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Section 1: 10-Q (DECEMBER 31, 2019 FORM 10-Q)

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2019-09-30 0001490906 srt:MinimumMember 2019-12-31 0001490906 srt:MaximumMember 2019-12-31 cffn:credit_score xbrli:shares iso4217:USD xbrli:shares iso4217:USD xbrli:pure cffn:contract

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 December 31, 2019
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 January 31, 2020, there were 141,512,165 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)
 
 
 
 
 
December 31,
 
September 30,
 
2019
 
2019
ASSETS:
 
 
 
Cash and cash equivalents (includes interest-earning deposits of $46,427 and $198,809)
$
70,703

 
$
220,370

Available-for-sale ("AFS") securities, at estimated fair value
1,229,587

 
1,204,863

Loans receivable, net (allowance for credit losses ("ACL") of $9,435 and $9,226)
7,429,207

 
7,416,747

Federal Home Loan Bank Topeka ("FHLB") stock, at cost
99,861

 
98,456

Premises and equipment, net
98,188

 
96,784

Income taxes receivable, net

 
2

Other assets
309,026

 
302,796

TOTAL ASSETS
$
9,236,572

 
$
9,340,018

 
 
 
 
LIABILITIES:
 
 
 
Deposits
$
5,585,851

 
$
5,581,867

Borrowings
2,189,991

 
2,239,989

Advance payments by borrowers for taxes and insurance
27,284

 
65,686

Income taxes payable, net
3,802

 

Deferred income tax liabilities, net
15,308

 
14,282

Accounts payable and accrued expenses
107,742

 
101,868

Total liabilities
7,929,978

 
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, 141,502,665 and 141,440,030
 
 
 
shares issued and outstanding as of December 31, 2019 and September 30, 2019, respectively
1,415

 
1,414

Additional paid-in capital
1,211,172

 
1,210,226

Unearned compensation, Employee Stock Ownership Plan ("ESOP")
(34,279
)
 
(34,692
)
Retained earnings
138,213

 
174,277

Accumulated other comprehensive (loss) income ("AOCI"), net of tax
(9,927
)
 
(14,899
)
Total stockholders' equity
1,306,594

 
1,336,326

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
9,236,572

 
$
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
 
December 31,
 
2019
 
2018
INTEREST AND DIVIDEND INCOME:
 
 
 
Loans receivable
$
69,914

 
$
70,772

Mortgage-backed securities ("MBS")
6,102

 
6,523

FHLB stock
1,826

 
1,971

Investment securities
1,507

 
1,441

Cash and cash equivalents
687

 
1,714

Total interest and dividend income
80,036

 
82,421

INTEREST EXPENSE:
 
 
 
Deposits
17,962

 
15,725

Borrowings
13,377

 
14,395

Total interest expense
31,339

 
30,120

NET INTEREST INCOME
48,697

 
52,301

PROVISION FOR CREDIT LOSSES
225

 

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
48,472

 
52,301

NON-INTEREST INCOME:
 
 
 
Deposit service fees
3,062

 
3,352

Insurance commissions
691

 
626

Other non-interest income
1,751

 
1,446

Total non-interest income
5,504

 
5,424

NON-INTEREST EXPENSE:
 
 
 
Salaries and employee benefits
13,471

 
12,962

Information technology and related expense
4,141

 
4,599

Occupancy, net
3,207

 
3,252

Advertising and promotional
1,410

 
760

Regulatory and outside services
1,343

 
1,766

Deposit and loan transaction costs
711

 
736

Office supplies and related expense
519

 
459

Federal insurance premium

 
528

Other non-interest expense
1,698

 
1,720

Total non-interest expense
26,500

 
26,782

INCOME BEFORE INCOME TAX EXPENSE
27,476

 
30,943

INCOME TAX EXPENSE
4,965

 
6,560

NET INCOME
$
22,511

 
$
24,383

 
 
 
 
Basic earnings per share ("EPS")
$
0.16

 
$
0.18

Diluted EPS
$
0.16

 
$
0.18

 
 
 
 
Basic weighted average common shares
137,898,010

 
137,550,920

Diluted weighted average common shares
137,976,122

 
137,592,379

 
 
 
 
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
 
December 31,
 
2019
 
2018
Net income
$
22,511

 
$
24,383

Other comprehensive income (loss), net of tax:
 
 
 
Unrealized gains (losses) on AFS securities arising during the period,
 
 
 
net of taxes of $145 and $(1,133)
(452
)
 
3,527

Changes in unrealized gains (losses) on cash flow hedges,
 
 
 
net of taxes of $(1,741) and $3,128
5,424

 
(9,744
)
Comprehensive income
$
27,483

 
$
18,166

 
 
 
 
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)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
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 Three Months Ended
 
December 31,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
22,511

 
$
24,383

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
FHLB stock dividends
(1,826
)
 
(1,971
)
Provision for credit losses
225

 

Amortization and accretion of premiums and discounts on securities
228

 
388

Depreciation and amortization of premises and equipment
2,286

 
2,518

Amortization of intangible assets
500

 
608

Amortization of deferred amounts related to FHLB advances, net
2

 
2

Common stock committed to be released for allocation - ESOP
582

 
531

Stock-based compensation
166

 
95

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

 
(9,970
)
Other assets, net
1,237

 
1,050

Income taxes payable/receivable, net
3,808

 
5,589

Deferred income tax liabilities, net
(597
)
 
(746
)
Accounts payable and accrued expenses
(2,312
)
 
(8,175
)
Net cash provided by operating activities
26,810

 
14,302

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of AFS securities
(149,359
)
 

Proceeds from calls, maturities and principal reductions of AFS securities
123,810

 
51,003

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

 
42,876

Proceeds from the redemption of FHLB stock
421

 
94,500

Purchase of FHLB stock

 
(93,324
)
Net change in loans receivable
(12,844
)
 
(11,898
)
Purchase of premises and equipment
(3,882
)
 
(2,183
)
Proceeds from sale of other real estate owned ("OREO")
585

 
631

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

 

Net cash (used in) provided by investing activities
(40,779
)
 
81,605

 
 
 
 
 
 
 
(Continued)


7


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
 
For the Three Months Ended
 
December 31,
 
2019
 
2018
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Cash dividends paid
(58,663
)
 
(65,362
)
Net change in deposits
3,984

 
(45,490
)
Proceeds from borrowings
362,400

 
2,615,000

Repayments on borrowings
(412,400
)
 
(2,618,866
)
Change in advance payments by borrowers for taxes and insurance
(38,402
)
 
(36,858
)
Stock options exercised
613

 
467

Net cash used in financing activities
(142,468
)
 
(151,109
)
 
 
 
 
NET DECREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS
(156,437
)
 
(55,202
)
 
 
 
 
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS:
 
 
Beginning of period
253,700

 
139,055

End of period
$
97,263

 
$
83,853

 
 
 
 
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 $70.7 million and $220.4 million at December 31, 2019 and September 30, 2019, respectively, and restricted cash and cash equivalents of $26.6 million and $33.3 million at December 31, 2019 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 three months ended December 31, 2019 and 2018.

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. The integration of the Company's data with the software provider is complete. Model development, with the assistance of the software provider, is currently in process. 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
 
December 31,
 
2019
 
2018
 
(Dollars in thousands, except per share amounts)
Net income
$
22,511

 
$
24,383

Income allocated to participating securities
(19
)
 
(9
)
Net income available to common stockholders
$
22,492

 
$
24,374

 
 
 
 
Average common shares outstanding
137,897,561

 
137,550,471

Average committed ESOP shares outstanding
449

 
449

Total basic average common shares outstanding
137,898,010

 
137,550,920

 
 
 
 
Effect of dilutive stock options
78,112

 
41,459

 
 
 
 
Total diluted average common shares outstanding
137,976,122

 
137,592,379

 
 
 
 
Net EPS:
 
 
 
Basic
$
0.16

 
$
0.18

Diluted
$
0.16

 
$
0.18

 
 
 
 
Antidilutive stock options, excluded from the diluted average
 
 
common shares outstanding calculation
435,750

 
550,021




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").
 
December 31, 2019
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
MBS
$
924,732

 
$
14,983

 
$
2,398

 
$
937,317

GSE debentures
274,994

 
257

 
96

 
275,155

Municipal bonds
17,050

 
65

 

 
17,115

 
$
1,216,776

 
$
15,305

 
$
2,494

 
$
1,229,587


 
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.
 
December 31, 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
$
71,249

 
$
387

 
$
174,037

 
$
2,011

GSE debentures
24,946

 
54

 
74,952

 
42

Municipal bonds

 

 

 

 
$
96,195

 
$
441

 
$
248,989

 
$
2,053


 
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 December 31, 2019 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 December 31, 2019 or September 30, 2019.
The amortized cost and estimated fair value of AFS debt securities as of December 31, 2019, 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
$
81,453

 
$
81,417

One year through five years
185,591

 
185,853

Five years through ten years
25,000

 
25,000

 
292,044

 
292,270

MBS
924,732

 
937,317

 
$
1,216,776

 
$
1,229,587



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
 
December 31,
 
2019
 
2018
 
(Dollars in thousands)
Taxable
$
1,437

 
$
1,348

Non-taxable
70

 
93

 
$
1,507

 
$
1,441




The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of the dates presented.
 
December 31, 2019
 
September 30, 2019
 
(Dollars in thousands)
Public unit deposits
$
307,875

 
$
381,143

Repurchase agreements
108,000

 
108,271

Federal Reserve Bank of Kansas City ("FRB of Kansas City")
6,109

 
6,636

 
$
421,984

 
$
496,050




13


4. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES
Loans receivable, net at the dates presented is summarized as follows:
 
December 31, 2019
 
September 30, 2019
 
(Dollars in thousands)
One- to four-family:
 
 
 
Originated
$
3,927,015

 
$
3,873,851

Correspondent purchased
2,343,750

 
2,349,877

Bulk purchased
237,691

 
252,347

Construction
38,771

 
36,758

Total
6,547,227

 
6,512,833

Commercial:
 
 
 
Commercial real estate
583,848

 
583,617

Commercial and industrial
57,019

 
61,094

Construction
107,372

 
123,159

Total
748,239

 
767,870

Consumer:
 
 
 
Home equity
118,491

 
120,587

Other
10,877

 
11,183

Total
129,368

 
131,770

 
 
 
 
Total loans receivable
7,424,834

 
7,412,473

 
 
 
 
Less:
 
 
 
ACL
9,435

 
9,226

Discounts/unearned loan fees
30,323

 
31,058

Premiums/deferred costs
(44,131
)
 
(44,558
)
 
$
7,429,207

 
$
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 December 31, 2019 and September 30, 2019, all loans 90 or more days delinquent were on nonaccrual status.
 
December 31, 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
$
8,980

 
$
3,527

 
$
12,507

 
$
3,938,497

 
$
3,951,004

Correspondent purchased
4,179

 
1,395

 
5,574

 
2,369,379

 
2,374,953

Bulk purchased
3,345

 
701

 
4,046

 
234,723

 
238,769

Commercial:
 
 
 
 
 
 
 
 
 
Commercial real estate
963

 

 
963

 
687,095

 
688,058

Commercial and industrial
231

 

 
231

 
56,385

 
56,616

Consumer:
 
 
 
 
 
 
 
 
 
Home equity
442

 
328

 
770

 
117,637

 
118,407

Other
45

 
12

 
57

 
10,778

 
10,835

 
$
18,185

 
$
5,963

 
$
24,148

 
$
7,414,494

 
$
7,438,642

 
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 December 31, 2019 and September 30, 2019 was $1.6 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 $512 thousand at December 31, 2019 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.
 
December 31, 2019
 
September 30, 2019
 
(Dollars in thousands)
One- to four-family:
 
 
 
Originated
$
4,159

 
$
4,436

Correspondent purchased
1,395

 
1,023

Bulk purchased
835

 
1,551

Commercial:
 
 
 
Commercial real estate
187

 

Commercial and industrial
175

 
173

Consumer:
 
 
 
Home equity
328

 
337

Other
12

 
21

 
$
7,091

 
$
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.
 
December 31, 2019
 
September 30, 2019
 
Special Mention
 
Substandard
 
Special Mention
 
Substandard
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
Originated
$
12,558

 
$
16,901

 
$
12,941

 
$
15,628

Correspondent purchased
3,102