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

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UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
Form 10-Q
________________________
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 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)

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 þ 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 þ 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 þ
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 þ

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

As of May 3, 2019, there were 141,371,539 shares of Capitol Federal Financial, Inc. common stock outstanding.




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




PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except per share amounts)
 
 
 
 
 
March 31,
 
September 30,
 
2019
 
2018
ASSETS:
 
 
 
Cash and cash equivalents (includes interest-earning deposits of $199,476 and $122,733)
$
218,051

 
$
139,055

Securities:
 
 
 
Available-for-sale ("AFS"), at estimated fair value (amortized cost of $741,975 and $718,564)
746,728

 
714,614

Held-to-maturity ("HTM"), at amortized cost (estimated fair value of $526,099 and $601,071)
527,460

 
612,318

Loans receivable, net (allowance for credit losses ("ACL") of $8,619 and $8,463)
7,570,806

 
7,514,485

Federal Home Loan Bank Topeka ("FHLB") stock, at cost
102,631

 
99,726

Premises and equipment, net
96,492

 
96,005

Income taxes receivable, net

 
2,177

Other assets
272,383

 
271,167

TOTAL ASSETS
$
9,534,551

 
$
9,449,547

 
 
 
 
LIABILITIES:
 
 
 
Deposits
$
5,701,111

 
$
5,603,354

FHLB borrowings
2,239,985

 
2,174,981

Other borrowings
100,000

 
110,052

Advance payments by borrowers for taxes and insurance
48,301

 
65,264

Income taxes payable, net
115

 

Deferred income tax liabilities, net
17,375

 
21,253

Accounts payable and accrued expenses
71,681

 
83,021

Total liabilities
8,178,568

 
8,057,925

 
 
 
 
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, 141,279,239 and 141,225,516
 
 
 
shares issued and outstanding as of March 31, 2019 and September 30, 2018, respectively
1,413

 
1,412

Additional paid-in capital
1,208,665

 
1,207,644

Unearned compensation, Employee Stock Ownership Plan ("ESOP")
(35,517
)
 
(36,343
)
Retained earnings
186,838

 
214,569

Accumulated other comprehensive (loss) income ("AOCI"), net of tax
(5,416
)
 
4,340

Total stockholders' equity
1,355,983

 
1,391,622

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
9,534,551

 
$
9,449,547

 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 


3


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)
 
 
 
 
 
 
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
71,657

 
$
64,194

 
$
142,429

 
$
128,383

Mortgage-backed securities ("MBS")
6,301

 
5,390

 
12,824

 
10,642

FHLB stock
1,831

 
3,201

 
3,802

 
6,296

Investment securities
1,505

 
1,094

 
2,946

 
2,088

Cash and cash equivalents
743

 
7,895

 
2,457

 
15,009

Total interest and dividend income
82,037

 
81,774

 
164,458

 
162,418

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
16,096

 
12,480

 
31,821

 
24,441

FHLB borrowings
12,525

 
18,772

 
26,055

 
36,689

Other borrowings
819

 
633

 
1,684

 
2,025

Total interest expense
29,440

 
31,885

 
59,560

 
63,155

NET INTEREST INCOME
52,597

 
49,889

 
104,898

 
99,263

PROVISION FOR CREDIT LOSSES

 

 

 

NET INTEREST INCOME AFTER
 
 
 
 
 
 
 
PROVISION FOR CREDIT LOSSES
52,597

 
49,889

 
104,898

 
99,263

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Deposit service fees
3,091

 
3,670

 
6,443

 
7,635

Income from bank-owned life insurance ("BOLI")
587

 
276

 
1,222

 
810

Other non-interest income
1,323

 
1,487

 
2,760

 
2,346

Total non-interest income
5,001

 
5,433

 
10,425

 
10,791

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
12,789

 
11,167

 
25,751

 
21,695

Information technology and related expense
4,284

 
3,622

 
8,883

 
6,953

Occupancy, net
3,292

 
2,839

 
6,544

 
5,604

Regulatory and outside services
1,056

 
1,151

 
2,822

 
2,291

Advertising and promotional
1,390

 
1,337

 
2,150

 
2,022

Deposit and loan transaction costs
465

 
1,313

 
1,201

 
2,720

Office supplies and related expense
736

 
442

 
1,195

 
884

Federal insurance premium
659

 
847

 
1,187

 
1,699

Other non-interest expense
1,470

 
880

 
3,190

 
1,766

Total non-interest expense
26,141

 
23,598

 
52,923

 
45,634

INCOME BEFORE INCOME TAX EXPENSE
31,457

 
31,724

 
62,400

 
64,420

INCOME TAX EXPENSE
6,903

 
8,394

 
13,463

 
9,254

NET INCOME
$
24,554

 
$
23,330

 
$
48,937

 
$
55,166

 
 
 
 
 
 
 
 
Basic earnings per share ("EPS")
$
0.18

 
$
0.17

 
$
0.36

 
$
0.41

Diluted EPS
$
0.18

 
$
0.17

 
$
0.36

 
$
0.41

 
 
 
 
 
 
 
 
Basic weighted average common shares
137,634,820

 
134,428,227

 
137,592,409

 
134,400,300

Diluted weighted average common shares
137,690,717

 
134,475,228

 
137,641,126

 
134,471,259

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 

4


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
 
 
 
 
 
 
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
Net income
$
24,554

 
$
23,330

 
$
48,937

 
$
55,166

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Changes in unrealized gains (losses) on AFS securities,
 
 
 
 
 
 
 
net of taxes of $(982), $610, $(2,115) and $1,319
3,061

 
(1,898
)
 
6,588

 
(3,064
)
Changes in unrealized gains (losses) on cash flow hedges,
 
 
 
 
 
 
 
net of taxes of $2,118, $(1,063), $5,246 and $(1,867)
(6,600
)
 
3,316

 
(16,344
)
 
4,638

Comprehensive income
$
21,015

 
$
24,748

 
$
39,181

 
$
56,740

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 


5


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended March 31, 2019
 
 
 
Additional
 
Unearned
 
 
 
 
 
Total
 
Common
 
Paid-In
 
Compensation
 
Retained
 
 
 
Stockholders'
 
Stock
 
Capital
 
ESOP
 
Earnings
 
AOCI
 
Equity
Balance at September 30, 2018
$
1,412

 
$
1,207,644

 
$
(36,343
)
 
$
214,569

 
$
4,340

 
$
1,391,622

Net income
 
 
 
 
 
 
24,383

 
 
 
24,383

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

 
 
 
394

ESOP activity
 
 
118

 
413

 
 
 
 
 
531

Stock-based compensation
 
 
95

 
 
 
 
 
 
 
95

Stock options exercised
1

 
466

 
 
 
 
 
 
 
467

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

 
1,208,323

 
(35,930
)
 
173,984

 
(1,877
)
 
1,345,913

Net income
 
 
 
 
 
 
24,554

 
 
 
24,554

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

 
413

 
 
 
 
 
547

Stock-based compensation
 
 
90

 
 
 
 
 
 
 
90

Stock options exercised

 
118

 
 
 
 
 
 
 
118

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

 
$
1,208,665

 
$
(35,517
)
 
$
186,838

 
$
(5,416
)
 
$
1,355,983

 
For the Six Months Ended March 31, 2018
 
 
 
Additional
 
Unearned
 
 
 
 
 
Total
 
Common
 
Paid-In
 
Compensation
 
Retained
 
 
 
Stockholders'
 
Stock
 
Capital
 
ESOP
 
Earnings
 
AOCI
 
Equity
Balance at September 30, 2017
$
1,382

 
$
1,167,368

 
$
(37,995
)
 
$
234,640

 
$
2,918

 
$
1,368,313

Net income
 
 
 
 
 
 
31,836

 
 
 
31,836

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
156

 
156

Cumulative effect of adopting ASU 2016-09
 
 
19

 
 
 
(19
)
 
 
 

ESOP activity
 
 
165

 
413

 
 
 
 
 
578

Stock-based compensation
 
 
94

 
 
 
 
 
 
 
94

Stock options exercised

 
46

 
 
 
 
 
 
 
46

Cash dividends to stockholders ($0.375 per share)
 
 
 
 
 
(50,412
)
 
 
 
(50,412
)
Balance at December 31, 2017
1,382

 
1,167,692

 
(37,582
)
 
216,045

 
3,074

 
1,350,611

Net income
 
 
 
 
 
 
23,330

 
 
 
23,330

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
1,418

 
1,418

Reclassification of certain tax effects related to adopting ASU 2018-02
 
 
 
 
 
 
(667
)
 
667

 

ESOP activity
 
 
123

 
413

 
 
 
 
 
536

Stock-based compensation
 
 
93

 
 
 
 
 
 
 
93

Stock options exercised
 
 
179

 
 
 
 
 
 
 
179

Cash dividends to stockholders ($0.085 per share)
 
 
 
 
 
(11,427
)
 
 
 
(11,427
)
Balance at March 31, 2018
$
1,382

 
$
1,168,087

 
$
(37,169
)
 
$
227,281

 
$
5,159

 
$
1,364,740

 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 
 


6


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
 
For the Six Months Ended
 
March 31,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
48,937

 
$
55,166

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
FHLB stock dividends
(3,802
)
 
(6,296
)
Originations of loans receivable held-for-sale ("LHFS")

 
(390
)
Proceeds from sales of LHFS

 
16,035

Amortization and accretion of premiums and discounts on securities
737

 
1,733

Depreciation and amortization of premises and equipment
4,710

 
4,180

Amortization of intangible assets
1,189

 

Amortization of deferred amounts related to FHLB advances, net
4

 
670

Common stock committed to be released for allocation - ESOP
1,078

 
1,114

Stock-based compensation
185

 
187

Changes in:
 
 
 
Unrestricted cash collateral (provided to)/received from derivative counterparties, net
(9,970
)
 
6,711

Other assets, net
1,418

 
2,257

Income taxes payable, net
2,291

 
138

Deferred income tax liabilities, net
(745
)
 
(6,396
)
Accounts payable and accrued expenses
(13,894
)
 
(8,350
)
Net cash provided by operating activities
32,138

 
66,759

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of AFS securities
(172,506
)
 
(223,829
)
Proceeds from calls, maturities and principal reductions of AFS securities
149,524

 
73,993

Proceeds from calls, maturities and principal reductions of HTM securities
83,692

 
109,702

Proceeds from sale of AFS securities

 
2,078

Proceeds from the redemption of FHLB stock
97,096

 
3,045

Purchase of FHLB stock
(96,199
)
 
(91,421
)
Net increase in loans receivable
(57,073
)
 
(22,437
)
Purchase of premises and equipment
(4,583
)
 
(4,214
)
Proceeds from sale of other real estate owned ("OREO")
1,062

 
1,587

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

 
(151,496
)
 
 
 
 
 
 
 
(Continued)


7


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
 
For the Six Months Ended
 
March 31,
 
2019
 
2018
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Cash dividends paid
(77,062
)
 
(61,839
)
Net change in deposits
97,757

 
44,325

Proceeds from borrowings
2,680,000

 
8,500,000

Repayments on borrowings
(2,625,052
)
 
(8,600,000
)
Change in advance payments by borrowers for taxes and insurance
(16,963
)
 
(9,053
)
Stock options exercised
585

 
225

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

 
(126,342
)
 
 
 
 
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS
92,416

 
(211,079
)
 
 
 
 
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS:
 
 
Beginning of period
139,055

 
351,659

End of period
$
231,471

 
$
140,580

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
Loans transferred to LHFS
$

 
$
15,814

 
 
 
 
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, 2018, 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 $218.1 million and $139.1 million at March 31, 2019 and September 30, 2018 and restricted cash and cash equivalents of $13.4 million at March 31, 2019, which was included in other assets on the consolidated balance sheet.  There was no restricted cash and cash equivalents at September 30, 2018.  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.

Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers. The ASU, as amended, implements a common revenue standard that clarifies the principles for recognizing revenue included in Accounting Standards Codification ("ASC") Topic 606. The core principle of the amended guidance is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The majority of the Company's revenue is composed of interest income from loans and securities which are explicitly excluded from the amended ASU. The Company elected to implement the amended ASU using the modified retrospective application with a cumulative adjustment to opening retained earnings at October 1, 2018. Upon adoption of the amended ASU, the Company recorded a cumulative adjustment, which increased opening retained earnings by $394 thousand related to contracts that were not complete upon adoption. The amount was related to the change in the recognition of revenue related to certain insurance commissions. Additionally, effective October 1, 2018, interchange network charges are reported as a reduction in deposit service fees. Previously, these charges were reported as expense in deposit and loan transaction costs in the consolidated statements of income. The Company concluded the ASU did not significantly change the Company's revenue recognition methods. This ASU did not have a material impact on the Company's consolidated financial condition or results of operations at the time of adoption. The new disclosure requirements of the ASU are included in Note 8. Revenue Recognition.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU supersedes certain accounting guidance related to equity securities with readily determinable fair values and the related impairment assessment. An entity's equity investments that are accounted for under the equity method of accounting or result in consolidation of an investee are not included within the scope of this ASU. The ASU requires public business entities to utilize the exit price notion when determining fair value for financial instruments measured at amortized cost on the balance sheet. The ASU also requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the notes to the financial statements. ASU 2016-01 became effective for the Company on October 1, 2018. The adoption of this ASU did not have a material impact on the Company's consolidated financial condition or results of operations. The new disclosure requirements of the ASU are included in Note 6. Fair Value of Financial Instruments.

In February 2016, the FASB issued ASU 2016-02, Leases. The ASU, as amended, revises lease accounting guidance by requiring that lessees recognize the assets and liabilities arising 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. ASU 2016-02 will become effective for the Company on October 1, 2019. 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 Company expects to select the transition relief provisions.

9


The Company has completed its development of a lease inventory and an internal lease data collection, organization, and computing platform for compliance with this ASU. The Company is continuing to evaluate the impact this ASU may have on the Company's consolidated financial condition and results of operations. The Company expects to recognize right-of-use assets and lease liabilities for substantially all of its operating lease commitments based on the present value of the minimum commitments under non-cancellable leases as of the date of adoption. The Company is continuing to evaluate the impact this ASU may have to the Company's disclosures.

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, HTM debt securities, 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 has selected a third-party vendor solution to assist in the application and implementation of the new accounting guidance and will begin loading historical loan and loss data into the third-party software during the third quarter of fiscal year 2019. 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 November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash (a consensus of the FASB Emerging Issues Task Force). The ASU addresses diversity in the classification and presentation of changes in restricted cash and cash equivalents on the statement of cash flows. The ASU requires that amounts described as restricted cash and cash equivalents be included with cash and cash equivalents when reconciling the beginning and ending amounts presented on the statement of cash flows, requires disclosures on the nature of restrictions on cash and cash equivalents, and the amount and financial statement line presentation of restricted cash and cash equivalents. The Company adopted this ASU on October 1, 2018 and it did not have a material impact on the Company's consolidated financial condition or results of operations at the time of adoption.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The ASU amends the hedge accounting recognition and presentation requirements in current GAAP. The purpose of the ASU was to improve transparency of hedging relationships in the financial statements and to reduce the complexity of applying hedge accounting for preparers. The ASU will become effective for the Company on October 1, 2019. The Company is currently evaluating the effect of the ASU on the Company's consolidated financial condition, results of operations and disclosures.

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.


10


2. EARNINGS PER SHARE
Shares acquired by the ESOP are not included in basic average shares outstanding until the shares are committed for allocation or vested to an employee's individual account. Unvested shares awarded pursuant to the Company's restricted stock benefit plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands, except per share amounts)
Net income
$
24,554

 
$
23,330

 
$
48,937

 
$
55,166

Income allocated to participating securities
(10
)
 
(10
)
 
(19
)
 
(23
)
Net income available to common stockholders
$
24,544

 
$
23,320

 
$
48,918

 
$
55,143

 
 
 
 
 
 
 
 
Average common shares outstanding
137,593,062

 
134,386,469

 
137,571,533

 
134,379,424

Average committed ESOP shares outstanding
41,758

 
41,758

 
20,876

 
20,876

Total basic average common shares outstanding
137,634,820

 
134,428,227

 
137,592,409

 
134,400,300

 
 
 
 
 
 
 
 
Effect of dilutive stock options
55,897

 
47,001

 
48,717

 
70,959

 
 
 
 
 
 
 
 
Total diluted average common shares outstanding
137,690,717

 
134,475,228

 
137,641,126

 
134,471,259

 
 
 
 
 
 
 
 
Net EPS:
 
 
 
 
 
 
 
Basic
$
0.18

 
$
0.17

 
$
0.36

 
$
0.41

Diluted
$
0.18

 
$
0.17

 
$
0.36

 
$
0.41

 
 
 
 
 
 
 
 
Antidilutive stock options, excluded from the diluted average
 
 
 
 
 
 
common shares outstanding calculation
494,395

 
598,195

 
529,261

 
527,642




11


3. SECURITIES
The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of AFS and HTM securities at the dates presented. The majority of the MBS and investment securities portfolios are composed of securities issued by United States government-sponsored enterprises ("GSEs").
 
March 31, 2019
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
MBS
$
469,455

 
$
5,995

 
$
606

 
$
474,844

GSE debentures
268,375

 
274

 
908

 
267,741

Municipal bonds
4,145

 
3

 
5

 
4,143

 
$
741,975

 
$
6,272

 
$
1,519

 
$
746,728

HTM:
 
 
 
 
 
 
 
MBS
$
510,450

 
$
5,107

 
$
6,461

 
$
509,096

Municipal bonds
17,010

 
19

 
26

 
17,003

 
$
527,460

 
$
5,126

 
$
6,487

 
$
526,099


 
September 30, 2018
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
MBS
$
445,883

 
$
3,270

 
$
4,063

 
$
445,090

GSE debentures
268,525

 
30

 
3,157

 
265,398

Municipal bonds
4,156

 

 
30

 
4,126

 
$
718,564

 
$
3,300

 
$
7,250

 
$
714,614

HTM:
 
 
 
 
 
 
 
MBS
$
591,900

 
$
4,514

 
$
15,589

 
$
580,825

Municipal bonds
20,418

 

 
172

 
20,246

 
$
612,318

 
$
4,514

 
$
15,761

 
$
601,071





12


The following tables summarize the estimated fair value and gross unrealized losses of those securities on which an unrealized loss at the dates presented was reported and the continuous unrealized loss position for less than 12 months and equal to or greater than 12 months as of the dates presented.
 
March 31, 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)
AFS:
 
 
 
 
 
 
 
MBS
$
11,197

 
$
55

 
$
67,001

 
$
551

GSE debentures
27,776

 
3

 
99,077

 
905

Municipal bonds

 

 
1,510

 
5

 
$
38,973

 
$
58

 
$
167,588

 
$
1,461

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HTM:
 
 
 
 
 
 
 
MBS
$
1,551

 
$
2

 
$
331,809

 
$
6,459

Municipal bonds
330

 
2

 
7,977

 
24

 
$
1,881

 
$