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Section 1: 8-K (CURRENT REPORT, ITEMS 2.02, 7.01, 8.01 AND 9.01)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported)
April 30, 2018

 
 
 
 
 
CAPITOL FEDERAL FINANCIAL, INC.
 
(Exact name of Registrant as specified in its Charter)

 
 
 
Maryland
001-34814
27-2631712
(State or other jurisdiction of incorporation)
(Commission File Number)
(IRS Employer Identification Number)


700 South Kansas Avenue Topeka, Kansas 66603
(Address of principal executive offices) (Zip Code)


Registrant's telephone number, including area code:
(785) 235-1341

N/A
(Former name or former address, if changed since last report)


Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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. ¨







ITEM 2.02 RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Registrant’s press release dated April 30, 2018, announcing the acquisition of Capital City Bancshares and financial results for the quarter ended March 31, 2018 is attached hereto as Exhibit 99.1, and is incorporated herein by reference.

ITEM 7.01 REGULATION FD DISCLOSURE
Attached hereto as Exhibit 99.2 and incorporated herein by reference are slides with information pertaining to the acquisition of Capital City Bancshares.

ITEM 8.01 OTHER EVENTS
The Registrant's press release dated April 30, 2018, announcing the acquisition of Capital City Bancshares, is attached hereto as Exhibit 99.3 and is incorporated herein by reference.

ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(d) Exhibits

Exhibit 99.1 – Press release dated April 30, 2018 announcing the acquisition of Capital City Bancshares and financial results for the quarter ended March 31, 2018

Exhibit 99.2 – Acquisition of Capital City Bancshares slide presentation

Exhibit 99.3 – Press release dated April 30, 2018 announcing the acquisition of Capital City Bancshares





 
 
 
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 hereunto duly authorized.

 
 
 
CAPITOL FEDERAL FINANCIAL, INC.
Date: April 30, 2018
By: /s/ Kent G. Townsend
 
 
 
 
 
 
 
 
Kent G. Townsend, Executive Vice-President,
 
 
Chief Financial Officer, and Treasurer
 


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Section 2: EX-99.1 (PRESS RELEASE ANNOUNCING ACQUISITION AND EARNINGS)

Exhibit



393249552_cffnlogo.jpg
NEWS RELEASE
FOR IMMEDIATE RELEASE
April 30, 2018
CAPITOL FEDERAL® FINANCIAL, INC. ANNOUNCES THE
ACQUISITION OF CAPITAL CITY BANCSHARES AND
REPORTS SECOND QUARTER FISCAL YEAR 2018 RESULTS

Topeka, KS - Capitol Federal® Financial, Inc. (NASDAQ: CFFN) ("Capitol Federal" or the "Company") announced today the acquisition of Capital City Bancshares, Inc. ("CCB") and results for the quarter ended March 31, 2018. Detailed results will be available in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, which will be filed with the Securities and Exchange Commission ("SEC") on or about May 10, 2018 and posted on our website, http://ir.capfed.com. For best viewing results, please view this release in Portable Document Format (PDF) on our website.

Highlights for the quarter include:
net income of $23.3 million;
basic and diluted earnings per share of $0.17;
net interest margin of 1.86% (2.24% excluding the effects of the leverage strategy); and
dividends paid of $11.4 million, or $0.085 per share.

Capitol Federal, the parent company of Capitol Federal® Savings Bank ("Capitol Federal Savings" or the "Bank"), and CCB, the parent company of Capital City Bank, a state chartered bank headquartered in Topeka, KS, announced the signing of a definitive agreement and plan of merger pursuant to which CCB will merge with and into Capitol Federal. Immediately upon closing the merger, Capital City Bank will merge with and into Capitol Federal Savings. As of March 31, 2018 and excluding purchase accounting, the combined company would have had pro-forma total assets of $9.5 billion, gross loans of $7.5 billion, deposits of $5.7 billion and an equity position of approximately $1.4 billion.

With the acquisition of Capital City Bank, Capitol Federal Savings will enter the commercial banking business, through the origination of commercial lending products and offering of commercial deposit services, for the first time in its 125 year history. While Capitol Federal Savings has built a small, but meaningful, portfolio of mostly commercial real estate loan participations through its network of correspondent banks over the course of the last five years (which portfolio totaled approximately $462 million in gross loans as of March 31, 2018), this merger with Capital City will enable the Company to offer a full array of commercial lending and deposit products and services. With the talented and experienced commercial banking teams from Capital City Bank joining Capitol Federal Savings, the Company will be able to introduce these lines of banking into its branches in overlapping communities upon closing of the merger, while working to expand to the other communities served by Capitol Federal.

Strategically and financially attractive acquisition of a $400 million commercial bank
Enhances deposit franchise and provides entry into commercial banking business lines
Delivers scalable banking platform, while remaining under $10 billion in assets

John B. Dicus, Chairman and President of Capitol Federal, stated: "We are pleased to be merging with Capital City Bank to introduce a full commercial banking experience to our customer base and communities. Capital City Bank has a long history of building a conservative, customer focused community bank, with an overlapping geographic focus in markets highly familiar to us - Topeka, Lawrence and the Overland Park market of Kansas City. Through the leadership of the Sabatini family, Capital City Bank has built a well-regarded company over the course of many decades, driven by the people and platforms we need to enter the commercial banking business in the right way and in a meaningful way. Through the many years of knowing the team at Capital City Bank, it is obvious to us that we hold a shared cultural approach to banking, focused on risk management and customer service. In addition, we are able to complete this merger and remain under $10 billion in assets, allowing us to continue our current dividend policy of paying 100% of earnings, while providing a positive upside."


1



Comparison of Operating Results for the Three Months Ended March 31, 2018 and December 31, 2017

For the quarter ended March 31, 2018, the Company recognized net income of $23.3 million, or $0.17 per share, compared to net income of $31.8 million, or $0.24 per share, for the quarter ended December 31, 2017. The decrease in net income was due primarily to higher income tax expense in the current quarter compared to the prior quarter. The effective income tax rate in the current quarter was 26.5% compared to 2.6% in the prior quarter. In the prior quarter, the Tax Cuts and Jobs Act (the "Tax Act") was enacted which reduced the federal corporate income tax rate from 35% to 21% effective January 1, 2018. In accordance with accounting principles generally accepted in the United States of America ("GAAP"), the Company revalued its deferred tax assets and liabilities as of December 22, 2017 to account for the lower corporate income tax rate. The revaluation of the Company's deferred income tax assets and liabilities reduced income tax expense by $7.5 million in the prior quarter. The impact of the enactment of the Tax Act was an increase in basic and diluted earnings per share of $0.08 in the prior quarter. Management estimates the effective tax rate for the third and fourth quarter of fiscal year 2018 to be approximately the same as the current quarter effective income tax rate of 26.5%, resulting in an effective income tax rate of 20% to 21% for fiscal year 2018. Management estimates the effective income tax rate for fiscal year 2019 will be approximately 22%.

Net interest income increased $515 thousand, or 1.0%, from the prior quarter to $49.9 million for the current quarter. The net interest margin increased three basis points from 1.83% for the prior quarter to 1.86% for the current quarter. Excluding the effects of the leverage strategy, the net interest margin would have increased four basis points from 2.20% for the prior quarter to 2.24% for the current quarter. The increase in net interest margin was due mainly to a decrease in the cost of borrowings not related to the leverage strategy, along with a reduction in interest expense resulting from fewer days in the current quarter.

Interest and Dividend Income
The weighted average yield on total interest-earning assets for the current quarter increased eight basis points from the prior quarter, to 3.06%, while the average balance of interest-earning assets decreased $71.5 million between the two periods. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have increased four basis points from the prior quarter, to 3.35%, while the average balance of interest-earning assets would have decreased $69.5 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,
 
December 31,
 
Change Expressed in:
 
2018
 
2017
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
64,194

 
$
64,189

 
$
5

 
%
Cash and cash equivalents
7,895

 
7,114

 
781

 
11.0

Mortgage-backed securities ("MBS")
5,390

 
5,252

 
138

 
2.6

Federal Home Loan Bank Topeka ("FHLB") stock
3,201

 
3,095

 
106

 
3.4

Investment securities
1,094

 
994

 
100

 
10.1

Total interest and dividend income
$
81,774

 
$
80,644

 
$
1,130

 
1.4


The table above includes interest income on cash and cash equivalents associated and not associated with the leverage strategy. Interest income on cash and cash equivalents not related to the leverage strategy decreased $165 thousand from the prior quarter due to a $79.9 million decrease in the average balance primarily resulting from cash being used to pay off certain maturing term borrowings during the prior quarter, partially offset by a 25 basis point increase in the weighted average yield. Interest income on cash associated with the leverage strategy increased $945 thousand from the prior quarter due to a 23 basis point increase in the weighted average yield. In both cases, the increase in the weighted average yield was related to balances held at the Federal Reserve Bank of Kansas City (the "FRB of Kansas City").


2



Interest Expense
The weighted average rate paid on total interest-bearing liabilities for the current quarter increased six basis points from the prior quarter, to 1.35%, while the average balance of interest-bearing liabilities decreased $33.3 million between the two periods. Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities for the current quarter would have increased one basis point from the prior quarter, to 1.30%, while the average balance of interest-bearing liabilities would have decreased $31.3 million. 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:
 
2018
 
2017
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB borrowings
$
18,772

 
$
17,917

 
$
855

 
4.8
 %
Deposits
12,480

 
11,961

 
519

 
4.3

Repurchase agreements
633

 
1,392

 
(759
)
 
(54.5
)
Total interest expense
$
31,885

 
$
31,270

 
$
615

 
2.0


The table above includes interest expense on FHLB borrowings associated and not associated with the leverage strategy. Interest expense on FHLB borrowings not related to the leverage strategy decreased $218 thousand from the prior quarter due to a three basis point decrease in the weighted average rate paid, to 2.05% for the current quarter. Interest expense on FHLB borrowings associated with the leverage strategy increased $1.1 million from the prior quarter due to a 24 basis point increase in the weighted average rate paid as a result of an increase in interest rates between periods.

The increase in interest expense on deposits was due primarily to a five basis point increase in the weighted average rate paid, to 0.96% for the current quarter. The increase in the weighted average rate paid was primarily due to increases in the money market deposit portfolio rate and retail certificate of deposit portfolio rate, which increased 12 basis points and five basis points, respectively.
The decrease in interest expense on repurchase agreements was due to the maturity of a $100.0 million repurchase agreement during the prior quarter.
Provision for Credit Losses
The Bank did not record a provision for credit losses during the current quarter or the prior quarter. Based on management's assessment of the allowance for credit losses ("ACL") formula analysis model and several other factors, it was determined that no provision for credit losses was necessary. Net loan recoveries were $20 thousand during the current quarter compared to net charge-offs of $28 thousand in the prior quarter. At March 31, 2018, loans 30 to 89 days delinquent were 0.19% of total loans and loans 90 or more days delinquent or in foreclosure were 0.16% of total loans. At December 31, 2017, loans 30 to 89 days delinquent were 0.25% of total loans and loans 90 or more days delinquent or in foreclosure were 0.15% of total loans.

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:
 
2018
 
2017
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
$
3,670

 
$
3,965

 
$
(295
)
 
(7.4
)%
Income from bank-owned life insurance ("BOLI")
276

 
534

 
(258
)
 
(48.3
)
Other non-interest income
1,487

 
859

 
628

 
73.1

Total non-interest income
$
5,433

 
$
5,358

 
$
75

 
1.4


The decrease in retail fees and charges was due mainly to a decrease in debit card income resulting from a reduction in transaction volume due to the seasonality of such activity. The decrease in income from BOLI was due mainly to a one-time adjustment to the benchmark interest rate associated with one of the policies. The increase in other non-interest income was due primarily to an increase in insurance commissions resulting from the receipt of annual commissions from certain insurance providers during the current quarter

3



and no such commissions received during the prior quarter, along with a gain on the sale of loans during the current quarter compared to a loss on the sale of loans during the prior quarter as management continues to test loan sale processes for liquidity purposes.

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:
 
2018
 
2017
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
11,167

 
$
10,528

 
$
639

 
6.1
 %
Information technology and related expense
3,622

 
3,331

 
291

 
8.7

Occupancy, net
2,839

 
2,765

 
74

 
2.7

Deposit and loan transaction costs
1,313

 
1,407

 
(94
)
 
(6.7
)
Regulatory and outside services
1,151

 
1,140

 
11

 
1.0

Federal insurance premium
847

 
852

 
(5
)
 
(0.6
)
Advertising and promotional
1,337

 
685

 
652

 
95.2

Office supplies and related expense
442

 
442

 

 

Other non-interest expense
880

 
886

 
(6
)
 
(0.7
)
Total non-interest expense
$
23,598

 
$
22,036

 
$
1,562

 
7.1


The increase in salaries and employee benefits expense was due primarily to the timing of expenses related to paid time-off usage and accruals, as well as to a new 2018 Tax Savings Bonus Plan. The 2018 Tax Savings Bonus plan is a one-time bonus award to qualifying non-officer employees. The anticipated expense associated with this plan will be recognized in fiscal year 2018 and is approximately $1.0 million, of which $333 thousand was recognized during the current quarter. It is expected that the Bank will recognize approximately $333 thousand of expense per quarter in the third and fourth quarters of fiscal year 2018 related to this plan. The increase in advertising and promotional expense was due primarily to the timing of media campaigns and sponsorships.

The Company's efficiency ratio was 42.66% for the current quarter compared to 40.26% for the prior quarter. The change in the efficiency ratio was due primarily to higher non-interest expense in the current quarter compared to the prior quarter. 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 $8.4 million for the current quarter, compared to $860 thousand for the prior quarter. The effective tax rate was 26.5% for the current quarter compared to 2.6% for the prior quarter. The lower effective income tax rate and income tax expense in the prior quarter were due primarily to revaluing the Company's deferred tax assets and liabilities as a result of the enactment of the Tax Act in December 2017. Management estimates the effective tax rate for the third and fourth quarter of fiscal year 2018 to be approximately the same as the current quarter effective income tax rate of 26.5%.

Comparison of Operating Results for the Six Months Ended March 31, 2018 and 2017

The Company recognized net income of $55.2 million, or $0.41 per share, for the six month period ended March 31, 2018 compared to net income of $42.2 million, or $0.31 per share, for the six month period ended March 31, 2017. The increase in net income was due primarily to a decrease in income tax expense resulting from the Tax Act being signed into law in December 2017.

The net interest margin increased eight basis points, from 1.77% for the prior year six month period to 1.85% for the current year six month period. Excluding the effects of the leverage strategy, the net interest margin would have increased 11 basis points, from 2.11% for the prior year six month period to 2.22% for the current year six month period. The increase in the net interest margin was due mainly to an increase in interest-earning asset yields, as well as a shift in the mix of interest-earning assets from relatively lower yielding securities to higher yielding loans and a net decrease in the cost of liabilities not related to the leverage strategy.


4



Interest and Dividend Income
The weighted average yield on total interest-earning assets increased 22 basis points, from 2.80% for the prior year six month period to 3.02% for the current year six month period, while the average balance of interest-earning assets decreased $163.7 million from the prior year six month period. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have increased 10 basis points, from 3.23% for the prior year six month period to 3.33% for the current year six month period, while the average balance of interest-earning assets would have decreased $152.2 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 Six Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2018
 
2017
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
128,383

 
$
125,051

 
$
3,332

 
2.7
 %
Cash and cash equivalents
15,009

 
7,101

 
7,908

 
111.4

MBS
10,642

 
12,553

 
(1,911
)
 
(15.2
)
FHLB stock
6,296

 
6,039

 
257

 
4.3

Investment securities
2,088

 
2,238

 
(150
)
 
(6.7
)
Total interest and dividend income
$
162,418

 
$
152,982

 
$
9,436

 
6.2


The increase in interest income on loans receivable was due mainly to a $118.3 million increase in the average balance of the portfolio, as well as a four basis point increase in the weighted average yield on the portfolio to 3.57% for the current year six month period. The increase in the weighted average yield was due primarily to adjustable-rate loans repricing to higher market rates, along with the origination and purchase of new loans at higher market rates.

The table above includes interest income on cash and cash equivalents associated and not associated with the leverage strategy. Interest income on cash and cash equivalents not related to the leverage strategy increased $794 thousand from the prior year six month period due to a 72 basis point increase in the weighted average yield. Interest income on cash associated with the leverage strategy increased $7.1 million from the prior year six month period due to a 74 basis point increase in the weighted average yield. In both cases, the increase in the weighted average yield was related to balances held at the FRB of Kansas City.

The decrease in interest income on the MBS portfolio was due to a $227.4 million decrease in the average balance of the portfolio, partially offset by a 12 basis point increase in the weighted average yield on the portfolio to 2.28% for the current year six month period. Cash flows not reinvested were used primarily to fund loan growth and pay off certain maturing term borrowings. The increase in the weighted average yield was due primarily to adjustable-rate MBS repricing to higher market rates, as well as a decrease in the impact of net premium amortization. Net premium amortization of $1.6 million during the current year six month period decreased the weighted average yield on the portfolio by 35 basis points. During the prior year six month period, $2.3 million of net premiums were amortized which decreased the weighted average yield on the portfolio by 40 basis points. As of March 31, 2018, the remaining net balance of premiums on our portfolio of MBS was $7.4 million.


5



Interest Expense
The weighted average rate paid on total interest-bearing liabilities increased 15 basis points, from 1.17% for the prior year six month period to 1.32% for the current year six month period, while the average balance of interest-bearing liabilities decreased $134.6 million from the prior year six month period. Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have decreased one basis point, from 1.30% for the prior year six month period to 1.29% for the current year six month period, and the average balance of interest-bearing liabilities would have decreased $123.0 million. 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:
 
2018
 
2017
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB borrowings
$
36,689

 
$
32,888

 
$
3,801

 
11.6
 %
Deposits
24,441

 
20,760

 
3,681

 
17.7

Repurchase agreements
2,025

 
2,974

 
(949
)
 
(31.9
)
Total interest expense
$
63,155

 
$
56,622

 
$
6,533

 
11.5


The table above includes interest expense on FHLB borrowings associated and not associated with the leverage strategy. Interest expense on FHLB borrowings not related to the leverage strategy decreased $3.9 million from the prior year six month period due to a 22 basis point decrease in the weighted average rate paid on the portfolio, to 2.06% for the current year six month period, and a $140.9 million decrease in the average balance of the portfolio. The decrease in the weighted average rate paid was due to certain advances maturing between periods being replaced at lower effective interest rates. The decrease in the average balance was a result of using cash flows from the securities portfolio and funds generated from deposit growth to pay off certain advances that matured between periods. Interest expense on FHLB borrowings associated with the leverage strategy increased $7.7 million from the prior year six month period due to a 77 basis point increase in the weighted average rate paid as a result of an increase in interest rates between periods.

The increase in interest expense on deposits was due primarily to a 13 basis point increase in the weighted average rate, to 0.93% for the current year six month period. The increase in the weighted average rate was primarily related to the certificate of deposit portfolio, which increased 19 basis points to 1.53% for the current year six month period. The weighted average rate paid on wholesale certificates increased 64 basis points, to 1.38% for the current year six month period.
 
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:
 
2018
 
2017
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
$
7,635

 
$
7,291

 
$
344

 
4.7
 %
Income from BOLI
810

 
1,096

 
(286
)
 
(26.1
)
Other non-interest income
2,346

 
2,454

 
(108
)
 
(4.4
)
Total non-interest income
$
10,791

 
$
10,841

 
$
(50
)
 
(0.5
)

The increase in retail fees and charges was due mainly to increases in debit card income due to higher transaction volume in the current year and a reduction in waived fees as customers and vendors have become more accustomed to the chip card technology. The decrease in income from BOLI was due mainly to a one-time adjustment to the benchmark interest rate associated with one of the policies.


6



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:
 
2018
 
2017
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
21,695

 
$
21,178

 
$
517

 
2.4
 %
Information technology and related expense
6,953

 
5,602

 
1,351

 
24.1

Occupancy, net
5,604

 
5,439

 
165

 
3.0

Deposit and loan transaction costs
2,720

 
2,614

 
106

 
4.1

Regulatory and outside services
2,291

 
2,611

 
(320
)
 
(12.3
)
Federal insurance premium
1,699

 
1,772

 
(73
)
 
(4.1
)
Advertising and promotional
2,022

 
1,953

 
69

 
3.5

Office supplies and related expense
884

 
978

 
(94
)
 
(9.6
)
Other non-interest expense
1,766

 
1,387

 
379

 
27.3

Total non-interest expense
$
45,634

 
$
43,534

 
$
2,100

 
4.8


The increase in salaries and employee benefits expense was due primarily to the 2018 Tax Savings Bonus Plan as previously discussed. The increase in information technology and related expense and the decrease in regulatory and outside services were due mainly to a change in the presentation of certain information technology professional and consulting expenses beginning in fiscal year 2018. Information technology professional and consulting expenses are now being reported in information technology and related expenses rather than regulatory and outside services. Additionally, these expenses increased compared to the prior year due primarily to ongoing enhancements to the Bank's online banking services, along with increases in information technology expenses related to software licensing and depreciation. The increase in other non-interest expense was due mainly to an increase in other real estate owned ("OREO") operations expense.

The Company's efficiency ratio was 41.47% for the current year six month period compared to 40.61% for the prior year six month period. The change in the efficiency ratio was due primarily to higher non-interest expense in the current year six month period compared to the prior year six month period.

Income Tax Expense
Income tax expense was $9.3 million for the current year six month period compared to $21.5 million for the prior year six month period. The effective tax rate was 14.4% for the current year six month period compared to 33.8% for the prior year six month period. The decrease in effective tax rate was due mainly to the Tax Act being signed into law in December 2017.

Financial Condition as of March 31, 2018

Total assets were $9.12 billion at March 31, 2018 compared to $9.19 billion at September 30, 2017. The $76.5 million decrease was due primarily to a $211.1 million decrease in cash and cash equivalents, partially offset by an increase in FHLB stock. At March 31, 2018, the Bank was not required by the FHLB to redeem the FHLB stock associated with the leverage strategy. At September 30, 2017, this stock was redeemed.

The loans receivable portfolio, net, totaled $7.20 billion at March 31, 2018 and at September 30, 2017. During the current year six month period, the Bank originated and refinanced $261.0 million of loans with a weighted average rate of 3.89% and purchased $210.9 million of one- to four-family loans from correspondent lenders with a weighted average rate of 3.60%. The Bank also entered into participations of $107.6 million of commercial real estate loans with a weighted average rate of 4.15%, of which $97.8 million had not yet been funded as of March 31, 2018. During the current year six month period, the Bank funded $52.0 million of new and existing commercial real estate loans. There are no agricultural loans in the Bank's loan portfolio.

The Bank is continuing to manage the size of its loan portfolio as it manages its liquidity levels to a target level of 15%.  The size of the loan portfolio has been managed by controlling correspondent loan volume primarily through the rates offered to correspondent lenders.  Given the balance of total assets, it is unlikely that loan growth will substantially increase in the current environment. Generally, over the past few years, cash flows from the securities portfolio have been used primarily to purchase loans and in part to

7



pay down FHLB advances. By moving cash from lower yielding assets to higher yielding assets and repaying higher cost liabilities, we have been able to maintain our net interest margin.  In addition to the repayment of securities, the Bank has emphasized growth in the deposit portfolio in part to pay down FHLB advances. The ratio of securities and cash to total assets was 15.5% at March 31, 2018. In the long run, management considers a 10% ratio of stockholders' equity to total assets at the Bank an appropriate level of capital. At March 31, 2018, this ratio was 13.3%.

The Bank has continued to utilize a leverage strategy to increase earnings in fiscal year 2018. The leverage strategy during the current quarter involved 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 were repaid prior to quarter end for regulatory purposes. The proceeds from the borrowings, net of the required FHLB stock holdings, which yielded 6.7% during the current quarter and 6.6% during the current year six month period, were 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 $713 thousand during the current quarter, compared to $767 thousand during the prior quarter. The decrease between quarters was due to a decrease in 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, partially offset by an increase in the yield on the related FHLB stock. Net income attributable to the leverage strategy was $1.5 million for both the current year six month period and the prior year six month period. Management continues to monitor the net interest rate spread and overall profitability of the strategy. The net interest rate spread from the leverage strategy is currently negative and, based on current interest rates, it is anticipated that the net interest rate spread will continue to be negative for some time. If the negative net interest rate spread worsens, management will likely suspend the strategy until it is in a position that generates income.

Total liabilities were $7.75 billion at March 31, 2018 compared to $7.82 billion at September 30, 2017. The $72.9 million decrease was due mainly to a decrease in repurchase agreements, partially offset by an increase in deposits. Repurchase agreements decreased due to the maturity of a $100.0 million repurchase agreement during the current year six month period. Deposits increased $44.3 million, to $5.35 billion at March 31, 2018, due mainly to an increase in checking accounts.

Stockholders' equity was $1.36 billion at March 31, 2018 compared to $1.37 billion at September 30, 2017. The $3.6 million decrease was due primarily to the payment of $61.8 million in cash dividends, partially offset by net income of $55.2 million. The cash dividends paid during the current year six month period totaled $0.46 per share and consisted of a $0.29 per share cash true-up dividend related to fiscal year 2017 earnings per the Company's dividend policy, and two regular quarterly cash dividends totaling $0.17 per share. On April 18, 2018, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.4 million, payable on May 18, 2018 to stockholders of record as of the close of business on May 4, 2018.

At March 31, 2018, Capitol Federal Financial, Inc., at the holding company level, had $110.8 million on deposit at the Bank. For fiscal year 2018, it is the intent of the Board of Directors and management to continue the payout of 100% of the Company's earnings to its 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.

In October 2015, the Company announced a stock repurchase plan for up to $70.0 million of common stock. The repurchase plan does not have an expiration date. The Company has not repurchased any shares under the repurchase plan through the date of this release.

The following table presents the balance of stockholders' equity and related information as of the dates presented.
 
March 31,
 
September 30,
 
March 31,
 
2018
 
2017
 
2017
 
(Dollars in thousands)
Stockholders' equity
$
1,364,740

 
$
1,368,313

 
$
1,382,289

Equity to total assets at end of period
15.0
%
 
14.9
%
 
14.9
%

The following table presents a reconciliation of total to net shares outstanding as of March 31, 2018.
Total shares outstanding
138,250,235

Less unallocated Employee Stock Ownership Plan ("ESOP") shares and unvested restricted stock
(3,773,556
)
Net shares outstanding
134,476,679



8



Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank in accordance with regulatory standards. As of March 31, 2018, the Bank and Company exceeded all regulatory capital requirements. The following table presents the Bank's regulatory capital ratios at March 31, 2018.
 
 
 
Regulatory
 
 
 
Requirement For
 
Bank
 
Well-Capitalized
 
Ratios
 
Status
Tier 1 leverage ratio
10.9%
 
5.0
%
Common equity tier 1 capital ratio
27.1
 
6.5

Tier 1 capital ratio
27.1
 
8.0

Total capital ratio
27.3
 
10.0


A reconciliation of the Bank's equity under GAAP to regulatory capital amounts as of March 31, 2018 is as follows (dollars in thousands):
Total Bank equity as reported under GAAP
$
1,210,455

Accumulated Other Comprehensive Income ("AOCI")
(5,159
)
Total tier 1 capital
1,205,296

ACL
8,390

Total capital
$
1,213,686


Capitol Federal Financial, Inc. is the holding company for the Bank. The Bank has 47 branch locations in Kansas and Missouri, and is one of the largest residential lenders in the State of Kansas. News and other information about the Company can be found at the Bank's website, http://www.capfed.com.

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

For further information contact:
Kent Townsend
Investor Relations
Executive Vice President,
700 S Kansas Ave
Chief Financial Officer and Treasurer
Topeka, KS 66603
700 S Kansas Ave
(785) 270-6055
Topeka, KS 66603
(785) 231-6360
 
 

9




SUPPLEMENTAL FINANCIAL INFORMATION
 
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except per share amounts)
 
March 31,
 
September 30,
 
2018
 
2017
ASSETS:
 
 
 
Cash and cash equivalents (includes interest-earning deposits of $127,120 and $340,748)
$
140,580

 
$
351,659

Securities:
 
 
 
Available-for-sale ("AFS"), at estimated fair value (amortized cost of $558,239 and $410,541)
559,146

 
415,831

Held-to-maturity at amortized cost (estimated fair value of $708,944 and $833,009)
716,372

 
827,738

Loans receivable, net (ACL of $8,390 and $8,398)
7,200,663

 
7,195,071

FHLB stock, at cost
195,626

 
100,954

Premises and equipment, net
84,704

 
84,818

Other assets
219,370

 
216,845

TOTAL ASSETS
$
9,116,461

 
$
9,192,916

 
 
 
 
LIABILITIES:
 
 
 
Deposits
$
5,354,193

 
$
5,309,868

FHLB borrowings
2,174,478

 
2,173,808

Repurchase agreements
100,000

 
200,000

Advance payments by borrowers for taxes and insurance
54,696

 
63,749

Income taxes payable, net
669

 
530

Deferred income tax liabilities, net
18,611

 
24,458

Accounts payable and accrued expenses
49,074

 
52,190

Total liabilities
7,751,721

 
7,824,603

 
 
 
 
STOCKHOLDERS' EQUITY:
 
 
 
Preferred stock, $0.01 par value; 100,000,000 shares authorized, no shares issued or outstanding

 

Common stock, $0.01 par value; 1,400,000,000 shares authorized, 138,250,235 and 138,223,835
 
 
 
 shares issued and outstanding as of March 31, 2018 and September 30, 2017, respectively
1,382

 
1,382

Additional paid-in capital
1,168,087

 
1,167,368

Unearned compensation, ESOP
(37,169
)
 
(37,995
)
Retained earnings
227,281

 
234,640

AOCI, net of tax
5,159

 
2,918

Total stockholders' equity
1,364,740

 
1,368,313

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
9,116,461

 
$
9,192,916


10



 
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands)
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2018
 
2017
 
2018
 
2017
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
64,194

 
$
64,189

 
$
128,383

 
$
125,051

Cash and cash equivalents
7,895

 
7,114

 
15,009

 
7,101

MBS
5,390

 
5,252

 
10,642

 
12,553

FHLB stock
3,201

 
3,095

 
6,296

 
6,039

Investment securities
1,094

 
994

 
2,088

 
2,238

Total interest and dividend income
81,774

 
80,644

 
162,418

 
152,982

 
 
 
 
 
 
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB borrowings
18,772

 
17,917

 
36,689

 
32,888

Deposits
12,480

 
11,961

 
24,441

 
20,760

Repurchase agreements
633

 
1,392

 
2,025

 
2,974

Total interest expense
31,885

 
31,270

 
63,155

 
56,622

 
 
 
 
 
 
 
 
NET INTEREST INCOME
49,889

 
49,374

 
99,263

 
96,360

 
 
 
 
 
 
 
 
PROVISION FOR CREDIT LOSSES

 

 

 

NET INTEREST INCOME AFTER
 
 
 
 
 
 
 
PROVISION FOR CREDIT LOSSES
49,889

 
49,374

 
99,263

 
96,360

 
 
 
 
 
 
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
3,670

 
3,965

 
7,635

 
7,291

Income from BOLI
276

 
534

 
810

 
1,096

Other non-interest income
1,487

 
859

 
2,346

 
2,454

Total non-interest income
5,433

 
5,358

 
10,791

 
10,841

 
 
 
 
 
 
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
11,167

 
10,528

 
21,695

 
21,178

Information technology and related expense
3,622

 
3,331

 
6,953

 
5,602

Occupancy, net
2,839

 
2,765

 
5,604

 
5,439

Deposit and loan transaction costs
1,313

 
1,407

 
2,720

 
2,614

Regulatory and outside services
1,151

 
1,140

 
2,291

 
2,611

Advertising and promotional
1,337

 
685

 
2,022

 
1,953

Federal insurance premium
847

 
852

 
1,699

 
1,772

Office supplies and related expense
442

 
442

 
884

 
978

Other non-interest expense
880

 
886

 
1,766

 
1,387

Total non-interest expense
23,598

 
22,036

 
45,634

 
43,534

INCOME BEFORE INCOME TAX EXPENSE
31,724

 
32,696

 
64,420

 
63,667

INCOME TAX EXPENSE
8,394

 
860

 
9,254

 
21,502

NET INCOME
$
23,330

 
$
31,836

 
$
55,166

 
$
42,165


11



The following is a reconciliation of the basic and diluted earnings per share calculations for the periods indicated.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands, except per share amounts)
Net income
$
23,330

 
$
31,836

 
$
55,166

 
$
42,165

Income allocated to participating securities
(10
)
 
(13
)
 
(23
)
 
(25
)
Net income available to common stockholders
$
23,320

 
$
31,823

 
$
55,143

 
$
42,140

 
 
 
 
 
 
 
 
Average common shares outstanding
134,386,469

 
134,372,531

 
134,379,424

 
133,858,701

Average committed ESOP shares outstanding
41,758

 
449

 
20,876

 
20,649

Total basic average common shares outstanding
134,428,227

 
134,372,980

 
134,400,300

 
133,879,350

 
 
 
 
 
 
 
 
Effect of dilutive stock options
47,001

 
94,329

 
70,959

 
223,097

 
 
 
 
 
 
 
 
Total diluted average common shares outstanding
134,475,228

 
134,467,309

 
134,471,259

 
134,102,447

 
 
 
 
 
 
 
 
Net earnings per share:
 
 
 
 
 
 
 
Basic
$
0.17

 
$
0.24

 
$
0.41

 
$
0.31

Diluted
$
0.17

 
$
0.24

 
$
0.41

 
$
0.31

 
 
 
 
 
 
 
 
Antidilutive stock options, excluded from the diluted
 
 
 
 
 
 
average common shares outstanding calculation
598,195

 
498,900

 
527,642

 
212,133




12



Loan Portfolio

The following table presents information related to the composition of our loan portfolio in terms of dollar amounts, weighted average rates, and percentages as of the dates indicated.
 
March 31, 2018
 
December 31, 2017
 
September 30, 2017
 
 
 
 
 
% of
 
 
 
 
 
% of
 
 
 
 
 
% of
 
Amount
 
Rate
 
Total
 
Amount
 
Rate
 
Total
 
Amount
 
Rate
 
Total
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
$
3,919,353

 
3.69
%
 
54.5
%
 
$
3,940,288

 
3.69
%
 
54.9
%
 
$
3,959,232

 
3.70
%
 
55.1
%
Correspondent purchased
2,490,776

 
3.54

 
34.6

 
2,453,625

 
3.54

 
34.2

 
2,445,311

 
3.53

 
34.0

Bulk purchased
327,611

 
2.33

 
4.6

 
338,084

 
2.31

 
4.7

 
351,705

 
2.29

 
4.9

Construction
28,195

 
3.49

 
0.4

 
33,063

 
3.47

 
0.4

 
30,647

 
3.45

 
0.4

Total
6,765,935

 
3.57

 
94.1

 
6,765,060

 
3.57

 
94.2

 
6,786,895

 
3.56

 
94.4

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent
273,507

 
4.10

 
3.8

 
205,020

 
4.22

 
2.9

 
183,030

 
4.24

 
2.6

Construction
25,995

 
4.59

 
0.4

 
80,062

 
3.89

 
1.1

 
86,952

 
3.80

 
1.2

Total
299,502

 
4.14

 
4.2

 
285,082

 
4.13

 
4.0

 
269,982

 
4.10

 
3.8

Total real estate loans
7,065,437

 
3.59

 
98.3

 
7,050,142

 
3.59

 
98.2

 
7,056,877

 
3.58

 
98.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
117,971

 
5.57

 
1.6

 
123,124

 
5.40

 
1.7

 
122,066

 
5.40

 
1.7

Other
4,334

 
4.03

 
0.1

 
4,238

 
4.04

 
0.1

 
3,808

 
4.05

 
0.1

Total consumer loans
122,305

 
5.52

 
1.7

 
127,362

 
5.36

 
1.8

 
125,874

 
5.36

 
1.8

Total loans receivable
7,187,742

 
3.63

 
100.0
%
 
7,177,504

 
3.62

 
100.0
%
 
7,182,751

 
3.61

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ACL
8,390

 
 
 
 
 
8,370

 
 
 
 
 
8,398

 
 
 
 
Discounts/unearned loan fees
24,996

 
 
 
 
 
25,110

 
 
 
 
 
24,962

 
 
 
 
Premiums/deferred costs
(46,307
)
 
 
 
 
 
(45,720
)
 
 
 
 
 
(45,680
)
 
 
 
 
Total loans receivable, net
$
7,200,663

 
 
 
 
 
$
7,189,744

 
 
 
 
 
$
7,195,071

 
 
 
 




13



Loan Activity: The following table summarizes activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, discounts/unearned loan fees, and premiums/deferred costs. Loans that were paid-off as a result of refinances and loans that are 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 six months ended March 31, 2018, the Bank endorsed $12.8 million of one- to four-family loans, reducing the average rate on those loans by 33 basis points. The amount of originations and refinances was lower in the current quarter than in prior quarters due to seasonality and a reduction in refinance opportunities.
 
For the Three Months Ended
 
March 31, 2018
 
December 31, 2017
 
September 30, 2017
 
June 30, 2017
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Beginning balance
$
7,177,504

 
3.62
%
 
$
7,182,751

 
3.61
%
 
$
7,228,425

 
3.60
%
 
$
7,182,346

 
3.59
%
Originations and refinances:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
77,825

 
3.80

 
109,102

 
3.70

 
102,687

 
3.82

 
116,422

 
3.94

Adjustable
36,612

 
4.28

 
37,502

 
4.26

 
44,900

 
4.10

 
59,372

 
3.87

Purchases and participations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
120,155

 
3.85

 
85,565

 
3.73

 
76,906

 
3.92

 
135,041

 
3.97

Adjustable
48,062

 
3.61

 
64,689

 
3.87

 
17,046

 
3.33

 
17,930

 
3.24

Change in undisbursed loan funds
(25,002
)
 
 
 
(17,706
)
 
 
 
21,823

 
 
 
13,648

 
 
Repayments
(246,894
)
 
 
 
(283,880
)
 
 
 
(307,909
)
 
 
 
(295,988
)
 
 
Principal recoveries (charge-offs), net
20

 
 
 
(28
)
 
 
 
(88
)
 
 
 
39

 
 
Other
(540
)
 
 
 
(491
)
 
 
 
(1,039
)
 
 
 
(385
)
 
 
Ending balance
$
7,187,742

 
3.63

 
$
7,177,504

 
3.62

 
$
7,182,751

 
3.61

 
$
7,228,425

 
3.60

 
For the Six Months Ended
 
March 31, 2018
 
March 31, 2017
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Beginning balance
$
7,182,751

 
3.61
%
 
$
6,949,522

 
3.60
%
Originations and refinances:
 
 
 
 
 
 
 
Fixed
186,927

 
3.74

 
292,114

 
3.42

Adjustable
74,114

 
4.27

 
82,983

 
3.66

Purchases and participations:
 
 
 
 
 
 
 
Fixed
205,720

 
3.80

 
331,526

 
3.59

Adjustable
112,751

 
3.76

 
52,420

 
2.86

Change in undisbursed loan funds
(42,708
)
 
 
 
41,558

 
 
Repayments
(530,774
)
 
 
 
(565,911
)
 
 
Principal charge-offs, net
(8
)
 
 
 
(93
)
 
 
Other
(1,031
)
 
 
 
(1,773
)
 
 
Ending balance
$
7,187,742

 
3.63

 
$
7,182,346

 
3.59


14



The following table presents loan origination, refinance, and purchase activity for the periods indicated, excluding endorsement activity, along with associated weighted average rates and percent of total. Loan originations, purchases, and refinances are reported together. 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. 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.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31, 2018
 
March 31, 2018
 
Amount
 
Rate
 
% of Total
 
Amount
 
Rate
 
% of Total
Fixed-rate:
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 15 years
$
43,072

 
3.29
%
 
15.2
%
 
$
79,987

 
3.23
%
 
13.8
%
> 15 years
120,818

 
3.92

 
42.7

 
272,725

 
3.86

 
47.1

Commercial real estate
33,257

 
4.14

 
11.8

 
38,049

 
4.13

 
6.6

Home equity
669

 
6.03

 
0.2

 
1,619

 
5.98

 
0.3

Other
164

 
7.58

 
0.1

 
267

 
8.27

 

Total fixed-rate
197,980

 
3.83

 
70.0

 
392,647

 
3.77

 
67.8

 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 36 months
1,776

 
2.87

 
0.6

 
2,543

 
2.84

 
0.4

> 36 months
42,646

 
3.23

 
15.1

 
78,616

 
3.19

 
13.5

Commercial real estate
23,893

 
4.10

 
8.5

 
69,543

 
4.16

 
12.0

Home equity
15,793

 
5.53

 
5.6

 
34,619

 
5.41

 
6.0

Other
566

 
3.52

 
0.2

 
1,544

 
3.69

 
0.3

Total adjustable-rate
84,674

 
3.90

 
30.0

 
186,865

 
3.96

 
32.2

 
 
 
 
 
 
 
 
 
 
 
 
Total originated, refinanced and purchased
$
282,654

 
3.85

 
100.0
%
 
$
579,512

 
3.83

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Purchased and participation loans included above:
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
$
86,938

 
3.74

 
 
 
$
167,711

 
3.72

 
 
Participations - commercial real estate
33,217

 
4.13

 
 
 
38,009

 
4.13

 
 
Total fixed-rate purchased/participations
120,155

 
3.85

 
 
 
205,720

 
3.80

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
24,169

 
3.12

 
 
 
43,208

 
3.11

 
 
Participations - commercial real estate
23,893

 
4.10

 
 
 
69,543

 
4.16

 
 
Total adjustable-rate purchased/participations
48,062

 
3.61

 
 
 
112,751

 
3.76

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total purchased/participation loans
$
168,217

 
3.78

 
 
 
$
318,471

 
3.79

 
 




15



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 loan-to-value ("LTV") ratio, and average balance per loan as of the dates presented. Credit scores are updated at least semiannually, with the latest update in March 2018, 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, 2018
 
December 31, 2017
 
September 30, 2017
 
 
 
% of
 
Credit
 
 
 
Average
 
 
 
% of
 
Credit
 
 
 
Average
 
 
 
% of
 
Credit
 
 
 
Average
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
(Dollars in thousands)
Originated
$
3,919,353

 
58.2
%
 
768

 
62
%
 
$
136

 
$
3,940,288

 
58.5
%
 
767

 
63
%
 
$
135

 
$
3,959,232

 
58.6
%
 
767

 
63
%
 
$
135

Correspondent purchased
2,490,776

 
37.0

 
764

 
67

 
377

 
2,453,625

 
36.5

 
764

 
68

 
377

 
2,445,311

 
36.2

 
764

 
68

 
375

Bulk purchased
327,611

 
4.8

 
759

 
62

 
305

 
338,084

 
5.0

 
757

 
62

 
304

 
351,705

 
5.2

 
757

 
63

 
305

 
$
6,737,740

 
100.0
%
 
766

 
64

 
185

 
$
6,731,997

 
100.0
%
 
765

 
64

 
183

 
$
6,756,248

 
100.0
%
 
765

 
65

 
182


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, 2018, 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 future cash needs.
 
Fixed-Rate
 
 
 
 
 
 
 
15 years
 
More than
 
Adjustable-
 
Total
 
or less
 
15 years
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Originate/refinance
$
12,143

 
$
34,432

 
$
14,602

 
$
61,177

 
3.89
%
Correspondent
9,566

 
76,991

 
15,205

 
101,762

 
4.00

 
$
21,709

 
$
111,423

 
$
29,807

 
$
162,939

 
3.96

 
 
 
 
 
 
 
 
 
 
Rate
3.55
%
 
4.15
%
 
3.56
%
 
 
 
 


16



The following table presents 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. Of the loans originated during the current quarter and current year six month period, $18.1 million and $38.4 million, respectively, were refinanced from another lender.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31, 2018
 
March 31, 2018
 
 
 
 
 
Credit
 
 
 
 
 
Credit
 
Amount
 
LTV
 
Score
 
Amount
 
LTV
 
Score
 
(Dollars in thousands)
Originated
$
80,216

 
76
%
 
760

 
$
181,636

 
77
%
 
762

Refinanced by Bank customers
16,989

 
70

 
751

 
41,316

 
67

 
753

Correspondent purchased
111,107

 
72

 
764

 
210,919

 
74

 
765

 
$
208,312

 
74

 
761

 
$
433,871

 
74

 
763


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 six month period ended March 31, 2018.
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
March 31, 2018
 
March 31, 2018
State
 
Amount
 
% of Total
 
Rate
 
Amount
 
% of Total
 
Rate
 
 
(Dollars in thousands)
Kansas
 
$
87,617

 
42.1
%
 
3.68
%
 
$
199,415

 
46.0
%
 
3.64
%
Texas
 
47,192

 
22.7

 
3.61

 
88,152

 
20.3

 
3.58

Missouri
 
40,512

 
19.4

 
3.67

 
79,773

 
18.4

 
3.64

Other states
 
32,991

 
15.8

 
3.52

 
66,531

 
15.3

 
3.58

 
 
$
208,312

 
100.0
%
 
3.64

 
$
433,871

 
100.0
%
 
3.62


Commercial Real Estate Loans: During the current year six month period, the Bank entered into commercial real estate loan participations of $107.6 million, which included $102.6 million of commercial real estate construction loans. Substantially all of the $102.6 million of commercial real estate construction loans had not yet been funded as of March 31, 2018. The Bank intends to continue to grow its commercial real estate loan portfolio through participations with correspondent lenders and other select lead banks.


17



The following table presents the Bank's commercial real estate loans and loan commitments by industry classification, as defined by the North American Industry Classification System, as of March 31, 2018. Based on the terms of the construction loans as of March 31, 2018, of the $162.4 million of undisbursed amounts in the table, $26.4 million is projected to be disbursed by June 30, 2018, and an additional $102.0 million is projected to be disbursed by March 31, 2019. It is possible that not all of the funds will be disbursed due to the nature of the funding of construction projects. Included in the table are fixed-rate loans totaling $315.7 million at a weighted average rate of 4.09% and adjustable-rate loans totaling $152.6 million at a weighted average rate of 4.61%. The weighted average rate of fixed-rate loans is lower than that of adjustable-rate loans due to the majority of the fixed-rate loans in the portfolio at March 31, 2018 having shorter terms to maturity. The credit risk for several of the Bank's borrowing relationships is mitigated due to the amount of equity injected into the projects, strong debt service coverage ratios, and liquidity, personal cash flow and net worth of the guarantors. Several of these borrowing relationships have a preference for fixed-rate loans and the market interest rates are typically lower for these types of borrowers.
 
Unpaid
 
Undisbursed
 
Gross Loan
 
Outstanding
 
 
 
% of
 
Principal
 
Amount
 
Amount
 
Commitments
 
Total
 
Total
 
(Dollars in thousands)
Accommodation and food services
$
141,707

 
$
39,012

 
$
180,719

 
$

 
$
180,719

 
38.6
%
Health care and social assistance
60,936

 
72,261

 
133,197

 

 
133,197

 
28.4

Real estate rental and leasing
29,387

 
29,009

 
58,396

 
490

 
58,886

 
12.6

Arts, entertainment, and recreation
33,116

 

 
33,116

 

 
33,116

 
7.1

Multi-family
10,012

 
20,950

 
30,962

 

 
30,962

 
6.6

Retail trade
17,851

 
1,159