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Item 1A. Risk Factors

2024-11-27 compared with 2023-11-29 · 43 added, 42 removed, 133 unchanged (39% of the section changed)

9 unchanged sentences

Changes in interest rates could have an adverse impact on our results of operations and financial condition because the majority of our interest-earning assets are long-term, fixed-rate loans, while the majority of our interest-bearing liabilities are shorter term, and therefore subject to a greater degree of interest rate fluctuations.

This type of risk is known as interest rate risk and is affected by prevailing economic and competitive conditions that are beyond the Company's control, including general economic conditions, inflationary trends and/or monetary policies of the FRB and fiscal policies of the United States federal government.

This type of risk is known as interest rate risk and is affected by prevailing economic and competitive conditions that are beyond the

Company's control, including general economic conditions, inflationary trends and/or monetary policies of the FRB and fiscal policies of the United States federal government.

The impact of changes in interest rates is generally observed on the income statement.

The magnitude of the impact will be determined by the difference between the amount of interest-earning assets and interest-bearing liabilities, both of which either reprice or mature within a given period of time, in addition to the yields earned on interest-earning assets and rates paid on interest-bearing liabilities.

This difference provides an indication of the extent to which our net interest rate spread will be impacted by changes in interest rates.

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Management's Discussion and Analysis of Financial Condition and Results of Operations - Stockholders' Equity" and "Part II, Item 8.

Financial Statements

and Supplementary Data – Notes to Consolidated Financial Statements – Note 15.

Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 15.

Accumulated Other Comprehensive Income."

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Fluctuations in interest rates also affect customer demand for loan and deposit products.

Competition from other financial institutions and/or brokerage firms could affect our ability to attract and retain deposits and could result in us paying more for deposits.

Competition from financial institutions and others could affect our ability to attract and retain deposits and could result in the Bank paying more for deposits.

In addition to general changes in interest rates, changes that affect the shape of the yield curve could negatively impact the Bank.

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As a result, a steeper yield curve, meaning long-term interest rates are significantly higher than short-term interest rates, would provide the Bank with a better opportunity to increase net interest income.

When the yield curve is flat, meaning long-term interest rates and short-term interest rates are essentially the same, or when the yield curve is inverted, meaning long-term interest rates are lower than short-term interest rates, the yield between interest-earning assets and interest-bearing liabilities that reprice is compressed or diminished and would likely negatively impact the Bank's net interest income.

When the yield curve is flat, meaning long-term interest rates and short-term interest rates are essentially the same, or when the yield curve is inverted, meaning long-term interest rates are lower than short-term interest rates, the net yield between interest-earning assets and interest-bearing liabilities that reprice is compressed or diminished and would likely negatively impact the Bank's net interest income.

See "Part II, Item 7A.

Quantitative and Qualitative Disclosures About Market Risk" for additional information about the Bank's interest rate risk management.

An economic downturn, especially one affecting our geographic market areas and certain regions of the country where we have correspondent loans secured by one- to four-family properties or commercial real estate participation loans, could have an adverse impact on our business and financial results.

Our primary lending emphasis is the origination of one- to four-family first mortgage loans secured by residential properties.

We have also purchased one- to four-family first mortgage loans, secured by properties that are typically outside our local market areas, from correspondent lenders.

An economic downturn, including a decline in real estate values, especially affecting our geographic market areas and certain regions of the country where we have commercial real estate loans or correspondent loans secured by one- to four-family properties, could have an adverse impact on our business and financial results.

As we have grown our commercial real estate lending portfolio, we have continued to maintain relationships not only in our local markets but in geographically diverse markets.

As a result, we are particularly exposed to downturns in regional housing and commercial real estate markets and, to a lesser extent, the U.S.

housing and commercial real estate markets, along with changes in the levels of unemployment or underemployment.

We monitor the current status and trends of local and national employment levels and trends and current conditions in the real estate and housing markets, as well as commercial real estate markets, in our local market areas and certain areas where we have correspondent loans and commercial real estate participation loans.

As a result, we are particularly exposed to downturns in regional housing and commercial real estate markets and, to a lesser extent, housing and commercial real estate markets nationwide, along with changes in the levels of unemployment or underemployment.

We monitor the current status and trends of local and national employment levels and trends and current conditions in the real estate and housing markets, as well as commercial real estate markets, in our local market areas and certain areas where we have commercial real estate loans and correspondent loans.

Decreases in local real estate values could adversely affect the value of the property used as collateral for our loans, which could cause us to realize a loss in the event of a foreclosure.

Adverse conditions in our local economies and in certain areas where we have correspondent loans and commercial real estate participation loans, such as inflation, unemployment, supply chain disruptions, recession, natural disasters or pandemics, or other factors beyond our control, could impact the ability of our borrowers to repay their loans.

Any one or a combination of these events may have an adverse impact on borrowers' ability to repay their loans, which could result in increased delinquencies, non-performing assets, loan losses, and future loan loss provisions.

Additionally, if insurance obtained by our

borrowers is insufficient to cover any losses sustained to the collateral, the decreases in the value of collateral securing our loans as a result of natural disasters or other related events could adversely impact our financial condition and results of operations.

If insurance coverage is unavailable to our borrowers due to the reluctance of insurance companies to renew policies covering the collateral or due to other factors, the resulting increase in cost of home ownership could affect the ability of borrowers to repay loans.

In addition, a decline in commercial real estate values would likewise adversely affect the value of collateral securing commercial real estate loans.

Adverse conditions in our local economies and in certain areas where we have commercial real estate loans and correspondent loans, such as inflation, unemployment, supply chain disruptions, recession, natural disasters or pandemics, or other factors beyond our control, could adversely impact the ability of our borrowers to repay their loans.

Declines in collateral values and adverse economic conditions could result in increased delinquencies, non-performing assets, loan losses, and future loan loss provisions.

Risks Related to Lending Activities

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In addition, breaches of security may occur through intentional or unintentional acts by those having authorized or unauthorized access to our confidential or other information or the confidential or other information of our customers, employees or others.

While we regularly conduct security and risk

assessments on our systems and those of our third-party service providers, there can be no assurance that their information security protocols are sufficient to withstand a cyberattack or other security breach.

While we regularly conduct security and risk assessments on our systems and those of our third-party service providers, there can be no assurance that their information security protocols are sufficient to withstand a cyberattack or other security breach.

Across our industry, the cost of minimizing these risks and investigating incidents has continued to increase with the frequency and sophistication of these threats.

During June 2023, a third-party service provider (the "Service Provider") to the Bank advised the Bank that files with personally identifiable information related to Bank customers had been compromised during a security incident experienced by the Service Provider (the "Incident").

The Bank used the Service Provider to process transactions.

The Incident resulted from a zero-day vulnerability in a managed file sharing software called MOVEit.

MOVEit is used by thousands of organizations around the world for securely transferring sensitive and confidential information and other data.

The vulnerability was exploited in a large-scale, cyber campaign that impacted government agencies, universities, and corporations around the world.

As a result of the Incident, an unauthorized party was able to obtain access to certain Bank customers' data in the Service Provider's possession that contained social security numbers, account numbers, and other personally identifiable information.

The Bank confirmed the Service Provider has fixed the vulnerability noted above and the Bank has implemented additional security procedures when sharing files with the Service Provider.

When the Bank received notice of the Incident from the Service Provider, the Bank promptly enacted response protocols.

The Service Provider has provided appropriate notifications to potentially affected customers.

The Bank worked with the Service Provider to identify any others potentially impacted by the Incident.

The Bank is not aware of any other third-party incidents related to the MOVEit vulnerability that has affected personally identifiable information associated with Bank customers.

The occurrence of any of the foregoing could subject us to litigation or regulatory scrutiny, cause us significant reputational damage or erode confidence in the security of our information systems, products and services, cause us to lose customers or have greater difficulty in attracting new customers, have an adverse effect on the value of our common stock or subject us to financial losses that may not be covered by insurance, any of which could have an adverse effect on our business, financial condition and results of operations.

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We have implemented certain safeguards against these types of activities, but they may not fully protect us from financial losses.

The occurrence of a security breach involving our customers' information, regardless of its origin, could damage our reputation and result in a loss of customers and business, subject us to additional regulatory scrutiny, and expose us to litigation and possible financial liability.

regulatory scrutiny, and expose us to litigation and possible financial liability.

Any of these events could have an adverse effect on our business, financial condition and results of operations.

See "Part I, Item 1C.

Cybersecurity" for additional discussion related to cybersecurity.

Third-party vendors subject the Company to potential business, reputation and financial risks.

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If the Bank were to falter in any of these areas, it could have an adverse effect on our business, financial condition and results of operations.

In August 2023, the Company implemented a new core processing system ("digital transformation").

While the digital transformation was completed successfully, the Company may face operational risks, such as disruptions in technology systems, which may impact customers.

The Company will work to remediate any such disruptions, if they occur, but no assurance can be given that a potential adverse development will be quickly or completely remediated.

If an adverse development arising from the digital transformation is not sufficiently remediated or is not remediated in a timely fashion, the Company's reputation could be significantly impacted, which could result in loss of customer business, subject the Company to regulatory scrutiny, or expose the Company to litigation, any of which could have a material impact on the Company's financial condition and results of operations.

Risks Related to Competition

Strong competition may limit growth and profitability.

While we are one of the largest mortgage loan originators in the state of Kansas, we compete in the same market areas as local, regional, and national banks, credit unions, mortgage brokerage firms, investment banking firms, investment brokerage firms, mortgage bankers, and savings institutions.

Strong competition may limit our growth and profitability.

While we are one of the largest mortgage loan originators in the state of Kansas, we compete in the same market areas as local, regional, and national banks, savings institutions, credit unions, mortgage brokerage firms, investment banking and brokerage firms, mortgage bankers and online competitors.

We also compete with online investment and mortgage brokerages and online banks that are not confined to any specific market area.

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We are subject to extensive regulation, supervision, and examination by the OCC, the FRB, and the FDIC.

These regulatory authorities exercise broad discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank's operations, reclassify assets, determine the adequacy of a bank's ACL, and determine the level of deposit insurance premiums assessed.

These regulatory authorities exercise broad discretion in connection with their supervisory and enforcement activities, including the ability to

impose restrictions on a bank's operations, reclassify assets, determine the adequacy of a bank's ACL, and determine the level of deposit insurance premiums assessed.

The CFPB has broad powers to supervise and enforce consumer protection laws, including a wide range of consumer protection laws that apply to all banks and savings institutions, like the authority to prohibit unfair, deceptive or abusive acts and practices.

The CFPB also has examination and enforcement authority over all banks with regulatory assets exceeding $10 billion at four consecutive quarter-ends.

The Bank exceeded $10 billion in

regulatory assets at March 31, 2023, June 30, 2023 and September 30, 2023.

The Bank intends to be below $10 billion in regulatory assets at December 31, 2023 so it will not exceed $10 billion in regulatory assets at four consecutive quarter-ends.

There are increased direct costs, additional regulatory burdens with indirect costs, and lost revenue, mainly related to interchange fees, associated with the Bank being over $10 billion in regulatory assets at certain points in time and for four consecutive quarter-ends.

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Bank regulatory agencies, such as the OCC, the FRB and the FDIC, govern the activities in which we may engage, primarily for the protection of depositors' funds, the DIF and the safety and soundness of the banking system as a whole, and not for the protection or benefit of investors.

The CFPB enforces consumer protection laws and regulations for the benefit of the consumer and not the protection or benefit of investors.

The CFPB enforces consumer protection laws and regulations for the benefit of consumers and not the protection or benefit of investors.

In addition, new laws and regulations, including those related to environmental, social, and governance initiatives, may continue to increase our costs of regulatory compliance and of doing business, and otherwise affect our operations.

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Business - Regulation and Supervision" for more information about the regulations to which the Company is subject.

The Company's ability to pay dividends is subject to the ability of the Bank to make capital distributions to the Company.

The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to generate earnings and to, therefore, make capital distributions to the Company, and on the availability of cash at the holding company level in the event earnings are not sufficient to pay dividends.

The Company's ability to pay dividends and repurchase shares is subject to the ability of the Bank to make capital distributions to the Company.

The long-term ability of the Company to pay dividends to its stockholders and repurchase shares is based primarily upon the ability of the Bank to generate sufficient earnings to make capital distributions to the Company and on the availability of cash at the holding company level in the event the Bank's earnings are not sufficient to make capital distributions to the Company.

Under certain circumstances, capital distributions from the Bank to the Company may be subject to regulatory approvals.

Business – Regulation and Supervision" for additional information.

The Bank's bad debt recapture amount may impact the amount and timing of capital distributions to the Company.

The Bank will report a net loss for tax purposes for fiscal year 2024 due to the sale of securities in October 2023 associated with the securities strategy and will therefore have negative current and accumulated earnings and profits for fiscal year 2024.

As a result of the negative current and accumulated earnings and profits, capital distributions from the Bank to the holding company during fiscal year 2024 were deemed to be drawn out of the Bank's pre-1988 bad debt reserves and resulted in the recognition of income tax expense based on the amount of the capital distribution multiplied by the then-current Bank income tax rate.

This additional tax expense reduced the amount of earnings available to be distributed to the holding company

during fiscal year 2024.

The Bank had $75.9 million in pre-1988 bad debt reserves at September 30, 2024, which equates to an unrecorded deferred tax liability of $15.9 million.

Given the amount of cash at the holding company level ($50.1 million as of September 30, 2024), and in an effort to minimize the tax associated with the bad debt recapture, it is currently the intention of management and the Board of Directors to not distribute earnings from the Bank to the Company during fiscal year 2025.

It is anticipated that the Bank will have sufficient taxable income during fiscal year 2025 to replenish tax accumulated earnings and profits to a positive level, allowing the Bank to make capital distributions to the Company during fiscal year 2026 and not be taxed on those distributions.

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

Management's Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Operating Results for the Years Ended September 30, 2024 and 2023" and "Part II, Item 8.

Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 9.

Income Taxes".

Our risk management and compliance programs and functions may not be effective in mitigating risk and loss.

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The unexpected loss of the services of one or more of the Company's key personnel could have an adverse impact on the Company's business because of their skills, knowledge of the Company's market, and years of industry experience, as well as the difficulty of promptly finding qualified replacement personnel.

Unresolved Staff Comments

The Company may be adversely affected by an increasing prevalence of fraud and other financial crimes.

Reported instances of fraud and related financial crimes are rising nationwide.

Like all financial institutions, the Company is vulnerable to increasing fraud losses as fraud schemes perpetrated against the Company and its customers continue to evolve and become more sophisticated.

While the Company has procedures and systems in place to detect, prevent, and mitigate fraud losses, fraud losses may still occur and could be material to the Company's results of operations.

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-K

Item 1A. Risk Factors