What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-10 compared with 2024-02-07 · 717 added, 319 removed, 645 unchanged (62% of the section changed)

12 unchanged sentences

• 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;

• transactions or activities that may result in the recapture of base-year, tax basis bad debt reserves;

• the strength of the U.S.

32 unchanged sentences

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

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

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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.

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.

In October 2023, the Company initiated a securities strategy by selling $1.30 billion of securities, representing 94% of its securities portfolio ("securities strategy").

The securities strategy was designed to allow the Company to improve its earnings stream going forward, beginning in the current fiscal year, by redeploying most of the proceeds into current market rate securities and to provide liquidity to deleverage the balance sheet utilizing the remaining proceeds.

During the quarter ended December 31, 2023 the Company completed the sale of securities and recognized $13.3 million ($10.0 million net of tax), or $0.08 per share, of additional loss related to the sale of the securities.

See additional information regarding the impact of the securities strategy on our financial measurements in "Comparison of Operating Results for the Three Months Ended March 31, 2024 and December 31, 2023 - Average Balance Sheet" and "Comparison of Operating Results for the Six Months Ended March 31, 2024 and March 31, 2023 - Average Balance Sheet" below.

The $1.30 billion of securities sold had a weighted average yield of 1.22% and an average duration of 3.6 years.

With the proceeds from the sale of the securities, the Company purchased $632.0 million of securities yielding 5.75%, paid down $500.0 million of borrowings with a cost of 4.70%, and held the remaining cash at the

FRB of Kansas City earning interest at the reserve balance rate until such time as it can be used to fund commercial activity or other Bank operations.

The Company recognized net income of $16.3 million, or $0.12 per share, for the current year six month period compared to net income of $30.4 million, or $0.23 per share, for the prior year six month period.

The lower net income for the current year six month period was primarily a result of the $13.3 million net loss on the sale of securities associated with the securities strategy, along with lower net interest income, partially offset by lower provision for credit losses and income tax expense in the current year six month period.

Absent the effect of the net loss associated with the securities strategy, EPS would have been $0.20 for the current year six month period.

Periodically at management's discretion, we have utilized a strategy to increase earnings which entails entering into short-term FHLB borrowings and depositing the proceeds from these FHLB borrowings, net of the cost to purchase FHLB stock to meet FHLB stock holding requirements, at the FRB of Kansas City (the "leverage strategy").

See additional information regarding the leverage strategy in the "Financial Condition - Borrowings" section below.

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

The net interest margin increased 17 basis points, from 1.59% for the prior year six month period to 1.76% for the current year six month period, due primarily to the leverage strategy being in place during portions of the prior year six month period but not in place during the current year six month period.

The leverage strategy negatively impacted the net interest margin for the prior year six month period by 20 basis points.

The absence of the leverage strategy during the current year six month period was partially offset by the negative effect on the net interest margin of an increase in the costs of deposits and borrowings, which exceeded the increase in yields on securities and loans.

The Company's efficiency ratio was 74.29% for the current year six month period compared to 57.43% for the prior year six month period.

Absent the net loss from the securities strategy, the efficiency ratio would have been 63.28% for the current year six month period.

The change in the efficiency ratio, absent the securities strategy, was due primarily to lower net interest income in the current year six month period compared to the prior year six month period.

The Company's operating expense ratio (annualized) for the current year six month period was 1.18% compared to 1.00% for the prior year six month period, due mainly to lower average assets in the current year six month period.

The leverage strategy was in place at times during the prior year six month period, which increased assets, but was not in place during the current year six month period.

Total assets were $9.72 billion at March 31, 2024, a $456.2 million decrease from September 30, 2023, due primarily to the securities strategy.

The loan portfolio was $7.88 billion at March 31, 2024, a $93.4 million decrease from September 30, 2023, due mainly to a $154.4 million decrease in one- to four-family loans, partially offset by a $62.5 million increase in commercial loans during the current year six month period.

As a result of rising interest rates and lack of housing inventory, there has been a slowdown in the housing market which has impacted the demand for residential loans and has directly impacted the Bank's one- to four-family loan portfolio.

Origination and refinance activity has slowed considerably and there has been a reduction in one- to four-family loan balances through scheduled repayments and loan payoffs.

While the Bank's loan activity levels are down, partially due to the interest rate environment and seasonality, management expects the Bank's one- to four-family loan portfolio will continue to decrease as cash flows from the one- to four-family portfolio will be used to fund commercial loan growth.

During the current quarter, several large commercial loans matured or prepaid which contributed to the slower growth in the balance of commercial loans.

Management anticipates the balance of commercial loans will trend upward in future periods.

Total deposits were $6.14 billion at March 31, 2024, an increase of $90.5 million from September 30, 2023.

The increase in deposits was primarily in retail certificates of deposit, all in the 14 month or shorter term category, partially offset by a decrease in retail money market accounts.

During the current quarter, the Bank held a Presidents' Day certificate of deposit campaign which resulted in some customers electing to move funds from money market accounts at the Bank into the certificate of deposit portfolio.

The Presidents' Day certificate of deposit campaign resulted in $147.0 million in new certificates of deposit at a weighted average rate of 5.27% and a weighted average term of 7 months.

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 $2.35 billion at March 31, 2024, a decrease of $528.1 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 quarter ended December 31, 2023 in conjunction with the securities strategy.

Management estimates that the Bank had $2.87 billion in additional liquidity available at March 31, 2024, 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 March 31, 2024, loans 30 to 89 days delinquent were 0.19% of total loans receivable, net, and loans 90 or more days delinquent or in foreclosure were 0.11% of total loans receivable, net.

During the current year six month period, net charge-offs ("NCOs") were $1 thousand.

At March 31, 2024, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(1.10) billion, or (11.3)% of total assets, compared to $(679.7) million, or (7.1)% of total assets, at December 31, 2023.

The change in the one-year gap amount was due to an increase in the amount of liability cash flows coming due in one year at March 31, 2024, partially offset by an increase in the amount of asset cash flows coming due during the same time period, compared to December 31, 2023.

The increase in liability cash flows was due primarily to an increase in certificates of deposit scheduled to mature within one year as of March 31, 2024, compared to December 31, 2023, as the Bank continued to offer its highest rates on shorter-term certificates of deposit.

The increase in asset cash flows was due primarily to an increase in the balance of cash between the two periods.

The Bank's Digital Transformation and Business Initiatives

With the implementation of our new core system and its ancillary systems ("digital transformation") in August 2023, we improved our internal and customer-facing technology.

The digital transformation implemented technology needed to enhance our customer's experience, deepen our wallet share with existing customers, and attract new customers.

In addition to the technology improvements, management has adjusted staffing in several areas to align with the Bank's strategy to grow and enhance commercial banking and lending.

Pairing improved technology, products and services with the right organizational structure has provided benefits in each customer segment:

consumer, small business and commercial.

The Bank has gained immediate traction with the new and improved True Blue Online ("TBO"), the Bank's digital banking platform for consumers and small businesses.

Those gains include:

• Mobile app store ratings have improved by 100% for Android year-over-year and approximately 24% for iOS since the digital transformation,

• Over 24,000 new users of our credit score service in TBO since August 2023, and

• 64% increase in person-to-person payment volume and 40% increase in combined payment amounts year-over-year for the current quarter following the integration of Zelle into TBO.

During the current quarter, we continued to improve our consumer banking products and services, leveraging technology from the digital transformation.

We implemented relationship-based pricing for our Presidents' Day certificate of deposit campaign in February 2024, resulting in new retail checking accounts from a campaign that has traditionally only yielded certificates of deposit.

Currently, the Bank is working on new digital banking services for our debit card products that will give consumers more control and faster access to their card.

Our small business customers now have access to improved digital services, and management has realigned staffing to focus on growing small business banking.

We are in the process of adding more small business services into TBO to continue deposit and fee income growth in this area.

For commercial banking and lending, alignment of technology, people, products and services is crucial to our objective of capturing complete banking relationships as we continue to strategically grow this business.

The technology implemented with the digital transformation provides more flexibility for structuring commercial loan transactions and has allowed us to build digital banking services to meet our customers' deposit and payment requirements to capture deposit and treasury management fee income growth.

The Bank has made two strategic hires within the treasury management area, bringing over 40 years of combined in-market experience to help with our business development efforts and to increase the profitability of our existing commercial customer base.

Management has completed staffing realignments, including reductions and reassignments where appropriate, in numerous areas of the Bank, including deposit operations, lending, and commercial banking, to ensure resources are aligned with our priorities and strategies.

Financial Condition

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

December 31, September 30, Percent

2023 2023 Change

Annualized Annualized

March 31, December 31, Percent September 30, Percent

2024 2023 Change 2023 Change

(Dollars and shares in thousands)

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Average number of diluted shares outstanding 130,536 132,353 (5.5) 133,225 (4.0)

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.

During the current quarter, total assets increased $145.2 million, to $9.72 billion at March 31, 2024, due primarily to increases in cash and securities, partially offset by a decrease in the loan portfolio.

The loan portfolio mix continued to shift from one- to four-family loans to commercial loans during the current quarter with an $88.0 million decrease in one- to four-family loans, including a $46.4 million decrease in one- to four-family correspondent loans and a $36.4 million decrease in one- to four-family originated loans, partially offset by a $20.3 million increase in commercial loans.

See additional discussion regarding the loan portfolio in the Executive Summary discussion above.

Total liabilities increased $154.4 million during the current quarter due primarily to a $120.1 million increase in deposits.

The increase in deposits was primarily in retail certificates of deposit, all in the 14 months or shorter term category, partially offset by a decrease in retail money market accounts.

Total borrowings decreased $22.0 million during the current quarter as not all maturing FHLB borrowings were replaced.

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

March 31, 2024 December 31, 2023 September 30, 2023

Amount Rate Amount Rate Amount Rate

(Dollars in thousands)

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

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

For the Three Months Ended For the Six Months Ended

March 31, 2024 March 31, 2024 March 31, 2023

Amount Rate Amount Rate Amount Rate

(Dollars in thousands)

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Ending balance $ 7,892,732 3.86 $ 7,892,732 3.86 $ 7,966,125 3.57

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.

The following table presents loan origination, refinance, and purchase/participation 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

Loan originations, purchases/participations, and refinances are reported together.

For the Six Months Ended

March 31, 2024 March 31, 2023

Amount Rate % of Total Amount Rate % of Total

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Home equity 4,039 9.03 1.9 2,587 7.70 0.2

Other 1,084 6.83 1.0 1,165 6.58 0.2

Consumer other 1,621 7.03 0.8 2,124 6.69 0.2

Total fixed-rate 99,999 6.82 46.4 393,231 5.26 35.9

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Home equity 16,583 9.43 7.7 29,548 7.89 2.7

Other 669 4.65 0.6 420 3.62 0.1

Consumer other 1,227 4.86 0.5 707 3.75 0.1

Total adjustable-rate 115,666 7.46 53.6 703,072 5.50 64.1

Total originated, refinanced and purchased $ 104,899 6.96 100.0 % $ 699,692 5.21 100.0 %

Total originated, refinanced and purchased/participations $ 215,665 7.16 100.0 % $ 1,096,303 5.41 100.0 %

Purchased and participation loans included above:

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Total purchased/participation loans $ 27,944 7.82 $ 550,905 5.41

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.

One- to Four-Family Loans - The following table presents, for our portfolio of one- to four-family loans, the amount, percent of total, weighted average rate, weighted average credit score, weighted average LTV ratio, and average balance per loan as of March 31, 2024 Credit scores were updated 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.

6 unchanged sentences

Bulk purchased 132,284 2.1 2.28 771 55 284

Construction 40,628 0.6 4.84 770 46 415

$ 6,437,457 100.0 % 3.45 770 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

Amount Rate LTV Score

For the Three Months Ended For the Six Months Ended

March 31, 2024 March 31, 2024

Credit Credit

Amount Rate LTV Score Amount Rate LTV Score

(Dollars in thousands)

2 unchanged sentences

$ 41,844 6.21 73 772 $ 114,845 6.58 74 768

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.

As of March 31, 2024, the Bank had one- to four-family loan origination and refinance commitments of $54.5 million at a weighted average rate of 6.39%.

There were no one- to four-family correspondent loan purchase commitments at March 31, 2024.

Commercial Loans - During the six months ended March 31, 2024, the Bank originated $52.9 million of commercial loans and entered into commercial loan participations totaling $24.4 million.

The Bank also processed commercial loan disbursements, excluding lines of credit, during the six months ended March 31, 2024 of $134.9 million at a weighted average rate of 6.15%.

As of March 31, 2024, December 31, 2023, and September 30, 2023, the Bank's commercial and industrial gross loan amounts (unpaid principal plus undisbursed amounts) totaled $164.8 million, $157.2 million and $158.5 million, respectively, and commitments totaled $2.9 million, $2.4 million and $2.6 million, respectively.

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

As of 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%.

As of March 31, 2024, the Bank had six commercial real estate and commercial construction loan commitments, totaling $85.0 million, at a weighted average rate of 7.89%.

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

Of the total commercial real estate and commercial construction undisbursed amounts and commitments outstanding as of March 31, 2024, management anticipates funding approximately $85 million during the June 2024 quarter, $76 million during the September 2024 quarter, $70 million during the December 2024 quarter, and $141 million during the March 2025 quarter or later.

At March 31, 2024, the unpaid principal balance of non-owner occupied commercial real estate loans was $750.4 million and the unpaid principal balance of owner occupied commercial real estate loans was $145.0 million, which are included in the table below.

March 31, 2024 December 31, 2023 September 30, 2023

Unpaid Undisbursed Gross Loan Gross Loan Gross Loan

Count Principal Amount Amount Amount Amount

(Dollars in thousands)

6 unchanged sentences

Single use building 31 39,141 4,693 43,834 43,815 47,193

Warehouse/manufacturing 39 32,100 560 32,660 36,056 35,963

Other 66 47,269 13,722 60,991 52,193 53,032

2 unchanged sentences

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

December 31, 2023 September 30, 2023

Unpaid Undisbursed Gross Loan Gross Loan

Count Principal Amount Amount Amount

March 31, 2024 December 31, 2023 September 30, 2023

Unpaid Undisbursed Gross Loan Gross Loan Gross Loan

Count Principal Amount Amount Amount Amount

(Dollars in thousands)

Kansas 592 $ 502,060 $ 156,516 $ 658,576 $ 662,756 $ 670,498

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

Missouri 151 263,319 38,650 301,969 326,593 332,610

Texas 17 288,716 55,633 344,349 347,825 348,707

Colorado 9 44,034 10,717 54,751 49,428 49,385

Tennessee 2 26,132 13,437 39,569 42,136

Nebraska 8 37,359 275 37,634 37,799 37,609

Tennessee 1 32,944 1,576 34,520 39,569 42,136

Arkansas 4 32,871 658 33,529 32,956 33,046

Other 14 36,532 31,581 68,113 44,069 48,947

796 $ 1,237,835 $ 295,606 $ 1,533,441 $ 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.

(Dollars in thousands)

10 unchanged sentences

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

Of the loans 30 to 89 days delinquent at December 31, 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.

Of the loans 30 to 89 days delinquent at March 31, 2024, 68% were 59 days or less delinquent.

Loans Delinquent for 30 to 89 Days at:

December 31, September 30,

Number Amount Number Amount

March 31, December 31, September 30,

2024 2023 2023

Number Amount Number Amount Number Amount

(Dollars in thousands)

15 unchanged sentences

Nonaccrual Loans and OREO at:

December 31, September 30,

Number Amount Number Amount

March 31, December 31, September 30,

2024 2023 2023

Number Amount Number Amount Number Amount

(Dollars in thousands)

16 unchanged sentences

Consumer — — — — — —

1 25 1 18 4 515

Total nonaccrual loans 56 8,789 55 10,187 60 9,409

4 unchanged sentences

Correspondent purchased — — 1 219 1 219

1 67 3 444 1 219

Total non-performing assets 57 $ 8,856 58 $ 10,631 61 $ 9,628

Non-performing assets as a percentage of total assets 0.09 % 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.

(1) Includes loans required to be reported as nonaccrual pursuant to accounting 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.

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.

At March 31, 2024, potential losses, after taking into consideration anticipated private mortgage insurance proceeds and estimated selling costs, have been charged-off.

Loans 30 to 89 Loans 90 or More Days Delinquent

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

December 31, 2023 September 30, 2023

Special Mention Substandard Special Mention Substandard

The increase in commercial special mention loans at March 31, 2024 compared to December 31, 2023 and September 30, 2023 was due mainly to one loan moving to special mention during the March 31, 2024 quarter as certain underlying economic considerations related to this loan are being monitored by management.

March 31, 2024 December 31, 2023 September 30, 2023

Special Mention Substandard Special Mention Substandard Special Mention Substandard

(Dollars in thousands)

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

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

Loans Receivable and Allowance for Credit Losses" for additional information related to the calculation of ACL as of March 31, 2024.

Distribution of ACL Ratio of ACL to Loans Receivable

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

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

2024 2023 2023 2024 2023 2023

13 unchanged sentences

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").

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

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

The Company applied a modified retrospective approach when adopting ASU 2022-02, resulting in a cumulative-effect adjustment which is reflected in the table below ("ASU 2022-02 Adoption").

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

At or For the Three Months Ended

December 31, 2023 December 31, 2022

At or For the Six Months Ended

March 31, 2024 March 31, 2023

(Dollars in thousands)

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ACL to NCOs (annualized) 10,971x 620x

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.

The ratio of NCOs to average non-performing assets was lower at the end of the current year period due primarily to lower NCOs compared to the prior year period.

The ratio of ACL to nonaccrual loans was lower at the end of the current year period compared to the end of the prior year period due mainly to a higher balance of nonaccrual loans compared to the prior year period, partially offset by a higher ACL balance at March 31, 2024.

The ratio of ACL to loans receivable, net was higher at the end of the current year period compared to the end of the prior year period due to a higher commercial loan ACL balance at March 31, 2024.

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

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

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

For the Three Months Ended

December 31, 2023 December 31, 2022

For the Six Months Ended

March 31, 2024 March 31, 2023

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

19 unchanged sentences

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.

Overall, fixed-rate securities comprised 94% of our securities portfolio at March 31, 2024.

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

The change in the portfolio yield at March 31, 2024 and December 31, 2023 compared to September 30, 2023 was primarily related to the securities strategy.

March 31, 2024 December 31, 2023 September 30, 2023

Amount Yield WAL Amount Yield WAL Amount Yield WAL

(Dollars in thousands)

8 unchanged sentences

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

For the Three Months Ended

December 31, 2023 December 31, 2022

For the Six Months Ended

March 31, 2024 March 31, 2023

Amount Yield WAL Amount Yield WAL

8 unchanged sentences

Ending balance - carrying value $ 842,950 5.63 5.4 $ 1,505,808 1.33 4.3

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.

Total liabilities were $8.70 billion at March 31, 2024, compared to $9.13 billion at September 30, 2023.

The decrease was due primarily to a decrease in borrowings as some of the cash flows from the sale of securities associated with the securities strategy were used to repay $500.0 million of BTFP borrowings.

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

Amount Rate Total Amount Rate Total

The increase in deposits as of March 31, 2024 compared to December 31, 2023 and September 30, 2023 was primarily in retail certificates of deposit, all in the 14 months or shorter term category, partially offset by a decrease in retail money market balances as some customers elected to move funds to the Bank's certificate of deposit offerings.

The increase in the deposit portfolio rate at March 31, 2024 compared to December 31, 2023 and September 30, 2023 was due mainly to higher rates on retail certificates of deposit.

March 31, 2024 December 31, 2023 September 30, 2023

% of % of % of

Amount Rate Total Amount Rate Total Amount Rate Total

(Dollars in thousands)

7 unchanged sentences

$ 6,141,711 2.32 100.0 % $ 6,021,595 2.20 100.0 % $ 6,051,220 2.07 100.0 %

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.

As of March 31, 2024, approximately $752.0 million (or approximately 7%) of the Bank's Call Report deposit balance was uninsured, of which approximately $430.8 million related to commercial and retail deposit accounts and the remainder was mainly comprised of fully collateralized public unit deposits and intercompany accounts.

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

Total borrowings at March 31, 2024 were $2.35 billion, which was comprised of $2.05 billion in fixed-rate FHLB advances, $300.0 million in FHLB variable-rate advances tied to interest rate swaps, and $971 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 March 31, 2024.

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

8 unchanged sentences

2029 50,000 4.17 4.17

$ 2,352,992 3.44 3.16

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

5 unchanged sentences

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

During the current year six month period, BTFP borrowings were paid off with the proceeds received from the securities strategy.

For the Three Months Ended For the Six Months Ended

March 31, 2024 March 31, 2024 March 31, 2023

Effective Effective Effective

Amount Rate WAM Amount Rate WAM Amount Rate WAM

(Dollars in thousands)

5 unchanged sentences

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.

Periodically, the Bank has utilized a leverage strategy to increase earnings which entails entering into short-term FHLB borrowings and depositing the proceeds from these FHLB borrowings, net of the cost to purchase FHLB stock to meet FHLB stock holding requirements, at the FRB of Kansas City.

The leverage strategy is not a core operating business for the Company.

It provides the Company the ability to utilize excess capital to generate earnings.

Additionally, it is a strategy that can be exited quickly without additional costs.

The profitability of the leverage strategy is attributable to net income derived from the dividends received on the increased FHLB stock holdings, plus the net interest rate spread between the yield on the leverage strategy cash at the FRB of Kansas City and the rate paid on the leverage strategy FHLB borrowings, less applicable Federal Deposit Insurance Corporation ("FDIC") premiums and estimated income tax expense.

Leverage strategy borrowings are repaid prior to each quarter end so there is no impact to quarter end capital ratios.

The leverage strategy was not in place during the current year six month period due to the strategy being unprofitable, but it was in place at points during the prior year six month period.

During the prior year six month period, the average balance of cash associated with the leverage strategy was $1.37 billion and interest earned on that cash was $27.2 million, the average balance of FHLB stock associated with the leverage strategy was $64.4 million and dividends earned on that stock were $2.8 million, and the average balance of FHLB borrowings associated with the leverage strategy was $1.43 billion and the related interest expense was $28.6 million.

Additionally, the Company recognized $286 thousand of FDIC premiums and $197 thousand of income tax expense during the prior year six month period related to the leverage strategy.

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.

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,

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

2024 2024 2024 2025 Total

11 unchanged sentences

Repricing Rate 3.73 % 4.08 % 4.15 % 3.86 % 3.97 %

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

The following table sets forth the WAM information for our certificates of deposit, in years, as of March 31, 2024.

Retail certificates of deposit 1.0

3 unchanged sentences

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.

Stockholders' equity totaled $1.02 billion at March 31, 2024, a decrease of $19.2 million from September 30, 2023.

During the current year six month period, the Company paid regular quarterly cash dividends totaling $22.4 million, or $0.17 per share.

On April 23, 2024, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.0 million, payable on May 17, 2024 to stockholders of record as of the close of business on May 3, 2024.

During the current year six month period, the Company repurchased 3,280,110 shares of common stock at an average price of $5.87 per share, or $19.3 million.

There remains $2.0 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's existing approval for the Company to repurchase shares expires in August 2024.

In February 2024, the Company received approval from the FRB for a new share repurchase plan of up to $75 million in additional common stock over a period of time, depending upon market conditions, cash balances at the Company level, and after the completion of the Company's existing share repurchase program.

This new plan has no expiration date;

however, the FRB's approval for the Company to repurchase shares expires in February 2025.

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.

As of March 31, 2024, 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.

As of March 31, 2024, the Bank's community bank leverage ratio ("CBLR") was 9.1%, which exceeded the minimum requirement of 9.0%.

At March 31, 2024, Capitol Federal Financial, Inc., at the holding company level, had $46.3 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.

1 unchanged sentence

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.

Additionally, management is currently evaluating the timing of capital distributions from the Bank to the holding company during the current fiscal year in relation to the tax issues associated with the Bank's pre-1988 bad debt recapture.

See additional discussion regarding the Bank's pre-1988 bad debt recapture in "Comparison of Operating Results for the Three Months Ended March 31, 2024 and December 31, 2023", "Item 1.

Financial Statements - Note 6.

Income Taxes", and "Item 1A.

Risk Factors".

The following table presents regular quarterly cash dividends and special cash dividends paid in calendar years 2024, 2023, and 2022.

The amounts represent cash dividends paid during each period.

For the quarter ended June 30, 2024, the amount presented represents the dividend payable on May 17, 2024 to stockholders of record as of the close of business on May 3, 2024.

Calendar Year

13 unchanged sentences

For the Three Months Ended

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

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

2024 2023 2023 2023 2023

20 unchanged sentences

Efficiency ratio 61.89 % 92.86 % (17.96 %) 72.32 % 60.86 %

Operating expense ratio (annualized) 1.19 % 1.18 % 1.08 % 1.09 % 1.04 %

Basic EPS $ 0.11 $ 0.02 $ (1.05) $ 0.06 $ 0.11

Diluted EPS 0.11 0.02 (1.05) 0.06 0.11

Comparison of Operating Results for the Three Months Ended March 31, 2024 and December 31, 2023

For the quarter ended March 31, 2024, the Company recognized net income of $13.8 million, or $0.11 per share, compared to net income of $2.5 million, or $0.02 per share, for the quarter ended December 31, 2023.

The higher net income in the current quarter was due primarily to the prior quarter including $13.3 million ($10.0 million net of tax) of net losses related to the sale of securities associated with the securities strategy discussed in the Executive Summary above.

Absent the net loss on the sale of securities, EPS would have been $0.10 for the prior quarter, compared to $0.11 per share in the current quarter.

The increase in EPS in the current quarter was due primarily to an increase in the net interest margin.

The net interest margin increased 11 basis points, from 1.71% for the prior quarter to 1.82% for the current quarter due mainly to a full quarter of income from higher yielding securities that were purchased during the prior quarter in association with the securities strategy.

Interest and Dividend Income

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

For the Three Months Ended

March 31, December 31, Change Expressed in:

2024 2023 Dollars Percent

(Dollars in thousands)

INTEREST AND DIVIDEND INCOME:

Loans receivable $ 76,122 $ 75,941 $ 181 0.2 %

MBS 7,794 5,859 1,935 33.0

Cash and cash equivalents 4,513 4,778 (265) (5.5)

FHLB stock 2,528 2,586 (58) (2.2)

Investment securities 2,332 2,528 (196) (7.8)

Total interest and dividend income $ 93,289 $ 91,692 $ 1,597 1.7

The increase in interest income on MBS was due to an increase in the weighted average yield from having a full quarter of income from securities at higher market yields purchased in association with the securities strategy.

The weighted average yield on MBS increased 133 basis points compared to the prior quarter.

The decrease in interest income on investment securities was due to a decrease in the average balance of the portfolio, partially offset by a higher weighted average yield, both a result of the securities strategy as not all the proceeds from the securities sale were reinvested into the securities portfolio.

See additional discussion regarding the use of the proceeds from the sale of securities associated with the securities strategy in the Executive Summary discussion above.

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

March 31, December 31, Change Expressed in:

2024 2023 Dollars Percent

(Dollars in thousands)

INTEREST EXPENSE:

Deposits $ 33,415 $ 32,443 $ 972 3.0 %

Borrowings 18,554 19,656 (1,102) (5.6)

Total interest expense $ 51,969 $ 52,099 $ (130) (0.2)

The increase in interest expense on deposits was due primarily to increases in the weighted average rate paid and the average balance of the retail certificate of deposit portfolio, partially offset by decreases in the weighted average rate paid and the average balance of money market accounts.

A large portion of the decrease in the average balance of money market accounts during the current quarter was related to the Presidents' Day certificate of deposit campaign as funds from money market accounts moved to certificates of deposit as a result of the campaign.

The weighted average rate of the money market portfolio decreased due primarily to management lowering the rates for certain tiers during the current quarter.

The decrease in interest expense on borrowings was due mainly to the pay down of $500.0 million of borrowings under the Federal Reserve's BTFP, as part of the securities strategy during the prior quarter.

Provision for Credit Losses

For the quarter ended March 31, 2024, the Bank recorded a provision for credit losses of $301 thousand, compared to a provision for credit losses of $123 thousand for the prior quarter.

The provision for credit losses in the current quarter was comprised of a $456 thousand increase in the ACL for loans, partially offset by a $155 thousand release 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 and disbursements on commercial loans, along with changes in the commercial loan mix.

See additional discussion regarding changes to the loan mix in the Executive Summary section above.

The release of provision for credit losses associated with the reserve for off-balance sheet credit exposures was due primarily to a reduction in the balance of commercial off-balance sheet credit exposures due to loans funding.

Non-Interest Income

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

For the Three Months Ended

March 31, December 31, Change Expressed in:

2024 2023 Dollars Percent

(Dollars in thousands)

NON-INTEREST INCOME:

Deposit service fees $ 2,451 $ 2,575 $ (124) (4.8) %

Insurance commissions 735 863 (128) (14.8)

Net loss from securities transactions — (13,345) 13,345 100.0

Other non-interest income 1,457 1,013 444 43.8

Total non-interest income $ 4,643 $ (8,894) $ 13,537 152.2

The net loss from securities transactions in the prior quarter related to the sale of securities associated with the securities strategy.

There was no similar transaction in the current quarter.

The increase in other non-interest income was due mainly to an increase in income on BOLI related to the receipt of death benefits in the current quarter while none were received in the prior quarter.

Non-Interest Expense

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

For the Three Months Ended

March 31, December 31, Change Expressed in:

2024 2023 Dollars Percent

(Dollars in thousands)

NON-INTEREST EXPENSE:

Salaries and employee benefits $ 12,887 $ 12,992 $ (105) (0.8) %

Information technology and related expense 4,954 5,369 (415) (7.7)

Occupancy, net 3,481 3,372 109 3.2

Federal insurance premium 1,727 1,860 (133) (7.2)

Regulatory and outside services 1,380 1,643 (263) (16.0)

Advertising and promotional 1,271 988 283 28.6

Deposit and loan transaction costs 867 542 325 60.0

Office supplies and related expense 419 361 58 16.1

Other non-interest expense 1,459 1,381 78 5.6

Total non-interest expense $ 28,445 $ 28,508 $ (63) (0.2)

The decrease in salaries and employee benefits was due mainly to a decrease in loan commissions compared to the prior quarter.

The decrease in information technology and related expense was due primarily to lower software licensing expenses and professional services, mainly related to costs associated with the digital transformation.

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

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

The increase in deposit and loan transaction costs was due primarily to expenses related to calendar year-end processing.

The Company's efficiency ratio was 61.89% for the current quarter compared to 92.86% for the prior quarter.

Absent the net loss on the sale of securities associated with the securities strategy, the efficiency ratio would have been 64.73% for the prior quarter.

The improvement in the efficiency ratio, absent the net loss associated with 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.

The Company's operating expense ratio (annualized) for the current quarter was 1.19% compared to 1.18% for the prior quarter.

The operating expense ratio is a measure of a financial institution's total non-interest expense as a percentage of average assets.

The ratio provides insight into how efficiently the Company is managing its expenses in relation to its assets, without the impact of changes in interest rates which factors into the efficiency ratio.

Income Tax Expense

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

For the Three Months Ended

March 31, December 31, Change Expressed in:

2024 2023 Dollars Percent

(Dollars in thousands)

Income before income tax expense (benefit) $ 17,217 $ 2,068 $ 15,149 732.5 %

Income tax expense (benefit) 3,455 (475) 3,930 (827.4)

Net income $ 13,762 $ 2,543 $ 11,219 441.2

Effective Tax Rate 20.1 % (23.0 %)

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

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

Without the tax benefit, income tax expense would have been $2.8 million and the effective tax rate, without the $13.3 million net pre-tax loss, would have been 18.0% for the prior quarter.

The increase in the effective tax rate from 18.0% for the prior quarter, without the tax benefit related to the net loss associated with the securities strategy, to 20.1% for the current quarter was due primarily to recording income taxes on the current quarter distribution of earnings from the Bank to the Company.

The tax on the earnings distribution was due to the recapture of a portion of the Bank's bad debt reserves which were established prior to September 30, 1988, and are included in the Bank's retained earnings ("pre-1988 bad debt reserves").

The federal tax regulations prior to September 30, 1988 allowed banks to deduct, up to specified formula limits, a certain percentage of income as bad debts, for which the Bank was not required to establish a deferred tax liability.

Rather, the difference was recorded in the Bank's retained earnings.

The pre-1988 bad debt reserves in retained earnings are subject to recapture by the Bank on the occurrence of certain distributions in excess of earnings and profits accumulated in tax years beginning after December 31, 1951 ("accumulated earnings and profits").

For federal tax return purposes, the net loss on the securities strategy in fiscal years 2023 and 2024 will be reported on the Company's September 30, 2024 federal tax return, as the actual sales of the securities occurred during fiscal year 2024.

Therefore, it is anticipated that a taxable net loss will be reported on the Company's September 30, 2024 federal tax return which will result in the Bank and Company having a negative current and accumulated earnings and profit position.

This requires the Bank to draw upon the pre-1988 bad debt reserves for any distributions from the Bank to the Company during the current fiscal year.

The Bank is required to pay taxes on the reductions to the pre-1988 bad debt reserves equal to the current corporate tax rate at the time of the distribution of the amount of Bank earnings paid to the Company.

Management is researching and analyzing the Bank's tax issues associated with the pre-1988 bad debt recapture.

Additionally, management and the Board of Directors are evaluating alternatives regarding additional fiscal year 2024 earnings distributions from the Bank to the Company as well as the implications of continuing negative current and accumulated earnings and profit.

At March 31, 2024, Capitol Federal Financial, Inc., at the holding company level, had $46.3 million in cash on deposit at the Bank.

See additional discussion regarding the Bank's pre-1988 bad debt recapture in "Item 1.

Financial Statements - Note 6.

Income Taxes", and "Item 1A.

Risk Factors".

Average Balance Sheet

5 unchanged sentences

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

March 31, 2024 December 31, 2023

Average Interest Average Interest

Outstanding Earned/ Yield/ Outstanding Earned/ Yield/

Amount Paid Rate Amount Paid Rate

(Dollars in thousands)

39 unchanged sentences

Net interest margin (8)

1.71 1.21 1.61

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

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

Selected performance ratios:

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Return on average equity (annualized) (10)(14)

0.98 (52.82) 5.99

Average equity to average assets 10.83 10.68

Operating expense ratio (annualized) (11)

1.18 1.08 0.96

Efficiency ratio (12)(14)

92.86 (17.96) 54.27

Pre-tax yield on leverage strategy (13)

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

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

(3) There were no nontaxable securities included in the average balance of investment securities for the quarter ended March 31, 2024.

Included in the average balance of investments securities for the quarter ended December 31, 2023 are nontaxable securities with an average balance of $201 thousand.

(4) There was no FHLB stock related to the leverage strategy for the quarters ended March 31, 2024 and December 31, 2023.

(5) There was no cash and cash equivalents related to the leverage strategy during the quarters ended March 31, 2024 and December 31, 2023.

(6) There was no FHLB borrowings related to the leverage strategy for the quarters ended March 31, 2024 and December 31, 2023.

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

2 unchanged sentences

(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

Management believes the net interest margin is important to investors as it is a profitability measure for financial institutions.

(9) Return on average assets represents annualized net income as a percentage of total average assets.

Management believes that the return on average assets is important to investors as it shows the Company's profitability in relation to the Company's average assets.

(10) Return on average equity represents annualized net income as a percentage of total average equity.

Management believes that the return on average equity is important to investors as it shows the Company's profitability in relation to the Company's average equity.

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

Management believes the operating expense ratio is important to investors as it provides insight into how efficiently the Company is managing its expenses in relation to its assets.

It is a financial measurement ratio that does not take into consideration changes in interest rates.

(12) 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.

Management believes the efficiency ratio is important to investors as it 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, related to its net interest margin and non-interest income.

(13) 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.

Management believes this ratio is important to investors as it provides the yield the Company is earning on the leverage strategy transaction.

(14) The table below provides a reconciliation between performance measures presented in accordance with GAAP and the same performance measures absent the impact of the net loss on the securities transactions associated with the securities strategy, which are not presented in accordance with GAAP.

The securities strategy was non-recurring in nature;

therefore management believes it is meaningful to investors to present certain financial measures without the securities strategy to better evaluate the Company's core operations.

See information regarding the securities strategy in the Executive Summary discussion above.

For the Three Months Ended

December 31, 2023

Actual Securities Strategy

(GAAP) Strategy (Non-GAAP)

Return on average assets (annualized) 0.10 % (0.42) % 0.52 %

Return on average equity (annualized) 0.98 (3.89) 4.87

Efficiency Ratio 92.86 28.13 64.73

$ 0.02 $ (0.08) $ 0.10

(15) EPS is calculated as net income divided by average shares outstanding.

Management believes EPS is an important measure to investors as it shows the Company's earnings in relation to the Company's outstanding shares.

Rate/Volume Analysis

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

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

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

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

For the Three Months Ended

December 31, 2023 vs.

September 30, 2023 December 31, 2023 vs.

March 31, 2024 vs.

December 31, 2023

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

Volume Rate Total Volume Rate Total

Increase (Decrease) Due to

Volume Rate Total

(Dollars in thousands)

14 unchanged sentences

Net change in net interest income $ (545) $ 2,272 $ 1,727

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.

Comparison of Operating Results for the Six Months Ended March 31, 2024 and 2023

The Company recognized net income of $16.3 million, or $0.12 per share, for the current year period, compared to net income of $30.4 million, or $0.23 per share, for the prior year period.

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

Without the effects of the securities strategy, EPS would have been $0.20 for the current year period.

See the Executive Summary section above for additional discussion.

Periodically at management's discretion, we have utilized the leverage strategy to increase earnings which entails entering into short-term FHLB borrowings and depositing the proceeds from these FHLB borrowings, net of the cost to purchase FHLB stock to meet FHLB stock holding requirements, at the FRB of Kansas City.

See additional information regarding the leverage strategy in the "Financial Condition - Borrowings" section above.

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.

The net interest margin increased 17 basis points, from 1.59% for the prior year period to 1.76% for the current year period, due primarily to the leverage strategy being in place during the prior year period but not in place during the current year period.

The leverage strategy negatively impacted the net interest margin for the prior year period by 20 basis points.

The absence of the leverage strategy during the current year period was partially offset by the negative effect on the net interest margin of an increase in the costs 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.

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:

For the Six Months Ended

March 31, Change Expressed in:

2024 2023 Dollars Percent

7 unchanged sentences

Total interest and dividend income $ 184,981 $ 180,886 $ 4,095 2.3

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.

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/participations 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 loan portfolio.

The increase in interest income on MBS and investment securities was due 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 were due mainly to the leverage strategy being utilized during the prior year period and not being utilized during the current year period.

Interest income on cash and cash equivalents related to the leverage strategy decreased $27.2 million and dividend income on FHLB stock related to the leverage strategy decreased $2.8 million compared to the prior year period.

Interest income on cash and cash equivalents not associated with the leverage strategy increased $8.8 million related to an increase in the average balance of cash and cash equivalents 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:

For the Six Months Ended

March 31, Change Expressed in:

2024 2023 Dollars Percent

4 unchanged sentences

Total interest expense $ 104,068 $ 93,099 $ 10,969 11.8

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

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

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

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

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

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 $28.5 million compared to the prior year period due to the leverage strategy being in place during the prior year period and not being in place during the current year period.

Interest expense on borrowings not associated with the leverage strategy increased $1.7 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

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 Bank recorded a provision for credit losses of $424 thousand during the current year period, compared to a provision for credit losses of $4.6 million for the prior year period.

The provision for credit losses in the current year period was comprised of an $856 thousand increase in the ACL for loans, partially offset by a $432 thousand release 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:

For the Six Months Ended

March 31, Change Expressed in:

2024 2023 Dollars Percent

3 unchanged sentences

Insurance commissions 1,598 1,672 (74) (4.4)

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

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

Other non-interest income 2,470 2,180 290 13.3

Total non-interest income $ (4,251) $ 10,435 $ (14,686) (140.7)

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.

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, with no similar transaction in the prior year period.

The increase in other non-interest income was due mainly to an increase in income on BOLI related to the receipt of death benefits in the current year period while none were received in the prior year period.

Non-Interest Expense

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

For the Three Months Ended

December 31, September 30, Change Expressed in:

For the Six Months Ended

March 31, Change Expressed in:

2024 2023 Dollars Percent

11 unchanged sentences

Total non-interest expense $ 56,953 $ 56,404 $ 549 1.0

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

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

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

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

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

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

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

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

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

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

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

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

The decrease in salaries and employee benefits was a result of a decrease in full-time equivalent employees between the two periods as a result of management's decision to not backfill non-critical employees through natural attrition, along with a reduction in loan commissions.

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 decrease in information technology and related expenses was due mainly to lower third-party project management expenses related to the Bank's digital transformation project during the prior year period along with other costs no longer incurred that were associated with the previous system, partially offset by higher software licensing expenses resulting from new agreements associated with the digital transformation project.

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 during the quarter ending September 30, 2023, along with an FDIC rule that increased the FDIC initial base deposit assessment rate by approximately two basis points on January 1, 2023.

The decrease in office supplies and related expense was due primarily to the outsourcing of statement processing associated with the digital transformation and the timing of office supply purchases, along with the write-off of the Bank's remaining inventory of unissued non-contactless debit cards during the prior year period which had become obsolete.

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 74.29% for the current year period compared to 57.43% for the prior year period.

Absent the net loss from the securities strategy, the efficiency ratio would have been 63.28% for the current year period.

The change in the efficiency ratio, without the securities strategy, was due primarily to lower net interest income in the current year period compared to the prior year period.

The Company's operating expense ratio (annualized) for the current year period was 1.18% compared to 1.00% for the prior year period, due mainly to lower average assets in the current year period.

The leverage strategy was in place at times during the prior year period, which increased assets, but was not in place during the current year period.

Income Tax Expense

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

For the Three Months Ended

December 31, September 30, Change Expressed in:

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

For the Six Months Ended

March 31, Change Expressed in:

2024 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)

Income before income tax expense $ 19,285 $ 37,267 $ (17,982) (48.3) %

Income tax expense 2,980 6,838 (3,858) (56.4)

Net income $ 16,305 $ 30,429 $ (14,124) (46.4)

Effective Tax Rate 15.5 % 18.3 %

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 lower income tax expense in the current year period was a result of treating the $13.3 million net loss on the securities sale associated with the securities strategy as a discrete tax benefit.

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

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

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

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

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

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

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

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

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

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

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

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

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

Without the tax benefit, income tax expense would have been $6.2 million and the effective tax rate, would have been 19.1% for the current year period.

Average Balance Sheet

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

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

Average outstanding balances are derived from average daily balances.

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

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

For the Six Months Ended

March 31, 2024 March 31, 2023

Average Interest Average Interest

Outstanding Earned/ Yield/ Outstanding Earned/ Yield/

Amount Paid Rate Amount Paid Rate

(Dollars in thousands)

Interest-earning assets:

One- to four-family loans:

Originated $ 4,006,536 $ 70,211 3.50 % $ 4,050,149 $ 67,024 3.31 %

Correspondent purchased 2,391,638 38,934 3.26 2,383,295 36,642 3.07

Bulk purchased 135,228 1,429 2.11 145,779 847 1.16

Total one- to four-family loans 6,533,402 110,574 3.38 6,579,223 104,513 3.18

Commercial loans 1,329,123 36,974 5.47 1,085,870 25,917 4.72

Consumer loans 106,112 4,515 8.51 102,705 3,708 7.24

Total loans receivable (1)

7,968,637 152,063 3.80 7,767,798 134,138 3.45

532,774 13,653 5.13 1,197,462 9,559 1.60

Investment securities (2)(3)

221,601 4,860 4.39 525,047 1,776 0.68

FHLB stock (4)

108,108 5,114 9.46 182,737 7,765 8.52

Cash and cash equivalents (5)

338,528 9,291 5.40 1,389,121 27,648 3.94

Total interest-earning assets 9,169,648 184,981 4.02 11,062,165 180,886 3.26

Other non-interest-earning assets 467,011 255,882

Total assets $ 9,636,659 $ 11,318,047

Liabilities and stockholders' equity:

Interest-bearing liabilities:

Checking $ 882,409 883 0.20 $ 998,604 657 0.13

Savings 472,034 362 0.15 543,630 201 0.07

Money market 1,349,997 12,443 1.84 1,690,893 6,218 0.74

Retail certificates 2,589,307 48,496 3.75 2,119,905 18,882 1.79

Commercial certificates 50,426 973 3.86 36,413 301 1.66

Wholesale certificates 121,518 2,701 4.45 112,272 1,785 3.19

Total deposits 5,465,691 65,858 2.41 5,501,717 28,044 1.02

Borrowings (6)

2,414,384 38,210 3.16 3,983,434 65,055 3.25

Total interest-bearing liabilities 7,880,075 104,068 2.64 9,485,151 93,099 1.96

Non-interest-bearing deposits 532,735 575,518

Other non-interest-bearing liabilities 187,477 182,083

Stockholders' equity 1,036,372 1,075,295

Total liabilities and stockholders' equity $ 9,636,659 $ 11,318,047

Net interest income (7)

$ 80,913 $ 87,787

Net interest-earning assets $ 1,289,573 $ 1,577,014

Net interest margin (8)

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

Selected performance ratios:

Return on average assets (annualized) (9)(14)

0.34 % 0.54 %

Return on average equity (annualized) (10)(14)

Average equity to average assets 10.75 9.50

Operating expense ratio (annualized) (11)

Efficiency ratio (12)(14)

Pre-tax yield on leverage strategy (13)

(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 $101 thousand and $1.1 million for the six month periods ended March 31, 2024 and March 31, 2023, respectively.

(4) There was no FHLB stock related to the leverage strategy for the six month period ended March 31, 2024.

Included in this line, for the six month period ended March 31, 2023, is FHLB stock related to the leverage strategy with an average outstanding balance of $64.4 million and dividend income of $2.8 million, at a weighted average yield of 8.58%, and FHLB stock not related to the leverage strategy with an average outstanding balance of $118.4 million and dividend income of $5.0 million, at a weighted average yield of 8.49%.

(5) There was no cash and cash equivalents related to the leverage strategy during the six month period ended March 31, 2024.

The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $1.37 billion and interest income of $27.2 million, at a weighted average yield of 3.93% during the six month period ended March 31, 2023.

(6) There were no borrowings related to the leverage strategy during the six month period ended March 31, 2024.

Included in this line, for the six month period ended March 31, 2023, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $1.43 billion and interest paid of $28.6 million, at a weighted average rate of 3.95%, and borrowings not related to the leverage strategy with an average outstanding balance of $2.55 billion and interest paid of $36.5 million, at a weighted average rate of 2.86%.

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.