Capitol Federal Financial, Inc.® Reports Third Quarter Fiscal Year 2022 Results

By: Capitol Federal Financial, Inc via Business Wire

July 27, 2022 at 09:00 AM EDT

Capitol Federal Financial, Inc.^® (NASDAQ: CFFN) (the "Company"), the parent company of Capitol Federal Savings Bank (the "Bank"), announced results today for the quarter ended June 30, 2022. The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 will be filed with the Securities and Exchange Commission ("SEC") on or about August 8, 2022 and posted on our website, http://ir.capfed.com. For best viewing results, please view this release in Portable Document Format (PDF) on our website.

Highlights for the quarter include:

net income of $21.2 million;
basic and diluted earnings per share of $0.16;
net interest margin of 1.79% (2.11% excluding the effects of the leverage strategy);
annualized loan growth of 7.2%;
paid dividends of $38.7 million, or $0.285 per share, including a $0.20 per share True Blue® Capitol dividend; and
on July 19, 2022, announced a cash dividend of $0.085 per share, payable on August 19, 2022 to stockholders of record as of the close of business on August 5, 2022.

Comparison of Operating Results for the Three Months Ended June 30, 2022 and March 31, 2022

For the quarter ended June 30, 2022, the Company recognized net income of $21.2 million, or $0.16 per share, compared to net income of $21.6 million, or $0.16 per share, for the quarter ended March 31, 2022. The decrease in net income was due primarily to a higher provision for credit losses, partially offset by an increase in net interest income and lower income tax expense. The net interest margin increased 10 basis points, from 1.69% for the prior quarter to 1.79% for the current quarter. When the leverage strategy discussed below 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. Excluding the effects of the leverage strategy, the net interest margin would have increased 10 basis points, from 2.01% for the prior quarter to 2.11% for the current quarter. The increase in the net interest margin excluding the effects of the leverage strategy was due mainly to an increase in asset yields and a change in the mix of interest-earning assets, as cash was used to fund loan growth.

Leverage Strategy

At times, the Bank has utilized a leverage strategy to increase earnings. The leverage strategy during the current quarter involved borrowing up to $2.10 billion by entering into short-term Federal Home Loan Bank Topeka ("FHLB") advances. The borrowings were repaid prior to quarter end. The proceeds from the borrowings, net of the required FHLB stock holdings which yielded 6.5% during the current quarter, were deposited at the Federal Reserve Bank of Kansas City ("FRB of Kansas City"). Net income attributable to the leverage strategy is largely derived from the dividends received on FHLB stock holdings, plus the net interest rate spread between the yield on the cash deposited at the FRB of Kansas City and the rate paid on the related FHLB borrowings, less applicable federal insurance premiums and estimated taxes. Net income attributable to the leverage strategy was $1.2 million during the current quarter and $1.8 million during the current year-to-date period. Management continues to monitor the net interest rate spread and overall profitability of the strategy. In July 2022, the level of borrowings associated with the leverage strategy was increased to $2.60 billion to further increase earnings, in response to the increase in the dividend rate paid by FHLB. It is expected that the strategy will continue to be utilized as long as it remains profitable.

Interest and Dividend Income

The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent. The weighted average yield on loans receivable increased four basis points and the weighted average yield on mortgage-backed securities ("MBS") increased eight basis points compared to the prior quarter.

	For the Three Months Ended
	June 30,		March 31,		Change Expressed in:
	2022		2022		Dollars		Percent
	(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable	$	56,886	$	55,412	$	1,474	2.7	%
MBS		5,048		4,821		227	4.7
FHLB stock		2,695		2,240		455	20.3
Cash and cash equivalents		3,968		949		3,019	318.1
Investment securities		815		800		15	1.9
Total interest and dividend income	$	69,412	$	64,222	$	5,190	8.1

The increase in interest income on loans receivable was due primarily to a decrease in correspondent loan premium amortization related to a reduction in payoff activity, as well as growth in the correspondent loan portfolio. The increase in interest income on MBS was due mainly to a decrease in premium amortization related to a slowdown in prepayment activity. The increase in dividend income on FHLB stock was due mainly to an increase in the dividend rate paid by FHLB. The increase in interest income on cash and cash equivalents was due to an increase in the yield earned on balances held at the FRB of Kansas City, the majority of which were related to the leverage strategy, due to an increase in market interest rates.

Interest Expense

The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent. The weighted average rate paid on deposits and the weighted average rate paid on borrowings not associated with the leverage strategy each decreased three basis points compared to the prior quarter.

	For the Three Months Ended
	June 30,		March 31,		Change Expressed in:
	2022		2022		Dollars			Percent
	(Dollars in thousands)
INTEREST EXPENSE:
Borrowings	$	11,644	$	8,732	$	2,912		33.3	%
Deposits		7,787		8,389		(602	)	(7.2	)
Total interest expense	$	19,431	$	17,121	$	2,310		13.5

The increase in interest expense on borrowings was due primarily to an increase in the rate paid on the short-term borrowings associated with the leverage strategy during the current quarter, due to higher market interest rates. Additionally, the average balance of borrowings not associated with the leverage strategy increased compared to the prior quarter due to new borrowings added near the end of the quarter, totaling $250.0 million at a weighted average rate of 3.51%, which contributed to the increase in interest expense. The decrease in interest expense on deposits was due primarily to a decrease in the weighted average rate paid on retail certificates of deposit and a decrease in the average balance of the portfolio, as maturing accounts either were not renewed or were replaced at offered rates, which were lower than the existing portfolio.

Provision for Credit Losses

For the quarter ended June 30, 2022, the Bank recorded a provision for credit losses of $937 thousand, compared to a negative provision for credit losses of $3.2 million for the prior quarter. The provision for credit losses in the current quarter was comprised of a $796 thousand increase in the allowance for credit losses ("ACL") for loans and a $141 thousand increase in reserves for off-balance sheet credit exposures. The provision for credit losses was due primarily to selecting a weighted economic forecast to incorporate a recessionary outlook into the model, as well as commercial loan growth.

Non-Interest Income

The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.

	For the Three Months Ended
	June 30,		March 31,		Change Expressed in:
	2022		2022		Dollars		Percent
	(Dollars in thousands)
NON-INTEREST INCOME:
Deposit service fees	$	3,601	$	3,300	$	301	9.1	%
Insurance commissions		788		543		245	45.1
Other non-interest income		1,726		1,573		153	9.7
Total non-interest income	$	6,115	$	5,416	$	699	12.9

The increase in deposit service fees was due mainly to increases in debit card income and service charges as a result of higher transaction activity. The increase in insurance commissions was due primarily to the receipt of annual contingent insurance commissions in the prior quarter, which were lower than expected, and the related accrual adjustments. The increase in other non-interest income was due mainly to an increase in income on bank-owned life insurance related to the receipt of death benefits.

Non-Interest Expense

The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.

	For the Three Months Ended
	June 30,		March 31,		Change Expressed in:
	2022		2022		Dollars			Percent
	(Dollars in thousands)
NON-INTEREST EXPENSE:
Salaries and employee benefits	$	14,581	$	14,023	$	558		4.0	%
Information technology and related expense		4,343		4,493		(150	)	(3.3	)
Occupancy, net		3,721		3,493		228		6.5
Regulatory and outside services		1,572		1,272		300		23.6
Advertising and promotional		1,068		1,494		(426	)	(28.5	)
Federal insurance premium		784		777		7		0.9
Deposit and loan transaction costs		664		689		(25	)	(3.6	)
Office supplies and related expense		494		502		(8	)	(1.6	)
Other non-interest expense		1,163		1,217		(54	)	(4.4	)
Total non-interest expense	$	28,390	$	27,960	$	430		1.5

The increase in salaries and employee benefits was due mainly to an increase in commissions due to an increase in loan origination activity, along with annual merit increases during the current quarter. The increase in regulatory and outside services was due primarily to the timing of external audit expenses, as well as an increase in consulting expenses related to the Bank's upcoming implementation of a new core processing system. The decrease in advertising and promotional expense was due primarily to the timing of campaigns and sponsorships.

The Company's efficiency ratio was 50.61% for the current quarter compared to 53.24% for the prior quarter. The improvement in the efficiency ratio was due primarily to higher net interest income. The efficiency ratio is a measure of a financial institution's total non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income. A lower value indicates that it is costing the financial institution less money to generate revenue, relative to the net interest margin and non-interest income.

Income Tax Expense

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

	For the Three Months Ended
	June 30,			March 31,			Change Expressed in:
		2022			2022		Dollars			Percent
	(Dollars in thousands)
Income before income tax expense	$	26,769		$	27,745		$	(976	)	(3.5	) %
Income tax expense		5,617			6,122			(505	)	(8.2	)
Net income	$	21,152		$	21,623		$	(471	)	(2.2	)

Effective Tax Rate		21.0	%		22.1	%

The decrease in income tax expense was due primarily to lower pretax income in the current quarter, along with a decrease in the effective tax rate as a result of higher deductible expenses associated with dividends paid on allocated Employee Stock Ownership Plan ("ESOP") shares due to the True Blue Capitol dividend paid in June 2022. Management anticipates the effective tax rate for fiscal year 2022 will be approximately 21%.

Comparison of Operating Results for the Nine Months Ended June 30, 2022 and 2021

The Company recognized net income of $65.0 million, or $0.48 per share, for the current year period compared to net income of $57.5 million, or $0.42 per share, for the prior year period. The increase in net income was due to an increase in net interest income, partially offset by higher income tax expense and a lower negative provision for credit losses. The net interest margin decreased six basis points, from 1.88% for the prior year period to 1.82% for the current year period. Excluding the effects of the leverage strategy, the net interest margin would have increased 16 basis points, from 1.88% for the prior year period to 2.04% for the current year period. The increase in net interest margin excluding the effects of the leverage strategy was due mainly to a reduction in the weighted average cost of retail certificates of deposit and borrowings, which outpaced the decrease in weighted average asset yields.

Interest and Dividend Income

The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent.

	For the Nine Months Ended
	June 30,				Change Expressed in:
	2022		2021		Dollars			Percent
	(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable	$	168,086	$	172,758	$	(4,672	)	(2.7	) %
MBS		14,494		16,499		(2,005	)	(12.2	)
FHLB stock		6,166		2,964		3,202		108.0
Cash and cash equivalents		4,931		117		4,814		4,114.5
Investment securities		2,423		2,075		348		16.8
Total interest and dividend income	$	196,100	$	194,413	$	1,687		0.9

The decrease in interest income on loans receivable was due to a decrease in the weighted average rate on the originated and correspondent one- to four-family loan portfolio, partially offset by the increase in the average balance of the loan portfolio. The decrease in the weighted average rate was due to endorsements, refinances, originations and purchases at lower market rates at the time of the transactions between periods, which are being fully reflected in the current year. Premium amortization related to the one- to four-family correspondent loan portfolio decreased significantly compared to the prior year period due to the slow-down in prepayments and endorsements resulting from an increase in market interest rates, partially offsetting the decrease in the weighted average rate.

The decrease in interest income on the MBS portfolio was due primarily to a decrease in the weighted average yield as a result of purchases at lower market yields between periods, along with a decrease in the average balance of the portfolio.

The increase in dividend income on FHLB stock and the increase in interest income on cash and cash equivalents were due mainly to the leverage strategy being utilized during the current year period and not being utilized during the prior period.

The increase in interest income on investment securities was due primarily to an increase in the average balance of the portfolio.

Interest Expense

The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.

	For the Nine Months Ended
	June 30,				Change Expressed in:
	2022		2021		Dollars			Percent
	(Dollars in thousands)
INTEREST EXPENSE:
Borrowings	$	27,961	$	26,885	$	1,076		4.0	%
Deposits		25,443		38,071		(12,628	)	(33.2	)
Total interest expense	$	53,404	$	64,956	$	(11,552	)	(17.8	)

The increase in interest expense on borrowings was due to the leverage strategy being utilized during a portion of the current year period and not being utilized during the prior year period. Interest expense on borrowings associated with the leverage strategy totaled $4.9 million during the current year period. This was partially offset by a lower cost of FHLB borrowings not associated with the leverage strategy due primarily to terminating or not renewing certain interest rate swap agreements, not replacing certain maturing FHLB advances, and prepaying certain advances during fiscal year 2021.

The decrease in interest expense on deposits was due mainly to a decrease in the weighted average rate paid on retail certificates of deposit, along with a decrease in the average balance of the portfolio. Retail certificates of deposit repriced downward between periods as they were renewed or were replaced at lower offered rates, along with some certificates of deposit not renewing.

Provision for Credit Losses

The Bank recorded a negative provision for credit losses during the current year period of $5.7 million, compared to a negative provision for credit losses of $7.2 million during the prior year period. The negative provision in the current year period was comprised of a $3.8 million decrease in the ACL for loans and a $1.9 million decrease in reserves for off-balance sheet credit exposures. The negative provision for credit losses associated with the ACL in the current year period was due primarily to a reduction in commercial loan qualitative factors, partially offset by an increase in ACL related to loan growth during the current year period. The negative provision for credit losses associated with the reserve for off-balance sheet credit exposures in the current year period was due primarily to a reduction in commercial loan qualitative factors.

Non-Interest Income

The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.

	For the Nine Months Ended
	June 30,				Change Expressed in:
	2022		2021		Dollars			Percent
	(Dollars in thousands)
NON-INTEREST INCOME:
Deposit service fees	$	10,331	$	8,988	$	1,343		14.9	%
Insurance commissions		2,042		2,249		(207	)	(9.2	)
Gain on sale of Visa Class B shares		—		7,386		(7,386	)	(100.0	)
Other non-interest income		4,664		4,160		504		12.1
Total non-interest income	$	17,037	$	22,783	$	(5,746	)	(25.2	)

The increase in deposit service fees was due primarily to an increase in debit card income and service charges as a result of higher transaction and settlement volume, in addition to an increase in the average transaction amount. The decrease in insurance commissions was due primarily to the receipt of annual contingent insurance commissions, which were lower than expected, and the related accrual adjustments. During the prior year period, the Bank sold its Visa Class B shares, resulting in a $7.4 million gain, with no similar transaction during the current year period. The increase in other non-interest income was due primarily to a gain on a loan-related financial derivative agreement.

Non-Interest Expense

The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.

	For the Nine Months Ended
	June 30,				Change Expressed in:
	2022		2021		Dollars			Percent
	(Dollars in thousands)
NON-INTEREST EXPENSE:
Salaries and employee benefits	$	42,332	$	41,402	$	930		2.2	%
Information technology and related expense		13,268		13,568		(300	)	(2.2	)
Occupancy, net		10,593		10,406		187		1.8
Regulatory and outside services		4,212		4,288		(76	)	(1.8	)
Advertising and promotional		3,626		3,729		(103	)	(2.8	)
Federal insurance premium		2,200		1,888		312		16.5
Deposit and loan transaction costs		2,050		2,123		(73	)	(3.4	)
Office supplies and related expense		1,464		1,289		175		13.6
Loss on interest rate swap termination		—		4,752		(4,752	)	(100.0	)
Other non-interest expense		3,299		3,877		(578	)	(14.9	)
Total non-interest expense	$	83,044	$	87,322	$	(4,278	)	(4.9	)

The increase in salaries and employee benefits was due primarily to merit increases and an increase in incentive compensation, partially offset by a decrease in commissions due to a reduction in loan origination activity compared to the prior year period. The increase in federal insurance premium expense was due mainly to an increase in average assets as a result of the leverage strategy being utilized during the current year period. During the prior year period, the Bank terminated $200.0 million of interest rate swaps, resulting in a loss of $4.8 million which was reclassified out of accumulated other comprehensive income ("AOCI") to earnings. The decrease in other non-interest expense was due primarily to the write-down during the prior year period of a property that had previously served as one of the Bank's branch locations.

The Company's efficiency ratio was 51.99% for the current year period compared to 57.36% for the prior year period. The improvement in the efficiency ratio was due primarily to higher net interest income.

Management intends to implement a new core processing system for the Bank by September 2023. The replacement system is expected to better position the Bank for the future and allow for the introduction of new products and services to enhance customer experiences. The implementation of the new core system and related conversion of data may result in increased third party expenses later in fiscal year 2022 and during fiscal year 2023.

Income Tax Expense

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

	For the Nine Months Ended
	June 30,						Change Expressed in:
	2022			2021			Dollars		Percent
	(Dollars in thousands)

Income before income tax expense	$	82,379		$	72,105		$	10,274	14.2	%
Income tax expense		17,418			14,576			2,842	19.5
Net income	$	64,961		$	57,529		$	7,432	12.9

Effective Tax Rate		21.1	%		20.2	%

The increase in income tax expense was due primarily to higher pretax income in the current year period. Additionally, the effective tax rate increased slightly compared to the prior year period, and is in line with management's anticipation of an effective tax rate of approximately 21% for fiscal year 2022.

Financial Condition as of June 30, 2022

The following table summarizes the Company's financial condition at the dates indicated.

							Annualized					Annualized
	June 30,			March 31,			Percent		September 30,			Percent
	2022			2022			Change		2021			Change
	(Dollars in thousands)
Total assets	$	9,476,053		$	9,531,296		(2.3	) %	$	9,631,246		(2.1	) %
Available-for-sale ("AFS") securities		1,694,160			1,780,419		(19.4	)		2,014,608		(21.2	)
Loans receivable, net		7,236,196			7,108,810		7.2			7,081,142		2.9
Deposits		6,329,883			6,614,844		(17.2	)		6,597,396		(5.4	)
Borrowings		1,869,897			1,583,747		72.3			1,582,850		24.2
Stockholders' equity		1,131,740			1,174,752		(14.6	)		1,242,273		(11.9	)
Equity to total assets at end of period		11.9	%		12.3	%				12.9	%
Average number of basic shares outstanding		135,725			135,677		0.1			135,571		0.2
Average number of diluted shares outstanding		135,725			135,677		0.1			135,571		0.2

During the current quarter and current year period, total assets decreased as cash and/or securities were partially reinvested in loans receivable. Deposit outflows, the majority of which occurred during the quarter ended June 30, 2022, were replaced by an increase in borrowings. The decrease in stockholders' equity from September 30, 2021 and March 31, 2022 to June 30, 2022 was due mainly to a reduction in AOCI as a result of changes in the fair value of AFS securities, along with the payment of a $0.20 per share True Blue Capitol dividend in June 2022.

During the current quarter, the deposit portfolio decreased $284.9 million, or 17.2% annualized. The decrease was primarily in retail certificates of deposit ($83.9 million), checking accounts ($70.0 million), public unit deposits ($67.0 million), and commercial certificates of deposit ($45.7 million). The decrease in checking accounts was mainly in retail accounts, as depositors used accumulated savings for other purposes during the quarter. The decrease in public unit deposits was due to the rapidly increasing costs of available funds in this category, to the point that rates were in excess of other funding sources available to the Bank. The decrease in commercial certificates of deposit was expected, as certain maturities were anticipated to be used to fund operations at the depositors' related businesses during the current year. The Bank has begun to increase offered rates on certificates of deposit and money market accounts, which has reduced the runoff in these portfolios.

Loans receivable, net, increased $127.4 million during the current quarter due primarily to a $101.7 million increase in one- to four-family loans and a $20.6 million increase in commercial loans.

The following table summarizes loan originations and purchases and borrowing activity, along with the related weighted average rates, during the periods indicated. The borrowings presented in the table have original contractual terms of one year or longer.

	For the Three Months Ended				For the Nine Months Ended
	June 30, 2022				June 30, 2022
	Amount		Rate		Amount			Rate
	(Dollars in thousands)
Loan originations and purchases
One- to four-family and consumer:
Originated	$	223,153	3.82	%	$	612,710		3.28	%
Purchased		145,362	3.48			394,011		3.01

Commercial:
Originated		37,646	4.28			174,925		3.98
Purchased		8,000	3.75			82,057		3.35
	$	414,161	3.74		$	1,263,703		3.30
Borrowing activity
Maturities and prepayments	$	—	—		$	(100,000	)	3.14
New borrowings		250,000	3.51			350,000		3.49

Stockholders' Equity

During the nine months ended June 30, 2022, the Company paid cash dividends totaling $91.6 million. These cash dividends totaled $0.675 per share and consisted of a $0.22 per share cash true-up dividend related to fiscal year 2021 earnings, a $0.20 per share True Blue Capitol cash dividend, and three regular quarterly cash dividends of $0.085 per share. On July 19, 2022, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.5 million, payable on August 19, 2022 to stockholders of record as of the close of business on August 5, 2022. In the long run, management considers the Bank's equity to total assets ratio of at least 9% an appropriate level of capital. At June 30, 2022, this ratio was 10.6%.

At June 30, 2022, Capitol Federal Financial, Inc., at the holding company level, had $91.9 million in cash on deposit at the Bank. For fiscal year 2022, it is the intention of the Board of Directors to continue the payout of 100% of the Company's earnings to the Company's stockholders. 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.

There remains $44.7 million authorized under the existing stock repurchase plan for additional purchases of the Company's common stock. Shares may be repurchased from time to time based upon market conditions, available liquidity and other factors. This plan has no expiration date; however, the Federal Reserve Bank's existing approval for the Company to repurchase shares expires in August 2022.

The following table presents a reconciliation of total to net shares outstanding as of June 30, 2022.

Total shares outstanding	138,854,084
Less unallocated ESOP shares and unvested restricted stock	(3,086,165	)
Net shares outstanding	135,767,919

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 June 30, 2022, the Bank's community bank leverage ratio ("CBLR") was 9.4%, which exceeded the minimum requirement of 9%. The CBLR is based on average assets. The leverage strategy increases average assets which reduces the Bank's CBLR.

Capitol Federal Financial, Inc. is the holding company for the Bank. The Bank has 54 branch locations in Kansas and Missouri, and is one of the largest residential lenders in the State of Kansas. News and other information about the Company can be found at the Bank's website, http://www.capfed.com.

Except for the historical information contained in this press release, the matters discussed herein may be deemed to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions. The words "may," "could," "should," "would," "will," "believe," "anticipate," "estimate," "expect," "intend," "plan," and similar expressions are intended to identify forward-looking statements. Forward-looking statements involve risks and uncertainties, including: potential adverse impacts of the ongoing COVID-19 pandemic and any governmental or societal responses thereto on economic conditions in the Company's local market areas and other market areas where the Bank has lending relationships, on other aspects of the Company's business operations and on financial markets; changes in policies or the application or interpretation of laws and regulations by regulatory agencies and tax authorities; other governmental initiatives affecting the financial services industry; changes in accounting principles, policies or guidelines; fluctuations in interest rates; demand for loans in the Company's and its correspondent banks' market areas; the future earnings and capital levels of the Bank, which could affect the ability of the Company to pay dividends in accordance with its dividend policies; competition; and other risks detailed from time to time in documents filed or furnished by the Company with the SEC. Actual results may differ materially from those currently expected. These forward-looking statements represent the Company's judgment as of the date of this release. The Company disclaims, however, any intent or obligation to update these forward-looking statements.

SUPPLEMENTAL FINANCIAL INFORMATION

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except per share amounts)
	June 30,			March 31,			September 30,
		2022			2022			2021
ASSETS:
Cash and cash equivalents (includes interest-earning deposits of $31,589, $110,444 and $24,289)	$	54,789		$	166,869		$	42,262
AFS securities, at estimated fair value (amortized cost of $1,830,262, $1,875,361 and $2,008,456)		1,694,160			1,780,419			2,014,608
Loans receivable, net (ACL of $16,283, $15,312 and $19,823)		7,236,196			7,108,810			7,081,142
FHLB stock, at cost		87,696			74,456			73,421
Premises and equipment, net		96,008			96,952			99,127
Income taxes receivable, net		1,993			—			—
Deferred income tax assets, net		19,636			12,399			—
Other assets		285,575			291,391			320,686
TOTAL ASSETS	$	9,476,053		$	9,531,296		$	9,631,246

LIABILITIES:
Deposits	$	6,329,883		$	6,614,844		$	6,597,396
Borrowings		1,869,897			1,583,747			1,582,850
Advance payments by borrowers for taxes and insurance		55,955			65,901			72,729
Income taxes payable, net		—			1,113			918
Deferred income tax liabilities, net		—			—			5,810
Other liabilities		88,578			90,939			129,270
Total liabilities		8,344,313			8,356,544			8,388,973

STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 100,000,000 shares authorized, no shares issued or outstanding		—			—			—
Common stock, $0.01 par value; 1,400,000,000 shares authorized, 138,854,084, 138,846,684 and 138,832,284 shares issued and outstanding as of June 30, 2022, March 31, 2022, and September 30, 2021, respectively		1,388			1,388			1,388
Additional paid-in capital		1,190,117			1,189,999			1,189,633
Unearned compensation, ESOP		(30,148	)		(30,561	)		(31,387	)
Retained earnings		72,308			89,833			98,944
Accumulated other comprehensive (loss) income, net of tax		(101,925	)		(75,907	)		(16,305	)
Total stockholders' equity		1,131,740			1,174,752			1,242,273
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	9,476,053		$	9,531,296		$	9,631,246

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands)
	For the Three Months Ended					For the Nine Months Ended
	June 30,		March 31,			June 30,
	2022			2022			2022			2021
INTEREST AND DIVIDEND INCOME:
Loans receivable	$	56,886	$	55,412		$	168,086		$	172,758
MBS		5,048		4,821			14,494			16,499
FHLB stock		2,695		2,240			6,166			2,964
Cash and cash equivalents		3,968		949			4,931			117
Investment securities		815		800			2,423			2,075
Total interest and dividend income		69,412		64,222			196,100			194,413

INTEREST EXPENSE:
Borrowings		11,644		8,732			27,961			26,885
Deposits		7,787		8,389			25,443			38,071
Total interest expense		19,431		17,121			53,404			64,956

NET INTEREST INCOME		49,981		47,101			142,696			129,457

PROVISION FOR CREDIT LOSSES		937		(3,188	)		(5,690	)		(7,187	)
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES		49,044		50,289			148,386			136,644

NON-INTEREST INCOME:
Deposit service fees		3,601		3,300			10,331			8,988
Insurance commissions		788		543			2,042			2,249
Gain on sale of Visa Class B shares		—		—			—			7,386
Other non-interest income		1,726		1,573			4,664			4,160
Total non-interest income		6,115		5,416			17,037			22,783

NON-INTEREST EXPENSE:
Salaries and employee benefits		14,581		14,023			42,332			41,402
Information technology and related expense		4,343		4,493			13,268			13,568
Occupancy, net		3,721		3,493			10,593			10,406
Regulatory and outside services		1,572		1,272			4,212			4,288
Advertising and promotional		1,068		1,494			3,626			3,729
Federal insurance premium		784		777			2,200			1,888
Deposit and loan transaction costs		664		689			2,050			2,123
Office supplies and related expense		494		502			1,464			1,289
Loss on interest rate swap termination		—		—			—			4,752
Other non-interest expense		1,163		1,217			3,299			3,877
Total non-interest expense		28,390		27,960			83,044			87,322
INCOME BEFORE INCOME TAX EXPENSE		26,769		27,745			82,379			72,105
INCOME TAX EXPENSE		5,617		6,122			17,418			14,576
NET INCOME	$	21,152	$	21,623		$	64,961		$	57,529

Average Balance Sheets

The following tables present the average balances of our assets, liabilities, and stockholders' equity, and the related annualized weighted average yields and rates on our interest-earning assets and interest-bearing liabilities for the periods indicated, as well as selected performance ratios and other information for the periods shown. Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.

	For the Three Months Ended
	June 30, 2022						March 31, 2022
	Average		Interest				Average		Interest
	Outstanding		Earned/		Yield/		Outstanding		Earned/		Yield/
	Amount		Paid		Rate		Amount		Paid		Rate
Assets:	(Dollars in thousands)
Interest-earning assets:
One- to four-family loans:
Originated	$	3,982,602	$	32,168	3.23	%	$	3,965,844	$	31,993	3.23	%
Correspondent purchased		2,060,947		14,027	2.72			2,026,120		13,060	2.58
Bulk purchased		154,663		464	1.20			161,149		503	1.25
Total one- to four-family loans		6,198,212		46,659	3.01			6,153,113		45,556	2.96
Commercial loans		890,455		9,104	4.05			869,205		8,851	4.07
Consumer loans		92,790		1,123	4.85			90,326		1,005	4.51
Total loans receivable⁽¹⁾		7,181,457		56,886	3.16			7,112,644		55,412	3.12
MBS⁽²⁾		1,343,891		5,048	1.50			1,357,693		4,821	1.42
Investment securities⁽²⁾⁽³⁾		522,147		815	0.62			522,019		800	0.61
FHLB stock⁽⁴⁾		166,879		2,695	6.48			158,546		2,240	5.73
Cash and cash equivalents⁽⁵⁾		1,930,539		3,968	0.81			1,971,341		949	0.19
Total interest-earning assets		11,144,913		69,412	2.49			11,122,243		64,222	2.31
Other non-interest-earning assets		293,882						385,323
Total assets	$	11,438,795					$	11,507,566

Liabilities and stockholders' equity:
Interest-bearing liabilities:
Checking	$	1,068,329		180	0.07		$	1,069,282		176	0.07
Savings		556,553		74	0.05			540,348		71	0.05
Money market		1,861,302		952	0.21			1,879,799		876	0.19
Retail certificates		2,169,262		6,383	1.18			2,241,080		7,012	1.27
Commercial certificates		84,231		129	0.61			116,181		183	0.64
Wholesale certificates		113,101		69	0.24			197,335		71	0.15
Total deposits		5,852,778		7,787	0.53			6,044,025		8,389	0.56
Borrowings⁽⁶⁾		3,687,592		11,644	1.26			3,499,010		8,732	1.01
Total interest-bearing liabilities		9,540,370		19,431	0.81			9,543,035		17,121	0.73
Non-interest-bearing deposits		586,876						577,989
Other non-interest-bearing liabilities		147,938						177,995
Stockholders' equity		1,163,611						1,208,547
Total liabilities and stockholders' equity	$	11,438,795					$	11,507,566

Net interest income⁽⁷⁾			$	49,981					$	47,101
Net interest-earning assets	$	1,604,543					$	1,579,208
Net interest margin⁽⁸⁾⁽⁹⁾					1.79						1.69
Ratio of interest-earning assets to interest-bearing liabilities					1.17x						1.17x

Selected performance ratios:
Return on average assets (annualized)⁽⁹⁾					0.74	%					0.75	%
Return on average equity (annualized)⁽⁹⁾					7.27						7.16
Average equity to average assets					10.17						10.50
Operating expense ratio (annualized)⁽¹⁰⁾					0.99						0.97
Efficiency ratio^(9)(11)					50.61						53.24
Pre-tax yield on leverage strategy⁽¹²⁾					0.31						0.14

	For the Nine Months Ended
	June 30, 2022						June 30, 2021
	Average		Interest				Average		Interest
	Outstanding		Earned/		Yield/		Outstanding		Earned/		Yield/
	Amount		Paid		Rate		Amount		Paid		Rate
Assets:	(Dollars in thousands)
Interest-earning assets:
One- to four-family loans:
Originated	$	3,973,184	$	96,583	3.24	%	$	3,963,088	$	104,482	3.52	%
Correspondent purchased		2,040,934		39,832	2.60			2,006,257		35,124	2.33
Bulk purchased		162,151		1,578	1.30			195,678		2,870	1.96
Total one- to four-family loans		6,176,269		137,993	2.98			6,165,023		142,476	3.08
Commercial loans		866,856		26,898	4.09			780,941		26,707	4.51
Consumer loans		91,979		3,195	4.64			103,241		3,575	4.63
Total loans receivable⁽¹⁾		7,135,104		168,086	3.14			7,049,205		172,758	3.26
MBS⁽²⁾		1,379,334		14,494	1.40			1,424,914		16,499	1.54
Investment securities⁽²⁾⁽³⁾		522,706		2,423	0.62			476,755		2,075	0.58
FHLB stock⁽⁴⁾		132,657		6,166	6.21			78,784		2,964	5.03
Cash and cash equivalents⁽⁵⁾		1,305,949		4,931	0.50			152,792		117	0.10
Total interest-earning assets		10,475,750		196,100	2.49			9,182,450		194,413	2.82
Other non-interest-earning assets		362,229						443,370
Total assets	$	10,837,979					$	9,625,820

Liabilities and stockholders' equity:
Interest-bearing liabilities:
Checking	$	1,063,280		535	0.07		$	955,731		588	0.08
Savings		539,152		215	0.05			478,011		209	0.06
Money market		1,835,666		2,653	0.19			1,554,947		3,220	0.28
Retail certificates		2,236,551		21,230	1.27			2,530,969		31,824	1.68
Commercial certificates		123,398		584	0.63			195,066		1,208	0.83
Wholesale certificates		170,051		226	0.18			254,606		1,022	0.54
Total deposits		5,968,098		25,443	0.57			5,969,330		38,071	0.85
Borrowings⁽⁶⁾		2,918,291		27,961	1.27			1,654,544		26,885	2.16
Total interest-bearing liabilities		8,886,389		53,404	0.80			7,623,874		64,956	1.14
Non-interest-bearing deposits		571,685						499,737
Other non-interest-bearing liabilities		177,081						219,204
Stockholders' equity		1,202,824						1,283,005
Total liabilities and stockholders' equity	$	10,837,979					$	9,625,820


Net interest income⁽⁷⁾			$	142,696					$	129,457
Net interest-earning assets	$	1,589,361					$	1,558,576
Net interest margin⁽⁸⁾⁽⁹⁾					1.82						1.88
Ratio of interest-earning assets to interest-bearing liabilities					1.18x						1.20x

Selected performance ratios:
Return on average assets (annualized)⁽⁹⁾					0.80	%					0.80	%
Return on average equity (annualized)⁽⁹⁾					7.20						5.98
Average equity to average assets					11.10						13.33
Operating expense ratio (annualized)⁽¹⁰⁾					1.02						1.21
Efficiency ratio^(9)(11)					51.99						57.36
Pre-tax yield on leverage strategy⁽¹²⁾					0.23						—

(1)		Balances are adjusted for unearned loan fees and deferred costs. Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent.
(2)		AFS securities are adjusted for unamortized purchase premiums or discounts.
(3)		The average balance of investment securities includes an average balance of nontaxable securities of $326 thousand and $2.0 million for the quarters ended June 30, 2022 and March 31, 2022, respectively, and $2.1 million and $7.2 million for the nine-month periods ended June 30, 2022 and June 30, 2021, respectively.
(4)		Included in this line, for the quarter and nine-month period ended June 30, 2022, is FHLB stock related to the leverage strategy with an average outstanding balance of $89.4 million and $58.2 million, respectively, and dividend income of $1.4 million and $2.7 million, respectively, at a weighted average yield of 6.48% and 6.12%, respectively, and FHLB stock not related to the leverage strategy with an average outstanding balance of $77.5 million and $74.5 million, respectively, and dividend income of $1.3 million and $3.5 million, respectively, at a weighted average yield of 6.48% and 6.29%, respectively. Included in this line for the quarter ended March 31, 2022 is FHLB stock related to the leverage strategy with an average outstanding balance of $86.2 million and dividend income of $1.2 million, at a weighted average yield of 5.75%, and FHLB stock not related to the leverage strategy with an average outstanding balance of $72.3 million and dividend income of $1.0 million, at a weighted average yield of 5.71%. There was no FHLB stock related to the leverage strategy during the nine-month period ended June 30, 2021.
(5)		The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $1.89 billion, $1.83 billion, and $1.23 billion during the quarter ended June 30, 2022, the quarter ended March 31, 2022 and nine-month period ended June 30, 2022, respectively. There were no cash and cash equivalents related to the leverage strategy during the nine-month period ended June 30, 2021.
(6)		Included in this line, for the quarter and nine-month period ended June 30, 2022, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $1.99 billion and $1.30 billion, respectively, and interest paid of $3.7 million and $4.9 million, respectively, at a weighted average rate of 0.73% and 0.50%, respectively, and FHLB borrowings not related to the leverage strategy with an average outstanding balance of $1.70 billion and $1.62 billion, respectively, and interest paid of $8.0 million and $23.0 million, respectively, at a weighted average rate of 1.87% and 1.89%, respectively. Included in this line for the quarter ended March 31, 2022 are FHLB borrowings related to the leverage strategy with an average outstanding balance of $1.92 billion and interest paid of $1.3 million at a weighted average rate of 0.26%, and FHLB borrowings not related to the leverage strategy with an average outstanding balance of $1.58 billion and interest paid of $7.5 million at a weighted average rate of 1.90%. There were no FHLB borrowings related to the leverage strategy during the nine-month period ended June 30, 2021. The FHLB advance amounts and rates included in this line include the effect of interest rate swaps and are net of deferred prepayment penalties.
(7)		Net interest income represents the difference between interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income depends on the average balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them.
(8)		Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.
(9)		The tables below provide a reconciliation between certain performance ratios presented in accordance with accounting standards generally accepted in the United States of America ("GAAP") and the performance ratios excluding the effects of the leverage strategy, which are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide the performance ratios without the leverage strategy because of the unique nature of the leverage strategy. The leverage strategy reduces some of our performance ratios due to the amount of earnings associated with the transaction in comparison to the size of the transaction, while increasing our net income.

	For the Three Months Ended
	June 30, 2022						March 31, 2022
	Actual		Leverage		Adjusted		Actual		Leverage		Adjusted
	(GAAP)		Strategy		(Non-GAAP)		(GAAP)		Strategy		(Non-GAAP)
Yield on interest-earning assets	2.49	%	(0.30	)%	2.79	%	2.31	%	(0.39	)%	2.70	%
Cost of interest-bearing liabilities	0.81		(0.03	)	0.84		0.73		(0.11	)	0.84
Return on average assets (annualized)	0.74		(0.10	)	0.84		0.75		(0.13	)	0.88
Return on average equity (annualized)	7.27		0.42		6.85		7.16		0.18		6.98
Net interest margin	1.79		(0.32	)	2.11		1.69		(0.32	)	2.01
Efficiency Ratio	50.61		(1.31	)	51.92		53.24		(0.58	)	53.82

	For the Nine Months Ended
	June 30, 2022						June 30, 2021
	Actual		Leverage		Adjusted		Actual		Leverage		Adjusted
	(GAAP)		Strategy		(Non-GAAP)		(GAAP)		Strategy		(Non-GAAP)
Yield on interest-earning assets	2.49	%	(0.25	) %	2.74	%	2.82	%	—	%	2.82	%
Cost of interest-bearing liabilities	0.80		(0.05	)	0.85		1.14		—		1.14
Return on average assets (annualized)	0.80		(0.08	)	0.88		0.80		—		0.80
Return on average equity (annualized)	7.20		0.20		7.00		5.98		—		5.98
Net interest margin	1.82		(0.22	)	2.04		1.88		—		1.88
Efficiency Ratio	51.99		(0.65	)	52.64		57.36		—		57.36

(10)		The operating expense ratio represents annualized non-interest expense as a percentage of average assets.
(11)		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.
(12)		The pre-tax yield on the leverage strategy represents annualized pre-tax income resulting from the transaction as a percentage of the average interest-earning assets associated with the transaction.

Loan Portfolio

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

	June 30, 2022							March 31, 2022							September 30, 2021
						% of							% of							% of
	Amount			Rate		Total		Amount			Rate		Total		Amount			Rate		Total
	(Dollars in thousands)
One- to four-family:
Originated	$	3,963,608		3.16	%	54.7	%	$	3,943,327		3.14	%	55.4	%	$	3,956,064		3.18	%	55.8	%
Correspondent purchased		2,070,822		2.99		28.6			1,995,167		2.95		28.0			2,003,477		3.02		28.2
Bulk purchased		151,461		1.27		2.1			155,657		1.33		2.2			173,662		1.65		2.4
Construction		60,426		2.84		0.8			50,512		2.78		0.7			39,142		2.82		0.6
Total		6,246,317		3.05		86.2			6,144,663		3.03		86.3			6,172,345		3.09		87.0
Commercial:
Commercial real estate		717,947		4.09		9.9			671,324		3.94		9.4			676,908		4.00		9.6
Commercial and industrial		70,932		3.98		1.0			78,363		3.92		1.1			66,497		3.83		0.9
Construction		115,031		4.33		1.6			133,597		4.06		1.9			85,963		4.03		1.2
Total		903,910		4.11		12.5			883,284		3.96		12.4			829,368		3.99		11.7
Consumer loans:
Home equity		87,235		5.03		1.2			82,878		4.57		1.2			86,274		4.60		1.2
Other		8,289		4.14		0.1			7,858		4.18		0.1			8,086		4.19		0.1
Total		95,524		4.96		1.3			90,736		4.54		1.3			94,360		4.57		1.3
Total loans receivable		7,245,751		3.21		100.0	%		7,118,683		3.16		100.0	%		7,096,073		3.21		100.0	%

Less:
ACL		16,283							15,312							19,823
Deferred loan fees/discounts		29,470							29,264							29,556
Premiums/deferred costs		(36,198	)						(34,703	)						(34,448	)
Total loans receivable, net	$	7,236,196						$	7,108,810						$	7,081,142

Loan Activity: The following table summarizes activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, deferred loan fees/discounts, and premiums/deferred costs. Loans that were paid off as a result of refinances are included in repayments. Loan endorsements are not included in the activity in the following table because a new loan is not generated at the time of the endorsement. The endorsed balance and rate are included in the ending loan portfolio balance and rate. Commercial loan renewals are not included in the activity in the following table unless new funds are disbursed at the time of renewal. The renewal balance and rate are included in the ending loan portfolio balance and rate.

	For the Three Months Ended					For the Nine Months Ended
	June 30, 2022					June 30, 2022
	Amount			Rate		Amount			Rate
	(Dollars in thousands)
Beginning balance	$	7,118,683		3.16	%	$	7,096,073		3.21	%
Originated and refinanced		260,799		3.88			787,635		3.44
Purchased and participations		153,362		3.50			476,068		3.06
Change in undisbursed loan funds		122					(45,115	)
Repayments		(287,123	)				(1,068,621	)
Principal recoveries/(charge-offs), net		175					220
Other		(267	)				(509	)
Ending balance	$	7,245,751		3.21		$	7,245,751		3.21

One- to Four-Family Loans: The following table presents, for our portfolio of one- to four-family loans, the amount, weighted average rate, percent of total, weighted average credit score, and weighted average loan-to-value ("LTV") ratio, and average balance per loan as of June 30, 2022. Credit scores were updated in March 2022 from a nationally recognized consumer rating agency. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. In most cases, the most recent appraisal was obtained at the time of origination.

					% of		Credit			Average
	Amount		Rate		Total		Score	LTV		Balance
	(Dollars in thousands)
Originated	$	3,963,608	3.16	%	64.1	%	772	61	%	$	157
Correspondent purchased		2,070,822	2.99		33.5		765	64			412
Bulk purchased		151,461	1.27		2.4		773	57			285
	$	6,185,891	3.06		100.0	%	770	62			200

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

	For the Three Months Ended							For the Nine Months Ended
	June 30, 2022							June 30, 2022
							Credit							Credit
	Amount		Rate		LTV		Score	Amount		Rate		LTV		Score
	(Dollars in thousands)
Originated	$	200,354	3.70	%	74	%	766	$	558,938	3.15	%	71	%	766
Correspondent purchased		145,362	3.48		75		767		394,011	3.01		73		770
	$	345,716	3.61		74		767	$	952,949	3.09		72		768

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 June 30, 2022, along with associated weighted average rates.

	Amount		Rate
	(Dollars in thousands)
Originate/refinance	$	182,662	4.16	%
Correspondent		77,156	3.82
	$	259,818	4.06

Commercial Loans: During the nine months ended June 30, 2022, the Bank originated $174.9 million of commercial loans and entered into commercial loan participations totaling $82.1 million. The Bank also processed commercial loan disbursements, excluding lines of credit, of approximately $232.0 million at a weighted average rate of 4.04%.

As of June 30, 2022, March 31, 2022, and September 30, 2021, the Bank's commercial and industrial gross loan amount (unpaid principal plus undisbursed amounts) totaled $95.2 million, $101.3 million, and $90.7 million, respectively, and commitments totaled $440 thousand at June 30, 2022.

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 June 30, 2022, the Bank had 26 commercial real estate and commercial construction loan commitments totaling $65.5 million, at a weighted average rate of 4.17%. 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.

	June 30, 2022										March 31, 2022			September 30, 2021
		Unpaid			Undisbursed			Gross Loan			Gross Loan			Gross Loan
	Count	Principal			Amount			Amount			Amount			Amount
		(Dollars in thousands)
Senior housing	34	$	248,787		$	79,334		$	328,121		$	331,230		$	265,284
Retail building	138		196,903			35,551			232,454			226,297			208,539
Hotel	11		160,521			32,380			192,901			194,287			194,665
Office building	85		52,738			50,305			103,043			104,787			109,987
Multi-family	34		59,840			19,706			79,546			71,180			66,199
One- to four-family property	372		62,191			8,235			70,426			70,920			69,174
Single use building	23		19,019			4,773			23,792			24,179			47,028
Other	94		32,979			2,993			35,972			35,917			36,167
	791	$	832,978		$	233,277		$	1,066,255		$	1,058,797		$	997,043

Weighted average rate			4.13	%		4.32	%		4.17	%		3.93	%		4.01	%

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

	June 30, 2022							March 31, 2022		September 30, 2021
		Unpaid		Undisbursed		Gross Loan		Gross Loan		Gross Loan
	Count	Principal		Amount		Amount		Amount		Amount
		(Dollars in thousands)
Kansas	600	$	320,063	$	57,888	$	377,951	$	366,403	$	348,835
Missouri	157		227,027		53,343		280,370		281,230		232,041
Texas	11		182,086		90,688		272,774		274,020		273,124
Colorado	5		19,832		14,139		33,971		35,452		36,099
Arkansas	3		21,884		11,618		33,502		33,589		33,763
Nebraska	6		33,088		4		33,092		33,269		33,468
Other	9		28,998		5,597		34,595		34,834		39,713
	791	$	832,978	$	233,277	$	1,066,255	$	1,058,797	$	997,043

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 June 30, 2022.

	Count	Amount
	(Dollars in thousands)
Greater than $30 million	6	$	246,066
>$15 to $30 million	16		335,698
>$10 to $15 million	6		71,174
>$5 to $10 million	20		131,051
$1 to $5 million	112		254,323
Less than $1 million	1,262		189,051
	1,422	$	1,227,363

As of June 30, 2022 and March 31, 2022, there were commercial loans with a gross loan amount (unpaid principal plus undisbursed amounts) of $73.6 million and $74.3 million, respectively, with modifications under the Bank's program to support and provide relief to borrowers during the Coronavirus Disease 2019 ("COVID-19") pandemic ("COVID-19 loan modifications") that were still in their deferral period.

Asset Quality

The following tables present loans 30 to 89 days delinquent, non-performing loans, and other real estate owned ("OREO") as of the dates indicated. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. Loans subject to payment forbearance under the Bank's COVID-19 loan modification program are not reported as delinquent during the forbearance time period. Of the loans 30 to 89 days delinquent at June 30, 2022, approximately 61% were 59 days or less delinquent. Nonaccrual loans are loans that are 90 or more days delinquent or in foreclosure and other loans required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements and/or internal policies, even if the loans are current. Non-performing assets include nonaccrual loans and OREO.

	Loans Delinquent for 30 to 89 Days at:
	June 30, 2022				March 31, 2022				December 31, 2021				September 30, 2021				June 30, 2021
	Number	Amount			Number	Amount			Number	Amount			Number	Amount			Number	Amount
	(Dollars in thousands)
One- to four-family:
Originated	64	$	6,035		64	$	6,931		74	$	7,009		48	$	4,156		51	$	5,141
Correspondent purchased	9		3,467		10		2,421		11		5,133		7		2,590		9		3,650
Bulk purchased	4		755		2		396		1		154		4		541		6		958
Commercial	6		706		4		373		2		222		2		37		1		35
Consumer	16		256		14		215		16		164		25		498		25		354
	99	$	11,219		94	$	10,336		104	$	12,682		86	$	7,822		92	$	10,138
30 to 89 days delinquent loans to total loans receivable, net			0.16	%			0.15	%			0.18	%			0.11	%			0.14	%

	Non-Performing Loans and OREO at:
	June 30, 2022				March 31, 2022				December 31, 2021				September 30, 2021				June 30, 2021
	Number	Amount			Number	Amount			Number	Amount			Number	Amount			Number	Amount
	(Dollars in thousands)
Loans 90 or More Days Delinquent or in Foreclosure:
One- to four-family:
Originated	36	$	2,585		44	$	3,999		48	$	3,943		50	$	3,693		53	$	3,696
Correspondent purchased	9		2,659		11		3,967		10		3,115		10		3,210		12		4,230
Bulk purchased	5		1,807		5		1,819		6		1,945		9		2,974		7		2,596
Commercial	7		1,184		6		1,167		6		1,170		6		1,214		7		1,278
Consumer	9		174		19		400		25		477		21		498		23		445
	66		8,409		85		11,352		95		10,650		96		11,589		102		12,245

Loans 90 or more days delinquent or in foreclosure
as a percentage of total loans			0.12	%			0.16	%			0.15	%			0.16	%			0.17	%

Nonaccrual loans less than 90 Days Delinquent:⁽¹⁾
One- to four-family:
Originated	2	$	207		5	$	505		5	$	451		7	$	1,288		7	$	1,392
Correspondent purchased	—		—		—		—		—		—		—		—		—		—
Bulk purchased	—		—		—		—		—		—		1		131		1		131
Commercial	1		4		2		34		3		62		4		419		3		403
Consumer	1		19		2		27		—		—		1		9		—		—
	4		230		9		566		8		513		13		1,847		11		1,926
Total nonaccrual loans	70		8,639		94		11,918		103		11,163		109		13,436		113		14,171

Nonaccrual loans as a percentage of total loans			0.12	%			0.17	%			0.16	%			0.19	%			0.20	%

OREO:
One- to four-family:
Originated⁽²⁾	2	$	237		—	$	—		2	$	319		3	$	170		3	$	177
Consumer	1		21		—		—		—		—		—		—		—		—
	3		258		—		—		2		319		3		170		3		177
Total non-performing assets	73	$	8,897		94	$	11,918		105	$	11,482		112	$	13,606		116	$	14,348

Non-performing assets as a percentage of total assets			0.09	%			0.13	%			0.12	%			0.14	%			0.15	%

(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.
(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 loans classified as special mention or substandard at the dates presented. The decrease in commercial special mention loans at June 30, 2022 compared to September 30, 2021 was due mainly to two commercial loans moving to the pass classification during the December 31, 2021 quarter as the underlying economic considerations being monitored by management improved to levels deemed appropriate by the Company. The commercial special mention loan balance at June 30, 2022 was comprised of a single loan which continues to show improvement in its cash flow from operations and other operating metrics.

	June 30, 2022				September 30, 2021
	Special Mention		Substandard		Special Mention		Substandard
	(Dollars in thousands)
One- to four-family	$	14,172	$	19,319	$	14,332	$	23,458
Commercial		46,366		3,078		99,729		3,259
Consumer		288		383		135		718
	$	60,826	$	22,780	$	114,196	$	27,435

Allowance for Credit Losses: The Bank is utilizing a discounted cash flow approach for estimating expected credit losses for pooled loans and loan commitments. Management applied qualitative factors at June 30, 2022 to account for economic uncertainty that may not be adequately captured in the third party economic forecast scenarios, along with the balance of large-dollar special mention commercial loans, and commercial loan COVID-19 modifications.

The following tables present ACL activity and related ratios at the dates and for the periods indicated. The reserve for off-balance sheet credit exposures totaled $3.8 million at June 30, 2022, $3.7 million at March 31, 2022, and $4.6 million at December 31, 2021.

	For the Three Months Ended			For the Nine Months Ended
	June 30, 2022			June 30, 2022
	(Dollars in thousands)
Balance at beginning of period	$	15,312		$	19,823
Charge-offs:
One- to four-family		—			(4	)
Commercial		—			(10	)
Consumer		(10	)		(16	)
Total charge-offs		(10	)		(30	)
Recoveries:
One- to four-family		126			137
Commercial		52			101
Consumer		7			12
Total recoveries		185			250
Net recoveries (charge-offs)		175			220
Provision for credit losses		796			(3,760	)
Balance at end of period	$	16,283		$	16,283

Ratio of net charge-offs during the period
to average loans outstanding during the period		—	%		—	%
Ratio of net charge-offs (recoveries) during the
period to average non-performing assets		(1.68	)		(1.96	)
ACL to non-performing loans at end of period		188.48			188.48
ACL to loans receivable at end of period		0.22			0.22
ACL to net charge-offs (annualized)	N/M⁽¹⁾			N/M⁽¹⁾

(1)

This ratio is not presented due to loan recoveries exceeding loan charge-offs during the period.

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

	Distribution of ACL				Ratio of ACL to Loans Receivable
	June 30,		March 31,		June 30,		March 31,
	2022		2022		2022		2022
	(Dollars in thousands)
One- to four-family	$	4,565	$	4,079	0.07	%	0.07	%
Commercial:
Commercial real estate		9,720		8,991	1.35		1.34
Commercial and industrial		408		389	0.58		0.50
Construction		1,362		1,651	1.18		1.24
Total		11,490		11,031	1.27		1.25
Consumer		228		202	0.24		0.22
Total	$	16,283	$	15,312	0.22		0.22

Securities Portfolio

The following table presents the distribution of our securities portfolio, at amortized cost, at June 30, 2022. Overall, fixed-rate securities comprised 95% of our securities portfolio at June 30, 2022. The weighted average life ("WAL") is the estimated remaining maturity (in years) after three-month historical prepayment speeds and projected call option assumptions have been applied. Weighted average yields on tax-exempt securities are not calculated on a fully tax-equivalent basis.

	Amount		Yield		WAL
	(Dollars in thousands)
MBS	$	1,306,076	1.55	%	4.5
U.S. government-sponsored enterprise debentures		519,976	0.61		3.1
Municipal bonds		210	3.00		0.1
Corporate bonds		4,000	5.12		7.4
Total securities portfolio	$	1,830,262	1.29		4.1

The following table summarizes the activity in our securities portfolio for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning and ending balances are as of the first and last days of the period presented and are generally derived from recent prepayment activity on the securities in the portfolio. The beginning and ending WALs are the estimated remaining principal repayment terms (in years) after three-month historical prepayment speeds have been applied.

	For the Three Months Ended						For the Nine Months Ended
	June 30, 2022						June 30, 2022
	Amount			Yield		WAL	Amount			Yield		WAL
	(Dollars in thousands)
Beginning balance - carrying value	$	1,780,419		1.25	%	4.1	$	2,014,608		1.16	%	3.5
Maturities and repayments		(72,502	)					(261,160	)
Net amortization of (premiums)/discounts		(1,044	)					(4,027	)
Purchases		28,447		3.17		4.3		86,993		2.56		4.3
Change in valuation on AFS securities		(41,160	)					(142,254	)
Ending balance - carrying value	$	1,694,160		1.29		4.1	$	1,694,160		1.29		4.1

Deposit Portfolio

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

	June 30, 2022						March 31, 2022						September 30, 2021
					% of						% of						% of
	Amount		Rate		Total		Amount		Rate		Total		Amount		Rate		Total
	(Dollars in thousands)
Non-interest-bearing checking	$	580,385	—	%	9.2	%	$	600,457	—	%	9.1	%	$	543,849	—	%	8.2	%
Interest-bearing checking		1,047,336	0.08		16.6			1,097,287	0.07		16.6			1,037,362	0.07		15.7
Savings		557,832	0.05		8.8			558,337	0.05		8.4			519,069	0.05		7.9
Money market		1,867,991	0.23		29.5			1,885,873	0.19		28.5			1,753,525	0.19		26.6
Retail certificates of deposit		2,129,734	1.16		33.6			2,213,617	1.22		33.5			2,341,531	1.41		35.5
Commercial certificates of deposit		55,076	0.68		0.9			100,739	0.61		1.5			190,215	0.66		2.9
Public unit certificates of deposit		91,529	0.57		1.4			158,534	0.14		2.4			211,845	0.21		3.2
	$	6,329,883	0.49		100.0	%	$	6,614,844	0.49		100.0	%	$	6,597,396	0.59		100.0	%

Borrowings

The following table presents the maturity of term borrowings, which consist entirely of FHLB advances, along with associated weighted average contractual and effective rates as of June 30, 2022.

	Term Borrowings Amount
Maturity by	FHLB		Interest rate		Contractual		Effective
Fiscal Year	Advances		swaps⁽¹⁾		Rate		Rate⁽²⁾
	(Dollars in thousands)
2022	$	75,000	$	—	0.29	%	0.29	%
2023		300,000		—	1.70		1.81
2024		300,000		165,000	2.55		2.80
2025		350,000		100,000	1.89		2.25
2026		250,000		—	0.96		1.27
2027		200,000		—	1.57		1.81
2028		—		100,000	2.02		3.45
	$	1,475,000	$	365,000	1.81		2.12

(1)		Represents adjustable-rate FHLB advances for which the Bank has entered into interest rate swaps with a notional amount of $365.0 million to hedge the variability in cash flows associated with the advances. Each interest rate swap matures on the same date as the related FHLB advance. The expected WAL of the interest rate swaps and related advances was 3.3 years at June 30, 2022.
(2)		The effective rate includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid.

The following table presents borrowing activity for the periods shown. The borrowings presented in the table have original contractual terms of one year or longer or are tied to interest rate swaps with original contractual terms of one year or longer. The effective rate is shown as a weighted average and includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. The weighted average maturity ("WAM") is the remaining weighted average contractual term in years. The beginning and ending WAMs represent the remaining maturity at each date presented. For new borrowings, the WAMs presented are as of the date of issue. The increase in the balance of FHLB advances during the current quarter was due to funding needs primarily in response to loan growth and deposit runoffs.

	For the Three Months Ended					For the Nine Months Ended
	June 30, 2022					June 30, 2022
			Effective						Effective
	Amount		Rate		WAM	Amount			Rate		WAM
	(Dollars in thousands)
Beginning balance	$	1,590,000	1.90	%	2.8	$	1,590,000		1.88	%	3.3
Maturities and prepayments		—	—				(100,000	)	3.14
New FHLB borrowings		250,000	3.51		2.7		350,000		3.49		3.8
Ending balance	$	1,840,000	2.12		2.6	$	1,840,000		2.12		2.6

Maturities of Interest-Bearing Liabilities

The following table presents the maturity and weighted average repricing rate, which is also the weighted average effective rate, of certificates of deposit, split between retail/commercial and public unit amounts, and term borrowings for the next four quarters as of June 30, 2022.

	September 30,			December 31,			March 31,			June 30,
		2022			2022			2023			2023		Total
	(Dollars in thousands)
Retail/Commercial Certificates:
Amount	$	481,348		$	344,684		$	251,665		$	205,645		$	1,283,342
Repricing Rate		1.25	%		1.14	%		1.22	%		0.81	%		1.14	%
Public Unit Certificates:
Amount	$	36,503		$	25,500		$	13,516		$	3,674		$	79,193
Repricing Rate		0.23	%		1.28	%		0.11	%		0.27	%		0.55	%
Term Borrowings:
Amount	$	75,000		$	—		$	100,000		$	100,000		$	275,000
Repricing Rate		0.29	%		—	%		1.46	%		1.82	%		1.27	%
Total
Amount	$	592,851		$	370,184		$	365,181		$	309,319		$	1,637,535
Repricing Rate		1.07	%		1.15	%		1.24	%		1.13	%		1.14	%

The following table sets forth the WAM information for our certificates of deposit, in years, as of June 30, 2022.

Retail certificates of deposit	1.1
Commercial certificates of deposit	0.6
Public unit certificates of deposit	0.5
Total certificates of deposit	1.1

Average Rates and Lives

At June 30, 2022, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(1.33) billion, or (14.0)% of total assets, compared to $(1.46) billion, or (15.3)% of total assets, at March 31, 2022. The change in the one-year gap amount was due primarily to a decrease in the amount of liability cash flows projected at June 30, 2022 compared to March 31, 2022. This was driven by the decrease in deposits compared to the prior quarter. In addition, the Bank projected higher cash flows on mortgage-related assets at June 30, 2022 compared to March 31, 2022, despite higher interest rates. As interest rates rise, borrowers have less economic incentive to refinance their mortgages and agency debt issuers have less economic incentive or opportunity to exercise their call options in order to issue new debt at lower interest rates, which would typically result in lower projected cash flows on these assets. However, during the current quarter, the Bank upgraded its interest rate risk model, which resulted in the third-party mortgage prepayment model projecting faster prepayment speeds for mortgage-related assets, despite the higher interest rates at June 30, 2022. The prepayment speeds in the upgraded interest rate risk model are more reflective of the Bank's actual experience at current market interest rates.

The amount of interest-bearing liabilities expected to reprice in a given period is not typically significantly impacted by changes in interest rates, because the Bank's borrowings and certificate of deposit portfolios have contractual maturities and generally cannot be terminated early without a prepayment penalty. If interest rates were to increase 200 basis points, as of June 30, 2022, the Bank's one-year gap is projected to be $(1.36) billion, or (14.4)% of total assets. The change in the gap compared to when there is no change in rates is due to lower anticipated net cash flows primarily due to lower repayments on mortgage-related assets in the higher rate environment. This compares to a one-year gap of $(1.54) billion, or (16.2)% of total assets, if interest rates were to have increased 200 basis points as of March 31, 2022.

The following table presents the weighted average yields/rates and WALs (in years), after applying prepayment, call assumptions, and decay rates for our interest-earning assets and interest-bearing liabilities as of June 30, 2022. Yields presented for interest-earning assets include the amortization of fees, costs, premiums and discounts, which are considered adjustments to the yield. The interest rate presented for term borrowings is the effective rate, which includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. The WAL presented for term borrowings includes the effect of interest rate swaps.

	Amount		Yield/Rate		WAL	% of Category		% of Total
	(Dollars in thousands)
Securities	$	1,694,160	1.29	%	4.2			18.6	%
Loans receivable:
Fixed-rate one- to four-family		5,620,639	3.10		6.7	77.6	%	61.9
Fixed-rate commercial		435,041	4.07		3.9	6.0		4.8
All other fixed-rate loans		74,188	3.50		7.2	1.0		0.8
Total fixed-rate loans		6,129,868	3.18		6.5	84.6		67.5
Adjustable-rate one- to four-family		565,252	2.46		3.6	7.8		6.2
Adjustable-rate commercial		468,869	4.39		7.6	6.5		5.2
All other adjustable-rate loans		81,762	4.70		2.7	1.1		0.9
Total adjustable-rate loans		1,115,883	3.44		5.2	15.4		12.3
Total loans receivable		7,245,751	3.22		6.3	100.0	%	79.8
FHLB stock		87,696	6.47		2.6			1.0
Cash and cash equivalents		54,789	0.94		—			0.6
Total interest-earning assets	$	9,082,396	2.88		5.8			100.0	%

Non-maturity deposits	$	3,473,159	0.16		5.5	60.4	%	45.6	%
Retail certificates of deposit		2,129,734	1.16		1.1	37.0		27.9
Commercial certificates of deposit		55,076	0.68		0.6	1.0		0.7
Public unit certificates of deposit		91,529	0.57		0.5	1.6		1.2
Total interest-bearing deposits		5,749,498	0.54		3.8	100.0	%	75.4
Term borrowings		1,840,000	2.12		2.6	98.1	%	24.1
Line of credit borrowings		35,700	1.63		—	1.9		0.5
Total borrowings		1,875,700	2.11		2.5	100.0	%	24.6
Total interest-bearing liabilities	$	7,625,198	0.92		3.5			100.0	%

View source version on businesswire.com: https://www.businesswire.com/news/home/20220727005158/en/

Contacts

Kent Townsend

Executive Vice President,

Chief Financial Officer and Treasurer

(785) 231-6360

ktownsend@capfed.com

Investor Relations

(785) 270-6055

investorrelations@capfed.com

Capitol Federal Financial, Inc.® Reports Third Quarter Fiscal Year 2022 Results

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Capitol Federal Financial, Inc.® Reports Third Quarter Fiscal Year 2022 Results

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