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Item 7. Management’s Discussion and Analysis

2024-11-27 compared with 2023-11-29 · 386 added, 259 removed, 689 unchanged (48% of the section changed)

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Because of this relationship, references to management actions, strategies and results of actions apply to both the Bank and the Company except where the context indicates otherwise.

Strategic Securities Transaction

In October 2023, the Company initiated a strategic securities transaction ("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 is reflected in our financial statements for the fiscal year ended September 30, 2023 and $13.3 million of which will be recorded in the first quarter of fiscal year 2024.

The securities strategy is designed to allow the Company to improve its earnings stream, beginning in fiscal year 2024, and to provide liquidity to deleverage the balance sheet, which should enable the Company to reduce the size of its balance sheet to under $10 billion in total assets by December 31, 2023, while keeping the Bank and Company well capitalized and with tangible common equity for the Company of more than 10.0%.

The securities strategy, on a static basis, is expected to increase our earnings per share by approximately $0.30 and our net interest margin by approximately 60 basis points in fiscal year 2024 subsequent to the sales of securities through securities reinvestment and debt repayment.

The $13.3 million loss discussed above, which was attributable to the change in valuation after September 30, 2023, is expected to reduce our earnings for the first quarter of fiscal year 2024 and for fiscal year 2024 by $0.08 per share.

The proceeds from the sale of the securities in October 2023 were used to purchase $632.0 million of securities, yielding 5.75%, and pay down $500.0 million of borrowings with a cost of 4.70%.

The Company plans to hold the remaining cash at the FRB earning the interest on reserve balances rate, until such time it can be used to fund commercial loan commitments or other Bank operations.

The Company expects these actions will help reduce total assets to approximately $9.70 billion by December 31, 2023.

The weighted average yield on the securities sold was 1.22% and the average duration was 3.6 years.

The Company expects the earn-back period to be 3.9 years, aligning closely with the average duration of the securities sold.

Following the execution of the securities strategy, the Company maintains exceptional asset quality along with strong liquidity measures, including an unused $2.11 billion line of credit with the FHLB, enabling the Company to meet current and expected future commitments.

The Company's balance sheet is primarily composed of one- to four-family loans, most of which were refinanced in fiscal years 2020, 2021 and 2022 at then-current market interest rates.

Securities were purchased during the same time period, also at low market interest rates, as a result of significant cash inflows from pandemic-related governmental stimulus support.

Beginning in March 2022, the Federal Reserve started to raise interest rates at a record pace which resulted in the Bank increasing rates on deposit products to retain funds.

Some of the Bank's borrowings also repriced to higher market interest rates during the same time period.

Due to the composition of our loan and securities portfolios, our assets were not able to reprice as quickly as our liabilities, resulting in net interest margin compression.

The securities strategy addresses the Company's recent decline in earnings associated with net interest margin compression driven by these factors by recognizing a net loss in fiscal year 2023.

Because the securities sold in the securities strategy were held on our balance sheet as AFS, the net loss in fiscal year 2023 had minimal impact to the Company's tangible book value per share ("TBVPS"), as most of this loss was already included in the calculation of our TBVPS.

Executive Summary

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

The Company recognized net loss of $101.7 million, or $(0.76) per share, for fiscal year 2023 compared to net income of $84.5 million, or $0.62 per share, for fiscal year 2022.

The net loss for the current year resulted from the securities strategy, specifically, the $192.6 million impairment loss on the securities that management did not have the intent to hold at September 30, 2023.

The securities were sold in October 2023.

Excluding the effects of the securities strategy, earnings per share would have been $0.33 for the current year.

The decrease in earnings per share, excluding the effects of the securities

strategy, from the prior year was due primarily to lower net interest income, along with recording a provision for credit losses of $6.8 million for the current year compared to a release of provision of $4.6 million for the prior year.

The net interest margin decreased 36 basis points, from 1.79% for the prior year to 1.43% for the current year.

Excluding the effects of the leverage strategy described below, the net interest margin decreased 49 basis points, from 2.04% for the prior year to 1.55% for the current year.

The decrease in the net interest margin excluding the effects of the leverage strategy was due mainly to an increase in the cost of borrowings and deposits, which exceeded the increase in loan yields.

At times, the Bank has utilized a leverage strategy to increase earnings which entails entering into short-term FHLB advances and depositing the proceeds from the borrowings, net of the required FHLB stock holdings, at the Federal Reserve Bank of Kansas City ("FRB of Kansas City").

The borrowings are repaid prior to each quarter end.

The average balance of leverage strategy borrowings was $924.4 million for the year ended September 30, 2023.

At times during the current year, the leverage strategy was not profitable and therefore was not utilized, resulting in a decrease in the average outstanding balance of leverage strategy borrowings compared to the prior year.

Net income attributable to the leverage strategy was $997 thousand and $3.1 million for the years ended September 30, 2023 and 2022, respectively.

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.

Total assets were $10.18 billion at September 30, 2023, an increase of $552.6 million from September 30, 2022.

The increase was mainly composed of a $506.7 million increase in the loan portfolio, or 6.8% growth, and a $196.4 million increase in operating cash, partially offset by a $178.8 million decrease in securities.

The growth in the loan portfolio was primarily funded with proceeds from borrowings.

Total liabilities were $9.13 billion at September 30, 2023, an increase of $605.0 million from September 30, 2022 due primarily to a $747.0 million increase in borrowings, partially offset by a $143.6 million decrease in deposits.

The increase in borrowings was composed of $500.0 million in BTFP borrowings at a rate of 4.70% and the remaining amounts were FHLB advances.

The decrease in deposits during the current year was mainly in non-maturity deposits which decreased $670.1 million, largely retail money market accounts, partially offset by a $460.4 million increase in retail certificates of deposit and a $53.6 million increase in public unit certificates of deposit.

The decrease in non-maturity deposit balances was likely due to depositors moving funds to a higher rate certificate of deposit product offered by the Bank, higher yielding investment products outside the Bank, and/or withdrawing funds for customer spending.

The majority of the growth in the retail certificate of deposit portfolio in the current year were in terms less than 17 months.

Management continues to competitively price certain short-term retail certificate of deposit products to encourage customers to move to shorter-term options.

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.

Stockholder's equity was $1.04 billion at September 30, 2023, a decrease of $52.4 million from September 30, 2022.

The decrease was due primarily to the payment of cash dividends during the current year.

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

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

Since the Company had the intent to sell the $1.30 billion of securities to maturity at September 30, 2023, the Company recognized an impairment loss on those securities of $192.6 million which was reflected in the Company's financial statements for the fiscal year ended September 30, 2023.

During the quarter ended December 31, 2023, the Company sold the 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.

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

See additional information regarding the impact of the securities strategy on our financial measurements in "Average Balance Sheets" 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 weighted average cost of 4.70%, and held the remaining cash at the FRB earning interest at the reserve balance rate until such time as it could be used to fund commercial loan activity or for other Bank operations.

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 resulted in the Bank and Company having a negative current and accumulated earnings and profit tax position.

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

See additional information regarding the Bank's pre-1988 bad debt recapture in "Part II, Item 8.

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

Income Taxes".

During the current year, the Bank was required to pay income taxes on the reductions to the pre-1988 bad debt reserves equal to the current corporate tax rate at the time of the distribution multiplied by the amount of Bank earnings paid to the Company ("pre-1988 bad debt recapture").

The Bank recorded $5.4 million of income tax expense on earnings distributions from the Bank to the Company during the current year due to the pre-1988 bad debt recapture.

As of September 30, 2024, the amount of the Bank's remaining pre-1988 bad debt reserves was $75.9 million, or $15.9 million tax effected.

It is currently the intention of management and the Board of Directors to make no distributions from the Bank to the Company during fiscal year 2025.

By not making distributions during fiscal year 2025, the Bank will not incur income tax expense related to the pre-1988 bad debt recaptures as occurred during the current year.

See "Financial Condition - Stockholders' Equity" section below for additional discussion.

The Company recognized net income of $38.0 million, or $0.29 per share, for fiscal year 2024 compared to a net loss of $101.7 million, or $(0.76) per share, for the prior fiscal year.

The net loss in the prior year resulted from the impairment loss on securities associated with the securities strategy.

Excluding the net loss associated with the securities strategy, earnings per share would have been $0.37 for the current year and $0.33 for the prior year.

The increase in earnings per share excluding the effects of the net loss associated with the securities strategy was due primarily to higher net interest income and a lower provision for credit losses in the current year, partially offset by higher income tax expense due primarily to the pre-1988 bad debt recapture.

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

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

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

comparison to the size of the transaction.

The leverage strategy was not utilized in the current fiscal year but it was in the prior fiscal year.

The net interest margin increased 34 basis points, from 1.43% for the prior year to 1.77% for the current year.

The leverage strategy negatively impacted the net interest margin for the prior year by 12 basis points.

The remaining improvement in the net interest margin absent the leverage strategy 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 66.91% for the current year compared to (626.63)% for the prior year.

Excluding the net losses from the securities strategy, the efficiency ratio would have been 61.97% for the current year and 65.31% for the prior year.

The improvement in the efficiency ratio, excluding the net losses from the securities strategy, was due primarily to higher net interest income and lower non-interest expense in the current year compared to the prior year.

Total assets were $9.53 billion at September 30, 2024, a decrease of $649.9 million from September 30, 2023.

The decrease was due primarily to a $528.2 million decrease in securities, mainly as a result of the securities strategy, along with a $63.6 million decrease in the loan portfolio.

The loan portfolio mix shifted toward higher earning commercial loans during the current fiscal year with a $287.2 million decrease in one- to four-family loans, partially offset by a $221.5 million increase in commercial loans.

Management expects one- to four-family loans will continue to decrease as a percentage of total loans as cash flows generated from the one- to four-family loan portfolio will be used to fund commercial loan growth.

Total liabilities at September 30, 2024 were $8.50 billion, a decrease of $638.1 million from September 30, 2023.

The decrease was due primarily to a $699.6 million 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 and not all maturing FHLB borrowings were replaced during the current fiscal year.

The decrease in borrowings was partially offset by an increase in deposits.

Total deposits increased $78.8 million from September 30, 2023, 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.

Total stockholders' equity was $1.03 billion at September 30, 2024, a decrease of $11.8 million from September 30, 2023 due primarily to stock buybacks early in fiscal year 2024, partially offset by an increase in accumulated other comprehensive income, net of tax.

The improvement in accumulated other comprehensive income, net of tax, was mainly a result of the securities strategy.

The Bank's asset quality remains strong, reflected in the continued low level of loan delinquency and charge-off ratios.

At September 30, 2024, loans 30 to 89 days delinquent were 0.20% of total loans receivable, net, and loans 90 or more days delinquent or in foreclosure were 0.12% of total loans receivable, net.

The ratio of net charge-offs (recoveries) ("NCOs") during the current year to average loans outstanding during the current year was 0.00%.

At September 30, 2023, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(1.19) billion, or (11.7)% of total assets, meaning the amount of interest-bearing liabilities exceeded the amount of interest-earning assets maturing or repricing during the same period.

The ratio of net charge-offs (recoveries) ("NCOs") during the current year to average loans outstanding during the current year was 0% as there were only $111 thousand of NCOs during the current year.

At September 30, 2024, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(1.51) billion, or (15.8)% of total assets, meaning the amount of interest-bearing liabilities exceeded the amount of interest-earning assets maturing or expected to reprice during the same period.

See additional discussion in "Part II, Item 7A.

Quantitative and Qualitative Disclosures About Market Risk."

In August 2023, management successfully implemented a new core processing and digital banking systems to enhance customer experiences and better position the Bank for the future.

The new platform will allow us to introduce new products and services quickly, drive better efficiencies, and provide a more personalized experience for our customers.

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 customers' experience, deepen our wallet share with existing customers, and attract new customers.

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

Pairing improved technology, products and services with the right organizational structure has provided benefits in each of the Bank's customer segments:

consumer, small business and commercial.

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

Those gains include:

a Mobile app store ratings have improved by over 115% for Android comparing the ratings from the pre-digital transformation to the end of fiscal year 2024 and over 25% for iOS since the digital transformation,

b Volume of deposit accounts opened online through the digital channel is over 62% higher in the current fiscal year compared to the prior fiscal year,

c Achieved over 27,000 active 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 92% year-over-year, and

ii Transaction volume is up 117% year-over-year.

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, 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.

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.

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 grow deposit and treasury management fee income.

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

Additionally, during the current fiscal year we began a project to improve pricing tools to equip staff to price new business in a profitable manner.

The project is expected to be completed mid-fiscal year 2025 and is anticipated to provide immediate benefits to the Bank such as ensuring profitable pricing, more efficient pricing processes, and faster pricing negotiations with our customers.

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.

Critical Accounting Estimates

Our most critical accounting estimates are the methodologies used to determine the ACL and reserve for off-balance sheet credit exposures and fair value measurements.

These estimates are important to the presentation of our financial condition and results of operations, involve a high degree of complexity, and require management to make difficult and subjective judgments that may require assumptions about highly uncertain matters.

Our most critical accounting estimate is the methodology used to determine the ACL and reserve for off-balance sheet credit exposures.

This estimate is important to the presentation of our financial condition and results of operations, involves a high degree of complexity, and requires management to make difficult and subjective judgments that may require assumptions about highly uncertain matters.

The use of different judgments, assumptions, and estimates could affect reported results materially.

These critical accounting estimates and their application are reviewed at least annually by our audit committee.

The following is a description of our critical accounting estimates and an explanation of the methods and assumptions underlying their application.

This critical accounting estimate and its application is reviewed at least annually by our audit committee.

The following is a description of our critical accounting estimate and an explanation of the methods and assumptions underlying its application.

Allowance for Credit Losses and Reserve for Off-Balance Sheet Credit Exposures.

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The prepayment and curtailment assumptions vary based on loan product type.

The ACL and reserve for off-balance sheet credit exposures may be materially affected by qualitative factors, especially during periods of economic uncertainty, for items not reflected in the economic forecast and/or discounted cash flow model, but which are deemed appropriate by management's current assessment of the risks related to the loan portfolio and/or external factors.

The ACL and reserve for off-balance sheet credit exposures may be materially affected by qualitative factors, for items not reflected in the economic forecast and/or discounted cash flow model, but which are deemed appropriate by management's current assessment of the risks related to the loan portfolio and/or external factors.

Such qualitative factors may include changes in the Bank's loan portfolio composition and credit concentrations, changes in the balances and/or trends in asset quality and/or loan credit performance, changes in lending underwriting standards, the effect of other external factors such as significant unique events or conditions, and actual and/or expected changes in economic conditions, real estate values, and/or other economic developments.

The qualitative factors applied by management at September 30, 2023 were (1) economic uncertainty that may not be adequately captured in the third-party economic forecast scenarios and (2) other management considerations related to commercial loans to account for credit risks not fully reflected in the discounted cash flow model.

The qualitative factors applied at September 30, 2023, and the importance and levels of the qualitative factors applied, may change in future periods depending on the level of changes

to items such as the uncertainty of economic conditions and management's assessment of the level of credit risk within the loan portfolio as a result of such changes, compared to the amount of ACL calculated by the model.

Management applied qualitative factors at September 30, 2024 to account for large dollar commercial loan concentrations and potential downside market risk with the recent housing price appreciation related to one- to four-family loans.

The qualitative factors applied at September 30, 2024, and the importance and levels of the qualitative factors applied, may change in future periods depending on the level of changes to items such as the uncertainty of economic conditions and management's assessment of the level of credit risk within the loan portfolio as a result of such changes, compared to the amount of ACL calculated by the model.

The evaluation of qualitative factors is inherently imprecise and requires significant management judgment.

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The ACL and the reserve for off-balance sheet credit exposures were $23.0 million and $6.0 million, respectively at September 30, 2024, compared to $23.8 million and $4.1 million, respectively, at September 30, 2023.

The $7.4 million increase in the ACL was due primarily to the outlook for worsening economic forecast conditions in the current year compared to the prior year, along with a reduction in the projected prepayment speeds used in the model for all loan categories.

The $656 thousand decrease in the reserve for off-balance sheet credit exposures was due primarily to refining our methodology to account for the estimated credit losses on unfunded commercial construction-to-permanent loans and commitments for the time period after construction is expected to be completed.

The decrease in the ACL between periods was mainly related to one- to four-family loans due to a decrease in the ACL to loan ratio and a decrease in overall one- to four-family loan balances, partially offset by an increase in the ACL for commercial loans due to commercial loan growth.

The $1.9 million increase in the reserve for off-balance sheet credit exposures was due primarily to an increase in the balance of off-balance sheet credit exposures and an increase in the ACL to loan ratio, which is applied to the off-balance sheet credit exposures, between periods, specifically for commercial construction loans.

See "Part II, Item 8.

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Loans Receivable and Allowance for Credit Losses - Allowance for Credit Losses" for additional information regarding the assumptions used in the Company's September 30, 2024 estimate of ACL.

While management utilizes its best judgment and information available, the adequacy of the ACL and reserve for off-balance sheet credit exposures is determined by certain factors outside of the Company's control, such as the performance of our portfolios, changes in the economic environment including economic uncertainty, changes in interest rates, and the view of the regulatory authorities toward classification of assets and the level of ACL and reserve for off-balance sheet credit exposures.

While management utilizes its best judgment and information available, the adequacy of the ACL and reserve for off-balance sheet credit exposures is determined by certain factors outside of the Company's control, such as the performance of our loan portfolio, changes in the economic environment including economic uncertainty, changes in interest rates, and the view of the regulatory authorities toward classification of assets and the level of ACL and reserve for off-balance sheet credit exposures.

Additionally, the level of ACL and reserve for off-balance sheet credit exposures may fluctuate based on the balance and mix of the loan portfolio and off-balance sheet credit exposures.

If actual results differ significantly from our assumptions, our ACL and reserve for off-balance sheet credit exposures may not be sufficient to cover inherent losses in our loan portfolio, resulting in additions to our ACL and an increase in the provision for credit losses.

Fair Value Measurements.

The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with Accounting Standards Codification ("ASC") 820 and ASC 825.

The Company groups its financial instruments at fair value in three levels based on the markets in which the instruments are traded and the reliability of the assumptions used to determine fair value, with Level 1 (quoted prices for identical assets in an active market) being considered the most reliable, and Level 3 having the most unobservable inputs and therefore being considered the least reliable.

The Company bases its fair values on the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date.

The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

The Company's AFS securities are measured at fair value on a recurring basis.

Changes in the fair value of AFS securities, not related to credit loss, are recorded, net of tax, as AOCI in stockholders' equity.

The Company primarily uses prices obtained from third-party pricing services to determine the fair value of its AFS securities.

Various modeling techniques are used to determine pricing for the Company's securities, including option pricing, discounted cash flow models, and similar techniques.

The inputs to these models may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data.

All AFS securities are classified as Level 2.

The Company's interest rate swaps are measured at fair value on a recurring basis.

The estimated fair values of the interest rate swaps are obtained from the counterparty and are determined by a discounted cash flow analysis using observable market-based inputs.

Changes in the fair value of the interest rate swaps are recorded, net of tax, as AOCI in stockholders' equity.

The Company did not have any other financial instruments that were measured at fair value on a recurring basis at September 30, 2023.

Recent Accounting Pronouncements

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Loans Receivable.

Total loans, net at September 30, 2023 were $7.97 billion, an increase of $506.7 million from September 30, 2022.

The increase was due primarily to growth in the commercial real estate loan portfolio and one- to four-family correspondent loan portfolio.

Originating and purchasing loans secured by one- to four-family residential properties is the Bank's primary lending business, resulting in a concentration in residential first mortgage loans secured by properties located in Kansas and Missouri.

The Bank also originates and participates in commercial loans, and originates consumer loans and construction loans.

The Bank purchases one- to four-family loans, on a loan-by-loan basis, from a select group of correspondent lenders ("correspondent purchased").

Loan purchases enable the Bank to attain geographic diversification in the one- to four-family loan portfolio.

We generally pay a premium of 0.50% to 1.00% of the loan balance to purchase these loans, and 1.00% of the loan balance to purchase the servicing of these loans.

Total loans, net at September 30, 2024 were $7.91 billion, a decrease of $63.6 million from September 30, 2023.

The decrease in the loan portfolio was due mainly to a $287.2 million decrease in one- to four-family loans, partially offset by a $221.5 million increase in commercial loans.

Originating one- to four-family loans is the Bank's primary lending business.

The Bank also originates consumer loans primarily secured by one- to four-family residential properties and originates and participates in commercial loans.

In addition, the Bank historically purchased one- to four-family loans from correspondent lenders.

The Bank has a portfolio concentration in one- to four-family loans and a geographic concentration of these loans in Kansas and Missouri.

As a result of continued high interest rates and lack of housing inventory which has reduced housing market transactions, our single-family origination activity has slowed which has directly impacted the Bank's one- to four-family loan portfolio.

Origination and refinance activity has slowed considerably, and one- to four-family loan balances have been reduced through scheduled repayments and loan payoffs.

During the June 30, 2024 quarter, the Bank suspended its one- to four-family correspondent lending channels for the foreseeable future.

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

As noted above, the Bank suspended its one- to four-family correspondent lending channels for the foreseeable future during the current year.

The Bank previously purchased one- to four-family loans, on a loan-by-loan basis, from a select group of correspondent lenders ("correspondent purchased").

Loan purchases enabled the Bank to attain geographic diversification in the one- to four-family loan portfolio.

We generally paid a premium of 0.50% to 1.00% of the loan balance to purchase these loans, and 1.00% of the loan balance to purchase the servicing of these loans.

The premium paid is amortized against the interest earned over the life of the loan, which reduces the loan yield.

If a loan pays off before the scheduled maturity date, the remaining premium is recognized as reduction in interest income.

For balance sheet management purposes, we reduced purchases of correspondent loans during the current year, with the intention of correspondent purchases eventually being near zero.

In the past, the Bank has also purchased one- to four-family loans from correspondent and nationwide lenders in bulk loan packages ("bulk purchased").

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The Bank's commercial loan portfolio is composed of commercial real estate loans, commercial construction loans and commercial and industrial loans.

Our commercial real estate loans include a variety of property types, including retail buildings, senior housing facilities, multi-family dwellings, hotels, and office buildings located in Kansas, Texas, and

Missouri, and 13 other states.

Our commercial real estate loans include a variety of property types, including multi-family dwellings, senior housing facilities, hotels, retail buildings, and office buildings located in Kansas, Texas, and Missouri, and 15 other states.

The Bank's commercial and industrial loan portfolio consists largely of loans secured by accounts receivable, inventory and equipment.

These loans are generally made to borrowers and secured by assets located in the Bank's market area.

Commercial borrowers are generally required to provide financial information annually, including borrower financial statements, subject property rental rates and income, maintenance costs, updated real estate property tax and insurance payments, and personal financial information for the guarantor(s).

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Depending on the financial strength of the project and/or the complexity of the borrower's financials, the Bank may also perform a global analysis of cash flows to account for all other properties owned by the borrower or guarantor.

If signs of weakness are identified, the Bank may begin performing more frequent financial and/or collateral reviews or will initiate contact with the borrower, or the lead bank will contact the borrower if the loan is a participation loan, to ensure cash flows from operations are maintained at a satisfactory level to meet the debt requirements.

If signs of weakness are identified, the Bank may begin performing more frequent financial and/or collateral reviews or initiate contact with the borrower, or the lead bank will contact the borrower if the loan is a participation loan, to ensure cash flows from operations are maintained at a satisfactory level to meet the debt requirements.

The Bank mitigates the risk of commercial real estate construction lending during the construction period by monitoring inspection reports from an independent third-party, project budget, percentage of completion, on-site inspections and percentage of advanced funds.

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The Bank regularly monitors the level of risk in the entire commercial loan portfolio, including concentrations in such factors as geographic locations, collateral types, tenant brand name, borrowing relationships, and lending relationships in the case of participation loans, among other factors.

The following table presents the balance and weighted average rate of our loan portfolio as of the dates indicated.

The rate on the portfolio increased 43 basis points during the current year due primarily to one- to four-family correspondent and commercial loan growth at interest rates higher than the existing portfolios, disbursements on higher rate commercial construction loans, and repricing of existing commercial loans to higher market interest rates.

The following table presents information related to the composition of our loan portfolio in terms of dollar amounts, weighted average rates, and percentage of total as of the dates indicated.

September 30, 2024 September 30, 2023

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Ending balance $ 7,923,251 4.02 $ 7,984,381 3.76

The following table presents loan origination, refinance, and purchase activity for the periods indicated, excluding endorsement activity, along with associated weighted average rates and percent of total.

The following table presents loan origination, refinance, and purchase/participation activity for the periods indicated, excluding endorsement activity, along with associated weighted average rates and percent of total.

Commercial loan renewals are not included in the activity in the following table except to the extent new funds are disbursed at the time of renewal.

Loan originations, purchases, and refinances are reported together.

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

For the Year Ended

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Home equity 8,402 9.00 1.2 6,080 8.20 0.4

Other 4,620 6.93 0.3 3,923 5.66 0.2

Consumer other 2,975 7.22 0.4 4,620 6.93 0.3

Total fixed-rate 277,515 6.58 39.1 687,589 5.87 43.7

6 unchanged sentences

Home equity 40,248 9.39 5.7 55,896 8.43 3.6

Other 1,635 4.25 0.1 1,763 3.03 0.1

Consumer other 3,267 5.42 0.5 1,635 4.25 0.1

Total adjustable-rate 431,134 7.68 60.9 886,845 5.75 56.3

Total originated, refinanced and purchased $ 1,574,434 5.81 100.0 % $ 1,767,047 3.63 100.0 %

Total originated, refinanced and purchased/participations $ 708,649 7.25 100.0 % $ 1,574,434 5.81 100.0 %

Purchased and participation loans included above:

8 unchanged sentences

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 loan-to-value ("LTV") ratio, and average balance per loan as of September 30, 2024.

Credit scores are updated at least annually, with the latest update in September 2023, from a nationally recognized consumer rating agency.

Credit scores were updated in September 2024, from a nationally recognized consumer rating agency.

The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available.

6 unchanged sentences

Bulk purchased 127,161 2.0 2.80 772 54 280

Construction 22,970 0.4 6.05 778 52 410

$ 6,304,670 100.0 % 3.55 770 60 214

The following table presents originated and correspondent purchased activity in our one- to four-family loan portfolio, excluding endorsement activity, along with associated weighted average rates, weighted average LTVs and weighted average credit scores for the current year.

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 LTV ratios and weighted average credit scores for the current year.

Amount Rate LTV Score

3 unchanged sentences

$ 303,120 6.40 75 770

The following table summarizes our one- to four-family loan origination and refinance commitments and one- to four-family correspondent loan purchase commitments as of September 30, 2023, along with associated weighted average rates.

It is expected that some of the loan commitments will expire unfunded, so the amounts reflected in the table below are not necessarily indicative of our future cash needs.

(Dollars in thousands)

Originate/refinance $ 53,497 6.62 %

Correspondent 1,765 5.81

$ 55,262 6.60

Commercial Loans - During fiscal year 2023, the Bank originated $463.1 million of commercial loans and entered into commercial loan participations totaling $228.3 million.

The Bank processed commercial loan disbursements, excluding lines of credit, of approximately $474.6 million at a weighted average rate of 6.09%.

As of September 30, 2023 and September 30, 2022, the Bank's commercial and industrial gross loan amounts (unpaid principal plus undisbursed amounts) totaled $158.5 million and $100.4 million, respectively, and commitments totaled $2.6 million and $458 thousand, respectively.

As of September 30, 2024, the Bank had one- to four-family loan origination and refinance commitments of $46.3 million at a weighted average rate of 6.10%.

There were no one- to four-family correspondent loan purchase commitments at September 30, 2024, as during the current year the Bank suspended purchasing one- to four-family loans from correspondent lenders.

Commercial Loans - During the year ended September 30, 2024, the Bank originated commercial loans and entered into commercial loan participations totaling $350.6 million, which was comprised of $156.4 million in commercial construction real estate loans, $122.4 million in commercial real estate loans, and $71.8 million in commercial and industrial loans.

During the current fiscal year, the Bank also processed commercial loan disbursements, excluding lines of credit, of approximately $326.7 million at a weighted average rate of 6.58%, which included $245.0 million, $60.1 million, and $21.6 million of disbursements on new and existing commercial construction, commercial real estate, and commercial and industrial loans, respectively.

As of September 30, 2024 and September 30, 2023, the Bank's commercial and industrial gross loan amounts (unpaid principal plus undisbursed amounts) totaled $163.6 million and $158.5 million, respectively, and commitments totaled $3.2 million and $2.6 million, respectively.

Of the $163.6 million outstanding at September 30, 2024, $74.1 million, or 46%, of the portfolio related to working capital loans, $43.8 million, or 27%, related to financing/leasing/purchasing vehicles and equipment, and $37.9 million, or 24%, related to purchasing/refinancing business/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 September 30, 2023, the Bank had three commercial real estate and commercial construction loan commitments totaling $14.0 million, at a weighted average rate of 7.57%, which are not included in the table below.

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 undisbursed amounts and commitments outstanding as of September 30, 2023, management anticipates funding approximately $86 million during the December 2023 quarter, $75 million during the March 2024 quarter, $52 million during the June 2024 quarter, and $172 million during the September 2024 quarter or later.

As of September 30, 2024, the Bank had 12 commercial real estate and commercial construction loan commitments totaling $186.1 million, at a weighted average rate of 7.19%.

Management anticipates 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 September 30, 2024, management anticipates funding approximately $150 million during the December 2024 quarter, $78 million during the March 2025 quarter, $83 million during the June 2025 quarter, and $149.7 million during the September 2025 quarter or later.

At September 30, 2024, the unpaid principal balance of non-owner occupied commercial real estate loans was $886.1 million and the unpaid principal balance of owner occupied commercial real estate loans was $165.3 million, which are included in the table below.

September 30, 2024 September 30, 2023

2 unchanged sentences

(Dollars in thousands)

Retail building 141 $ 265,336 $ 87,163 $ 352,499 $ 230,153

Senior housing 36 308,765 22,442 331,207 328,259

Multi-family 38 $ 172,674 $ 187,033 $ 359,707 $ 308,846

Senior housing 36 327,144 5,190 332,334 331,207

Hotel 20 293,720 29,676 323,396 233,012

Retail building 133 263,877 52,384 316,261 352,499

Office building 77 127,289 672 127,961 130,921

1 unchanged sentence

Single use building 32 43,176 262 43,438 47,193

Warehouse/manufacturing 47 34,243 413 34,656 35,963

Other 69 57,710 4,303 62,013 53,032

9 unchanged sentences

Missouri 140 260,890 52,256 313,146 332,610

New York 1 60,000 — 60,000 —

Colorado 8 42,604 7,413 50,017 49,385

Tennessee 2 26,391 15,745 42,136 —

Arkansas 5 35,522 1,066 36,588 33,046

Nebraska 7 32,418 4 32,422 37,609

California 2 12,271 2,769 15,040 —

Other 18 72,030 22,436 94,466 91,083

773 $ 1,379,300 $ 283,882 $ 1,663,182 $ 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 September 30, 2023.

The following table presents the Bank's commercial real estate and commercial construction loans by unpaid principal balance, aggregated by type of primary collateral and state, along with weighted average LTV ratio and weighted average debt service coverage ratio ("DSCR") as of September 30, 2024.

The LTV ratio is calculated using the gross loan amount (composed of unpaid principal and undisbursed amounts) as of September 30, 2024 and the most current collateral value available, which is most often the value at origination/purchase.

For existing real estate, the "as is" value is used.

If the property is to be constructed, the "as completed" value of the collateral is utilized.

The DSCR is calculated based on historical borrower performance, or projected borrower performance for newly formed entities with no performance history.

The DSCR is calculated at the time of origination, and is updated at the time of subsequent loan renewals or reviews of borrower financials.

The DSCR presented in the table below is based on the DSCR at the time of origination unless an updated DSCR has been calculated.

As of September 30, 2024 approximately 50% of the loans, based on unpaid principal balance, had updated DSCRs.

Weighted Weighted

Kansas Texas Missouri New York Other Total LTV DSCR

(Dollars in thousands)

Greater than $30 million 9 $ 436,940

Senior Housing $ 161,146 $ — $ 109,820 $ — $ 56,178 $ 327,144 70.2 % 1.41x

Hotel 42,633 140,054 9,672 60,000 41,361 293,720 57.3 % 1.45

Retail Building 85,366 84,515 50,317 — 43,678 263,876 60.5 % 1.91

Multi-family 95,935 15,546 40,517 — 20,677 172,675 62.6 % 1.41

Office Building 57,477 60,471 8,983 — 358 127,289 49.0 % 2.68

Other 119,522 900 41,581 — 32,593 194,596 51.6 % 3.10

$ 562,079 $ 301,486 $ 260,890 $ 60,000 $ 194,845 $ 1,379,300 59.6 % 1.87

Weighted LTV 60.0 % 59.4 % 59.7 % 46.2 % 62.8 % 59.6 %

Weighted DSCR 2.05x 1.50x 2.18x 1.18x 1.74x 1.87x

The following table presents the Bank's commercial real estate and construction loans and outstanding loan commitments, categorized by aggregate gross loan amount (unpaid principal plus undisbursed amounts) or outstanding loan commitment amount, average loan amount, weighted average LTV ratio and weighted average DSCR, as of September 30, 2024.

See information above for the weighted average LTV ratio and DSCR calculations.

For loans and commitments over $50.0 million, $182.2 million were related to hotels in California, New York, and Texas, $143.1 million were related to multi-family properties located in Kansas, and $60.0 million was related to an office building in Texas.

Average Weighted Weighted

Count Amount Amount LTV DSCR

(Dollars in thousands)

Greater than $50 million 6 $ 385,283 $ 64,214 54.4 % 1.49x

>$30 to $50 million 6 211,210 35,202 63.4 1.41

2 unchanged sentences

>$10 to $15 million 12 143,695 11,975 71.8 1.57

>$5 to $10 million 27 195,657 7,247 64.7 1.83

$1 to $5 million 114 263,607 2,312 59.7 2.11

Less than $1 million 596 128,604 216 40.0 4.06

5 unchanged sentences

Of the loans 30 to 89 days delinquent at September 30, 2024 and 2023, approximately 66% and 72%, respectively, were 59 days or less delinquent.

The increase in loans 30 to 89 days delinquent during the current year was due mainly to delinquencies returning to more historical levels as government payment assistance programs expired.

The increase in commercial real estate loans that were 30 to 89 days delinquent from September 30, 2023 was not due to one underlying reason.

Management is working closely with the borrowers to address payment issues.

September 30,

Number Amount Number Amount

5 unchanged sentences

Construction — — 4 1,123

Commercial 5 94 — —

Commercial real estate 11 2,996 1 36

Commercial and industrial 4 391 4 58

Consumer 35 642 30 730

15 unchanged sentences

Bulk purchased 5 1,535 2 942

Commercial 12 2,183 8 1,167

Commercial real estate 7 1,163 8 1,966

Commercial and industrial 2 82 4 217

Consumer 20 436 9 113

7 unchanged sentences

Bulk purchased — — — —

Commercial 1 18 1 77

Commercial real estate 3 326 1 18

Commercial and industrial 2 252 — —

Consumer — — — —

3 unchanged sentences

Originated (2)

— $ — 4 $ 307

Correspondent purchased — — 1 219

Consumer — — 1 21

Total non-performing assets 77 $ 10,147 61 $ 9,628

Non-performing assets as a percentage of total assets 0.11 % 0.09 %

(1) Includes loans required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements and/or internal policies, even if the loans are current.

(1) Includes loans required to be reported as nonaccrual pursuant to accounting and/or internal policies, even if the loans are current.

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

The following table presents the states where the properties securing five percent or more of the total amount of our one- to four-family loans, excluding construction 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 September 30, 2023.

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, excluding construction 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 September 30, 2024.

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

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.

15 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 September 30, 2023 compared to September 30, 2022 was due mainly to three loans in a single commercial relationship where the borrower has experienced some performance issues.

Since being classified as special mention, these loans have been trending in a positive direction.

Management continues to closely monitor the borrower's performance.

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

The decrease in commercial and industrial special mention loans at September 30, 2024 compared to September 30, 2023 was due mainly to two loans being upgraded to pass due to an improvement in financial results.

September 30, 2024 September 30, 2023

2 unchanged sentences

One- to four-family $ 17,528 $ 22,715 $ 18,603 $ 19,314

Commercial 16,407 1,293 565 2,733

Commercial real estate 16,169 2,302 2,488 1,138

Commercial and industrial 413 335 13,919 155

Consumer 326 487 327 190

2 unchanged sentences

The following table presents the distribution of our ACL and the ratio of ACL to loans receivable, by loan type, at the dates indicated.

The increase in the ratio of ACL to loans receivable for commercial loans from September 30, 2022 to September 30, 2023 was due mainly to the outlook for worsening economic forecast conditions in the current year compared to the prior year, along with a reduction in projected prepayment speeds.

See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates", "Part II, Item 8.

Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1.

Summary of Significant Accounting Policies and Note 4.

Loans Receivable and Allowance for Credit Losses” for additional information regarding the Bank's ACL, including management's qualitative factors.

September 30, 2024 September 30, 2023

19 unchanged sentences

$ 23,035 0.29 % 100.0 % 100.0 % $ 23,759 0.30 % 100.0 % 100.0 %

See "Part II, Item 8.

Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1.

Summary of Significant Accounting Policies and Note 4.

Loans Receivable and Allowance for Credit Losses” for additional information regarding the Bank's ACL.

The following tables present ACL activity and related ratios at the dates and for the periods indicated.

The Bank adopted ASU 2016-13, Financial Instruments - Credit Losses:

Measurement of Credit Losses on Financial Instruments ("CECL") on October 1, 2020.

The ratio of NCOs to average non-performing assets during the current year was higher than the prior year due to a net charge-off in the current year compared to a net recovery in the prior year.

The ratio of ACL to nonaccrual loans was higher in the current year compared to the prior year due to higher ACL compared to the prior year period.

The ratio of ACL to loans receivable, net was higher in the current year compared to the prior year due primarily to a higher ACL balance, mainly related to commercial loans.

The ratio of ACL to NCOs for the prior year period was not meaningful as recoveries exceeded loan charge-offs, compared to the current year period where loan charge-offs exceeded recoveries.

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

Historically, the Bank has maintained very low delinquency ratios and NCO rates.

Over the past two years, the Bank's highest ratio of commercial loans 90 days or more delinquent to total commercial loans at a quarter end was 0.17%.

The highest such ratio for one- to four-family originated and correspondent loans, combined, was 0.12%.

The amount of total NCOs during fiscal year 2024 was $111 thousand.

During the 10-year period ended September 30, 2024, the Bank recognized $1.4 million of total NCOs.

As of September 30, 2024, the ACL balance was $23.0 million and the reserve for off-balance sheet credit exposures totaled $6.0 million.

Management believes that this level of ACL and reserves is adequate for the risk characteristics in our loan portfolio.

The Bank's commercial real estate ACL ratios, in aggregate, continue to be higher than those of our peers.

The following tables present the average and median commercial real estate ACL ratios for the Bank and two of the Bank's peer groups at the month ends for the periods noted.

The OCC peer group consists of all savings banks greater than $1 billion in assets and the Asset Size peer group consists of all banks between $5 billion and $15 billion in asset size.

The peer group information is sourced from the respective peers' Call Reports.

Average September

2022 December

2023 September

2023 December

2024 September

Bank 1.17 % 1.30 % 1.28 % 1.45 % 1.57 % 1.58 % 1.60 % 1.57 % 1.32 %

OCC 0.96 0.92 1.21 1.22 1.21 1.14 1.10 1.11 N/A

Asset Size 1.17 1.18 1.18 1.19 1.24 1.16 1.16 1.15 N/A

Median September

2022 December

2023 September

2023 December

2024 September

Bank 1.17 % 1.30 % 1.28 % 1.45 % 1.57 % 1.58 % 1.60 % 1.57 % 1.32 %

OCC 0.90 0.84 1.00 0.98 1.06 1.02 0.98 1.02 N/A

Asset Size 1.13 1.15 1.13 1.12 1.12 1.10 1.13 1.06 N/A

The following table presents ACL activity and related ratios at the dates and for the periods indicated.

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

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

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

At or For the Year Ended September 30,

2 unchanged sentences

Balance at beginning of period $ 23,759 $ 16,371 $ 19,823

Adoption of CECL — — (4,761)

ASU 2022-02 Adoption 20 — —

Charge-offs (160) (115) (70)

7 unchanged sentences

ACL to loans receivable, net at end of period 0.29 0.30 0.22

ACL to NCOs 223x N/M 42x

ACL at end of period to NCOs during the period 207x 223x N/M

The ratio of NCOs to average non-performing assets during the current year was higher than the prior year due to higher NCOs compared to the prior year.

The ratio of ACL to nonaccrual loans was lower at the end of the current year compared to the prior year-end due to a higher balance of nonaccrual loans and a lower ACL balance.

The decrease in the ratio of the ACL to total loans as of September 30, 2024 from September 30, 2023 was due mainly to a decrease in the one- to four-family ACL to loan ratio and a decrease in overall one- to four-family loan balances, partially offset by an increase in the ACL for commercial loans due to commercial loan growth.

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

See "Part II, Item 8.

Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 4.

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.

30 unchanged sentences

The composition and maturities of the securities portfolio at September 30, 2024 is indicated in the following table by remaining contractual maturity, without consideration of call features or pre-refunding dates, along with associated weighted average yields.

The weighted average yields were calculated by multiplying each estimated fair value by its yield and dividing the sum of these results by the total estimated fair value.

The weighted average yields are current yields and includes the amortization of premiums or discounts and are calculated by multiplying each estimated fair value by its current yield and dividing the sum of these results by the total estimated fair value.

Yields on tax-exempt investments are not calculated on a fully tax equivalent basis .

7 unchanged sentences

Corporate bonds — — — — 3,388 5.12 — — 3,388 5.12

Municipal bonds — — — — 942 2.55 — — 942 2.55

$ 376 2.60 $ 52,353 5.57 $ 262,096 5.90 $ 541,441 5.50 $ 856,266 5.63

8 unchanged sentences

Maturities and repayments (455,110) (186,860)

Proceeds from sale (1,272,512) —

Net amortization of (premiums)/discounts 8,182 (3,016)

Purchases 1,176,645 5.55 5.1 — — —

Net loss from securities sales (13,345) —

Change in valuation on AFS securities 27,924 11,051

1 unchanged sentence

Total liabilities were $8.50 billion at September 30, 2024, compared to $9.13 billion at September 30, 2023.

The increase in liabilities between September 30, 2022 and September 30, 2023 was due primarily to an increase in borrowings, partially offset by a decrease in deposits.

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, partially offset by an increase in deposits.

The following table presents the amount, weighted average rate and percent of total for the components of our deposit portfolio at the dates presented.

The decrease in deposits compared to the prior year was mainly in non-maturity deposits, largely retail money market accounts, partially offset by increases in retail certificates of deposit and public unit certificates of deposit.

The increase in the deposit portfolio rate during the current year period was due mainly to higher rates on money market accounts and retail certificates of deposit.

Total deposits increased from September 30, 2023, 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.

The amount of commercial non-maturity deposits included in the table below at September 30, 2024 and 2023 was $259.7 million and $267.3 million, respectively.

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

At September 30,

9 unchanged sentences

$ 6,129,982 2.45 100.0 % $ 6,051,220 2.07 100.0 %

As of September 30, 2023 and 2022, $789.0 million and $721.8 million, respectively, of our deposit portfolio was uninsured.

Of the $789.0 million at September 30, 2023, $425.1 million related to commercial and retail deposit accounts and the remainder was mainly comprised of fully collateralized public unit deposits and intercompany accounts.

During the current year, management sought to grow certificates of deposit with terms of 14 months or less by offering market competitive rates.

We focused on terms that should allow us to price down certificates of deposit as and when the FRB reduces overnight rates, which first occurred in September 2024 and occurred again in November 2024.

The weighted average maturity ("WAM") of our retail certificate of deposit portfolio as of September 30, 2024 was approximately 10 months.

Our retail certificate of deposit retention rate has been approximately 87% over the past 12-months.

Additionally, management focused on retaining and growing deposits through the introduction of a high-yield savings account early in fiscal year 2024 which had an annual percentage yield of 4.30% for balances over $10 thousand as of September 30, 2024.

The high-yield savings account balance was $96.2 million as of September 30, 2024.

Of this amount, approximately 45% relates to existing Bank customers increasing their balances during the year by bringing in funds from outside the Bank, approximately 40% is from internal Bank transfers from other deposit products, largely the money market portfolio, and the remaining 15% is composed of new deposit relationships.

While there is an immediate repricing and increase in cost on internal transfers within the Bank, we believe we have captured rate sensitive money by offering this product, rather than having those funds leave the Bank.

As of September 30, 2024 and 2023, approximately $766.8 million (or approximately 12%) and $789.0 million (or approximately 13%), respectively, of the Bank's Call Report deposit balance was uninsured.

Of the $766.8 million at September 30, 2024, approximately $460.1 million related to commercial and retail deposit accounts, with the remainder 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.

The following table sets forth the portion of the Bank's certificates of deposit portfolio, by account, that are in excess of the FDIC insurance limit, by remaining time until maturity, as of September 30, 2023 (dollars in thousands).

The following table sets forth the portion of the Bank's certificate of deposit portfolio, by account, that are in excess of the FDIC insurance limit, by remaining time until maturity, as of September 30, 2024 (dollars in thousands).

3 months or less $ 139,686

2 unchanged sentences

Over 12 months 114,722

Total borrowings at September 30, 2023 were $2.88 billion, which was comprised of $2.02 billion in fixed-rate FHLB advances, $365.0 million in variable-rate advances tied to interest rate swaps, and $500.0 million in BTFP borrowings.

The $747.0 million increase in borrowings from September 30, 2022 was due mainly to the new BTFP borrowings totaling $500.0 million with a term of one year and a rate of 4.70%.

During the current and prior year, the Bank utilized the leverage strategy, as discussed in the "Executive Summary" section above.

These borrowings were repaid prior to September 30, 2023 and 2022.

The following table presents the maturity of term borrowings, which consist of FHLB advances and BTFP borrowings, along with associated weighted average contractual and effective rates as of September 30, 2023.

Total borrowings at September 30, 2024 were $2.18 billion, which was comprised of $1.98 billion in fixed-rate FHLB advances, $200.0 million in FHLB variable-rate advances tied to interest rate swaps, and $1.1 million in finance leases.

Borrowings decreased $699.6 million from September 30, 2023 as some of the funds from the securities strategy were used to repay all $500.0 million of outstanding borrowings under the BTFP and not all maturing FHLB borrowings were replaced during the current fiscal year.

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 September 30, 2024.

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

10 unchanged sentences

The following table presents borrowing activity for the periods shown.

The borrowings presented in the table have original contractual terms of one year or longer or are tied to interest rate swaps with original contractual terms of one year or longer, and line of credit borrowings are excluded.

The borrowings presented in the table have original contractual terms of one year or longer or are tied to interest rate swaps with original contractual terms of one year or longer.

Line of credit borrowings and finance leases are excluded from the table.

The effective rate is shown as a weighted average and includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid.

The weighted average maturity ("WAM") is the remaining weighted average contractual term in years.

The WAM is the remaining weighted average contractual term in years.

The beginning and ending WAMs represent the remaining maturity at each date presented.

For new borrowings, the WAMs presented are as of the date of issue.

The new FHLB borrowings added during the current year had a WAM of 3.2 years, which is generally a shorter term than what management has selected in prior periods.

During the current year, management periodically paid off BTFP borrowings and borrowed new BTFP funds to take advantage of lower interest rates.

Because of these transactions, BTFP activity is presented on a net basis in the table below.

During the current year, management paid down BTFP borrowings with the proceeds received from the securities strategy.

For the Year Ended September 30,

7 unchanged sentences

Ending balance $ 2,180,656 3.29 1.6 $ 2,882,828 3.34 1.8

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

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

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

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

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

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

quarter end capital ratios.

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

During the prior year, the average balance of cash associated with the leverage strategy was $882.8 million and interest earned on that cash was $37.8 million, the average balance of FHLB stock associated with the leverage strategy was $41.6 million and dividends earned on that stock were $3.6 million, and the average balance of FHLB borrowings associated with the leverage strategy was $924.4 million and the related interest expense was $39.7 million.

Additionally, the Company recognized $406 thousand of FDIC premiums and $215 thousand of income tax expense during the prior year 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.

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Stockholders' equity totaled $1.03 billion at September 30, 2024.

During the year ended September 30, 2023, the Company paid cash dividends totaling $83.2 million.

These cash dividends totaled $0.62 per share and consisted of a $0.28 per share cash true-up dividend related to fiscal year 2022 earnings and four regular quarterly cash dividends of $0.085 per share.

During the year ended September 30, 2024, the Company repurchased $19.3 million of shares and paid regular quarterly cash dividends totaling $44.5 million, or $0.34 per share.

On October 22, 2024, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.1 million, payable on November 15, 2024 to stockholders of record as of the close of business on November 1, 2024.

In conjunction with the securities strategy, the $192.6 million unrealized loss at September 30, 2023 associated with the $1.30 billion of AFS securities that management intended to sell, was recognized in income during the current year.

Since the securities were classified as AFS, the unrealized loss was already reflected in stockholders' equity within AOCI.

Therefore, the recognition of the unrealized loss in income in the current year did not impact stockholders' equity.

See "Part II, Item 8.

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

Accumulated Other Comprehensive Income" for additional information on AOCI.

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 September 30, 2023, the Bank's capital ratios exceeded the well-capitalized requirements.

As of September 30, 2023, the Bank also exceeded all internal policy thresholds for sensitivity to changes in interest rates, and the Bank's risk-based tier 1 capital ratio was 16.0%.

As of September 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 rates.

As of September 30, 2024, the Bank's community bank leverage ratio was 9.2%.

See "Part II, Item 8.

1 unchanged sentence

Regulatory Capital Requirements" for additional regulatory capital information.

At September 30, 2023, Capitol Federal Financial, Inc., at the holding company level, had $83.4 million in cash on deposit at the Bank.

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

To the extent that earnings in fiscal year 2024 exceed $0.34 per share, the Board of Directors will consider the payment of additional dividends.

Dividend payments depend upon a number of factors including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company level.

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

Subsequent to September 30, 2023 and through November 22, 2023, the Company repurchased 700,000 shares at an average price of $5.35 per share.

There remains $17.5 million authorized under the existing stock repurchase plan for additional purchases of the Company's common stock.

These repurchases occurred in the first half of the current year.

The Company currently has $75.0 million authorized for repurchase under existing stock repurchase plans.

The FRB's current approval for the Company to repurchase shares up to the $75.0 million authorization expires in February 2025.

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

This plan has no expiration date;

however, the FRB of Kansas City's existing approval for the Company to repurchase shares expires in August 2024.

Based on the Company's accumulated earnings and profits at the beginning of its 2024 tax year and the 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 Years Ended September 30, 2024 and 2023 - Income Tax Expense" below), the Company believes that all dividends paid to stockholders by the Company during fiscal year 2024 should be treated as a return of capital, pursuant to Internal Revenue Code Section 301(c)(2), which reduced the tax basis in the stockholders' shares 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 the Company's proposed actions for fiscal year 2025 (as discussed further below), 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 U.S.

federal income tax purposes.

At September 30, 2024, Capitol Federal Financial, Inc.

at the holding company level, had $50.1 million in cash on deposit at the Bank.

Given the amount of cash at the holding company level, and in an effort to minimize the tax associated with the pre-1988 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.

See additional information regarding the pre-1988 bad debt recapture in "Part II, Item 8.

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

Income Taxes".

It is currently 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 earnings distributions to the Company during fiscal year 2026 and not be taxed on those distributions.

For fiscal year 2025, 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 year.

To the extent that earnings in fiscal year 2025 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, the Bank's taxable current earnings and accumulated earnings and profits, and the amount of cash at the holding company level.

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.

Calendar Year

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

Selected performance ratios:

Return on average assets (9)(14)

0.40 % (0.93) %

Return on average equity (10)(14)

Average equity to average assets 10.75 9.77

Operating expense ratio (11)

Efficiency ratio (12)(14)

66.91 (626.63)

Pre-tax yield on leverage strategy (13)

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

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

(3) The average balance of investment securities includes an average balance of nontaxable securities of $1.0 million and $1.7 million for the years ended September 30, 2023 and 2022, respectively.

(4) Included in this line, for the years ended September 30, 2023 and September 30, 2022, respectively, is FHLB stock related to the leverage strategy with an average outstanding balance of $41.6 million and $71.0 million, respectively, dividend income of $3.6 million and $4.8 million, respectively, at a weighted average yield of 8.69% and 6.75%, respectively, and FHLB stock not related to the leverage strategy with an average outstanding balance of $116.3 million and $78.2 million, respectively, and dividend income of $10.2 million and $5.2 million, respectively, at a weighted average yield of 8.77% and 6.69%, respectively.

(5) The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $882.8 million and $1.51 billion during the years ended September 30, 2023 and September 30, 2022, respectively.

(6) Included in this line, for the years ended September 30, 2023 and September 30, 2022, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $924.4 million and $1.58 billion, respectively, and interest paid of $39.7 million and $18.5 million, respectively, at a weighted average rate of 4.24% and 1.15%, respectively, and borrowings not related to the leverage strategy with an average outstanding balance of $2.73 billion and $1.71 billion, respectively, and interest paid of $84.5 million and $34.0 million, respectively, at a weighted average rate of 3.08% and 1.98%, respectively.

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

(3) The average balance of investment securities includes an average balance of nontaxable securities of $51 thousand and $1.0 million for the years ended September 30, 2024 and 2023, respectively.

(4) There was no FHLB stock related to the leverage strategy for the year ended September 30, 2024.

Included in this line, for the year ended September 30, 2023, is FHLB stock related to the leverage strategy with an average outstanding balance of $41.6 million and dividend income of $3.6 million, at a weighted average yield of 8.69%, and FHLB stock not related to the leverage strategy with an average outstanding balance of $116.3 million, and dividend income of $10.2 million, at a weighted average yield of 8.77%.

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

The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $882.8 million and interest income of $37.8 million, at a weighted average yield of 4.22% during the year ended September 30, 2023.

(6) There were no borrowings related to the leverage strategy during the year ended September 30, 2024.

Included in this line, for the year ended September 30, 2023 are FHLB borrowings related to the leverage strategy with an average outstanding balance of $924.4 million and interest paid of $39.7 million, at a weighted average rate of 4.24%, and borrowings not related to the leverage strategy with an average outstanding balance of $2.73 billion, and interest paid of $84.5 million, at a weighted average rate of 3.08%.

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

(7) Net interest income represents the difference between interest income earned on interest-earning assets and interest paid on interest-bearing liabilities.

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(8) Net interest margin represents net interest income as a percentage of average interest-earning assets.

(9) The table below provides a reconciliation between performance measures presented in accordance with accounting standards generally accepted in the United States of America ("GAAP") and the same performance measures excluding the effects of the leverage strategy and without the net loss on securities transactions associated with the securities strategy, which are not presented in accordance with GAAP.

Management believes it is important for comparability purposes to provide the performance measures without the leverage strategy because of the unique nature of the leverage strategy and the net loss on securities transactions due to the non-recurring nature of the securities strategy.

The Excluding Leverage Strategy (Non-GAAP) column and the Excluding Securities Strategy (Non-GAAP) column each begin with Actual (GAAP) before applying the respective strategy adjustments.

The leverage strategy reduces some of our performance measures due to the amount of earnings associated with the transaction in comparison to the size of the transaction, while increasing our net income.

The net loss on securities associated with the securities strategy is non-recurring, outside of the additional $13.3 million of pre-tax net loss that will be reported in the first quarter of fiscal year 2024 related to the sale of the securities in October 2023, and resulted in the Company reporting a net loss for fiscal year 2023.

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

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

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

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

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

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

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

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

(12) The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income.

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

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

(13) The pre-tax yield on the leverage strategy represents 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 accounting standards generally accepted in the United States of America ("GAAP") and the same performance measures excluding 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 excluding 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 Year Ended September 30,

Actual Leverage Excluding Leverage Strategy Securities Excluding Securities Strategy Actual Leverage Excluding Leverage Strategy

(GAAP) Strategy (Non-GAAP) Strategy (Non-GAAP) (GAAP) Strategy (Non-GAAP)

Yield on interest-earning assets 3.35 % 0.10 % 3.25 % 2.59 % (0.19) % 2.78 %

Cost of interest-bearing liabilities 2.25 0.23 2.02 0.94 0.04 0.90

Without Without

Securities Securities

Actual Securities Strategy Actual Securities Strategy

(GAAP) Strategy (Non-GAAP) (GAAP) Strategy (Non-GAAP)

Return on average assets 0.40 % (0.10) % 0.50 % (0.93) % (1.33) % 0.40 %

Return on average equity 3.69 (0.97) 4.66 (9.48) (13.58) 4.10

Net interest margin 1.43 (0.12) 1.55 1.79 (0.25) 2.04

Efficiency Ratio 66.91 4.94 61.97 (626.63) (691.94) 65.31

Earnings per share (15)

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

$ 0.29 $ (0.08) $ 0.37 $ (0.76) $ (1.09) $ 0.33

(15) Earnings per share is calculated as net income divided by average shares outstanding.

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

Comparison of Operating Results for the Years Ended September 30, 2024 and 2023

The Company recognized net loss of $101.7 million, or $(0.76) per share, for the current year, compared to net income of $84.5 million, or $0.62 per share, for the prior year.

The net loss for the current year resulted from the securities strategy, specifically, the recognition of the impairment loss on the securities sold in October 2023.

Excluding the effects of the securities strategy, earnings per share would have been $0.33 for the current year.

The decrease in earnings per share from the prior year, excluding the effects of the securities strategy, was due primarily to lower net interest income, along with recording a provision for credit losses of $6.8 million for the current year compared to a release of provision of $4.6 million for the prior year.

The net interest margin decreased 36 basis points, from 1.79% for the prior year to 1.43% for the current year.

Excluding the effects of the leverage strategy, the net interest margin decreased 49 basis points, from 2.04% for the prior year to 1.55% for the current year.

The Company recognized net income of $38.0 million, or $0.29 per share, for the current year, compared to net loss of $101.7 million, or $(0.76) per share, for the prior year.

The net loss in the prior year resulted from a $192.6 million impairment loss ($145.6 million net of tax) on the securities associated with the securities strategy.

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

The securities associated with the securities strategy were sold in the first quarter of fiscal year 2024 resulting in $13.3 million ($10.0 million net of tax) of net losses related to the sale.

Excluding the effects of the net loss associated with the securities strategy, earnings per share would have been $0.37 for the current year and $0.33 for the prior year.

The increase in earnings per share excluding the effects of the net losses associated with the securities strategy was due primarily to higher net interest income and a lower provision for credit losses in the current year, partially offset by higher income tax expense.

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

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

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

The net interest margin increased 34 basis points, from 1.43% for the prior year to 1.77% for the current year.

The leverage strategy negatively impacted the net interest margin for the prior year by 12 basis points.

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

Interest and Dividend Income

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Loans receivable $ 308,707 $ 280,087 $ 28,620 10.2 %

Cash and cash equivalents 43,796 18,304 25,492 139.3

MBS 33,650 18,520 15,130 81.7

Cash and cash equivalents 15,728 43,796 (28,068) (64.1)

FHLB stock 10,009 13,821 (3,812) (27.6)

1 unchanged sentence

Total interest and dividend income $ 376,843 $ 359,789 $ 17,054 4.7

The increase in interest income on loans receivable was due to an increase in the weighted average yield on, and the average balance of, the loan portfolio.

The increase in the average balance was mainly in the correspondent one-to four-family and commercial real estate loan portfolios.

The increase in the weighted average yield was due primarily to originations and purchases at higher market yields, 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 interest income on cash and cash equivalents was due to a higher yield on cash as a result of an increase in FRB interest rates.

The increase in dividend income on FHLB stock was due mainly to a higher FHLB dividend rate compared to the prior fiscal year, along with an increase in the average balance of FHLB stock due to an increase in FHLB borrowings not associated with the leverage strategy.

The increase in interest income on loans receivable was due largely to an increase in the weighted average yield, along with an increase in the average balance of the portfolio primarily as a result of growth in the commercial loan portfolio as the loan portfolio mix continued to shift from one- to four-family loans to commercial loans.

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 - Loans Receivable" section 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 and not being utilized during the current year.

Interest income on cash and cash equivalents related to the leverage strategy decreased $37.8 million and dividend income on FHLB

stock related to the leverage strategy decreased $3.6 million compared to the prior year.

Interest income on cash and cash equivalents not associated with the leverage strategy increased $9.7 million due largely to an increase in the average balance of cash and cash equivalents.

The increase in the average balance was mainly a result of the securities strategy as not all of the proceeds from the securities strategy were immediately redeployed due to future anticipated commercial loan fundings and the higher rate paid on amounts held at the FRB.

Interest Expense

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INTEREST EXPENSE:

Borrowings $ 124,250 $ 52,490 $ 71,760 136.7 %

Deposits $ 139,549 $ 82,267 $ 57,282 69.6 %

Borrowings 75,233 124,250 (49,017) (39.5)

Total interest expense $ 214,782 $ 206,517 $ 8,265 4.0

The increase in interest expense on borrowings was due primarily to an increase in the average balance and weighted average rate on borrowings not associated with the leverage strategy, along with an increase in the weighted average rate on the borrowings associated with the leverage strategy compared to the prior year.

Interest expense on borrowings not associated with the leverage strategy increased due to new borrowings added during the current year, at market interest rates higher than the overall portfolio rate, to replace maturing advances, meet deposit withdrawals, and fund other operational needs.

Interest expense on borrowings associated with the leverage strategy increased $21.2 million compared to the prior year due to an increase in the weighted average rates paid on leverage strategy borrowings, partially offset by reduced usage in the current year compared to the prior year.

The increase in interest expense on deposits was due to an increase in the weighted average rate paid on the deposit portfolio, primarily retail certificates of deposit and money market accounts.

The increase in interest expense on deposits was due almost entirely to an increase in the weighted average rate paid on deposits, specifically retail certificates of deposit and money market accounts.

To a lesser extent, the average balance of retail certificates of deposit also increased interest expense on deposits, partially offset by a decrease in the average balance of money market accounts.

See additional information regarding the deposit portfolio composition in the "Financial Condition - Deposits" section above.

Interest expense on borrowings associated with the leverage strategy decreased $39.7 million compared to the prior year due to the leverage strategy being in place during the prior year and not being in place during the current year.

Interest expense on borrowings not associated with the leverage strategy decreased $9.3 million due mainly to a decrease in borrowings under the BTFP, which were repaid during the current year, and a reduction in the average outstanding balance on the Bank's FHLB line of credit compared to the prior year.

The decrease in these borrowings was partially offset by new borrowings in the current year at market interest rates higher than the overall portfolio rate, to replace maturing advances and fund operational needs.

Provision for Credit Losses

The Bank recorded a provision for credit losses during the current year of $6.8 million, compared to a release of provision of $4.6 million during the prior year.

The provision for credit losses in the current year was comprised of a $7.5 million increase in the ACL for loans and a $656 thousand decrease in reserve for off-balance sheet credit exposures.

The provision for credit losses associated with the ACL was due primarily to the outlook for worsening economic forecast conditions in the current year compared to the prior year, along with a reduction in the projected prepayment speeds used in the model for all loan categories.

The release of provision for credit losses associated with the reserve for off-balance sheet credit exposures was due primarily to refining our methodology to account for the estimated credit losses on unfunded commercial construction-to-permanent loans and commitments for the time period after construction is expected to be completed.

The Company recorded a provision for credit losses of $1.3 million during the current year, compared to a provision for credit losses of $6.8 million for the prior year.

The provision for credit losses in the current year was comprised of a $1.9 million increase in the reserve for off-balance sheet credit exposures, partially offset by a $633 thousand release in the ACL for loans.

The increase in the reserve for off-balance sheet credit exposures was due primarily to an increase in the balance of off-balance sheet credit exposures and an increase in the ACL to loan ratio, which is applied to off-balance sheet credit exposures, between periods, specifically for commercial construction loans.

The change in the balance of the ACL from the prior fiscal year end to the end of the current fiscal year was a decrease of $724 thousand which differs from the $633 thousand above primarily due to NCOs.

The reduction in ACL was due to a decrease in the ACL for our one- to four-family loans as a result of a decrease in the ACL to loan ratio and a decrease in loan balances, partially offset by an increase in the ACL for our commercial loans due to growth in the commercial loan portfolio.

See discussion regarding the ACL in the "Management's Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Estimates" section above.

Non-Interest Income

7 unchanged sentences

Insurance commissions 3,257 3,487 (230) (6.6)

Net loss from securities transactions (192,622) — (192,622) N/A

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

Other non-interest income 4,770 4,935 (165) (3.3)

Total non-interest income $ 5,244 $ (171,455) $ 176,699 103.1

The decrease in deposit service fees was due primarily to a change in the fee structure of certain deposit products after the digital transformation, an increase in debit card expenses, and waiving certain fees for several weeks after the digital transformation.

The increase in insurance commissions was due primarily to annual contingent insurance commissions received being higher than anticipated and the related accrual adjustments, along with overall commissions being higher in the current year due mainly to growth and strong retention on personal policies and continued success growing our commercial policies.

The net loss from securities transactions relates to the Bank's securities strategy discussed above.

The decrease in other non-interest income was due mainly to gains on a loan-related financial derivative agreement included in the prior year, with no such market value gains in the current year, along with a decrease in income on bank-owned life insurance compared to the prior year due to a reduction in the yield and death benefits received during the current year.

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.

The decrease in insurance commissions was primarily due to adjustments to accrued contingent commissions made in anticipation of lower commissions largely related to industry changes in underwriting and loss experience which is adversely impacting new business and projected loss ratios.

The industry changes impacting commissions are expected to persist for the foreseeable future, so management is currently evaluating other insurance revenue streams while maintaining our current lines of business.

The net loss from securities transactions in the prior year related to the impairment loss on securities associated with the securities strategy while the $13.3 million loss in the current year related to additional losses incurred on those securities when they were ultimately sold during the first quarter of fiscal year 2024.

Non-Interest Expense

8 unchanged sentences

Occupancy, net 13,558 14,236 (678) (4.8)

Regulatory and outside services 6,039 6,192 (153) (2.5)

Federal insurance premium 6,052 4,456 1,596 35.8

Regulatory and outside services 5,743 6,039 (296) (4.9)

Advertising and promotional 4,264 4,305 (41) (1.0)

3 unchanged sentences

Total non-interest expense $ 111,943 $ 113,934 $ (1,991) (1.7)

The decrease in salaries and employee benefits was attributable mainly to lower incentive compensation in the current year, along with a reduction in loan commissions due to lower loan origination activity, and an increase in capitalized payroll costs related to the digital transformation.

The increase in information technology and related expenses was due mainly to third-party project management expenses associated with the digital transformation, along with higher software licensing expenses due to agreement renewals at higher costs and new agreements associated with the digital transformation.

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

The increase in federal insurance premium expense was due mainly to an increase in the FDIC assessment rate.

The increase in office supplies and related expense was due primarily to an increase in postage, along with the write-off of the Bank's remaining inventory of unissued non-contactless debit cards, which have now become obsolete.

The increase in other non-interest expense was due mainly to expenses associated with the collateral received on the Bank's interest rate swap agreements.

The increase in salaries and employee benefits was mainly attributable to higher incentive compensation in the current year compared to the prior year, as no incentive compensation was paid in the prior year due to the net loss recognized by the Company.

The decrease in information technology and related expense was due mainly to lower third-party project management expenses associated with the Bank's digital transformation during the prior year 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.

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 assessment rate was adjusted for the occurrence of the Bank's net loss during the quarter ending September 30, 2023.

The decrease in regulatory and outside services was due to the prior year including expenses related 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 66.91% for the current year compared to (626.63)% for the prior year.

Excluding the effects of the securities strategy, the efficiency ratio would have been 65.31% for the current year.

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

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

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

Excluding the net losses from the securities strategy, the efficiency ratio would have been 61.97% for the current year and 65.31% for the prior year.

Income Tax Expense

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

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

For the Year Ended

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(Dollars in thousands)

(Loss) income before income tax (benefit) expense $ (138,955) $ 107,203 $ (246,158) (229.6) %

Income tax (benefit) expense (37,296) 22,750 (60,046) (263.9)

Net (loss) income $ (101,659) $ 84,453 $ (186,112) (220.4)

Income (loss) before income tax expense (benefit) $ 54,103 $ (138,955) $ 193,058 138.9 %

Income tax expense (benefit) 16,093 (37,296) 53,389 143.1

Net income (loss) $ 38,010 $ (101,659) $ 139,669 137.4

Effective Tax Rate 29.7 % 26.8 %

The income tax benefit in the current year was a result of the pretax loss.

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

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

For the prior year, absent the net loss, the effective income tax rate would have been 18.1%.

The higher effective tax rate in the current year was due primarily to recording $5.4 million of income tax expense on the current year distributions of earnings from the Bank to the Company in association with the pre-1988 bad debt recapture ($0.04/share reduction in earnings per share), along with higher state income tax expense mainly related to the tax treatment of the 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.

Fiscal Year 2025 Outlook

Salaries and employee benefits expense is expected to be $5 million higher in fiscal year 2024 as compared to fiscal year 2023 due to an anticipated increase in incentive compensation, merit increases, the filling of vacant positions, and a reduction in capitalized payroll costs which were related to the digital transformation in fiscal year 2023.

Information technology and related expenses are anticipated to be $3 million lower in fiscal year 2024 as compared to fiscal year 2023 due to a reduction in professional services costs related to the digital transformation.

Now that the digital transformation is complete, these professional services are no longer necessary.

Income from deposit service fees is anticipated to be approximately $1 million lower in fiscal year 2024 as compared to fiscal year 2023 due to changes in the fee structure of certain deposit products after the digital transformation, which is in line with industry trends.

In the first quarter of fiscal year 2024, $13.3 million of net pre-tax losses will be recognized on the sale of securities in October 2023.

Management anticipates the effective tax rate for fiscal year 2024 will be approximately 19% to 20%.

Salaries and employee benefits expense is expected to be $5.7 million higher in fiscal year 2025 compared to fiscal year 2024 due to an anticipated increase in incentive compensation, merit increases, and the filling of vacant positions.

Information technology and related expenses are anticipated to be $1.4 million higher in fiscal year 2025 compared to fiscal year 2024 due to these expenses returning to a more normal run rate and implementation of new banking technologies.

We anticipate that the federal deposit insurance premium will be approximately $1.7 million less in fiscal year 2025 compared to fiscal year 2024 because there is no longer an increase in our assessment rate due to the net loss in fiscal year 2023.

Overall, management is expecting a 4.8% increase in operating expenses for fiscal year 2025 compared to fiscal year 2024.

Management anticipates the effective income tax rate for fiscal year 2025 will be 19% to 20%.

The effective income tax rate is anticipated to be lower than fiscal year 2024 as it is currently the intention of management and the Board of Directors to not make capital distributions from the Bank to the Company during fiscal year 2025.

By not making capital distributions during fiscal year 2025, the Bank will not incur income tax expense related to the bad debt recapture as occurred during fiscal year 2024.

See "Financial Condition - Stockholders' Equity" section above for additional discussion.

Comparison of Operating Results for the Years Ended September 30, 2023 and 2022

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The liquidity stress test incorporates both short-term and long-term liquidity scenarios in order to identify and to quantify liquidity risk.

Management also monitors key liquidity

statistics related to items such as wholesale funding gaps, borrowings capacity, and available unpledged collateral, as well as various liquidity ratios.

In the event short-term liquidity needs exceed available cash, the Bank has access to a line of credit at the FHLB in addition to the FRB of Kansas City's discount window, as well as the BTFP through March 2024.

Management also monitors key liquidity statistics related to items such as wholesale funding gaps, borrowings capacity, and available unpledged collateral, as well as various liquidity ratios.

In the event short-term liquidity needs exceed available cash, the Bank has access to a line of credit at the FHLB, in addition to the FRB of Kansas City's discount window.

Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40% of Bank Call Report total assets without the pre-approval of FHLB senior management.

The Bank's FHLB borrowing limit was 50% of Bank Call Report total assets as of September 30, 2023, as approved by the president of FHLB.

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

The Bank's FHLB borrowing limit approved by FHLB senior management became 45% of Bank Call Report total assets effective November 1, 2024.

The reduction in the percentage from 50% to 45% was related to FHLB's internal lending limit guidelines.

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 September 30, 2024, the amount of securities pledged for the discount window was $111.3 million.

At September 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.

The amount that can be borrowed under the BTFP is based upon the par value of securities pledged as collateral, the term can be up to one year in length, and the borrowings can be prepaid without penalty.

At September 30, 2023, the amount of securities pledged for the discount window and BTFP was $516.0 million, at par.

If management observes unusual trends in the amount and frequency of line of credit utilization and/or short-term borrowings that is not in conjunction with a planned strategy, such as the leverage strategy, the Bank will likely utilize long-term wholesale borrowing sources such as FHLB advances and/or repurchase agreements to provide long-term, fixed-rate funding.

The maturities of these long-term borrowings are generally staggered in order to mitigate the risk of a highly negative cash flow position at maturity.

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 September 30, 2024, the Bank had total borrowings, at par, of $2.18 billion, or approximately 23% of total assets.

The borrowings balance was composed of $2.38 billion of FHLB advances and $500.0 million related to the BTFP.

Of this amount, $990.0 million is scheduled to mature in the next 12 months.

The borrowings balance was composed primarily of FHLB advances, of which, $714.7 million is scheduled to be repaid (amortizing advances) or mature in the next 12 months.

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

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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 could utilize the repayment and maturity of outstanding loans, MBS, and other investments for liquidity needs rather than reinvesting such funds into the related portfolios.

The Bank has access to other sources of funds for liquidity purposes, such as brokered and public unit certificates of deposit.

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 September 30, 2024, the Bank had $744.2 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 September 30, 2024, the Bank's policy allowed for combined brokered and public unit certificates of deposit up to 15% of total deposits.

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See "Part II, Item 8.

Financial Statements and Supplementary Data –

Notes to Consolidated Financial Statements – Note 6.

Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 6.

Low Income Housing Partnerships and Note 12.

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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 7. Management’s Discussion and Analysis