What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-07 compared with 2024-05-10 · 326 added, 338 removed, 1024 unchanged (39% of the section changed)

6 unchanged sentences

• 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 originate 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;

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• 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 future earnings and capital levels of the Bank, the impact of the pre-1988 bad debt recapture 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 Company's income tax expense and the Company's ability to pay dividends in accordance with its dividend policy and/or repurchase shares;

• the strength of the U.S.

43 unchanged sentences

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

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

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

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.

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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.

See additional information regarding the impact of the securities strategy on our financial measurements in "Comparison of Operating Results for the Nine Months Ended June 30, 2024 and June 30, 2023 - Average Balance Sheet" below.

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

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

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

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

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

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

at the reserve balance rate, pending its use to fund commercial activity or other Bank operations.

See additional discussion related to commercial loan activity in the "Financial Condition" and "Financial Condition - Loans Receivable" sections below.

The Company recognized net income of $26.0 million, or $0.20 per share, for the current year period, compared to net income of $38.7 million, or $0.29 per share, for the prior year period.

The lower net income for the current year period was primarily a result of the $10.0 million (net of tax) of net losses associated with the securities strategy, a decrease in deposit service fees, a decrease in net interest income, and an increase in income tax expense largely related to the pre-1988 bad debt recapture, partially offset by a lower provision for credit losses and a decrease in non-interest expense.

Excluding the effects of the net loss associated with the securities strategy, EPS would have been $0.28 for the current year period.

The income tax expense associated with the pre-1988 bad debt recapture negatively impacted earnings by $0.02 per share in the current year period.

See additional discussion related to the pre-1988 bad debt recapture in the "Comparison of Operating Results for the Three Months Ended June 30, 2024 and March 31, 2024" section below.

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").

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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.

The net interest margin increased 27 basis points, from 1.50% for the prior year period to 1.77% 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 16 basis points.

The remaining improvement in the net interest margin absent the leverage strategy when compared to the prior year period, was due to higher yields on securities and loans which outpaced the increase in the cost of deposits, largely in retail certificates of deposit.

The Company's efficiency ratio was 69.77% for the current year period compared to 61.78% for the prior year period.

Excluding the net loss from the securities strategy, the efficiency ratio would have been 62.87% for the current year period.

The change in the efficiency ratio, excluding the securities strategy, was due primarily to lower non-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 1.03% 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.

Total assets were $9.60 billion at June 30, 2024, a $574.7 million decrease from September 30, 2023, due primarily to the securities strategy.

The loan portfolio was $7.93 billion at June 30, 2024, a $37.9 million decrease from September 30, 2023, due mainly to a $214.4 million decrease in one- to four-family loans, partially offset by a $177.9 million increase in commercial loans.

As a result of rising interest rates and lack of housing inventory, there has been a slowdown in the housing market which has reduced the demand for residential loans and 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.

Additionally, during the current quarter, the Bank suspended its one- to four-family correspondent lending channels for the foreseeable future.

Management expects the Bank's one- to four-family loan portfolio will continue to decrease as cash flows generated from the one- to four-family portfolio are used to fund commercial loan growth.

Total deposits were $6.13 billion at June 30, 2024, an increase of $78.4 million from September 30, 2023.

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 as some customers elected to move funds to the Bank's certificate of deposit offerings or the Bank's higher yielding savings account offering.

Management continues to competitively price certain short-term retail certificate of deposit products so that if market 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 $2.29 billion at June 30, 2024, a decrease of $587.5 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.

Management estimates that the Bank had $3.00 billion in additional liquidity available at June 30, 2024, based on the Bank's blanket collateral agreement with FHLB and unencumbered securities.

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

At March 31, 2024, loans 30 to 89 days delinquent were 0.19% of total loans receivable, net, and loans 90 or more days delinquent or in foreclosure were 0.11% of total loans receivable, net.

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

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

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

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

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

At June 30, 2024, loans 30 to 89 days delinquent were 0.21% 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 period, net charge-offs ("NCOs") were $58 thousand.

At June 30, 2024, the gap between the amount of the Bank's interest-earning assets and its interest-bearing liabilities projected to reprice within one year was $(1.40) billion, or (14.6)% of total assets, compared to $(1.19) billion, or (11.7)% of total assets, at

September 30, 2023.

The change in the one-year gap amount was due to a net increase in the amount of liability cash flows coming due in one year, partially offset by an increase in the amount of interest-earning asset cash flows coming due in one year as of June 30, 2024, compared to September 30, 2023.

The net increase in liability cash flows coming due in one year primarily related to the Bank's retail certificate of deposit portfolio, partially offset by a decrease in borrowings coming due in one year as the Bank repaid its BTFP amount outstanding in conjunction with the securities strategy.

The increase in the one-year cash flow for retail certificates of deposit was due to the Bank continuing to offer higher rates on shorter-term certificates of deposit.

The increase in interest-earning assets projected to mature or reprice within one year was due primarily to an increase in the amount of loans expected to mature or reprice, as well as to an increase in the balance of cash between 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.

The digital transformation implemented technology needed to enhance our customers' 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.

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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.

a Mobile app store ratings have improved by over 100% for Android year-over-year and approximately 25% for iOS since the digital transformation,

b Volume of deposit accounts opened online through the digital channel is 60% higher in the current fiscal year compared to the prior fiscal year,

c Over 27,000 new users of our credit score service in TBO since August 2023, and

d Continued growth in person-to-person payment volume following the integration of Zelle into TBO:

i Settlement volume is up 37% quarter over quarter and 97% compared to the same quarter in 2023, and

ii Transaction volume is up 32% quarter over quarter and 121% compared to the same quarter in 2023.

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.

We are now accepting credits from two instant payment networks:

RTP® and FedNow®, enabling our deposit customers to receive credits in seconds.

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.

For commercial banking, 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.

During the current quarter several new treasury management services were added in response to the needs of customers in the sales pipeline.

Leveraging our new technology and organizational structure to quickly respond to customer needs in the sales pipeline is central to our growth strategy for commercial deposits.

Management has continued to adjust staffing in numerous areas of the Bank, including deposit operations, lending, and commercial banking, to ensure resources are aligned with our priorities and strategies.

Financial Condition

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Annualized Annualized

March 31, December 31, Percent September 30, Percent

June 30, March 31, Percent September 30, Percent

2024 2024 Change 2023 Change

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Average number of diluted shares outstanding 129,866 130,536 (2.1) 133,225 (3.4)

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

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

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

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

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

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

During the current quarter, total assets decreased $118.5 million, to $9.60 billion at June 30, 2024, due primarily to a decrease in cash which was used to pay off certain borrowings that matured and to fund deposit withdrawals and other Bank operations.

The loan portfolio mix continued to shift from one- to four-family loans to commercial loans during the current quarter, with $115.4 million in commercial loan growth (34% annualized), partially offset by a $59.9 million decrease in one- to four-family loans due primarily to a $52.1 million decrease in one- to four-family correspondent loans.

Total liabilities were $8.58 billion at June 30, 2024, a decrease of $114.3 million from March 31, 2024, due primarily to a $59.4 million decrease in borrowings as not all maturing FHLB borrowings were replaced.

Total deposits were $6.13 billion at June 30, 2024, a $12.1 million decrease from March 31, 2024.

The decrease was primarily in retail money market and checking accounts, partially offset by an increase in retail certificates of deposit in terms of 14 months or less and the high yield savings account.

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

June 30, 2024 March 31, 2024 September 30, 2023

Amount Rate Amount Rate Amount Rate

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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

For the Three Months Ended For the Nine Months Ended

June 30, 2024 June 30, 2024 June 30, 2023

Amount Rate Amount Rate Amount Rate

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

For the Six Months Ended

March 31, 2024 March 31, 2023

For the Nine Months Ended

June 30, 2024 June 30, 2023

Amount Rate % of Total Amount Rate % of Total

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Total purchased/participation loans $ 34,212 7.94 $ 613,274 5.54

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.

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.

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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

For the Three Months Ended For the Nine Months Ended

June 30, 2024 June 30, 2024

Credit Credit

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$ 101,341 6.44 75 770 $ 216,186 6.52 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.

As of June 30, 2024, the Bank had one- to four-family loan origination and refinance commitments of $58.6 million at a weighted average rate of 6.57%.

There were no one- to four-family correspondent loan purchase commitments at June 30, 2024, as during the current quarter the Bank suspended purchasing one- to four-family loans from correspondent lenders for the foreseeable future.

Commercial Loans - During the nine months ended June 30, 2024, the Bank originated and entered into commercial loan participations totaling $290.1 million, including $135.4 million in commercial construction loans, $87.5 million in commercial real estate loans, and $67.2 million in commercial and industrial loans.

During that period, the Bank also processed commercial loan disbursements, excluding lines of credit, of approximately $241.0 million at a weighted average rate of 6.42%, which included $194.3 million, $29.5 million, and $17.2 million of disbursements on new and existing commercial construction, commercial real estate, and commercial and industrial loans, respectively.

As of June 30, 2024, March 31, 2024, and September 30, 2023, the Bank's commercial and industrial gross loan amounts (unpaid principal plus undisbursed amounts) totaled $169.0 million, $164.8 million and $158.5 million, respectively, and commitments totaled $1.1 million, $2.9 million and $2.6 million, respectively.

Of the $169.0 million outstanding at June 30, 2024, $76.9 million, or 46%, of the portfolio related to working capital loans, $45.0 million, or 27%, related to financing/leasing/purchasing vehicles and equipment, and $38.5 million, or 23%, related to purchasing/refinancing business and/or assets.

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

As of June 30, 2024, the Bank had six commercial real estate and commercial construction loan commitments, totaling $59.1 million, at a weighted average rate of 7.57%.

We anticipate fully funding the majority of the undisbursed amounts as most are not cancellable by the Bank.

Of the total commercial real estate and commercial construction undisbursed amounts and commitments outstanding as of June 30, 2024, management anticipates funding approximately $98 million during the September 2024 quarter, $70 million during the December 2024 quarter, $66 million during the March 2025 quarter, and $128 million during the June 2025 quarter or later.

At June 30, 2024, the unpaid principal balance of non-owner occupied commercial real estate loans was $828.6 million and the unpaid principal balance of owner occupied commercial real estate loans was $144.6 million, which are included in the table below.

June 30, 2024 March 31, 2024 September 30, 2023

Unpaid Undisbursed Gross Loan Gross Loan Gross Loan

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(Dollars in thousands)

Multi-family 41 $ 164,318 $ 217,459 $ 381,777 $ 301,285 $ 308,846

Retail building 139 268,734 58,744 327,478 342,713 352,499

Senior housing 34 305,386 5,792 311,178 313,362 331,207

Multi-family 40 133,348 167,937 301,285 302,908 308,846

Hotel 17 282,176 22,046 304,222 245,336 233,012

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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

June 30, 2024 March 31, 2024 September 30, 2023

Unpaid Undisbursed Gross Loan Gross Loan Gross Loan

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Kansas 580 $ 522,486 $ 167,445 $ 689,931 $ 658,576 $ 670,498

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

Texas 19 295,655 48,396 344,051 344,349 348,707

Missouri 149 272,232 60,805 333,037 301,969 332,610

Colorado 8 40,194 10,293 50,487 54,751 49,385

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

New York 1 60,000 — 60,000 — —

Tennessee 1 33,397 946 34,343 34,520 42,136

Arkansas 4 33,181 253 33,434 33,529 33,046

Nebraska 7 32,564 4 32,568 37,634 37,609

Other 17 43,826 29,273 73,099 68,113 48,947

786 $ 1,333,535 $ 317,415 $ 1,650,950 $ 1,533,441 $ 1,562,938

The following table presents the Bank's commercial loan portfolio and outstanding loan commitments, categorized by gross loan amount (unpaid principal plus undisbursed amounts) or outstanding loan commitment amount, as of March 31, 2024.

The following table presents the Bank's commercial loan portfolio and outstanding loan commitments, categorized by aggregate gross loan amount (unpaid principal plus undisbursed amounts) or outstanding loan commitment amount and average loan amount, as of June 30, 2024.

For loans over $50.0 million, $143.1 million were multi-family loans located in Kansas and Missouri, $116.0 million related to hotels in New York and Texas, and $60.0 million related to an office building in Texas.

The current weighted average LTV based on the total projected disbursed loan amounts and the weighted average actual/projected DSCR for loans over $50 million was 57% and 1.37x respectively, as of June 30, 2024.

Count Amount Amount

(Dollars in thousands)

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>$10 to $15 million 14 169,472 12,105

>$5 to $10 million 32 233,458 7,296

$1 to $5 million 135 308,176 2,283

Less than $1 million 1,190 187,592 158

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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.

Of the loans 30 to 89 days delinquent at June 30, 2024, 56% were 59 days or less delinquent.

Loans Delinquent for 30 to 89 Days at:

March 31, December 31, September 30,

June 30, March 31, September 30,

2024 2024 2023

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Construction — — — — 4 1,123

Commercial 11 3,354 14 3,809 5 94

Commercial real estate 10 2,516 9 3,111 1 36

Commercial and industrial 5 265 2 243 4 58

Consumer 40 926 35 601 30 730

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Nonaccrual Loans and OREO at:

March 31, December 31, September 30,

June 30, March 31, September 30,

2024 2024 2023

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Bulk purchased 4 1,271 3 962 2 942

Commercial 11 1,203 8 1,198 12 2,183

Commercial real estate 6 1,078 7 1,076 8 1,966

Commercial and industrial 2 82 4 127 4 217

Consumer 13 236 10 250 9 113

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Bulk purchased — — — — — —

Commercial 1 25 1 18 1 18

Commercial real estate — — — — 1 18

Commercial and industrial 1 30 1 25 — —

Consumer — — — — — —

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

The following table presents the states where the properties securing ten percent or more of the total amount of our one- to four-family loans are located and the corresponding balance of loans 30 to 89 days delinquent, 90 or more days delinquent or in foreclosure, and weighted average LTV ratios for loans 90 or more days delinquent or in foreclosure at 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.

At June 30, 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

9 unchanged sentences

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

The increase in commercial special mention loans at 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

The increase in commercial special mention loans at June 30, 2024 compared to September 30, 2023 was due mainly to two loans moving to special mention during the current year period as certain underlying economic considerations related to the loans are being monitored by management.

June 30, 2024 March 31, 2024 September 30, 2023

Special Mention Substandard Special Mention Substandard Special Mention Substandard

6 unchanged sentences

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

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

Loans Receivable and Allowance for Credit Losses" for additional information related to the calculation of ACL as of June 30, 2024.

The increase in the ACL to loans receivable ratio at June 30, 2024 compared to March 31, 2024 and September 30, 2023 was due primarily to changes in the loan portfolio mix, due specifically to commercial loan growth.

Commercial loans generally have higher expected credit losses compared to one- to four-family loans.

Distribution of ACL Ratio of ACL to Loans Receivable

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

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

2024 2024 2023 2024 2024 2023

17 unchanged sentences

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

At or For the Nine Months Ended

June 30, 2024 June 30, 2023

(Dollars in thousands)

11 unchanged sentences

ACL to NCOs (annualized) 332x 667x

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.

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

The ratio of ACL to loans receivable, net was higher at the end of the current year period compared to the end of the prior year period due primarily to changes in the loan portfolio mix, specifically commercial loan growth.

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

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

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

For the Six Months Ended

March 31, 2024 March 31, 2023

For the Nine Months Ended

June 30, 2024 June 30, 2023

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

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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.

Overall, fixed-rate securities comprised 94% of our securities portfolio at June 30, 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

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

June 30, 2024 March 31, 2024 September 30, 2023

Amount Yield WAL Amount Yield WAL Amount Yield WAL

9 unchanged sentences

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

For the Six Months Ended

March 31, 2024 March 31, 2023

For the Nine Months Ended

June 30, 2024 June 30, 2023

Amount Yield WAL Amount Yield WAL

8 unchanged sentences

Ending balance - carrying value $ 801,953 5.68 5.7 $ 1,444,867 1.33 4.0

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.

Total liabilities were $8.58 billion at June 30, 2024, compared to $9.13 billion at September 30, 2023.

The decrease was due primarily to a decrease in borrowings as some of the funds from the securities strategy were used to repay all $500.0 million of outstanding borrowings under the BTFP.

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.

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

The amount of commercial non-maturity deposits included in the table below at June 30, 2024, March 31, 2024, and September 30, 2023 was $247.5 million, $251.8 million, and $267.3 million, respectively.

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

June 30, 2024 March 31, 2024 September 30, 2023

% of % of % of

9 unchanged sentences

$ 6,129,660 2.44 100.0 % $ 6,141,711 2.32 100.0 % $ 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.

Management has focused on retaining and growing deposits through the introduction of a high-yield savings account early in fiscal year 2024 which has a current rate of 4.21% for balances over $10 thousand.

The high-yield savings account balance was $58.2 million as of June 30, 2024.

A portion of the decrease in the money market portfolio during the current year period has been attributable to the growth in this product, along with the growth in retail certificates of deposit.

Management has sought to grow certificates of deposit with terms of 14 months or less by offering market competitive rates.

We have focused on terms that will allow us to price down certificates of deposit if the FRB reduces overnight rates.

Our certificate of deposit retention rate has been approximately 90% over the past 12-months.

As of June 30, 2024, approximately $751.2 million (or approximately 12%) of the Bank's Call Report deposit balance was uninsured, of which approximately $440.0 million related to commercial and retail deposit accounts and the remainder was mainly comprised of fully collateralized public unit deposits and intercompany accounts.

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

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

The following table presents the maturity of term borrowings, which consist of FHLB advances, along with associated weighted average contractual and effective rates as of March 31, 2024.

Total borrowings at June 30, 2024 were $2.29 billion, which was comprised of $1.99 billion in fixed-rate FHLB advances, $300.0 million in FHLB variable-rate advances tied to interest rate swaps, and $1.1 million 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 June 30, 2024.

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

16 unchanged sentences

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

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

For the Three Months Ended For the Nine Months Ended

June 30, 2024 June 30, 2024 June 30, 2023

Effective Effective Effective

7 unchanged sentences

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.

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 purchases of FHLB stock made to meet FHLB stock holding requirements, at the FRB of Kansas City.

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

3 unchanged sentences

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

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

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

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

When the leverage strategy is in place, it reduces the

net interest margin due to the amount of earnings from the transaction in comparison to the size of the transaction.

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

During the prior year period, the average balance of cash associated with the leverage strategy was $1.10 billion and interest earned on that cash was $34.7 million, the average balance of FHLB stock associated with the leverage strategy was $52.0 million and dividends earned on that stock were $3.4 million, and the average balance of FHLB borrowings associated with the leverage strategy was $1.16 billion and the related interest expense was $36.5 million.

Additionally, the Company recognized $368 thousand of FDIC premiums and $209 thousand of income tax expense during the prior year period related to the leverage strategy.

When the leverage strategy is in place, it reduces the net interest margin

due to the amount of earnings from the transaction in comparison to the size of the transaction.

Management continues to monitor the net interest rate spread and overall profitability of the leverage strategy.

Maturities of Interest-Bearing Liabilities.

The following table presents the maturity and weighted average repricing rate, which is also the weighted average effective rate, of certificates of deposit, split between retail/commercial and public unit amounts, and non-amortizing FHLB advances for the next four quarters as of March 31, 2024.

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

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

2024 2024 2025 2025 Total

11 unchanged sentences

Repricing Rate 4.07 % 4.26 % 3.97 % 4.09 % 4.11 %

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

The following table sets forth the WAM information for our certificates of deposit, in years, as of June 30, 2024.

Retail certificates of deposit 0.9

3 unchanged sentences

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.

Stockholders' equity totaled $1.02 billion at June 30, 2024, a decrease of $23.4 million from September 30, 2023.

During the current year period, the Company repurchased $19.3 million of shares and paid regular quarterly cash dividends totaling $33.5 million, or $0.255 per share.

On July 23, 2024, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.0 million, payable on August 16, 2024 to stockholders of record as of the close of business on August 2, 2024.

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank in accordance with regulatory standards.

As of 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.

As of June 30, 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.

As of June 30, 2024, the Bank's community bank leverage ratio ("CBLR") was 9.1%.

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

There were no shares repurchased during the current quarter as the Company considered the level of cash at the holding company to be appropriate in light of its continuing evaluation of the corporate and tax implications of distributing earnings from the Bank to the Company as a result of the pre-1988 bad debt recapture requirements at the Bank level.

The Company has $77.0 million authorized for repurchase under existing stock repurchase plans.

These plans have no expiration date;

however, the FRB's existing approval for the Company to repurchase shares up to $2.0 million expires in August 2024 and $75.0 million expires in February 2025.

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

At June 30, 2024, Capitol Federal Financial, Inc., at the holding company level, had $49.1 million in cash on deposit at the Bank.

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

Based on the Company's accumulated earnings and profits at the beginning of its tax year and the expected current year tax earnings and profits deficit as a result of the losses associated with the securities strategy ("See Comparison of Operating Results for the Three Months Ended June 30, 2024 and March 31, 2024 - Income Tax Expense" below), all dividends paid to stockholders by the Company during fiscal year 2024 will be treated as a return of capital, pursuant to Internal Revenue Code Section 301(c)(2), which reduces the tax basis in the shares of the holder by the amount of the dividend received.

Stockholders should consult their own tax advisors to determine the income tax consequences of their specific situation.

The Company is providing this for informational purposes only and not as legal or tax advice.

Based on current tax earnings and profits projections for fiscal year 2025, the Company anticipates that the majority, if not all, of the dividend payments to Company stockholders in fiscal year 2025 will be treated as dividends for tax purposes.

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.

For the quarter ended September 30, 2024, the amount presented represents the dividend payable on August 16, 2024 to stockholders of record as of the close of business on August 2, 2024.

Calendar Year

13 unchanged sentences

For the Three Months Ended

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

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

2024 2024 2023 2023 2023

23 unchanged sentences

Diluted EPS 0.07 0.11 0.02 (1.05) 0.06

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.

Comparison of Operating Results for the Three Months Ended June 30, 2024 and March 31, 2024

For the quarter ended June 30, 2024, the Company recognized net income of $9.6 million, or $0.07 per share, compared to net income of $13.8 million, or $0.11 per share, for the quarter ended March 31, 2024.

The lower net income in the current quarter was due primarily to higher income tax expense, mainly from income tax expense on the quarterly earnings distribution from the Bank to the holding company due to the Bank's pre-1988 bad debt recapture, and a higher provision for credit losses due largely to commercial loan growth.

The income tax expense associated with the pre-1988 bad debt recapture negatively impacted earnings by $0.03 per share in the current quarter.

See additional discussion regarding the Bank's pre-1988 bad debt recapture in the "Income Tax Expense" section below.

The net interest margin decreased five basis points, from 1.82% for the prior quarter to 1.77% for the current quarter due mainly to increases in the cost and average balance of retail certificates of deposit outpacing net interest margin improvements from the securities and loan portfolios.

Interest and Dividend Income

1 unchanged sentence

For the Three Months Ended

March 31, December 31, Change Expressed in:

June 30, March 31, Change Expressed in:

2024 2024 Dollars Percent

7 unchanged sentences

Total interest and dividend income $ 94,995 $ 93,289 $ 1,706 1.8

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.

The increase in interest income on loans receivable was due to an increase in the weighted average yield, partially offset by a lower average portfolio balance compared to the prior quarter due largely to a decrease in the one-to four-family correspondent loan portfolio.

See additional discussion in the "Financial Condition" section above.

The increase in interest income on MBS was due to an increase in average balance compared to the prior quarter as a result of the full quarter impact of purchases made late in the prior quarter as well as purchases made during the current quarter.

The decrease in interest income on cash and cash equivalents was due to a decrease in the average balance as excess operating cash during the current quarter was, in part, reinvested into the MBS portfolio.

Interest Expense

1 unchanged sentence

For the Three Months Ended

March 31, December 31, Change Expressed in:

June 30, March 31, Change Expressed in:

2024 2024 Dollars Percent

4 unchanged sentences

Total interest expense $ 54,671 $ 51,969 $ 2,702 5.2

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.

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.

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.

For the quarter ended June 30, 2024, the Bank recorded a provision for credit losses of $1.5 million, compared to a provision for credit losses of $301 thousand for the prior quarter.

The provision for credit losses in the current quarter was comprised of a $1.3 million increase in the ACL for loans, along with a $195 thousand increase 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.

Non-Interest Income

1 unchanged sentence

For the Three Months Ended

March 31, December 31, Change Expressed in:

June 30, March 31, Change Expressed in:

2024 2024 Dollars Percent

3 unchanged sentences

Insurance commissions 905 735 170 23.1

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

Other non-interest income 1,098 1,457 (359) (24.6)

Total non-interest income $ 4,709 $ 4,643 $ 66 1.4

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.

The increase in deposit service fees was due primarily to increased debit card usage, which generated additional interchange and service charge income during the current quarter.

The increase in insurance commissions was mainly a result of rate increases within the insurance market on both existing and new business.

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

Non-Interest Expense

1 unchanged sentence

For the Three Months Ended

March 31, December 31, Change Expressed in:

June 30, March 31, Change Expressed in:

2024 2024 Dollars Percent

11 unchanged sentences

Total non-interest expense $ 27,950 $ 28,445 $ (495) (1.7)

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

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

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

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

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

The increase in salaries and employee benefits was due mainly to merit and other salary adjustments during the current quarter and an increase in loan commissions due to an increase in one- to four-family loan origination volume compared to the prior quarter.

The increase in information technology and related expense was due primarily to higher software related expenses mainly related to new agreements and agreement renewals at higher costs.

The decrease in the federal insurance premium was due to the actual FDIC assessment being lower than projected for the prior quarter, which was reflected in the current quarter when it was paid.

The decrease in advertising and promotional expense was due mainly to the timing of campaigns compared to the prior quarter.

The decrease in deposit and loan transaction costs was due primarily to expenses related to calendar year-end processing in the prior quarter.

The decrease in other non-interest expense was due mainly to a reduction in customer fraud losses compared to the prior quarter.

The Company's efficiency ratio was 62.07% for the current quarter compared to 61.89% 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 change in the efficiency ratio was due to lower net interest income, partially offset by lower non-interest expense.

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 Company's operating expense ratio (annualized) for the current quarter was 1.17% compared to 1.19% for the prior quarter, due to lower non-interest expense compared to 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.

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

1 unchanged sentence

For the Three Months Ended

March 31, December 31, Change Expressed in:

June 30, March 31, Change Expressed in:

2024 2024 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)

Income before income tax expense $ 15,611 $ 17,217 $ (1,606) (9.3) %

Income tax expense 5,963 3,455 2,508 72.6

Net income $ 9,648 $ 13,762 $ (4,114) (29.9)

Effective Tax Rate 38.2 % 20.1 %

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.

The increase in income tax expense and the higher effective tax rate in the current quarter was due primarily to recording $2.9 million of income taxes on the current quarter distribution of earnings from the Bank to the Company, compared to $508 thousand of income taxes on the distribution of earnings from the Bank to the Company during the prior quarter.

The distribution of earnings during the current quarter was consistent with distributions in prior periods as 100% of the Bank's quarterly earnings were distributed to the Company.

The income tax on the earnings distribution from the Bank to the Company 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").

It is anticipated that a taxable net loss will be reported on the Company's September 30, 2024 federal tax return due to the net losses associated with the securities strategy which will result in the Bank and Company having a negative current and accumulated earnings and profit tax 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".

It is anticipated that the Bank will be required to record income tax expense on earnings distributions from the Bank to the Company for the remainder of fiscal year 2024 due to the amount of remaining pre-1988 bad debt reserves, which was $85.5 million, or $18.0 million tax effected, as of June 30, 2024.

Management anticipates the effective tax rate for the fourth quarter of fiscal year 2024 will be approximately 30% which includes the pre-1988 bad debt recapture for the quarterly earnings projected to be paid from the Bank to the Company during the fourth quarter of fiscal year 2024, assuming regulatory approval is received for the distribution.

Management continues to evaluate the timing and amount of capital distributions from the Bank to the holding company during the remainder of the current fiscal year and in future periods in connection with the tax issues associated with the pre-1988 bad debt reserves.

There is some uncertainty related to how the Bank's current earnings and profits, beginning in fiscal year 2025, should be treated in relation to distributions from the Bank to the Company and the associated impact, if any, to the pre-1988 bad debt reserves.

Management anticipates the effective tax rate for fiscal year 2025 may be in the 30% to 33% range if the Bank is required to record income tax expense on all the distributions from the Bank to the Company during fiscal year 2025.

Average Balance Sheet

5 unchanged sentences

For the Three Months Ended

March 31, 2024 December 31, 2023

June 30, 2024 March 31, 2024

Average Interest Average Interest

50 unchanged sentences

Efficiency ratio (12)

Pre-tax yield on leverage strategy (13)

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

1 unchanged sentence

(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.

(3) There were no nontaxable securities included in the average balance of investment securities for the quarters ended June 30, 2024 or March 31, 2024.

(4) There was no FHLB stock related to the leverage strategy for the quarters ended June 30, 2024 and March 31, 2024.

(5) There was no cash and cash equivalents related to the leverage strategy during the quarters ended June 30, 2024 and March 31, 2024.

(6) There was no FHLB borrowings related to the leverage strategy for the quarters ended June 30, 2024 and March 31, 2024.

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

13 unchanged sentences

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

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

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

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

The securities strategy was non-recurring in nature;

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

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

For the Three Months Ended

December 31, 2023

Actual Securities Strategy

(GAAP) Strategy (Non-GAAP)

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

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

Efficiency Ratio 92.86 28.13 64.73

$ 0.02 $ (0.08) $ 0.10

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

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

Rate/Volume Analysis

The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended March 31, 2024 to the three months ended December 31, 2023.

The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended June 30, 2024 to the three months ended March 31, 2024.

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.

1 unchanged sentence

For the Three Months Ended

March 31, 2024 vs.

December 31, 2023

June 30, 2024 vs.

March 31, 2024

Increase (Decrease) Due to

16 unchanged sentences

Net change in net interest income $ 293 $ (1,289) $ (996)

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

Comparison of Operating Results for the Nine Months Ended June 30, 2024 and 2023

The Company recognized net income of $26.0 million, or $0.20 per share, for the current year period, compared to net income of $38.7 million, or $0.29 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.

In the first quarter of fiscal year 2024, the Bank incurred $13.3 million ($10.0 million net of tax) of net losses related to the securities strategy discussed in the "Executive Summary" section above.

The lower net income for the current year period was primarily a result of the net loss associated with the securities strategy, a decrease in deposit service fees, a decrease in net interest income, and an increase in income tax expense largely related to the pre-1988 bad debt recapture, partially offset by a lower provision for credit losses and a decrease in non-interest expense.

Excluding the effects of the net loss associated with the securities strategy, EPS would have been $0.28 for the current year period.

The income tax expense associated with the pre-1988 bad debt recapture negatively impacted earnings by $0.02 per share in the current year period.

The leverage strategy negatively impacted the net interest margin for the prior year period by 16 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.

The remaining improvement in the net interest margin absent the leverage strategy when compared to the prior year period, was due to higher yields earned on securities and loans which outpaced the increase in the cost of deposits, largely in retail certificates of deposit.

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:

For the Nine Months Ended

June 30, Change Expressed in:

2024 2023 Dollars Percent

7 unchanged sentences

Total interest and dividend income $ 279,976 $ 271,530 $ 8,446 3.1

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 loans receivable was due largely to an increase in the weighted average yield and the average balance of the portfolio.

The increase in the weighted average yield was due primarily to originations and purchases at higher market rates 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 loan portfolio which was partially offset by a decrease in the average balance of the one-to four-family loan portfolio.

See additional discussion in the "Financial Condition" and "Financial Condition - Loans Receivable" sections above.

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.

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

Interest income on cash and cash equivalents related to the leverage strategy decreased $34.7 million and dividend income on FHLB stock related to the leverage strategy decreased $3.4 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 income on cash and cash equivalents not associated with the leverage strategy increased $10.2 million due largely 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:

For the Nine Months Ended

June 30, Change Expressed in:

2024 2023 Dollars Percent

6 unchanged sentences

Interest expense on borrowings associated with the leverage strategy decreased $36.5 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.

Interest expense on borrowings not associated with the leverage strategy decreased $3.4 million due mainly to a reduction in the average outstanding balance of the FHLB line of credit compared to the prior year period and a decrease in borrowings under the BTFP, which were repaid during the first quarter of fiscal year 2024.

The decrease was partially offset by new borrowings 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 Bank recorded a provision for credit losses of $1.9 million during the current year period, compared to a provision for credit losses of $5.9 million for the prior year period.

The provision for credit losses in the current year period was comprised of a $2.1 million increase in the ACL for loans, partially offset by a $238 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.

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:

For the Nine Months Ended

June 30, Change Expressed in:

2024 2023 Dollars Percent

6 unchanged sentences

Total non-interest income $ 458 $ 16,249 $ (15,791) (97.2)

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

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

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:

For the Nine Months Ended

June 30, Change Expressed in:

2024 2023 Dollars Percent

11 unchanged sentences

Total non-interest expense $ 84,903 $ 85,740 $ (837) (1.0)

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

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

The increase in the federal insurance premium was due to an increase in the FDIC assessment rate as a result of the way the rate is adjusted for the occurrence of a net loss during the quarter ending September 30, 2023, along with an FDIC rule that increased the FDIC initial base deposit assessment rate by approximately two basis points on January 1, 2023.

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

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

The 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, partially offset by lower capitalized payroll costs than the prior year due to the digital transformation project in the prior year.

In connection with management's decision to not backfill non-critical employees, beginning in 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 expense was due mainly to lower third-party project management expenses due to the Bank's digital transformation project during the prior year period along with the discontinuation of other costs associated with the previous core 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 primarily 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 decrease in advertising and promotional expense was due primarily to the timing of campaigns between the periods.

The increase in deposit and loan transaction costs was due primarily to the outsourcing of statement processing related to the digital transformation, partially offset by a reduction in other costs due to 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 69.77% for the current year period compared to 61.78% 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.

Excluding the net losses from the securities strategy, the efficiency ratio would have been 62.87% for the current year period.

The change in the efficiency ratio, excluding the securities strategy, was due primarily to lower non-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 1.03% for the prior year period, due mainly to lower average assets in the current year period.

2 unchanged sentences

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:

For the Nine Months Ended

June 30, Change Expressed in:

2024 2023 Dollars Percent

4 unchanged sentences

Effective Tax Rate 25.6 % 17.9 %

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.

The increase in income tax expense and the higher effective tax rate in the current year period was due primarily to recording income taxes on the current year distributions of earnings from the Bank to the Company in association with the pre-1988 bad debt recapture, partially offset by a $3.3 million tax benefit related to the $13.3 million net loss on the securities sale associated with the securities strategy.

Average Balance Sheet

4 unchanged sentences

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

For the Nine Months Ended

June 30, 2024 June 30, 2023

Average Interest Average Interest

54 unchanged sentences

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

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

(3) The average balance of investment securities includes an average balance of nontaxable securities of $68 thousand and $1.1 million for the nine month periods ended June 30, 2024 and June 30, 2023, respectively.

(4) There was no FHLB stock related to the leverage strategy for the nine month period ended June 30, 2024.

Included in this line, for the nine month period ended June 30, 2023, is FHLB stock related to the leverage strategy with an average outstanding balance of $52.0 million and dividend income of $3.4 million, at a weighted average yield of 8.65%, and FHLB stock not related to the leverage strategy with an average outstanding balance of $118.7 million and dividend income of $7.7 million, at a weighted average yield of 8.63%.

(5) There was no cash and cash equivalents related to the leverage strategy during the nine month period ended June 30, 2024.

The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $1.10 billion and interest income of $34.7 million, at a weighted average yield of 4.14% during the nine month period ended June 30, 2023.

(6) There were no borrowings related to the leverage strategy during the nine month period ended June 30, 2024.

Included in this line, for the nine month period ended June 30, 2023, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $1.16 billion and interest paid of $36.5 million, at a weighted average rate of 4.17%, and borrowings not related to the leverage strategy with an average outstanding balance of $2.67 billion and interest paid of $60.0 million, at a weighted average rate of 2.99%.

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

19 unchanged sentences

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

For the Six Months Ended

March 31, 2024

For the Nine Months Ended

June 30, 2024

Actual Securities Strategy

10 unchanged sentences

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

For the Nine Months Ended

June 30, 2024 vs.

June 30, 2023

Increase (Decrease) Due to

16 unchanged sentences

Net change in net interest income $ (4,038) $ 2,738 $ (1,300)

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.

Comparison of Operating Results for the Three Months Ended June 30, 2024 and 2023

For the quarter ended June 30, 2024, the Company recognized net income of $9.6 million, or $0.07 per share, compared to net income of $8.3 million, or $0.06 per share for the quarter ended June 30, 2023.

The increase in net income was due primarily to an increase in net interest income partially offset by higher income tax expense, mainly from income tax expense on the quarterly earnings distribution from the Bank to the holding company due to the Bank's pre-1988 bad debt recapture.

The income tax expense associated with the pre-1988 bad debt recapture negatively impacted earnings by $0.03 per share in the current year quarter.

The net interest margin increased 45 basis points, from 1.32% for the prior year quarter to 1.77% for the current quarter, due primarily to higher yields on securities and loans and a lower average balance on borrowings, which outpaced the increase in the cost of deposits, largely retail certificates of deposit.

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

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

Interest and Dividend Income

1 unchanged sentence

For the Three Months Ended

March 31, Change Expressed in:

June 30, Change Expressed in:

2024 2023 Dollars Percent

7 unchanged sentences

Total interest and dividend income $ 94,995 $ 90,644 $ 4,351 4.8

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

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 mainly 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 $7.5 million and dividend income on FHLB stock related to the leverage strategy decreased $610 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 income on cash and cash equivalents not associated with the leverage strategy increased $1.4 million due primarily to an increase in the average balance of cash which was mainly a result of the securities strategy.

Interest Expense

1 unchanged sentence

For the Three Months Ended

March 31, Change Expressed in:

June 30, Change Expressed in:

2024 2023 Dollars Percent

4 unchanged sentences

Total interest expense $ 54,671 $ 55,894 $ (1,223) (2.2)

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.

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

Interest expense on borrowings associated with the leverage strategy decreased $7.9 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.

Interest expense on borrowings not associated with the leverage strategy decreased $5.1 million due primarily to a decrease in borrowings under the Federal Reserve's BTFP, which were repaid during the quarter ended December 31, 2023 in association with the securities strategy.

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.

The Bank recorded a provision for credit losses during the current quarter of $1.5 million, compared to a provision of $1.3 million during the prior year quarter.

See Comparison of "Operating Results for the Three Months Ended June 30, 2024 and March 31, 2024" above for additional discussion regarding the provision for credit losses during the current quarter.

Non-Interest Income

1 unchanged sentence

For the Three Months Ended

March 31, Change Expressed in:

June 30, Change Expressed in:

2024 2023 Dollars Percent

5 unchanged sentences

Total non-interest income $ 4,709 $ 5,814 $ (1,105) (19.0)

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.

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

The decrease in other non-interest income was due mainly to a decrease in income on BOLI related to the receipt of death benefits in the prior year quarter while none were received in the current year quarter, along with a decrease in the fair value of a loan-related financial derivative.

Non-Interest Expense

1 unchanged sentence

For the Three Months Ended

March 31, Change Expressed in:

June 30, Change Expressed in:

2024 2023 Dollars Percent

12 unchanged sentences

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 deposit and loan transaction costs was due primarily to new statement and check processing expenses related to agreements associated with the digital transformation.

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

The decrease in advertising and promotional expense was due primarily to the timing of campaigns between the periods.

The Company's efficiency ratio was 62.07% for the current quarter compared to 72.32% 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.

The improvement in the efficiency ratio was due primarily to higher net interest income and lower non-interest expense in the current quarter.

The Company's operating expense ratio (annualized) for the current quarter was 1.17% compared to 1.09% for the prior year quarter, due mainly to lower average assets in the current quarter, partially offset by lower non-interest expense.

The decrease in average assets was due primarily to the securities strategy, which lowered the average balance of securities compared to the prior year quarter, along with the leverage strategy being in place at times during the prior year quarter, which increased assets.

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

Income Tax Expense

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For the Three Months Ended

March 31, Change Expressed in:

June 30, Change Expressed in:

2024 2023 Dollars Percent

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Effective Tax Rate 38.2 % 16.2 %

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.

The higher income tax expense in the current year quarter was due primarily to recording $2.9 million of income taxes on the current quarter distribution of earnings from the Bank to the Company, along with higher pretax income in the current quarter.

The income tax expense on the distribution of earnings is also the main reason for the increase in the effective tax rate between periods as there was no such income tax expense on distributions in the prior year quarter.

See Comparison of "Operating Results for the Three Months Ended June 30, 2024 and March 31, 2024" above for additional discussion.

Average Balance Sheet

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For the Three Months Ended

March 31, 2024 March 31, 2023

June 30, 2024 June 30, 2023

Average Interest Average Interest

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(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%.

(3) There were no nontaxable securities included in the average balance of investment securities for the three months ended June 30, 2024.

The average balance of investment securities includes an average balance of nontaxable securities of $1.0 million for the three months ended June 30, 2023.

(4) There was no FHLB stock related to the leverage strategy for the three months ended June 30, 2024.

Included in this line, for the three months ended June 30, 2023 is FHLB stock related to the leverage strategy with an average outstanding balance of $27.2 million and dividend income of $610 thousand, at a weighted average yield of 9.00%, and FHLB stock not related to the leverage strategy with an average outstanding balance of $119.3 million and dividend income of $2.7 million, at a weighted average yield of 8.91%.

(5) There was no cash and cash equivalents related to the leverage strategy during the three months ended June 30, 2024.

The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $577.2 million and interest income of $7.5 million, at a weighted average yield of 5.15% during the three months ended June 30, 2023.

(6) There was no FHLB borrowings related to the leverage strategy for the three months ended June 30, 2024.

Included in this line, for the three months ended June 30, 2023 are FHLB borrowings related to the leverage strategy with an average outstanding balance of $604.4 million and interest paid of $7.9 million, at a weighted average rate of 5.20%, and borrowings not related to the leverage strategy with an average outstanding balance of $2.92 billion and interest paid of $23.5 million, at a weighted average rate of 3.23%.

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

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Rate/Volume Analysis

The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended June 30, 2024 to the three months ended June 30, 2023.

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,

For the Three Months Ended June 30,

Increase (Decrease) Due to

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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.

The Bank's FHLB borrowing limit was 50% of Bank Call Report total assets as of June 30, 2024, as approved by FHLB senior management.

FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB.

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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.

At June 30, 2024, the amount of securities pledged for the discount window was $112.7 million.

At June 30, 2024, there were no borrowings from the FRB of Kansas City's discount window.

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

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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.

Recently, the Bank started entering into fully-amortizing FHLB advances that require periodic payments of principal over the term of the advance.

This type of advance allows the Bank the opportunity to start repricing its liability cash flows sooner in a down-rate environment and generally provides for favorable pricing when compared to similar long term bullet advances with comparable average lives as a result of the current term structure of interest rates.

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.

At June 30, 2024, the Bank had total borrowings, at par, of $2.29 billion, or approximately 24% of total assets.

The borrowings balance was composed of FHLB advances.

Of this amount, $774.7 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.

Management estimated that the Bank had $2.93 billion in additional liquidity available at June 30, 2024 based on the Bank's blanket collateral agreement with FHLB and unencumbered securities.

At June 30, 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.

At June 30, 2024, the Bank had $672.3 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.

As of June 30, 2024, the Bank's policy allowed for combined brokered and public unit certificates of deposit up to 15% of total deposits.

At June 30, 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 $126.3 million as collateral for public unit certificates of deposit at June 30, 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.

At June 30, 2024, $2.20 billion of the Bank's certificate of deposit portfolio was scheduled to mature within the next 12 months, including $83.8 million of public unit certificates of deposit and $50.7 million of commercial certificates of deposit.

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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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.

Management continues to evaluate the timing and amount of capital distributions to be made from the Bank to the holding company during the remainder of the current fiscal year and in future periods in connection with 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 June 30, 2024 and March 31, 2024", "Item 1.

Financial Statements - Note 6.

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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%.

As of June 30, 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 June 30, 2024 was 16.0%.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis