Capitol Federal Financial, Inc. 10-Q

Item 1. Financial Statements CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands, except per share amounts) March 31, September 30, 2024 2023 ASSETS: Cash and cash equivalents (includes interest-earning deposits of $ 419,332 and $ 213,830 ) $ 443,513 $ 245,605 Available-for-sale ("AFS") securities, at estimated fair value (amortized cost of $ 831,337 and $ 1,385,992 ) 842,950 1,384,482 Loans receivable, net (allowance for credit losses ("ACL") of $ 24,634 and $ 23,759 ) 7,877,569 7,970,949 Federal Home Loan Bank Topeka ("FHLB") stock, at cost 109,070 110,714 Premises and equipment, net 91,105 91,531 Income taxes receivable, net 2,644 8,531 Deferred income tax assets, net 35,390 29,605 Other assets 319,045 336,044 TOTAL ASSETS $ 9,721,286 $ 10,177,461 LIABILITIES: Deposits $ 6,141,711 $ 6,051,220 Borrowings 2,351,022 2,879,125 Advances by borrowers 52,698 62,993 Other liabilities 150,952 140,069 Total liabilities 8,696,383 9,133,407 STOCKHOLDERS' EQUITY: Preferred stock, $ .01 par value; 100,000,000 shares authorized, no shares issued or outstanding — — Common stock, $ .01 par value; 1,400,000,000 shares authorized, 132,685,065 and 135,936,375 shares issued and outstanding as of March 31, 2024 and September 30, 2023, respectively 1,327 1,359 Additional paid-in capital 1,147,029 1,166,643 Unearned compensation, Employee Stock Ownership Plan ("ESOP") ( 27,258 ) ( 28,083 ) Accumulated deficit ( 110,722 ) ( 104,565 ) Accumulated other comprehensive income ("AOCI"), net of tax 14,527 8,700 Total stockholders' equity 1,024,903 1,044,054 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,721,286 $ 10,177,461 See accompanying notes to consolidated financial statements. 3 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share amounts) For the Three Months Ended For the Six Months Ended March 31, March 31, 2024 2023 2024 2023 INTEREST AND DIVIDEND INCOME: Loans receivable $ 76,122 $ 69,319 $ 152,063 $ 134,138 Mortgage-backed securities ("MBS") 7,794 4,748 13,653 9,559 Cash and cash equivalents 4,513 10,977 9,291 27,648 FHLB stock 2,528 3,607 5,114 7,765 Investment securities 2,332 895 4,860 1,776 Total interest and dividend income 93,289 89,546 184,981 180,886 INTEREST EXPENSE: Deposits 33,415 16,140 65,858 28,044 Borrowings 18,554 31,447 38,210 65,055 Total interest expense 51,969 47,587 104,068 93,099 NET INTEREST INCOME 41,320 41,959 80,913 87,787 PROVISION FOR CREDIT LOSSES 301 891 424 4,551 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 41,019 41,068 80,489 83,236 NON-INTEREST INCOME: Deposit service fees 2,451 3,122 5,026 6,583 Insurance commissions 735 877 1,598 1,672 Net loss from securities transactions — — ( 13,345 ) — Other non-interest income 1,457 1,084 2,470 2,180 Total non-interest income 4,643 5,083 ( 4,251 ) 10,435 NON-INTEREST EXPENSE: Salaries and employee benefits 12,887 12,789 25,879 26,487 Information technology and related expense 4,954 5,789 10,323 10,859 Occupancy, net 3,481 3,568 6,853 7,042 Federal insurance premium 1,727 1,246 3,587 2,058 Regulatory and outside services 1,380 1,305 3,023 2,838 Advertising and promotional 1,271 1,333 2,259 2,166 Deposit and loan transaction costs 867 690 1,409 1,301 Office supplies and related expense 419 631 780 1,264 Other non-interest expense 1,459 1,280 2,840 2,389 Total non-interest expense 28,445 28,631 56,953 56,404 INCOME BEFORE INCOME TAX EXPENSE 17,217 17,520 19,285 37,267 INCOME TAX EXPENSE 3,455 3,331 2,980 6,838 NET INCOME $ 13,762 $ 14,189 $ 16,305 $ 30,429 Basic earnings per share ("EPS") $ 0.11 $ 0.11 $ 0.12 $ 0.23 Diluted EPS $ 0.11 $ 0.11 $ 0.12 $ 0.23 Basic weighted average common shares 130,536,246 133,150,224 131,449,744 133,903,769 Diluted weighted average common shares 130,536,246 133,150,224 131,449,744 133,903,769 See accompanying notes to consolidated financial statements. 4 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands) For the Three Months Ended For the Six Months Ended March 31, March 31, 2024 2023 2024 2023 Net income $ 13,762 $ 14,189 $ 16,305 $ 30,429 Other comprehensive income, net of tax: Unrealized (losses) gains on AFS securities arising during the period, net of taxes of $ 1,766 , $( 5,415 ), $( 3,584 ), and $( 9,626 ) ( 5,471 ) 16,777 11,110 29,827 Reclassification adjustment for gross gains on AFS securities included in net income, net of taxes of $ 0 , $ 0 , $ 383 , and $ 0 — — ( 1,188 ) — Unrealized gains (losses) on cash flow hedges arising during the period, net of taxes of $( 814 ), $ 483 , $ 153 , and $ 251 2,521 ( 1,495 ) ( 477 ) ( 780 ) Reclassification adjustment for cash flow hedge amounts included in net income, net of taxes of $ 542 , $ 427 , $ 1,168 , and $ 664 ( 1,678 ) ( 1,323 ) ( 3,618 ) ( 2,057 ) Comprehensive income $ 9,134 $ 28,148 $ 22,132 $ 57,419 See accompanying notes to consolidated financial statements. 5 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) (Dollars in thousands, except per share amounts) For the Six Months Ended March 31, 2024 Additional Unearned Total Common Paid-In Compensation Accumulated Stockholders' Stock Capital ESOP Deficit AOCI Equity Balance at September 30, 2023 $ 1,359 $ 1,166,643 $ ( 28,083 ) $ ( 104,565 ) $ 8,700 $ 1,044,054 Net income 2,543 2,543 Cumulative effect of adopting Accounting Standards Update ("ASU") 2022-02, net of tax ( 27 ) ( 27 ) Other comprehensive income, net of tax 10,455 10,455 ESOP activity ( 190 ) 412 222 Restricted stock activity, net ( 6 ) ( 6 ) Stock-based compensation 87 87 Repurchase of common stock ( 20 ) ( 11,879 ) ( 11,899 ) Cash dividends to stockholders ($ 0.085 per share) ( 11,308 ) ( 11,308 ) Balance at December 31, 2023 $ 1,339 $ 1,154,655 $ ( 27,671 ) $ ( 113,357 ) $ 19,155 $ 1,034,121 Net income 13,762 13,762 Other comprehensive loss, net of tax ( 4,628 ) ( 4,628 ) ESOP activity ( 168 ) 413 245 Restricted stock activity, net 1 ( 3 ) ( 2 ) Stock-based compensation 82 82 Repurchase of common stock ( 13 ) ( 7,537 ) ( 7,550 ) Cash dividends to stockholders ($ 0.085 per share) ( 11,127 ) ( 11,127 ) Balance at March 31, 2024 $ 1,327 $ 1,147,029 $ ( 27,258 ) $ ( 110,722 ) $ 14,527 $ 1,024,903 For the Six Months Ended March 31, 2023 Additional Unearned Total Common Paid-In Compensation Retained Stockholders' Stock Capital ESOP Earnings AOCI Equity Balance at September 30, 2022 $ 1,388 $ 1,190,213 $ ( 29,735 ) $ 80,266 $ ( 145,633 ) $ 1,096,499 Net income 16,240 16,240 Other comprehensive income, net of tax 13,031 13,031 ESOP activity ( 72 ) 413 341 Stock-based compensation 89 89 Repurchase of common stock ( 27 ) ( 22,169 ) ( 22,196 ) Cash dividends to stockholders ($ 0.365 per share) ( 49,209 ) ( 49,209 ) Balance at December 31, 2022 $ 1,361 $ 1,168,061 $ ( 29,322 ) $ 47,297 $ ( 132,602 ) $ 1,054,795 Net income 14,189 14,189 Other comprehensive income, net of tax 13,959 13,959 ESOP activity ( 76 ) 412 336 Stock-based compensation 74 74 Cash dividends to stockholders ($ 0.085 per share) ( 11,319 ) ( 11,319 ) Balance at March 31, 2023 1,361 1,168,059 ( 28,910 ) 50,167 ( 118,643 ) 1,072,034 6 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) For the Six Months Ended March 31, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net income 16,305 30,429 Adjustments to reconcile net income to net cash provided by operating activities: FHLB stock dividends ( 5,114 ) ( 7,765 ) Provision for credit losses 424 4,551 Originations of loans receivable held-for-sale ("LHFS") ( 425 ) ( 218 ) Proceeds from sales of LHFS 431 215 Amortization and accretion of premiums and discounts on securities ( 5,741 ) 1,559 Depreciation and amortization of premises and equipment 4,078 4,581 Amortization of intangible assets 379 548 Amortization of deferred amounts related to FHLB advances, net 762 886 Common stock committed to be released for allocation - ESOP 467 677 Stock-based compensation 169 163 Net loss from securities transactions 13,345 — Changes in: Unrestricted cash collateral from derivative counterparties, net ( 5,800 ) ( 2,500 ) Other assets, net 7,076 1,461 Income taxes payable/receivable, net 5,875 ( 2,650 ) Deferred income tax liabilities, net ( 7,656 ) 787 Other liabilities ( 9,407 ) ( 7,990 ) Net cash provided by operating activities 15,168 24,734 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of AFS securities ( 951,527 ) — Proceeds from calls, maturities and principal reductions of AFS securities 255,533 95,393 Proceeds from sale of AFS securities 1,272,512 — Proceeds from the redemption of FHLB stock 6,758 214,120 Purchase of FHLB stock — ( 233,827 ) Net change in loans receivable 92,101 ( 503,585 ) Proceeds from sale of participating interest in loans receivable — 5,563 Purchase of premises and equipment ( 2,732 ) ( 2,269 ) Proceeds from sale of other real estate owned ("OREO") 396 347 Proceeds from sale of assets held-for-sale 180 — Proceeds from bank-owned life insurance ("BOLI") death benefit 1,049 — Net cash provided by (used in) investing activities 674,270 ( 424,258 ) (Continued) 7 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) For the Six Months Ended March 31, 2024 2023 CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid ( 22,435 ) ( 60,528 ) Net change in deposits 90,491 ( 50,431 ) Proceeds from borrowings 225,100 3,092,000 Repayments on borrowings ( 754,942 ) ( 2,528,436 ) Change in advances by borrowers ( 10,295 ) ( 19,872 ) Repurchase of common stock ( 19,449 ) ( 22,196 ) Net cash (used in) provided by financing activities ( 491,530 ) 410,537 NET INCREASE IN CASH AND CASH EQUIVALENTS 197,908 11,013 CASH AND CASH EQUIVALENTS: Beginning of period 245,605 49,194 End of period $ 443,513 $ 60,207 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES: Purchase of securities that will settle in a subsequent period $ 29,467 $ — See accompanying notes to consolidated financial statements. (Concluded) 8 Notes to Consolidated Financial Statements (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The consolidated financial statements include the accounts of Capitol Federal Financial, Inc.® (the "Company") and its wholly-owned subsidiary, Capitol Federal Savings Bank (the "Bank"). The Bank has two wholly-owned subsidiaries, Capitol Funds, Inc. and Capital City Investments, Inc. Capitol Funds, Inc. has a wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company. Capital City Investments, Inc. is a real estate and investment holding company. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2023, filed with the Securities and Exchange Commission ("SEC"). Interim results are not necessarily indicative of results for a full year. Net Presentation of Cash Flows Related to Borrowings - At times, the Bank enters into FHLB advances with contractual maturities of 90 days or less. Cash flows related to these advances are reported on a net basis in the consolidated statements of cash flows. Recent Accounting Pronouncements - In March 2022, the Financial Accounting Standards Board ("FASB") issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings ("TDRs") and Vintage Disclosures . This ASU eliminates the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, this ASU requires that an entity disclose current-period gross write-offs by year of origination for financing receivables within the scope of Accounting Standards Codification ("ASC") 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost . The Company adopted the ASU on October 1, 2023 on a prospective basis, except for the amendments impacting the measurement of the ACL for TDRs, which were adopted on a modified retrospective approach. Upon adoption, the Company recorded a $ 20 thousand increase in ACL, a $ 16 thousand increase in reserves for off-balance sheet exposures, and a cumulative effect-adjustment to accumulated deficit of $ 27 thousand, net of tax. The adjustments are attributable to including TDRs in the ACL model, as of October 1, 2023. The new disclosure requirements associated with this ASU are included below and in Note 4. Loans Receivable and Allowance for Credit Losses. The following significant accounting policies have been updated since the Company's 2023 Annual Report on Form 10-K to reflect the adoption of ASU 2022-02. Troubled debt restructurings - Prior to the Company's adoption of ASU 2022-02, a loan was accounted for as a TDR if the Bank granted a concession to a borrower experiencing financial difficulties. Such concessions generally involve extensions of loan maturity dates, the granting of periods during which reduced payment amounts are required, and/or reductions in interest rates. The Bank does not forgive principal or interest, nor does it commit to lend additional funds to these borrowers, except for situations generally involving the capitalization of delinquent interest and/or escrow on one- to four-family loans and consumer loans, not to exceed the original loan amount. In the case of commercial loans, the Bank generally does not forgive principal or interest or commit to lend additional funds unless the borrower provides additional collateral or other enhancements to improve the credit quality. Loan modifications - The TDR policy outlined above regarding Bank concessions to a borrower experiencing financial difficulty continues to apply for loan modifications upon adoption of ASU 2022-02 on October 1, 2023. If the change in the loan terms resulting from the modification is deemed to be more than minor, all existing unamortized deferred loan origination fees and costs are recognized at the time of modification. Modifications of loans to borrowers experiencing financial difficulty that are in the form of principal forgiveness, interest rate reductions, other-than-insignificant payment delays, or a term extension (or a combination thereof) require disclosure in the Company's footnotes. The Company's modification disclosures are included in Note 4. Loans Receivable and Allowance for Credit Losses. Modified loans are included in the Company's ACL model based on the risk characteristics of the loan. If a modified loan is deemed uncollectible and no longer shares similar risk characteristics within the respective loan pool in the ACL model, the loan is evaluated on an individual basis and any loss is charged-off against the related ACL. In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements - Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative. This ASU incorporates a variety of Topics into the Codification that are currently included in SEC Regulations S-X and S-K. The ASU is intended to align the accounting standards of GAAP with SEC Regulations S-X and S-K. Each amendment in the ASU will only become effective for the Company if the SEC removes the related disclosure or presentation requirement from its existing regulations by June 30, 2027. This may result in disclosures currently presented outside of the Company's financial statements being relocated to the Company's financial statements. The amendments will be applied 9 prospectively by the Company. The ASU is not expected to have a material impact on the Company's disclosures as the Company is currently subject to SEC Regulations S-X and S-K. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures. This ASU requires enhanced disclosures of segment information for all public entities, including those that have a single reportable segment, primarily in the area of segment revenues and expenses. Entities that have a single reportable segment, like the Company, will be required to provide all the disclosures required by this ASU and all existing segment disclosures requirements in ASC 280, Segment Reporting . This ASU is effective for the Company on October 1, 2024. The Company is currently evaluating the effect this ASU will have on the Company's segment disclosures. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures . This ASU requires public entities to provide additional annual disclosures regarding specific categories of the income tax rate reconciliation and additional information for reconciling items within the income tax rate reconciliation that meet a certain quantitative threshold. This ASU is effective for the Company on October 1, 2025. The Company is currently evaluating the effect this ASU will have on the Company's income tax disclosures. In March 2024, the FASB issued ASU 2024-02, Codification Improvements - Amendments to Remove References to the Concepts Statements. This ASU removes references to various Concept Statements to simplify the Codification and provide a distinction between authoritative and nonauthoritative literature. This ASU is effective for the Company on October 1, 2025. The Company is currently evaluating this ASU, but it is not expected to have a significant impact on the Company's consolidated financial condition, results of operations, and disclosures. 2. EARNINGS PER SHARE Shares acquired by the ESOP are not included in basic average shares outstanding until the shares are committed for allocation or vested to an employee's individual account. Unvested shares awarded pursuant to the Company's restricted stock benefit plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security. For the Three Months Ended For the Six Months Ended March 31, March 31, 2024 2023 2024 2023 (Dollars in thousands, except per share amounts) Net income $ 13,762 $ 14,189 $ 16,305 $ 30,429 Income allocated to participating securities ( 10 ) ( 6 ) ( 12 ) ( 14 ) Net income available to common stockholders $ 13,752 $ 14,183 $ 16,293 $ 30,415 Total basic average common shares outstanding 130,536,246 133,150,224 131,449,744 133,903,769 Effect of dilutive stock options — — — — Total diluted average common shares outstanding 130,536,246 133,150,224 131,449,744 133,903,769 Net EPS: Basic $ 0.11 $ 0.11 $ 0.12 $ 0.23 Diluted $ 0.11 $ 0.11 $ 0.12 $ 0.23 Antidilutive stock options, excluded from the diluted average common shares outstanding calculation 326,572 373,541 331,041 375,808 10 3. SECURITIES The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of AFS securities at the dates presented. The majority of our securities are government guaranteed or issued by a Government Sponsored Enterprise ("GSE"). March 31, 2024 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in thousands) MBS $ 636,387 $ 13,121 $ 670 $ 648,838 U.S. Treasury bills 99,408 1 6 99,403 GSE debentures 91,542 — 82 91,460 Corporate bonds 4,000 — 751 3,249 $ 831,337 $ 13,122 $ 1,509 $ 842,950 September 30, 2023 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in thousands) MBS $ 901,440 $ 113 $ 819 $ 900,734 GSE debentures 479,610 — 182 479,428 Corporate bonds 4,000 — 622 3,378 Municipal bonds 942 — — 942 $ 1,385,992 $ 113 $ 1,623 $ 1,384,482 The following tables summarize the estimated fair value and gross unrealized losses of those AFS securities on which an unrealized loss at the dates presented was reported and the continuous unrealized loss position for less than 12 months and equal to or greater than 12 months as of the dates presented. March 31, 2024 Less Than 12 Months Equal to or Greater Than 12 Months Estimated Unrealized Estimated Unrealized Fair Value Losses Fair Value Losses (Dollars in thousands) MBS $ 109,410 $ 426 $ 20,150 $ 244 U.S. Treasury bills 74,440 6 — — GSE debentures 81,460 82 — — Corporate bonds — — 3,249 751 $ 265,310 $ 514 $ 23,399 $ 995 September 30, 2023 Less Than 12 Months Equal to or Greater Than 12 Months Estimated Unrealized Estimated Unrealized Fair Value Losses Fair Value Losses (Dollars in thousands) MBS $ 6,179 $ 109 $ 34,555 $ 710 GSE debentures — — 24,818 182 Corporate bonds — — 3,378 622 $ 6,179 $ 109 $ 62,751 $ 1,514 11 The unrealized losses at March 31, 2024 were a result of an increase in market yields from the time the securities were purchased. In general, as market yields rise, the fair value of securities will decrease; as market yields fall, the fair value of securities will increase. Management did not record an ACL on securities in an unrealized loss position at March 31, 2024 as management does not believe any of the securities were impaired due to credit quality reasons. The issuers of these securities continue to make scheduled and timely principal and interest payments, as applicable, under the contractual term of the securities so management believes the entire principal balance will be collected as scheduled. Additionally, management does not have the intent to sell any of the securities and believes that it is more likely than not that the Company will not be required to sell the securities before the recovery of the remaining amortized cost, which could be at maturity. The fair value is expected to recover as the securities approach their maturity date, if not before, or if market yields for such securities decline. The amortized cost and estimated fair value of AFS debt securities as of March 31, 2024, by contractual maturity, are shown below. Actual principal repayments may differ from contractual maturities due to prepayment or early call privileges by the issuer. In the case of MBS, borrowers on the underlying loans generally have the right to prepay their loans without penalty. For this reason, MBS are not included in the maturity categories. Amortized Estimated Cost Fair Value (Dollars in thousands) One year or less $ 119,035 $ 119,028 Five years through ten years 75,915 75,084 194,950 194,112 MBS 636,387 648,838 $ 831,337 $ 842,950 The following table presents the taxable and non-taxable components of interest income on investment securities for the periods presented. For the Three Months Ended For the Six Months Ended March 31, March 31, 2024 2023 2024 2023 (Dollars in thousands) Taxable $ 2,332 $ 888 $ 4,858 $ 1,762 Non-taxable — 7 2 14 $ 2,332 $ 895 $ 4,860 $ 1,776 The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of the dates presented. March 31, 2024 September 30, 2023 (Dollars in thousands) Public unit deposits $ 156,652 $ 178,396 Federal Reserve Bank of Kansas City ("FRB of Kansas City") borrowings 117,814 519,195 $ 274,466 $ 697,591 . During the quarter ended December 31, 2023, the Bank sold $ 1.30 billion of AFS securities. The Bank received gross proceeds of $ 1.27 billion from the sale and realized gross losses of $ 14.9 million and gross gains of $ 1.6 million, resulting in a net loss of $ 13.3 million on the sale during the quarter ended December 31, 2023. All other dispositions of securities during the current year and prior year periods were the result of principal repayments, calls, or maturities. 12 4. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES Loans receivable, net at the dates presented is summarized as follows: March 31, 2024 September 30, 2023 (Dollars in thousands) One- to four-family: Originated $ 3,950,097 $ 3,978,837 Correspondent purchased 2,314,448 2,405,911 Bulk purchased 132,284 137,193 Construction 40,628 69,974 Total 6,437,457 6,591,915 Commercial: Commercial real estate 1,035,634 995,788 Commercial and industrial 112,123 112,953 Construction 202,201 178,746 Total 1,349,958 1,287,487 Consumer: Home equity 96,114 95,723 Other 9,203 9,256 Total 105,317 104,979 Total loans receivable 7,892,732 7,984,381 Less: ACL 24,634 23,759 Deferred loan fees/discounts 30,007 31,335 Premiums/deferred costs ( 39,478 ) ( 41,662 ) $ 7,877,569 $ 7,970,949 Lending Practices and Underwriting Standards - Originating one- to four-family loans is the Bank's primary lending business. The Bank also purchases one- to four-family loans from correspondent lenders, but to a much lesser extent in the current fiscal year compared to prior years, and originates consumer loans primarily secured by one- to four-family residential properties and originates and participates in commercial loans. The Bank has a loan concentration in one- to four-family loans and a geographic concentration of these loans in Kansas and Missouri. One- to four-family loans - Full documentation to support an applicant's credit and income, and sufficient funds to cover all applicable fees and reserves at closing, are required on all loans. Properties securing one- to four-family loans are appraised by either staff appraisers or fee appraisers, both of which are independent of the loan origination function. The underwriting standards for loans purchased from correspondent lenders are generally similar to the Bank's internal underwriting standards. The underwriting of loans purchased from correspondent lenders on a loan-by-loan basis is performed by the Bank's underwriters. The Bank also originates owner-occupied construction-to-permanent loans secured by one- to four-family residential real estate. Construction draw requests and the supporting documentation are reviewed and approved by designated personnel. The Bank also performs regular documented inspections of the construction project to ensure the funds are being used for the intended purpose and the project is being completed according to the plans and specifications provided. Commercial loans - The Bank's commercial portfolio includes loans that are originated by the Bank or in participation with a lead bank. For commercial participation loans, the Bank performs the same underwriting procedures as if the loan was originated by the Bank. 13 When underwriting a commercial real estate or commercial construction loan, several factors are considered, such as the income producing potential of the property, cash equity provided by the borrower, the financial strength of the borrower, managerial expertise of the borrower or tenant, feasibility studies, lending experience with the borrower and the marketability of the property. At the time of origination, loan-to-value ("LTV") ratios on commercial real estate loans generally do not exceed 85 % of the appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.15 . For commercial construction loans, LTV ratios generally do not exceed 80 % of the projected appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.15 , but it applies to the projected cash flows, and the borrower must have successful experience with the construction and operation of properties similar to the subject property. Appraisals on properties securing these loans are performed by independent state certified fee appraisers. The Bank's commercial and industrial loans are generally made in the Bank's market areas and are underwritten on the basis of the borrower's ability to service the debt from income. Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets. In general, commercial and industrial loans involve more credit risk than commercial real estate loans due to the type of collateral securing commercial and industrial loans. As a result of these additional complexities, variables and risks, commercial and industrial loans generally require more thorough underwriting and servicing than other types of loans. Consumer loans - The Bank offers a variety of consumer loans, the majority of which are home equity loans and lines of credit for which the Bank also has the first mortgage or the first lien position. The underwriting standards for consumer loans include a determination of an applicant's payment history on other debts and an assessment of an applicant's ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of an applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security in relation to the proposed loan amount. Credit Quality Indicators - Based on the Bank's lending emphasis and underwriting standards, management has segmented the loan portfolio into three segments: (1) one- to four-family; (2) consumer; and (3) commercial. These segments are further divided into classes for purposes of providing disaggregated credit quality information about the loan portfolio. The classes are: one- to four-family - originated, one- to four-family - correspondent purchased, one- to four-family - bulk purchased, consumer - home equity, consumer - other, commercial - commercial real estate, and commercial - commercial and industrial. One- to four-family construction loans are included in the originated class and commercial construction loans are included in the commercial real estate class. As part of the on-going monitoring of the credit quality of the Company's loan portfolio, management tracks certain credit quality indicators including trends related to loan classification and delinquency status. Loan Classification - In accordance with the Bank's asset classification policy, management regularly reviews the problem loans in the Bank's portfolio to determine whether any require classification. Loan classifications are defined as follows: • Special mention - These loans are performing loans on which known information about the collateral pledged or the possible credit problems of the borrower(s) have caused management to have doubts as to the ability of the borrower(s) to comply with present loan repayment terms and which may result in the future inclusion of such loans in the nonaccrual loan categories. • Substandard - A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those characterized by the distinct possibility the Bank will sustain some loss if the deficiencies are not corrected. • Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses present make collection or liquidation in full on the basis of currently existing facts and conditions and values highly questionable and improbable. • Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as assets on the books is not warranted. 14 The following tables set forth, as of the dates indicated, the amortized cost of loans by class of financing receivable, year of origination or most recent credit decision, and loan classification. All revolving lines of credit and revolving lines of credit converted to term loans are presented separately, regardless of origination year. Loans classified as doubtful or loss are individually evaluated for loss. At March 31, 2024 and September 30, 2023, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off. March 31, 2024 Revolving Line of Current Fiscal Fiscal Fiscal Fiscal Revolving Credit Fiscal Year Year Year Year Prior Line of Converted Year 2023 2022 2021 2020 Years Credit to Term Total (Dollars in thousands) One- to four-family: Originated Pass $ 83,561 $ 327,985 $ 592,527 $ 844,641 $ 547,511 $ 1,552,672 $ — $ — $ 3,948,897 Special Mention — — 2,567 1,988 1,176 10,133 — — 15,864 Substandard — — — 458 660 9,513 — — 10,631 Correspondent purchased Pass 1,707 337,286 499,356 588,099 237,402 665,907 — — 2,329,757 Special Mention — 938 911 1,771 413 1,658 — — 5,691 Substandard — — 1,418 266 — 5,499 — — 7,183 Bulk purchased Pass — — — — — 129,562 — — 129,562 Special Mention — — — — — — — — — Substandard — — — — — 3,175 — — 3,175 85,268 666,209 1,096,779 1,437,223 787,162 2,378,119 — — 6,450,760 Commercial: Commercial real estate Pass 172,946 391,650 295,398 145,222 79,036 128,647 11,952 — 1,224,851 Special Mention 4,567 2,462 — — — — 46 — 7,075 Substandard — 790 — — 594 464 — — 1,848 Commercial and industrial Pass 7,881 32,427 19,776 9,892 2,242 2,641 24,349 — 99,208 Special Mention 455 12,322 — — — — — — 12,777 Substandard — — — — — 82 40 — 122 185,849 439,651 315,174 155,114 81,872 131,834 36,387 — 1,345,881 Consumer: Home equity Pass 3,880 5,050 5,216 1,639 979 2,529 70,536 6,027 95,856 Special Mention — — — — — 16 43 202 261 Substandard — — — — — 7 169 67 243 Other Pass 2,170 3,721 2,086 527 183 149 298 — 9,134 Special Mention — — — — 2 — — — 2 Substandard — 1 63 — 2 — — — 66 6,050 8,772 7,365 2,166 1,166 2,701 71,046 6,296 105,562 Total $ 277,167 $ 1,114,632 $ 1,419,318 $ 1,594,503 $ 870,200 $ 2,512,654 $ 107,433 $ 6,296 $ 7,902,203 15 September 30, 2023 Revolving Line of Fiscal Fiscal Fiscal Fiscal Fiscal Revolving Credit Year Year Year Year Year Prior Line of Converted 2023 2022 2021 2020 2019 Years Credit to Term Total (Dollars in thousands) One- to four-family: Originated Pass $ 318,569 $ 597,298 $ 874,518 $ 568,081 $ 251,773 $ 1,398,616 $ — $ — $ 4,008,855 Special Mention — 1,883 1,468 767 1,863 8,067 — — 14,048 Substandard 292 155 221 564 939 7,954 — — 10,125 Correspondent purchased Pass 346,084 517,976 607,968 246,926 62,744 643,520 — — 2,425,218 Special Mention 308 674 1,674 420 357 1,133 — — 4,566 Substandard — — — 564 — 5,402 — — 5,966 Bulk purchased Pass — — — — — 134,464 — — 134,464 Special Mention — — — — — — — — — Substandard — — — — — 3,208 — — 3,208 665,253 1,117,986 1,485,849 817,322 317,676 2,202,364 — — 6,606,450 Commercial: Commercial real estate Pass 403,269 301,164 208,942 81,478 82,027 79,170 10,448 — 1,166,498 Special Mention 2,483 — — — — — — — 2,483 Substandard 67 — — 594 219 255 — — 1,135 Commercial and industrial Pass 30,206 23,166 11,740 3,228 2,693 748 27,104 — 98,885 Special Mention 13,191 — — — — — 699 — 13,890 Substandard — — — 73 — 82 — — 155 449,216 324,330 220,682 85,373 84,939 80,255 38,251 — 1,283,046 Consumer: Home equity Pass 5,501 5,624 1,955 1,069 746 2,224 72,119 6,205 95,443 Special Mention — 46 — — — 21 62 195 324 Substandard — — — — — 15 125 48 188 Other Pass 4,758 2,693 787 338 133 129 412 — 9,250 Special Mention — — — 4 — — — 1 5 Substandard 2 — — — — — — — 2 10,261 8,363 2,742 1,411 879 2,389 72,718 6,449 105,212 Total $ 1,124,730 $ 1,450,679 $ 1,709,273 $ 904,106 $ 403,494 $ 2,285,008 $ 110,969 $ 6,449 $ 7,994,708 16 Delinquency Status - The following tables set forth, as of the dates indicated, the amortized cost of current loans, loans 30 to 89 days delinquent, and loans 90 or more days delinquent or in foreclosure ("90+/FC"), by class of financing receivable and year of origination or most recent credit decision as of the dates indicated. All revolving lines of credit and revolving lines of credit converted to term loans are presented separately, regardless of origination year. March 31, 2024 Revolving Line of Current Fiscal Fiscal Fiscal Fiscal Revolving Credit Fiscal Year Year Year Year Prior Line of Converted Year 2023 2022 2021 2020 Years Credit to Term Total (Dollars in thousands) One- to four-family: Originated Current $ 83,561 $ 327,697 $ 594,810 $ 846,216 $ 548,960 $ 1,564,985 $ — $ — $ 3,966,229 30-89 — 288 284 632 287 5,297 — — 6,788 90+/FC — — — 239 100 2,036 — — 2,375 Correspondent purchased Current 1,707 337,945 500,267 588,911 237,815 668,766 — — 2,335,411 30-89 — 279 — 1,225 — 1,685 — — 3,189 90+/FC — — 1,418 — — 2,613 — — 4,031 Bulk purchased Current — — — — — 130,914 — — 130,914 30-89 — — — — — 860 — — 860 90+/FC — — — — — 963 — — 963 85,268 666,209 1,096,779 1,437,223 787,162 2,378,119 — — 6,450,760 Commercial: Commercial real estate Current 177,437 394,113 295,398 144,209 78,953 127,485 11,998 — 1,229,593 30-89 76 770 — 1,013 84 1,162 — — 3,105 90+/FC — 19 — — 593 464 — — 1,076 Commercial and industrial Current 8,336 44,749 19,776 9,892 2,242 2,636 24,105 — 111,736 30-89 — — — — — — 244 — 244 90+/FC — — — — — 87 40 — 127 185,849 439,651 315,174 155,114 81,872 131,834 36,387 — 1,345,881 Consumer: Home equity Current 3,880 5,030 5,070 1,639 979 2,523 70,312 6,202 95,635 30-89 — 20 146 — — 22 306 47 541 90+/FC — — — — — 7 130 47 184 Other Current 2,170 3,702 2,055 527 181 149 292 — 9,076 30-89 — 19 31 — 4 — 6 — 60 90+/FC — 1 63 — 2 — — — 66 6,050 8,772 7,365 2,166 1,166 2,701 71,046 6,296 105,562 Total $ 277,167 $ 1,114,632 $ 1,419,318 $ 1,594,503 $ 870,200 $ 2,512,654 $ 107,433 $ 6,296 $ 7,902,203 17 September 30, 2023 Revolving Line of Fiscal Fiscal Fiscal Fiscal Fiscal Revolving Credit Year Year Year Year Year Prior Line of Converted 2023 2022 2021 2020 2019 Years Credit to Term Total (Dollars in thousands) One- to four-family: Originated Current $ 318,211 $ 598,283 $ 875,563 $ 567,975 $ 253,546 $ 1,407,090 $ — $ — $ 4,020,668 30-89 358 898 644 1,437 820 5,960 — — 10,117 90+/FC 292 155 — — 209 1,587 — — 2,243 Correspondent purchased Current 346,084 518,650 608,573 247,346 62,652 643,739 — — 2,427,044 30-89 308 — 1,069 564 449 2,862 — — 5,252 90+/FC — — — — — 3,454 — — 3,454 Bulk purchased Current — — — — — 136,577 — — 136,577 30-89 — — — — — 153 — — 153 90+/FC — — — — — 942 — — 942 665,253 1,117,986 1,485,849 817,322 317,676 2,202,364 — — 6,606,450 Commercial: Commercial real estate Current 404,867 301,164 208,942 81,478 82,027 79,188 10,448 — 1,168,114 30-89 36 — — — — — — — 36 90+/FC 916 — — 594 219 237 — — 1,966 Commercial and industrial Current 43,397 23,166 11,740 3,228 2,690 748 27,684 — 112,653 30-89 — — — — 2 — 57 — 59 90+/FC — — — 73 1 82 62 — 218 449,216 324,330 220,682 85,373 84,939 80,255 38,251 — 1,283,046 Consumer: Home equity Current 5,428 5,631 1,955 990 746 2,195 71,986 6,312 95,243 30-89 73 39 — 79 — 50 239 125 605 90+/FC — — — — — 15 81 11 107 Other Current 4,737 2,613 765 338 132 129 412 — 9,126 30-89 17 80 22 4 1 — — 1 125 90+/FC 6 — — — — — — — 6 10,261 8,363 2,742 1,411 879 2,389 72,718 6,449 105,212 Total $ 1,124,730 $ 1,450,679 $ 1,709,273 $ 904,106 $ 403,494 $ 2,285,008 $ 110,969 $ 6,449 $ 7,994,708 18 Gross Charge-Offs - Since the adoption of ASU 2022-02 on October 1, 2023, the Company has been required to present gross charge-offs by class of financing receivable and year of origination or most recent credit decision. The following table sets forth the required gross charge-off information for the six month period ended March 31, 2024. Revolving Lines Current Fiscal Fiscal Fiscal Fiscal Revolving of Credit Fiscal Year Year Year Year Prior Lines of Converted to Year 2023 2022 2021 2020 Years Credit Term Total (Dollars in thousands) One- to four-family: Originated $ — $ — $ — $ — $ — $ — $ — $ — $ — Correspondent purchased — — — — — — — — — Bulk purchased — — — — — — — — — — — — — — — — — — Commercial: Commercial real estate — — — — — 10 — — 10 Commercial and Industrial — — — — — — — — — — — — — — 10 — — 10 Consumer: Home Equity 2 1 — — — — — — 3 Other — 8 — — — 4 — — 12 2 9 — — — 4 — — 15 Total $ 2 $ 9 $ — $ — $ — $ 14 $ — $ — $ 25 19 Delinquent and Nonaccrual Loans - The following tables present the amortized cost, at the dates indicated, by class, of loans 30 to 89 days delinquent, loans 90 or more days delinquent or in foreclosure, total delinquent loans, current loans, and total loans. At March 31, 2024 and September 30, 2023, all loans 90 or more days delinquent were on nonaccrual status. March 31, 2024 90 or More Days Total Total 30 to 89 Days Delinquent or Delinquent Current Amortized Delinquent in Foreclosure Loans Loans Cost (Dollars in thousands) One- to four-family: Originated $ 6,788 $ 2,375 $ 9,163 $ 3,966,229 $ 3,975,392 Correspondent purchased 3,189 4,031 7,220 2,335,411 2,342,631 Bulk purchased 860 963 1,823 130,914 132,737 Commercial: Commercial real estate 3,105 1,076 4,181 1,229,593 1,233,774 Commercial and industrial 244 127 371 111,736 112,107 Consumer: Home equity 541 184 725 95,635 96,360 Other 60 66 126 9,076 9,202 $ 14,787 $ 8,822 $ 23,609 $ 7,878,594 $ 7,902,203 September 30, 2023 90 or More Days Total Total 30 to 89 Days Delinquent or Delinquent Current Amortized Delinquent in Foreclosure Loans Loans Cost (Dollars in thousands) One- to four-family: Originated $ 10,117 $ 2,243 $ 12,360 $ 4,020,668 $ 4,033,028 Correspondent purchased 5,252 3,454 8,706 2,427,044 2,435,750 Bulk purchased 153 942 1,095 136,577 137,672 Commercial: Commercial real estate 36 1,966 2,002 1,168,114 1,170,116 Commercial and industrial 59 218 277 112,653 112,930 Consumer: Home equity 605 107 712 95,243 95,955 Other 125 6 131 9,126 9,257 $ 16,347 $ 8,936 $ 25,283 $ 7,969,425 $ 7,994,708 The amortized cost of mortgage loans secured by residential real estate for which formal foreclosure proceedings were in process as of March 31, 2024 and September 30, 2023 was $ 3.2 million and $ 2.5 million, respectively, which is included in loans 90 or more days delinquent or in foreclosure in the tables above. The carrying value of residential OREO held as a result of obtaining physical possession upon completion of a foreclosure or through completion of a deed in lieu of foreclosure was $ 67 thousand at March 31, 2024 and $ 219 thousand at September 30, 2023. 20 The following table presents the amortized cost at March 31, 2024 and September 30, 2023, by class, of loans classified as nonaccrual. Additionally, the amortized cost of nonaccrual loans that had no related ACL is presented, all of which were individually evaluated for loss and any identified losses have been charged off. March 31, 2024 September 30, 2023 Nonaccrual Loans Nonaccrual Loans with No ACL Nonaccrual Loans Nonaccrual Loans with No ACL (Dollars in thousands) One- to four-family: Originated $ 2,375 $ 159 $ 2,457 $ 471 Correspondent purchased 4,031 — 3,739 285 Bulk purchased 963 630 942 630 Commercial: Commercial real estate 1,076 444 1,984 446 Commercial and industrial 153 83 218 155 Consumer: Home equity 184 — 107 3 Other 66 — 6 — $ 8,848 $ 1,316 $ 9,453 $ 1,990 Loan Modifications - The following tables present the amortized cost basis of loans as of March 31, 2024 that were both experiencing financial difficulties and modified during the periods noted, by class of financing receivable and by type of modification. Also presented in the tables is the percentage of the amortized cost basis of loans as of March 31, 2024 that were modified to borrowers experiencing financial difficulties as compared to the amortized cost basis of each class of financing receivable as of March 31, 2024. During the three months and six months ended March 31, 2024, the Company did not charge-off any amounts related to the loans presented in the table below. The Company has not committed to lend additional amounts to borrowers included in these tables. For the Three Months Ended March 31, 2024 Combination- Total Term Extension Class of Principal Interest Rate Payment Term and Financing Forgiveness Reduction Delay Extension Payment Delay Total Receivable (Dollars in thousands) One- to four-family: Originated $ — $ — $ — $ — $ 3,429 $ 3,429 0.09 % Correspondent — — — — 845 845 0.04 Bulk purchased — — — — — — — — — — — 4,275 4,275 0.07 Commercial: Commercial real estate — — — — 238 238 0.02 Commercial and industrial — — — — 455 455 0.41 — — — — 693 693 0.05 Consumer loans: Home equity — — — — — — — Other — — — — — — — — — — — — — — Total $ — $ — $ — $ — $ 4,968 $ 4,968 0.06 21 For the Six Months Ended March 31, 2024 Combination- Total Term Extension Class of Principal Interest Rate Payment Term and Financing Forgiveness Reduction Delay Extension Payment Delay Total Receivable (Dollars in thousands) One- to four-family: Originated $ — $ — $ — $ — $ 7,385 $ 7,385 0.19 % Correspondent — — — — 1,744 1,744 0.07 Bulk purchased — — — — — — — — — — — 9,129 9,129 0.14 Commercial: Commercial real estate — — — — 238 238 0.02 Commercial and industrial — — — — 455 455 0.41 — — — — 693 693 0.05 Consumer loans: Home equity — — — — — — — Other — — — — — — — — — — — — — — Total $ — $ — $ — $ — $ 9,822 $ 9,822 0.12 Financial effect of loan modifications - All loan modifications during the three months and six months ended March 31, 2024 were a combination of term extensions and payment delays. The table below presents the financial impact of loan modifications during the three and six months ended March 31, 2024. For the Three Months Ended March 31, 2024 For the Six Months Ended March 31, 2024 Term Payment Term Payment Extension Delays Extension Delays One- to four-family: Originated 39 months 4 months 31 months 4 months Correspondent 20 months 5 months 17 months 4 months Commercial: Commercial real estate 26 months 26 months 26 months 26 months Commercial and industrial 6 months 6 months 6 months 6 months Performance of loan modifications - Of the loans modified during the three and six months ended March 31, 2024, $ 93 thousand of one- to four-family originated loans defaulted through March 31, 2024. The Company considers "default" to mean 90 days or more past due under the modified terms. Of the loans modified during the three and six months ended March 31, 2024, $ 672 thousand of one-to four-family originated loans were 30-89 days delinquent at March 31, 2024. All other loans modified during the three and six months ended March 31, 2024 were current at March 31, 2024. TDRs - Prior to the adoption of ASU 2022-02 on October 1, 2023, loans were accounted for as TDRs if the Bank granted a concession to a borrower experiencing financial difficulties. There was one one- to four-family bulk loan restructured during the three and six months ended March 31, 2023, with an amortized cost of $ 239 thousand prior to restructuring and an amortized cost of $ 257 thousand immediately after restructuring. During the three months ended March 31, 2023, there were no TDRs that became delinquent within 12 months after being restructured. During the six months ended March 31, 2023 there was one one- to four-family originated TDR with an amortized cost of $ 8 thousand that became delinquent within 12 months after being restructured. 22 Allowance for Credit Losses - The following is a summary of ACL activity, by loan portfolio segment, for the periods presented. For the Three Months Ended March 31, 2024 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Beginning balance $ 2,094 $ 2,948 $ 206 $ 5,248 $ 18,678 $ 252 $ 24,178 Charge-offs — — — — ( 10 ) ( 8 ) ( 18 ) Recoveries 3 — — 3 — 15 18 Provision for credit losses ( 25 ) ( 155 ) ( 11 ) ( 191 ) 662 ( 15 ) 456 Ending balance $ 2,072 $ 2,793 $ 195 $ 5,060 $ 19,330 $ 244 $ 24,634 For the Six Months Ended March 31, 2024 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Beginning balance $ 2,149 $ 2,972 $ 207 $ 5,328 $ 18,180 $ 251 $ 23,759 Adoption of ASU 2022-02 3 1 14 18 2 — 20 Balance at October 1, 2023 2,152 2,973 221 5,346 18,182 251 23,779 Charge-offs — — — — ( 10 ) ( 15 ) ( 25 ) Recoveries 8 — — 8 1 15 24 Provision for credit losses ( 88 ) ( 180 ) ( 26 ) ( 294 ) 1,157 ( 7 ) 856 Ending balance $ 2,072 $ 2,793 $ 195 $ 5,060 $ 19,330 $ 244 $ 24,634 For the Three Months Ended March 31, 2023 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Beginning balance $ 2,159 $ 2,987 $ 216 $ 5,362 $ 13,584 $ 243 $ 19,189 Charge-offs — — — — — ( 16 ) ( 16 ) Recoveries — — — — 1 1 2 Provision for credit losses ( 20 ) 87 5 72 637 5 714 Ending balance $ 2,139 $ 3,074 $ 221 $ 5,434 $ 14,222 $ 233 $ 19,889 For the Six Months Ended March 31, 2023 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Beginning balance $ 2,066 $ 2,734 $ 206 $ 5,006 $ 11,120 $ 245 $ 16,371 Charge-offs — — — — — ( 20 ) ( 20 ) Recoveries 1 — — 1 1 2 4 Provision for credit losses 72 340 15 427 3,101 6 3,534 Ending balance $ 2,139 $ 3,074 $ 221 $ 5,434 $ 14,222 $ 233 $ 19,889 23 The key assumptions in the Company's ACL model include the economic forecast, the forecast and reversion to mean time periods, and prepayment and curtailment assumptions. Management also considered certain qualitative factors when evaluating the adequacy of the ACL at March 31, 2024. The key assumptions utilized in estimating the Company's ACL at March 31, 2024 are discussed below. • Economic Forecast - Management considered several economic forecasts provided by a third party and selected an economic forecast that was the most appropriate considering the facts and circumstances at March 31, 2024. The forecasted economic indices applied to the model at March 31, 2024 were the national unemployment rate, changes in commercial real estate price index, changes in home values, and changes in the U.S. gross domestic product. The economic index most impactful to all loan pools within the model at March 31, 2024 was the national unemployment rate. The forecasted national unemployment rate in the economic scenario selected by management at March 31, 2024 had the national unemployment rate gradually increasing to 4.1 % by March 31, 2025, which was the end of our four-quarter forecast time period. • Forecast and reversion to mean time periods - The forecasted time period and the reversion to mean time period were each four quarters for all of the economic indices at March 31, 2024. • Prepayment and curtailment assumptions - The assumptions used at March 31, 2024 were generally based on actual historical prepayment and curtailment speeds, adjusted by management as deemed necessary. The prepayment and curtailment assumptions vary for each respective loan pool in the model. • Qualitative factors - The qualitative factors applied by management at March 31, 2024 included the following: ◦ The economic uncertainties related to the unemployment rate, the labor force composition, and the labor participation rate that are not captured in the third-party economic forecast scenarios; and ◦ Other management considerations related to commercial loans to account for credit risks not fully reflected in the discounted cash flow model. Reserve for Off-Balance Sheet Credit Exposures - The following is a summary of the changes in reserve for off-balance sheet credit exposures during the periods indicated. At March 31, 2024 and September 30, 2023, the Bank's off-balance sheet credit exposures totaled $ 790.9 million and $ 837.7 million, respectively. For the Three Months Ended For the Six Months Ended March 31, 2024 March 31, 2023 March 31, 2024 March 31, 2023 (Dollars in thousands) Beginning balance $ 3,834 $ 5,591 $ 4,095 $ 4,751 Adoption of ASU 2022-02 — — 16 — (Release)/provision for credit losses ( 155 ) 177 ( 432 ) 1,017 Ending balance $ 3,679 $ 5,768 $ 3,679 $ 5,768 24 5. BORROWED FUNDS Borrowings - Borrowings at March 31, 2024 consisted of $ 2.35 billion in FHLB advances, of which $ 2.05 billion were fixed-rate advances and $ 300.0 million were variable-rate advances and $ 971 thousand in finance leases. Borrowings at September 30, 2023 consisted of $ 2.38 billion in FHLB advances, of which $ 2.02 billion were fixed-rate advances and $ 365.0 million were variable-rate advances, and $ 500.0 million of borrowings from the Federal Reserve's Bank Term Funding Program ("BTFP"). During the current year period, the Bank paid off the $ 500.0 million of BTFP borrowings. As of March 31, 2024 and September 30, 2023, the Bank held interest rate swap agreements with an aggregate notional amount of $ 300.0 million and $ 365.0 million, respectively, in order to hedge the variable cash flows associated with $ 300.0 million and $ 365.0 million, respectively, of adjustable-rate FHLB advances. At March 31, 2024 and September 30, 2023, the interest rate swap agreements had an average remaining term to maturity of 1.9 years and 2.1 years, respectively. The interest rate swaps were designated as cash flow hedges and involved the receipt of variable amounts from a counterparty in exchange for the Bank making fixed-rate payments over the life of the interest rate swap agreements. At March 31, 2024 and September 30, 2023, the interest rate swaps were in a gain position with a total fair value of $ 7.6 million and $ 13.0 million, respectively, which was reported in other assets on the consolidated balance sheet. During the three and six month periods ended March 31, 2024, $ 1.7 million and $ 3.6 million, respectively, was reclassified from AOCI as a decrease to interest expense. During the three and six month periods ended March 31, 2023, $ 1.3 million and $ 2.1 million, respectively, was reclassified from AOCI as a decrease to interest expense. At March 31, 2024, the Company estimated that $ 4.9 million of interest expense associated with the interest rate swaps would be reclassified from AOCI as a decrease to interest expense on FHLB borrowings during the next 12 months. The Bank has minimum collateral posting thresholds with its derivative counterparties and posts collateral on a daily basis. The Bank held cash collateral of $ 8.2 million and $ 14.0 million at March 31, 2024 and September 30, 2023, respectively, in compliance with its minimum posting requirements. Periodically, management 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 ("leverage strategy"). 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. Leverage strategy borrowings are repaid prior to each quarter end. 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. 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. 6. INCOME TAXES Prior to the Small Business Job Protection Act (the "1996 Act"), the Bank was permitted to deduct, up to a specified formula limit, 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. As a result of the 1996 Act, savings institutions, like the Bank, have been required to use the specific charge-off method in computing bad debt deductions beginning with their 1996 Federal tax return. Pre-1988 bad debt reserves in retained earnings remain subject to recapture by the Bank on the occurrence of certain distributions in excess of current earnings and profits accumulated in tax years beginning after December 31, 1951 ("accumulated earnings and profits"). The Bank estimates its pre-1988 bad debt reserves to be $ 99.2 million at March 31, 2024, which equates to an unrecorded deferred tax liability of $ 24.3 million at March 31, 2024. Any distributions from the Bank to Capitol Federal Financial, Inc. which would be deemed to be drawn out of the Bank's pre-1988 bad debt reserves, would require a payment of taxes at the then-current rate by the Bank on the amount of earnings deemed to be removed from the bad debt reserves for such distribution, thereby reducing the amount of cash that can be distributed to the Company. The net loss associated with the securities strategy that was recognized in fiscal year 2023 net income will be recognized in the Company's fiscal year 2024 income tax return due to the sale of the securities occurring in October 2023 (in fiscal 2024). As a result, the Company anticipates it will report a taxable net loss on its September 30, 2024 corporate income tax return. Due to the anticipated taxable net loss in fiscal year 2024, the Bank's earning distributions to the Company during fiscal year 2024 will be deemed to draw upon the Bank's pre-1988 bad debt reserves. This will result in an increase in income tax expense in fiscal year 2024 equivalent to the distributions paid by the Bank that are deemed to be drawn upon the Bank's pre-1988 bad debt reserves times the Bank's current statutory tax rate. These amounts will be treated as discrete tax items in the quarters the distributions are paid and will offset the Bank's net operating loss deferred tax asset. During the current fiscal year, the Company reversed the $ 47.0 million deferred tax asset as of September 30, 2023 related to the net loss on the securities transaction and recorded a deferred tax asset for the anticipated taxable net loss in the current fiscal year. The deferred tax asset related to the anticipated taxable net loss, or net operating loss, was $ 42.3 million at March 31, 2024. In addition, the Company recorded a deferred tax asset in the current fiscal year related to its low income housing tax credits that are currently not 25 utilized due to tax return income limitations. The related deferred tax asset at March 31, 2024 was $ 7.6 million. Federal net operating losses carry forward indefinitely and federal tax credits carry forward for 20 years. The Company assesses the available positive and negative evidence surrounding the recoverability of its deferred tax assets and applies its judgment in estimating the amount of valuation allowance necessary under the circumstances. At March 31, 2024, the Company does not believe a valuation allowance is necessary on the deferred income tax assets recorded during the current quarter as it is more likely than not that these amounts will be realized through the reversal of the Company's existing taxable temporary differences and projected future taxable income. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair Value Measurements - The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with ASC 820 and ASC 825. The Company's AFS securities and interest rate swaps are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other financial instruments on a non-recurring basis, such as OREO and loans individually evaluated for impairment. These non-recurring fair value adjustments involve the application of lower of cost or fair value accounting or write-downs of individual financial instruments. The Company groups its financial instruments at fair value in three levels based on the markets in which the financial instruments are traded and the reliability of the assumptions used to determine fair value. These levels are: • Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets. • Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. • Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company's own estimates of assumptions that market participants would use in pricing the financial instrument. Valuation techniques include the use of option pricing models, discounted cash flow models, and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the financial instrument. The Company bases the fair value of its financial instruments on the price that would be received from the sale of an instrument in an orderly transaction between market participants at the measurement date under current market conditions. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The following is a description of valuation methodologies used for financial instruments measured at fair value on a recurring basis. AFS Securities - The Company's AFS securities portfolio is carried at estimated fair value. The Company primarily uses prices obtained from third-party pricing services to determine the fair value of its securities. On a quarterly basis, management corroborates a sample of prices obtained from the third-party pricing service for Level 2 securities by comparing them to an independent source. If the price provided by the independent source varies by more than a predetermined percentage from the price received from the third-party pricing service, then the variance is researched by management. The Company did not have to adjust prices obtained from the third-party pricing service when determining the fair value of its securities during the six months ended March 31, 2024 or during fiscal year 2023. The Company's major security types, based on the nature and risks of the securities, are: • U.S. Treasury bills - Estimated fair values are based on pricing data from active primary and secondary markets, and inter-dealer brokers. (Level 1) • MBS - The majority of these securities are issued by GSEs. Estimated fair values are based on a discounted cash flow method. Cash flows are determined based on prepayment projections of the underlying mortgages and are discounted using current market yields for benchmark securities. (Level 2) • GSE debentures - Estimated fair values are based on a discounted cash flow method. Cash flows are determined by taking any embedded options into consideration and are discounted using current market yields for similar securities. (Level 2) • Corporate Bonds and Municipal Bonds - Estimated fair values are based on a discounted cash flow method. Cash flows are determined by taking any embedded options into consideration and are discounted using current market yields for securities with similar credit profiles. (Level 2) 26 Interest Rate Swaps - The Company's interest rate swaps are designated as cash flow hedges and are reported at fair value in other assets on the consolidated balance sheet if in a gain position, and in other liabilities if in a loss position, with any unrealized gains and losses, net of taxes, reported as AOCI in stockholders' equity. See "Note 5. Borrowed Funds" for additional information. The estimated fair values of the interest rates swaps are obtained from the counterparty and are determined by a discounted cash flow analysis using observable market-based inputs. On a quarterly basis, management corroborates the estimated fair values by internally calculating the estimated fair value using a discounted cash flow analysis with independent observable market-based inputs from a third party. No adjustments were made to the estimated fair values obtained from the counterparty during the six months ended March 31, 2024 or during fiscal year 2023. (Level 2) The following tables provide the level of valuation assumption used to determine the carrying value of the Company's financial instruments measured at fair value on a recurring basis at the dates presented. The Company did no t have any Level 3 financial instruments measured at fair value on a recurring basis at March 31, 2024 or September 30, 2023. March 31, 2024 Quoted Prices Significant Significant in Active Markets Other Observable Unobservable Carrying for Identical Assets Inputs Inputs Value (Level 1) (Level 2) (Level 3) (Dollars in thousands) Assets: AFS Securities: MBS $ 648,838 $ — $ 648,838 $ — U.S. Treasury bills 99,403 99,403 — — GSE debentures 91,460 — 91,460 — Corporate bonds 3,249 — 3,249 — 842,950 99,403 743,547 — Interest rate swaps 7,602 — 7,602 — $ 850,552 $ 99,403 $ 751,149 $ — September 30, 2023 Quoted Prices Significant Significant in Active Markets Other Observable Unobservable Carrying for Identical Assets Inputs Inputs Value (Level 1) (Level 2) (Level 3) (Dollars in thousands) Assets: AFS Securities: MBS $ 900,734 $ — $ 900,734 $ — GSE debentures 479,428 — 479,428 — Corporate bonds 3,378 — 3,378 — Municipal bonds 942 — 942 — 1,384,482 — 1,384,482 — Interest rate swaps 13,018 — 13,018 — $ 1,397,500 $ — $ 1,397,500 $ — The following is a description of valuation methodologies used for significant financial instruments measured at fair value on a non-recurring basis. The significant unobservable inputs used in the determination of the fair value of assets classified as Level 3 have an inherent measurement uncertainty that, if changed, could result in higher or lower fair value measurements of these assets as of the reporting date . Loans Receivable - Collateral dependent assets are assets evaluated on an individual basis. Those collateral dependent assets that are evaluated on an individual basis are considered financial assets measured at fair value on a non-recurring basis. The fair value of collateral dependent loans/loans individually evaluated for loss on a non-recurring basis during the six months ended March 31, 2024 and 2023 that were still held in the portfolio as of March 31, 2024 and 2023 was $ 1.2 million and $ 3.6 million, respectively. Fair values of collateral dependent loans/loans individually evaluated for loss cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the loan and, as such, are classified as Level 3. 27 The one- to four-family loans included in this amount were individually evaluated to determine if the carrying value of the loan was in excess of the fair value of the collateral, less estimated selling costs of 10 %. Fair values were estimated through current appraisals. Management does not adjust or apply a discount to the appraised value of one- to four-family loans, except for the estimated sales cost noted above, and the primary unobservable input for these loans was the appraisal. For commercial loans, if the most recent appraisal or book value of the collateral does not reflect current market conditions due to the passage of time and/or other factors, management will adjust the existing appraised or book value based on knowledge of local market conditions, recent transactions, and estimated selling costs, if applicable. Adjustments to appraised or book values are generally based on assumptions not observable in the marketplace. The primary significant unobservable inputs for commercial loans individually evaluated during the six months ended March 31, 2024 and March 31, 2023 were downward adjustments to the book value of the collateral for lack of marketability. During the six months ended March 31, 2024, the adjustments ranged from 5 % to 100 %, with a weighted average of 16 %. During the six months ended March 31, 2023, the adjustments ranged from 8 % to 100 %, with a weighted average of 21 %. The basis utilized in calculating the weighted averages for these adjustments was the original unadjusted value of each collateral item. OREO - OREO primarily represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at the lower of cost or fair value. The fair value for one- to four-family OREO is estimated through current appraisals or listing prices, less estimated selling costs of 10 %. Management does not adjust or apply a discount to the appraised value or listing price, except for the estimated sales costs noted above. The primary significant unobservable input for one- to four-family OREO was the appraisal or listing price. There was $ 67 thousand and $ 93 thousand of one- to four-family OREO measured on a non-recurring basis during the six months ended March 31, 2024 and March 31, 2023, respectively. The carrying value of the properties equaled the fair value of the properties at March 31, 2024 and 2023. For commercial OREO, if the most recent appraisal or book value of the collateral does not reflect current market conditions due to the passage of time and/or other factors, management will adjust the existing appraised or book value based on knowledge of local market conditions, recent transactions, and estimated selling costs, if applicable. Adjustments to appraised or book values are generally based on assumptions not observable in the marketplace. The primary significant unobservable input for commercial OREO is downward adjustments to book value of the collateral for lack of marketability. Fair values of foreclosed property cannot be determined with precision and may not be realized in an actual sale of the property and, as such, are classified as Level 3. There was no commercial OREO measured on a non-recurring basis during the six months ended March 31, 2024 and 2023. 28 Fair Value Disclosures - The Company estimated fair value amounts using available market information and a variety of valuation methodologies as of the dates presented. Considerable judgment is required to interpret market data to develop the estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company would realize from a current market exchange at subsequent dates. The carrying amounts and estimated fair values of the Company's financial instruments by fair value hierarchy, at the dates presented, were as follows: March 31, 2024 Carrying Estimated Fair Value Amount Total Level 1 Level 2 Level 3 (Dollars in thousands) Assets: Cash and cash equivalents $ 443,513 $ 443,513 $ 443,513 $ — $ — AFS securities 842,950 842,950 99,403 743,547 — Loans receivable 7,877,569 7,433,829 — — 7,433,829 FHLB stock 109,070 109,070 109,070 — — Interest rate swaps 7,602 7,602 — 7,602 — Liabilities: Deposits 6,141,711 6,119,242 3,235,421 2,883,821 — Borrowings 2,351,022 2,300,949 — 2,300,949 — September 30, 2023 Carrying Estimated Fair Value Amount Total Level 1 Level 2 Level 3 (Dollars in thousands) Assets: Cash and cash equivalents $ 245,605 $ 245,605 $ 245,605 $ — $ — AFS securities 1,384,482 1,384,482 — 1,384,482 — Loans receivable 7,970,949 7,358,462 — — 7,358,462 FHLB stock 110,714 110,714 110,714 — — Interest rate swaps 13,018 13,018 — 13,018 — Liabilities: Deposits 6,051,220 6,004,975 3,321,028 2,683,947 — Borrowings 2,879,125 2,802,849 — 2,802,849 — 8. ACCUMULATED OTHER COMPREHENSIVE INCOME The following tables present the changes in the components of AOCI, net of tax, for the periods indicated. For the Three Months Ended March 31, 2024 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance $ 14,251 $ 4,904 19,155 Other comprehensive income (loss), before reclassifications ( 5,471 ) 2,521 ( 2,950 ) Amount reclassified from AOCI, net of taxes of $ 542 — ( 1,678 ) ( 1,678 ) Other comprehensive income (loss) ( 5,471 ) 843 ( 4,628 ) Ending balance $ 8,780 $ 5,747 14,527 29 For the Six Months Ended March 31, 2024 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance ( 1,142 ) 9,842 8,700 Other comprehensive income (loss), before reclassifications 11,110 ( 477 ) 10,633 Amount reclassified from AOCI, net of taxes of $ 1,168 — ( 3,618 ) ( 3,618 ) Reclassification adjustment for gross gains on AFS securities included in net income, net of taxes of $ 383 ( 1,188 ) — ( 1,188 ) Other comprehensive income (loss) 9,922 ( 4,095 ) 5,827 Ending balance 8,780 5,747 14,527 For the Three Months Ended March 31, 2023 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance ( 142,069 ) 9,467 ( 132,602 ) Other comprehensive income (loss), before reclassifications 16,777 ( 1,495 ) 15,282 Amount reclassified from AOCI, net of taxes of $ 427 — ( 1,323 ) ( 1,323 ) Other comprehensive income (loss) 16,777 ( 2,818 ) 13,959 Ending balance ( 125,292 ) 6,649 ( 118,643 ) For the Six Months Ended March 31, 2023 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance $ ( 155,119 ) $ 9,486 $ ( 145,633 ) Other comprehensive income (loss), before reclassifications 29,827 ( 780 ) 29,047 Amount reclassified from AOCI, net of taxes of $ 664 — ( 2,057 ) ( 2,057 ) Other comprehensive income (loss) 29,827 ( 2,837 ) 26,990 Ending balance $ ( 125,292 ) $ 6,649 $ ( 118,643 ) 30