CFFN filing — read by section

Item 2. Management’s Discussion and Analysis

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 
 
 
 
 The Company and the Bank may from time to time make written or oral "forward-looking statements," including statements contained in documents filed or furnished by the Company with the SEC. These forward-looking statements may be included in this Quarterly Report on Form 10-Q and the exhibits attached to it, in the Company's reports to stockholders, in the Company's press releases, and in other communications by the Company, which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. 
 
 
 These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause our future results to differ materially from the beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in the forward-looking statements: 
 
 
 • our ability to maintain overhead costs at reasonable levels; 
 • our ability to originate and purchase a sufficient volume of one- to four-family loans in order to maintain the balance of that portfolio at a level desired by management; 
 • our ability to invest funds in wholesale or secondary markets at favorable yields compared to the related funding source; 
 • our ability to access cost-effective funding and maintain sufficient liquidity; 
 • the expected synergies and other benefits from our acquisition activities might not be realized to the extent anticipated, within the anticipated time frames, or at all; 
 • our ability to extend our commercial banking and trust asset management expertise across our market areas; 
 • fluctuations in deposit flows; 
 • transactions or activities that may result in the recapture of base-year, tax basis bad debt reserves; 
 • 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 or repurchase shares; 
 • the strength of the U.S. economy in general and the strength and/or the availability of labor in the local economies in which we conduct operations, including areas where we have purchased large amounts of correspondent loans, originated commercial loans, and entered into commercial loan participations; 
 • changes in real estate values, unemployment levels, general economic trends, and the level and direction of loan delinquencies and charge-offs may require changes in the estimates of the adequacy of the ACL and may adversely affect our business; 
 • increases in classified and/or non-performing assets, which may require the Bank to increase the ACL, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets; 
 • results of examinations of the Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our ACL; 
 • changes in accounting principles, policies, or guidelines; 
 • the effects of, and changes in, monetary and interest rate policies of the Board of Governors of the Federal Reserve System ("FRB"); 
 • the effects of, and changes in, trade and fiscal policies and laws of the United States government; 
 • the effects of, and changes in, foreign and military policies of the United States government; 
 • inflation, interest rate, market, monetary, and currency fluctuations and the effects of a potential economic recession or slower economic growth; 
 • the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor or depositor sentiment; 
 • the timely development and acceptance of new products and services and the perceived overall value of these products and services by users, including the features, pricing, and quality compared to competitors' products and services; 
 • the willingness of users to substitute competitors' products and services for our products and services; 
 • our success in gaining regulatory approval of our products and services and branching locations, when required; 
 • the impact of interpretations of, and changes in, financial services laws and regulations, including laws concerning taxes, banking, securities, consumer protection, trust and insurance and the impact of other governmental initiatives affecting the financial services industry; 
 • the ability to attract and retain skilled employees; 
 • implementing business initiatives may be more difficult or expensive than anticipated; 
 • significant litigation; 
 • technological changes; 
 • our ability to maintain the security of our financial, accounting, technology, and other operating systems and facilities, including the ability to withstand cyberattacks; 
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 • changes in consumer spending, borrowing and saving habits; and 
 • our success at managing the risks involved in our business. 
 
 
 This list of factors is not all inclusive. For a discussion of risks and uncertainties related to our business that could adversely impact our operations and/or financial results, see "Part I, Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2023 and Part II, Item 1A. Risk Factors within this Quarterly Report on Form 10-Q. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank. 
 
 
 As used in this Form 10-Q, unless we specify or the context indicates otherwise, "the Company," "we," "us," and "our" refer to Capitol Federal Financial, Inc. a Maryland corporation, and its subsidiaries. "Capitol Federal Savings," and "the Bank," refer to Capitol Federal Savings Bank, a federal savings bank and the wholly-owned subsidiary of Capitol Federal Financial, Inc. 
 
 
 The following discussion and analysis is intended to assist in understanding the financial condition, results of operations, liquidity, and capital resources of the Company. The Bank comprises almost all of the consolidated assets and liabilities of the Company and the Company is dependent primarily upon the performance of the Bank for the results of its operations. Because of this relationship, references to management actions, strategies and results of actions apply to both the Bank and the Company except where the context indicates otherwise. This discussion and analysis should be read in conjunction with Management's Discussion and Analysis included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2023, filed with the SEC. 
 
 
 
 
 Available Information 
 Financial and other Company information, including press releases, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports can be obtained free of charge from our investor relations website, http://ir.capfed.com. SEC filings are available on our website immediately after they are electronically filed with or furnished to the SEC, and are also available on the SEC's website at www.sec.gov. 
 
 
 
 
 
 Critical Accounting Estimates 
 Our most critical accounting estimates are the methodologies used to determine the ACL and reserve for off-balance sheet credit exposures and fair value measurements. These estimates are important to the presentation of our financial condition and results of operations, involve a high degree of complexity, and require management to make difficult and subjective judgments that may require assumptions about highly uncertain matters. The use of different judgments, assumptions, and estimates could affect reported results materially. These critical accounting estimates and their application are reviewed at least annually by the audit committee of our Board of Directors. For a full discussion of our critical accounting estimates, see "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2023. 
 
 
 
 
 
 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"). 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 and fiscal year ended September 30, 2023. 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 
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 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. 
 
 
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 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. 
 
 
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 Financial Condition 
 The following table summarizes the Company's financial condition at the dates indicated. 
 
 Annualized Annualized 
 March 31, December 31, Percent September 30, Percent 
 2024 2023 Change 2023 Change 
 (Dollars and shares in thousands) 
 Total assets $ 9,721,286 $ 9,576,064 6.1 % $ 10,177,461 (9.0) % 
 AFS securities 842,950 740,462 55.4 1,384,482 (78.2) 
 Loans receivable, net 7,877,569 7,947,510 (3.5) 7,970,949 (2.3) 
 Deposits 6,141,711 6,021,595 8.0 6,051,220 3.0 
 Borrowings 2,351,022 2,373,064 (3.7) 2,879,125 (36.7) 
 Stockholders' equity 1,024,903 1,034,121 (3.6) 1,044,054 (3.7) 
 Equity to total assets at end of period 10.5 % 10.8 % 10.3 % 
 Average number of basic shares outstanding 130,536 132,353 (5.5) 133,225 (4.0) 
 Average number of diluted shares outstanding 130,536 132,353 (5.5) 133,225 (4.0) 

 
 
 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. 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. Total borrowings decreased $22.0 million during the current quarter as not all maturing FHLB borrowings were replaced. 
 
 
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 Loans Receivable. The following table presents the balance and weighted average rate of our loan portfolio as of the dates indicated. 
 
 March 31, 2024 December 31, 2023 September 30, 2023 
 Amount Rate Amount Rate Amount Rate 
 (Dollars in thousands) 
 One- to four-family: 
 Originated $ 3,950,097 3.47 % $ 3,986,479 3.44 % $ 3,978,837 3.39 % 
 Correspondent purchased 2,314,448 3.46 2,360,843 3.45 2,405,911 3.44 
 Bulk purchased 132,284 2.28 134,504 2.10 137,193 1.85 
 Construction 40,628 4.84 43,631 4.47 69,974 3.68 
 Total 6,437,457 3.45 6,525,457 3.42 6,591,915 3.38 
 Commercial: 
 Commercial real estate 1,035,634 5.32 1,019,431 5.27 995,788 5.29 
 Commercial and industrial 112,123 6.53 113,686 6.46 112,953 6.36 
 Construction 202,201 5.54 196,493 5.41 178,746 5.01 
 Total 1,349,958 5.46 1,329,610 5.39 1,287,487 5.35 
 Consumer loans: 
 Home equity 96,114 8.86 96,952 8.84 95,723 8.83 
 Other 9,203 5.50 9,670 5.32 9,256 5.20 
 Total 105,317 8.57 106,622 8.52 104,979 8.51 
 Total loans receivable 7,892,732 3.86 7,961,689 3.82 7,984,381 3.76 
 
 Less: 
 ACL 24,634 24,178 23,759 
 Deferred loan fees/discounts 30,007 30,653 31,335 
 Premiums/deferred costs (39,478) (40,652) (41,662) 
 Total loans receivable, net $ 7,877,569 $ 7,947,510 $ 7,970,949 

 
 
 Loan Activity - The following table summarizes activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, deferred loan fees/discounts, and premiums/deferred costs. Loans that were paid off as a result of refinances are included in repayments. Loan endorsements are not included in the activity in the following table because a new loan is not generated at the time of the endorsement. The endorsed balance and rate are included in the ending loan portfolio balance and rate. Commercial loan renewals are not included in the activity presented in the following table unless new funds are disbursed at the time of renewal. The renewal balance and rate are included in the ending loan portfolio balance and rate. 
 
 
 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) 
 Beginning balance $ 7,961,689 3.82 % $ 7,984,381 3.76 % $ 7,471,670 3.33 % 
 Originated and refinanced 86,319 7.14 187,721 7.06 545,398 5.41 
 Purchased and participations 24,447 8.09 27,944 7.82 550,905 5.41 
 Change in undisbursed loan funds 34,642 117,888 (146,184) 
 Repayments (214,365) (424,976) (449,992) 
 Principal (charge-offs)/recoveries, net — (1) (16) 
 Other — (225) (5,656) 
 Ending balance $ 7,892,732 3.86 $ 7,892,732 3.86 $ 7,966,125 3.57 

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 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/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 
 (Dollars in thousands) 
 Fixed-rate: 
 One- to four-family $ 64,347 6.64 % 29.8 % $ 270,613 5.22 % 24.7 % 
 One- to four-family construction 12,772 6.74 5.9 23,045 5.28 2.1 
 Commercial: 
 Real estate 1,156 7.28 0.5 10,628 6.02 1.0 
 Commercial and industrial 12,432 6.98 5.8 15,634 6.52 1.4 
 Construction 3,632 7.07 1.7 68,600 4.87 6.3 
 Home equity 4,039 9.03 1.9 2,587 7.70 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 
 
 Adjustable-rate: 
 One- to four-family 27,004 6.38 12.5 268,836 4.85 24.5 
 One- to four-family construction 10,722 6.54 5.0 15,414 4.67 1.4 
 Commercial: 
 Real estate 15,506 6.13 7.2 202,727 5.34 18.5 
 Commercial and industrial 7,983 7.69 3.7 34,514 7.15 3.1 
 Construction 36,641 8.23 17.0 151,326 6.10 13.8 
 Home equity 16,583 9.43 7.7 29,548 7.89 2.7 
 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/participations $ 215,665 7.16 100.0 % $ 1,096,303 5.41 100.0 % 
 
 Purchased and participation loans included above: 
 Fixed-rate: 
 Correspondent purchased - one- to four-family $ 2,978 6.43 $ 169,653 5.21 
 
 Participations and purchases - commercial 3,500 7.00 3,016 6.40 
 
 Total fixed-rate purchased/participations 6,478 6.74 172,669 5.23 
 
 Adjustable-rate: 
 Correspondent purchased - one- to four-family 519 2.93 197,038 4.87 
 
 Participations and purchases - commercial 20,947 8.27 181,198 6.18 
 
 Total adjustable-rate purchased/participations 21,466 8.14 378,236 5.50 
 Total purchased/participation loans $ 27,944 7.82 $ 550,905 5.41 

 
 
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 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. In most cases, the most recent appraisal was obtained at the time of origination. 
 
 
 % of Credit Average 
 Amount Total Rate Score LTV Balance 
 (Dollars in thousands) 
 Originated $ 3,950,097 61.4 % 3.47 % 771 59 % $ 166 
 Correspondent purchased 2,314,448 35.9 3.46 767 64 410 
 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 periods indicated. 
 
 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) 
 Originated $ 41,844 6.21 % 73 % 772 $ 111,348 6.60 % 74 % 768 
 Correspondent purchased — — — — 3,497 5.91 70 765 
 
 $ 41,844 6.21 73 772 $ 114,845 6.58 74 768 

 
 
 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. 
 
 
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 The following table presents the Bank's commercial real estate and commercial construction loans by type of primary collateral as of the dates indicated. As of March 31, 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 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) 
 Retail building 138 $ 276,593 $ 66,120 $ 342,713 $ 349,028 $ 352,499 
 Senior housing 34 304,207 9,155 313,362 330,077 331,207 
 Multi-family 40 133,348 167,937 301,285 302,908 308,846 
 Hotel 16 217,548 27,788 245,336 231,987 233,012 
 Office building 79 128,686 913 129,599 129,348 130,921 
 One- to four-family property 353 58,943 4,718 63,661 65,583 70,265 
 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 
 796 $ 1,237,835 $ 295,606 $ 1,533,441 $ 1,540,995 $ 1,562,938 
 
 Weighted average rate 5.36 % 6.25 % 5.53 % 5.44 % 5.47 % 

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

 
 
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 The following table presents the Bank's commercial loan portfolio and outstanding loan commitments, categorized by gross loan amount (unpaid principal plus undisbursed amounts) or outstanding loan commitment amount, as of March 31, 2024. 
 
 Count Amount 
 (Dollars in thousands) 
 Greater than $30 million 10 $ 488,649 
 >$15 to $30 million 18 381,168 
 >$10 to $15 million 14 169,975 
 >$5 to $10 million 32 234,841 
 $1 to $5 million 137 325,280 
 Less than $1 million 1,178 186,284 
 1,389 $ 1,786,197 

 
 
 
 Asset Quality 
 
 
 Delinquent and nonaccrual loans and OREO. The following table presents the Company's 30 to 89 day delinquent loans at the dates indicated. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. Of the loans 30 to 89 days delinquent at March 31, 2024, 68% were 59 days or less delinquent. 
 
 Loans Delinquent for 30 to 89 Days at: 
 March 31, December 31, September 30, 
 2024 2023 2023 
 Number Amount Number Amount Number Amount 
 (Dollars in thousands) 
 One- to four-family: 
 Originated 72 $ 6,803 77 $ 7,746 88 $ 9,078 
 Correspondent purchased 10 3,144 16 6,049 17 5,192 
 Bulk purchased 5 856 4 583 1 149 
 Construction — — — — 4 1,123 
 Commercial 11 3,354 14 3,809 5 94 
 Consumer 35 601 40 766 30 730 
 133 $ 14,758 151 $ 18,953 145 $ 16,366 
 
 Loans 30 to 89 days delinquent 
 to total loans receivable, net 0.19 % 0.24 % 0.21 % 

 
 
 40 

 

 The following table presents the Company's nonaccrual loans and OREO at the dates indicated. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. Nonaccrual loans are loans that are 90 or more days delinquent or in foreclosure and other loans required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements and/or internal policies, even if the loans are current. At all dates presented, there were no loans 90 or more days delinquent that were still accruing interest. Non-performing assets include nonaccrual loans and OREO. 
 
 Nonaccrual Loans and OREO at: 
 March 31, December 31, September 30, 
 2024 2023 2023 
 Number Amount Number Amount Number Amount 
 (Dollars in thousands) 
 Loans 90 or More Days Delinquent or in Foreclosure: 
 One- to four-family: 
 Originated 23 $ 2,380 29 $ 3,749 24 $ 2,246 
 Correspondent purchased 8 3,969 10 4,164 9 3,410 
 Bulk purchased 3 962 2 942 2 942 
 Commercial 11 1,203 8 1,198 12 2,183 
 Consumer 10 250 5 116 9 113 
 55 8,764 54 10,169 56 8,894 
 
 Loans 90 or more days delinquent or in foreclosure 
 as a percentage of total loans 0.11 % 0.13 % 0.11 % 
 
 Nonaccrual loans less than 90 Days Delinquent: (1) 
 
 One- to four-family: 
 Originated — $ — — $ — 2 $ 215 
 Correspondent purchased — — — — 1 282 
 Bulk purchased — — — — — — 
 Commercial 1 25 1 18 1 18 
 Consumer — — — — — — 
 1 25 1 18 4 515 
 Total nonaccrual loans 56 8,789 55 10,187 60 9,409 
 
 Nonaccrual loans as a percentage of total loans 0.11 % 0.13 % 0.12 % 
 
 OREO: 
 One- to four-family: 
 Originated (2) 
 1 $ 67 2 $ 225 — $ — 
 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 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. 
 
 
 
 
 41 

 

 The following table presents the states where the properties securing ten percent or more of the total amount of our one- to four-family loans are located and the corresponding balance of loans 30 to 89 days delinquent, 90 or more days delinquent or in foreclosure, and weighted average LTV ratios for loans 90 or more days delinquent or in foreclosure at March 31, 2024. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. At March 31, 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 
 One- to Four-Family Days Delinquent or in Foreclosure 
 State Amount % of Total Amount % of Total Amount % of Total LTV 
 (Dollars in thousands) 
 Kansas $ 3,526,285 54.8 % $ 6,110 56.6 % $ 1,885 25.8 % 53 % 
 Missouri 1,111,289 17.2 2,118 19.6 495 6.8 60 
 
 Other states 1,799,883 28.0 2,575 23.8 4,931 67.4 53 
 
 
 
 $ 6,437,457 100.0 % $ 10,803 100.0 % $ 7,311 100.0 % 54 

 
 
 Classified loans. The following table presents loans classified as special mention or substandard at the dates presented. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. 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) 
 One- to four-family $ 21,531 $ 21,033 $ 19,601 $ 22,659 $ 18,603 $ 19,314 
 Commercial 19,886 1,969 15,097 1,221 16,407 1,293 
 Consumer 263 309 335 175 327 190 
 $ 41,680 $ 23,311 $ 35,033 $ 24,055 $ 35,337 $ 20,797 

 
 
 
 
 
 Allowance for Credit Losses. The distribution of our ACL and the ratio of ACL to loans receivable, by loan type, at the dates indicated is summarized below. See "Note 4. Loans Receivable and Allowance for Credit Losses" for additional information related to the calculation of ACL as of March 31, 2024. 
 
 Distribution of ACL Ratio of ACL to Loans Receivable 
 March 31, December 31, September 30, March 31, December 31, September 30, 
 2024 2023 2023 2024 2023 2023 
 (Dollars in thousands) 
 One- to four-family: 
 Originated $ 2,035 $ 2,055 $ 2,084 0.05 % 0.05 % 0.05 % 
 Correspondent purchased 2,793 2,948 2,972 0.12 0.12 0.12 
 Bulk purchased 195 206 207 0.15 0.15 0.15 
 Construction 37 39 65 0.09 0.09 0.09 
 Total 5,060 5,248 5,328 0.08 0.08 0.08 
 Commercial: 
 Real estate 16,605 16,152 15,589 1.60 1.58 1.57 
 Commercial and industrial 1,019 973 1,104 0.91 0.86 0.98 
 Construction 1,706 1,553 1,487 0.84 0.79 0.83 
 Total 19,330 18,678 18,180 1.43 1.40 1.41 
 Consumer 244 252 251 0.23 0.24 0.24 
 Total $ 24,634 $ 24,178 $ 23,759 0.31 0.30 0.30 

 42 

 

 The following table presents ACL activity and related ratios at the dates and for the periods indicated. 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"). See "Note 1. Summary of Significant Accounting Policies" for additional information regarding the adoption of ASU 2022-02. 
 
 
 
 At or For the Six Months Ended 
 March 31, 2024 March 31, 2023 
 (Dollars in thousands) 
 Balance at beginning of period $ 23,759 $ 16,371 
 ASU 2022-02 Adoption 20 — 
 Charge-offs (25) (20) 
 Recoveries 24 4 
 Net (charge-offs) recoveries (1) (16) 
 Provision for credit losses 856 3,534 
 Balance at end of period $ 24,634 $ 19,889 
 
 Ratio of NCOs during the period 
 to average non-performing assets 0.01 % 0.20 % 
 
 ACL to nonaccrual loans at end of period 280.28 339.98 
 
 ACL to loans receivable, net at end of period 0.31 0.25 
 
 ACL to NCOs (annualized) 10,971x 620x 

 
 
 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. See "Note 4. Loans Receivable and Allowance for Credit Losses" for additional information related to ACL activity by specific loan categories. 
 
 
 
 
 43 

 

 The following table presents NCOs, average loans, and NCOs as a percentage of average loans, by loan type, for the periods indicated. 
 
 For the Six Months Ended 
 March 31, 2024 March 31, 2023 
 NCOs Average Loans % of Average Loans NCOs Average Loans % of Average Loans 
 (Dollars in thousands) 
 One- to four-family: 
 Originated $ (8) $ 3,965,723 — % $ (1) $ 3,985,665 — % 
 Correspondent — 2,391,638 — — 2,383,295 — 
 Bulk purchased — 135,228 — — 145,779 — 
 Construction — 40,813 — — 64,484 — 
 Total (8) 6,533,402 — (1) 6,579,223 — 
 Commercial: 
 Real estate 10 1,028,869 — (1) 817,179 — 
 Commercial and industrial (1) 114,314 — — 84,181 — 
 Construction — 185,940 — — 184,510 — 
 Total 9 1,329,123 — (1) 1,085,870 — 
 Consumer: 
 Home equity 3 96,565 — 8 93,902 0.01 
 Other (3) 9,547 (0.03) 10 8,803 0.11 
 Total — 106,112 — 18 102,705 0.02 
 $ 1 $ 7,968,637 — $ 16 $ 7,767,798 — 

 While management utilizes its best judgment and information available, the adequacy of the ACL is determined by certain factors outside of the Company's control, such as the performance of our loan portfolio, changes in the economic environment including economic uncertainty, changes in interest rates, and the views of regulatory authorities toward classification of assets and the level of ACL. Additionally, the level of ACL may fluctuate based on the balance and mix of the loan portfolio. If actual results reflect significant underperformance compared to our assumptions and/or if one or more of our assumptions, such as the economic forecast, represents a more negative outlook in a future period, there could be additions to our ACL and an increase in the provision for credit losses. 
 
 
 
 Securities. The following table presents the distribution of our securities portfolio, at amortized cost, at the dates indicated. The majority of our securities are government guaranteed or issued by GSEs. Overall, fixed-rate securities comprised 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 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) 
 MBS $ 636,387 5.68 % 6.2 $ 503,912 5.76 % 5.4 $ 901,440 1.71% 4.7 
 U.S. Treasury bills 99,408 5.38 0.1 213,700 5.48 0.1 — — — 
 GSE debentures 91,542 5.62 5.5 — — — 479,610 0.64 1.9 
 Corporate bonds 4,000 5.12 8.1 4,000 5.12 8.4 4,000 5.12 8.6 
 Municipal bonds — — — — — — 942 2.55 6.9 
 $ 831,337 5.63 % 5.4 $ 721,612 5.67 % 3.9 $ 1,385,992 1.35% 3.8 

 
 
 44 

 

 The following table summarizes the activity in our securities portfolio for the periods presented. The weighted average yields for the beginning and ending balances are as of the first and last days of the periods presented and are generally derived from recent prepayment activity on the securities in the portfolio. The beginning and ending WALs are the estimated remaining principal repayment terms (in years) after three month historical prepayment speeds and projected call option assumptions have been applied. 
 
 For the Six Months Ended 
 March 31, 2024 March 31, 2023 
 Amount Yield WAL Amount Yield WAL 
 (Dollars in thousands) 
 Beginning balance - carrying value $ 1,384,482 1.35 % 3.8 $ 1,563,307 1.29 % 4.2 
 Maturities and repayments (255,533) (95,393) 
 Proceeds from sale (1,272,512) — 
 Net amortization of (premiums)/discounts 5,741 (1,559) 
 Purchases 980,994 5.60 4.4 — — — 
 Net loss from securities transactions (13,345) — 
 Change in valuation on AFS securities 13,123 39,453 
 Ending balance - carrying value $ 842,950 5.63 5.4 $ 1,505,808 1.33 4.3 

 
 
 
 Liabilities. 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. 
 
 
 Deposits. The following table presents the amount, weighted average rate and percent of total for the components of our deposit portfolio at the dates presented. The 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. 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. 
 
 March 31, 2024 December 31, 2023 September 30, 2023 
 % of % of % of 
 Amount Rate Total Amount Rate Total Amount Rate Total 
 (Dollars in thousands) 
 Non-interest-bearing checking $ 549,818 — % 8.9 % $ 555,382 — % 9.2 % $ 558,326 — % 9.2 % 
 Interest-bearing checking 902,848 0.19 14.7 895,665 0.17 14.9 901,994 0.19 14.9 
 Savings 482,503 0.27 7.9 471,372 0.12 7.8 480,091 0.12 7.9 
 Money market 1,300,252 1.67 21.2 1,360,349 1.96 22.6 1,380,617 1.96 22.8 
 Retail certificates of deposit 2,725,110 4.01 44.4 2,569,391 3.75 42.7 2,533,954 3.47 41.9 
 Commercial certificates of deposit 55,727 4.19 0.9 49,152 3.80 0.8 48,751 3.56 0.8 
 Public unit certificates of deposit 125,453 4.61 2.0 120,284 4.54 2.0 147,487 4.44 2.5 
 $ 6,141,711 2.32 100.0 % $ 6,021,595 2.20 100.0 % $ 6,051,220 2.07 100.0 % 

 
 
 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. 
 45 

 
 

 Borrowings. 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. 
 
 
 Maturity by Contractual Effective 
 Fiscal Year Amount Rate Rate (1) 
 
 (Dollars in thousands) 
 
 2024 $ 275,000 3.77 % 2.57 % 
 2025 650,000 3.30 2.96 
 2026 575,000 2.81 2.95 
 2027 482,500 3.14 3.25 
 2028 320,492 4.92 4.17 
 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. 
 
 
 The following table presents borrowing activity for the periods shown. The borrowings presented in the table have original contractual terms of one year or longer or are tied to interest rate swaps with original contractual terms of one year or longer. Line of credit borrowings and finance leases are excluded from the table. The effective rate is shown as a weighted average and includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. The weighted average maturity ("WAM") is the remaining weighted average contractual term in years. The beginning and ending WAMs represent the remaining maturity at each date presented. During the current 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) 
 Beginning balance $ 2,375,410 3.13 % 2.0 $ 2,882,828 3.34 % 1.8 $ 2,062,500 2.44 % 2.5 
 Maturities and repayments (72,418) 2.84 (229,836) 3.26 (114,836) 1.80 
 New FHLB borrowings 50,000 4.17 5.0 200,000 4.54 4.0 550,000 4.52 3.3 
 BTFP, net — — — (500,000) 4.70 — — — — 
 Ending balance $ 2,352,992 3.16 1.9 $ 2,352,992 3.16 1.9 $ 2,497,664 2.93 2.3 

 
 
 Leverage Strategy 
 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 
 46 

 

 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 March 31, 2024. 
 
 June 30, September 30, December 31, March 31, 
 2024 2024 2024 2025 Total 
 (Dollars in thousands) 
 Retail/Commercial Certificates: 
 Amount $ 488,977 $ 497,837 $ 577,131 $ 473,162 $ 2,037,107 
 Repricing Rate 4.05 % 4.45 % 4.41 % 4.43 % 4.33 % 
 Public Unit Certificates: 
 Amount $ 31,563 $ 34,985 $ 29,025 $ 17,526 $ 113,099 
 Repricing Rate 4.42 % 4.63 % 4.67 % 4.90 % 4.62 % 
 Term Borrowings: 
 Amount $ 100,000 $ 175,000 $ 200,000 $ 150,000 $ 625,000 
 Repricing Rate 1.98 % 2.91 % 3.35 % 1.93 % 2.67 % 
 Total 
 Amount $ 620,540 $ 707,822 $ 806,156 $ 640,688 $ 2,775,206 
 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 March 31, 2024. 
 
 Retail certificates of deposit 1.0 
 Commercial certificates of deposit 0.8 
 Public unit certificates of deposit 0.6 
 Total certificates of deposit 0.9 

 47 

 
 

 Stockholders' Equity. 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 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 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. To the extent that earnings in fiscal year 2024 exceed $0.34 per share, the Board of Directors will consider the payment of additional dividends. Dividend payments depend upon a number of factors, including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company level. 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 
 2024 2023 2022 
 Amount Per Share Amount Per Share Amount Per Share 
 (Dollars in thousands, except per share amounts) 
 Regular quarterly dividends paid 
 Quarter ended March 31 $ 11,127 $ 0.085 $ 11,319 $ 0.085 $ 11,535 $ 0.085 
 Quarter ended June 30 11,044 0.085 11,321 0.085 11,534 0.085 
 Quarter ended September 30 — — 11,323 0.085 11,534 0.085 
 Quarter ended December 31 — — 11,308 0.085 11,508 0.085 
 True-up dividends paid — — — — 37,701 0.280 
 True Blue Capitol dividends paid — — — — 27,143 0.200 
 Calendar year-to-date dividends paid $ 22,171 $ 0.170 $ 45,271 $ 0.340 $ 110,955 $ 0.820 

 48 

 
 

 Operating Results 
 The following table presents selected income statement and other information for the quarters indicated. 
 
 For the Three Months Ended 
 March 31, December 31, September 30, June 30, March 31, 
 2024 2023 2023 2023 2023 
 (Dollars in thousands, except per share data) 
 Interest and dividend income: 
 Loans receivable $ 76,122 $ 75,941 $ 74,031 $ 71,918 $ 69,319 
 MBS 7,794 5,859 4,399 4,562 4,748 
 Cash and cash equivalents 4,513 4,778 6,139 10,009 10,977 
 FHLB stock 2,528 2,586 2,796 3,260 3,607 
 Investment securities 2,332 2,528 894 895 895 
 Total interest and dividend income 93,289 91,692 88,259 90,644 89,546 
 
 Interest expense: 
 Borrowings 18,554 19,656 27,746 31,449 31,447 
 Deposits 33,415 32,443 29,778 24,445 16,140 
 
 Total interest expense 51,969 52,099 57,524 55,894 47,587 
 
 Net interest income 41,320 39,593 30,735 34,750 41,959 
 
 Provision for credit losses 301 123 963 1,324 891 
 
 Net interest income 
 (after provision for credit losses) 41,019 39,470 29,772 33,426 41,068 
 
 Non-interest income 4,643 (8,894) (187,704) 5,814 5,083 
 Non-interest expense 28,445 28,508 28,194 29,336 28,631 
 Income tax (benefit) expense 3,455 (475) (45,736) 1,602 3,331 
 Net income (loss) $ 13,762 $ 2,543 $ (140,390) $ 8,302 $ 14,189 
 
 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 

 
 
 
 
 49 

 
 

 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. 
 
 
 50 

 

 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. 
 51 

 

 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". 
 52 

 
 

 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 Three Months Ended 
 March 31, 2024 December 31, 2023 
 Average Interest Average Interest 
 Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ 
 Amount Paid Rate Amount Paid Rate 
 Assets: (Dollars in thousands) 
 Interest-earning assets: 
 One- to four-family loans: 
 Originated $ 3,987,323 $ 35,151 3.53 % $ 4,025,539 $ 35,060 3.48 % 
 Correspondent purchased 2,369,131 19,274 3.25 2,413,900 19,660 3.26 
 Bulk purchased 133,832 735 2.20 136,609 694 2.03 
 Total one- to four-family loans 6,490,286 55,160 3.40 6,576,048 55,414 3.37 
 Commercial loans 1,351,574 18,708 5.48 1,306,917 18,267 5.47 
 Consumer loans 106,267 2,254 8.53 105,958 2,260 8.46 
 Total loans receivable (1) 
 7,948,127 76,122 3.82 7,988,923 75,941 3.78 
 MBS (2) 
 538,882 7,794 5.78 526,733 5,859 4.45 
 Investment securities (2)(3) 
 175,832 2,332 5.31 266,873 2,528 3.79 
 FHLB stock (4) 
 107,562 2,528 9.45 108,648 2,586 9.44 
 Cash and cash equivalents (5) 
 330,751 4,513 5.40 346,220 4,778 5.40 
 Total interest-earning assets 9,101,154 93,289 4.09 9,237,397 91,692 3.95 
 Other non-interest-earning assets 467,949 466,084 
 Total assets $ 9,569,103 $ 9,703,481 
 
 Liabilities and stockholders' equity: 
 Interest-bearing liabilities: 
 Checking $ 878,243 438 0.20 $ 886,530 445 0.20 
 Savings 471,239 224 0.19 472,819 138 0.12 
 Money market 1,335,269 5,706 1.72 1,364,565 6,737 1.96 
 Retail certificates 2,623,613 25,297 3.88 2,555,375 23,199 3.60 
 Commercial certificates 51,304 510 4.00 49,558 463 3.70 
 Wholesale certificates 112,077 1,240 4.45 130,857 1,461 4.43 
 Total deposits 5,471,745 33,415 2.46 5,459,704 32,443 2.36 
 
 
 
 Borrowings (6) 
 2,360,776 18,554 3.15 2,467,410 19,656 3.15 
 Total interest-bearing liabilities 7,832,521 51,969 2.67 7,927,114 52,099 2.61 
 Non-interest-bearing deposits 528,278 537,144 
 Other non-interest-bearing liabilities 172,042 202,743 
 Stockholders' equity 1,036,262 1,036,480 
 Total liabilities and stockholders' equity $ 9,569,103 $ 9,703,481 
 
 Net interest income (7) 
 $ 41,320 $ 39,593 
 Net interest-earning assets $ 1,268,633 $ 1,310,283 
 Net interest margin (8) 
 1.82 1.71 
 Ratio of interest-earning assets to interest-bearing liabilities 1.16x 1.17x 
 
 Selected performance ratios: 
 Return on average assets (annualized) (9)(14) 
 0.58 % 0.10 % 
 Return on average equity (annualized) (10)(14) 
 5.31 0.98 
 Average equity to average assets 10.83 10.68 
 Operating expense ratio (annualized) (11) 
 1.19 1.18 
 Efficiency ratio (12)(14) 
 61.89 92.86 
 Pre-tax yield on leverage strategy (13) 
 — — 

 
 
 53 

 

 (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) 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. 
 (7) Net interest income represents the difference between interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income depends on the average balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them. 
 (8) Net interest margin represents annualized net interest income as a percentage of average interest-earning assets. Management believes 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 
 Without 
 Securities 
 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 
 EPS (15) 
 $ 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. 
 
 
 54 

 

 Rate/Volume Analysis 
 The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended March 31, 2024 to the three months ended December 31, 2023. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. 
 
 For the Three Months Ended 
 March 31, 2024 vs. December 31, 2023 
 Increase (Decrease) Due to 
 Volume Rate Total 
 (Dollars in thousands) 
 Interest-earning assets: 
 Loans receivable $ (137) $ 318 $ 181 
 MBS 139 1,796 1,935 
 Investment securities (1,021) 825 (196) 
 FHLB stock (57) (1) (58) 
 Cash and cash equivalents (264) (1) (265) 
 Total interest-earning assets (1,340) 2,937 1,597 
 
 Interest-bearing liabilities: 
 Checking (8) 1 (7) 
 Savings — 86 86 
 Money market (154) (878) (1,032) 
 Certificates of deposit 400 1,525 1,925 
 Borrowings (1,033) (69) (1,102) 
 
 Total interest-bearing liabilities (795) 665 (130) 
 
 Net change in net interest income $ (545) $ 2,272 $ 1,727 

 
 
 
 
 
 
 
 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. 
 
 
 55 

 

 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 Six Months Ended 
 March 31, Change Expressed in: 
 2024 2023 Dollars Percent 
 (Dollars in thousands) 
 INTEREST AND DIVIDEND INCOME: 
 Loans receivable $ 152,063 $ 134,138 $ 17,925 13.4 % 
 MBS 13,653 9,559 4,094 42.8 
 Cash and cash equivalents 9,291 27,648 (18,357) (66.4) 
 FHLB stock 5,114 7,765 (2,651) (34.1) 
 Investment securities 4,860 1,776 3,084 173.6 
 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 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. 
 
 For the Six Months Ended 
 March 31, Change Expressed in: 
 2024 2023 Dollars Percent 
 (Dollars in thousands) 
 INTEREST EXPENSE: 
 Deposits $ 65,858 $ 28,044 $ 37,814 134.8 % 
 Borrowings 38,210 65,055 (26,845) (41.3) 
 Total interest expense $ 104,068 $ 93,099 $ 10,969 11.8 

 
 
 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 
 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 a reduction in the balance of commercial off-balance sheet credit exposures due to construction loans being funded and converted to permanent loans. 
 
 
 56 

 

 Non-Interest Income 
 The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent. 
 
 For the Six Months Ended 
 March 31, Change Expressed in: 
 2024 2023 Dollars Percent 
 (Dollars in thousands) 
 NON-INTEREST INCOME: 
 Deposit service fees $ 5,026 $ 6,583 $ (1,557) (23.7) % 
 Insurance commissions 1,598 1,672 (74) (4.4) 
 
 
 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 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 Six Months Ended 
 March 31, Change Expressed in: 
 2024 2023 Dollars Percent 
 (Dollars in thousands) 
 NON-INTEREST EXPENSE: 
 Salaries and employee benefits $ 25,879 $ 26,487 $ (608) (2.3) % 
 Information technology and related expense 10,323 10,859 (536) (4.9) 
 Occupancy, net 6,853 7,042 (189) (2.7) 
 Federal insurance premium 3,587 2,058 1,529 74.3 
 Regulatory and outside services 3,023 2,838 185 6.5 
 Advertising and promotional 2,259 2,166 93 4.3 
 Deposit and loan transaction costs 1,409 1,301 108 8.3 
 Office supplies and related expense 780 1,264 (484) (38.3) 
 
 
 Other non-interest expense 2,840 2,389 451 18.9 
 Total non-interest expense $ 56,953 $ 56,404 $ 549 1.0 

 
 
 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. 
 
 
 57 

 

 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 effective tax rate. 
 
 For the Six Months Ended 
 March 31, Change Expressed in: 
 2024 2023 Dollars Percent 
 (Dollars in thousands) 
 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 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. 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. 
 
 
 58 

 
 

 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 
 Assets: (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 
 MBS (2) 
 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) 
 1.76 1.59 
 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) 
 3.15 5.66 
 Average equity to average assets 10.75 9.50 
 Operating expense ratio (annualized) (11) 
 1.18 1.00 
 Efficiency ratio (12)(14) 
 74.29 57.43 
 Pre-tax yield on leverage strategy (13) 
 — 0.15 

 59 

 

 (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. 
 (8) Net interest margin represents annualized net interest income as a percentage of average interest-earning assets. 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 Six Months Ended 
 March 31, 2024 
 Without 
 Securities 
 Actual Securities Strategy 
 (GAAP) Strategy (Non-GAAP) 
 Return on average assets (annualized) 0.34 % (0.21) % 0.55 % 
 Return on average equity (annualized) 3.15 (1.94) 5.09 
 Efficiency Ratio 74.29 11.01 63.28 
 EPS (15) 
 $ 0.12 $ (0.08) $ 0.20 

 (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. 
 
 
 
 
 60 

 

 Rate/Volume Analysis 
 The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous period's average rate, and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. 
 
 For the Six Months Ended 
 March 31, 2024 vs. March 31, 2023 
 Increase (Decrease) Due to 
 Volume Rate Total 
 (Dollars in thousands) 
 Interest-earning assets: 
 Loans receivable $ 5,567 $ 12,358 $ 17,925 
 MBS (7,660) 11,754 4,094 
 Investment securities (1,563) 4,647 3,084 
 FHLB stock (3,418) 767 (2,651) 
 Cash and cash equivalents (26,085) 7,728 (18,357) 
 Total interest-earning assets (33,159) 37,254 4,095 
 
 Interest-bearing liabilities: 
 Checking (83) 309 226 
 Savings (29) 190 161 
 Money market (1,468) 7,692 6,224 
 Certificates of deposit 5,420 25,783 31,203 
 Borrowings (31,619) 4,774 (26,845) 
 Total interest-bearing liabilities (27,779) 38,748 10,969 
 
 Net change in net interest income $ (5,380) $ (1,494) $ (6,874) 

 
 
 
 
 
 Comparison of Operating Results for the Three Months Ended March 31, 2024 and 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 $14.2 million, or $0.11 per share for the quarter ended March 31, 2023. The decrease in net income was due primarily to a decrease in net interest income partially offset by lower provision for credit losses in the current quarter. The net interest margin increased 26 basis points, from 1.56% for the prior year quarter to 1.82% for the current quarter, due primarily to the leverage strategy being in place during the prior year quarter but not in place during the current year quarter. The leverage strategy negatively impacted the net interest margin for the prior year period by 15 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 cost of retail certificates of deposit, which exceeded the increase in yields on securities and loans. 
 
 
 61 

 

 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, Change Expressed in: 
 2024 2023 Dollars Percent 
 (Dollars in thousands) 
 INTEREST AND DIVIDEND INCOME: 
 Loans receivable $ 76,122 $ 69,319 $ 6,803 9.8 % 
 MBS 7,794 4,748 3,046 64.2 
 Cash and cash equivalents 4,513 10,977 (6,464) (58.9) 
 FHLB stock 2,528 3,607 (1,079) (29.9) 
 Investment securities 2,332 895 1,437 160.6 
 Total interest and dividend income $ 93,289 $ 89,546 $ 3,743 4.2 

 
 
 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 primarily in the commercial 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 quarter and not being utilized during the current year quarter. Interest income on cash and cash equivalents related to the leverage strategy decreased $10.6 million and dividend income on FHLB stock related to the leverage strategy decreased $951 thousand compared to the prior year quarter. Interest income on cash and cash equivalents not associated with the leverage strategy increased $4.1 million due primarily to an increase in the average balance of cash and cash equivalents which was mainly a result of the securities strategy. 
 
 
 Interest Expense 
 The following table presents the components of interest expense for the periods presented, along with the change measured in dollars and percent. 
 
 For the Three Months Ended 
 March 31, Change Expressed in: 
 2024 2023 Dollars Percent 
 (Dollars in thousands) 
 INTEREST EXPENSE: 
 Deposits $ 33,415 $ 16,140 $ 17,275 107.0 % 
 Borrowings 18,554 31,447 (12,893) (41.0) 
 Total interest expense $ 51,969 $ 47,587 $ 4,382 9.2 

 
 
 The increase in interest expense on deposits was due primarily to an increase in the weighted average rate paid on the deposit portfolio, mainly retail certificates of deposit and money market accounts. Interest expense on borrowings associated with the leverage strategy decreased $11.3 million compared to the prior year quarter due to the leverage strategy being in place during the prior year quarter and not being in place during the current year quarter. Interest expense on borrowings not associated with the leverage strategy decreased $1.6 million due to a decrease in the average balance of FHLB borrowings compared to the prior year quarter. 
 
 
 Provision for Credit Losses 
 The Bank recorded a provision for credit losses during the current quarter of $301 thousand, compared to a provision of $891 thousand during the prior year quarter. See "Comparison of Operating Results for the Three Months Ended March 31, 2024 and December 31, 2023" above for additional discussion regarding the provision for credit losses during the current quarter. 
 
 
 62 

 

 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, Change Expressed in: 
 2024 2023 Dollars Percent 
 (Dollars in thousands) 
 NON-INTEREST INCOME: 
 Deposit service fees $ 2,451 $ 3,122 $ (671) (21.5) % 
 Insurance commissions 735 877 (142) (16.2) 
 
 
 Other non-interest income 1,457 1,084 373 34.4 
 Total non-interest income $ 4,643 $ 5,083 $ (440) (8.7) 

 
 
 The decrease in deposit service fees was due primarily to a change in the fee structure of certain deposit products after the digital transformation in August 2023. 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 quarter while none were received in the prior year 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, Change Expressed in: 
 2024 2023 Dollars Percent 
 (Dollars in thousands) 
 NON-INTEREST EXPENSE: 
 Salaries and employee benefits $ 12,887 $ 12,789 $ 98 0.8 % 
 Information technology and related expense 4,954 5,789 (835) (14.4) 
 Occupancy, net 3,481 3,568 (87) (2.4) 
 Federal insurance premium 1,727 1,246 481 38.6 
 Regulatory and outside services 1,380 1,305 75 5.7 
 Advertising and promotional 1,271 1,333 (62) (4.7) 
 Deposit and loan transaction costs 867 690 177 25.7 
 Office supplies and related expense 419 631 (212) (33.6) 
 
 Other non-interest expense 1,459 1,280 179 14.0 
 Total non-interest expense $ 28,445 $ 28,631 $ (186) (0.6) 

 
 
 The decrease in information technology and related expenses was due mainly to lower third-party project management expenses associated with the digital transformation project during the prior year quarter 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. The increase in deposit and loan transaction costs was due primarily to new statement and check processing expenses related to agreements associated with the digital transformation. The decrease in office supplies and related expense was due primarily to the outsourcing of statement processing related to the digital transformation, and the timing of office supply purchases between periods. The increase in other non-interest expense was due mainly to an increase in customer fraud losses. 
 
 
 The Company's efficiency ratio was 61.89% for the current quarter compared to 60.86% for the prior year quarter. The change in the efficiency ratio was due primarily to lower net interest income in the current quarter. The Company's operating expense ratio (annualized) for the current quarter was 1.19% compared to 1.04% for the prior year quarter, due mainly to lower average assets in the current quarter. The leverage strategy was in place at times during the prior year quarter, which increased assets, but was not in place during the current year quarter. 
 63 

 

 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, Change Expressed in: 
 2024 2023 Dollars Percent 
 (Dollars in thousands) 
 Income before income tax expense $ 17,217 $ 17,520 $ (303) (1.7) % 
 Income tax expense 3,455 3,331 124 3.7 
 Net income $ 13,762 $ 14,189 $ (427) (3.0) 
 
 Effective Tax Rate 20.1 % 19.0 % 

 
 
 Income tax expense was higher in the current year quarter due to a higher effective tax rate, partially offset by lower pretax income. The higher effective tax rate was due primarily to recording income taxes on the current quarter distribution of earnings from the Bank to the Company. See "Comparison of Operating Results for the Three Months Ended March 31, 2024 and December 31, 2023" above for additional discussion. 
 64 

 
 

 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 Three Months Ended 
 March 31, 2024 March 31, 2023 
 Average Interest Average Interest 
 Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ 
 Amount Paid Rate Amount Paid Rate 
 Assets: (Dollars in thousands) 
 Interest-earning assets: 
 One- to four-family loans: 
 Originated $ 3,987,323 $ 35,151 3.53 % $ 4,050,515 $ 33,660 3.32 % 
 Correspondent purchased 2,369,131 19,274 3.25 2,462,960 19,380 3.15 
 Bulk purchased 133,832 735 2.20 144,438 413 1.14 
 Total one- to four-family loans 6,490,286 55,160 3.40 6,657,913 53,453 3.21 
 Commercial loans 1,351,574 18,708 5.48 1,147,681 13,924 4.85 
 Consumer loans 106,267 2,254 8.53 102,649 1,942 7.67 
 Total loans receivable (1) 
 7,948,127 76,122 3.82 7,908,243 69,319 3.51 
 MBS (2) 
 538,882 7,794 5.78 1,173,366 4,748 1.62 
 Investment securities (2)(3) 
 175,832 2,332 5.31 525,012 895 0.68 
 FHLB stock (4) 
 107,562 2,528 9.45 167,567 3,607 8.73 
 Cash and cash equivalents (5) 
 330,751 4,513 5.40 967,586 10,977 4.54 
 Total interest-earning assets 9,101,154 93,289 4.09 10,741,774 89,546 3.34 
 Other non-interest-earning assets 467,949 263,916 
 Total assets $ 9,569,103 $ 11,005,690 
 
 Liabilities and stockholders' equity: 
 Interest-bearing liabilities: 
 Checking $ 878,243 438 0.20 $ 989,440 368 0.15 
 Savings 471,239 224 0.19 541,324 101 0.08 
 Money market 1,335,269 5,706 1.72 1,620,451 3,184 0.80 
 Retail certificates 2,623,613 25,297 3.88 2,176,103 11,115 2.07 
 Commercial certificates 51,304 510 4.00 38,575 197 2.07 
 Wholesale certificates 112,077 1,240 4.45 127,037 1,175 3.75 
 Total deposits 5,471,745 33,415 2.46 5,492,930 16,140 1.19 
 
 
 
 Borrowings (6) 
 2,360,776 18,554 3.15 3,700,022 31,447 3.42 
 Total interest-bearing liabilities 7,832,521 51,969 2.67 9,192,952 47,587 2.09 
 Non-interest-bearing deposits 528,278 574,495 
 Other non-interest-bearing liabilities 172,042 172,481 
 Stockholders' equity 1,036,262 1,065,762 
 Total liabilities and stockholders' equity $ 9,569,103 $ 11,005,690 
 
 Net interest income (7) 
 $ 41,320 $ 41,959 
 Net interest-earning assets $ 1,268,633 $ 1,548,822 
 Net interest margin (8) 
 1.82 1.56 
 Ratio of interest-earning assets to interest-bearing liabilities 1.16x 1.17x 
 
 Selected performance ratios: 
 Return on average assets (annualized) (9) 
 0.58 % 0.52 % 
 Return on average equity (annualized) (10) 
 5.31 5.33 
 Average equity to average assets 10.83 9.68 
 Operating expense ratio (annualized) (11) 
 1.19 1.04 
 Efficiency ratio (12) 
 61.89 60.86 
 Pre-tax yield on leverage strategy (13) 
 — 0.06 

 
 
 65 

 

 (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) There were no nontaxable securities included in the average balance of investment securities for the three months ended March 31, 2024. The average balance of investment securities includes an average balance of nontaxable securities of $1.0 million for the three months ended March 31, 2023. 
 (4) There was no FHLB stock related to the leverage strategy for the three months ended March 31, 2024. Included in this line, for the three months ended March 31, 2023 is FHLB stock related to the leverage strategy with an average outstanding balance of $44.1 million and dividend income of $951 thousand, at a weighted average yield of 8.75%, and FHLB stock not related to the leverage strategy with an average outstanding balance of $123.5 million and dividend income of $2.7 million, at a weighted average yield of 8.72%. 
 (5) There was no cash and cash equivalents related to the leverage strategy during the three months ended March 31, 2024. The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $935.1 million and interest income of $10.6 million, at a weighted average yield of 4.54% during the three months ended March 31, 2023. 
 (6) There was no FHLB borrowings related to the leverage strategy for the three months ended March 31, 2024. Included in this line, for the three months ended March 31, 2023 are FHLB borrowings related to the leverage strategy with an average outstanding balance of $979.2 million and interest paid of $11.3 million, at a weighted average rate of 4.60%, and borrowings not related to the leverage strategy with an average outstanding balance of $2.72 billion and interest paid of $20.2 million, at a weighted average rate of 3.00%. The FHLB advance amounts and rates included in this line include the effect of interest rate swaps and are net of deferred prepayment penalties. 
 (7) Net interest income represents the difference between interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income depends on the average balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them. 
 (8) Net interest margin represents annualized net interest income as a percentage of average interest-earning assets. Management believes 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. 
 66 

 

 Rate/Volume Analysis 
 The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended March 31, 2024 to the three months ended March 31, 2023. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. 
 
 For the Three Months Ended March 31, 
 2024 vs. 2023 
 Increase (Decrease) Due to 
 Volume Rate Total 
 (Dollars in thousands) 
 Interest-earning assets: 
 Loans receivable $ 1,307 $ 5,496 $ 6,803 
 MBS (3,715) 6,761 3,046 
 Investment securities (955) 2,392 1,437 
 FHLB stock (1,353) 274 (1,079) 
 Cash and cash equivalents (8,251) 1,787 (6,464) 
 Total interest-earning assets (12,967) 16,710 3,743 
 
 Interest-bearing liabilities: 
 Checking (44) 114 70 
 Savings (14) 137 123 
 Money market (638) 3,160 2,522 
 Certificates of deposit 2,796 11,764 14,560 
 Borrowings (14,768) 1,875 (12,893) 
 
 Total interest-bearing liabilities (12,668) 17,050 4,382 
 
 Net change in net interest income $ (299) $ (340) $ (639) 

 
 
 67 

 
 

 Liquidity and Capital Resources 
 
 
 Liquidity refers to our ability to generate sufficient cash to fund ongoing operations, to repay maturing certificates of deposit and other deposit withdrawals, to repay maturing borrowings, and to fund loan commitments. Liquidity management is both a daily and long-term function of our business management. The Company's most available liquid assets are represented by cash and cash equivalents and AFS securities. The Bank's primary sources of funds are deposits, FHLB borrowings, repayments and maturities of outstanding loans and MBS and other short-term investments, and funds provided by operations. The Bank's long-term borrowings primarily have been used to manage long-term liquidity needs and the Bank's interest rate risk with the intention to improve the earnings of the Bank while maintaining capital ratios that meet or exceed the regulatory standards for well-capitalized financial institutions. In addition, the Bank's focus on managing risk has provided additional liquidity capacity by maintaining a balance of MBS and investment securities available as collateral for borrowings. 
 
 
 We generally intend to manage cash reserves sufficient to meet short-term liquidity needs, which are routinely forecasted for 10, 30, and 365 days. Additionally, on a monthly basis, we perform a liquidity stress test in accordance with the Interagency Policy Statement on Funding and Liquidity Risk Management. The liquidity stress test incorporates both short-term and long-term liquidity scenarios in order to identify and to quantify liquidity risk. Management also monitors key liquidity statistics related to items such as wholesale funding gaps, borrowings capacity, and available unpledged collateral, as well as various liquidity ratios. 
 
 
 In the event short-term liquidity needs exceed available cash, the Bank has access to a line of credit at the FHLB, in addition to the FRB of Kansas City's discount window. Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40% of Bank Call Report total assets without the pre-approval of FHLB senior management. The Bank's FHLB borrowing limit was 50% of Bank Call Report total assets as of March 31, 2024, as approved by FHLB senior management. FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB. When the leverage strategy is in place, the Bank maintains the resulting excess cash reserves from the FHLB borrowings at the FRB of Kansas City, which can be used to meet any short-term liquidity needs. Additionally, FHLB borrowings may exceed 40% of Bank Call Report total assets if the Bank continues its leverage strategy and FHLB senior management continues to approve the Bank's borrowing limit being in excess of 40% of Call Report total assets. All or a portion of the short-term FHLB borrowings in conjunction with the leverage strategy can be repaid at maturity, if necessary or desired. The amount that can be borrowed from the FRB of Kansas City's discount window is based upon the fair value of securities pledged as collateral. At March 31, 2024, the amount of securities pledged for the discount window was $117.8 million. Management tests the Bank's access to the FRB of Kansas City's discount window annually with a nominal overnight borrowing. 
 
 
 If management observes unusual trends in the amount and frequency of line of credit utilization and/or short-term borrowings that is not in conjunction with a planned strategy, such as the leverage strategy, the Bank will likely utilize long-term wholesale borrowing sources such as FHLB advances and/or repurchase agreements to provide long-term, fixed-rate funding. The maturities of these long-term borrowings are generally staggered in order to mitigate the risk of a highly negative cash flow position at maturity. The Bank's internal policy limits total borrowings to 55% of total assets. At March 31, 2024, the Bank had total borrowings, at par, of $2.35 billion, or approximately 24% of total assets. The borrowings balance was composed of FHLB advances. Of this amount, $664.7 million is scheduled to be repaid or mature in the next 12 months. Management estimated 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. 
 
 
 At March 31, 2024, the Bank had no repurchase agreements. The Bank may enter into repurchase agreements as management deems appropriate, not to exceed 15% of total assets, and subject to the total borrowings internal policy limit of 55% as discussed above. 
 
 
 The Bank has the ability to utilize the repayment and maturity of outstanding loans, MBS, and other investments for liquidity needs rather than reinvesting such funds into the related portfolios. At March 31, 2024, the Bank had $539.0 million of securities that were eligible but unused as collateral for borrowing or other liquidity needs. The Bank also has access to other sources of funds for liquidity purposes, such as brokered and public unit certificates of deposit. As of March 31, 2024, the Bank's policy allowed for combined brokered and public unit certificates of deposit up to 15% of total deposits. At March 31, 2024, the Bank did not have any brokered certificates of deposit, and public unit certificates of deposit were approximately 2% of total deposits. The Bank had pledged securities with an estimated fair value of $156.7 million as collateral for public unit certificates of deposit at March 31, 2024. The securities pledged as collateral for public unit certificates of deposit are held under joint custody with FHLB and generally will be released upon deposit maturity. 
 
 
 At March 31, 2024, $2.15 billion of the Bank's certificate of deposit portfolio was scheduled to mature within the next 12 months, including $113.1 million of public unit certificates of deposit and $47.0 million of commercial certificates of deposit. Based on our deposit retention experience and our current pricing strategy, we anticipate the majority of the maturing retail certificates of deposit will renew or transfer to other deposit products of the Bank at prevailing rates, although no assurance can be given in this regard. Due to the nature of public unit certificates of deposit and commercial certificates of deposit, retention rates are not as predictable as for retail certificates of deposit. 
 
 
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 While scheduled payments from the amortization of loans and MBS and payments on short-term investments are relatively predictable sources of funds, deposit flows, prepayments on loans and MBS, and calls of investment securities are greatly influenced by general interest rates, economic conditions, and competition, and are less predictable sources of funds. To the extent possible, the Bank manages the cash flows of its loan and deposit portfolios by the rates it offers customers. We anticipate we will continue to have sufficient funds, through the repayments and maturities of loans and securities, deposits and borrowings, to meet our current commitments. 
 
 
 Limitations on Dividends and Other Capital Distributions 
 
 
 Office of the Comptroller of the Currency ("OCC") regulations impose restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends and other transactions charged to the capital account. Under FRB and OCC safe harbor regulations, savings institutions generally may make capital distributions during any calendar year equal to earnings of the previous two calendar years and current year-to-date earnings (to the extent not previously distributed). A savings institution that is a subsidiary of a savings and loan holding company, such as the Company, that proposes to make a capital distribution must submit written notice to the OCC and FRB 30 days prior to such distribution. The OCC and FRB may object to the distribution during that 30-day period based on safety and soundness or other concerns. Savings institutions that desire to make a larger capital distribution, are under special restrictions, or are not, or would not be, sufficiently capitalized following a proposed capital distribution must obtain regulatory non-objection prior to making such a distribution. 
 
 
 The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company. So long as the Bank remains well capitalized after each capital distribution (as evidenced by maintaining regulatory capital ratios greater than the required percentages) and operates in a safe and sound manner, it is management's belief that the OCC and FRB will continue to allow the Bank to distribute its earnings to the Company, although no assurance can be given in this regard. Management is currently evaluating the timing and amount 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". 
 
 
 Regulatory Capital 
 
 
 Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank per the regulatory framework for prompt corrective action ("PCA"). Qualifying institutions that elect to use the CBLR framework, such as the Bank and the Company, that maintain the required minimum leverage ratio of 9.0% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the capital requirements for the well capitalized category under the agencies' PCA framework. As of March 31, 2024, the Bank's CBLR was 9.1% and the Company's CBLR was 10.0%, which exceeded the minimum requirements. The Bank's risk-based tier 1 capital ratio at March 31, 2024 was 16.3%. 
 
 
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
Capitol Federal Financial, Inc. 10-Q

Item 2. Management’s Discussion and Analysis
