Delinquent or in Foreclosure: 
 One- to four-family: 
 Originated 29 $ 3,749 24 $ 2,246 
 Correspondent purchased 10 4,164 9 3,410 
 Bulk purchased 2 942 2 942 
 Commercial 8 1,198 12 2,183 
 Consumer 5 116 9 113 
 54 10,169 56 8,894 
 
 Loans 90 or more days delinquent or in foreclosure 
 as a percentage of total loans 0.13 % 0.11 % 
 
 Nonaccrual loans less than 90 Days Delinquent: (1) 
 
 One- to four-family: 
 Originated — $ — 2 $ 215 
 Correspondent purchased — — 1 282 
 Bulk purchased — — — — 
 Commercial 1 18 1 18 
 Consumer — — — — 
 1 18 4 515 
 Total nonaccrual loans 55 10,187 60 9,409 
 
 Nonaccrual loans as a percentage of total loans 0.13 % 0.12 % 
 
 OREO: 
 One- to four-family: 
 Originated (2) 
 2 $ 225 — $ — 
 Correspondent purchased 1 219 1 219 
 
 
 
 
 3 444 1 219 
 Total non-performing assets 58 $ 10,631 61 $ 9,628 
 
 Non-performing assets as a percentage of total assets 0.11 % 0.09 % 

 
 
 (1) Includes loans required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements and/or internal policies, even if the loans are current. 
 (2) Real estate-related consumer loans where we also hold the first mortgage are included in the one- to four-family category as the underlying collateral is one- to four-family property. 
 
 
 
 
 39 

 
 

 The following table presents the states where the properties securing ten percent or more of the total amount of our one- to four-family loans are located and the corresponding balance of loans 30 to 89 days delinquent, 90 or more days delinquent or in foreclosure, and weighted average LTV ratios for loans 90 or more days delinquent or in foreclosure at December 31, 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 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 
 One- to Four-Family Days Delinquent or in Foreclosure 
 State Amount % of Total Amount % of Total Amount % of Total LTV 
 (Dollars in thousands) 
 Kansas $ 3,531,138 54.5 % $ 6,519 45.3 % $ 2,506 28.3 % 54 % 
 Missouri 1,117,487 17.2 3,082 21.5 2,070 23.4 65 
 
 Other states 1,833,201 28.3 4,777 33.2 4,279 48.3 55 
 
 
 
 $ 6,481,826 100.0 % $ 14,378 100.0 % $ 8,855 100.0 % 57 

 
 
 Classified loans. The following table presents loans classified as special mention or substandard at the dates presented. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. 
 
 December 31, 2023 September 30, 2023 
 Special Mention Substandard Special Mention Substandard 
 (Dollars in thousands) 
 One- to four-family $ 19,601 $ 22,659 $ 18,603 $ 19,314 
 Commercial 15,097 1,221 16,407 1,293 
 Consumer 335 175 327 190 
 $ 35,033 $ 24,055 $ 35,337 $ 20,797 

 
 
 
 Allowance for Credit Losses. The distribution of our ACL and the ratio of ACL to loans receivable, by loan type, at the dates indicated is summarized below. See "Note 4. 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 
 December 31, September 30, December 31, September 30, 
 2023 2023 2023 2023 
 (Dollars in thousands) 
 One- to four-family: 
 Originated $ 2,055 $ 2,084 0.05 % 0.05 % 
 Correspondent purchased 2,948 2,972 0.12 0.12 
 Bulk purchased 206 207 0.15 0.15 
 Construction 39 65 0.09 0.09 
 Total 5,248 5,328 0.08 0.08 
 Commercial: 
 Real estate 16,152 15,589 1.58 1.57 
 Commercial and industrial 973 1,104 0.86 0.98 
 Construction 1,553 1,487 0.79 0.83 
 Total 18,678 18,180 1.40 1.41 
 Consumer 252 251 0.24 0.24 
 Total $ 24,178 $ 23,759 0.30 0.30 

 40 

 
 

 The following table presents ACL activity and related ratios at the dates and for the periods indicated. 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"). See "Note 1. 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 (charge-offs) recoveries (1) (2) 
 Provision for credit losses 400 2,820 
 Balance at end of period $ 24,178 $ 19,189 
 
 Ratio of NCOs during the period 
 to average non-performing assets 0.01 % 0.02 % 
 
 ACL to nonaccrual loans at end of period 237.34 233.07 
 
 ACL to loans receivable, net at end of period 0.30 0.25 
 
 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. See "Note 4. Loans Receivable and Allowance for Credit Losses" for additional information related to ACL activity by specific loan categories. 
 
 
 
 
 41 

 
 

 The following table presents NCOs, average loans, and NCOs as a percentage of average loans, by loan type, for the periods indicated. 
 
 For the Three Months Ended 
 December 31, 2023 December 31, 2022 
 NCOs Average Loans % of Average Loans NCOs Average Loans % of Average Loans 
 (Dollars in thousands) 
 One- to four-family: 
 Originated $ (5) $ 3,985,425 — % $ (1) $ 3,984,609 — % 
 Correspondent — 2,413,900 — — 2,305,362 — 
 Bulk purchased — 136,609 — — 147,091 — 
 Construction — 40,114 — — 65,181 — 
 Total (5) 6,576,048 — (1) 6,502,243 — 
 Commercial: 
 Real estate — 1,015,756 — — 780,366 — 
 Commercial and industrial (1) 114,561 — — 78,310 — 
 Construction — 176,600 — — 166,726 — 
 Total (1) 1,306,917 — — 1,025,402 — 
 Consumer: 
 Home equity 2 96,315 — 3 93,905 — 
 Other 5 9,643 0.05 — 8,855 — 
 Total 7 105,958 0.01 3 102,760 — 
 $ 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 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. If actual results reflect significant underperformance compared to our assumptions and/or if one or more of our assumptions, such as the economic forecast, represents a more negative outlook in a future period, there could be additions to our ACL and an increase in the provision for credit losses. 
 
 
 
 Securities. The following table presents the distribution of our securities portfolio, at amortized cost, at the dates indicated. 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. 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 
 U.S. Treasury bills 213,700 5.48 0.1 — — — 
 GSE debentures — — — 479,610 0.64 1.9 
 Corporate bonds 4,000 5.12 8.4 4,000 5.12 8.6 
 Municipal bonds — — — 942 2.55 6.9 
 $ 721,612 5.67 % 3.9 $ 1,385,992 1.35 % 3.8 

 
 
 42 

 
 

 The following table summarizes the activity in our securities portfolio for the periods presented. The weighted average yields for the beginning and ending balances are as of the first and last days of the periods presented and are generally derived from recent prepayment activity on the securities in the portfolio. The beginning and ending WALs are the estimated remaining principal repayment terms (in years) after three-month historical prepayment speeds and projected call option assumptions have been applied. 
 
 For the Three Months Ended 
 December 31, 2023 December 31, 2022 
 Amount Yield WAL Amount Yield WAL 
 (Dollars in thousands) 
 Beginning balance - carrying value $ 1,384,482 1.35 % 3.8 $ 1,563,307 1.29 % 4.2 
 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 

 
 
 
 Liabilities. 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. 
 
 
 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 $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 
 % of % of 
 Amount Rate Total Amount Rate Total 
 (Dollars in thousands) 
 Non-interest-bearing checking $ 555,382 — % 9.2 % $ 558,326 — % 9.2 % 
 Interest-bearing checking 895,665 0.17 14.9 901,994 0.19 14.9 
 Savings 471,372 0.12 7.8 480,091 0.12 7.9 
 Money market 1,360,349 1.96 22.6 1,380,617 1.96 22.8 
 Retail certificates of deposit 2,569,391 3.75 42.7 2,533,954 3.47 41.9 
 Commercial certificates of deposit 49,152 3.80 0.8 48,751 3.56 0.8 
 Public unit certificates of deposit 120,284 4.54 2.0 147,487 4.44 2.5 
 $ 6,021,595 2.20 100.0 % $ 6,051,220 2.07 100.0 % 

 
 
 
 
 43 

 
 
 

 Borrowings. 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. 
 
 
 Maturity by Contractual Effective 
 Fiscal Year Amount Rate Rate (1) 
 
 (Dollars in thousands) 
 
 2024 $ 340,000 4.15 % 2.61 % 
 2025 650,000 3.31 2.96 
 2026 575,000 2.81 2.95 
 2027 485,000 3.15 3.25 
 2028 325,410 4.94 4.19 
 
 $ 2,375,410 3.50 3.13 

 
 
 (1) The effective rate includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. 
 
 
 The following table presents borrowing activity for the periods shown. The borrowings presented in the table have original contractual terms of one year or longer or are tied to interest rate swaps with original contractual terms of one year or longer. 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 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. 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) 
 Beginning balance $ 2,882,828 3.34 % 1.8 $ 2,062,500 2.44 % 2.5 
 Maturities and repayments (157,418) 3.46 (7,418) 4.13 
 New FHLB borrowings 150,000 4.66 3.7 450,000 4.45 3.3 
 BTFP, net (500,000) 4.70 — — — — 
 Ending balance $ 2,375,410 3.13 2.0 $ 2,505,082 2.80 2.4 

 
 
 
 
 Leverage Strategy 
 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 leverage strategy. 
 44 

 
 

 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 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 
 (Dollars in thousands) 
 Retail/Commercial Certificates: 
 Amount $ 270,858 $ 423,200 $ 424,691 $ 480,918 $ 1,599,667 
 Repricing Rate 2.90 % 3.86 % 4.37 % 4.24 % 3.95 % 
 Public Unit Certificates: 
 Amount $ 17,174 $ 31,563 $ 34,985 $ 29,025 $ 112,747 
 Repricing Rate 4.30 % 4.42 % 4.63 % 4.67 % 4.53 % 
 Term Borrowings: 
 Amount $ 65,000 $ 100,000 $ 175,000 $ 200,000 $ 540,000 
 Repricing Rate 2.72 % 1.98 % 2.93 % 3.35 % 2.88 % 
 Total 
 Amount $ 353,032 $ 554,763 $ 634,676 $ 709,943 $ 2,252,414 
 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 December 31, 2023. 
 
 Retail certificates of deposit 1.1 
 Commercial certificates of deposit 0.8 
 Public unit certificates of deposit 0.6 
 Total certificates of deposit 1.1 

 45 

 
 
 

 Stockholders' Equity. 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 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. 
 
 
 
 Calendar Year 
 2024 2023 2022 
 Amount Per Share Amount Per Share Amount Per Share 
 (Dollars in thousands, except per share amounts) 
 Regular quarterly dividends paid 
 Quarter ended March 31 $ 11,129 $ 0.085 $ 11,319 $ 0.085 $ 11,535 $ 0.085 
 Quarter ended June 30 — — 11,321 0.085 11,534 0.085 
 Quarter ended September 30 — — 11,323 0.085 11,534 0.085 
 Quarter ended December 31 — — 11,308 0.085 11,508 0.085 
 True-up dividends paid — — — — 37,701 0.280 
 True Blue Capitol dividends paid — — — — 27,143 0.200 
 Calendar year-to-date dividends paid $ 11,129 $ 0.085 $ 45,271 $ 0.340 $ 110,955 $ 0.820 

 46 

 
 
 

 Operating Results 
 The following table presents selected income statement and other information for the quarters indicated. 
 
 For the Three Months Ended 
 December 31, September 30, June 30, March 31, December 31, 
 2023 2023 2023 2023 2022 
 (Dollars in thousands, except per share data) 
 Interest and dividend income: 
 Loans receivable $ 75,941 $ 74,031 $ 71,918 $ 69,319 $ 64,819 
 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 
 Investment securities 2,528 894 895 895 881 
 Total interest and dividend income 91,692 88,259 90,644 89,546 91,340 
 
 Interest expense: 
 Borrowings 19,656 27,746 31,449 31,447 33,608 
 Deposits 32,443 29,778 24,445 16,140 11,904 
 
 Total interest expense 52,099 57,524 55,894 47,587 45,512 
 
 Net interest income 39,593 30,735 34,750 41,959 45,828 
 
 Provision for credit losses 123 963 1,324 891 3,660 
 
 Net interest income 
 (after provision for credit losses) 39,470 29,772 33,426 41,068 42,168 
 
 Non-interest income (8,894) (187,704) 5,814 5,083 5,352 
 Non-interest expense 28,508 28,194 29,336 28,631 27,773 
 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 % 
 
 Basic EPS $ 0.02 $ (1.05) $ 0.06 $ 0.11 $ 0.12 
 Diluted EPS 0.02 (1.05) 0.06 0.11 0.12 

 
 
 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. 
 47 

 
 
 

 
 For the Three Months Ended 
 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 
 Assets: (Dollars in thousands) 
 Interest-earning assets: 
 One- to four-family loans: 
 Originated $ 4,025,539 $ 35,060 3.48 % $ 4,036,609 $ 34,584 3.43 % $ 4,049,790 $ 33,364 3.29 % 
 Correspondent purchased 2,413,900 19,660 3.26 2,454,407 19,794 3.23 2,305,362 17,261 2.99 
 Bulk purchased 136,609 694 2.03 138,922 524 1.51 147,091 434 1.18 
 Total one- to four-family loans 6,576,048 55,414 3.37 6,629,938 54,902 3.31 6,502,243 51,059 3.14 
 Commercial loans 1,306,917 18,267 5.47 1,249,498 16,930 5.30 1,025,402 11,993 4.58 
 Consumer loans 105,958 2,260 8.46 104,252 2,199 8.37 102,760 1,767 6.82 
 Total loans receivable (1) 
 7,988,923 75,941 3.78 7,983,688 74,031 3.69 7,630,405 64,819 3.38 
 MBS (2) 
 526,733 5,859 4.45 1,078,957 4,399 1.63 1,221,035 4,811 1.58 
 Investment securities (2)(3) 
 266,873 2,528 3.79 524,574 894 0.68 525,081 881 0.67 
 FHLB stock (4) 
 108,648 2,586 9.44 120,159 2,796 9.23 197,577 4,158 8.35 
 Cash and cash equivalents (5) 
 346,220 4,778 5.40 453,486 6,139 5.30 1,801,493 16,671 3.62 
 Total interest-earning assets 9,237,397 91,692 3.95 10,160,864 88,259 3.45 11,375,591 91,340 3.19 
 Other non-interest-earning assets 466,084 271,074 248,022 
 Total assets $ 9,703,481 $ 10,431,938 $ 11,623,613 
 
 Liabilities and stockholders' equity: 
 Interest-bearing liabilities: 
 Checking $ 886,530 445 0.20 $ 900,526 449 0.20 $ 1,007,569 289 0.11 
 Savings 472,819 138 0.12 492,737 145 0.12 545,885 100 0.07 
 Money market 1,364,565 6,737 1.96 1,404,496 6,913 1.95 1,759,804 3,035 0.68 
 Retail certificates 2,555,375 23,199 3.60 2,498,839 20,268 3.22 2,064,929 7,767 1.49 
 Commercial certificates 49,558 463 3.70 30,735 273 3.53 34,298 104 1.20 
 Wholesale certificates 130,857 1,461 4.43 158,598 1,730 4.33 97,828 609 2.47 
 Total deposits 5,459,704 32,443 2.36 5,485,931 29,778 2.15 5,510,313 11,904 0.86 
 Borrowings (6) 
 2,467,410 19,656 3.15 3,150,179 27,746 3.48 4,260,685 33,608 3.10 
 Total interest-bearing liabilities 7,927,114 52,099 2.61 8,636,110 57,524 2.64 9,770,998 45,512 1.84 
 Non-interest-bearing deposits 537,144 540,607 576,519 
 Other non-interest-bearing liabilities 202,743 191,978 191,474 
 Stockholders' equity 1,036,480 1,063,243 1,084,622 
 Total liabilities and stockholders' equity $ 9,703,481 $ 10,431,938 $ 11,623,613 
 
 Net interest income (7) 
 $ 39,593 $ 30,735 $ 45,828 
 Net interest-earning assets $ 1,310,283 $ 1,524,754 $ 1,604,593 
 Net interest margin (8)(9) 
 1.71 1.21 1.61 
 Ratio of interest-earning assets to interest-bearing liabilities 1.17x 1.18x 1.16x 
 
 Selected performance ratios: 
 Return on average assets (annualized) (9) 
 0.10 % (5.38 %) 0.56 % 
 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) 
 — 0.07 0.20 

 48 

 
 

 (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 $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. 
 (7) Net interest income represents the difference between interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income depends on the average balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them. 
 (8) Net interest margin represents annualized net interest income as a percentage of average interest-earning assets. 
 (9) The table below provides a reconciliation between 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 
 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 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. 
 (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. 
 
 
 49 

 
 

 Rate/Volume Analysis 
 The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous period's average rate, and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. 
 
 For the Three Months Ended 
 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) 
 Interest-earning assets: 
 Loans receivable $ 371 $ 1,539 $ 1,910 $ 4,190 $ 6,932 $ 11,122 
 MBS (3,141) 4,601 1,460 (3,921) 4,969 1,048 
 Investment securities (633) 2,267 1,634 (626) 2,273 1,647 
 FHLB stock (273) 63 (210) (2,061) 489 (1,572) 
 Cash and cash equivalents (1,478) 117 (1,361) (17,580) 5,687 (11,893) 
 Total interest-earning assets (5,154) 8,587 3,433 (19,998) 20,350 352 
 
 Interest-bearing liabilities: 
 Checking (7) 3 (4) (38) 194 156 
 Savings (6) (1) (7) (15) 53 38 
 Money market (197) 21 (176) (818) 4,521 3,703 
 Certificates of deposit 401 2,451 2,852 2,512 14,130 16,642 
 Borrowings (8,361) 271 (8,090) (16,482) 2,530 (13,952) 
 Total interest-bearing liabilities (8,170) 2,745 (5,425) (14,841) 21,428 6,587 
 
 Net change in net interest income $ 3,016 $ 5,842 $ 8,858 $ (5,157) $ (1,078) $ (6,235) 

 
 
 
 
 50 

 
 
 

 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. 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 
 (Dollars in thousands) 
 INTEREST AND DIVIDEND INCOME: 
 Loans receivable $ 75,941 $ 74,031 $ 1,910 2.6 % 
 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) 
 Investment securities 2,528 894 1,634 182.8 
 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 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. 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 
 (Dollars in thousands) 
 INTEREST EXPENSE: 
 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 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 
 51 

 
 

 $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 
 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 Three Months Ended 
 December 31, September 30, Change Expressed in: 
 2023 2023 Dollars Percent 
 (Dollars in thousands) 
 NON-INTEREST INCOME: 
 Deposit service fees $ 2,575 $ 2,758 $ (183) (6.6) % 
 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 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 Three Months Ended 
 December 31, September 30, Change Expressed in: 
 2023 2023 Dollars Percent 
 (Dollars in thousands) 
 NON-INTEREST EXPENSE: 
 Salaries and employee benefits $ 12,992 $ 11,804 $ 1,188 10.1 % 
 Information technology and related expense 5,369 6,448 (1,079) (16.7) 
 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 
 Deposit and loan transaction costs 542 778 (236) (30.3) 
 Office supplies and related expense 361 689 (328) (47.6) 
 
 Other non-interest expense 1,381 1,213 168 13.8 
 Total non-interest expense $ 28,508 $ 28,194 $ 314 1.1 

 
 
 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 
 52 

 
 

 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 the effective tax rate. 
 
 For the Three Months Ended 
 December 31, September 30, Change Expressed in: 
 2023 2023 Dollars Percent 
 (Dollars in thousands) 
 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 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. 
 
 
 53 

 
 
 

 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. 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. 
 
 
 Interest and Dividend Income 
 The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent. 
 
 For the Three Months Ended 
 December 31, Change Expressed in: 
 2023 2022 Dollars Percent 
 (Dollars in thousands) 
 INTEREST AND DIVIDEND INCOME: 
 Loans receivable $ 75,941 $ 64,819 $ 11,122 17.2 % 
 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) 
 Investment securities 2,528 881 1,647 186.9 
 Total interest and dividend income $ 91,692 $ 91,340 $ 352 0.4 

 
 
 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 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 time periods presented, along with the change measured in dollars and percent. 
 
 For the Three Months Ended 
 December 31, Change Expressed in: 
 2023 2022 Dollars Percent 
 (Dollars in thousands) 
 INTEREST EXPENSE: 
 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 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 
 54 

 
 

 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 $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 
 The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent. 
 
 For the Three Months Ended 
 December 31, Change Expressed in: 
 2023 2022 Dollars Percent 
 (Dollars in thousands) 
 NON-INTEREST INCOME: 
 Deposit service fees $ 2,575 $ 3,461 $ (886) (25.6) % 
 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 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 
 The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent. 
 
 For the Three Months Ended 
 December 31, Change Expressed in: 
 2023 2022 Dollars Percent 
 (Dollars in thousands) 
 NON-INTEREST EXPENSE: 
 Salaries and employee benefits $ 12,992 $ 13,698 $ (706) (5.2) % 
 Information technology and related expense 5,369 5,070 299 5.9 
 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 
 Deposit and loan transaction costs 542 611 (69) (11.3) 
 Office supplies and related expense 361 633 (272) (43.0) 
 
 
 Other non-interest expense 1,381 1,109 272 24.5 
 Total non-interest expense $ 28,508 $ 27,773 $ 735 2.6 

 
 
 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 
 55 

 
 

 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. 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 effective tax rate. 
 
 For the Three Months Ended 
 December 31, Change Expressed in: 
 2023 2022 Dollars Percent 
 (Dollars in thousands) 
 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 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%. 
 56 

 
 
 

 Liquidity and Capital Resources 
 
 
 Liquidity refers to our ability to generate sufficient cash to fund ongoing operations, to repay maturing certificates of deposit and other deposit withdrawals, to repay maturing borrowings, and to fund loan commitments. Liquidity management is both a daily and long-term function of our business management. The Company's most available liquid assets are represented by cash and cash equivalents and AFS securities. The Bank's primary sources of funds are deposits, FHLB borrowings, repayments and maturities of outstanding loans and MBS and other short-term investments, and funds provided by operations. The Bank's long-term borrowings primarily have been used to manage long-term liquidity needs and the Bank's interest rate risk with the intention to improve the earnings of the Bank while maintaining capital ratios that meet or exceed the regulatory standards for well-capitalized financial institutions. In addition, the Bank's focus on managing risk has provided additional liquidity capacity by maintaining a balance of MBS and investment securities available as collateral for borrowings. 
 
 
 We generally intend to manage cash reserves sufficient to meet short-term liquidity needs, which are routinely forecasted for 10, 30, and 365 days. Additionally, on a monthly basis, we perform a liquidity stress test in accordance with the Interagency Policy Statement on Funding and Liquidity Risk Management. The liquidity stress test incorporates both short-term and long-term liquidity scenarios in order to identify and to quantify liquidity risk. Management also monitors key liquidity statistics related to items such as wholesale funding gaps, borrowings capacity, and available unpledged collateral, as well as various liquidity ratios. 
 
 
 In the event short-term liquidity needs exceed available cash, the Bank has access to a line of credit at 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 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 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. 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. 
 
 
 If management observes unusual trends in the amount and frequency of line of credit utilization and/or short-term borrowings that is not in conjunction with a planned strategy, such as the leverage strategy, the Bank will likely utilize long-term wholesale borrowing sources such as FHLB advances and/or repurchase agreements to provide long-term, fixed-rate funding. The maturities of these long-term borrowings are generally staggered in order to mitigate the risk of a highly negative cash flow position at maturity. The Bank's internal policy limits total borrowings to 55% of total assets. At 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 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 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 
 57 

 
 

 to the nature of public unit certificates of deposit and commercial certificates of deposit, retention rates are not as predictable as for retail certificates of deposit. 
 
 
 While scheduled payments from the amortization of loans and MBS and payments on short-term investments are relatively predictable sources of funds, deposit flows, prepayments on loans and MBS, and calls of investment securities are greatly influenced by general interest rates, economic conditions, and competition, and are less predictable sources of funds. To the extent possible, the Bank manages the cash flows of its loan and deposit portfolios by the rates it offers customers. We anticipate we will continue to have sufficient funds, through the repayments and maturities of loans and securities, deposits and borrowings, to meet our current commitments. 
 
 
 Limitations on Dividends and Other Capital Distributions 
 
 
 Office of the Comptroller of the Currency ("OCC") regulations impose restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Under FRB and OCC safe harbor regulations, savings institutions generally may make capital distributions during any calendar year equal to earnings of the previous two calendar years and current year-to-date earnings (to the extent not previously distributed). A savings institution that is a subsidiary of a savings and loan holding company, such as the Company, that proposes to make a capital distribution must submit written notice to the OCC and FRB 30 days prior to such distribution. The OCC and FRB may object to the distribution during that 30-day period based on safety and soundness or other concerns. Savings institutions that desire to make a larger capital distribution, are under special restrictions, or are not, or would not be, sufficiently capitalized following a proposed capital distribution must obtain regulatory non-objection prior to making such a distribution. 
 
 
 The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company. So long as the Bank remains well capitalized after each capital distribution (as evidenced by maintaining 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"). 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. 
 
 
 
 Regulatory 
 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 

 58
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
Capitol Federal Financial, Inc. 10-Q

Item 2. Management’s Discussion and Analysis
