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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
Form 10-Q
________________________
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __ to __
Commission file number: 001-34814
Capitol Federal Financial, Inc.
(Exact name of registrant as specified in its charter)

Maryland
27-2631712
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
 
 
700 South Kansas Avenue,
Topeka,
Kansas
66603
(Address of principal executive offices)
(Zip Code)

(785) 235-1341
(Registrant's telephone number, including area code)
_____________________________________
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock,
par value $0.01 per share
CFFN
The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒            Accelerated filer ☐        Non-accelerated filer ☐
Smaller reporting company ☐        Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 1, 2020, there were 141,511,716 shares of Capitol Federal Financial, Inc. common stock outstanding.


PART I - FINANCIAL INFORMATION
Page Number
Item 1.
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
Item 3.
Item 4.
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 



PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except per share amounts)
 
 
 
 
 
March 31,
 
September 30,
 
2020
 
2019
ASSETS:
 
 
 
Cash and cash equivalents (includes interest-earning deposits of $5,512 and $198,809)
$
118,374

 
$
220,370

Available-for-sale ("AFS") securities, at estimated fair value
1,236,037

 
1,204,863

Loans receivable, net (allowance for credit losses ("ACL") of $31,196 and $9,226)
7,476,805

 
7,416,747

Federal Home Loan Bank Topeka ("FHLB") stock, at cost
101,575

 
98,456

Premises and equipment, net
98,589

 
96,784

Income taxes receivable, net
4,255

 
2

Other assets
335,558

 
302,796

TOTAL ASSETS
$
9,371,193

 
$
9,340,018

 
 
 
 
LIABILITIES:
 
 
 
Deposits
$
5,774,619

 
$
5,581,867

Borrowings
2,115,869

 
2,239,989

Advance payments by borrowers for taxes and insurance
55,306

 
65,686

Deferred income tax liabilities, net
10,236

 
14,282

Accounts payable and accrued expenses
127,370

 
101,868

Total liabilities
8,083,400

 
8,003,692

 
 
 
 
STOCKHOLDERS' EQUITY:
 
 
 
Preferred stock, $.01 par value; 100,000,000 shares authorized, no shares issued or outstanding
—

 
—

Common stock, $.01 par value; 1,400,000,000 shares authorized, 141,512,165 and 141,440,030
 
 
 
shares issued and outstanding as of March 31, 2020 and September 30, 2019, respectively
1,415

 
1,414

Additional paid-in capital
1,211,466

 
1,210,226

Unearned compensation, Employee Stock Ownership Plan ("ESOP")
(33,866
)
 
(34,692
)
Retained earnings
130,756

 
174,277

Accumulated other comprehensive (loss) income ("AOCI"), net of tax
(21,978
)
 
(14,899
)
Total stockholders' equity
1,287,793

 
1,336,326

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
9,371,193

 
$
9,340,018

 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 


3

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)
 
 
 
 
 
 
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
March 31,
 
2020
 
2019
 
2020
 
2019
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
69,613

 
$
71,657

 
$
139,527

 
$
142,429

Mortgage-backed securities ("MBS")
5,866

 
6,301

 
11,968

 
12,824

FHLB stock
1,714

 
1,831

 
3,540

 
3,802

Investment securities
1,382

 
1,505

 
2,889

 
2,946

Cash and cash equivalents
380

 
743

 
1,067

 
2,457

Total interest and dividend income
78,955

 
82,037

 
158,991

 
164,458

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
17,804

 
16,096

 
35,766

 
31,821

Borrowings
12,483

 
13,344

 
25,860

 
27,739

Total interest expense
30,287

 
29,440

 
61,626

 
59,560

NET INTEREST INCOME
48,668

 
52,597

 
97,365

 
104,898

PROVISION FOR CREDIT LOSSES
22,075

 
—

 
22,300

 
—

NET INTEREST INCOME AFTER
 
 
 
 
 
 
 
PROVISION FOR CREDIT LOSSES
26,593

 
52,597

 
75,065

 
104,898

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Deposit service fees
2,783

 
3,091

 
5,845

 
6,443

Insurance commissions
400

 
541

 
1,091

 
1,167

Other non-interest income
1,488

 
1,369

 
3,239

 
2,815

Total non-interest income
4,671

 
5,001

 
10,175

 
10,425

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
13,235

 
12,789

 
26,706

 
25,751

Information technology and related expense
4,268

 
4,284

 
8,409

 
8,883

Occupancy, net
3,449

 
3,292

 
6,656

 
6,544

Advertising and promotional
1,359

 
1,390

 
2,769

 
2,150

Regulatory and outside services
1,297

 
1,056

 
2,640

 
2,822

Deposit and loan transaction costs
678

 
465

 
1,389

 
1,201

Office supplies and related expense
592

 
736

 
1,111

 
1,195

Federal insurance premium
—

 
659

 
—

 
1,187

Other non-interest expense
1,286

 
1,470

 
2,984

 
3,190

Total non-interest expense
26,164

 
26,141

 
52,664

 
52,923

INCOME BEFORE INCOME TAX EXPENSE
5,100

 
31,457

 
32,576

 
62,400

INCOME TAX EXPENSE
824

 
6,903

 
5,789

 
13,463

NET INCOME
$
4,276

 
$
24,554

 
$
26,787

 
$
48,937

 
 
 
 
 
 
 
 
Basic earnings per share ("EPS")
$
0.03

 
$
0.18

 
$
0.19

 
$
0.36

Diluted EPS
$
0.03

 
$
0.18

 
$
0.19

 
$
0.36

 
 
 
 
 
 
 
 
Basic weighted average common shares
137,968,327

 
137,634,820

 
137,932,976

 
137,592,409

Diluted weighted average common shares
138,000,334

 
137,690,717

 
137,988,649

 
137,641,126

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 

4

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
 
 
 
 
 
 
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
March 31,
 
2020
 
2019
 
2020
 
2019
Net income
$
4,276

 
$
24,554

 
$
26,787

 
$
48,937

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on AFS securities arising during the period,
 
 
 
 
 
 
net of taxes of $(3,332), $(982), $(3,187) and $(2,115)
10,378

 
3,061

 
9,926

 
6,588

Changes in unrealized gains (losses) on cash flow hedges,
 
 
 
 
 
 
 
net of taxes of $7,200, $2,118, $5,459 and $5,246
(22,429
)
 
(6,600
)
 
(17,005
)
 
(16,344
)
Comprehensive (loss) income
$
(7,775
)
 
$
21,015

 
$
19,708

 
$
39,181

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 


5

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended March 31, 2020
 
 
 
Additional
 
Unearned
 
 
 
 
 
Total
 
Common
 
Paid-In
 
Compensation
 
Retained
 
 
 
Stockholders'
 
Stock
 
Capital
 
ESOP
 
Earnings
 
AOCI
 
Equity
Balance at September 30, 2019
$
1,414

 
$
1,210,226

 
$
(34,692
)
 
$
174,277

 
$
(14,899
)
 
$
1,336,326

Net income
 
 
 
 
 
 
22,511

 
 
 
22,511

Other comprehensive income, net of tax
 
 
 
 
 
 
 
4,972

 
4,972

Cumulative effect of adopting Accounting Standards Update ("ASU") 2016-02
 
 
 
 
 
 
88

 
 
 
88

ESOP activity
 
 
169

 
413

 
 
 
 
 
582

Restricted stock activity, net
 
 
(1
)
 
 
 
 
 
 
 
(1
)
Stock-based compensation
 
 
166

 
 
 
 
 
 
 
166

Stock options exercised
1

 
612

 
 
 
 
 
 
 
613

Cash dividends to stockholders ($0.425 per share)
 
 
 
 
 
(58,663
)
 
 
 
(58,663
)
Balance at December 31, 2019
$
1,415

 
$
1,211,172

 
$
(34,279
)
 
$
138,213

 
$
(9,927
)
 
$
1,306,594

Net income
 
 
 
 
 
 
4,276

 
 
 
4,276

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
(12,051
)
 
(12,051
)
ESOP activity
 
 
117

 
413

 
 
 
 
 
530

Stock-based compensation
 
 
152

 
 
 
 
 
 
 
152

Stock options exercised
 
 
25

 
 
 
 
 
 
 
25

Cash dividends to stockholders ($0.085 per share)
 
 
 
 
 
(11,733
)
 
 
 
(11,733
)
Balance at March 31, 2020
1,415

 
1,211,466

 
(33,866
)
 
130,756

 
(21,978
)
 
1,287,793

 
For the Six Months Ended March 31, 2019
 
 
 
Additional
 
Unearned
 
 
 
 
 
Total
 
Common
 
Paid-In
 
Compensation
 
Retained
 
 
 
Stockholders'
 
Stock
 
Capital
 
ESOP
 
Earnings
 
AOCI
 
Equity
Balance at September 30, 2018
$
1,412

 
$
1,207,644

 
$
(36,343
)
 
$
214,569

 
$
4,340

 
$
1,391,622

Net income
 
 
 
 
 
 
24,383

 
 
 
24,383

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
(6,217
)
 
(6,217
)
Cumulative effect of adopting ASU 2014-09
 
 
 
 
 
 
394

 
 
 
394

ESOP activity
 
 
118

 
413

 
 
 
 
 
531

Stock-based compensation
 
 
95

 
 
 
 
 
 
 
95

Stock options exercised
1

 
466

 
 
 
 
 
 
 
467

Cash dividends to stockholders ($0.475 per share)
 
 
 
 
 
(65,362
)
 
 
 
(65,362
)
Balance at December 31, 2018
$
1,413

 
$
1,208,323

 
$
(35,930
)
 
$
173,984

 
$
(1,877
)
 
$
1,345,913

Net income
 
 
 
 
 
 
24,554

 
 
 
24,554

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
(3,539
)
 
(3,539
)
ESOP activity
 
 
134

 
413

 
 
 
 
 
547

Stock-based compensation
 
 
90

 
 
 
 
 
 
 
90

Stock options exercised
 
 
118

 
 
 
 
 
 
 
118

Cash dividends to stockholders ($0.085 per share)
 
 
 
 
 
(11,700
)
 
 
 
(11,700
)
Balance at March 31, 2019
1,413

 
1,208,665

 
(35,517
)
 
186,838

 
(5,416
)
 
1,355,983

 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 
 


6

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
 
For the Six Months Ended
 
March 31,
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
26,787

 
$
48,937

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
FHLB stock dividends
(3,540
)
 
(3,802
)
Provision for credit losses
22,300

 
—

Amortization and accretion of premiums and discounts on securities
556

 
737

Depreciation and amortization of premises and equipment
4,564

 
4,710

Amortization of intangible assets
997

 
1,189

Amortization of deferred amounts related to FHLB advances, net
95

 
4

Common stock committed to be released for allocation - ESOP
1,112

 
1,078

Stock-based compensation
318

 
185

Changes in:
 
 
 
Unrestricted cash collateral (provided to)/received from derivative counterparties, net
—

 
(9,970
)
Other assets, net
3,649

 
1,418

Income taxes payable/receivable, net
(4,249
)
 
2,291

Deferred income tax liabilities, net
(1,800
)
 
(745
)
Accounts payable and accrued expenses
(12,413
)
 
(13,894
)
Net cash provided by operating activities
38,376

 
32,138

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of AFS securities
(288,319
)
 
(172,506
)
Proceeds from calls, maturities and principal reductions of AFS securities
269,702

 
149,524

Proceeds from calls, maturities and principal reductions of held-to-maturity ("HTM") securities
—

 
83,692

Proceeds from the redemption of FHLB stock
421

 
97,096

Purchase of FHLB stock
—

 
(96,199
)
Net change in loans receivable
(82,595
)
 
(57,073
)
Purchase of premises and equipment
(6,497
)
 
(4,583
)
Proceeds from sale of other real estate owned ("OREO")
987

 
1,062

Proceeds from bank-owned life insurance ("BOLI") death benefit
490

 
—

Net cash (used in) provided by investing activities
(105,811
)
 
1,013

 
 
 
 
 
 
 
(Continued)


7

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
 
For the Six Months Ended
 
March 31,
 
2020
 
2019
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Cash dividends paid
(70,396
)
 
(77,062
)
Net change in deposits
192,752

 
97,757

Proceeds from borrowings
1,186,600

 
2,680,000

Repayments on borrowings
(1,306,600
)
 
(2,625,052
)
Change in advance payments by borrowers for taxes and insurance
(10,380
)
 
(16,963
)
Payment of FHLB prepayment penalties
(4,215
)
 
—

Stock options exercised
638

 
585

Net cash (used in) provided by financing activities
(11,601
)
 
59,265

 
 
 
 
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS
(79,036
)
 
92,416

 
 
 
 
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS:
 
 
Beginning of period
253,700

 
139,055

End of period
$
174,664

 
$
231,471

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
Operating lease right-of-use assets obtained
$
15,658

 
$
—

Operating lease liabilities obtained
$
15,543

 
$
—

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
(Concluded)


8

Notes to Consolidated Financial Statements (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements include the accounts of Capitol Federal Financial, Inc.® (the "Company") and its wholly-owned subsidiary, Capitol Federal Savings Bank (the "Bank"). The Bank has two wholly-owned subsidiaries, Capitol Funds, Inc. and Capital City Investments, Inc. Capitol Funds, Inc. has a wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company. Capital City Investments, Inc. is a real estate and investment holding company. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019, filed with the Securities and Exchange Commission ("SEC"). Interim results are not necessarily indicative of results for a full year.

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Cash, cash equivalents, restricted cash and restricted cash equivalents reported in the statement of cash flows include cash and cash equivalents of $118.4 million and $220.4 million at March 31, 2020 and September 30, 2019, respectively, and restricted cash and cash equivalents of $56.3 million and $33.3 million at March 31, 2020 at September 30, 2019, respectively, which was included in other assets on the consolidated balance sheet.  The restricted cash and cash equivalents relate to the collateral postings to/from the Bank's derivative counterparties associated with the Bank's interest rate swaps.  See additional discussion regarding the interest rate swaps in Note 5. Borrowed Funds.

Net Presentation of Cash Flows Related to Borrowings - At times, the Bank enters into certain FHLB advances with contractual maturities of 90 days or less. Cash flows related to these advances are reported on a net basis in the consolidated statements of cash flows. There was no FHLB advance activity reported on a net basis in the consolidated statements of cash flows during the six months ended March 31, 2020 and 2019.

Leases - The Company leases real estate property for branches, ATMs, and certain equipment. All of the leases in which the Company is the lessee are classified as operating leases. The Company determines if an arrangement is a lease at inception and if the lease is an operating lease or a finance lease.

Operating lease right-of-use assets represent the Company's right to use an underlying asset during the lease term and operating lease liabilities represent the Company's obligation to make lease payments arising from the lease. The right-of-use assets associated with operating leases are recorded in other assets in the Company's consolidated balance sheets. The lease liabilities associated with operating leases are included in accounts payable and accrued expenses on the consolidated balance sheets. The period over which the right-of-use asset is amortized is generally the lesser of the expected remaining term or the remaining useful life of the leased asset. The lease liability is decreased as periodic lease payments are made. The Company performs impairment assessments for right-of-use assets when events or changes in circumstances indicate that their carrying values may not be recoverable.

The calculated amount of the right-of-use assets and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of the minimum remaining lease payments. The Company's lease agreements often include one or more options to renew at the Company's discretion. If, at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company includes the extended term in the calculation of the right-of-use asset and lease liability. Generally, the Company cannot practically determine the interest rate implicit in the lease so the Company's incremental borrowing rate is used as the discount rate for the lease. The Company uses FHLB advance interest rates, which have been deemed as the Company's incremental borrowing rate, at lease inception based upon the term of the lease. For operating leases existing prior to October 1, 2019, the rate for the remaining lease term as of October 1, 2019 was applied. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Lease expense, variable lease expense and short-term lease expense are included in occupancy expense in the Company's consolidated statements of income. For facility-related leases, the Company elected, by lease class, to not separate lease and non-lease components. Lease expense is recognized on a straight-line basis over the lease term. Variable lease expense primarily represents payments such as common area maintenance and utilities and are recognized as expense in the period when those payments are incurred. Short-term lease expense relates to leases with an initial term of 12 months or less. The Company has elected to not record a right-of-use asset or lease liability for short-term leases.

Recent Accounting Pronouncements - In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases. The ASU, as amended, revises lease accounting guidance by requiring that lessees recognize the assets and liabilities arising

9

from leases on the balance sheet. Additionally, the ASU requires entities to disclose both quantitative and qualitative information regarding their leasing activities. The accounting applied by a lessor is largely unchanged from that applied under the previous guidance. In July 2018, the FASB issued ASU 2018-11, Leases, which provides entities with relief from the costs of implementation by allowing the option to not restate comparative periods as part of the transition. The ASU, as amended, became effective for the Company on October 1, 2019. Upon adoption, the Company elected the modified retrospective approach and the optional transition method under which the Company used the effective date as the date of initial application of the amendments. The optional practical expedients the Company elected include: (1) not reassessing whether any expired or existing contracts are or contain leases, (2) not reassessing the classification of any expired or existing contracts, (3) not reassessing initial direct costs for existing leases, and (4) using hindsight for leases existing at adoption date. For leases with an initial term of 12 months or less, the Company elected the short-term lease option, which entails not recognizing right-of-use assets and lease liabilities for these leases. Additionally, the Company elected, for facility-related leases, the practical expedient that allows an entity to elect, by lease class, the ability to not separate lease and non-lease components. Upon adoption, the Company recognized a right-of-use asset of $15.7 million and a lease liability of $15.5 million, related to the Company's non-cancellable operating lease commitments based on the present value of the expected remaining lease payments as of October 1, 2019. The cumulative-effect adjustment to retained earnings at the time of adoption totaled $88 thousand. These ASUs did not have a material impact on the Company's results of operations and cash flows at the time of adoption. The disclosures required by the ASU are included in Note 9. Leases.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU, as amended, replaces the incurred loss impairment methodology in current GAAP, which requires credit losses to be recognized when it is probable that a loss has been incurred, with a new impairment methodology. The new impairment methodology requires an entity to measure, at each reporting date, the expected credit losses of financial assets not measured at fair value, such as loans and loan commitments, over their contractual lives. Under the new impairment methodology, expected credit losses will be measured at each reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU amends the current credit loss measurements for AFS debt securities. Credit losses related to AFS debt securities will be recorded through the ACL rather than as a direct write-down as per current GAAP. The ASU also requires enhanced disclosures related to credit quality and significant estimates and judgments used by management when estimating credit losses. The ASU will become effective for the Company on October 1, 2020. The Company continues to work with a software provider on the application and implementation of the new accounting guidance, which includes assistance with historical data analysis, loan segmentation, model development, and documentation. The integration of the Company's data with the software provider is complete, along with an analysis of the historical data entered into the software. Management is currently working with the software provider on loan portfolio segmentations and model development, including incorporating economic forecasting into the models. While we are currently unable to reasonably estimate the impact of adopting this ASU, we expect the impact of adoption will be influenced by the composition of our loan and securities portfolios as well as the economic conditions and forecasts at the time of adoption.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosures Requirements for Fair Value Measurement. This ASU eliminates, modifies and adds certain disclosure requirements for fair value measurements. The ASU adds disclosure requirements for the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The effective date of this ASU for the Company is October 1, 2020, with early adoption permitted. Entities are allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. Since this ASU only requires disclosure changes, it will not have a significant impact on the Company's consolidated financial condition and results of operations.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include internal-use software license). The effective date of this ASU for the Company is October 1, 2020, with early adoption permitted. The Company is currently evaluating the effect of the ASU on the Company's consolidated financial condition, results of operations and disclosures.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This ASU makes clarifications and corrections to the application of the guidance contained in each of the amended topics. According to the provisions of the ASU, entities that have not adopted ASU 2017-12 prior to the issuance of ASU 2019-04 shall adopt the provisions of both ASUs at the same time. The effective date of the non-hedging amendments contained in ASU 2019-04 for the Company is October 1, 2020. The Company is currently evaluating the effect of the non-hedging amendments contained in this ASU on the Company's consolidated financial condition, results of operations and disclosures.


10

2. EARNINGS PER SHARE
Shares acquired by the ESOP are not included in basic average shares outstanding until the shares are committed for allocation or vested to an employee's individual account. Unvested shares awarded pursuant to the Company's restricted stock benefit plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
March 31,
 
2020
 
2019
 
2020
 
2019
 
(Dollars in thousands, except per share amounts)
Net income
$
4,276

 
$
24,554

 
$
26,787

 
$
48,937

Income allocated to participating securities
(3
)
 
(10
)
 
(22
)
 
(19
)
Net income available to common stockholders
$
4,273

 
$
24,544

 
$
26,765

 
$
48,918

 
 
 
 
 
 
 
 
Average common shares outstanding
137,926,574

 
137,593,062

 
137,911,988

 
137,571,533

Average committed ESOP shares outstanding
41,753

 
41,758

 
20,988

 
20,876

Total basic average common shares outstanding
137,968,327

 
137,634,820

 
137,932,976

 
137,592,409

 
 
 
 
 
 
 
 
Effect of dilutive stock options
32,007

 
55,897

 
55,673

 
48,717

 
 
 
 
 
 
 
 
Total diluted average common shares outstanding
138,000,334

 
137,690,717

 
137,988,649

 
137,641,126

 
 
 
 
 
 
 
 
Net EPS:
 
 
 
 
 
 
 
Basic
$
0.03

 
$
0.18

 
$
0.19

 
$
0.36

Diluted
$
0.03

 
$
0.18

 
$
0.19

 
$
0.36

 
 
 
 
 
 
 
 
Antidilutive stock options, excluded from the diluted average
 
 
 
 
 
 
common shares outstanding calculation
382,894

 
494,395

 
387,979

 
529,261




11

3. SECURITIES
The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of AFS securities at the dates presented. The majority of the MBS and investment securities portfolios are composed of securities issued by United States government-sponsored enterprises ("GSEs").
 
March 31, 2020
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
MBS
$
947,549

 
$
26,223

 
$
454

 
$
973,318

GSE debentures
250,080

 
699

 
—

 
250,779

Municipal bonds
11,887

 
53

 
—

 
11,940

 
$
1,209,516

 
$
26,975

 
$
454

 
$
1,236,037


 
September 30, 2019
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
MBS
$
923,256

 
$
15,571

 
$
2,340

 
$
936,487

GSE debentures
249,828

 
304

 
178

 
249,954

Municipal bonds
18,371

 
52

 
1

 
18,422

 
$
1,191,455

 
$
15,927

 
$
2,519

 
$
1,204,863



The following tables summarize the estimated fair value and gross unrealized losses of those AFS securities on which an unrealized loss at the dates presented was reported and the continuous unrealized loss position for less than 12 months and equal to or greater than 12 months as of the dates presented.
 
March 31, 2020
 
Less Than 12 Months
 
Equal to or Greater Than 12 Months
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
(Dollars in thousands)
MBS
$
53,830

 
$
451

 
$
1,985

 
$
3

GSE debentures
—

 
—

 
—

 
—

Municipal bonds
—

 
—

 
—

 
—

 
$
53,830

 
$
451

 
$
1,985

 
$
3


 
September 30, 2019
 
Less Than 12 Months
 
Equal to or Greater Than 12 Months
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
(Dollars in thousands)
MBS
$
111,368

 
$
126

 
$
199,442

 
$
2,214

GSE debentures
—

 
—

 
74,812

 
178

Municipal bonds
1,755

 
1

 
—

 
—

 
$
113,123

 
$
127

 
$
274,254

 
$
2,392




12

The unrealized losses at March 31, 2020 and September 30, 2019 were a result of an increase in market yields from the time the securities were purchased. In general, as market yields rise, the fair value of securities will decrease; as market yields fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in market yields as temporary. Therefore, these securities have not been classified as other-than-temporarily impaired. The impairment is also considered temporary because scheduled coupon payments have been made, it is anticipated that the entire principal balance will be collected as scheduled, and management neither intends to sell the securities, nor is it more likely than not that the Company will be required to sell the securities, before the recovery of the remaining amortized cost amount, which could be at maturity. As a result of the analysis, management has concluded that no other-than-temporary impairments existed at March 31, 2020 or September 30, 2019.
The amortized cost and estimated fair value of AFS debt securities as of March 31, 2020, by contractual maturity, are shown below.  Actual principal repayments may differ from contractual maturities due to prepayment or early call privileges by the issuer. In the case of MBS, borrowers on the underlying loans generally have the right to prepay their loans without prepayment penalty. For this reason, MBS are not included in the maturity categories.
 
Amortized
 
Estimated
 
Cost
 
Fair Value
 
(Dollars in thousands)
One year or less
$
55,179

 
$
55,245

One year through five years
206,788

 
207,474

 
261,967

 
262,719

MBS
947,549

 
973,318

 
$
1,209,516

 
$
1,236,037



The following table presents the taxable and non-taxable components of interest income on investment securities for the periods presented.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
March 31,
 
2020
 
2019
 
2020
 
2019
 
(Dollars in thousands)
Taxable
$
1,322

 
$
1,419

 
$
2,759

 
$
2,767

Non-taxable
60

 
86

 
130

 
179

 
$
1,382

 
$
1,505

 
$
2,889

 
$
2,946




The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of the dates presented.
 
March 31, 2020
 
September 30, 2019
 
(Dollars in thousands)
Federal Reserve Bank of Kansas City ("FRB of Kansas City")
$
396,458

 
$
6,636

Public unit deposits
321,451

 
381,143

Repurchase agreements
109,425

 
108,271

 
$
827,334

 
$
496,050




13

4. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES
Loans receivable, net at the dates presented is summarized as follows:
 
March 31, 2020
 
September 30, 2019
 
(Dollars in thousands)
One- to four-family:
 
 
 
Originated
$
3,944,782

 
$
3,873,851

Correspondent purchased
2,385,907

 
2,349,877

Bulk purchased
228,730

 
252,347

Construction
35,798

 
36,758

Total
6,595,217

 
6,512,833

Commercial:
 
 
 
Commercial real estate
584,236

 
583,617

Commercial and industrial
62,153

 
61,094

Construction
126,266

 
123,159

Total
772,655

 
767,870

Consumer:
 
 
 
Home equity
114,571

 
120,587

Other
10,837

 
11,183

Total
125,408

 
131,770

 
 
 
 
Total loans receivable
7,493,280

 
7,412,473

 
 
 
 
Less:
 
 
 
ACL
31,196

 
9,226

Discounts/unearned loan fees
29,645

 
31,058

Premiums/deferred costs
(44,366
)
 
(44,558
)
 
$
7,476,805

 
$
7,416,747



Lending Practices and Underwriting Standards - Originating and purchasing 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. The Bank has a loan concentration in one- to four-family loans and a geographic concentration of these loans in Kansas and Missouri.

One- to four-family loans - Full documentation to support an applicant's credit and income, and sufficient funds to cover all applicable fees and reserves at closing, are required on all loans. Generally, loans are underwritten according to the "ability to repay" and "qualified mortgage" standards, as issued by the Consumer Financial Protection Bureau ("CFPB"). Properties securing one- to four-family loans are appraised by either staff appraisers or fee appraisers, both of which are independent of the loan origination function.

The underwriting standards for loans purchased from correspondent lenders are generally similar to the Bank's internal underwriting standards. The underwriting of loans purchased from correspondent lenders on a loan-by-loan basis is performed by the Bank's underwriters.

The Bank also originates owner-occupied construction-to-permanent loans secured by one- to four-family residential real estate. Construction draw requests and the supporting documentation are reviewed and approved by designated personnel. The Bank also performs regular documented inspections of the construction project to ensure the funds are being used for the intended purpose and the project is being completed according to the plans and specifications provided.

Commercial loans - The Bank's commercial real estate and commercial construction loans are originated by the Bank or are in participation with a lead bank. When underwriting a commercial real estate or commercial construction loan, several factors are considered, such as the income producing potential of the property, cash equity provided by the borrower, the financial strength of the borrower, managerial expertise of the borrower or tenant, feasibility studies, lending experience with the borrower and the marketability of the property. For commercial real estate and commercial construction participation loans, the Bank performs the

14

same underwriting procedures as if the loan was being originated by the Bank. At the time of origination, loan-to-value ("LTV") ratios on commercial real estate loans generally do not exceed 85% of the appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.15. For commercial construction loans, LTV ratios generally do not exceed 80% of the projected appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.15, but it applies to the projected cash flows, and the borrower must have successful experience with the construction and operation of properties similar to the subject property. Appraisals on properties securing these loans are performed by independent state certified fee appraisers.

The Bank's commercial and industrial loans are generally made in the Bank's market areas and are underwritten on the basis of the borrower's ability to service the debt from income. Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets. In general, commercial and industrial loans involve more credit risk than commercial real estate loans due to the type of collateral securing these loans. As a result of these additional complexities, variables and risks, these loans require more thorough underwriting and servicing than other types of loans.

Consumer loans - The Bank offers a variety of secured consumer loans, including home equity loans and lines of credit, home improvement loans, vehicle loans, and loans secured by deposits. The Bank also originates a very limited amount of unsecured loans. The majority of the consumer loan portfolio is comprised of home equity lines of credit for which the Bank also has the first mortgage or the home equity line of credit is in the first lien position.

The underwriting standards for consumer loans include a determination of an applicant's payment history on other debts and an assessment of an applicant's ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of an applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security in relation to the proposed loan amount.

Credit Quality Indicators - Based on the Bank's lending emphasis and underwriting standards, management has segmented the loan portfolio into three segments: (1) one- to four-family; (2) consumer; and (3) commercial. These segments are further divided into classes for purposes of providing disaggregated information about the credit quality of the loan portfolio. The classes are: one- to four-family - originated, one- to four-family - correspondent purchased, one- to four-family - bulk purchased, consumer - home equity, consumer - other, commercial - commercial real estate, and commercial - commercial and industrial. One- to four-family construction loans are included in either the originated class or correspondent purchased class, and commercial construction loans are included in the commercial real estate class.

The Bank's primary credit quality indicators for the one- to four-family and consumer - home equity loan portfolios are delinquency status, asset classifications, LTV ratios, and borrower credit scores. The Bank's primary credit quality indicators for the commercial and consumer - other loan portfolios are delinquency status and asset classifications.


15

The following tables present the recorded investment, by class, in loans 30 to 89 days delinquent, loans 90 or more days delinquent or in foreclosure, total delinquent loans, current loans, and total recorded investment at the dates presented. The recorded investment in loans is defined as the unpaid principal balance of a loan, less charge-offs and inclusive of unearned loan fees and deferred costs. At March 31, 2020 and September 30, 2019, all loans 90 or more days delinquent were on nonaccrual status.
 
March 31, 2020
 
 
 
90 or More Days
 
Total
 
 
 
Total
 
30 to 89 Days
 
Delinquent or
 
Delinquent
 
Current
 
Recorded
 
Delinquent
 
in Foreclosure
 
Loans
 
Loans
 
Investment
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
Originated
$
8,333

 
$
4,503

 
$
12,836

 
$
3,953,549

 
$
3,966,385

Correspondent purchased
4,602

 
1,362

 
5,964

 
2,411,591

 
2,417,555

Bulk purchased
2,950

 
641

 
3,591

 
226,167

 
229,758

Commercial:
 
 
 
 
 
 
 
 
 
Commercial real estate
1,560

 
546

 
2,106

 
705,058

 
707,164

Commercial and industrial
—

 
172

 
172

 
61,695

 
61,867

Consumer:
 
 
 
 
 
 
 
 
 
Home equity
594

 
304

 
898

 
113,577

 
114,475

Other
34

 
22

 
56

 
10,741

 
10,797

 
$
18,073

 
$
7,550

 
$
25,623

 
$
7,482,378

 
$
7,508,001

 
September 30, 2019
 
 
 
90 or More Days
 
Total
 
 
 
Total
 
30 to 89 Days
 
Delinquent or
 
Delinquent
 
Current
 
Recorded
 
Delinquent
 
in Foreclosure
 
Loans
 
Loans
 
Investment
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
Originated
$
7,187

 
$
3,261

 
$
10,448

 
$
3,885,335

 
$
3,895,783

Correspondent purchased
2,762

 
1,023

 
3,785

 
2,377,629

 
2,381,414

Bulk purchased
3,624

 
1,484

 
5,108

 
248,376

 
253,484

Commercial:
 
 
 
 
 
 
 
 
 
Commercial real estate
762

 
—

 
762

 
702,377

 
703,139

Commercial and industrial
70

 
173

 
243

 
60,340

 
60,583

Consumer:
 
 
 
 
 
 
 
 
 
Home equity
446

 
302

 
748

 
119,688

 
120,436

Other
78

 
21

 
99

 
11,035

 
11,134

 
$
14,929

 
$
6,264

 
$
21,193

 
$
7,404,780

 
$
7,425,973



The recorded investment in mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of March 31, 2020 and September 30, 2019 was $1.7 million and $1.5 million, respectively, which is included in loans 90 or more days delinquent or in foreclosure in the table above.   The carrying value of residential OREO held as a result of obtaining physical possession upon completion of a foreclosure or through completion of a deed in lieu of foreclosure was $187 thousand at March 31, 2020 and $745 thousand at September 30, 2019.

16


The following table presents the recorded investment, by class, in loans classified as nonaccrual at the dates presented.
 
March 31, 2020
 
September 30, 2019
 
(Dollars in thousands)
One- to four-family:
 
 
 
Originated
$
5,313

 
$
4,436

Correspondent purchased
1,553

 
1,023

Bulk purchased
775

 
1,551

Commercial:
 
 
 
Commercial real estate
670

 
—

Commercial and industrial
172

 
173

Consumer:
 
 
 
Home equity
347

 
337

Other
22

 
21

 
$
8,852

 
$
7,541



In accordance with the Bank's asset classification policy, management regularly reviews the problem loans in the Bank's portfolio to determine whether any loans require classification. Loan classifications are defined as follows:

•
Special mention - These loans are performing loans on which known information about the collateral pledged or the possible credit problems of the borrower(s) have caused management to have doubts as to the ability of the borrower(s) to comply with present loan repayment terms and which may result in the future inclusion of such loans in the non-performing loan categories.
•
Substandard - A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those characterized by the distinct possibility the Bank will sustain some loss if the deficiencies are not corrected.
•
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses present make collection or liquidation in full on the basis of currently existing facts and conditions and values highly questionable and improbable.
•
Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as assets on the books is not warranted.

The following table sets forth the recorded investment in loans classified as special mention or substandard, by class, at the dates presented. Special mention and substandard loans are included in the ACL formula analysis model if the loans are not individually evaluated for loss. Loans classified as doubtful or loss are individually evaluated for loss. At the dates presented, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.
 
March 31, 2020
 
September 30, 2019
 
Special Mention
 
Substandard
 
Special Mention
 
Substandard
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
Originated
$
10,586

 
$
17,308

 
$
12,941

 
$
15,628

Correspondent purchased
3,092

 
3,741

 
2,349

 
2,785

Bulk purchased
—

 
4,910

 
102

 
5,294

Commercial:
 
 
 
 
 
 
 
Commercial real estate
51,416

 
2,232

 
52,891

 
2,472

Commercial and industrial
1,082

 
2,301

 
1,215

 
3,057

Consumer:
 
 
 
 
 
 
 
Home equity
471

 
637

 
280

 
696

Other
7

 
22

 
2

 
24

 
$
66,654

 
$
31,151

 
$
69,780

 
$
29,956




17

The following table shows the weighted average credit score and weighted average LTV for one- to four-family loans and consumer home equity loans at the dates presented. Borrower credit scores are intended to provide an indication as to the likelihood that a borrower will repay their debts. Credit scores are updated at least annually, with the last update in September 2019, from a nationally recognized consumer rating agency. The LTV ratios provide an estimate of the extent to which the Bank may incur a loss on any given loan that may go into foreclosure. The consumer - home equity LTV does not take into account the first lien position, if applicable.  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.
 
March 31, 2020
 
September 30, 2019
 
Credit Score
 
LTV
 
Credit Score
 
LTV
One- to four-family - originated
767
 
62
%
 
768
 
62
%
One- to four-family - correspondent
764
 
65

 
765
 
65

One- to four-family - bulk purchased
763
 
61

 
762
 
61

Consumer - home equity
752
 
19

 
754
 
19

 
766
 
62

 
766
 
62




Troubled Debt Restructurings ("TDRs") - The following tables present the recorded investment prior to restructuring and immediately after restructuring in all loans restructured during the periods presented. These tables do not reflect the recorded investment at the end of the periods indicated. Any increase in the recorded investment at the time of the restructuring was generally due to the capitalization of delinquent interest and/or escrow balances.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31, 2020
 
March 31, 2020
 
Number
 
Pre-
 
Post-
 
Number
 
Pre-
 
Post-
 
of
 
Restructured
 
Restructured
 
of
 
Restructured
 
Restructured
 
Contracts
 
Outstanding
 
Outstanding
 
Contracts
 
Outstanding
 
Outstanding
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
Originated
3

 
$
138

 
$
140

 
5

 
$
241

 
$
242

Correspondent purchased
1

 
192

 
191

 
1

 
192

 
191

Bulk purchased
—

 
—

 
—

 
1

 
75

 
134

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
1

 
837

 
837

 
1

 
837

 
837

Commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
2

 
45

 
44

 
2

 
45

 
44

Other
—

 
—

 
—

 
—

 
—

 
—

 
7

 
$
1,212

 
$
1,212

 
10

 
$
1,390

 
$
1,448


18

 
For the Three Months Ended
 
For the Six Months Ended
 
March 31, 2019
 
March 31, 2019
 
Number
 
Pre-
 
Post-
 
Number
 
Pre-
 
Post-
 
of
 
Restructured
 
Restructured
 
of
 
Restructured
 
Restructured
 
Contracts
 
Outstanding
 
Outstanding
 
Contracts
 
Outstanding
 
Outstanding
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
Originated
—

 
$
—

 
$
—

 
1

 
$
117

 
$
117

Correspondent purchased
—

 
—

 
—

 
—

 
—

 
—

Bulk purchased
1

 
308

 
308

 
1

 
308

 
308

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
—

 
—

 
—

 
—

 
—

 
—

Commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
—

 
—

 
—

 
—

 
—

 
—

Other
—

 
—

 
—

 
—

 
—

 
—

 
1

 
$
308

 
$
308

 
2

 
$
425

 
$
425



The following table provides information on TDRs that became delinquent during the periods presented within 12 months after being restructured.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31, 2020
 
March 31, 2019
 
March 31, 2020
 
March 31, 2019
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
Contracts
 
Investment
 
Contracts
 
Investment
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
—

 
$
—

 
1

 
$
45

 
1

 
$
38

 
1

 
$
45

Correspondent purchased
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Bulk purchased
—

 
—

 
—

 
—

 
1

 
134

 
—

 
—

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial and industrial
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
1

 
9

 
—

 
—

 
1

 
9

 
—

 
—

Other
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1

 
$
9

 
1

 
$
45

 
3

 
$
181

 
1

 
$
45



In late March 2020, the Bank announced loan modification programs to support and provide relief for its borrowers during the Coronavirus Disease 2019 ("COVID-19") pandemic. Generally, loan modifications under these programs ("COVID-19 loan modifications") for one- to four-family loans and consumer loans consist of a three-month payment forbearance, with the deferred principal, interest, and escrow added to the loan payoff amount.  COVID-19 loan modifications of commercial loans mainly consist of up to a six-month interest-only payment period. The COVID-19 loan modifications are not considered troubled debt restructurings per current GAAP, nor are the loans with payment forbearance reported as past due or placed on non-accrual status during the forbearance time period.



19

Impaired loans - The following information pertains to impaired loans, by class, as of the dates presented.
 
March 31, 2020
 
September 30, 2019
 
 
 
Unpaid
 
 
 
 
 
Unpaid
 
 
 
Recorded
 
Principal
 
Related
 
Recorded
 
Principal
 
Related
 
Investment
 
Balance
 
ACL
 
Investment
 
Balance
 
ACL
 
(Dollars in thousands)
With no related allowance recorded
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
Originated
$
14,406

 
$
15,013

 
$
—

 
$
14,683

 
$
15,241

 
$
—

Correspondent purchased
1,946

 
2,049

 
—

 
1,763

 
1,868

 
—

Bulk purchased
4,909

 
5,630

 
—

 
4,943

 
5,661

 
—

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
512

 
840

 
—

 
—

 
—

 
—

Commercial and industrial
—

 
148

 
—

 
60

 
184

 
—

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
336

 
446

 
—

 
345

 
462

 
—

Other
—

 
33

 
—

 
—

 
29

 
—

 
22,109

 
24,159

 
—

 
21,794

 
23,445

 
—

With an allowance recorded
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
Originated
—

 
—

 
—

 
—

 
—

 
—

Correspondent purchased
—

 
—

 
—

 
—

 
—

 
—

Bulk purchased
—

 
—

 
—

 
—

 
—

 
—

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
—

 
—

 
—

 
—

 
—

 
—

Commercial and industrial
2,076

 
2,074

 
240

 
—

 
—

 
—

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
—

 
—

 
—

 
—

 
—

 
—

Other
—

 
—

 
—

 
—

 
—

 
—

 
2,076

 
2,074

 
240

 
—

 
—

 
—

Total
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
Originated
14,406

 
15,013

 
—

 
14,683

 
15,241

 
—

Correspondent purchased
1,946

 
2,049

 
—

 
1,763

 
1,868

 
—

Bulk purchased
4,909

 
5,630

 
—

 
4,943

 
5,661

 
—

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
512

 
840

 
—

 
—

 
—

 
—

Commercial and industrial
2,076

 
2,222

 
240

 
60

 
184

 
—

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
336

 
446

 
—

 
345

 
462

 
—

Other
—

 
33

 
—

 
—

 
29

 
—

 
$
24,185

 
$
26,233

 
$
240

 
$
21,794

 
$
23,445

 
$
—



20

The following information pertains to impaired loans, by class, for the periods presented.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31, 2020
 
March 31, 2019
 
March 31, 2020
 
March 31, 2019
 
Average
 
Interest
 
Average
 
Interest
 
Average
 
Interest
 
Average
 
Interest
 
Recorded
 
Income
 
Recorded
 
Income
 
Recorded
 
Income
 
Recorded
 
Income
 
Investment
 
Recognized
 
Investment
 
Recognized
 
Investment
 
Recognized
 
Investment
 
Recognized
 
(Dollars in thousands)
With no related allowance recorded
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
$
14,441

 
$
161

 
$
15,928

 
$
167

 
$
14,526

 
$
322

 
$
16,980

 
$
352

Correspondent purchased
1,854

 
19

 
2,177

 
23

 
1,814

 
37

 
2,251

 
45

Bulk purchased
4,965

 
50

 
5,230

 
43

 
4,965

 
102

 
5,453

 
86

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
547

 
4

 
—

 
—

 
312

 
4

 
—

 
—

Commercial and industrial
—

 
—

 
—

 
—

 
19

 
—

 
—

 
—

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
332

 
5

 
436

 
7

 
335

 
11

 
461

 
16

Other
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
22,139

 
239

 
23,771

 
240

 
21,971

 
476

 
25,145

 
499

With an allowance recorded
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Correspondent purchased
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Bulk purchased
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Commercial and industrial
2,244

 
42

 
—

 
—

 
1,282

 
54

 
—

 
—

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,244

 
42

 
—

 
—

 
1,282

 
54

 
—

 
—

Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
14,441

 
161

 
15,928

 
167

 
14,526

 
322

 
16,980

 
352

Correspondent purchased
1,854

 
19

 
2,177

 
23

 
1,814

 
37

 
2,251

 
45

Bulk purchased
4,965

 
50

 
5,230

 
43

 
4,965

 
102

 
5,453

 
86

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
547

 
4

 
—

 
—

 
312

 
4

 
—

 
—

Commercial and industrial
2,244

 
42

 
—

 
—

 
1,301

 
54

 
—

 
—

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
332

 
5

 
436

 
7

 
335

 
11

 
461

 
16

Other
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
$
24,383

 
$
281

 
$
23,771

 
$
240

 
$
23,253

 
$
530

 
$
25,145

 
$
499



21

Allowance for Credit Losses - Management maintains an ACL to absorb inherent losses in the loan portfolio based on quarterly assessments of the loan portfolio. Each quarter a formula analysis model is prepared which segregates the loan portfolio into categories based on certain risk characteristics.  Historical loss factors and qualitative factors are applied to each loan category in the formula analysis model.  The factors are reviewed by management quarterly to assess whether the factors adequately cover probable and estimable losses inherent in the loan portfolio.  Due to the deterioration of economic conditions as a result of the COVID-19 pandemic, management increased some of the historical loss factors and qualitative factors in the formula analysis model to account for the increase in the estimated inherent losses in the loan portfolio at March 31, 2020 which accounts for the majority of the increase in the ACL during the current quarter. If economic conditions continue to worsen and/or the current and future government programs do not provide adequate relief to borrowers, it is possible the Bank's ACL will need to increase in future periods.

The following is a summary of ACL activity, by loan portfolio segment, for the periods presented, and the ending balance of ACL based on the Company's impairment methodology.

 
For the Three Months Ended March 31, 2020
 
One- to Four-Family
 
 
 
 
 
 
 

 
Correspondent
 
Bulk
 

 

 
 
 
 
 
Originated
 
Purchased
 
Purchased
 
Total
 
Commercial
 
Consumer
 
Total
 
(Dollars in thousands)
Beginning balance
$
2,047

 
$
1,200

 
$
612

 
$
3,859

 
$
5,418

 
$
158

 
$
9,435

Charge-offs
(46
)
 
—

 
—

 
(46
)
 
(325
)
 
(4
)
 
(375
)
Recoveries
3

 
—

 
—

 
3

 
54

 
4

 
61

Provision for credit losses
4,463

 
2,155

 
(55
)
 
6,563

 
15,181

 
331

 
22,075

Ending balance
$
6,467

 
$
3,355

 
$
557

 
$
10,379

 
$
20,328

 
$
489

 
$
31,196

 
For the Six Months Ended March 31, 2020
 
One- to Four-Family
 
 
 
 
 
 
 

 
Correspondent
 
Bulk
 

 

 
 
 
 
 
Originated
 
Purchased
 
Purchased
 
Total
 
Commercial
 
Consumer
 
Total
 
(Dollars in thousands)
Beginning balance
$
2,000

 
$
1,203

 
$
687

 
$
3,890

 
$
5,171

 
$
165

 
$
9,226

Charge-offs
(64
)
 
—

 
—

 
(64
)
 
(349
)
 
(10
)
 
(423
)
Recoveries
3

 
—

 
—

 
3

 
81

 
9

 
93

Provision for credit losses
4,528

 
2,152

 
(130
)
 
6,550

 
15,425

 
325

 
22,300

Ending balance
$
6,467

 
$
3,355

 
$
557

 
$
10,379

 
$
20,328

 
$
489

 
$
31,196

 
For the Three Months Ended March 31, 2019
 
One- to Four-Family
 
 
 
 
 
 
 

 
Correspondent
 
Bulk
 

 

 
 
 
 
 
Originated
 
Purchased
 
Purchased
 
Total
 
Commercial
 
Consumer
 
Total
 
(Dollars in thousands)
Beginning balance
$
2,761

 
$
1,748

 
$
836

 
$
5,345

 
$
3,034

 
$
179

 
$
8,558

Charge-offs
(10
)
 
—

 
—

 
(10
)
 
—

 
(2
)
 
(12
)
Recoveries
2

 
—

 
17

 
19

 
25

 
29

 
73

Provision for credit losses
(580
)
 
(356
)
 
(51
)
 
(987
)
 
1,029

 
(42
)
 
—

Ending balance
$
2,173

 
$
1,392

 
$
802

 
$
4,367

 
$
4,088

 
$
164

 
$
8,619


22

 
For the Six Months Ended March 31, 2019
 
One- to Four-Family
 
 
 
 
 
 
 

 
Correspondent
 
Bulk
 

 

 
 
 
 
 
Originated
 
Purchased
 
Purchased
 
Total
 
Commercial
 
Consumer
 
Total
 
(Dollars in thousands)
Beginning balance
$
2,953

 
$
1,861

 
$
925

 
$
5,739

 
$
2,556

 
$
168

 
$
8,463

Charge-offs
(30
)
 
—

 
(26
)
 
(56
)
 
—

 
(12
)
 
(68
)
Recoveries
5

 
—

 
106

 
111

 
27

 
86

 
224

Provision for credit losses
(755
)
 
(469
)
 
(203
)
 
(1,427
)
 
1,505

 
(78
)
 
—

Ending balance
$
2,173

 
$
1,392

 
$
802

 
$
4,367

 
$
4,088

 
$
164

 
$
8,619



The following is a summary of the loan portfolio and related ACL balances, at the dates presented, by loan portfolio segment disaggregated by the Company's impairment method.

 
March 31, 2020
 
One- to Four-Family
 

 
 
 
 
 

 
Correspondent
 
Bulk
 

 

 
 
 
 
 
Originated
 
Purchased
 
Purchased
 
Total
 
Commercial
 
Consumer
 
Total
 
(Dollars in thousands)
Recorded investment in loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
3,951,979

 
$
2,415,609

 
$
224,849

 
$
6,592,437

 
$
766,443

 
$
124,936

 
$
7,483,816

Individually evaluated for impairment
14,406

 
1,946

 
4,909

 
21,261

 
2,588

 
336

 
24,185

 
$
3,966,385

 
$
2,417,555

 
$
229,758

 
$
6,613,698

 
$
769,031

 
$
125,272

 
$
7,508,001

 
 
 
 
 
 
 
 
 
 
 
 
 
 
ACL for loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
6,467

 
$
3,355

 
$
557

 
$
10,379

 
$
20,088

 
$
489

 
$
30,956

Individually evaluated for impairment
—

 
—

 
—

 
—

 
240

 
—

 
240

 
$
6,467

 
$
3,355

 
$
557

 
$
10,379

 
$
20,328

 
$
489

 
$
31,196

 
September 30, 2019
 
One- to Four-Family
 

 
 
 
 
 

 
Correspondent
 
Bulk
 

 

 
 
 
 
 
Originated
 
Purchased
 
Purchased
 
Total
 
Commercial
 
Consumer
 
Total
 
(Dollars in thousands)
Recorded investment in loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
3,881,100

 
$
2,379,651

 
$
248,541

 
$
6,509,292

 
$
763,662

 
$
131,225

 
$
7,404,179

Individually evaluated for impairment
14,683

 
1,763

 
4,943

 
21,389

 
60

 
345

 
21,794

 
$
3,895,783

 
$
2,381,414

 
$
253,484

 
$
6,530,681

 
$
763,722

 
$
131,570

 
$
7,425,973

 
 
 
 
 
 
 
 
 
 
 
 
 
 
ACL for loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
2,000

 
$
1,203

 
$
687

 
$
3,890

 
$
5,171

 
$
165

 
$
9,226

Individually evaluated for impairment
—

 
—

 
—

 
—

 
—

 
—

 
—

 
$
2,000

 
$
1,203

 
$
687

 
$
3,890

 
$
5,171

 
$
165

 
$
9,226



23

5. BORROWED FUNDS
FHLB Borrowings and Interest Rate Swaps - At March 31, 2020 and September 30, 2019, the Bank had entered into interest rate swap agreements with a total notional amount of $640.0 million in order to hedge the variable cash flows associated with $640.0 million of adjustable-rate FHLB advances. At March 31, 2020 and September 30, 2019, the interest rate swap agreements had an average remaining term to maturity of 4.0 years and 4.5 years, respectively. The interest rate swaps were designated as cash flow hedges and involve the receipt of variable amounts from a counterparty in exchange for the Bank making fixed-rate payments over the life of the interest rate swap agreements. At March 31, 2020 and September 30, 2019, the interest rate swaps were in a loss position with a total fair value of $55.6 million and $33.1 million, respectively, which was reported in accounts payable and accrued expenses on the consolidated balance sheet. During the three and six months ended March 31, 2020, $983 thousand and $1.7 million, respectively, was reclassified from AOCI as an increase to interest expense. During the three months ended March 31, 2019, $100 thousand was reclassified from AOCI as a decrease to interest expense. During the six months ended March 31, 2019, $51 thousand was reclassified from AOCI as an increase to interest expense. There was no hedge ineffectiveness recognized in the consolidated statements of income during any of these periods. At March 31, 2020, the Company estimated that $13.0 million of interest expense associated with the interest rate swaps will be reclassified from AOCI as an increase to interest expense on FHLB borrowings during the next 12 months. The Bank has minimum collateral posting thresholds with its derivative counterparties and posts collateral on a daily basis. The Bank posted cash collateral of $56.3 million at March 31, 2020 and $33.3 million at September 30, 2019.

During the current quarter, the Bank prepaid fixed-rate FHLB advances totaling $350.0 million with a weighted average contractual interest rate of 2.42% and a weighted average remaining term of 1.0 years, and replaced these advances with $350.0 million of fixed-rate FHLB advances with a weighted average contractual interest rate of 1.43% and a weighted average term of 4.7 years. The Bank paid penalties totaling $4.2 million to FHLB as a result of prepaying the FHLB advances. The prepayment penalties are being recognized in interest expense over the life of the new FHLB advances.







24

6. FAIR VALUE OF FINANCIAL INSTRUMENTS
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's AFS securities and interest rate swaps are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other financial instruments on a non-recurring basis, such as OREO and loans individually evaluated for impairment. These non-recurring fair value adjustments involve the application of lower of cost or fair value accounting or write-downs of individual financial instruments.

The Company groups its financial instruments at fair value in three levels based on the markets in which the financial instruments are traded and the reliability of the assumptions used to determine fair value. These levels are:

•
Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
•
Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
•
Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company's own estimates of assumptions that market participants would use in pricing the financial instrument. Valuation techniques include the use of option pricing models, discounted cash flow models, and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the financial instrument.

The Company bases its fair values on the price that would be received from the sale of a financial instrument in an orderly transaction between market participants at the measurement date under current market conditions. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

The following is a description of valuation methodologies used for financial instruments measured at fair value on a recurring basis.

AFS Securities - The Company's AFS securities portfolio is carried at estimated fair value. The majority of the securities within the AFS portfolio were issued by GSEs. The Company primarily uses prices obtained from third party pricing services to determine the fair value of its securities. On a quarterly basis, management corroborates a sample of prices obtained from the third party pricing service for Level 2 securities by comparing them to an independent source. If the price provided by the independent source varies by more than a predetermined percentage from the price received from the third party pricing service, then the variance is researched by management. The Company did not have to adjust prices obtained from the third party pricing service when determining the fair value of its securities during the six months ended March 31, 2020 or during fiscal year 2019. The Company's major security types, based on the nature and risks of the securities, are:

•
GSE Debentures - Estimated fair values are based on a discounted cash flow method. Cash flows are determined by taking any embedded options into consideration and are discounted using current market yields for similar securities. (Level 2)
•
MBS - Estimated fair values are based on a discounted cash flow method. Cash flows are determined based on prepayment projections of the underlying mortgages and are discounted using current market yields for benchmark securities. (Level 2)
•
Municipal Bonds - Estimated fair values are based on a discounted cash flow method. Cash flows are determined by taking any embedded options into consideration and are discounted using current market yields for securities with similar credit profiles. (Level 2)

Interest Rate Swaps - The Company's interest rate swaps are designated as cash flow hedges and are reported at fair value in other assets on the consolidated balance sheet if in a gain position, and in accounts payable and accrued expenses if in a loss position, with any unrealized gains and losses, net of taxes, reported as AOCI in stockholders' equity. See "Note 5. Borrowed Funds" for additional information. The estimated fair values of the interest rates swaps are obtained from the counterparty and are determined by a discounted cash flow analysis using observable market-based inputs. On a quarterly basis, management corroborates the estimated fair values by internally calculating the estimated fair value using a discounted cash flow analysis with independent observable market-based inputs from a third party. No adjustments were made to the estimated fair values during the six months ended March 31, 2020 or during fiscal year 2019. (Level 2)


25

The following tables provide the level of valuation assumption used to determine the carrying value of the Company's financial instruments measured at fair value on a recurring basis at the dates presented. The Company did not have any Level 3 financial instruments measured at fair value on a recurring basis at March 31, 2020 or September 30, 2019.
 
March 31, 2020
 
 
 
Quoted Prices
 
Significant
 
Significant
 
 
 
in Active Markets
 
Other Observable
 
Unobservable
 
Carrying
 
for Identical Assets
 
 Inputs
 
Inputs
 
Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
AFS Securities:
 
 
 
 
 
 
 
MBS
$
973,318

 
$
—

 
$
973,318

 
$
—

GSE debentures
250,779

 
—

 
250,779

 
—

Municipal bonds
11,940

 
—

 
11,940

 
—

 
$
1,236,037

 
$
—

 
$
1,236,037

 
$
—

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$
55,555

 
$
—

 
$
55,555

 
$
—


 
September 30, 2019
 
 
 
Quoted Prices
 
Significant
 
Significant
 
 
 
in Active Markets
 
Other Observable
 
Unobservable
 
Carrying
 
for Identical Assets
 
 Inputs
 
Inputs
 
Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
AFS Securities:
 
 
 
 
 
 
 
MBS
$
936,487

 
$
—

 
$
936,487

 
$
—

GSE debentures
249,954

 
—

 
249,954

 
—

Municipal bonds
18,422

 
—

 
18,422

 
—

 
$
1,204,863

 
$
—

 
$
1,204,863

 
$
—

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$
33,090

 
$
—

 
$
33,090

 
$
—



The following is a description of valuation methodologies used for significant financial instruments measured at fair value on a non-recurring basis.

Loans Receivable - The fair value of impaired loans individually evaluated for impairment on a non-recurring basis during the six months ended March 31, 2020 and 2019 that were still held in the portfolio as of March 31, 2020 and 2019 was $4.9 million and $2.8 million, respectively.

The one- to four-family loans included in this amount were individually evaluated to determine if the carrying value of the loan was in excess of the fair value of the collateral, less estimated selling costs of 10%. Fair values were estimated through current appraisals. Management does not adjust or apply a discount to the appraised value of one- to four-family loans, except for the estimated sales cost noted above, and the primary unobservable input for these loans was the appraisal.

For commercial loans, if the most recent appraisal or book value of the collateral does not reflect the current market conditions due to the passage of time and/or other factors, management will make adjustments to the existing appraised or book value based on knowledge of local market conditions, recent transactions, and estimated selling costs, if applicable. Adjustments to appraised or book values are generally based on assumptions not observable in the marketplace. The primary significant unobservable inputs for

26

impaired commercial loans individually evaluated for impairment during the six months ended March 31, 2020 were downward adjustments to the book value of the collateral for lack of marketability. The adjustments ranged from 10% to 50%, with a weighted average of 20%. There were no impaired commercial loans individually evaluated during the six months ended March 31, 2019.

Fair values of impaired loans individually evaluated for impairment cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the loan and, as such, are classified as Level 3.

OREO - OREO primarily represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at lower of cost or fair value. The fair value for OREO is estimated through current appraisals or listing prices, less estimated selling costs of 10%. Management does not adjust or apply a discount to the appraised value or listing price, except for the estimated sales costs noted above. The primary significant unobservable input for OREO was the appraisal or listing price. Fair values of foreclosed property cannot be determined with precision and may not be realized in an actual sale of the property and, as such, are classified as Level 3. The fair value of OREO measured on a non-recurring basis during the six months ended March 31, 2020 and 2019 that was still held in the portfolio as of March 31, 2020 and 2019 was $183 thousand and $582 thousand, respectively. The carrying value of the properties equaled the fair value of the properties at March 31, 2020 and 2019.

Fair Value Disclosures - The Company determined estimated fair value amounts using available market information and a variety of valuation methodologies as of the dates presented. Considerable judgment is required to interpret market data to develop the estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company would realize from a current market exchange at subsequent dates.

The carrying amounts and estimated fair values of the Company's financial instruments by fair value hierarchy, at the dates presented, were as follows:
 
March 31, 2020
 
Carrying
 
Estimated Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
118,374

 
$
118,374

 
$
118,374

 
$
—

 
$
—

AFS securities
1,236,037

 
1,236,037

 
—

 
1,236,037

 
—

Loans receivable
7,476,805

 
7,934,879

 
—

 
—

 
7,934,879

FHLB stock
101,575

 
101,575

 
101,575

 
—

 
—

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
5,774,619

 
5,852,187

 
2,732,263

 
3,119,924

 
—

Borrowings
2,115,869

 
2,165,705

 
30,000

 
2,135,705

 
—

Interest rate swaps
55,555

 
55,555

 
—

 
55,555

 
—

 
 
 
 
 
 
 
 
 
 
 
September 30, 2019
 
Carrying
 
Estimated Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
220,370

 
$
220,370

 
$
220,370

 
$
—

 
$
—

AFS securities
1,204,863

 
1,204,863

 
—

 
1,204,863

 
—

Loans receivable
7,416,747

 
7,654,586

 
—

 
—

 
7,654,586

FHLB stock
98,456

 
98,456

 
98,456

 
—

 
—

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
5,581,867

 
5,614,895

 
2,594,242

 
3,020,653

 
—

Borrowings
2,239,989

 
2,253,353

 
100,001

 
2,153,352

 
—

Interest rate swaps
33,090

 
33,090

 
—

 
33,090

 
—




27

7. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following tables present the changes in the components of AOCI, net of tax, for the periods indicated.
 
For the Three Months Ended March 31, 2020
 
Unrealized
 
Unrealized
 
 
 
Gains (Losses)
 
Gains (Losses)
 
 
 
on AFS
 
on Cash Flow
 
Total
 
Securities
 
Hedges
 
AOCI
 
(Dollars in thousands)
Beginning balance
$
9,698

 
$
(19,625
)
 
$
(9,927
)
Other comprehensive income (loss), before reclassifications
10,378

 
(23,412
)
 
(13,034
)
Amount reclassified from AOCI
—

 
983

 
983

Other comprehensive income (loss)
10,378

 
(22,429
)
 
(12,051
)
Ending balance
$
20,076

 
$
(42,054
)
 
$
(21,978
)
 
For the Six Months Ended March 31, 2020
 
Unrealized
 
Unrealized
 
 
 
Gains (Losses)
 
Gains (Losses)
 
 
 
on AFS
 
on Cash Flow
 
Total
 
Securities
 
Hedges
 
AOCI
 
(Dollars in thousands)
Beginning balance
$
10,150

 
$
(25,049
)
 
$
(14,899
)
Other comprehensive income (loss), before reclassifications
9,926

 
(18,697
)
 
(8,771
)
Amount reclassified from AOCI
—

 
1,692

 
1,692

Other comprehensive income (loss)
9,926

 
(17,005
)
 
(7,079
)
Ending balance
$
20,076

 
$
(42,054
)
 
$
(21,978
)

 
For the Three Months Ended March 31, 2019
 
Unrealized
 
Unrealized
 
 
 
Gains (Losses)
 
Gains (Losses)
 
 
 
on AFS
 
on Cash Flow
 
Total
 
Securities
 
Hedges
 
AOCI
 
(Dollars in thousands)
Beginning balance
$
537

 
$
(2,414
)
 
$
(1,877
)
Other comprehensive income (loss), before reclassifications
3,061

 
(6,500
)
 
(3,439
)
Amount reclassified from AOCI
—

 
(100
)
 
(100
)
Other comprehensive income (loss)
3,061

 
(6,600
)
 
(3,539
)
Ending balance
$
3,598

 
$
(9,014
)
 
$
(5,416
)
 
For the Six Months Ended March 31, 2019
 
Unrealized
 
Unrealized
 
 
 
Gains (Losses)
 
Gains (Losses)
 
 
 
on AFS
 
on Cash Flow
 
Total
 
Securities
 
Hedges
 
AOCI
 
(Dollars in thousands)
Beginning balance
$
(2,990
)
 
$
7,330

 
$
4,340

Other comprehensive income (loss), before reclassifications
6,588

 
(16,395
)
 
(9,807
)
Amount reclassified from AOCI
—

 
51

 
51

Other comprehensive income (loss)
6,588

 
(16,344
)
 
(9,756
)
Ending balance
$
3,598

 
$
(9,014
)
 
$
(5,416
)



28

8. REVENUE RECOGNITION
Details of the Company's primary types of non-interest income revenue streams by financial statement line item reported in the consolidated statements of income that are within the scope of ASC Topic 606 are below. During the six months ended March 31, 2020 and 2019, revenue from contracts with customers totaled $7.5 million and $8.1 million, respectively.

Deposit Service Fees
Interchange Transaction Fees - Interchange transaction fee income primarily consists of interchange fees earned on a transactional basis through card payment networks. The performance obligation for these types of transactions is satisfied as services are rendered for each transaction and revenue is recognized daily concurrently with the transaction processing services provided to the cardholder.

In order to participate in the card payment networks, the Company must pay various transaction related costs established by the networks ("interchange network charges"), including membership fees and a per unit charge for each transaction. The Company is acting as an agent for its debit card customers when they are utilizing the card payment networks; therefore, interchange transaction fee income is reported net of interchange network charges. Interchange network charges totaled $1.6 million and $1.7 million for the six months ended March 31, 2020 and 2019, respectively.

Service Charges on Deposit Accounts - Service charges on deposit accounts consist of account maintenance and transaction-based fees such as overdrafts, insufficient funds, wire transfers and the use of out-of-network ATMs. The Company's performance obligation is satisfied over a period of time, generally a month, for account maintenance and at the time of service for transaction-based fees. Revenue is recognized after the performance obligation is satisfied. Payments are typically collected from the customer's deposit account at the time the transaction is processed and/or at the end of the customer's statement cycle (typically monthly).

Insurance Commissions
Commissions are received on insurance product sales. The Company acts in the capacity of an agent between the Company's customer and the insurance carrier. The Company's performance obligation is satisfied when the terms of the policy have been agreed upon and the insurance policy becomes effective. Additionally, the Company earns performance-based incentives ("contingent insurance commissions") based on certain criteria established by the insurance carriers.

Other Non-Interest Income
Trust Asset Management Income - The Company provides trust asset management services to customers. The Company primarily earns fees for these services over time as the monthly services are provided and the Company assesses revenue at each month end. Fees are charged based on a tiered scale of the market value of the individual trust asset accounts at the end of the month.

9. LEASES
The Company leases real estate property for branches, ATMs, and certain equipment. These leases have remaining terms that range from one year to 47 years, some of which include the exercising of renewal options that the Company considers to be reasonably certain. As of March 31, 2020, a right-of-use asset of $15.1 million was included in other assets and a lease liability of $15.1 million was included in accounts payable and accrued expenses on the consolidated balance sheets.

As of March 31, 2020, for the Company's operating leases, the weighted average remaining lease term was 23.3 years and the weighted average discount rate was 2.70%. The Company did not enter into any new lease obligations during the six months ended March 31, 2020.

The following tables presents lease expenses and supplemental cash flow information related to the Company's leases for the periods presented.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31, 2020
 
March 31, 2020
 
(Dollars in thousands)
Operating lease expense
$
376

 
$
765

Variable lease expense
58

 
108

Short-term lease expense
7

 
16

Cash paid for amounts included in the measurement of lease liabilities
339

 
683




29

The following table presents future minimum payments, rounded to the nearest thousand, for operating leases with initial or remaining terms in excess of one year as of March 31, 2020:
Remainder of fiscal year 2020
$
573

Fiscal year 2021
1,361

Fiscal year 2022
1,327

Fiscal year 2023
1,234

Fiscal year 2024
1,025

Fiscal year 2025
854

Thereafter
15,391

Total future minimum lease payments
21,765

Amounts representing interest
(6,708
)
Present value of net future minimum lease payments
$
15,057



The Company elected the modified retrospective approach for its adoption of ASU 2016-02, and the optional transition method under which the Company used the effective date as the date of initial application of the amendments. These elections require the inclusion of ASC Topic 840 disclosures for periods that continue to be presented in accordance with ASC Topic 840. As of September 30, 2019, future minimum rental commitments, rounded to the nearest thousand, required under operating leases that had initial or remaining non-cancelable lease terms in excess of one year were as follows:
2020
$
1,298

2021
1,187

2022
1,069

2023
930

2024
637

Thereafter
1,115

 
$
6,236




30

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The Company and the Bank may from time to time make written or oral "forward-looking statements," including statements contained in documents filed or furnished by the Company with the SEC. These forward-looking statements may be included in this Quarterly Report on Form 10-Q and the exhibits attached to it, in the Company's reports to stockholders, in the Company's press releases, and in other communications by the Company, which are made in good faith by us pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause our future results to differ materially from the beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in the forward-looking statements:

•
our ability to maintain overhead costs at reasonable levels;
•
our ability to originate and purchase a sufficient volume of one- to four-family loans in order to maintain the balance of that portfolio at a level desired by management;
•
our ability to invest funds in wholesale or secondary markets at favorable yields compared to the related funding source;
•
our ability to access cost-effective funding;
•
the expected cost savings, synergies and other benefits from our acquisition of Capital City Bancshares, Inc. ("CCB") might not be realized within the anticipated time frames or at all;
•
our ability to extend the commercial banking and trust asset management expertise acquired from CCB through our existing branch footprint;
•
fluctuations in deposit flows;
•
the future earnings and capital levels of the Bank and the continued non-objection by our primary federal banking regulators, to the extent required, to distribute capital from the Bank to the Company, which could affect the ability of the Company to pay dividends in accordance with its dividend policy;
•
the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations, including areas where we have purchased large amounts of correspondent loans;
•
changes in real estate values, unemployment levels, and the level and direction of loan delinquencies and charge-offs may require changes in the estimates of the adequacy of the ACL, which may adversely affect our business;
•
potential adverse impacts of the ongoing COVID-19 pandemic and any governmental or societal responses thereto on the 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;
•
increases in classified and/or non-performing assets, which may require the Bank to increase the ACL, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets;
•
results of examinations of the Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our ACL;
•
changes in accounting principles, policies, or guidelines;
•
the effects of, and changes in, monetary and interest rate policies of the Board of Governors of the Federal Reserve System ("FRB");
•
the effects of, and changes in, trade and fiscal policies and laws of the United States government;
•
the effects of, and changes in, foreign and military policies of the United States government;
•
inflation, interest rate, market, monetary, and currency fluctuations;
•
the timely development and acceptance of new products and services and the perceived overall value of these products and services by users, including the features, pricing, and quality compared to competitors' products and services;
•
the willingness of users to substitute competitors' products and services for our products and services;
•
our success in gaining regulatory approval of our products and services and branching locations, when required;
•
the impact of interpretations of, and changes in, financial services laws and regulations, including laws concerning taxes, banking, securities, consumer protection, trust and insurance and the impact of other governmental initiatives affecting the financial services industry;
•
implementing business initiatives may be more difficult or expensive than anticipated;
•
significant litigation;
•
technological changes;
•
our ability to maintain the security of our financial, accounting, technology, and other operating systems and facilities, including the ability to withstand cyber-attacks;
•
acquisitions and dispositions;
•
changes in consumer spending, borrowing and saving habits; and
•
our success at managing the risks involved in our business.


31

This list of important factors is not all inclusive. For a discussion of risks and uncertainties related to our business that could adversely impact our operations and/or financial results, see "Part I, Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019 and Part II, Item 1A. Risk Factors within this Form 10-Q. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank.

As used in this Form 10-Q, unless we specify or the context indicates otherwise, "the Company," "we," "us," and "our" refer to Capitol Federal Financial, Inc. a Maryland corporation, and its subsidiaries. "Capitol Federal Savings," and "the Bank," refer to Capitol Federal Savings Bank, a federal savings bank and the wholly-owned subsidiary of Capitol Federal Financial, Inc.

The following discussion and analysis is intended to assist in understanding the financial condition, results of operations, liquidity, and capital resources of the Company. The Bank comprises almost all of the consolidated assets and liabilities of the Company and the Company is dependent primarily upon the performance of the Bank for the results of its operations. Because of this relationship, references to management actions, strategies and results of actions apply to both the Bank and the Company. This discussion and analysis should be read in conjunction with Management's Discussion and Analysis included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019, filed with the SEC.

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.

Response to and Impact of the COVID-19 Pandemic

During the current quarter, the COVID-19 pandemic had a significant impact on our customers, employees, business operations and financial results. Management's actions related to COVID-19 and the impact of COVID-19 on certain aspects of the Company's business and financial results are summarized below.
 
Customer, employee, and community health precautions - In response to the rapidly evolving COVID-19 pandemic, the Company focused first on the well-being of its people, customers and communities. Preventative health measures were put in place including elimination of business-related travel, implementing mandatory work from home for all employees able to do so, social distancing precautions for all employees in the office, adjusting branch banking hours and operational measures to promote social distancing when customers do visit branches, and preventative cleaning at offices and branches. The Company also focused on business continuity measures, including activating its Crisis Management Team to put into action our business continuity plan, monitoring potential business interruptions, making further improvements to our technology allowing employees to work from home, and conducting regular discussions with our technology vendors.

Lobby services have been changed to appointment only while drive-through, mobile, and online banking have become the Bank's primary channels of serving customers. Retail loan closings have been conducted with customers coming to our drive-through facilities and commercial loans are closed in person only when necessary. All employees continue to be paid their regular salary and receive full benefits.
Loan modification programs - In late March 2020, the Bank announced loan modification programs to support and provide relief for its borrowers during the COVID-19 pandemic. Generally, loan modifications under these programs ("COVID-19 loan modifications") for one- to four-family loans and consumer loans consist of a three-month payment forbearance, with the deferred principal, interest, and escrow added to the loan payoff amount.  COVID-19 loan modifications of commercial loans mainly consist of a six-month interest-only payment period. The COVID-19 loan modifications are not considered troubled debt restructurings per current GAAP.

As of April 30, 2020, COVID-19 loan modifications had been processed for 494 one- to four-family loans totaling $137.0 million for which the borrowers had a weighted average credit score of 734, and 105 consumer loans totaling $2.7 million for which the borrowers had a weighted average credit score of 707.  As of April 30, 2020, 263 additional COVID-19 loan modification agreements had been sent to one- to four-family borrowers but were still pending.  The pending COVID-19 loan modifications had a total balance of $51.9 million and a weighted average credit score of 729.

As of April 30, 2020, the Bank had processed 181 COVID-19 loan modifications of commercial loans totaling $200.0 million, and were in the process of modifying an additional 32 commercial loans totaling $165.8 million.  

Small Business Administration ("SBA") Payroll Protection Program ("PPP") loans - The first PPP authorized up to $349 billion and the second PPP authorized up to $320 billion in loans to small businesses primarily to pay their employees during the first eight weeks after receiving their loan proceeds with loan payments deferred for six months and the final balance due 24 months after funding, subject to potential debt forgiveness. These loans are fully guaranteed by the SBA. The first PPP application process started April 3,

32

2020 and the full $349 billion was exhausted on April 16, 2020. The Bank continued to take applications for PPP loans after the first PPP was exhausted in anticipation of a second PPP. The second PPP application process started April 27, 2020. Between the two PPPs, the Bank has processed 575 applications for PPP loans totaling $40.7 million, of which $34.1 million had been funded as of April 30, 2020. The origination fees associated with the PPP loans processed by the Bank are expected to be $1.7 million. Based on discussions with borrowers, we anticipate that more than 75% of the balances of the PPP loans will be forgiven after eight weeks from the funding date.

Provision for credit losses and allowance for credit losses - As a result of the deterioration of economic conditions due to the COVID-19 pandemic, the Bank recorded a provision for credit losses of $22.1 million during the current quarter. The provision for credit losses increased the ACL to $31.2 million at March 31, 2020 resulting in an ACL to loans receivable ratio of 0.42% compared to 0.12% at September 30, 2019. The ACL to loans receivable ratio for one- to four-family loans was 0.16% at March 31, 2020 compared to 0.06% at September 30, 2019 and the ACL to loans receivable ratio for commercial loans was 2.63% at March 31, 2020 compared to 0.67% at September 30, 2019. See additional ACL discussion in the "Financial Condition - Asset Quality - Allowance for credit losses and Provision for credit losses" section below, and additional discussion regarding the composition of the Bank's loan portfolio in the "Financial Condition - Loans Receivable" section below.

Suspension of correspondent loan activity - In an effort to manage the influx of refinance requests from current customers during the initial days of the COVID-19 pandemic, the Bank suspended its purchase of correspondent one- to four-family loans. Correspondent applications and commitments in the pipeline at the time of the suspension continue to progress through the approval and funding process.

Capital, liquidity, and dividends - Management performed stress test scenarios during April 2020. Based on the Company's existing capital levels, conservative loan underwriting policies, loan concentration, and geographical diversification, no liquidity or capital concerns were identified as a result of the stress tests. Management anticipates being able to manage the economic risks and uncertainties associated with the COVID-19 pandemic and remain well capitalized with sufficient liquidity to serve our customers. With earnings of $0.19 per share, year-to-date, and a cash balance at the holding company level of $101.0 million, the Company has the resources to continue to pay its regular quarterly dividend of $0.085 per share for the foreseeable future. Given the current state of economic uncertainty and how that may play out with the credit risk exposure in the Bank's loan portfolio, the Company has elected to defer the annual True Blue dividend in June 2020 and not ask for a regulatory non-objection to move capital from the Bank to the Company to pay that dividend. It is management's intent to ask for a regulatory non-objection at some point in the future and to pay this dividend when economic conditions are more certain. It remains the Company's intent to pay out 100% of its earnings.

Summary of Financial Condition and Results of Operation

For the quarter ended March 31, 2020, the Company recognized net income of $4.3 million, or $0.03 per share, compared to net income of $24.6 million, or $0.18 per share, for the quarter ended March 31, 2019. The decrease was due primarily to the $22.1 million provision for credit losses during the current quarter, partially offset by a reduction in income tax expense. The net interest margin decreased 14 basis points, from 2.33% for the prior year quarter to 2.19% for the current quarter. The decrease in the net interest margin was due mainly to a decrease in the loan portfolio yield, as well as an increase in the cost of deposits.

For the six months ended March 31, 2020, the Company recognized net income of $26.8 million, or $0.19 per share, a decrease of $22.2 million, or 45.3%, from the six-month period ended March 31, 2019. The decrease in net income was due primarily to the $22.3 million provision for credit losses during the current period. The net interest margin decreased eleven basis points, from 2.30% for the prior year period to 2.19% for the current period. The leverage strategy was suspended at certain times during the prior year period and during all of the current year period due to the negative interest rate spreads between the related FHLB borrowings and cash held at the FRB of Kansas City, making the transaction unprofitable. When the leverage strategy is in place, it reduces the net interest margin due to the small 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 decreased 14 basis points, from 2.33% for the prior year period to 2.19% for the current year period. The decrease in the net interest margin, excluding the effects of the leverage strategy, was due mainly to an increase in the cost of retail/business certificates of deposit, as well as a decrease in the loan portfolio yield.

The Federal Reserve, in response to economic risks resulting from COVID-19 responses by businesses, individuals, and government entities, returned to a zero-interest rate policy in March 2020. This was after most broader market rates decreased significantly in response to evolving news about COVID-19. However, while liability costs decreased, mortgage rates did not, primarily due to a rapid and unexpected increase in refinance activity. The Bank was able to restructure the cost of $350.0 million of its FHLB advances by lowering their cost 72 bps, which reduced our interest expense on those advances immediately and primarily led to the stability in our net interest margin. Given current levels of yields on new loans and the amount of one- to four-family refinances and endorsements of terms to lower current market rates, the yield on the total loan portfolio is likely to continue to decrease. Additionally, yields on new securities are lower than the portfolio yield. While the Bank had begun to lower deposit rates in February,

33

by late March and into the month of April, the Bank was able to lower deposit rates further in response to the changes in market rates and competition. Considering the drastic changes in market rates and the continued economic uncertainty, it is likely that with the changes the Bank has made to its cost of funding, if the rates on mortgage loans are reduced as capacity constraints are lessened in the mortgage origination system, our net interest margin should remain stable with some downside risk as a result of prepayments and premium amortization on correspondent loans.
Total assets increased $31.2 million, or 0.3% from September 30, 2019 to March 31, 2020, due mainly to loan portfolio growth which was largely funded with excess operating cash. The operating cash balance at September 30, 2019 was higher than normal due partially to anticipated loan fundings. Total loans increased $60.1 million from September 30, 2019 to March 31, 2020. The increase was primarily in the originated one- to four-family loan portfolio. During the current year-to-date period, the Bank originated and refinanced $450.0 million of one- to four-family and consumer loans with a weighted average rate of 3.49% and purchased $253.1 million of one- to four-family loans from correspondent lenders with a weighted average rate of 3.42%. The Bank also originated $67.6 million of commercial loans with a weighted average rate of 4.65% and entered into commercial real estate loan participations of $28.4 million at a weighted average rate of 4.65%. The commercial loan portfolio totaled $772.7 million at March 31, 2020 and was composed of 76% commercial real estate, 16% commercial construction, and 8% commercial and industrial. Total commercial real estate and commercial construction potential exposure, including undisbursed amounts and outstanding commitments totaling $167.2 million, was $877.7 million at March 31, 2020. Total commercial and industrial potential exposure, including undisbursed amounts and outstanding commitments of $18.8 million, was $80.9 million at March 31, 2020. Given the current level of total assets and the economic and interest rate environment, it is unlikely that the total loan portfolio will increase materially during the remainder of fiscal year 2020.

Total deposits increased $192.8 million, or 3.5%, from September 30, 2019 to March 31, 2020. Non-maturity deposits increased $138.0 million and retail/business certificates of deposit increased $72.4 million, partially offset by a $17.6 million decrease in public unit certificates of deposit. The increase in retail/business certificates of deposit was primarily in intermediate-term certificates, followed by short-term certificates.

Total borrowings at March 31, 2020 were $2.12 billion, a decrease of $124.1 million, or 5.5%, from September 30, 2019. The decrease was due to repaying the FHLB line of credit balance and not renewing a portion of the FHLB advances that matured during the current year period, partially offset by a $30.0 million draw on the FRB of Kansas City line of credit at March 31, 2020. Management is currently using the FRB of Kansas City line of credit rather than the FHLB line of credit for short-term funding needs as the interest rate on the FRB of Kansas City line of credit is lower than the FHLB line of credit.

Stockholders' equity was $1.29 billion at March 31, 2020 compared to $1.34 billion at September 30, 2019. The $48.5 million decrease was due primarily to the payment of $70.4 million in cash dividends, partially offset by net income of $26.8 million during the current year-to-date period. In the long run, management considers a Bank stockholders' equity to total assets ratio of at least 10% an appropriate level of capital. At March 31, 2020, this ratio was 12.2%. The cash dividends paid during the current year-to-date period totaled $0.51 per share and consisted of a $0.34 per share cash true-up dividend related to fiscal year 2019 earnings per the Company's dividend policy, and two regular quarterly cash dividends totaling $0.17 per share. On April 21, 2020, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.7 million, payable on May 15, 2020 to stockholders of record as of the close of business on May 1, 2020.

At times, the Bank has utilized a leverage strategy to increase earnings. The leverage strategy involves borrowing up to $2.10 billion either on the Bank's FHLB line of credit or by entering into short-term FHLB advances, depending on the rates offered by FHLB. The borrowings are repaid at quarter end, or earlier if the strategy is suspended. The proceeds from the borrowings, net of the required FHLB stock holdings which yield approximately 7.25% from dividends, are deposited at the 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 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 $14 thousand during the prior year period. The leverage strategy was not in place during the current year period, due to the large negative interest rate spread making the strategy unprofitable. Management continues to monitor the net interest rate spread and overall profitability of the strategy. It is expected that the strategy will be reimplemented if it reaches a position that is profitable.

Available Information
Financial and other Company information, including press releases, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports can be obtained free of charge from our investor relations website, http://ir.capfed.com. SEC filings are available on our website immediately after they are electronically filed with or furnished to the SEC, and are also available on the SEC's website at www.sec.gov.


34

Critical Accounting Policies
Our most critical accounting policies are the methodologies used to determine the ACL and fair value measurements. These policies 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 or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could affect reported results materially. These critical accounting policies and their application are reviewed at least annually by our audit committee. For a full discussion of our critical accounting policies, see Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019.

35

Financial Condition
The following table presents selected balance sheet information as of the dates indicated.
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
2020
 
2019
 
2019
 
2019
 
2019
 
(Dollars in thousands)
Total assets
$
9,371,193

 
$
9,236,572

 
$
9,340,018

 
$
9,286,275

 
$
9,534,551

Cash and cash equivalents
118,374

 
70,703

 
220,370

 
43,051

 
218,051

AFS securities
1,236,037

 
1,229,587

 
1,204,863

 
769,393

 
746,728

HTM securities
—

 
—

 
—

 
483,858

 
527,460

Loans receivable, net
7,476,805

 
7,429,207

 
7,416,747

 
7,507,468

 
7,570,806

FHLB stock, at cost
101,575

 
99,861

 
98,456

 
100,109

 
102,631

Deposits
5,774,619

 
5,585,851

 
5,581,867

 
5,580,871

 
5,701,111

Borrowings
2,115,869

 
2,189,991

 
2,239,989

 
2,239,987

 
2,339,985

Stockholders' equity
1,287,793

 
1,306,594

 
1,336,326

 
1,327,099

 
1,355,983

Equity to total assets at end of period
13.7
%
 
14.1
%
 
14.3
%
 
14.3
%
 
14.2
%
Total assets were $9.37 billion at March 31, 2020, an increase of $134.6 million, or 1.5%, from December 31, 2019, due primarily to increases in the loan portfolio and cash and cash equivalents. The increase in cash and cash equivalents was due mainly to increasing the amount of cash on hand in anticipation of customer cash needs during the COVID-19 pandemic. Total loans were $7.48 billion at March 31, 2020, an increase of $47.6 million, or 0.6%, from December 31, 2019. The increase was primarily in the one- to four-family correspondent loan portfolio and commercial construction portfolio, partially offset by an increase in ACL. During the current quarter, the Bank originated and refinanced $193.6 million of one- to four-family and consumer loans with a weighted average rate of 3.45% and purchased $144.6 million of one- to four-family loans from correspondent lenders with a weighted average rate of 3.40%. The Bank also originated $35.2 million of commercial loans with a weighted average rate of 4.42% and processed commercial loan disbursements, excluding lines of credit, of approximately $49 million at a weighted average rate of 4.56%. Given the current level of total assets and the economic and interest rate environment, it is unlikely that the total loan portfolio will increase materially during the remainder of fiscal year 2020.

Total deposits were $5.77 billion at March 31, 2020, an increase of $188.8 million, or 3.4%, from December 31, 2019. Retail/business certificates of deposit increased $108.8 million due primarily to the Presidents' Day certificate of deposit campaign in February 2020, and non-maturity deposits increased $66.7 million. The increase in the retail/business certificates of deposit was primarily in intermediate-term certificates.

Stockholders' equity was $1.29 billion at March 31, 2020 compared to $1.31 billion at December 31, 2019. The $18.8 million decrease was due primarily to other comprehensive loss, net of tax of $12.1 million, which was due to a reduction in the fair value of our interest rate swaps, partially offset by an increase in unrealized gains on our AFS securities, and the payment of $11.7 million in cash dividends. These decreases were partially offset by net income of $4.3 million during the current quarter.





36

Loans Receivable. The following table presents the balance and weighted average rate of our loan portfolio as of the dates indicated. Approximately 68% of the one- to four-family loan portfolio balance at March 31, 2020 was comprised of loans that had a balance of $510 thousand or less at the time of origination.
 
March 31, 2020
 
December 31, 2019
 
September 30, 2019
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
Originated
$
3,944,782

 
3.68
%
 
$
3,927,015

 
3.71
%
 
$
3,873,851

 
3.74
%
Correspondent purchased
2,385,907

 
3.60

 
2,343,750

 
3.62

 
2,349,877

 
3.64

Bulk purchased
228,730

 
2.88

 
237,691

 
2.93

 
252,347

 
2.94

Construction
35,798

 
3.61

 
38,771

 
3.82

 
36,758

 
4.00

Total
6,595,217

 
3.62

 
6,547,227

 
3.65

 
6,512,833

 
3.68

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
584,236

 
4.45

 
583,848

 
4.48

 
583,617

 
4.48

Commercial and industrial
62,153

 
4.62

 
57,019

 
4.97

 
61,094

 
5.14

Construction
126,266

 
4.40

 
107,372

 
4.68

 
123,159

 
4.81

Total
772,655

 
4.45

 
748,239

 
4.54

 
767,870

 
4.58

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
Home equity
114,571

 
5.67

 
118,491

 
5.73

 
120,587

 
6.15

Other
10,837

 
4.56

 
10,877

 
4.58

 
11,183

 
4.57

Total
125,408

 
5.58

 
129,368

 
5.63

 
131,770

 
6.02

Total loans receivable
7,493,280

 
3.74

 
7,424,834

 
3.77

 
7,412,473

 
3.81

 
 
 
 
 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
 
 
 
 
ACL
31,196

 
 
 
9,435

 
 
 
9,226

 
 
Discounts/unearned loan fees
29,645

 
 
 
30,323

 
 
 
31,058

 
 
Premiums/deferred costs
(44,366
)
 
 
 
(44,131
)
 
 
 
(44,558
)
 
 
Total loans receivable, net
$
7,476,805

 
 
 
$
7,429,207

 
 
 
$
7,416,747

 
 



37

Loan Activity - The following tables summarize activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, discounts/unearned loan fees, and premiums/deferred costs. Loans that were paid-off as a result of refinances and loans that were sold 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. During the current year period, the Bank endorsed $170.9 million of one- to four-family loans, reducing the average rate on those loans by 81 basis points. Commercial loan renewals are not included in the activity in the following table unless new funds are disbursed at the time of renewal. As noted earlier, during the initial days of the COVID-19 pandemic, correspondent one- to four-family lending activities were suspended by the Bank but correspondent applications and commitments in the pipeline continue to progress through the approval and funding process.
 
For the Three Months Ended
 
March 31, 2020
 
December 31, 2019
 
September 30, 2019
 
June 30, 2019
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Beginning balance
$
7,424,834

 
3.77
%
 
$
7,412,473

 
3.81
%
 
$
7,501,741

 
3.83
%
 
$
7,564,076

 
3.82
%
Originated and refinanced:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
172,891

 
3.44

 
233,693

 
3.52

 
188,753

 
3.60

 
121,871

 
4.09

Adjustable
55,946

 
4.11

 
55,126

 
4.30

 
59,550

 
4.37

 
63,341

 
4.87

Purchased and participations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
125,612

 
3.46

 
123,118

 
3.77

 
49,161

 
4.12

 
29,447

 
4.65

Adjustable
18,985

 
2.96

 
13,801

 
3.06

 
12,305

 
3.55

 
10,018

 
3.85

Change in undisbursed loan funds
24,049

 
 
 
(9,743
)
 
 
 
12,293

 
 
 
34,742

 
 
Repayments
(328,644
)
 
 
 
(403,361
)
 
 
 
(410,624
)
 
 
 
(321,439
)
 
 
Principal (charge-offs)/recoveries, net
(314
)
 
 
 
(16
)
 
 
 
(110
)
 
 
 
(33
)
 
 
Other
(79
)
 
 
 
(257
)
 
 
 
(596
)
 
 
 
(282
)
 
 
Ending balance
$
7,493,280

 
3.74

 
$
7,424,834

 
3.77

 
$
7,412,473

 
3.81

 
$
7,501,741

 
3.83

 
 
 
 
 
 
 
 
 
For the Six Months Ended
 
March 31, 2020
 
March 31, 2019
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Beginning balance
$
7,412,473

 
3.81
%
 
$
7,507,645

 
3.74
%
Originated and refinanced:
 
 
 
 
 
 
 
Fixed
406,584

 
3.48

 
194,710

 
4.58

Adjustable
111,072

 
4.20

 
196,717

 
4.87

Purchased and participations:
 
 
 
 
 
 
 
Fixed
248,730

 
3.61

 
107,527

 
4.88

Adjustable
32,786

 
3.00

 
53,982

 
4.70

Change in undisbursed loan funds
14,306

 
 
 
5,185

 
 
Repayments
(732,005
)
 
 
 
(501,094
)
 
 
Principal (charge-offs)/recoveries, net
(330
)
 
 
 
156

 
 
Other
(336
)
 
 
 
(752
)
 
 
Ending balance
$
7,493,280

 
3.74

 
$
7,564,076

 
3.82




38

The following tables present loan origination, refinance, and purchase 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.
 
For the Three Months Ended
 
March 31, 2020
 
March 31, 2019
 
Amount
 
Rate
 
% of Total
 
Amount
 
Rate
 
% of Total
 
(Dollars in thousands)
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:(1)
 
 
 
 
 
 
 
 
 
 
 
<= 15 years
$
68,559

 
2.95
%
 
18.4
%
 
$
13,873

 
4.25
%
 
5.5
%
> 15 years
198,373

 
3.54

 
53.1

 
66,993

 
4.45

 
27.0

One- to four-family construction
13,971

 
3.44

 
3.7

 
11,801

 
4.56

 
4.8

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
3,872

 
4.71

 
1.0

 
15,027

 
7.23

 
6.0

Commercial and industrial
9,992

 
3.82

 
2.7

 
3,956

 
5.29

 
1.6

Commercial construction
1,522

 
5.40

 
0.4

 
—

 
—

 
—

Home equity
1,124

 
5.85

 
0.3

 
1,189

 
5.83

 
0.5

Other
1,090

 
5.51

 
0.3

 
1,226

 
4.67

 
0.5

Total fixed-rate
298,503

 
3.45

 
79.9

 
114,065

 
4.85

 
45.9

 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:(2)
 
 
 
 
 
 
 
 
 
 
 
<= 36 months
1,571

 
2.86

 
0.4

 
2,459

 
3.83

 
1.0

> 36 months
35,099

 
2.98

 
9.4

 
30,068

 
4.03

 
12.1

One- to four-family construction
4,007

 
3.00

 
1.1

 
3,467

 
3.87

 
1.4

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
17,347

 
4.53

 
4.7

 
72,879

 
4.69

 
29.3

Commercial and industrial
1,950

 
5.00

 
0.5

 
11,615

 
5.35

 
4.7

Commercial construction
508

 
5.50

 
0.1

 
—

 
—

 
—

Home equity
13,686

 
5.16

 
3.7

 
13,450

 
6.42

 
5.4

Other
763

 
3.96

 
0.2

 
399

 
3.50

 
0.2

Total adjustable-rate
74,931

 
3.82

 
20.1

 
134,337

 
4.73

 
54.1

 
 
 
 
 
 
 
 
 
 
 
 
Total originated, refinanced and purchased
$
373,434

 
3.52

 
100.0
%
 
$
248,402

 
4.79

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Purchased and participation loans included above:
 
 
 
 
 
 
 
 
 
 
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
$
125,612

 
3.46

 
 
 
$
24,611

 
4.35

 
 
Participations - commercial
—

 
—

 
 
 
10,776

 
8.00

 
 
Total fixed-rate purchased/participations
125,612

 
3.46

 
 
 
35,387

 
5.46

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
18,985

 
2.96

 
 
 
11,331

 
4.01

 
 
Participations - commercial
—

 
—

 
 
 
—

 
—

 
 
Total adjustable-rate purchased/participations
18,985

 
2.96

 
 
 
11,331

 
4.01

 
 
Total purchased/participation loans
$
144,597

 
3.40

 
 
 
$
46,718

 
5.11

 
 


39

 
For the Six Months Ended
 
March 31, 2020
 
March 31, 2019
 
Amount
 
Rate
 
% of Total
 
Amount
 
Rate
 
% of Total
 
(Dollars in thousands)
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:(1)
 
 
 
 
 
 
 
 
 
 
 
<= 15 years
$
153,063

 
2.96
%
 
19.1
%
 
$
36,928

 
4.21
%
 
6.7
%
> 15 years
408,843

 
3.56

 
51.2

 
173,127

 
4.53

 
31.3

One- to four-family construction
25,102

 
3.42

 
3.1

 
28,279

 
4.53

 
5.1

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
13,272

 
5.00

 
1.7

 
22,829

 
6.40

 
4.1

Commercial and industrial
14,039

 
3.90

 
1.8

 
6,358

 
5.31

 
1.2

Commercial construction
36,253

 
4.72

 
4.5

 
29,919

 
4.78

 
5.4

Home equity
2,487

 
5.88

 
0.3

 
2,383

 
6.16

 
0.4

Other
2,255

 
5.55

 
0.3

 
2,414

 
4.68

 
0.5

Total fixed-rate
655,314

 
3.53

 
82.0

 
302,237

 
4.69

 
54.7

 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:(2)
 
 
 
 
 
 
 
 
 
 
 
<= 36 months
3,669

 
2.86

 
0.5

 
7,687

 
3.76

 
1.4

> 36 months
66,308

 
3.02

 
8.3

 
63,147

 
4.03

 
11.4

One- to four-family construction
9,997

 
3.03

 
1.2

 
11,712

 
4.23

 
2.1

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
26,522

 
4.65

 
3.3

 
93,583

 
4.79

 
16.9

Commercial and industrial
4,475

 
5.08

 
0.6

 
13,950

 
5.46

 
2.5

Commercial construction
1,487

 
5.53

 
0.2

 
28,650

 
5.35

 
5.2

Home equity
29,969

 
5.47

 
3.7

 
30,876

 
6.36

 
5.6

Other
1,431

 
4.04

 
0.2

 
1,094

 
3.15

 
0.2

Total adjustable-rate
143,858

 
3.93

 
18.0

 
250,699

 
4.83

 
45.3

 
 
 
 
 
 
 
 
 
 
 
 
Total originated, refinanced and purchased
$
799,172

 
3.60

 
100.0
%
 
$
552,936

 
4.75

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Purchased and participation loans included above:
 
 
 
 
 
 
 
 
 
 
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
$
220,304

 
3.48

 
 
 
$
63,550

 
4.46

 
 
Participations - commercial
28,426

 
4.65

 
 
 
43,977

 
5.49

 
 
Total fixed-rate purchased/participations
248,730

 
3.61

 
 
 
107,527

 
4.88

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
32,786

 
3.00

 
 
 
25,332

 
3.97

 
 
Participations - commercial
—

 
—

 
 
 
28,650

 
5.35

 
 
Total adjustable-rate purchased/participations
32,786

 
3.00

 
 
 
53,982

 
4.70

 
 
Total purchased/participation loans
$
281,516

 
3.54

 
 
 
$
161,509

 
4.82

 
 

(1)
The fixed-rate one- to four-family loans less than or equal to 15 years have an original maturity at origination of less than or equal to 15 years, while fixed-rate one- to four-family loans greater than 15 years have an original maturity at origination of greater than 15 years.
(2)
The adjustable-rate one- to four-family loans less than or equal to 36 months have a term to first reset of less than or equal to 36 months at origination and adjustable-rate one- to four-family loans greater than 36 months have a term to first reset of greater than 36 months at origination.


40

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 credit score, weighted average LTV ratio, and average balance per loan as of the dates presented. Credit scores are updated at least annually, with the latest update in September 2019, 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.
 
March 31, 2020
 
September 30, 2019
 
 
 
% of
 
Credit
 
 
 
Average
 
 
 
% of
 
Credit
 
 
 
Average
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
(Dollars in thousands)
Originated
$
3,944,782

 
60.1
%
 
767

 
62
%
 
$
143

 
$
3,873,851

 
59.8
%
 
768

 
62
%
 
$
140

Correspondent purchased
2,385,907

 
36.4

 
764

 
65

 
375

 
2,349,877

 
36.3

 
765

 
65

 
371

Bulk purchased
228,730

 
3.5

 
763

 
61

 
302

 
252,347

 
3.9

 
762

 
61

 
304

 
$
6,559,419

 
100.0
%
 
766

 
63

 
189

 
$
6,476,075

 
100.0
%
 
767

 
63

 
186


The following tables present originated, refinanced, and correspondent purchased activity in our one- to four-family loan portfolio, excluding endorsement activity, along with associated weighted average LTVs and weighted average credit scores for the periods indicated. Included in the "Refinanced by Bank customers" line item are correspondent loans that were refinanced with the Bank. Of the loans originated during the current year period, $127.4 million were refinanced from other lenders. Of the loans originated and refinanced during the current year period, 78% had loan values of $510 thousand or less. Of the correspondent loans purchased during the current year period, 23% had loan values of $510 thousand or less.
 
For the Three Months Ended
 
March 31, 2020
 
March 31, 2019
 
 
 
 
 
Credit
 
 
 
 
 
Credit
 
Amount
 
LTV
 
Score
 
Amount
 
LTV
 
Score
 
(Dollars in thousands)
Originated
$
133,513

 
75
%
 
764

 
$
83,101

 
77
%
 
755

Refinanced by Bank customers
43,470

 
68

 
758

 
9,618

 
67

 
749

Correspondent purchased
144,597

 
71

 
766

 
35,942

 
74

 
761

 
$
321,580

 
73

 
764

 
$
128,661

 
76

 
756

 
For the Six Months Ended
 
March 31, 2020
 
March 31, 2019
 
 
 
 
 
Credit
 
 
 
 
 
Credit
 
Amount
 
LTV
 
Score
 
Amount
 
LTV
 
Score
 
(Dollars in thousands)
Originated
$
305,900

 
75
%
 
766

 
$
209,426

 
77
%
 
755

Refinanced by Bank customers
107,992

 
68

 
760

 
22,572

 
67

 
746

Correspondent purchased
253,090

 
71

 
767

 
88,882

 
74

 
762

 
$
666,982

 
72

 
765

 
$
320,880

 
75

 
756



41

The following table presents the amount, percent of total, and weighted average rate, by state, of one- to four-family loan originations and correspondent purchases where originations and purchases in the state exceeded five percent of the total amount originated and purchased during the period ended March 31, 2020.
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
March 31, 2020
 
March 31, 2020
State
 
Amount
 
% of Total
 
Rate
 
Amount
 
% of Total
 
Rate
 
 
(Dollars in thousands)
Kansas
 
$
153,911

 
47.8
%
 
3.30
%
 
$
361,548

 
54.2
%
 
3.33
%
Missouri
 
59,433

 
18.5

 
3.37

 
119,514

 
17.9

 
3.38

Texas
 
59,371

 
18.5

 
3.29

 
103,439

 
15.5

 
3.32

Other states
 
48,865

 
15.2

 
3.47

 
82,481

 
12.4

 
3.48

 
 
$
321,580

 
100.0
%
 
3.34

 
$
666,982

 
100.0
%
 
3.35


One- to Four-Family Loan Commitments - 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 March 31, 2020, along with associated weighted average rates. Loan commitments generally have fixed expiration dates or other termination clauses and may require the payment of a rate lock fee. 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. As discussed above, the Bank suspended its purchase of correspondent one- to four-family loans during the initial days of the COVID-19 pandemic, but the Bank continues to progress through the approval and funding of the commitments in the pipeline at the time of the suspension.
 
Fixed-Rate
 
 
 
 
 
 
 
15 years
 
More than
 
Adjustable-
 
Total
 
or less
 
15 years
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Originate/refinance
$
27,472

 
$
49,544

 
$
12,376

 
$
89,392

 
3.27
%
Correspondent
28,065

 
68,986

 
15,668

 
112,719

 
3.25

 
$
55,537

 
$
118,530

 
$
28,044

 
$
202,111

 
3.26

 
 
 
 
 
 
 
 
 
 
Rate
2.90
%
 
3.50
%
 
2.96
%
 
 
 
 

Commercial Loans - During the current year period, the Bank originated $67.6 million of commercial loans, entered into commercial real estate loan participations totaling $28.4 million, and processed commercial loan disbursements, excluding lines of credit, of approximately $89 million at a weighted average rate of 4.72%.


42

The following table presents the Bank's commercial real estate and commercial construction loans and loan commitments by type of primary collateral, as of March 31, 2020. Included in the gross loan amounts in the table, which does not include outstanding commitments, are fixed-rate loans totaling $482.7 million at a weighted average rate of 4.34% and adjustable-rate loans totaling $340.8 million at a weighted average rate of 4.65%. The weighted average rate of fixed-rate loans is lower than that of adjustable-rate loans due primarily to the majority of the fixed-rate loans in the portfolio at March 31, 2020 having shorter terms to maturity. Because the commitments to pay out undisbursed funds are not cancellable by the Bank, unless the loan is in default, we anticipate fully funding the related projects.
 
Unpaid
 
Undisbursed
 
Gross Loan
 
Outstanding
 
 
 
% of
 
Principal
 
Amount
 
Amount
 
Commitments
 
Total
 
Total
 
(Dollars in thousands)
Senior housing
$
227,102

 
$
45,545

 
$
272,647

 
$
—

 
$
272,647

 
31.1
%
Hotel
117,462

 
19,137

 
136,599

 
43,757

 
180,356

 
20.5

Retail building
120,333

 
21,609

 
141,942

 
4,999

 
146,941

 
16.7

Multi-family
59,294

 
15,452

 
74,746

 
1,720

 
76,466

 
8.7

One- to four-family property
57,434

 
4,882

 
62,316

 
1,652

 
63,968

 
7.3

Office building
53,469

 
1,039

 
54,508

 
590

 
55,098

 
6.3

Single use building
44,539

 
4,556

 
49,095

 
807

 
49,902

 
5.7

Other
30,869

 
787

 
31,656

 
675

 
32,331

 
3.7

 
$
710,502

 
$
113,007

 
$
823,509

 
$
54,200

 
$
877,709

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average rate
4.44
%
 
4.65
%
 
4.47
%
 
5.35
%
 
4.52
%
 
 

The following table summarizes the Bank's commercial real estate and commercial construction loans and loan commitments by state as of March 31, 2020.
 
Unpaid
 
Undisbursed
 
Gross Loan
 
Outstanding
 
 
 
% of
 
Principal
 
Amount
 
Amount
 
Commitments
 
Total
 
Total
 
(Dollars in thousands)
Kansas
$
285,283

 
$
10,817

 
$
296,100

 
$
2,919

 
$
299,019

 
34.1
%
Missouri
227,267

 
66,363

 
293,630

 
3,401

 
297,031

 
33.8

Texas
99,316

 
27,934

 
127,250

 
43,697

 
170,947

 
19.5

Nebraska
31,919

 
1,690

 
33,609

 
—

 
33,609

 
3.8

Kentucky
25,230

 
330

 
25,560

 
—

 
25,560

 
2.9

California
5,941

 
4,300

 
10,241

 
—

 
10,241

 
1.2

Other
35,546

 
1,573

 
37,119

 
4,183

 
41,302

 
4.7

 
$
710,502

 
$
113,007

 
$
823,509

 
$
54,200

 
$
877,709

 
100.0
%

The following table presents the Bank's commercial and industrial loans and loan commitments by business purpose, as of March 31, 2020.
 
Unpaid
 
Undisbursed
 
Gross Loan
 
Outstanding
 
 
 
% of
 
Principal
 
Amount
 
Amount
 
Commitments
 
Total
 
Total
 
(Dollars in thousands)
Working capital
$
17,789

 
$
13,116

 
$
30,905

 
$
2,910

 
$
33,815

 
41.8
%
Equipment
16,943

 
536

 
17,479

 
70

 
17,549

 
21.7

Business investment
11,993

 
80

 
12,073

 
125

 
12,198

 
15.1

Purchase/lease autos
8,954

 
95

 
9,049

 
—

 
9,049

 
11.2

Other
6,474

 
1,825

 
8,299

 
—

 
8,299

 
10.2

 
$
62,153

 
$
15,652

 
$
77,805

 
$
3,105

 
$
80,910

 
100.0
%


43

The following table presents the Bank's commercial loan portfolio and outstanding loan commitments, categorized by gross loan amount (unpaid principal plus undisbursed amounts) or outstanding loan commitment amount, as of March 31, 2020.
 
Count
 
Amount
 
(Dollars in thousands)
Greater than $30 million
3

 
$
121,748

>$15 to $30 million
12

 
296,150

>$10 to $15 million
4

 
50,192

>$5 to $10 million
13

 
83,795

$1 to $5 million
95

 
214,002

Less than $1 million
1,223

 
192,732

 
1,350

 
$
958,619


The Bank's commercial lending team is working proactively with our commercial customers as the COVID-19 pandemic continues to present challenging operating conditions. As discussed above, through April 30, 2020, we have modified or are in the process of modifying $365.8 million of commercial loans under our COVID-19 loan modification program. We have also processed 575 PPP loans for $40.7 million, for which we expect to receive approximately $1.7 million in fees under the first PPP. Approximately 60% of PPP loans processed are in the following industries: construction, professional/scientific/technical, health care/social assistance, and retail trade.

The following table presents the unpaid principal balance of Bank's commercial real estate loans, by type of primary collateral, and commercial and industrial loans, by business purpose, that either have been modified or are in the process of being modified as of April 30, 2020. The information is split by type of modification and presented as a percentage of total modifications, as well as by a percentage of the related unpaid principal balance of the related property type or business purpose category.
 
Modification Type
 
 
 
% of
 
Interest
 
Payment
 
 
 
% of
 
Property Type/
 
Only
 
Deferral
 
Total
 
Total
 
Business Purpose
 
(Dollars in thousands)
 
 
 
 
Commercial real estate
 
 
 
 
 
 
 
 
 
Senior housing
$
101,904

 
$
46,220

 
$
148,124

 
40.5
%
 
65.2
%
Hotel
76,249

 
19,266

 
95,515

 
26.1

 
81.3

Single use building
30,450

 
5,331

 
35,781

 
9.8

 
80.3

Retail building
31,814

 
3,119

 
34,933

 
9.6

 
29.0

Office building
16,415

 
7,012

 
23,427

 
6.4

 
43.8

Multi-family
8,233

 
—

 
8,233

 
2.3

 
13.9

One- to four-family property
7,680

 
—

 
7,680

 
2.1

 
13.4

Other
3,297

 
—

 
3,297

 
0.9

 
10.7

 
276,042

 
80,948

 
356,990

 
97.7

 
50.2

Commercial and industrial
 
 
 
 
 
 
 
 
 
Equipment
4,141

 
—

 
4,141

 
1.1

 
24.4

Business investment
2,372

 
—

 
2,372

 
0.6

 
19.8

Working capital
869

 
—

 
869

 
0.2

 
4.9

Purchase/lease autos
587

 
—

 
587

 
0.2

 
6.6

Other
807

 
—

 
807

 
0.2

 
12.5

 
8,776

 
—

 
8,776

 
2.3

 
14.1

Total
$
284,818

 
$
80,948

 
$
365,766

 
100.0
%
 
47.3
%


44


Asset Quality. The Bank's traditional one- to four-family underwriting guidelines have provided the Bank with generally low delinquencies and low levels of non-performing assets within this loan category compared to national levels. Of particular importance is the complete and full documentation required for each loan the Bank originates, participates in or purchases. This allows the Bank to make an informed credit decision based upon a thorough assessment of the borrower's ability to repay the loan. The Bank performs more extensive due diligence when underwriting commercial loans than loans secured by one- to four-family residential properties due to the larger loan amounts, the more complex sources of repayment and the riskier nature of such loans. When participating in a commercial loan, the Bank performs the same underwriting procedures as if the loan was being originated by the Bank. See additional discussion regarding underwriting standards in "Part I, Item 1. Business - Lending Practices and Underwriting Standards" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019.

Delinquent and non-performing loans and OREO - The following table presents the Company's 30 to 89 day delinquent loans at the dates indicated. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs. Of the loans 30 to 89 days delinquent at March 31, 2020, approximately 78% were 59 days or less delinquent.
 
Loans Delinquent for 30 to 89 Days at:
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
2020
 
2019
 
2019
 
2019
 
2019
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
92
 
$
8,360

 
96
 
$
9,004

 
90
 
$
7,223

 
94

 
$
7,749

 
79

 
$
8,694

Correspondent purchased
13
 
4,531

 
13
 
4,117

 
9
 
2,721

 
14

 
3,727

 
13

 
4,133

Bulk purchased
12
 
2,914

 
14
 
3,307

 
16
 
3,581

 
13

 
2,249

 
13

 
2,722

Commercial
7
 
1,555

 
7
 
1,192

 
8
 
826

 
12

 
1,699

 
13

 
1,361

Consumer
43
 
628

 
40
 
488

 
42
 
525

 
43

 
630

 
37

 
481

 
167
 
$
17,988

 
170
 
$
18,108

 
165
 
$
14,876

 
176

 
$
16,054

 
155

 
$
17,391

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans 30 to 89 days delinquent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
to total loans receivable, net
 
 
0.24
%
 
 
 
0.24
%
 
 
 
0.20
%
 
 
 
0.21
%
 
 
 
0.23
%

The table below presents the Company's non-performing loans and OREO at the dates indicated. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs. Non-performing loans are loans that are 90 or more days delinquent or in foreclosure and other loans required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements and/or internal policies, even if the loans are current. At all dates presented, there were no loans 90 or more days delinquent that were still accruing interest. Non-performing assets include non-performing loans and OREO. OREO primarily includes assets acquired in settlement of loans. Over the past 12 months, OREO properties acquired in settlement of one- to four-family loans were owned by the Bank, on average, for approximately three months before the properties were sold.

45

 
Non-Performing Loans and OREO at:
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
2020
 
2019
 
2019
 
2019
 
2019
 
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
53

 
$
4,517

 
44

 
$
3,552

 
44

 
$
3,268

 
58

 
$
5,069

 
67

 
$
5,172

Correspondent purchased
4

 
1,342

 
4

 
1,376

 
4

 
1,008

 
2

 
871

 
3

 
918

Bulk purchased
1

 
630

 
2

 
689

 
6

 
1,465

 
7

 
2,194

 
10

 
2,782

Commercial
4

 
716

 
—

 
—

 
4

 
170

 
—

 
—

 
—

 
—

Consumer
17

 
326

 
20

 
340

 
25

 
362

 
25

 
437

 
27

 
567

 
79

 
7,531

 
70

 
5,957

 
83

 
6,273

 
92

 
8,571

 
107

 
9,439

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans 90 or more days delinquent or in foreclosure
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 as a percentage of total loans
 
 
0.10
%
 
 
 
0.08
%
 
 
 
0.08
%
 
 
 
0.11
%
 
 
 
0.12
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonaccrual loans less than 90 Days Delinquent:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
13

 
$
811

 
11

 
$
634

 
16

 
$
1,183

 
15

 
$
1,057

 
18

 
$
1,761

Correspondent purchased
1

 
189

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Bulk purchased
1

 
134

 
1

 
134

 
1

 
65

 
2

 
374

 
—

 
—

Commercial
2

 
129

 
6

 
363

 
1

 
7

 
1

 
7

 
2

 
1,712

Consumer
2

 
43

 
—

 
—

 
2

 
35

 
2

 
4

 
3

 
14

 
19

 
1,306

 
18

 
1,131

 
20

 
1,290

 
20

 
1,442

 
23

 
3,487

Total non-performing loans
98

 
8,837

 
88

 
7,088

 
103

 
7,563

 
112

 
10,013

 
130

 
12,926

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-performing loans as a percentage of total loans
 
0.12
%
 
 
 
0.10
%
 
 
 
0.10
%
 
 
 
0.13
%
 
 
 
0.17
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OREO:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated(2)
5

 
$
187

 
8

 
$
414

 
8

 
$
745

 
8

 
$
546

 
5

 
$
549

Bulk purchased
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1

 
322

Commercial
—

 
—

 
—

 
—

 
1

 
600

 
1

 
600

 
1

 
600

Consumer
—

 
—

 
1

 
98

 
—

 
—

 
—

 
—

 
—

 
—

 
5

 
187

 
9

 
512

 
9

 
1,345

 
9

 
1,146

 
7

 
1,471

Total non-performing assets
103

 
$
9,024

 
97

 
$
7,600

 
112

 
$
8,908

 
121

 
$
11,159

 
137

 
$
14,397

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-performing assets as a percentage of total assets
 
0.10
%
 
 
 
0.08
%
 
 
 
0.10
%
 
 
 
0.12
%
 
 
 
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.

46

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 are located and the corresponding balance of loans 30 to 89 days delinquent, 90 or more days delinquent or in foreclosure, and weighted average LTV ratios for loans 90 or more days delinquent or in foreclosure at March 31, 2020. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. At March 31, 2020, potential losses, after taking into consideration anticipated private mortgage insurance proceeds and estimated selling costs, have been charged-off.
 
 
 
 
 
 
Loans 30 to 89
 
Loans 90 or More Days Delinquent
 
 
One- to Four-Family
 
Days Delinquent
 
or in Foreclosure
State
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Amount
 
% of Total
 
LTV
 
 
(Dollars in thousands)
Kansas
 
$
3,592,113

 
54.7
%
 
$
6,655

 
42.1
%
 
$
4,229

 
65.2
%
 
63
%
Missouri
 
1,179,941

 
18.0

 
2,300

 
14.5

 
804

 
12.4

 
64

Texas
 
759,064

 
11.6

 
1,591

 
10.1

 
441

 
6.8

 
44

Other states
 
1,028,301

 
15.7

 
5,259

 
33.3

 
1,015

 
15.6

 
71

 
 
$
6,559,419

 
100.0
%
 
$
15,805

 
100.0
%
 
$
6,489

 
100.0
%
 
63


Classified loans - The following table presents loans classified as special mention or substandard at the dates presented. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs. The increase in special mention loans at March 31, 2020 compared to March 31, 2019 was due primarily to one $50.0 million commercial participation real estate loan being classified as special mention during the quarter ended June 30, 2019. Management continues to closely monitor the project and surrounding activities. Included in substandard commercial loans at March 31, 2020 and December 31, 2019 were $3.4 million and $3.8 million, respectively, of loans added in the CCB acquisition which have since been renewed and on which the related purchase acquisition adjustments have been accreted; as such, these loans are now included in the Bank's ACL formula analysis model or are individually evaluated for impairment. There were no such loans at March 31, 2019.
 
March 31, 2020
 
December 31, 2019
 
March 31, 2019
 
Special Mention
 
Substandard
 
Special Mention
 
Substandard
 
Special Mention
 
Substandard
 
(Dollars in thousands)
One- to four-family
$
13,678

 
$
26,077

 
$
15,778

 
$
25,376

 
$
11,943

 
$
28,774

Commercial
52,515

 
4,538

 
52,809

 
5,356

 
5,330

 
1,712

Consumer
479

 
659

 
375

 
683

 
125

 
882

 
$
66,672

 
$
31,274

 
$
68,962

 
$
31,415

 
$
17,398

 
$
31,368


Allowance for credit losses and Provision for credit losses - Management maintains an ACL to absorb inherent losses in the loan portfolio based on quarterly assessments of the loan portfolio. The ACL is maintained through provisions for credit losses which are either charged to or credited to income. Each quarter a formula analysis model is prepared which segregates the loan portfolio into categories based on certain risk characteristics.  Historical loss factors and qualitative factors are applied to each loan category in the formula analysis model.  The factors are reviewed by management quarterly to assess whether the factors adequately cover probable and estimable losses inherent in the loan portfolio.  Due to the deterioration of economic conditions as a result of the COVID-19 pandemic, management increased some of the historical loss factors and qualitative factors to account for the increase in the estimated inherent losses in the loan portfolio at March 31, 2020.

One- to Four- Family and Consumer Loans: Management took into consideration the unprecedented increase in layoffs/furloughs as a result of COVID-19 and the industries and employee groups impacted by the layoffs/furloughs, the Bank's historical ACL to loans receivable ratios compared to the historical unemployment and housing price index trending, and the Bank's historical charge-off percentages when evaluating the Bank's historical loss factors and qualitative loss factors at March 31, 2020. As a result of the analysis, management increased the historical loss factors and qualitative factors for one- to four-family and consumer loans at March 31, 2020. Management selected the worst historical time periods reviewed and used those factors in the ACL formula analysis model at March 31, 2020. Management then evaluated the calculated ACL to the Bank's historical ACL to loan ratios to determine the appropriate amount of ACL at March 31, 2020.

Commercial Loans: As a result of the very limited historical loan loss experience for our commercial loan portfolio, management considered historical peer ACL to loans receivable percentages and peer charge-off percentages and the economic conditions during those time periods when evaluating the level of ACL at March 31, 2020 for commercial loans. Management also considered the layoffs/furloughs information noted above, along with impacts to certain categories of our commercial loan portfolio related to stay-at-home orders, mandatory closures, social distancing requirements, work-from-home requirements, and populations generally disproportionately

47

impacted by COVID-19 (e.g., senior housing), among others. Additionally, the commercial lending team closely analyzed the Bank's largest commercial relationships in late March 2020. Approximately 83% of all commercial loan balances outstanding at March 31, 2020 were analyzed. There were $162.5 million of commercial loans, or 21% of the unpaid commercial loan balance at March 31, 2020, considered most at risk of short-term operational cash flow issues and/or to have collateral concerns, primarily in the hotel and single use building categories, which were both among the categories with the highest usage of the Bank's COVID-19 loan modification program. The weighted average LTV ratios based on the unpaid principal balance of senior housing, retail building, hotel, office building, and single use building loans were 68%, 76%, 58%, 80%, and 68%, respectively, at March 31, 2020. We also considered the largest credits in these loan categories. The evaluation of most of our commercial and industrial loans concluded that many of these loans are to businesses that are deemed essential, which we believe reduces the risk of loss on these loans at this time. Management was not aware of any construction delays or other issues that would significantly delay or impact funding of the commercial construction loans at March 31, 2020. After reviewing the economic information noted above, management established a COVID-19 qualitative factor at March 31, 2020. The COVID-19 qualitative factor was developed by analyzing historical peer ACL to loans receivable percentages and peer charge-off percentages.
Overall: Programs under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act were not sufficiently in effect at March 31, 2020 to provide relief to borrowers and the extent of the relief to borrowers related to the CARES Act programs is not yet known. Management believes the ACL at March 31, 2020 was adequate to absorb inherent losses in the loan portfolio at that point in time based on the known facts and circumstances of the economic environment. Management will continue to closely monitor economic conditions and will work with borrowers as necessary to assist them through this challenging economic climate. If economic conditions continue to worsen and/or the CARES Act programs and future government programs, if any, do not provide adequate relief to borrowers, it is possible the Bank's ACL will need to increase in future periods.



48

See "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Allowance for Credit Losses" and "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019 for a full discussion of our ACL methodology. See "Note 4. Loans Receivable and Allowance for Credit Losses" for additional information on the ACL.

The distribution of our ACL at the dates indicated is summarized below.
 
At
 
March 31, 2020
 
September 30, 2019
 
 
 
% of ACL
 
 
 
% of
 
 
 
% of ACL
 
 
 
% of
 
Amount
 
to Total
 
Total
 
Loans to
 
Amount
 
to Total
 
Total
 
Loans to
 
of ACL
 
ACL
 
Loans
 
Total Loans
 
of ACL
 
ACL
 
Loans
 
Total Loans
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
$
6,420

 
20.6
%
 
$
3,944,782

 
52.6
%
 
$
1,982

 
21.6
%
 
$
3,873,851

 
52.2
%
Correspondent purchased
3,355

 
10.7

 
2,385,907

 
31.8

 
1,203

 
13.0

 
2,349,877

 
31.7

Bulk purchased
557

 
1.8

 
228,730

 
3.1

 
687

 
7.4

 
252,347

 
3.4

Construction
47

 
0.2

 
35,798

 
0.5

 
18

 
0.2

 
36,758

 
0.5

Total
10,379

 
33.3

 
6,595,217

 
88.0

 
3,890

 
42.2

 
6,512,833

 
87.8

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
14,672

 
47.0

 
584,236

 
7.8

 
3,448

 
37.4

 
583,617

 
7.9

Commercial and industrial
1,489

 
4.8

 
62,153

 
0.8

 
472

 
5.1

 
61,094

 
0.8

Construction
4,167

 
13.4

 
126,266

 
1.7

 
1,251

 
13.5

 
123,159

 
1.7

Total
20,328

 
65.2

 
772,655

 
10.3

 
5,171

 
56.0

 
767,870

 
10.4

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
397

 
1.3

 
114,571

 
1.5

 
97

 
1.1

 
120,587

 
1.6

Other consumer
92

 
0.2

 
10,837

 
0.2

 
68

 
0.7

 
11,183

 
0.2

Total consumer loans
489

 
1.5

 
125,408

 
1.7

 
165

 
1.8

 
131,770

 
1.8

 
$
31,196

 
100.0
%
 
$
7,493,280

 
100.0
%
 
$
9,226

 
100.0
%
 
$
7,412,473

 
100.0
%



49

The ratio of ACL to loans receivable, by loan type, at the dates indicated is summarized below.
 
At
 
March 31, 
 
December 31, 
 
September 30, 
 
June 30, 
 
March 31, 
 
2020
 
2019
 
2019
 
2019
 
2019
One- to four-family:
 
 
 
 
 
 
 
 
 
Originated
0.16
%
 
0.05
%
 
0.05
%
 
0.05
%
 
0.05
%
Correspondent purchased
0.14

 
0.05

 
0.05

 
0.05

 
0.06

Bulk purchased
0.24

 
0.26

 
0.27

 
0.28

 
0.29

Construction
0.13

 
0.05

 
0.05

 
0.05

 
0.05

Total
0.16

 
0.06

 
0.06

 
0.06

 
0.07

Commercial:
 
 
 
 
 
 
 
 
 
Commercial real estate
2.51

 
0.62

 
0.59

 
0.55

 
0.51

Commercial and industrial
2.40

 
1.25

 
0.77

 
0.38

 
0.30

Construction
3.30

 
1.02

 
1.02

 
1.00

 
0.99

Total
2.63

 
0.72

 
0.67

 
0.61

 
0.56

Consumer
0.39

 
0.12

 
0.13

 
0.11

 
0.12

Total
0.42

 
0.13

 
0.12

 
0.12

 
0.11



The following tables present ACL activity and related ratios at the dates and for the periods indicated. See "Note 4 - Loans Receivable and Allowance for Credit Losses" for additional information related to ACL activity by specific loan categories.
 
For the Three Months Ended
 
March 31, 2020
 
December 31, 2019
 
September 30, 2019
 
June 30, 2019
 
March 31, 2019
 
(Dollars in thousands)
ACL beginning balance
$
9,435

 
$
9,226

 
$
9,036

 
$
8,619

 
$
8,558

Charge-offs
(375
)
 
(48
)
 
(133
)
 
(61
)
 
(12
)
Recoveries
61

 
32

 
23

 
28

 
73

Provision for credit losses
22,075

 
225

 
300

 
450

 
—

ACL ending balance
$
31,196

 
$
9,435

 
$
9,226

 
$
9,036

 
$
8,619

 
 
 
 
 
 
 
 
 
 
ACL to loans receivable at end of period
0.42
%
 
0.13
%
 
0.12
%
 
0.12
%
 
0.11
 %
ACL to non-performing loans at end of period
353.02

 
133.11

 
121.99

 
90.24

 
66.68

Ratio of net charge-offs (recoveries) during the
 
 
 
 
 
 
 
 
 
period to average loans outstanding
—

 
—

 
—

 
—

 
—

Ratio of net charge-offs (recoveries) during the
 
 
 
 
 
 
 
 
 
period to average non-performing assets
3.78

 
0.19

 
1.09

 
0.26

 
(0.41
)
ACL to net charge-offs (annualized)
24.9x

 
144.5x

 
21.1x

 
68.1x

 
N/M(1)


50

 
For the Six Months Ended
 
March 31, 2020
 
March 31, 2019
 
(Dollars in thousands)
ACL beginning balance
$
9,226

 
$
8,463

Charge-offs
(423
)
 
(68
)
Recoveries
93

 
224

Provision for credit losses
22,300

 
—

ACL ending balance
$
31,196

 
$
8,619

 
 
 
 
Ratio of net charge-offs during the period to
 
 
 
average loans outstanding during the period
—
%
 
—
 %
Ratio of net charge-offs during the period to
 
 
 
average non-performing assets during the period
3.68

 
(1.14
)
ACL to net charge-offs (annualized)
47.3x

 
N/M(1)

(1)
This ratio is not presented for the time periods noted due to loan recoveries exceeding loan charge-offs during these periods.

51

Securities. The following table presents the distribution of our securities portfolio, at amortized cost, at the dates indicated. Overall, fixed-rate securities comprised 79% of our securities portfolio at March 31, 2020. 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 taxable equivalent basis.
 
March 31, 2020
 
December 31, 2019
 
September 30, 2019
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Fixed-rate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MBS
$
690,220

 
2.33
%
 
3.1

 
$
648,663

 
2.40
%
 
2.8

 
$
625,840

 
2.46
%
 
2.9

GSE debentures
250,080

 
1.88

 
0.3

 
274,994

 
2.03

 
0.8

 
249,828

 
2.15

 
0.7

Municipal bonds
11,887

 
1.66

 
0.9

 
17,050

 
1.60

 
0.9

 
18,371

 
1.63

 
1.0

Total fixed-rate securities
952,187

 
2.20

 
2.3

 
940,707

 
2.28

 
2.2

 
894,039

 
2.35

 
2.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MBS
257,329

 
2.97

 
4.9

 
276,069

 
3.09

 
4.3

 
297,416

 
3.10

 
4.7

Total securities portfolio
$
1,209,516

 
2.36

 
2.9

 
$
1,216,776

 
2.46

 
2.7

 
$
1,191,455

 
2.54

 
2.9



The following table presents the carrying value of MBS in our portfolio by issuer at the dates presented.
 
March 31, 2020
 
December 31, 2019
 
September 30, 2019
 
(Dollars in thousands)
Federal National Mortgage Association ("FNMA")
$
735,385

 
$
681,383

 
$
656,799

Federal Home Loan Mortgage Corporation ("FHLMC")
179,987

 
192,821

 
208,745

Government National Mortgage Association
57,946

 
63,113

 
70,943

 
$
973,318

 
$
937,317

 
$
936,487


52

Mortgage-Backed Securities - The balance of MBS, which primarily consists of securities of U.S. GSEs, increased $36.8 million, from $936.5 million at September 30, 2019, to $973.3 million at March 31, 2020. The following tables summarize the activity in our portfolio of MBS 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 balances are as of the last day of the period previous to the period presented and the weighted average yields for the ending balances are as of the last day of the period presented and are generally derived from recent prepayment activity on the securities in the portfolio as of the dates presented. The beginning and ending WAL are the estimated remaining principal repayment term (in years) after three-month historical prepayment speeds have been applied.

 
For the Three Months Ended
 
March 31, 2020
 
December 31, 2019
 
September 30, 2019
 
June 30, 2019
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Beginning balance - carrying value
$
937,317

 
2.61
%
 
3.3

 
$
936,487

 
2.67
%
 
3.5

 
$
979,256

 
2.68
%
 
3.4

 
$
985,294

 
2.67
%
 
3.7

Maturities and repayments
(65,767
)
 
 
 
 
 
(72,635
)
 
 
 
 
 
(70,865
)
 
 
 
 
 
(74,335
)
 
 
 
 
Net amortization of (premiums)/discounts
(279
)
 
 
 
 
 
(248
)
 
 
 
 
 
(270
)
 
 
 
 
 
(375
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
88,863

 
1.80

 
4.5

 
74,359

 
2.05

 
3.8

 
25,214

 
1.93

 
3.2

 
23,620

 
2.74

 
3.8

Adjustable
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
40,362

 
2.79

 
4.5

Valuation transferred from HTM to AFS
—

 
 
 
 
 
—

 
 
 
 
 
3,039

 
 
 
 
 
—

 
 
 
 
Change in valuation on AFS securities
13,184

 
 
 
 
 
(646
)
 
 
 
 
 
113

 
 
 
 
 
4,690

 
 
 
 
Ending balance - carrying value
$
973,318

 
2.50

 
3.6

 
$
937,317

 
2.61

 
3.3

 
$
936,487

 
2.67

 
3.5

 
$
979,256

 
2.68

 
3.4

 
For the Six Months Ended
 
March 31, 2020
 
March 31, 2019
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Beginning balance - carrying value
$
936,487

 
2.67
%
 
3.5

 
$
1,036,990

 
2.57
%
 
3.4

Maturities and repayments
(138,402
)
 
 
 
 
 
(129,916
)
 
 
 
 
Net amortization of (premiums)/discounts
(527
)
 
 
 
 
 
(659
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
Fixed
163,222

 
1.91

 
4.2

 
28,921

 
2.89

 
5.1

Adjustable
—

 
—

 
—

 
43,776

 
2.69

 
4.3

Change in valuation on AFS securities
12,538

 
 
 
 
 
6,182

 
 
 
 
Ending balance - carrying value
$
973,318

 
2.50

 
3.6

 
$
985,294

 
2.67

 
3.7


53

Investment Securities - Investment securities, which consist of U.S. GSE debentures (primarily issued by FNMA, FHLMC, or Federal Home Loan Banks) and municipal investments, decreased $5.7 million, from $268.4 million at September 30, 2019, to $262.7 million at March 31, 2020. Municipal investments totaled $11.9 million at March 31, 2020. The following tables summarize the activity of investment securities 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 balances are as of the last day of the period previous to the period presented and the weighted average yields for the ending balances are as of the last day of the period presented. The beginning and ending WALs represent the estimated remaining principal repayment terms (in years) of the securities after projected call dates have been considered, based upon market rates at each date presented.
 
For the Three Months Ended
 
March 31, 2020
 
December 31, 2019
 
September 30, 2019
 
June 30, 2019
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Beginning balance - carrying value
$
292,270

 
2.00
%
 
0.8

 
$
268,376

 
2.11
%
 
0.8

 
$
273,995

 
2.30
%
 
1.0

 
$
288,894

 
2.38
%
 
1.0

Maturities, calls and sales
(80,125
)
 
 
 
 
 
(51,175
)
 
 
 
 
 
(80,690
)
 
 
 
 
 
(65,781
)
 
 
 
 
Net amortization of (premiums)/discounts
(49
)
 
 
 
 
 
20

 
 
 
 
 
(13
)
 
 
 
 
 
153

 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
50,097

 
1.42

 
0.4

 
75,000

 
1.90

 
1.7

 
75,000

 
2.02

 
1.1

 
50,000

 
2.60

 
1.0

Valuation transferred from HTM to AFS
—

 
 
 
 
 
—

 
 
 
 
 
47

 
 
 
 
 
—

 
 
 
 
Change in valuation on AFS securities
526

 
 
 
 
 
49

 
 
 
 
 
37

 
 
 
 
 
729

 
 
 
 
Ending balance - carrying value
$
262,719

 
1.87

 
0.3

 
$
292,270

 
2.00

 
0.8

 
$
268,376

 
2.11

 
0.8

 
$
273,995

 
2.30

 
1.0

 
For the Six Months Ended
 
March 31, 2020
 
March 31, 2019
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Beginning balance - carrying value
$
268,376

 
2.11
%
 
0.8

 
$
289,942

 
2.05
%
 
2.2

Maturities, calls and sales
(131,300
)
 
 
 
 
 
(103,300
)
 
 
 
 
Net amortization of (premiums)/discounts
(29
)
 
 
 
 
 
(78
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
Fixed
125,097

 
1.71

 
1.2

 
99,809

 
2.67

 
0.7

Change in valuation on AFS securities
575

 
 
 
 
 
2,521

 
 
 
 
Ending balance - carrying value
$
262,719

 
1.87

 
0.3

 
$
288,894

 
2.38

 
1.0


54

Liabilities

Deposits - The following table presents the amount, weighted average rate and percent of total for the components of our deposit portfolio at the dates presented. The increase in retail/business certificates of deposit at March 31, 2020 compared to December 31, 2019 was due primarily to the Presidents' Day certificate of deposit campaign in February 2020. As of April 30, 2020, the Bank has processed $101.2 million of deposits related to some form of Economic Impact Payments from the U.S. government to individuals as authorized by the CARES Act, and deposits from PPP loans.
 
March 31, 2020
 
December 31, 2019
 
September 30, 2019
 
 
 
 
 
% of
 
 
 
 
 
% of
 
 
 
 
 
% of
 
Amount
 
Rate
 
 Total
 
Amount
 
Rate
 
 Total
 
Amount
 
Rate
 
 Total
 
(Dollars in thousands)
Non-interest-bearing checking
$
385,092

 
—
%
 
6.7
%
 
$
368,311

 
—
%
 
6.6
%
 
$
357,284

 
—
%
 
6.4
%
Interest-bearing checking
761,589

 
0.10

 
13.2

 
745,436

 
0.08

 
13.3

 
717,121

 
0.09

 
12.8

Savings
377,212

 
0.08

 
6.5

 
358,817

 
0.09

 
6.4

 
321,494

 
0.05

 
5.8

Money market
1,208,370

 
0.62

 
20.9

 
1,192,972

 
0.69

 
21.4

 
1,198,343

 
0.70

 
21.5

Retail/business certificates of deposit
2,765,142

 
2.11

 
47.9

 
2,656,379

 
2.11

 
47.6

 
2,692,770

 
2.08

 
48.2

Public unit certificates of deposit
277,214

 
1.87

 
4.8

 
263,936

 
2.14

 
4.7

 
294,855

 
2.29

 
5.3

 
$
5,774,619

 
1.25

 
100.0
%
 
$
5,585,851

 
1.27

 
100.0
%
 
$
5,581,867

 
1.29

 
100.0
%

The following tables set forth scheduled maturity information for our certificates of deposit, including public unit certificates of deposit, along with associated weighted average rates, as of March 31, 2020.
 
 
Amount Due
 
 
 
 
 
 
 
 
More than
 
More than
 
 
 
 
 
 
 
 
1 year
 
1 year to
 
2 years to 3
 
More than
 
Total
Rate range
 
or less
 
2 years
 
years
 
3 years
 
Amount
 
Rate
 
 
(Dollars in thousands)
 
 
  0.00 – 0.99%
 
$
24,636

 
$
3,040

 
$
9

 
$
—

 
$
27,685

 
0.62
%
  1.00 – 1.99%
 
815,587

 
390,098

 
164,390

 
52,050

 
1,422,125

 
1.79

  2.00 – 2.99%
 
641,838

 
282,295

 
436,272

 
231,894

 
1,592,299

 
2.38

  3.00 – 3.99%
 
—

 
—

 
247

 
—

 
247

 
3.00

 
 
$
1,482,061

 
$
675,433

 
$
600,918

 
$
283,944

 
$
3,042,356

 
2.09

 
 
 
 
 
 
 
 
 
 
 
 
 
Percent of total
 
48.7
%
 
22.2
%
 
19.8
%
 
9.3
%
 
 
 
 
Weighted average rate
 
1.99

 
2.03

 
2.28

 
2.36

 
 
 
 
Weighted average maturity (in years)
 
0.4

 
1.5

 
2.5

 
3.8

 
1.4

 
 
Weighted average maturity for the retail/business certificate of deposit portfolio (in years)
 
1.5

 
 
 
Amount Due
 
 
 
 
 
Over
 
Over
 
 
 
 
 
3 months
 
3 to 6
 
6 to 12
 
Over
 
 
 
or less
 
months
 
months
 
12 months
 
Total
 
(Dollars in thousands)
Retail/business certificates of deposit less than $100,000
$
233,608

 
$
145,979

 
$
316,771

 
$
877,976

 
$
1,574,334

Retail/business certificates of deposit of $100,000 or more
195,779

 
131,187

 
221,913

 
641,929

 
1,190,808

Public unit certificates of deposit of $100,000 or more
139,526

 
47,228

 
50,070

 
40,390

 
277,214

 
$
568,913

 
$
324,394

 
$
588,754

 
$
1,560,295

 
$
3,042,356


55

Borrowings - The following tables present 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. FHLB advances are presented at par. 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. During the current quarter, the Bank prepaid fixed-rate FHLB advances scheduled to mature within the next 12 months totaling $350.0 million with a weighted average rate of 2.42%, and replaced these advances with $350.0 million of fixed-rate FHLB advances with a weighted average term of 4.7 years and a weighted average effective rate of 1.70%, which includes the impact of deferred prepayment penalties being recognized over the life of the new advances. This activity is reflected in the table below.
 
For the Three Months Ended
 
March 31, 2020
 
December 31, 2019
 
September 30, 2019
 
June 30, 2019
 
 
 
Effective
 
 
 
 
 
Effective
 
 
 
 
 
Effective
 
 
 
 
 
Effective
 
 
 
Amount
 
Rate
 
WAM
 
Amount
 
Rate
 
WAM
 
Amount
 
Rate
 
WAM
 
Amount
 
Rate
 
WAM
 
(Dollars in thousands)
Beginning balance
$
2,090,000

 
2.37
%
 
2.6

 
$
2,140,000

 
2.38
%
 
2.6

 
$
2,140,000

 
2.35
%
 
2.6

 
$
2,240,000

 
2.29
%
 
2.8

Maturities and prepayments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FHLB advances
(415,000
)
 
2.45

 
 
 
(350,000
)
 
2.40

 
 
 
(375,000
)
 
2.38

 
 
 
(200,000
)
 
2.11

 
 
New FHLB borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate
350,000

 
1.70

 
4.7

 
100,000

 
1.96

 
5.0

 
100,000

 
2.14

 
4.0

 
—

 
—

 
—

Interest rate swaps(1)
65,000

 
2.61

 
4.0

 
200,000

 
2.57

 
2.5

 
275,000

 
2.70

 
4.5

 
100,000

 
3.09

 
9.0

Ending balance
$
2,090,000

 
2.25

 
3.0

 
$
2,090,000

 
2.37

 
2.6

 
$
2,140,000

 
2.38

 
2.6

 
$
2,140,000

 
2.35

 
2.6

 
For the Six Months Ended
 
March 31, 2020
 
March 31, 2019
 
 
 
Effective
 
 
 
 
 
Effective
 
 
 
Amount
 
Rate
 
WAM
 
Amount
 
Rate
 
WAM
 
(Dollars in thousands)
Beginning balance
$
2,140,000

 
2.38
%
 
2.6

 
$
2,185,052

 
2.17
%
 
2.9

Maturities and prepayments:
 
 
 
 
 
 
 
 
 
 
FHLB advances
(765,000
)
 
2.43

 
 
 
(300,000
)
 
1.73

 
 
CCB acquisition - junior subordinated debentures assumed (redeemed)
—

 
—

 
—

 
(10,052
)
 
8.76

 
12.3

New FHLB borrowings:
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate
450,000

 
1.76

 
4.8

 
100,000

 
3.39

 
5.0

Interest rate swaps(1)
265,000

 
2.58

 
2.9

 
265,000

 
2.49

 
3.9

Ending balance
$
2,090,000

 
2.25

 
3.0

 
$
2,240,000

 
2.29

 
2.8


(1)
Represents adjustable-rate FHLB advances for which the Bank has entered into interest rate swaps to hedge the variability in cash flows associated with the advances. The effective rate and WAM presented include the effect of the interest rate swaps.

56

Maturities - The following table presents the maturity of term borrowings (which includes FHLB advances, at par, and repurchase agreements), along with associated weighted average contractual and effective rates as of March 31, 2020.
 
 
Term Borrowings Amount
 
 
 
 
 
 
Maturity by
 

 
Interest rate
 
Total
 
Contractual
 
Effective
Fiscal Year
 
Fixed-rate
 
swaps(1)
 
Amount
 
Rate
 
Rate(2)
 
 
(Dollars in thousands)
 
 
 
 
2020
 
$
300,000

 
$
440,000

 
$
740,000

 
1.85
 
2.46
2021
 
200,000

 
200,000

 
400,000

 
1.91
 
2.28
2022
 
200,000

 
—

 
200,000

 
2.23
 
2.23
2023
 
300,000

 
—

 
300,000

 
1.70
 
1.81
2024
 
100,000

 
—

 
100,000

 
3.39
 
3.39
2025
 
250,000

 
—

 
250,000

 
1.82
 
1.94
2026
 
100,000

 
—

 
100,000

 
1.28
 
1.60
 
 
$
1,450,000

 
$
640,000

 
$
2,090,000

 
1.92
 
2.25

(1)
Represents adjustable-rate FHLB advances for which the Bank has entered into interest rate swaps with a notional amount of $640.0 million to hedge the variability in cash flows associated with the advances. These advances are presented based on their contractual maturity dates and will be renewed periodically until the maturity or termination of the interest rate swaps. The expected WAL of the interest rate swaps was 4.0 years at March 31, 2020.
(2)
The effective rate includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid.

As of March 31, 2020, the Bank did not have a balance outstanding on its FHLB line of credit. The average outstanding balance of FHLB line of credit borrowings during the current year period was $91.7 million at an average rate of 1.85%, and during the current quarter was $82.4 million at an average rate of 1.74%. During the current quarter, the Bank began utilizing the FRB of Kansas City line of credit rather than the FHLB line of credit, as the rate at the FRB of Kansas City was lower. At March 31, 2020, the Bank had an outstanding balance of $30.0 million on its FRB of Kansas City line of credit. The average outstanding balance of the FRB of Kansas City line of credit borrowing during the current quarter was $5.5 million at an average rate of 0.23%.

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/business and public unit amounts, and term borrowings for the next four quarters as of March 31, 2020.
 
 
Retail/ Business
 
 
 
Public Unit
 
 
 
Term
 
 
 
 
 
 
Maturity by
 
Certificate
 
Repricing
 
Certificate
 
Repricing
 
Borrowings
 
Repricing
 
 
 
Repricing
Quarter End
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
Total
 
Rate
 
 
(Dollars in thousands)
June 30, 2020
 
$
429,387

 
2.07
%
 
$
139,526

 
1.76
%
 
$
200,000

 
2.35
%
 
$
768,913

 
2.08
%
September 30, 2020
 
277,166

 
2.03

 
47,228

 
2.10

 
540,000

 
2.50

 
864,394

 
2.33

December 31, 2020
 
275,542

 
1.94

 
29,261

 
1.68

 
250,000

 
2.47

 
554,803

 
2.17

March 31, 2021
 
263,142

 
2.00

 
20,809

 
2.04

 
150,000

 
1.97

 
433,951

 
1.99

 
 
$
1,245,237

 
2.02

 
$
236,824

 
1.84

 
$
1,140,000

 
2.40

 
$
2,622,061

 
2.17



57

Stockholders' Equity. Stockholders' equity was $1.29 billion at March 31, 2020 compared to $1.34 billion at September 30, 2019. The $48.5 million decrease was due primarily to the payment of $70.4 million in cash dividends, partially offset by net income of $26.8 million during the current year period. In the long run, management considers a Bank stockholders' equity to total assets ratio of at least 10% an appropriate level of capital. At March 31, 2020, this ratio was 12.2%. The cash dividends paid during the current period totaled $0.51 per share and consisted of a $0.34 per share cash true-up dividend related to fiscal year 2019 earnings per the Company's dividend policy, and two regular quarterly cash dividends totaling $0.17 per share. On April 21, 2020, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.7 million, payable on May 15, 2020 to stockholders of record as of the close of business on May 1, 2020.

At March 31, 2020, Capitol Federal Financial, Inc., at the holding company level, had $101.0 million on deposit at the Bank. For fiscal year 2020, it is currently the intent 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.

The Company works to find multiple ways to provide stockholder value. This has primarily been through the payment of cash dividends and historically the Company has also utilized stock buybacks. The Company has maintained a policy of paying out 100% of its earnings to stockholders in the form of quarterly cash dividends and an annual cash true-up dividend in December of each year. In order to provide additional stockholder value, the Company has paid a True Blue Capitol cash dividend of $0.25 per share in June of each of the past six years. The Company has paid the True Blue Capitol dividend primarily due to excess capital levels at the Company and Bank. The Company considers various business strategies and their impact on capital and asset measures on both a current and future basis, as well as regulatory capital levels and requirements, in determining the amount, if any, and timing of the True Blue dividend. Given the current state of economic uncertainty and how that may play out with the credit risk exposure in the Bank's loan portfolio, the Company has elected to defer the annual True Blue dividend in June 2020 and not ask for a regulatory non-objection to move capital from the Bank to the Company to pay that dividend. It is management's intent to ask for a regulatory non-objection at some point in the future and to pay this dividend when economic conditions are more certain. It remains the Company's intent to pay out 100% of its earnings.

The following table presents regular quarterly cash dividends and special cash dividends paid in calendar years 2020, 2019, and 2018. The amounts represent cash dividends paid during each period. For the quarter ending June 30, 2020, the amount presented represents the dividend payable on May 15, 2020 to stockholders of record as of the close of business on May 1, 2020.
 
Calendar Year
 
2020
 
2019
 
2018
 
Amount
 
Per Share
 
Amount
 
Per Share
 
Amount
 
Per Share
 
(Dollars in thousands, except per share amounts)
Regular quarterly dividends paid
 
 
 
 
 
 
 
 
 
 
 
Quarter ended March 31
$
11,733

 
$
0.085

 
$
11,700

 
$
0.085

 
$
11,427

 
$
0.085

Quarter ended June 30
11,734

 
0.085

 
11,708

 
0.085

 
11,429

 
0.085

Quarter ended September 30

 

 
11,713

 
0.085

 
11,430

 
0.085

Quarter ended December 31

 

 
11,731

 
0.085

 
11,696

 
0.085

True-up dividends paid

 

 
46,932

 
0.340

 
53,666

 
0.390

True Blue dividends paid

 

 
34,446

 
0.250

 
33,614

 
0.250

Calendar year-to-date dividends paid
$
23,467

 
$
0.170

 
$
128,230

 
$
0.930

 
$
133,262

 
$
0.980


The Company has authorized the repurchase of up to $70.0 million of its common stock under its stock repurchase plan. Shares may be repurchased from time to time based upon market conditions, available liquidity and other factors. There is no expiration for this repurchase plan and no shares have been repurchased under this repurchase plan.


58

Operating Results
The following table presents selected income statement and other information for the quarters indicated.
 
For the Three Months Ended
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
2020
 
2019
 
2019
 
2019
 
2019
 
(Dollars in thousands, except per share data)
Interest and dividend income:
 
 
 
 
 
 
 
 
 
Loans receivable
$
69,613

 
$
69,914

 
$
70,366

 
$
71,434

 
$
71,657

MBS
5,866

 
6,102

 
6,293

 
6,613

 
6,301

FHLB stock
1,714

 
1,826

 
2,156

 
1,865

 
1,831

Investment securities
1,382

 
1,507

 
1,585

 
1,835

 
1,505

Cash and cash equivalents
380

 
687

 
2,885

 
464

 
743

Total interest and dividend income
78,955

 
80,036

 
83,285

 
82,211

 
82,037

 
 
 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
 
 
 
Deposits
17,804

 
17,962

 
17,471

 
16,909

 
16,096

Borrowings
12,483

 
13,377

 
16,003

 
13,621

 
13,344

Total interest expense
30,287

 
31,339

 
33,474

 
30,530

 
29,440

 
 
 
 
 
 
 
 
 
 
Net interest income
48,668

 
48,697

 
49,811

 
51,681

 
52,597

 
 
 
 
 
 
 
 
 
 
Provision for credit losses
22,075

 
225

 
300

 
450

 
—

 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
 
 
 
 
 
 
 
(after provision for credit losses)
26,593

 
48,472

 
49,511

 
51,231

 
52,597

 
 
 
 
 
 
 
 
 
 
Non-interest income
4,671

 
5,504

 
5,859

 
5,674

 
5,001

Non-interest expense
26,164

 
26,500

 
26,330

 
27,691

 
26,141

Income tax expense
824

 
4,965

 
6,631

 
6,317

 
6,903

Net income
$
4,276

 
$
22,511

 
$
22,409

 
$
22,897

 
$
24,554

 
 
 
 
 
 
 
 
 
 
Efficiency ratio
49.05
%
 
48.89
%
 
47.30
%
 
48.28
%
 
45.38
%
 
 
 
 
 
 
 
 
 
 
Basic EPS
$
0.03

 
$
0.16

 
$
0.16

 
$
0.17

 
$
0.18

Diluted EPS
0.03

 
0.16

 
0.16

 
0.17

 
0.18






59

Comparison of Operating Results for the Six Months Ended March 31, 2020 and 2019

The Company recognized net income of $26.8 million, or $0.19 per share, for the six-month period ended March 31, 2020 compared to net income of $48.9 million, or $0.36 per share, for the six-month period ended March 31, 2019. The decrease in net income was due primarily to a $22.3 million provision for credit losses during the current period.

Net interest income decreased $7.5 million, or 7.2%, from the prior year period to $97.4 million for the current year period. The net interest margin decreased 11 basis points, from 2.30% for the prior year period to 2.19% for the current year period. The leverage strategy was suspended at certain times during the prior year period and during all of the current year period due to the negative interest rate spreads between the related FHLB borrowings and cash held at the FRB of Kansas City, making the transaction unprofitable. See additional discussion regarding the leverage strategy in the Financial Condition section below. 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. Excluding the effects of the leverage strategy, the net interest margin would have decreased 14 basis points, from 2.33% for the prior year period to 2.19% for the current year period. The decrease in the net interest margin, excluding the effects of the leverage strategy, was due mainly to an increase in the cost of retail/business certificates of deposit, as well as a decrease in the loan portfolio yield.

Interest and Dividend Income
The weighted average yield on total interest-earning assets decreased four basis points, from 3.60% for the prior year period to 3.56% for the current year period, and the average balance of interest-earning assets decreased $221.2 million. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have decreased six basis points, from 3.62% for the prior year period to 3.56% for the current year period, and the average balance of interest-earning assets would have decreased $105.8 million. The decrease in the weighted average yield between periods was due primarily to a decrease in the loan portfolio yield discussed below. The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent.
 
For the Six Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2020
 
2019
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
139,527

 
$
142,429

 
$
(2,902
)
 
(2.0
)%
MBS
11,968

 
12,824

 
(856
)
 
(6.7
)
FHLB stock
3,540

 
3,802

 
(262
)
 
(6.9
)
Investment securities
2,889

 
2,946

 
(57
)
 
(1.9
)
Cash and cash equivalents
1,067

 
2,457

 
(1,390
)
 
(56.6
)
Total interest and dividend income
$
158,991

 
$
164,458

 
$
(5,467
)
 
(3.3
)

The decrease in interest income on loans receivable was due mainly to a decrease in yield resulting from an increase in the amortization of premiums related to correspondent loan payoff and endorsement activity. This was partially offset by a shift in the mix of the loan portfolio, as the average balance of lower-yielding one- to four-family loans decreased $201.6 million, or 3.0%, partially offset by a $128.6 million, or 20%, increase in the average balance of higher-yielding commercial loans. The weighted average yield on the loans receivable portfolio decreased four basis points, from 3.77% for the prior year period to 3.73% for the current year period.

The decrease in interest income on the MBS portfolio was due primarily to a $57.1 million, or 5.8%, decrease in the average balance of the portfolio. The decrease in dividend income on FHLB stock and the decrease in interest income on cash and cash equivalents were due primarily to the leverage strategy being in place for a portion of the prior year period and not being in place during the current period. See additional discussion regarding the leverage strategy in the Executive Summary above.
 


60

Interest Expense
The weighted average rate paid on total interest-bearing liabilities increased eight basis points, from 1.49% for the prior year period to 1.57% for the current year period, while the average balance of interest-bearing liabilities decreased $155.4 million. Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased nine basis points, from 1.48% for the prior year period to 1.57% for the current year period, while the average balance of interest-bearing liabilities would have decreased $40.0 million. The increase in the weighted average rate from the prior year period was due primarily to an increase in the cost of deposits, specifically the retail/business certificate of deposit portfolio. The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.
 
For the Six Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2020
 
2019
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
$
35,766

 
$
31,821

 
$
3,945

 
12.4
 %
Borrowings
25,860

 
27,739

 
(1,879
)
 
(6.8
)
Total interest expense
$
61,626

 
$
59,560

 
$
2,066

 
3.5


The increase in interest expense on deposits was due primarily to an increase in the cost of the retail/business certificate of deposit portfolio. The weighted average rate of the retail/business certificate of deposit portfolio increased 26 basis points, to 2.10% for the current year period, and the average balance increased $190.6 million, or approximately 7%. Late in the third quarter of fiscal year 2019, the Bank increased offered rates on short-term and certain intermediate-term certificates of deposit in an effort to encourage customers to move funds to those terms and during the fourth quarter of fiscal year 2019, the Bank held the unTraditional campaign, resulting in growth in the short-term and certain intermediate-term certificates of deposit.

The "Borrowings" line item in the table above includes interest expense associated and not associated with the leverage strategy. Interest expense on borrowings not related to the leverage strategy decreased $503 thousand from the prior year period due primarily to the redemption of the junior subordinated debentures previously added in the CCB acquisition. Additionally, interest expense on the FHLB line of credit decreased $454 thousand, largely offset by an increase in the weighted average effective rate paid on FHLB advances between periods. Interest expense on FHLB borrowings associated with the leverage strategy decreased $1.4 million from the prior year period due to the leverage strategy being in place for a portion of the prior year period and not being in place at all during the current year period.

Provision for Credit Losses
The Bank recorded a provision for credit losses during the current period of $22.3 million, compared to no provision for credit losses during the prior year period. The $22.3 million provision for credit losses in the current period was primarily related to the deterioration of economic conditions as a result of COVID-19. See additional ACL discussion in the "Financial Condition - Asset Quality - Allowance for credit losses and Provision for credit losses" section above.

Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.
 
For the Six Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2020
 
2019
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Deposit service fees
$
5,845

 
$
6,443

 
$
(598
)
 
(9.3
)%
Insurance commissions
1,091

 
1,167

 
(76
)
 
(6.5
)
Other non-interest income
3,239

 
2,815

 
424

 
15.1

Total non-interest income
$
10,175

 
$
10,425

 
$
(250
)
 
(2.4
)

The decrease in deposit service fees was due mainly to the discontinuation of point-of-sale service charges, which the Bank ceased charging in April 2019. The increase in other non-interest income was due mainly to the receipt of a BOLI death benefit during the current period.

61


Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.
 
For the Six Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2020
 
2019
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
26,706

 
$
25,751

 
$
955

 
3.7
 %
Information technology and related expense
8,409

 
8,883

 
(474
)
 
(5.3
)
Occupancy, net
6,656

 
6,544

 
112

 
1.7

Advertising and promotional
2,769

 
2,150

 
619

 
28.8

Regulatory and outside services
2,640

 
2,822

 
(182
)
 
(6.4
)
Deposit and loan transaction costs
1,389

 
1,201

 
188

 
15.7

Office supplies and related expense
1,111

 
1,195

 
(84
)
 
(7.0
)
Federal insurance premium
—

 
1,187

 
(1,187
)
 
(100.0
)
Other non-interest expense
2,984

 
3,190

 
(206
)
 
(6.5
)
Total non-interest expense
$
52,664

 
$
52,923

 
$
(259
)
 
(0.5
)

The increase in salaries and employee benefits expense was due primarily to an increase in loan commissions and merit increases. The decrease in information technology and related expense was due mainly to the prior year period including costs related to the integration of CCB operations. The increase in advertising and promotional expense was due to running advertising campaigns in the early part of our fiscal year as we will do less advertising during the various election campaigns in the fall, as well as to the timing of sponsorships. The decrease in the federal insurance premium was due mainly to the Bank receiving an assessment credit from the FDIC. During the prior fiscal year, the Bank began utilizing a credit from the FDIC as a result of the FDIC deposit insurance fund ratio exceeding 1.38%. Pursuant to regulatory guidance, once the insurance fund exceeds 1.38% of insured deposits, deposit insurance assessment credits are allocated to banks with less than $10 billion in assets, to compensate for premiums previously paid that contributed to growth of the fund past 1.15%. These credits fully offset the Bank's premium assessments during the current year period and will continue to offset the Bank's premium assessments as long as the insurance fund ratio remains at or above 1.35% of insured deposits and the Bank still has a remaining assessment credit balance. As of March 31, 2020, the Bank had a remaining assessment credit of approximately $320 thousand. The assessment credit will be fully utilized during the third quarter of fiscal year 2020, so management anticipates recognizing federal insurance premium expense during the next quarter.

Management anticipates that salaries and employee benefits expense in fiscal year 2020 will increase approximately $1.0 million from fiscal year 2019, a decrease from our original estimate of a $4.0 million increase. The reduction in the expense estimate was due primarily to a delay in the implementation of information technology changes pertaining to commercial banking activities and related back office functions, a reduction in commercial lending hiring, along with expense reductions related to the impact of COVID-19, including the postponement of annual merit increases which were to be implemented later this year and the deferral of the True Blue dividend and related compensation expense as discussed above.

The Company's efficiency ratio was 48.97% for the current period compared to 45.89% for the prior year period. The change in the efficiency ratio was due to lower net interest income in the current period compared to the prior year period. 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 the financial institution is generating revenue with a proportionally lower level of expense.

Income Tax Expense
Income tax expense was $5.8 million for the current period compared to $13.5 million for the prior year period. The decrease in income tax expense was due primarily to lower pretax income in the current period, as well as a lower effective tax rate. The effective tax rate was 17.8% for the current period compared to 21.6% for the prior year period. The lower effective tax rate in the current period compared to the prior year period was due mainly to the Company's permanent differences having a proportionately larger impact given the lower pretax income in the current year period and a discrete benefit recognized as a result of favorable federal tax guidance that was issued during the current period related to certain BOLI policies added in the CCB acquisition.


62

Average Balance Sheet
The following table presents the average balances of our assets, liabilities, and stockholders' equity, and the related annualized weighted average yields and rates on our interest-earning assets and interest-bearing liabilities, as well as selected performance ratios and other information, for the periods indicated. Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.
 
For the Six Months Ended
 
March 31, 2020
 
March 31, 2019
 
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
$
6,568,525

 
$
117,199

 
3.57
%
 
$
6,770,175

 
$
122,309

 
3.61
%
Commercial loans
762,799

 
18,652

 
4.81

 
634,229

 
15,787

 
4.92

Consumer loans
128,491

 
3,676

 
5.72

 
138,369

 
4,333

 
6.28

Total loans receivable(1)
7,459,815

 
139,527

 
3.73

 
7,542,773

 
142,429

 
3.77

MBS(2)
926,969

 
11,968

 
2.58

 
984,033

 
12,824

 
2.61

Investment securities(2)(3)
282,759

 
2,889

 
2.04

 
277,292

 
2,946

 
2.13

FHLB stock
99,128

 
3,540

 
7.14

 
104,023

 
3,802

 
7.33

Cash and cash equivalents(4)
133,908

 
1,067

 
1.57

 
215,660

 
2,457

 
2.25

Total interest-earning assets(1)(2)
8,902,579

 
158,991

 
3.56

 
9,123,781

 
164,458

 
3.60

Other non-interest-earning assets
441,199

 
 
 
 
 
368,864

 
 
 
 
Total assets
$
9,343,778

 
 
 
 
 
$
9,492,645

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Checking
$
1,096,466

 
351

 
0.06

 
$
1,063,346

 
294

 
0.06

Savings
361,592

 
153

 
0.08

 
357,243

 
113

 
0.06

Money market
1,190,938

 
4,044

 
0.68

 
1,260,999

 
4,441

 
0.71

Retail/business certificates
2,686,028

 
28,215

 
2.10

 
2,495,475

 
22,947

 
1.84

Wholesale certificates
286,328

 
3,003

 
2.10

 
392,693

 
4,026

 
2.06

Total deposits
5,621,352

 
35,766

 
1.27

 
5,569,756

 
31,821

 
1.15

Borrowings(5)
2,204,903

 
25,860

 
2.33

 
2,411,905

 
27,739

 
2.29

Total interest-bearing liabilities
7,826,255

 
61,626

 
1.57

 
7,981,661

 
59,560

 
1.49

Other non-interest-bearing liabilities
194,698

 
 
 
 
 
142,060

 
 
 
 
Stockholders' equity
1,322,825

 
 
 
 
 
1,368,924

 
 
 
 
Total liabilities and stockholders' equity
$
9,343,778

 
 
 
 
 
$
9,492,645

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income(6)
 
 
$
97,365

 
 
 
 
 
$
104,898

 
 
Net interest rate spread(7)(8)
 
 
 
 
1.99

 
 
 
 
 
2.11

Net interest-earning assets
$
1,076,324

 
 
 
 
 
$
1,142,120

 
 
 
 
Net interest margin(8)(9)
 
 
 
 
2.19

 
 
 
 
 
2.30

Ratio of interest-earning assets to interest-bearing liabilities
 
1.14x

 
 
 
 
 
1.14x

 
 
 
 
 
 
 
 
 
 
 
 
Selected performance ratios:
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized)(8)
 
 
 
0.57

 
 
 
 
 
1.03

Return on average equity (annualized)(8)
 
 
 
4.05

 
 
 
 
 
7.15

Average equity to average assets
 
 
 
 
14.16

 
 
 
 
 
14.42

Operating expense ratio(10)
 
 
 
 
1.13

 
 
 
 
 
1.12

Efficiency ratio(8)(11)
 
 
 
 
48.97

 
 
 
 
 
45.89

Pre-tax yield on leverage strategy(12)
 
 
 
 
—

 
 
 
 
 
0.03


63

(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)
MBS and investment securities classified as AFS are stated at amortized cost, adjusted for unamortized purchase premiums or discounts.
(3)
The average balance of investment securities includes an average balance of nontaxable securities of $16.1 million and $22.8 million for the six months ended March 31, 2020 and March 31, 2019, respectively.
(4)
There were no cash and cash equivalents related to the leverage strategy during the six months ended March 31, 2020. The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $110.2 million for the six months ended March 31, 2019.
(5)
There were no FHLB borrowings related to the leverage strategy during the six months ended March 31, 2020. Included in this line item, for the six months ended March 31, 2019, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $115.4 million and interest paid of $1.4 million, at a weighted average rate of 2.36%, and FHLB borrowings not related to the leverage strategy with an average outstanding balance of $2.30 billion and interest paid of $26.4 million, at a weighted average rate of 2.29%. 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.
(6)
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.
(7)
Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(8)
The table below provides a reconciliation between certain performance ratios presented in accordance with 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 small amount of earnings associated with the transaction in comparison to the size of the transaction, while increasing our net income.
 
For the Six Months Ended
 
March 31, 2020
 
March 31, 2019
 
Actual
 
Leverage
 
Adjusted
 
Actual
 
Leverage
 
Adjusted
 
(GAAP)
 
Strategy
 
(Non-GAAP)
 
(GAAP)
 
Strategy
 
(Non-GAAP)
Return on average assets (annualized)
0.57
%
 
—
%
 
0.57
%
 
1.03
%
 
(0.01
)%
 
1.04
%
Return on average equity (annualized)
4.05

 
—

 
4.05

 
7.15

 
—

 
7.15

Net interest margin
2.19

 
—

 
2.19

 
2.30

 
(0.03
)
 
2.33

Net interest rate spread
1.99

 
—

 
1.99

 
2.11

 
(0.03
)
 
2.14

Efficiency Ratio
48.97

 
—

 
48.97

 
45.89

 
—

 
45.89

(9)
Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.
(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.


64

Rate/Volume Analysis
The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous period's average rate, and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.
 
For the Six Months Ended
 
March 31, 2020 vs. March 31, 2019
 
Increase (Decrease) Due to
 
Volume
 
Rate
 
Total
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable
$
(722
)
 
$
(2,180
)
 
$
(2,902
)
MBS
(738
)
 
(118
)
 
(856
)
Investment securities
58

 
(115
)
 
(57
)
FHLB stock
(164
)
 
(98
)
 
(262
)
Cash and cash equivalents
(771
)
 
(619
)
 
(1,390
)
Total interest-earning assets
(2,337
)
 
(3,130
)
 
(5,467
)
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Checking
10

 
47

 
57

Savings
1

 
39

 
40

Money market
(228
)
 
(168
)
 
(396
)
Certificates of deposit
838

 
3,406

 
4,244

Borrowings
(2,654
)
 
775

 
(1,879
)
Total interest-bearing liabilities
(2,033
)
 
4,099

 
2,066

 
 
 
 
 
 
Net change in net interest income
$
(304
)
 
$
(7,229
)
 
$
(7,533
)

Comparison of Operating Results for the Three Months Ended March 31, 2020 and 2019
For the quarter ended March 31, 2020, the Company recognized net income of $4.3 million, or $0.03 per share, compared to net income of $24.6 million, or $0.18 per share for the quarter ended March 31, 2019. The decrease in net income was due primarily to $22.1 million of provision for credit losses during the current quarter. The net interest margin decreased 14 basis points, from 2.33% for the prior year quarter to 2.19% for the current quarter. The decrease in the net interest margin was due mainly to a decrease in the loan portfolio yield and an increase in the cost of deposits.

Interest and Dividend Income
The weighted average yield on total interest-earning assets decreased nine basis points, from 3.64% for the prior year quarter to 3.55% for the current quarter, and the average balance of interest-earning assets decreased $133.7 million. The following table presents the components of interest and dividend income for the time periods presented along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2020
 
2019
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
69,613

 
$
71,657

 
$
(2,044
)
 
(2.9
)%
MBS
5,866

 
6,301

 
(435
)
 
(6.9
)
FHLB stock
1,714

 
1,831

 
(117
)
 
(6.4
)
Investment securities
1,382

 
1,505

 
(123
)
 
(8.2
)
Cash and cash equivalents
380

 
743

 
(363
)
 
(48.9
)
Total interest and dividend income
$
78,955

 
$
82,037

 
$
(3,082
)
 
(3.8
)


65

The decrease in interest income on loans receivable was due mainly to a decrease in yield resulting from an increase in the amortization of premiums related to correspondent loan payoff and endorsement activity. The weighted average yield on the loans receivable portfolio decreased seven basis points, from 3.79% for the prior year quarter to 3.72% for the current quarter.

The decrease in interest income on the MBS portfolio was due primarily to a $39.5 million, or 4.1%, decrease in the average balance of the portfolio, along with an eight basis point decrease in the weighted average yield on the portfolio, from 2.63% for the prior year quarter to 2.55% for the current quarter. The decrease in the weighted average yield was due primarily to the purchase of MBS at market rates lower than the existing portfolio.

The decrease in interest income on cash and cash equivalents was due mainly to a decrease in the yield on cash held at the FRB of Kansas City, as well as a decrease in the average balance of operating cash.

Interest Expense
The weighted average rate paid on total interest-bearing liabilities increased four basis points, from 1.51% for the prior year quarter to 1.55% for the current quarter, while the average balance of interest-bearing liabilities decreased $67.2 million. The following table presents the components of interest expense for the periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2020
 
2019
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
$
17,804

 
$
16,096

 
$
1,708

 
10.6
 %
Borrowings
12,483

 
13,344

 
(861
)
 
(6.5
)
Total interest expense
$
30,287

 
$
29,440

 
$
847

 
2.9


The increase in interest expense on deposits was due primarily to an increase in the cost of the retail/business certificate of deposit portfolio. The weighted average rate of the retail/business certificate of deposit portfolio increased 24 basis points, to 2.11% for the current quarter, and the average balance increased $199.2 million, or approximately 8%. Late in the third quarter of fiscal year 2019, the Bank increased offered rates on short-term and certain intermediate-term certificates of deposit in an effort to encourage customers to move funds to those terms and during the fourth quarter of fiscal year 2019, the Bank held the unTraditional campaign, resulting in growth in the short-term and certain intermediate-term certificates of deposit.

The decrease in interest expense on borrowings was due primarily to a decrease in the average balance of FHLB advances, as not all of the advances maturing between periods were renewed, as well as a decrease in the average rate paid on the FHLB line of credit.

Provision for Credit Losses
The Bank recorded a provision for credit losses during the current quarter of $22.1 million, compared to no provision for credit losses during the prior year quarter. The $22.1 million provision for credit losses in the current quarter was in recognition of the deterioration of economic conditions as a result of the COVID-19 pandemic. See additional ACL discussion in the "Financial Condition - Asset Quality - Allowance for credit losses and Provision for credit losses" section above.

Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2020
 
2019
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Deposit service fees
$
2,783

 
$
3,091

 
$
(308
)
 
(10.0
)%
Insurance commissions
400

 
541

 
(141
)
 
(26.1
)
Other non-interest income
1,488

 
1,369

 
119

 
8.7

Total non-interest income
$
4,671

 
$
5,001

 
$
(330
)
 
(6.6
)


66

The decrease in deposit service fees was due mainly to the discontinuation of point-of-sale service charges, which the Bank ceased charging in April 2019. The decrease in insurance commissions was due primarily to the receipt of annual contingent insurance commissions and adjustments to the related accruals.

Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2020
 
2019
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
13,235

 
$
12,789

 
$
446

 
3.5
 %
Information technology and related expense
4,268

 
4,284

 
(16
)
 
(0.4
)
Occupancy, net
3,449

 
3,292

 
157

 
4.8

Advertising and promotional
1,359

 
1,390

 
(31
)
 
(2.2
)
Regulatory and outside services
1,297

 
1,056

 
241

 
22.8

Deposit and loan transaction costs
678

 
465

 
213

 
45.8

Office supplies and related expense
592

 
736

 
(144
)
 
(19.6
)
Federal insurance premium
—

 
659

 
(659
)
 
(100.0
)
Other non-interest expense
1,286

 
1,470

 
(184
)
 
(12.5
)
Total non-interest expense
$
26,164

 
$
26,141

 
$
23

 
0.1


The increase in salaries and employee benefits expense was due mainly to an increase in loan commissions and merit increases between periods. The increase in regulatory and outside services was due primarily to cash delivery services related to increasing the amount of cash on hand in anticipation of customer cash needs during the COVID-19 pandemic, as well as an increase in consulting expenses. The increase in deposit and loan transaction costs was due primarily to an increase in loan activities in the current quarter as compared to the prior year quarter. The decrease in federal insurance premium was due mainly to the Bank receiving an assessment credit from the FDIC as discussed above.

The Company's efficiency ratio was 49.05% for the current quarter compared to 45.38% for the prior year quarter. The change in the efficiency ratio was due mainly to a decrease in net interest income.

Income Tax Expense
Income tax expense was $824 thousand for the current quarter compared to $6.9 million for the prior year quarter. The decrease in income tax expense was due primarily to lower pretax income in the current quarter, as well as a lower effective tax rate. The effective tax rate for the current quarter was 16.2% compared to 21.9% for the prior year quarter. The lower effective tax rate in the current quarter compared to the prior year quarter was due mainly to the Company's permanent differences having a proportionately larger impact given the lower pretax income in the current quarter.


67

Average Balance Sheet
Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.
 
For the Three Months Ended
 
March 31, 2020
 
March 31, 2019
 
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
$
6,594,029

 
$
58,838

 
3.57
%
 
$
6,746,611

 
$
61,325

 
3.64
%
Commercial loans
759,328

 
8,994

 
4.69

 
680,110

 
8,186

 
4.80

Consumer loans
126,710

 
1,781

 
5.65

 
137,342

 
2,146

 
6.33

Total loans receivable(1)
7,480,067

 
69,613

 
3.72

 
7,564,063

 
71,657

 
3.79

MBS(2)
920,419

 
5,866

 
2.55

 
959,897

 
6,301

 
2.63

Investment securities(2)(3)
280,911

 
1,382

 
1.97

 
272,218

 
1,505

 
2.21

FHLB stock
99,879

 
1,714

 
6.90

 
99,725

 
1,831

 
7.45

Cash and cash equivalents(4)
105,381

 
380

 
1.43

 
124,444

 
743

 
2.39

Total interest-earning assets(1)(2)
8,886,657

 
78,955

 
3.55

 
9,020,347

 
82,037

 
3.64

Other non-interest-earning assets
454,687

 
 
 
 
 
370,396

 
 
 
 
Total assets
$
9,341,344

 
 
 
 
 
$
9,390,743

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Checking
$
1,107,232

 
181

 
0.07

 
$
1,076,504

 
149

 
0.06

Savings
365,554

 
74

 
0.08

 
358,733

 
56

 
0.06

Money market
1,208,521

 
1,981

 
0.66

 
1,275,504

 
2,269

 
0.72

Retail/business certificates
2,691,029

 
14,103

 
2.11

 
2,491,814

 
11,492

 
1.87

Wholesale certificates
296,828

 
1,465

 
1.98

 
401,722

 
2,130

 
2.15

Total deposits
5,669,164

 
17,804

 
1.26

 
5,604,277

 
16,096

 
1.16

Borrowings(5)
2,176,166

 
12,483

 
2.29

 
2,308,271

 
13,344

 
2.33

Total interest-bearing liabilities
7,845,330

 
30,287

 
1.55

 
7,912,548

 
29,440

 
1.51

Other non-interest-bearing liabilities
183,018

 
 
 
 
 
123,280

 
 
 
 
Stockholders' equity
1,312,996

 
 
 
 
 
1,354,915

 
 
 
 
Total liabilities and stockholders' equity
$
9,341,344

 
 
 
 
 
$
9,390,743

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income(6)
 
 
$
48,668

 
 
 
 
 
$
52,597

 
 
Net interest rate spread(7)(8)
 
 
 
 
2.00

 
 
 
 
 
2.13

Net interest-earning assets
$
1,041,327

 
 
 
 
 
$
1,107,799

 
 
 
 
Net interest margin(8)(9)
 
 
 
 
2.19

 
 
 
 
 
2.33

Ratio of interest-earning assets to interest-bearing liabilities
 
1.13x

 
 
 
 
 
1.14x

 
 
 
 
 
 
 
 
 
 
 
 
Selected performance ratios:
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized)(8)
 
 
 
 
0.18
%
 
 
 
 
 
1.05
%
Return on average equity (annualized)(8)
 
 
 
 
1.30

 
 
 
 
 
7.25

Average equity to average assets
 
 
 
 
14.06

 
 
 
 
 
14.43

Operating expense ratio(10)
 
 
 
 
1.12

 
 
 
 
 
1.11

Efficiency ratio(8)(11)
 
 
 
 
49.05

 
 
 
 
 
45.38



68

(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 $15.0 million and $22.0 million for the three months ended March 31, 2020 and March 31, 2019, respectively.
(4)
There were no cash and cash equivalents related to the leverage strategy during the quarters ended March 31, 2020 and March 31, 2019.
(5)
There were no borrowings related to the leverage strategy during the quarters ended March 31, 2020 and March 31, 2019. The FHLB advance amounts and rates included in this line include the effect of interest rate swaps and are net of deferred prepayment penalties.
(6)
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.
(7)
Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(8)
The leverage strategy was not in place during the quarters ended March 31, 2020 and March 31, 2019.
(9)
Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.
(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.

Rate/Volume Analysis
The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended March 31, 2020 to the three months ended March 31, 2019. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.
 
For the Three Months Ended March 31,
 
2020 vs. 2019
 
Increase (Decrease) Due to
 
Volume
 
Rate
 
Total
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable
$
(564
)
 
$
(1,480
)
 
$
(2,044
)
MBS
(255
)
 
(180
)
 
(435
)
Investment securities
47

 
(170
)
 
(123
)
FHLB stock
3

 
(120
)
 
(117
)
Cash and cash equivalents
(100
)
 
(263
)
 
(363
)
Total interest-earning assets
(869
)
 
(2,213
)
 
(3,082
)
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Checking
5

 
27

 
32

Savings
1

 
17

 
18

Money market
(107
)
 
(181
)
 
(288
)
Certificates of deposit
498

 
1,448

 
1,946

Borrowings
(775
)
 
(86
)
 
(861
)
Total interest-bearing liabilities
(378
)
 
1,225

 
847

 
 
 
 
 
 
Net change in net interest income
$
(491
)
 
$
(3,438
)
 
$
(3,929
)


Comparison of Operating Results for the Three Months Ended March 31, 2020 and December 31, 2019

For the quarter ended March 31, 2020, the Company recognized net income of $4.3 million, or $0.03 per share, compared to net income of $22.5 million, or $0.16 per share, for the quarter ended December 31, 2019. The decrease was due primarily to recording a $22.1 million provision for credit losses during the current quarter. The net interest margin increased one basis point, from 2.18% for the prior quarter to 2.19% for the current quarter. The increase in the net interest margin was due mainly to a decrease in the cost of borrowings compared to the prior quarter.

69


Interest and Dividend Income
The weighted average yield on total interest-earning assets decreased three basis points, from 3.58% for the prior quarter to 3.55% for the current quarter, and the average balance of interest-earning assets decreased $31.7 million between the two periods. The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
December 31,
 
Change Expressed in:
 
2020
 
2019
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
69,613

 
$
69,914

 
$
(301
)
 
(0.4
)%
MBS
5,866

 
6,102

 
(236
)
 
(3.9
)
FHLB stock
1,714

 
1,826

 
(112
)
 
(6.1
)
Investment securities
1,382

 
1,507

 
(125
)
 
(8.3
)
Cash and cash equivalents
380

 
687

 
(307
)
 
(44.7
)
Total interest and dividend income
$
78,955

 
$
80,036

 
$
(1,081
)
 
(1.4
)

The weighted average yield on the loans receivable portfolio decreased three basis points, from 3.75% for the prior quarter to 3.72% for the current quarter, due mainly to a reduction in deferred fee recognition related to commercial loan payoff activity, as well as the origination and purchase of new loans at market rates lower than the existing portfolio. The decrease in interest income on the MBS portfolio was due primarily to a six basis point decrease in the weighted average yield on the portfolio to 2.55% for the current quarter. The decrease in the weighted average yield was due primarily to the purchase of MBS at market rates lower than the existing portfolio. The decrease in interest income on cash and cash equivalents was due mainly to a decrease in the average balance of operating cash.

Interest Expense
The weighted average rate paid on total interest-bearing liabilities decreased four basis points, from 1.59% for the prior quarter to 1.55% for the current quarter, while the average balance of interest-bearing liabilities increased $37.9 million between the two periods. The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
December 31,
 
Change Expressed in:
 
2020
 
2019
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
$
17,804

 
$
17,962

 
$
(158
)
 
(0.9
)%
Borrowings
12,483

 
13,377

 
(894
)
 
(6.7
)
Total interest expense
$
30,287

 
$
31,339

 
$
(1,052
)
 
(3.4
)
The decrease in interest expense on borrowings was due primarily to the replacement of certain FHLB advances to take advantage of lower market rates late in the December 31, 2019 quarter and during the current quarter. During the current quarter, the Bank prepaid fixed-rate FHLB advances scheduled to mature in the next year totaling $350.0 million with a weighted average rate of 2.42%, and replaced these advances with $350.0 million of fixed-rate FHLB advances with a weighted average term of 4.7 years and a weighted average effective rate of 1.70%, which includes the impact of deferred prepayment penalties being recognized over the life of the new advances.

Provision for Credit Losses
The Bank recorded a provision for credit losses during the current quarter of $22.1 million, compared to a provision for credit losses during the prior quarter of $225 thousand. The $22.1 million provision for credit losses in the current quarter was in recognition of the deterioration of economic conditions as a result of the COVID-19 pandemic. See additional ACL discussion in the "Financial Condition - Asset Quality - Allowance for credit losses and Provision for credit losses" section above.


70

Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
December 31,
 
Change Expressed in:
 
2020
 
2019
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Deposit service fees
$
2,783

 
$
3,062

 
$
(279
)
 
(9.1
)%
Insurance commissions
400

 
691

 
(291
)
 
(42.1
)
Other non-interest income
1,488

 
1,751

 
(263
)
 
(15.0
)
Total non-interest income
$
4,671

 
$
5,504

 
$
(833
)
 
(15.1
)

The decrease in deposit service fees was due mainly to a decrease in debit card income resulting from a reduction in transaction volume related to the seasonality of such activity, as well as a decrease in service charge income.  The decrease in insurance commissions was due primarily to the receipt of annual contingent insurance commissions and adjustments to the related accruals. Contingent insurance commissions are performance-based incentives based on certain criteria established by the insurance carriers. Contingent insurance commissions are accrued based on management's expectations and are adjusted when the funds are received. The decrease in other non-interest income was due mainly to the receipt of a BOLI death benefit during the prior quarter, and no such benefit during the current quarter.

Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
December 31,
 
Change Expressed in:
 
2020
 
2019
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
13,235

 
$
13,471

 
$
(236
)
 
(1.8
)%
Information technology and related expense
4,268

 
4,141

 
127

 
3.1

Occupancy, net
3,449

 
3,207

 
242

 
7.5

Advertising and promotional
1,359

 
1,410

 
(51
)
 
(3.6
)
Regulatory and outside services
1,297

 
1,343

 
(46
)
 
(3.4
)
Deposit and loan transaction costs
678

 
711

 
(33
)
 
(4.6
)
Office supplies and related expense
592

 
519

 
73

 
14.1

Other non-interest expense
1,286

 
1,698

 
(412
)
 
(24.3
)
Total non-interest expense
$
26,164

 
$
26,500

 
$
(336
)
 
(1.3
)

The decrease in salaries and employee benefits expense was due mainly to a decrease in loan commissions. The decrease in other non-interest expense was due primarily to the prior quarter including a write-down of an OREO property. This property was sold during the prior quarter.

The Company's efficiency ratio was 49.05% for the current quarter compared to 48.89% for the prior quarter. The change in the efficiency ratio was due primarily to lower non-interest income in the current quarter compared to the prior quarter.

Income Tax Expense
Income tax expense was $824 thousand for the current quarter, compared to $5.0 million for the prior quarter. The effective tax rate was 16.2% for the current quarter compared to 18.1% for the prior quarter. The effective tax rate was lower in the current quarter due primarily to lower pretax income due mainly to the provision for credit losses in the current quarter. The decrease in pretax income resulted in the Company's permanent differences having a proportionately larger impact on the effective tax rate. Management anticipates the effective income tax rate for the remainder of fiscal year 2020 will be approximately 21% each quarter, resulting in an effective tax rate of approximately 20% for fiscal year 2020.

71


Average Balance Sheet
Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.
 
For the Three Months Ended
 
March 31, 2020
 
December 31, 2019
 
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
$
6,594,029

 
$
58,838

 
3.57
%
 
$
6,543,298

 
$
58,361

 
3.57
%
Commercial loans
759,328

 
8,994

 
4.69

 
766,232

 
9,657

 
4.94

Consumer loans
126,710

 
1,781

 
5.65

 
130,253

 
1,896

 
5.77

Total loans receivable(1)
7,480,067

 
69,613

 
3.72

 
7,439,783

 
69,914

 
3.75

MBS(2)
920,419

 
5,866

 
2.55

 
933,448

 
6,102

 
2.61

Investment securities(2)(3)
280,911

 
1,382

 
1.97

 
284,587

 
1,507

 
2.12

FHLB stock
99,879

 
1,714

 
6.90

 
98,384

 
1,826

 
7.36

Cash and cash equivalents(4)
105,381

 
380

 
1.43

 
162,126

 
687

 
1.66

Total interest-earning assets(1)(2)
8,886,657

 
78,955

 
3.55

 
8,918,328

 
80,036

 
3.58

Other non-interest-earning assets
454,687

 
 
 
 
 
427,858

 
 
 
 
Total assets
$
9,341,344

 
 
 
 
 
$
9,346,186

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Checking
$
1,107,232

 
181

 
0.07

 
$
1,085,818

 
170

 
0.06

Savings
365,554

 
74

 
0.08

 
357,674

 
79

 
0.09

Money market
1,208,521

 
1,981

 
0.66

 
1,173,545

 
2,063

 
0.70

Retail/business certificates
2,691,029

 
14,103

 
2.11

 
2,681,081

 
14,111

 
2.09

Wholesale certificates
296,828

 
1,465

 
1.98

 
275,941

 
1,539

 
2.21

Total deposits
5,669,164

 
17,804

 
1.26

 
5,574,059

 
17,962

 
1.28

Borrowings(5)
2,176,166

 
12,483

 
2.29

 
2,233,327

 
13,377

 
2.36

Total interest-bearing liabilities
7,845,330

 
30,287

 
1.55

 
7,807,386

 
31,339

 
1.59

Other non-interest-bearing liabilities
183,018

 
 
 
 
 
206,253

 
 
 
 
Stockholders' equity
1,312,996

 
 
 
 
 
1,332,547

 
 
 
 
Total liabilities and stockholders' equity
$
9,341,344

 
 
 
 
 
$
9,346,186

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income(6)
 
 
$
48,668

 
 
 
 
 
$
48,697

 
 
Net interest rate spread(7)(8)
 
 
 
 
2.00

 
 
 
 
 
1.99

Net interest-earning assets
$
1,041,327

 
 
 
 
 
$
1,110,942

 
 
 
 
Net interest margin(8)(9)
 
 
 
 
2.19

 
 
 
 
 
2.18

Ratio of interest-earning assets to interest-bearing liabilities
 
1.13x

 
 
 
 
 
1.14x

 
 
 
 
 
 
 
 
 
 
 
 
Selected performance ratios:
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized)(8)
 
 
 
 
0.18
%
 
 
 
 
 
0.96
%
Return on average equity (annualized)(8)
 
 
 
 
1.30

 
 
 
 
 
6.76

Average equity to average assets
 
 
 
 
14.06

 
 
 
 
 
14.26

Operating expense ratio(10)
 
 
 
 
1.12

 
 
 
 
 
1.13

Efficiency ratio(8)(11)
 
 
 
 
49.05

 
 
 
 
 
48.89



72

(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 $15.0 million and $17.3 million for the quarters ended March 31, 2020 and December 31, 2019, respectively.
(4)
There were no cash and cash equivalents related to the leverage strategy during the quarters ended March 31, 2020 and December 31, 2019.
(5)
There were no FHLB borrowings related to the leverage strategy during the quarters ended March 31, 2020 and December 31, 2019. The FHLB advance amounts and rates included in this line include the effect of interest rate swaps and are net of deferred prepayment penalties.
(6)
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.
(7)
Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(8)
The leverage strategy was not in place during the quarters ended March 31, 2020 and December 31, 2019.
(9)
Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.
(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.

Rate/Volume Analysis
The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended March 31, 2020 to the three months ended December 31, 2019. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.
 
For the Three Months Ended
 
March 31, 2020 vs. December 31, 2019
 
Increase (Decrease) Due to
 
Volume
 
Rate
 
Total
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable
$
267

 
$
(568
)
 
$
(301
)
MBS
(84
)
 
(152
)
 
(236
)
Investment securities
(19
)
 
(106
)
 
(125
)
FHLB stock
23

 
(135
)
 
(112
)
Cash and cash equivalents
(220
)
 
(87
)
 
(307
)
Total interest-earning assets
(33
)
 
(1,048
)
 
(1,081
)
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Checking
3

 
9

 
12

Savings
1

 
(6
)
 
(5
)
Money market
52

 
(135
)
 
(83
)
Certificates of deposit
44

 
(126
)
 
(82
)
Borrowings
(376
)
 
(518
)
 
(894
)
Total interest-bearing liabilities
(276
)
 
(776
)
 
(1,052
)
 
 
 
 
 
 
Net change in net interest income
$
243

 
$
(272
)
 
$
(29
)




73

Liquidity and Capital Resources
Liquidity refers to our ability to generate sufficient cash to fund ongoing operations, to repay maturing certificates of deposit and other deposit withdrawals, to repay maturing borrowings, and to fund loan commitments. Liquidity management is both a daily and long-term function of our business management. The Company's most available liquid assets are represented by cash and cash equivalents, AFS securities, and short-term investment securities. The Bank's primary sources of funds are deposits, FHLB borrowings, repurchase agreements, repayments and maturities of outstanding loans and MBS and other short-term investments, and funds provided by operations. The Bank's long-term borrowings primarily have been used to manage the Bank's interest rate risk with the intent to improve the earnings of the Bank while maintaining capital ratios in excess of regulatory standards for well-capitalized financial institutions. In addition, the Bank's focus on managing risk has provided additional liquidity capacity by maintaining a balance of MBS and investment securities available as collateral for borrowings.

We generally intend to manage cash reserves sufficient to meet short-term liquidity needs, which are routinely forecasted for 10, 30, and 365 days. Additionally, on a monthly basis, we perform a liquidity stress test in accordance with the Interagency Policy Statement on Funding and Liquidity Risk Management. The liquidity stress test incorporates both short-term and long-term liquidity scenarios in order to identify and to quantify liquidity risk. Management also monitors key liquidity statistics related to items such as wholesale funding gaps, borrowings capacity, and available unpledged collateral, as well as various liquidity ratios.

In the event short-term liquidity needs exceed available cash, the Bank has access to a line of credit at FHLB and the FRB of Kansas City's discount window. Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40% of regulatory total assets without the pre-approval of FHLB senior management. The president of FHLB has approved an increase, through July 2020, in the Bank's borrowing limit to 55% of Bank Call Report total assets. When the leverage strategy is in place, the Bank maintains the resulting excess cash reserves from the FHLB borrowings at the FRB of Kansas City, which can be used to meet any short-term liquidity needs. 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 and certain other characteristics of those securities. Management had tested the Bank's access to the FRB of Kansas City's discount window annually with a nominal, overnight borrowing. At March 31, 2020, the Bank had pledged securities with an estimated value of $396.5 million as collateral at the FRB of Kansas City and had drawn down $30.0 million on the related line-of-credit. Management is currently using the FRB line of credit rather than the FHLB line of credit for short-term funding needs as the interest rate on the FRB line of credit is lower than the FHLB line of credit.

If management observes a trend in the amount and frequency of line of credit utilization and/or short-term borrowings that is not in conjunction with a planned strategy, such as the leverage strategy, the Bank will likely utilize long-term wholesale borrowing sources such as FHLB advances and/or repurchase agreements to provide long-term, fixed-rate funding. The maturities of these long-term borrowings are generally staggered in order to mitigate the risk of a highly negative cash flow position at maturity. The Bank's internal policy limits total borrowings to 55% of total assets. At March 31, 2020, the Bank had total borrowings, at par, of $2.12 billion, or approximately 23% of total assets.

The amount of FHLB borrowings outstanding at March 31, 2020 was $1.99 billion, of which $1.04 billion were advances scheduled to mature in the next 12 months, including $640.0 million of one-year floating-rate FHLB advances tied to interest rate swaps. All FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB. At March 31, 2020, the ratio of the par value of the Bank's FHLB borrowings to Call Report total assets was 21%. When the full leverage strategy is in place, FHLB borrowings may be in excess of 40% of the Bank's Call Report total assets, and may be in excess of 40% as long as the Bank continues its leverage strategy and FHLB senior management continues to approve the Bank's borrowing limit being in excess of 40% of Call Report total assets. All or a portion of the FHLB borrowings in conjunction with the leverage strategy can be repaid at any point in time while the strategy is in effect, if necessary or desired.

At March 31, 2020, the Bank had repurchase agreements of $100.0 million, or approximately 1% of total assets, all of which were scheduled to mature in the next 12 months. The Bank may enter into additional repurchase agreements as management deems appropriate, not to exceed 15% of total assets, and subject to the total borrowings internal policy limit of 55% as discussed above. The Bank has pledged securities with an estimated fair value of $109.4 million as collateral for repurchase agreements as of March 31, 2020. The securities pledged for the repurchase agreements will be delivered back to the Bank when the repurchase agreements mature.

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. At March 31, 2020, the Bank had $759.3 million of securities that were eligible but unused as collateral for borrowing or other liquidity needs. 


74

The Bank has access to other sources of funds for liquidity purposes, such as brokered and public unit certificates of deposit. As of March 31, 2020, the Bank's policy allowed for combined brokered and public unit certificates of deposit up to 15% of total deposits. At March 31, 2020, the Bank did not have any brokered certificates of deposit, and public unit certificates of deposit were approximately 5% of total deposits. The Bank had pledged securities with an estimated fair value of $321.5 million as collateral for public unit certificates of deposit at March 31, 2020. The securities pledged as collateral for public unit certificates of deposit are held under joint custody with FHLB and generally will be released upon deposit maturity.

At March 31, 2020, $1.48 billion of the Bank's certificate of deposit portfolio was scheduled to mature within the next 12 months, including $236.8 million of public unit certificates of deposit. Based on our deposit retention experience and our current pricing strategy, we anticipate the majority of the maturing retail certificates of deposit will renew or transfer to other deposit products of the Bank at the prevailing rate, although no assurance can be given in this regard.  We also anticipate the majority of the maturing public unit certificates of deposit will be replaced with similar wholesale funding products.

While scheduled payments from the amortization of loans and MBS and payments on short-term investments are relatively predictable sources of funds, deposit flows, prepayments on loans and MBS, and calls of investment securities are greatly influenced by general interest rates, economic conditions, and competition, and are less predictable sources of funds. To the extent possible, the Bank manages the cash flows of its loan and deposit portfolios by the rates it offers customers.



75

The following table presents the contractual maturities of our loan, MBS, and investment securities portfolios at March 31, 2020, along with associated weighted average yields. Loans and securities which have adjustable interest rates are shown as maturing in the period during which the contract is due. The table does not reflect the effects of possible prepayments or enforcement of due on sale clauses. As of March 31, 2020, the amortized cost of investment securities in our portfolio which are callable or have pre-refunding dates within one year was $202.9 million.
 
Loans(1)
 
MBS
 
Investment Securities
 
Total
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
(Dollars in thousands)
Amounts due:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Within one year
$
313,736

 
4.31
%
 
$
5,196

 
2.59
%
 
$
55,245

 
1.52
%
 
$
374,177

 
3.88
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
After one year:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over one to two years
40,947

 
4.52

 
5,544

 
2.64

 
4,270

 
1.75

 
50,761

 
4.08

Over two to three years
60,480

 
4.42

 
27,140

 
1.53

 
27,490

 
1.98

 
115,110

 
3.16

Over three to five years
113,991

 
4.68

 
35,098

 
1.83

 
175,714

 
1.96

 
324,803

 
2.90

Over five to ten years
689,582

 
3.70

 
309,180

 
2.38

 
—

 
—

 
998,762

 
3.29

Over ten to fifteen years
1,280,491

 
3.54

 
339,352

 
2.50

 
—

 
—

 
1,619,843

 
3.33

After fifteen years
4,994,053

 
3.72

 
251,808

 
2.84

 
—

 
—

 
5,245,861

 
3.67

Total due after one year
7,179,544

 
3.71

 
968,122

 
2.50

 
207,474

 
1.96

 
8,355,140

 
3.53

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
7,493,280

 
3.74

 
$
973,318

 
2.50

 
$
262,719

 
1.87

 
$
8,729,317

 
3.54


(1)
Demand loans, loans having no stated maturity, and overdraft loans are included in the amounts due within one year. Construction loans are presented based on the estimated term to complete construction. The maturity date for home equity loans assumes the customer always makes the required minimum payment.

76

Limitations on Dividends and Other Capital Distributions

Office of the Comptroller of the Currency ("OCC") regulations impose restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Under FRB and OCC safe harbor regulations, savings institutions generally may make capital distributions during any calendar year equal to earnings of the previous two calendar years and current year-to-date earnings. A savings institution that is a subsidiary of a savings and loan holding company, such as the Company, that proposes to make a capital distribution must submit written notice to the OCC and FRB 30 days prior to such distribution. The OCC and FRB may object to the distribution during that 30-day period based on safety and soundness or other concerns. Savings institutions that desire to make a larger capital distribution, are under special restrictions, or are not, or would not be, sufficiently capitalized following a proposed capital distribution must obtain regulatory non-objection prior to making such a distribution.
 
The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company.  So long as the Bank remains well capitalized after each capital distribution (as evidenced by maintaining a Community Bank Leverage Ratio ("CBLR") greater than the required percentage), and operates in a safe and sound manner, it is management's belief that the OCC and FRB will continue to allow the Bank to distribute its earnings to the Company, although no assurance can be given in this regard. The Company has elected to not submit a regulatory non-objection notice of distribution of the Bank's current quarter earnings at this time due to the economic uncertainties associated with the COVID-19 pandemic. Management may submit a regulatory non-objection notice of distribution of the Bank's current quarter earnings in the future.

Off-Balance Sheet Arrangements, Commitments and Contractual Obligations

The Company, in the normal course of business, makes commitments to buy or sell assets, to extend credit, or to incur or fund liabilities. There have been no material changes in commitments, contractual obligations or off-balance sheet arrangements from September 30, 2019. For additional information, see "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Off-Balance Sheet Arrangements, Commitments and Contractual Obligations" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019. We anticipate we will continue to have sufficient funds, through repayments and maturities of loans and securities, deposits and borrowings, to meet our current commitments.

The maximum balance of short-term FHLB borrowings outstanding at any month-end during the six months ended March 31, 2020 was $1.24 billion, and the average balance of short-term FHLB borrowings outstanding during this period was $1.14 billion at a weighted average contractual rate of 1.97%. The balance of short-term FHLB borrowings outstanding at March 31, 2020 was $1.04 billion, at a weighted average contractual rate of 1.81%. Short-term FHLB borrowings for this purpose are defined as those with maturity dates within the next 12 months.

Contingencies

In the normal course of business, the Company and its subsidiary are named defendants in various lawsuits and counter claims. In the opinion of management, after consultation with legal counsel, none of the currently pending suits had or are expected to have a materially adverse effect on the Company's consolidated financial statements for the quarter ended March 31, 2020, or future periods.

Capital

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank per the regulatory framework for prompt corrective action ("PCA"). In September 2019, the regulatory agencies, including the OCC and FRB, adopted a final rule, effective January 1, 2020, creating the CBLR for institutions with total consolidated assets of less than $10 billion and that meet other qualifying criteria. The CBLR provides for a simple measure of capital adequacy for qualifying institutions. According to the final rule, qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules and to have met the well-capitalized ratio requirements. In April 2020, the federal bank regulatory agencies announced the issuance of two interim final rules, effective immediately, to provide temporary relief to community banking organizations. Under the interim final rules, the CBLR requirement is a minimum of 8% for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. The Bank elected the CBLR framework during the current quarter. As of March 31, 2020, the Bank's CBLR was 12.4% and the Company's CBLR was 13.9%, which exceeded the minimum requirements.


77

The following table presents a reconciliation of equity under GAAP to regulatory capital amounts, as of March 31, 2020, for the Bank and the Company (dollars in thousands):
 
Bank
 
Company
Total equity as reported under GAAP
$
1,145,134

 
$
1,287,793

AOCI
21,978

 
21,978

Goodwill and other intangibles, net of associated deferred taxes
(14,478
)
 
(14,478
)
Total tier 1 capital
$
1,152,634

 
$
1,295,293





78

Item 3. Quantitative and Qualitative Disclosure about Market Risk
Asset and Liability Management and Market Risk
For a complete discussion of the Bank's asset and liability management policies, as well as the potential impact of interest rate changes upon the market value of the Bank's portfolios, see "Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk" in the Company's Annual Report on Form 10-K for the year ended September 30, 2019. The analysis presented in the tables below reflects the level of market risk at the Bank, including the cash the holding company has on deposit at the Bank.

The rates of interest the Bank earns on its assets and pays on its liabilities are generally established contractually for a period of time. Fluctuations in interest rates have a significant impact not only upon our net income, but also upon the cash flows and market values of our assets and liabilities. Our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our interest-earning assets and interest-bearing liabilities. Risk associated with changes in interest rates on the earnings of the Bank and the market value of its financial assets and liabilities is known as interest rate risk. Interest rate risk is our most significant market risk, and our ability to adapt to changes in interest rates is known as interest rate risk management.

On a weekly basis, management reviews deposit flows, loan demand, cash levels, and changes in several market rates to assess all pricing strategies. The Bank's pricing strategy for first mortgage loan products includes setting interest rates based on secondary market prices and competitor pricing for our local and correspondent lending markets. Pricing for commercial loans is generally based on competitor pricing and the credit risk of the borrower with consideration given to the overall relationship of the borrower. Generally, deposit pricing is based upon a survey of competitors in the Bank's market areas, and the need to attract funding and retain maturing deposits. The majority of our loans are fixed-rate products with maturities up to 30 years, while the majority of our retail deposits have stated maturities or repricing dates of less than two years.

The general objective of our interest rate risk management program is to determine and manage an appropriate level of interest rate risk while maximizing net interest income in a manner consistent with our policy to manage, to the extent practicable, the exposure of net interest income to changes in market interest rates. The Board of Directors and Asset and Liability Management Committee ("ALCO") regularly review the Bank's interest rate risk exposure by forecasting the impact of hypothetical, alternative interest rate environments on net interest income and the market value of portfolio equity ("MVPE") at various dates. The MVPE is defined as the net of the present value of cash flows from existing assets, liabilities, and off-balance sheet instruments. The present values are determined based upon market conditions as of the date of the analysis, as well as in alternative interest rate environments providing potential changes in the MVPE under those alternative interest rate environments. Net interest income is projected in the same alternative interest rate environments with both a static balance sheet and management strategies considered. The MVPE and net interest income analyses are also conducted to estimate our sensitivity to rates for future time horizons based upon market conditions as of the date of the analysis. In addition to the interest rate environments presented below, management also reviews the impact of non-parallel rate shock scenarios on a quarterly basis. These scenarios consist of flattening and steepening the yield curve by changing short-term and long-term interest rates independent of each other, and simulating cash flows and determining valuations as a result of these hypothetical changes in interest rates to identify rate environments that pose the greatest risk to the Bank. This analysis helps management quantify the Bank's exposure to changes in the shape of the yield curve.

Qualitative Disclosure about Market Risk
At March 31, 2020, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $508.6 million, or 5.43% of total assets, compared to $251.9 million, or 2.73% of total assets, at December 31, 2019. The increase in the one-year gap amount was due primarily to lower interest rates as of March 31, 2020, compared to December 31, 2019. As interest rates decrease, borrowers have more economic incentive to refinance their mortgages and agency debt issuers have more economic incentive or opportunity to exercise their call options in order to issue new debt at lower interest rates, resulting in lower projected cash flows on these assets.

The majority of interest-earning assets anticipated to reprice in the coming year are repayments and prepayments on one- to four-family loans and MBS, both of which include the option to prepay without a fee being paid by the contract holder. The amount of interest-bearing liabilities expected to reprice in a given period is not typically impacted significantly 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, but did increase this quarter, as previously discussed. If interest rates were to increase 200 basis points, as of March 31, 2020, the Bank's one-year gap is projected to be $(312.8) million, or (3.34)% of total assets. The decrease in the gap compared to when there is no change in rates is due to lower anticipated cash flows in the higher rate environment. This compares to a one-year gap of $(523.0) million, or (5.66)% of total assets, if interest rates were to have increased 200 basis points as of December 31, 2019.

During the current quarter, loan repayments totaled $328.6 million and cash flows from the securities portfolio totaled $145.9 million. The majority of these cash flows were reinvested into new loans and securities at current market interest rates. Total cash flows from

79

term liabilities that matured and repriced into current market interest rates during the current quarter were $439.7 million, including $65.0 million in FHLB borrowings. These offsetting cash flows allow the Bank to manage its interest rate risk and gap position more precisely than if the Bank did not have offsetting cash flows due to its mix of assets or maturity structure of liabilities.

The Bank primarily uses long-term fixed-rate borrowings with no embedded options to lengthen the average life of the Bank's liabilities. The fixed-rate characteristics of these borrowings lock-in the cost until maturity and thus decrease the amount of liabilities repricing as interest rates move higher compared to funding with lower-cost short-term borrowings. These borrowings are laddered in order to prevent large amounts of liabilities repricing in any one period. The WAL of the Bank's term borrowings as of March 31, 2020 was 1.9 years. However, including the impact of interest rate swaps related to $640.0 million of adjustable-rate FHLB advances, the WAL of the Bank's term borrowings as of March 31, 2020 was 3.0 years. The interest rate swaps effectively convert the adjustable-rate borrowings into long-term, fixed-rate liabilities. It is anticipated that the Bank will renew the upcoming advances to lower costing term advances, or not renew them based upon our assessment of lending opportunities and our liquidity position at that time.

The Bank uses the securities portfolio to shorten the average life of the Bank's assets. Security purchases over the past few years have primarily been focused on callable agency debentures with maturities no longer than five years, shorter duration MBS, and adjustable-rate MBS. These securities have a shorter average life and provide a steady source of cash flow that can be reinvested in higher-yielding assets as interest rates rise.

In addition to these wholesale strategies, the Bank has sought to increase non-maturity deposits. Non-maturity deposits are expected to reduce the risk of higher interest rates because their interest rates are not expected to increase significantly as market interest rates rise. Specifically, checking accounts and savings accounts have had minimal interest rate fluctuations throughout historical interest rate cycles, though no assurance can be given that this will be the case in future interest rate cycles. The balances and rates of these accounts have historically tended to remain very stable over time, giving them the characteristic of long-term liabilities. The Bank uses historical data pertaining to these accounts to estimate their future balances. Additionally, to the extent we expand the commercial banking business, we expect to have the ability to obtain lower-costing commercial deposits, which could be used to reduce the cost of funds by replacing FHLB borrowings and wholesale deposits.

With the significant decrease in interest rates during the current quarter, the Bank has decreased the rates on certificates of deposit and money market accounts at a pace with competitors in its market areas. The Bank currently expects it will continue to lower rates as market conditions allow.
 



80

Gap Table. The following gap table summarizes the anticipated maturities or repricing periods of the Bank's interest-earning assets and interest-bearing liabilities based on the information and assumptions set forth in the notes below. Cash flow projections for mortgage-related assets are calculated based in part on prepayment assumptions at current and projected interest rates. Prepayment projections are subjective in nature, involve uncertainties and assumptions and, therefore, cannot be determined with a high degree of accuracy. Although certain assets and liabilities may have similar maturities or periods to repricing, they may react differently to changes in market interest rates. Assumptions may not reflect how actual yields and costs respond to market interest rate changes. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the gap table below. A positive gap indicates more cash flows from assets are expected to reprice than cash flows from liabilities and would indicate, in a rising rate environment, that earnings should increase. A negative gap indicates more cash flows from liabilities are expected to reprice than cash flows from assets and would indicate, in a rising rate environment, that earnings should decrease. For additional information regarding the impact of changes in interest rates, see the following Change in Net Interest Income and Change in MVPE discussions and tables.
 
 
 
More Than
 
More Than
 
 
 
 
 
Within
 
One Year to
 
Three Years
 
Over
 
 
 
One Year
 
Three Years
 
to Five Years
 
Five Years
 
Total
Interest-earning assets:
(Dollars in thousands)
Loans receivable(1)
$
2,075,424

 
$
2,221,032

 
$
1,295,807

 
$
1,893,486

 
$
7,485,749

Securities(2)
620,926

 
320,938

 
139,868

 
127,784

 
1,209,516

Other interest-earning assets
5,336

 
—

 
—

 
—

 
5,336

Total interest-earning assets
2,701,686

 
2,541,970

 
1,435,675

 
2,021,270

 
8,700,601

 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
Non-maturity deposits(3)
180,978

 
313,620

 
251,303

 
2,087,371

 
2,833,272

Certificates of deposit
1,482,061

 
1,276,351

 
283,507

 
437

 
3,042,356

Borrowings(4)
530,000

 
575,000

 
715,000

 
339,971

 
2,159,971

Total interest-bearing liabilities
2,193,039

 
2,164,971

 
1,249,810

 
2,427,779

 
8,035,599

 
 
 
 
 
 
 
 
 
 
Excess (deficiency) of interest-earning assets over
 
 
 
 
 
 
 
 
interest-bearing liabilities
$
508,647

 
$
376,999

 
$
185,865

 
$
(406,509
)
 
$
665,002

 
 
 
 
 
 
 
 
 
 
Cumulative excess of interest-earning assets over
 
 
 
 
 
 
 
 
interest-bearing liabilities
$
508,647

 
$
885,646

 
$
1,071,511

 
$
665,002

 
 
 
 
 
 
 
 
 
 
 
 
Cumulative excess of interest-earning assets over interest-bearing
 
 
 
 
 
 
liabilities as a percent of total Bank assets at:
 
 
 
 
 
 
 
 
March 31, 2020
5.43
 %
 
9.45
%
 
11.44
%
 
7.10
%
 
 
September 30, 2019
5.21

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative one-year gap - interest rates +200 bps at:
 
 
 
 
 
 
 
 
March 31, 2020
(3.34
)
 
 
 
 
 
 
 
 
September 30, 2019
(3.88
)
 
 
 
 
 
 
 
 

(1)
Adjustable-rate loans are included in the period in which the rate is next scheduled to adjust or in the period in which repayments are expected to occur, or prepayments are expected to be received, prior to their next rate adjustment, rather than in the period in which the loans are due. Fixed-rate loans are included in the periods in which they are scheduled to be repaid, based on scheduled amortization and prepayment assumptions. Balances are net of undisbursed amounts and deferred fees and exclude loans 90 or more days delinquent or in foreclosure.
(2)
MBS reflect projected prepayments at amortized cost. Investment securities are presented based on contractual maturities, term to call dates or pre-refunding dates as of March 31, 2020, at amortized cost.
(3)
Although the Bank's checking, savings, and money market accounts are subject to immediate withdrawal, management considers a substantial amount of these accounts to be core deposits having significantly longer effective maturities. The decay rates (the assumed rates at which the balances of existing accounts decline) used on these accounts is based on assumptions developed from our actual experiences with these accounts. If all of the Bank's checking, savings, and money market accounts had been assumed to be subject to repricing within one year, interest-bearing liabilities which were estimated to mature or reprice within one year would have exceeded interest-earning assets with comparable characteristics by $2.14 billion, for a cumulative one-year gap of (22.9)% of total assets.
(4)
Borrowings exclude deferred prepayment penalty costs. Included in this line item are $640.0 million of FHLB adjustable-rate advances with interest rate swaps. The repricing for these liabilities is projected to occur at the maturity date of each interest rate swap.


81

Change in Net Interest Income. For each date presented in the following table, the estimated change in the Bank's net interest income is based on the indicated instantaneous, parallel and permanent change in interest rates. The change in each interest rate environment represents the difference between estimated net interest income in the 0 basis point interest rate environment ("base case," assumes the forward market and product interest rates implied by the yield curve are realized) and the estimated net interest income in each alternative interest rate environment (assumes market and product interest rates have a parallel shift in rates across all maturities by the indicated change in rates). Projected cash flows for each scenario are based upon varying prepayment assumptions to model likely customer behavior changes as market rates change. For the current quarter, multiple yields along the yield curve were less than one percent, so the -100 basis points scenario was not applicable.  Estimations of net interest income used in preparing the table below were based upon the assumptions that the total composition of interest-earning assets and interest-bearing liabilities does not change materially and that any repricing of assets or liabilities occurs at anticipated product and market rates for the alternative rate environments as of the dates presented. The estimation of net interest income does not include any projected gains or losses related to the sale of loans or securities, or income derived from non-interest income sources, but does include the use of different prepayment assumptions in the alternative interest rate environments. It is important to consider that estimated changes in net interest income are for a cumulative four-quarter period. These do not reflect the earnings expectations of management.
Change
 
Net Interest Income At
(in Basis Points)
 
March 31, 2020
 
September 30, 2019
in Interest Rates(1)
 
Amount ($)
 
Change ($)
 
Change (%)
 
Amount ($)
 
Change ($)
 
Change (%)
 
 
(Dollars in thousands)
  000 bp
 
$
202,863

 
$
—

 
—
 %
 
$
193,329

 
$
—

 
—
 %
+100 bp
 
207,807

 
4,944

 
2.44

 
194,093

 
764

 
0.40

+200 bp
 
206,017

 
3,154

 
1.55

 
192,111

 
(1,218
)
 
(0.63
)
+300 bp
 
202,361

 
(502
)
 
(0.25
)
 
188,752

 
(4,577
)
 
(2.37
)

(1)
Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities.

The net interest income projection was higher in the base case scenario at March 31, 2020 compared to September 30, 2019 due primarily to a larger projected decrease in interest expense than interest income. The decrease in interest expense was driven primarily by a decrease in the actual cost of deposits and borrowings. During the current quarter, the Bank modified $350.0 million of term borrowings into new long-term borrowings with a lower cost. As a result, the cost on the Bank's term borrowings portfolio decreased by 12 basis points. The Bank was also able to lower the cost of its deposit portfolio by two basis points due to lower money market rates and a decrease in the interest rates offered on certificates of deposit. In addition, during the current quarter management changed the way that future certificate of deposit rates are forecasted in the Bank's interest rate risk model. This change was made to more closely align the forecasted rates with the current rates offered, thus lowering the projected interest expense.

The net interest income projections increase from the base case in the +100 and +200 basis point scenarios at March 31, 2020. The net interest income projection was more adversely impacted in the rising interest rate scenarios at September 30, 2019 compared to March 31, 2020, due primarily to higher interest rates at September 30, 2019. In addition, the modification of $350.0 million of borrowings during the current quarter lengthened the Bank's liabilities, thus reducing the risk to higher interest rates. The positive impact of rising interest rates diminished as interest rates increase until turning negative in the +300 basis point scenario. Higher interest rates decreased the projected cash flows from the Bank's mortgage-related assets, thus increasing the negative impact of rising interest rates.
 




82

Change in MVPE. The following table sets forth the estimated change in the MVPE for each date presented based on the indicated instantaneous, parallel, and permanent change in interest rates. The change in each interest rate environment represents the difference between the MVPE in the base case (assumes the forward market interest rates implied by the yield curve are realized) and the MVPE in each alternative interest rate environment (assumes market interest rates have a parallel shift in rates). Projected cash flows for each scenario are based upon varying prepayment assumptions to model likely customer behavior as market rates change. For the current quarter, multiple yields along the yield curve were less than one percent, so the -100 basis points scenario was not applicable.  The estimations of the MVPE used in preparing the table below were based upon the assumptions that the total composition of interest-earning assets and interest-bearing liabilities does not change, that any repricing of assets or liabilities occurs at current product or market rates for the alternative rate environments as of the dates presented, and that different prepayment rates were used in each alternative interest rate environment. The estimated MVPE results from the valuation of cash flows from financial assets and liabilities over the anticipated lives of each for each interest rate environment. The table below presents the effects of the changes in interest rates on our assets and liabilities as they mature, repay, or reprice, as shown by the change in the MVPE for alternative interest rates.
Change
 
Market Value of Portfolio Equity At
(in Basis Points)
 
March 31, 2020
 
September 30, 2019
in Interest Rates(1)
 
Amount ($)
 
Change ($)
 
Change (%)
 
Amount ($)
 
Change ($)
 
Change (%)
 
 
(Dollars in thousands)
  000 bp
 
$
1,087,074

 
$
—

 
—
 %
 
$
1,283,429

 
$
—

 
—
 %
+100 bp
 
1,185,836

 
98,762

 
9.09

 
1,286,446

 
3,017

 
0.24

+200 bp
 
1,116,523

 
29,449

 
2.71

 
1,162,151

 
(121,278
)
 
(9.45
)
+300 bp
 
980,783

 
(106,291
)
 
(9.78
)
 
992,060

 
(291,369
)
 
(22.70
)

(1)
Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities.

The percentage change in the Bank's MVPE at March 31, 2020 was positive in the +100 and +200 basis point scenarios and negative in the +300 basis point scenario. At September 30, 2019 the percentage change in the Bank's MVPE was negative in the +200 and +300 basis point scenarios. This change was due primarily to lower interest rates at March 31, 2020 and the modification of $350.0 million of borrowings during the current quarter into long-term liabilities which reduced the Bank's risk to higher interest rates. As interest rates increase, 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, resulting in lower projected cash flows on these assets. As interest rates increase in the rising rate scenarios, repayments on mortgage-related assets are more likely to decrease and only be realized through significant changes in borrowers' lives such as divorce, death, job-related relocations, or other events as there is less economic incentive for borrowers to prepay their debt, resulting in an increase in the average life of mortgage-related assets. Similarly, call projections for the Bank's callable agency debentures decrease as interest rates rise, which results in cash flows related to these assets moving closer to the contractual maturity dates. The higher expected average lives of these assets, relative to the assumptions in the base case interest rate environment, increases the sensitivity of their market value to changes in interest rates.

In the +100 and +200 basis point scenarios, the market value of liabilities decrease at a faster pace than the market value of assets due to having a longer duration in these scenarios. The longer duration makes the market value of these liabilities more sensitive to changes in interest rates. In the +300 basis point scenario, prepayment speeds on mortgage-related assets and call projections on investment securities decrease to a point where the durations of assets are longer, and thus more sensitive to rising interest rates. This results in a larger decrease in the market value of assets than liabilities in this scenario.
 


83

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 March 31, 2020. 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. The maturity and repricing terms presented for one- to four-family loans represent the contractual terms of the loan.
 
Amount
 
Yield/Rate
 
WAL
 
% of Category
 
% of Total
 
(Dollars in thousands)
Investment securities
$
262,719

 
1.87
%
 
0.3

 
21.3
%
 
2.9
%
MBS - fixed
713,154

 
2.33

 
3.1

 
57.7

 
8.0

MBS - adjustable
260,164

 
2.97

 
2.4

 
21.0

 
2.9

Total securities
1,236,037

 
2.36

 
2.3

 
100.0
%
 
13.8

Loans receivable:
 
 
 
 
 
 
 
 
 
Fixed-rate one- to four-family:
 
 
 
 
 
 
 
 
 
<= 15 years
1,061,681

 
3.09

 
3.4

 
14.2
%
 
11.9

> 15 years
4,515,742

 
3.82

 
4.8

 
60.3

 
50.5

Fixed-rate commercial
441,343

 
4.45

 
3.1

 
5.9

 
4.9

All other fixed-rate loans
49,676

 
4.81

 
3.3

 
0.7

 
0.6

Total fixed-rate loans
6,068,442

 
3.75

 
4.4

 
81.1

 
67.9

Adjustable-rate one- to four-family:
 
 
 
 
 
 
 
 
 
<= 36 months
205,019

 
2.55

 
2.8

 
2.7

 
2.3

> 36 months
776,977

 
3.27

 
2.1

 
10.4

 
8.7

Adjustable-rate commercial
331,312

 
4.84

 
7.1

 
4.4

 
3.7

All other adjustable-rate loans
111,530

 
5.30

 
1.6

 
1.4

 
1.2

Total adjustable-rate loans
1,424,838

 
3.69

 
3.3

 
18.9

 
15.9

Total loans receivable
7,493,280

 
3.74

 
4.2

 
100.0
%
 
83.8

FHLB stock
101,575

 
6.72

 
2.0

 
 
 
1.1

Cash and cash equivalents
118,374

 
—

 
—

 
 
 
1.3

Total interest-earning assets
$
8,949,266

 
3.53

 
3.9

 
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
Non-maturity deposits
$
2,732,263

 
0.31

 
15.3

 
47.3
%
 
34.6
%
Retail/business certificates of deposit
2,765,142

 
2.11

 
1.5

 
47.9

 
35.0

Public unit certificates of deposit
277,214

 
1.87

 
0.5

 
4.8

 
3.5

Total deposits
5,774,619

 
1.25

 
7.9

 
100.0
%
 
73.1

Term borrowings
2,090,000

 
2.25

 
3.0

 
98.6
%
 
26.5

Line of credit borrowings
30,000

 
0.25

 
—

 
1.4

 
0.4

Total borrowings
2,120,000

 
2.22

 
3.0

 
100.0
%
 
26.9

Total interest-bearing liabilities
$
7,894,619

 
1.51

 
6.6

 
 
 
100.0
%

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, the "Act") as of March 31, 2020. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of March 31, 2020, such disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Act is accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms.

84


Changes in Internal Control Over Financial Reporting
Management reviewed the Company’s internal control over financial reporting in consideration of operational changes as a result of COVID-19.  There have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Act) that occurred during the Company's quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and the Bank are involved as plaintiff or defendant in various legal actions arising in the normal course of business. In our opinion, after consultation with legal counsel, we believe it unlikely that such pending legal actions will have a material adverse effect on our financial condition, results of operations or liquidity.
Item 1A. Risk Factors
There have been no material changes to our risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019; however, in light of recent developments relating to the COVID-19 pandemic, the Company is supplementing its risk factors in this Form 10-Q.

The Impact of the COVID-19 Pandemic on Our Customers, Employees and Business Operations Has Had, and Will Likely Continue to Have, a Significant Adverse Effect on Our Business, Results of Operations and Financial Condition

The COVID-19 pandemic has created a global public-health crisis that has resulted in widespread market volatility and deteriorating economic conditions for households and businesses. The deteriorating economic conditions, most of which are unprecedented, include more than 20 million people becoming unemployed in the United States in one month's time, cuts in consumer spending on almost all categories of purchases except groceries and staples, and closure or significantly reduced operations of restaurants, bars, airlines, hotels, and entertainment and hospitality venues, among others. In the Bank's local markets, governments put stay-at-home orders into effect which only allow for essential businesses to remain open.

In response to the COVID-19 pandemic, an essential business, the Company implemented business continuity measures, including activating its Crisis Management Team to put into action our business continuity plan, monitoring potential business interruptions, making further improvements to our information technology allowing nearly half of our employees to work from home, and conducting regular discussions with our third-party service providers providing services to facilities that are open. Heightened cybersecurity, information security and operational risks may result from these remote work-from-home arrangements. Preventative health measures were put in place including elimination of business-related travel, implementing mandatory work from home for all employees able to do so, social distancing precautions for all employees in the office, adjusting branch banking hours and operational measures to promote social distancing when customers do visit branches, and preventative cleaning at offices and branches. These actions have resulted in changes to our business operations, but have not yet significantly impacted most business operations. Depending on the severity and length of the COVID-19 pandemic, which is impossible to predict, we could experience significant disruptions in our business operations if key personnel or a significant number of employees were to become unavailable due to the effects of, and restrictions resulting from, the COVID-19 pandemic, as well as decreased demand for our products and services.

There is pervasive uncertainty surrounding the future economic conditions that will emerge in the months and years following the start of the COVID-19 pandemic. As a result, management is confronted with a significant and unfamiliar degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values. The unknown economic recovery time resulting from the COVID-19 pandemic creates risks that loan modification programs made available to our customers will be insufficient to prevent or reduce delinquencies or help our customers stay in business. Businesses that do not take advantage of loan modification programs provided by the Bank could also be at risk of becoming delinquent or going out of business. The PPP loans made by the Bank are guaranteed by the SBA and, if used by the borrower for authorized purposes, may be fully forgiven. However, in the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by the Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if it has already made payment under the guaranty, seek recovery of any loss related to the deficiency from the Bank.

Since the commencement of the PPP, several larger banks have been subject to litigation regarding their processing of PPP loan applications. The Bank may be exposed to the risk of similar litigation, from both customers and non-customers that approached the Bank seeking PPP loans. PPP lenders, including the Bank, may also be subject to the risk of litigation in connection with other aspects of the PPP, including but not limited to borrowers seeking forgiveness of their loans. If any such litigation is filed against the Bank, it may result in significant financial or reputational harm to us.

85


It is likely that many of our individual borrowers have become unemployed and may not be able to continue making mortgage payments under the terms of their loans. Also included in the CARES Act were Economic Impact Payments to individuals meeting certain income requirements. Individuals began receiving those payments in mid-April 2020. This may help mitigate the risk that some borrowers become delinquent or delay the potential for default until they can return to work. However, it is uncertain how long borrowers may need some form of assistance or forbearance.

In order to help our customers, it is likely that utilization of our COVID-19 loan modification programs may increase in the future. Asset quality may deteriorate further and the amount of our ACL may not be sufficient for future loan losses we may experience. This could require us to increase our reserves and recognize more expense in future periods. The changes in market rates of interest and the impact that has on our ability to price our products may reduce our net interest income in the future or negatively impact the demand for our products. There is some risk that operational costs could increase as we maintain existing facilities in accordance with health guidelines as well as potentially continuing to have staff work remotely.

The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

See "Liquidity and Capital Resources - Capital" in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding OCC restrictions on dividends from the Bank to the Company.

The following table summarizes our stock repurchase activity during the three months ended March 31, 2020 and additional information regarding our stock repurchase program. The Company has $70.0 million of common stock authorized under its stock repurchase plan. There is no expiration for this repurchase plan. Shares may be repurchased from time to time in the open-market based upon market conditions and available liquidity.
 
 
 
 
 
Total Number of
 
Approximate Dollar
 
Total
 
 
 
Shares Purchased as
 
Value of Shares
 
Number of
 
Average
 
Part of Publicly
 
that May Yet Be
 
Shares
 
Price Paid
 
Announced Plans
 
Purchased Under the
 
Purchased
 
per Share
 
or Programs
 
Plans or Programs
January 1, 2020 through
 
 
 
 
 
 
 
January 31, 2020
—

 
$
—

 
—

 
$
70,000,000

February 1, 2020 through
 
 
 
 
 
 
 
February 29, 2020
—

 
—

 
—

 
70,000,000

March 1, 2020 through
 
 
 
 
 
 
 
March 31, 2020
—

 
—

 
—

 
70,000,000

Total
—

 
—

 
—

 
70,000,000


Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
See Index to Exhibits.

86

INDEX TO EXHIBITS
Exhibit
Number
 
Document
 
Charter of Capitol Federal Financial, Inc., as filed on May 6, 2010, as Exhibit 3(i) to Capitol Federal Financial, Inc.'s Registration Statement on Form S-1 (File No. 333-166578) and incorporated herein by reference
 
Bylaws of Capitol Federal Financial, Inc., as amended, filed on March 30, 2020, as Exhibit 3.2 to Form 8-K for Capitol Federal Financial Inc. and incorporated herein by reference

 
Description of the Registrant's Securities, as filed on November 27, 2019, as Exhibit 4 to the Registrant's Annual Report on Form 10-K and incorporated herein by reference
 
Form of Change of Control Agreement with each of John B. Dicus, Kent G. Townsend, and Rick C. Jackson filed on January 20, 2011 as Exhibit 10.1 to the Registrant's Current Report on Form 8-K and incorporated herein by reference
 
Form of Change of Control Agreement with Natalie G. Haag filed on November 29, 2012 as Exhibit 10.1(iv) to the Registrant's Annual Report on Form 10-K and incorporated herein by reference
 
Form of Change of Control Agreement with Daniel L. Lehman filed on November 29, 2016 as Exhibit 10.1(v) to the Registrant's Annual Report on Form 10-K and incorporated herein by reference
 
Form of Change of Control Agreement with Robert D. Kobbeman filed on November 29, 2018 as Exhibit 10.1(iv) to the Registrant's Annual Report on Form 10-K and incorporated herein by reference
 
Employment Agreement with Robert D. Kobbeman, as amended, filed on November 29, 2018 as Exhibit 10.1(v) to the Registrant's Annual Report on Form 10-K and incorporated herein by reference
 
Form of Change of Control Agreement with Anthony S. Barry filed on May 10, 2019 as Exhibit 10.1(vi) to the Registrant's March 31, 2019 Form 10-Q and incorporated herein by reference
 
Capitol Federal Financial's 2000 Stock Option and Incentive Plan (the "Stock Option Plan") filed on April 13, 2000 as Appendix A to Capitol Federal Financial's Revised Proxy Statement (File No. 000-25391) and incorporated herein by reference
 
Capitol Federal Financial Deferred Incentive Bonus Plan, as amended
 
Form of Incentive Stock Option Agreement under the Stock Option Plan filed on February 4, 2005 as Exhibit 10.5 to the December 31, 2004 Form 10-Q for Capitol Federal Financial and incorporated herein by reference
 
Form of Non-Qualified Stock Option Agreement under the Stock Option Plan filed on February 4, 2005 as Exhibit 10.6 to the December 31, 2004 Form 10-Q for Capitol Federal Financial and incorporated herein by reference
 
Description of Director Fee Arrangements filed on November 29, 2018 as Exhibit 10.6 to the Registrant's September 30, 2018 Form 10-K and incorporated herein by reference
 
Short-term Performance Plan, as amended
 
Capitol Federal Financial, Inc. 2012 Equity Incentive Plan (the "Equity Incentive Plan") filed on December 22, 2011 as Appendix A to Capitol Federal Financial, Inc.'s Proxy Statement (File No. 001-34814) and incorporated herein by reference
 
Form of Incentive Stock Option Agreement under the Equity Incentive Plan filed on February 6, 2012 as Exhibit 10.12 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
 
Form of Non-Qualified Stock Option Agreement under the Equity Incentive Plan filed on February 6, 2012 as Exhibit 10.13 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
 
Form of Stock Appreciation Right Agreement under the Equity Incentive Plan filed on February 6, 2012 as Exhibit 10.14 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
 
Form of Restricted Stock Agreement under the Equity Incentive Plan filed on February 6, 2012 as Exhibit 10.15 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
 
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by John B. Dicus, Chairman, President and Chief Executive Officer
 
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Kent G. Townsend, Executive Vice President, Chief Financial Officer and Treasurer
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 made by John B. Dicus, Chairman, President and Chief Executive Officer, and Kent G. Townsend, Executive Vice President, Chief Financial Officer and Treasurer

87

101
 
The following information from the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, filed with the Securities and Exchange Commission on May 8, 2020, has been formatted in Inline eXtensible Business Reporting Language ("XBRL"): (i) Consolidated Balance Sheets at March 31, 2020 and September 30, 2019, (ii) Consolidated Statements of Income for the three and six months ended March 31, 2020 and 2019, (iii) Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2020 and 2019, (iv) Consolidated Statements of Stockholders' Equity for the three and six months ended March 31, 2020 and 2019, (v) Consolidated Statements of Cash Flows for the six months ended March 31, 2020 and 2019, and (vi) Notes to the Unaudited Consolidated Financial Statements.
104
 
Cover Page Interactive Data File, formatted in Inline XBRL and included in Exhibit 101

88

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CAPITOL FEDERAL FINANCIAL, INC.
 
 
 
 
 
 
 
 
 
 
 
 
 
Date: May 8, 2020
By:
/s/ John B. Dicus
 
 
 
John B. Dicus, Chairman, President and Chief Executive Officer
 
 
 
 
 
Date: May 8, 2020
By:
/s/ Kent G. Townsend
 
 
 
Kent G. Townsend, Executive Vice President,
 
 
 
Chief Financial Officer and Treasurer
 


89