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

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false0001490906 0001490906 2019-10-30 2019-10-30


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)
October 30, 2019

 
 
 
 
 
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 No.)


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))

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 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 October 30, 2019, announcing financial results for fiscal year 2019 is attached hereto as Exhibit 99.1, and is incorporated herein by reference.

ITEM 7.01 REGULATION FD DISCLOSURE
The Registrant’s press release dated October 30, 2019, announcing that its Board of Directors declared a fiscal year 2019 cash true-up dividend of $0.34 per share on outstanding CFFN common stock is attached hereto as Exhibit 99.2, and is incorporated herein by reference. The dividend is payable on December 6, 2019, to stockholders of record as of the close of business on November 22, 2019.

ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(d) Exhibits

Exhibit 99.1 – Press release announcing earnings dated October 30, 2019
Exhibit 99.2 – Press release announcing fiscal year 2019 cash true-up dividend dated October 30, 2019
Exhibit 104 – Cover page interactive data file, formatted in Inline XBRL.







 
 
 
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: October 30, 2019
By: /s/ Kent G. Townsend
 
 
 
 
 
 
 
 
Kent G. Townsend, Executive Vice-President,
 
 
Chief Financial Officer, and Treasurer
 


(Back To Top)

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

Exhibit



400720826_cffnlogo.jpg
NEWS RELEASE
FOR IMMEDIATE RELEASE
October 30, 2019
CAPITOL FEDERAL FINANCIAL, INC.® 
REPORTS FISCAL YEAR 2019 RESULTS

Topeka, KS - Capitol Federal Financial, Inc.® (NASDAQ: CFFN) (the "Company"), the parent company of Capitol Federal Savings Bank (the "Bank"), announced results today for the fiscal year ended September 30, 2019. Detailed results will be available in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019, which will be filed with the Securities and Exchange Commission ("SEC") on or about November 27, 2019 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 $22.4 million;
basic and diluted earnings per share of $0.16;
net interest margin of 2.15% (2.24% excluding the effects of the leverage strategy); and
paid dividends of $11.7 million, or $0.085 per share.

Highlights for the fiscal year include:
net income of $94.2 million;
basic and diluted earnings per share of $0.68;
net interest margin of 2.26% (2.30% excluding the effects of the leverage strategy);
total commercial loans and commitments outstanding of $1.00 billion at September 30, 2019;
paid dividends of $134.9 million, or $0.98 per share; and
declared a fiscal year 2019 cash true-up dividend of $0.34 per share, payable on December 6, 2019.

Comparison of Operating Results for the Fiscal Years Ended September 30, 2019 and 2018

The Company recognized net income of $94.2 million, or $0.68 per share, for the fiscal year ended September 30, 2019 compared to net income of $98.9 million, or $0.73 per share, for the fiscal year ended September 30, 2018. The decrease in net income was due primarily to a $10.0 million increase in non-interest expense during the current year, partially offset by a $7.6 million increase in net interest income due primarily to higher yielding loans added in the acquisition of Capital City Bancshares, Inc. ("CCB"). Additionally, income tax expense was $1.4 million higher in the current fiscal year due primarily to income tax adjustments required in the prior fiscal year with the enactment of The Tax Cuts and Jobs Act (the "Tax Act") in December 2017.

The net interest margin increased 31 basis points, from 1.95% for the prior fiscal year to 2.26% for the current fiscal year. When the leverage strategy is in place, it reduces the net interest margin due to the amount of earnings from the transaction in comparison to the size of the transaction. The leverage strategy was suspended at certain times during the current year due to the negative interest rate spreads between the related Federal Home Loan Bank Topeka ("FHLB") borrowings and cash held at the Federal Reserve Bank of Kansas City (the "FRB of Kansas City") making the transaction unprofitable. See additional discussion regarding the leverage strategy in the Financial Condition section below. Excluding the effects of the leverage strategy, the net interest margin would have increased six basis points, from 2.24% for the prior fiscal year to 2.30% for the current fiscal year. The increase in the net interest margin excluding the effects of the leverage strategy was due mainly to the addition of higher yielding commercial loans in the CCB acquisition, partially offset by an increase in the cost of deposits.

To the extent market rates of interest remain at current levels or go lower during fiscal year 2020, the Company expects a decrease in our net interest margin, compared to fiscal year 2019, due primarily to lower yields on our loans and securities. If realized, the decrease in the yields on our loans and securities is expected to be from loans originated at lower rates, adjustable-rate loans repricing lower and increased prepayment speeds on our correspondent loans and mortgage-backed securities ("MBS") portfolios, which would accelerate the amortization of the premiums we have paid to acquire these assets. The rates on our certificate of deposit portfolio and

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borrowings may also decrease if market rates decrease, but will likely do so at a slower pace than interest-earning assets because the majority of those liabilities have stated maturities.

Interest and Dividend Income
The weighted average yield on total interest-earning assets increased 45 basis points, from 3.16% for the prior fiscal year to 3.61% for the current fiscal year, while the average balance of interest-earning assets decreased $1.03 billion from the prior fiscal year. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have increased 23 basis points, from 3.39% for the prior fiscal year to 3.62% for the current fiscal year, and the average balance of interest-earning assets would have increased $202.1 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 Year Ended
 
 
 
 
 
September 30,
 
Change Expressed in:
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
284,229

 
$
260,198

 
$
24,031

 
9.2
 %
MBS
25,730

 
22,619

 
3,111

 
13.8

FHLB stock
7,823

 
10,962

 
(3,139
)
 
(28.6
)
Investment securities
6,366

 
4,670

 
1,696

 
36.3

Cash and cash equivalents
5,806

 
23,443

 
(17,637
)
 
(75.2
)
Total interest and dividend income
$
329,954

 
$
321,892

 
$
8,062

 
2.5


The increase in interest income on loans receivable was due to a $282.0 million increase in the average balance of the portfolio, as well as a 17 basis point increase in the weighted average yield on the portfolio to 3.77% for the current fiscal year. The increase in the average balance was due mainly to the acquisition of CCB. The increase in the weighted average yield was also due mainly to the addition of higher yielding loans associated with the CCB acquisition, legacy adjustable-rate loans repricing to higher market rates, and the origination and purchase of new loans at higher market rates.

The increase in interest income on the MBS portfolio was due to a 28 basis point increase in the weighted average yield on the portfolio to 2.63% for the current fiscal year, along with a $16.7 million increase in the average balance of the portfolio. The increase in the weighted average yield was due primarily to a decrease in the impact of net premium amortization, as well as adjustable-rate MBS repricing to higher market rates. Net premium amortization of $1.3 million during the current fiscal year decreased the weighted average yield on the portfolio by 13 basis points. During the prior fiscal year, $3.0 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 31 basis points. As of September 30, 2019, the remaining net balance of premiums on our portfolio of MBS was $2.3 million.

The decrease in dividend income on FHLB stock was due to a decrease in the average balance of FHLB stock as a result of the leverage strategy being in place for a shorter period of time during the current fiscal year as compared to the prior fiscal year. This was partially offset by a higher dividend rate on FHLB stock during the current fiscal year. See additional discussion regarding the leverage strategy in the Financial Condition section below.

The increase in interest income on the investment securities portfolio was due to a 66 basis point increase in the weighted average yield on the portfolio to 2.26%. The increase in the weighted average yield was primarily a result of replacing maturing securities at higher market rates.

The cash and cash equivalents line item in the table above includes interest income associated and not associated with the leverage strategy. Interest income on cash and cash equivalents not related to the leverage strategy decreased $705 thousand from the prior fiscal year due to an $86.8 million decrease in the average balance, partially offset by a 68 basis point increase in the weighted average yield which was related to cash balances held at the FRB of Kansas City. Interest income on cash associated with the leverage strategy decreased $16.9 million from the prior fiscal year due to a $1.18 billion decrease in the average balance, as the leverage strategy was in place for a shorter period of time during the current fiscal year.


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Interest Expense
The weighted average rate paid on total interest-bearing liabilities increased 18 basis points, from 1.36% for the prior fiscal year to 1.54% for the current fiscal year, while the average balance of interest-bearing liabilities decreased $973.3 million from the prior fiscal year. Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased 19 basis points, from 1.33% for the prior fiscal year to 1.52% for the current fiscal year, and the average balance of interest-bearing liabilities would have increased $263.2 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 Year Ended
 
 
 
 
 
September 30,
 
Change Expressed in:
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
$
66,201

 
$
52,625

 
$
13,576

 
25.8
 %
FHLB borrowings
54,391

 
67,120

 
(12,729
)
 
(19.0
)
Other borrowings
2,972

 
3,374

 
(402
)
 
(11.9
)
Total interest expense
$
123,564

 
$
123,119

 
$
445

 
0.4


The increase in interest expense on deposits was due primarily to a 20 basis point increase in the weighted average rate, to 1.19% for the current fiscal year. The deposit accounts assumed in the CCB acquisition were at a lower average rate than our legacy deposit portfolio rate and our overall deposit portfolio rate, which partially offset the increase in the deposit portfolio rate in the current fiscal year. The increase in the weighted average rate was due primarily to increases in the average retail/business certificate of deposit portfolio rate and money market portfolio rate, which increased 29 basis points and 33 basis points, respectively, as market interest rates increased throughout both years. Additionally, late in the third quarter of fiscal year 2019, the Bank increased offered rates on short-term and certain intermediate-term certificates of deposit in an effort to encourage customers to move funds to those terms and during the fourth quarter of fiscal year 2019 the Bank held a special certificate of deposit campaign ("unTraditional campaign") resulting in growth in the short-term and certain intermediate-term certificates of deposit. See the Financial Condition section below for more information.

The FHLB borrowings line item in the table above includes interest expense associated and not associated with the leverage strategy. Interest expense on FHLB borrowings not related to the leverage strategy increased $5.5 million from the prior fiscal year due to a 23 basis point increase in the weighted average rate paid, to 2.30% for the current fiscal year, and a $14.0 million increase in the average balance of the portfolio. The increase in the weighted average rate paid was due primarily to certain maturing advances being replaced at higher effective market interest rates. Interest expense on FHLB borrowings associated with the leverage strategy decreased $18.2 million from the prior fiscal year due to the leverage strategy being in place for a shorter period of time during the current fiscal year.

The decrease in interest expense on other borrowings was due mainly to the maturity of a $100.0 million repurchase agreement during the prior fiscal year, which was not replaced with a new repurchase agreement.

Provision for Credit Losses
The Bank recorded a provision for credit losses during the current fiscal year of $750 thousand, compared to no provision for credit losses during the prior fiscal year. The $750 thousand provision for credit losses in the current fiscal year is due primarily to commercial loan activities during the current fiscal year, specifically the classification of a large commercial loan as special mention, commercial loan growth and funding, certain commercial loans that renewed since being obtained in the CCB acquisition and are now in the Bank's allowance for credit losses ("ACL") model, and commercial loan charge-offs.


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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 Year Ended
 
 
 
 
 
September 30,
 
Change Expressed in:
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Deposit service fees
$
12,740

 
$
15,636

 
$
(2,896
)
 
(18.5
)%
Income from bank-owned life insurance ("BOLI")
2,432

 
1,875

 
557

 
29.7

Other non-interest income
6,786

 
4,524

 
2,262

 
50.0

Total non-interest income
$
21,958

 
$
22,035

 
$
(77
)
 
(0.3
)

The decrease in deposit service fees was due mainly to a change in the presentation of interchange network charges related to the adoption of a new revenue recognition accounting standard during the current fiscal year. Previously, interchange network charges were reported in deposit and loan expense. As a result of the adoption of the new revenue recognition accounting standard on October 1, 2018, interchange transaction fee income is now reported net of interchange network charges, which totaled $3.4 million during the current fiscal year and $3.0 million during the prior fiscal year.

The increase in income from BOLI was due primarily to a one-time adjustment during the prior fiscal year to the benchmark rate associated with one of the policies which reduced income from BOLI during that period, as well as to an increase in income related to policies acquired in the CCB acquisition.

The increase in other non-interest income was due mainly to revenues from the trust asset management operations obtained in the CCB acquisition, commercial loan fee related income, insurance commission income, and income related to the collateral pledged by the Bank on its interest rate swap agreements.

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 Year Ended
 
 
 
 
 
September 30,
 
Change Expressed in:
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
53,145

 
$
46,563

 
$
6,582

 
14.1
 %
Information technology and related expense
17,615

 
13,999

 
3,616

 
25.8

Occupancy, net
13,032

 
11,455

 
1,577

 
13.8

Regulatory and outside services
5,813

 
5,709

 
104

 
1.8

Advertising and promotional
5,244

 
5,034

 
210

 
4.2

Deposit and loan transaction costs
2,478

 
5,621

 
(3,143
)
 
(55.9
)
Office supplies and related expense
2,439

 
1,888

 
551

 
29.2

Federal insurance premium
1,172

 
3,277

 
(2,105
)
 
(64.2
)
Other non-interest expense
6,006

 
3,356

 
2,650

 
79.0

Total non-interest expense
$
106,944

 
$
96,902

 
$
10,042

 
10.4


The increase in salaries and employee benefits was due primarily to expense related to retained CCB employees. Management anticipates salaries and employee benefits will be approximately $4.0 million higher in fiscal year 2020 due primarily to an increase in staffing for commercial banking activities and related back office functions, along with an increase in information technology staff. The $4.0 million increase is expected to be approximately $1.2 million in each of the second and third quarters and $1.6 million in the fourth quarter. The increase in information technology and related expense was due mainly to an increase in software licensing and costs related to the integration of CCB operations. The increase in occupancy, net was due primarily to expenses related to properties

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acquired in the CCB acquisition. The decrease in deposit and loan transaction costs was due mainly to the adoption of the new revenue recognition standard discussed above. The increase in office supplies and related expense was due primarily to costs related to the integration of CCB customers and operations. The decrease in the federal insurance premium was due mainly to the Bank receiving a credit from the Federal Deposit Insurance Corporation ("FDIC") as a result of the FDIC deposit insurance fund ratio reaching 1.40%. Pursuant to regulatory guidance, once the insurance fund exceeds 1.38% of insured deposits, deposit insurance assessment credits are allocated to banks with less than $10 billion in assets, to compensate for premiums previously paid that contributed to growth of the fund past 1.15%. These credits will continue to offset the Bank's premium assessments as long as the insurance fund ratio remains above 1.38% of insured deposits and the Bank still has a remaining credit balance. As of September 30, 2019, the Bank had a remaining credit of $1.6 million. The increase in other non-interest expense was due primarily to amortization of deposit intangibles associated with the acquisition of CCB. Management anticipates other non-interest expense may increase in the first quarter of fiscal year 2020 due primarily to a potential $400 thousand write-down of an OREO property that was added in the CCB acquisition, related to an offer received on this property subsequent to September 30, 2019.

The Company's efficiency ratio was 46.83% for the current fiscal year compared to 43.89% for the prior fiscal year. The change in the efficiency ratio was due to higher non-interest expense in the current fiscal year compared to the prior fiscal year. 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 $26.4 million for the current fiscal year compared to $25.0 million for the prior fiscal year. The effective tax rate was 21.9% for the current fiscal year compared to 20.2% for the prior fiscal year. The increase in the effective tax rate compared to the prior year was due mainly to the enactment of the Tax Act in the prior fiscal year. In accordance with accounting principles generally accepted in the United States of America ("GAAP"), the Company revalued its deferred tax assets and liabilities in December 2017 to account for the lower corporate tax rate which reduced income tax expense by $7.5 million. This benefit was partially offset, when comparing the two fiscal years, as the Company was required to apply a blended statutory federal tax rate, because we have a fiscal year end of September 30, of 24.5% in the prior fiscal year compared to 21% in the current fiscal year. Additionally, the tax credit benefits associated with the Company's low income housing partnership investments were higher in the current fiscal year compared to the prior fiscal year, which contributed to a reduction in the current year effective income tax compared to the prior fiscal year. Management anticipates the effective income tax rate for fiscal year 2020 will be approximately 21% to 22%.

Comparison of Operating Results for the Three Months Ended September 30, 2019 and June 30, 2019

For the quarter ended September 30, 2019, the Company recognized net income of $22.4 million, or $0.16 per share, compared to net income of $22.9 million, or $0.17 per share, for the quarter ended June 30, 2019. The decrease in net income was due primarily to a decrease in net interest income, partially offset by a decrease in non-interest expense.

Net interest income decreased $1.9 million, or 3.6%, from the prior quarter to $49.8 million for the current quarter. The net interest margin decreased 14 basis points from 2.29% for the prior quarter to 2.15% for the current quarter. Excluding the effects of the leverage strategy, the net interest margin would have decreased five basis points, from 2.29% for the prior quarter to 2.24% for the current quarter. The leverage strategy was in place during a portion of the current quarter, and was not in place during the prior quarter. When the leverage strategy is in place, it reduces the net interest margin due to the amount of earnings from the transaction in comparison to the size of the transaction. The decrease in the net interest margin, excluding the effects of the leverage strategy, was due mainly to an increase in the cost of retail/business certificates of deposit and a decrease in interest income on loans receivable, partially offset by a decrease in the cost of public unit certificates of deposit.


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Interest and Dividend Income
The weighted average yield on total interest-earning assets decreased six basis points, from 3.64% for the prior quarter to 3.58% for the current quarter, while the average balance of interest-earning assets increased $253.1 million between the two periods. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have decreased two basis points, from 3.64% for the prior quarter to 3.62% for the current quarter, and the average balance of interest-earning assets would have decreased $144.8 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
 
 
 
 
 
September 30,
 
June 30,
 
Change Expressed in:
 
2019
 
2019
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
70,366

 
$
71,434

 
$
(1,068
)
 
(1.5
)%
MBS
6,293

 
6,613

 
(320
)
 
(4.8
)
FHLB stock
2,156

 
1,865

 
291

 
15.6

Investment securities
1,585

 
1,835

 
(250
)
 
(13.6
)
Cash and cash equivalents
2,885

 
464

 
2,421

 
521.8

Total interest and dividend income
$
83,285

 
$
82,211

 
$
1,074

 
1.3


The decrease in interest income on loans receivable was due primarily to an increase in premium amortization on one- to four-family correspondent loans as a result of payoff activity. The decrease in interest income on the MBS portfolio was due to a $59.2 million decrease in the average balance of the portfolio. The increase in interest income on FHLB stock and cash and cash equivalents was due mainly to the leverage strategy being in place during a portion of current quarter. The decrease in interest income on investment securities was due mainly to a 26 basis point decrease in the average yield on the portfolio resulting primarily from discount accretion on securities called during the prior quarter.

Interest Expense
The weighted average rate paid on total interest-bearing liabilities for the current quarter increased eight basis points, from 1.54% for the prior quarter to 1.62% for the current quarter, and the average balance of interest-bearing liabilities increased $266.0 million between the two periods. Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased three basis points, from 1.54% for the prior quarter to 1.57% for the current quarter, while the average balance of interest-bearing liabilities would have decreased $131.8 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
 
 
 
 
 
September 30,
 
June 30,
 
Change Expressed in:
 
2019
 
2019
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
$
17,471

 
$
16,909

 
$
562

 
3.3
%
FHLB borrowings
15,355

 
12,981

 
2,374

 
18.3

Other borrowings
648

 
640

 
8

 
1.3

Total interest expense
$
33,474

 
$
30,530

 
$
2,944

 
9.6


The increase in interest expense on deposits was due primarily to a four basis point increase in the weighted average rate paid, to 1.25% for the current quarter. The increase in the weighted average rate paid was due primarily to a seven basis point increase in the average retail/business certificate of deposit portfolio rate, to 2.02% in the current quarter. As discussed above, late in the prior quarter the Bank increased offered rates on short-term and certain intermediate-term certificates of deposit and, during the current quarter, ran the unTraditional certificate of deposit campaign, which added 2.6 basis points to the average cost of certificates of deposit. The remainder of the increase in the weighted average rate paid was due primarily to lower rate longer-term certificates of deposit which matured and repriced to higher rates.

The FHLB borrowings line item in the table above includes interest expense associated and not associated with the leverage strategy. Interest expense on FHLB borrowings not related to the leverage strategy decreased $186 thousand from the prior quarter due

6



primarily to a decrease in the usage of the FHLB line of credit during the current quarter. Interest expense on FHLB borrowings associated with the leverage strategy increased $2.6 million from the prior quarter due to the leverage strategy being in place during a portion of the current quarter.

Provision for Credit Losses
The Bank recorded a provision for credit losses during the current quarter of $300 thousand, compared to a provision for credit losses during the prior quarter of $450 thousand. The $300 thousand provision for credit losses in the current quarter was primarily a result of commercial loan activities, specifically related to certain commercial loans that renewed since the CCB acquisition and are now included in the Bank's ACL model and due to commercial loan charge-offs during the current quarter.

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
 
 
 
 
 
September 30,
 
June 30,
 
Change Expressed in:
 
2019
 
2019
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Deposit service fees
$
3,159

 
$
3,131

 
$
28

 
0.9
%
Income from BOLI
620

 
590

 
30

 
5.1

Other non-interest income
2,080

 
1,953

 
127

 
6.5

Total non-interest income
$
5,859

 
$
5,674

 
$
185

 
3.3


The increase in other non-interest income was due mainly to an increase in commercial loan fee-related income.

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
 
 
 
 
 
September 30,
 
June 30,
 
Change Expressed in:
 
2019
 
2019
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
13,940

 
$
13,454

 
$
486

 
3.6
 %
Information technology and related expense
4,080

 
4,652

 
(572
)
 
(12.3
)
Occupancy, net
3,264

 
3,224

 
40

 
1.2

Regulatory and outside services
1,566

 
1,425

 
141

 
9.9

Advertising and promotional
1,647

 
1,447

 
200

 
13.8

Deposit and loan transaction costs
596

 
681

 
(85
)
 
(12.5
)
Office supplies and related expense
555

 
689

 
(134
)
 
(19.4
)
Federal insurance premium
(615
)
 
600

 
(1,215
)
 
(202.5
)
Other non-interest expense
1,297

 
1,519

 
(222
)
 
(14.6
)
Total non-interest expense
$
26,330

 
$
27,691

 
$
(1,361
)
 
(4.9
)

The increase in salaries and employee benefits expense was due mainly to annual merit increases, an increase in commission compensation, and one additional working day during the current quarter.  The decrease in information technology and related expense was due primarily to a decrease in costs related to the integration of CCB operations. The decrease in federal insurance premiums was due to the Bank receiving a credit from the FDIC as discussed above.

The Company's efficiency ratio was 47.30% for the current quarter compared to 48.28% for the prior quarter. The improvement in the efficiency ratio was due primarily to lower non-interest expense in the current quarter compared to the prior quarter.


7



Income Tax Expense
Income tax expense was $6.6 million for the current quarter, compared to $6.3 million for the prior quarter. The effective tax rate was 22.8% for the current quarter compared to 21.6% for the prior quarter.

Financial Condition as of September 30, 2019
Management continues to manage the size and mix of the loan portfolio, over the long-term, by utilizing cash flows from the one- to four-family loan portfolio to fund commercial loan growth. Given the current level of total assets and the interest rate environment, it is unlikely that the loan portfolio will increase in the next year. Over the past few years, cash flows from the securities portfolio have been used primarily to purchase loans and in part to pay down FHLB advances. By moving cash from lower yielding assets to higher yielding assets and repaying higher costing liabilities, we have been able to maintain our net interest margin.  Additionally, the Bank began reducing its balance of public unit certificates of deposit late in the third quarter of the current fiscal year in order to reduce its use of expensive wholesale funds and release securities pledged as collateral, which assists with liquidity levels. The balance of public unit certificates of deposit was $294.9 million at September 30, 2019. Management intends to maintain the balance of public unit certificates of deposit at approximately the current level for the time being. Management continues to evaluate liquidity levels, as measured by the ratio of securities and cash to total assets, and may consider reducing its target ratio below the current target level of 15%.

Total assets were $9.34 billion at September 30, 2019, an increase of $53.7 million, or 0.6%, from June 30, 2019. During the current quarter, some of the cash flows from the securities and loan portfolios were not reinvested into the respective portfolios; rather, the cash was placed at the FRB of Kansas City due to the current interest rate environment and to securities being called late in the current quarter. Cash and cash equivalents increased $177.3 million while the securities and loan portfolios decreased $139.1 million during the current quarter. Effective September 30, 2019, the Company adopted Accounting Standards Update ("ASU") 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities and certain components of ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments that are applicable to ASU 2017-12. As part of the adoption, the Company reclassified $444.7 million of held-to-maturity ("HTM") securities to available-for-sale ("AFS") securities. The adoption of ASU 2017-12 and the related components of ASU 2019-04 did not have any other impact on the Company's consolidated financial condition or results of operations at the time of adoption.

Total loans were $7.42 billion at September 30, 2019, a decrease of $90.7 million, or 1.2%, from June 30, 2019. The decrease was primarily in the one- to four-family correspondent loan portfolio and commercial real estate loan portfolio, partially offset by an increase in originated one- to four-family loans. The decrease in the commercial real estate portfolio during the current quarter was due largely to the payoff of a $45 million participation loan. During the current quarter, the Bank originated and refinanced $231.1 million of one- to four-family and consumer loans with a weighted average rate of 3.66% and purchased $44.0 million of one- to four-family loans from correspondent lenders with a weighted average rate of 3.81%. The Bank also originated $17.2 million of commercial loans with a weighted average rate of 5.52% and entered into commercial real estate loan participations of $17.5 million at a weighted average rate of 4.50%.

Total deposits were $5.58 billion at September 30, 2019, unchanged from June 30, 2019; however, the composition of the deposit portfolio changed during the current quarter. Retail/business certificates of deposit increased $132.3 million, funded primarily by cash flows from new deposit accounts, money market accounts, and checking accounts. Short-term and intermediate-term certificates of deposit increased $207.8 million while longer-term and variable rate certificates of deposit decreased $75.5 million. The change in the deposit portfolio mix was intentional, as the Bank increased offered rates on short-term and certain intermediate-term certificates of deposit late in the prior quarter and ran the unTraditional campaign during the current quarter. The intention of the unTraditional campaign was to attract deposits with generally shorter terms to maturity, to allow the Bank to more quickly reprice certificate of deposit funds lower if market interest rates decrease.

Total assets decreased $109.5 million, or 1.2%, from September 30, 2018 to September 30, 2019. The decrease was largely in the securities portfolio and the loan portfolio, partially offset by an increase in operating cash. The one- to four-family loan portfolio decreased $285.6 million, partially offset by a $198.3 million increase in the commercial loan portfolio as cash flows from the one- to four-family loan portfolio were used to fund commercial loan growth. During the current fiscal year, the Bank originated and refinanced $660.8 million of one- to four-family and consumer loans with a weighted average rate of 4.18% and purchased $166.4 million of one- to four-family loans from correspondent lenders with a weighted average rate of 4.17%. The Bank also originated $164.1 million of commercial loans with a weighted average rate of 5.10% and entered into commercial real estate loan participations totaling $96.0 million at a weighted average rate of 5.27%. The commercial loan portfolio totaled $767.9 million at September 30, 2019, compared to $569.6 million at September 30, 2018. At September 30, 2019, the commercial loan portfolio was composed of 76% commercial real estate, 16% commercial construction, and 8% commercial and industrial. Total commercial real estate and commercial construction potential exposure, including undisbursed amounts and outstanding commitments totaling $214.3 million, was $921.1 million at September 30, 2019. Total commercial and industrial potential exposure, including undisbursed amounts and outstanding commitments of $16.8 million, was $77.9 million at September 30, 2019.

8




Total deposits decreased $21.5 million, or 0.4%, from September 30, 2018 to September 30, 2019. The public unit certificate of deposit portfolio decreased $112.8 million, money market accounts decreased $54.5 million and savings accounts decreased $31.4 million. The retail/business certificate of deposit portfolio increased $163.4 million during the current fiscal year. Excluding the impact of the planned decrease in the balance of public unit certificates of deposit, total deposits would have increased $91.3 million over the same period.

Total FHLB borrowings at September 30, 2019 were $2.14 billion, a decrease of $35.0 million, or 1.6%, from September 30, 2018. The decrease was due to not renewing a portion of the FHLB advances that matured during the current fiscal year.

Stockholders' equity was $1.34 billion at September 30, 2019 compared to $1.39 billion at September 30, 2018. The $55.3 million decrease was due primarily to the payment of $134.9 million in cash dividends, partially offset by net income of $94.2 million during the current fiscal year. In the long run, management considers a ratio of stockholders' equity to total assets at the Bank of at least 10% an appropriate level of capital. At September 30, 2019, this ratio was 12.5%. The cash dividends paid during the current fiscal year totaled $0.98 per share and consisted of a $0.39 per share cash true-up dividend related to fiscal year 2018 earnings per the Company's dividend policy, a $0.25 per share True Blue Capitol dividend, and four regular quarterly cash dividends totaling $0.34 per share.

At times, the Bank has utilized a leverage strategy to increase earnings. The leverage strategy during the current fiscal year 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, or earlier if the strategy was suspended. The proceeds from the borrowings, net of the required FHLB stock holdings which yielded 7.4% from dividends during the current fiscal year, 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 $36 thousand during the current fiscal year, compared to $1.7 million during the prior fiscal year. The decrease was due mainly to the strategy being suspended for the majority of the current year due to the large negative interest rate spread, making the strategy unprofitable. Management continues to monitor the net interest rate spread and overall profitability of the strategy. It is expected that the strategy will be reimplemented if it reaches a position that is profitable.

On October 16, 2019, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.7 million, payable on November 15, 2019 to stockholders of record as of the close of business on November 1, 2019. On October 30, 2019, the Company announced a fiscal year 2019 cash true-up dividend of $0.34 per share, or approximately $46.9 million, related to fiscal year 2019 earnings. The $0.34 per share cash true-up dividend was determined by taking the difference between total earnings for fiscal year 2019 and total regular quarterly cash dividends paid during fiscal year 2019, divided by the number of shares outstanding as of October 18, 2019. The cash true-up dividend is payable on December 6, 2019 to stockholders of record as of the close of business on November 22, 2019, and is the result of the Board of Directors' commitment to distribute to stockholders 100% of the annual earnings of the Company for fiscal year 2019.

At September 30, 2019, Capitol Federal Financial, Inc., at the holding company level, had $126.3 million on deposit at the Bank. For fiscal year 2020, it is the intent of the Board of Directors to continue the payout of 100% of the Company's earnings to the Company's stockholders. Dividend payments depend upon a number of factors including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company.

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

The following table presents the balance of stockholders' equity and related information as of the dates presented.
 
September 30,
 
June 30,
 
September 30,
 
2019
 
2019
 
2018
 
(Dollars in thousands)
Stockholders' equity
$
1,336,326

 
$
1,327,099

 
$
1,391,622

Equity to total assets at end of period
14.3
%
 
14.3
%
 
14.7
%


9



The following table presents a reconciliation of total to net shares outstanding as of September 30, 2019.
Total shares outstanding
141,440,030

Less unallocated Employee Stock Ownership Plan ("ESOP") shares and unvested restricted stock
(3,590,958
)
Net shares outstanding
137,849,072


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 September 30, 2019, the Bank and Company exceeded all regulatory capital requirements. The following table presents the Bank's regulatory capital ratios at September 30, 2019.
 
 
 
Regulatory
 
 
 
Requirement For
 
Bank
 
Well-Capitalized
 
Ratios
 
Status
Tier 1 leverage ratio
12.1%
 
5.0
%
Common equity tier 1 capital ratio
24.1
 
6.5

Tier 1 capital ratio
24.1
 
8.0

Total capital ratio
24.3
 
10.0


The following table presents a reconciliation of the Bank's equity under GAAP to regulatory capital amounts as of September 30, 2019 (dollars in thousands):
Total Bank equity as reported under GAAP
$
1,168,986

Accumulated Other Comprehensive Income ("AOCI")
14,899

Goodwill and other intangibles, net of deferred tax liabilities
(14,848
)
Total tier 1 capital
1,169,037

ACL
9,226

Total capital
$
1,178,263


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

Except for the historical information contained in this press release, the matters discussed herein may be deemed to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions. The words "may," "could," "should," "would," "will," "believe," "anticipate," "estimate," "expect," "intend," "plan," and similar expressions are intended to identify forward-looking statements. Forward-looking statements involve risks and uncertainties, including the possibility that expected cost savings, synergies and other benefits from the acquisition of CCB might not be realized within the anticipated time frames or at all, 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,
(785) 270-6055
Chief Financial Officer and Treasurer
(785) 231-6360
 
 

10




SUPPLEMENTAL FINANCIAL INFORMATION
 
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except per share amounts)
 
September 30,
 
September 30,
 
2019
 
2018
ASSETS:
 
 
 
Cash and cash equivalents (includes interest-earning deposits of $198,809 and $122,733)
$
220,370

 
$
139,055

Securities:
 
 
 
AFS, at estimated fair value (amortized cost of $1,191,455 and $718,564)
1,204,863

 
714,614

HTM, at amortized cost (estimated fair value of $0 and $601,071)

 
612,318

Loans receivable, net (ACL of $9,226 and $8,463)
7,416,747

 
7,514,485

FHLB stock, at cost
98,456

 
99,726

Premises and equipment, net
96,784

 
96,005

Income taxes receivable, net
2

 
2,177

Other assets
302,796

 
271,167

TOTAL ASSETS
$
9,340,018

 
$
9,449,547

 
 
 
 
LIABILITIES:
 
 
 
Deposits
$
5,581,867

 
$
5,603,354

FHLB borrowings
2,139,989

 
2,174,981

Other borrowings
100,000

 
110,052

Advance payments by borrowers for taxes and insurance
65,686

 
65,264

Deferred income tax liabilities, net
14,282

 
21,253

Accounts payable and accrued expenses
101,868

 
83,021

Total liabilities
8,003,692

 
8,057,925

 
 
 
 
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, 141,440,030 and 141,225,516
 
 
shares issued and outstanding as of September 30, 2019 and 2018, respectively
1,414

 
1,412

Additional paid-in capital
1,210,226

 
1,207,644

Unearned compensation, ESOP
(34,692
)
 
(36,343
)
Retained earnings
174,277

 
214,569

AOCI, net of tax
(14,899
)
 
4,340

Total stockholders' equity
1,336,326

 
1,391,622

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
9,340,018

 
$
9,449,547


11



 
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands)
 
For the Three Months Ended
 
For the Year Ended
 
September 30,
 
June 30,
 
September 30,
 
2019
 
2019
 
2019
 
2018
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
70,366

 
$
71,434

 
$
284,229

 
$
260,198

MBS
6,293

 
6,613

 
25,730

 
22,619

FHLB stock
2,156

 
1,865

 
7,823

 
10,962

Investment securities
1,585

 
1,835

 
6,366

 
4,670

Cash and cash equivalents
2,885

 
464

 
5,806

 
23,443

Total interest and dividend income
83,285

 
82,211

 
329,954

 
321,892

 
 
 
 
 
 
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
17,471

 
16,909

 
66,201

 
52,625

FHLB borrowings
15,355

 
12,981

 
54,391

 
67,120

Other borrowings
648

 
640

 
2,972

 
3,374

Total interest expense
33,474

 
30,530

 
123,564

 
123,119

 
 
 
 
 
 
 
 
NET INTEREST INCOME
49,811

 
51,681

 
206,390

 
198,773

 
 
 
 
 
 
 
 
PROVISION FOR CREDIT LOSSES
300

 
450

 
750

 

NET INTEREST INCOME AFTER
 
 
 
 
 
 
 
PROVISION FOR CREDIT LOSSES
49,511

 
51,231

 
205,640

 
198,773

 
 
 
 
 
 
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Deposit service fees
3,159

 
3,131

 
12,740

 
15,636

Income from BOLI
620

 
590

 
2,432

 
1,875

Other non-interest income
2,080

 
1,953

 
6,786

 
4,524

Total non-interest income
5,859

 
5,674

 
21,958

 
22,035

 
 
 
 
 
 
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
13,940

 
13,454

 
53,145

 
46,563

Information technology and related expense
4,080

 
4,652

 
17,615

 
13,999

Occupancy, net
3,264

 
3,224

 
13,032

 
11,455

Regulatory and outside services
1,566

 
1,425

 
5,813

 
5,709

Advertising and promotional
1,647

 
1,447

 
5,244

 
5,034

Deposit and loan transaction costs
596

 
681

 
2,478

 
5,621

Office supplies and related expense
555

 
689

 
2,439

 
1,888

Federal insurance premium
(615
)
 
600

 
1,172

 
3,277

Other non-interest expense
1,297

 
1,519

 
6,006

 
3,356

Total non-interest expense
26,330

 
27,691

 
106,944

 
96,902

INCOME BEFORE INCOME TAX EXPENSE
29,040

 
29,214

 
120,654

 
123,906

INCOME TAX EXPENSE
6,631

 
6,317

 
26,411

 
24,979

NET INCOME
$
22,409

 
$
22,897

 
$
94,243

 
$
98,927



12



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 Year Ended
 
September 30,
 
June 30,
 
September 30,
 
2019
 
2019
 
2019
 
2018
 
(Dollars in thousands, except per share amounts)
Net income
$
22,409

 
$
22,897

 
$
94,243

 
$
98,927

Income allocated to participating securities
(20
)
 
(16
)
 
(55
)
 
(40
)
Net income available to common stockholders
$
22,389

 
$
22,881

 
$
94,188

 
$
98,887

 
 
 
 
 
 
 
 
Average common shares outstanding
137,676,683

 
137,637,428

 
137,614,465

 
134,635,886

Average committed ESOP shares outstanding
124,346

 
83,052

 
62,458

 
62,458

Total basic average common shares outstanding
137,801,029

 
137,720,480

 
137,676,923

 
134,698,344

 
 
 
 
 
 
 
 
Effect of dilutive stock options
65,960

 
67,048

 
58,478

 
60,647

 
 
 
 
 
 
 
 
Total diluted average common shares outstanding
137,866,989

 
137,787,528

 
137,735,401

 
134,758,991

 
 
 
 
 
 
 
 
Net earnings per share:
 
 
 
 
 
 
 
Basic
$
0.16

 
$
0.17

 
$
0.68

 
$
0.73

Diluted
$
0.16

 
$
0.17

 
$
0.68

 
$
0.73

 
 
 
 
 
 
 
 
Antidilutive stock options, excluded from the diluted
 
 
 
 
 
 
average common shares outstanding calculation
439,750

 
457,486

 
470,938

 
541,418




13



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.
 
September 30, 2019
 
June 30, 2019
 
September 30, 2018
 
 
 
 
 
% of
 
 
 
 
 
% of
 
 
 
 
 
% of
 
Amount
 
Rate
 
Total
 
Amount
 
Rate
 
Total
 
Amount
 
Rate
 
Total
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
$
3,873,851

 
3.74
%
 
52.2
%
 
$
3,853,289

 
3.77
%
 
51.4
%
 
$
3,965,692

 
3.74
%
 
52.8
%
Correspondent purchased
2,349,877

 
3.64

 
31.7

 
2,417,307

 
3.64

 
32.2

 
2,505,987

 
3.59

 
33.4

Bulk purchased
252,347

 
2.94

 
3.4

 
264,256

 
2.85

 
3.5

 
293,607

 
2.60

 
3.9

Construction
36,758

 
4.00

 
0.5

 
34,481

 
4.16

 
0.5

 
33,149

 
4.03

 
0.4

Total
6,512,833

 
3.68

 
87.8

 
6,569,333

 
3.69

 
87.6

 
6,798,435

 
3.64

 
90.5

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
583,617

 
4.48

 
7.9

 
612,287

 
4.53

 
8.2

 
426,243

 
4.33

 
5.7

Commercial and industrial
61,094

 
5.14

 
0.8

 
68,243

 
5.20

 
0.9

 
62,869

 
5.00

 
0.9

Construction
123,159

 
4.81

 
1.7

 
118,218

 
4.94

 
1.6

 
80,498

 
4.59

 
1.1

Total
767,870

 
4.58

 
10.4

 
798,748

 
4.65

 
10.7

 
569,610

 
4.44

 
7.7

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
120,587

 
6.15

 
1.6

 
122,696

 
6.38

 
1.6

 
129,588

 
5.97

 
1.7

Other
11,183

 
4.57

 
0.2

 
10,964

 
4.51

 
0.1

 
10,012

 
4.59

 
0.1

Total
131,770

 
6.02

 
1.8

 
133,660

 
6.22

 
1.7

 
139,600

 
5.87

 
1.8

Total loans receivable
7,412,473

 
3.81

 
100.0
%
 
7,501,741

 
3.83

 
100.0
%
 
7,507,645

 
3.74

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ACL
9,226

 
 
 
 
 
9,036

 
 
 
 
 
8,463

 
 
 
 
Discounts/unearned loan fees
31,058

 
 
 
 
 
31,748

 
 
 
 
 
33,933

 
 
 
 
Premiums/deferred costs
(44,558
)
 
 
 
 
 
(46,511
)
 
 
 
 
 
(49,236
)
 
 
 
 
Total loans receivable, net
$
7,416,747

 
 
 
 
 
$
7,507,468

 
 
 
 
 
$
7,514,485

 
 
 
 




14



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 were sold are included in repayments. Loan endorsements are not included in the activity in the following table because a new loan is not generated at the time of the endorsement. The endorsed balance and rate are included in the ending loan portfolio balance and rate. During the quarter ended September 30, 2019, the Bank endorsed $99.9 million of one- to four-family loans, reducing the average rate on those loans by 80 basis points. Commercial loan renewals are not included in the activity in the following table unless new funds are disbursed at the time of renewal.
 
For the Three Months Ended
 
September 30, 2019
 
June 30, 2019
 
March 31, 2019
 
December 31, 2018
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Beginning balance
$
7,501,741

 
3.83
%
 
$
7,564,076

 
3.82
%
 
$
7,518,887

 
3.78
%
 
$
7,507,645

 
3.74
%
Originated and refinanced:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
188,753

 
3.60

 
121,871

 
4.09

 
78,678

 
4.58

 
116,032

 
4.59

Adjustable
59,550

 
4.37

 
63,341

 
4.87

 
123,006

 
4.80

 
73,711

 
4.98

Purchased and participations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
49,161

 
4.12

 
29,447

 
4.65

 
35,387

 
5.46

 
72,140

 
4.60

Adjustable
12,305

 
3.55

 
10,018

 
3.85

 
11,331

 
4.01

 
42,651

 
4.88

Change in undisbursed loan funds
12,293

 
 
 
34,742

 
 
 
30,500

 
 
 
(25,315
)
 
 
Repayments
(410,624
)
 
 
 
(321,439
)
 
 
 
(233,625
)
 
 
 
(267,469
)
 
 
Principal (charge-offs)/recoveries, net
(110
)
 
 
 
(33
)
 
 
 
61

 
 
 
95

 
 
Other
(596
)
 
 
 
(282
)
 
 
 
(149
)
 
 
 
(603
)
 
 
Ending balance
$
7,412,473

 
3.81

 
$
7,501,741

 
3.83

 
$
7,564,076

 
3.82

 
$
7,518,887

 
3.78

 
For the Year Ended
 
September 30, 2019
 
September 30, 2018
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Beginning balance
$
7,507,645

 
3.74
%
 
$
7,182,751

 
3.61
%
Originated and refinanced:
 
 
 
 
 
 
 
Fixed
505,334

 
4.10

 
447,890

 
4.07

Adjustable
319,608

 
4.77

 
185,495

 
4.40

Purchased and participations:
 
 
 
 
 
 
 
Fixed
186,135

 
4.64

 
364,508

 
3.98

Adjustable
76,305

 
4.40

 
162,873

 
3.73

Loans added in CCB acquisition, net

 

 
299,659

 
4.77

Change in undisbursed loan funds
52,220

 
 
 
(31,004
)
 
 
Repayments
(1,233,157
)
 
 
 
(1,102,624
)
 
 
Principal recoveries, net
13

 
 
 
65

 
 
Other
(1,630
)
 
 
 
(1,968
)
 
 
Ending balance
$
7,412,473

 
3.81

 
$
7,507,645

 
3.74


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 September 2019, from a nationally recognized consumer rating agency. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. In most cases, the most recent appraisal was obtained at the time of origination.
 
September 30, 2019
 
September 30, 2018
 
 
 
% of
 
Credit
 
 
 
Average
 
 
 
% of
 
Credit
 
 
 
Average
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
(Dollars in thousands)
Originated
$
3,873,851

 
59.8
%
 
768

 
62
%
 
$
140

 
$
3,965,692

 
58.6
%
 
767

 
62
%
 
$
138

Correspondent purchased
2,349,877

 
36.3

 
765

 
65

 
371

 
2,505,987

 
37.1

 
764

 
67

 
378

Bulk purchased
252,347

 
3.9

 
762

 
61

 
304

 
293,607

 
4.3

 
758

 
62

 
304

 
$
6,476,075

 
100.0
%
 
767

 
63

 
186

 
$
6,765,286

 
100.0
%
 
765

 
64

 
186


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 fiscal year, $46.2 million and $85.1 million, respectively, were refinanced from other lenders.
 
For the Three Months Ended
 
For the Year Ended
 
September 30, 2019
 
September 30, 2019
 
 
 
 
 
Credit
 
 
 
 
 
Credit
 
Amount
 
LTV
 
Score
 
Amount
 
LTV
 
Score
 
(Dollars in thousands)
Originated
$
165,713

 
77
%
 
766

 
$
494,739

 
78
%
 
760

Refinanced by Bank customers
43,666

 
69

 
757

 
86,381

 
68

 
752

Correspondent purchased
43,966

 
72

 
762

 
166,413

 
73

 
762

 
$
253,345

 
75

 
764

 
$
747,533

 
76

 
760


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 fiscal year ended September 30, 2019.
 
 
For the Three Months Ended
 
For the Year Ended
 
 
September 30, 2019
 
September 30, 2019
State
 
Amount
 
% of Total
 
Rate
 
Amount
 
% of Total
 
Rate
 
 
(Dollars in thousands)
Kansas
 
$
178,558

 
70.5
%
 
3.42
%
 
$
507,341

 
67.9
%
 
3.92
%
Missouri
 
51,024

 
20.1

 
3.47

 
128,751

 
17.2

 
3.95

Texas
 
12,732

 
5.0

 
3.87

 
64,098

 
8.6

 
4.12

Other states
 
11,031

 
4.4

 
3.79

 
47,343

 
6.3

 
4.23

 
 
$
253,345

 
100.0
%
 
3.47

 
$
747,533

 
100.0
%
 
3.96


16



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 September 30, 2019, 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. As of June 30, 2019, one- to four-family loan origination and refinance commitments and one- to four-family correspondent loan purchase commitments totaled $115.6 million.
 
Fixed-Rate
 
 
 
 
 
 
 
15 years
 
More than
 
Adjustable-
 
Total
 
or less
 
15 years
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Originate/refinance
$
16,826

 
$
44,828

 
$
14,679

 
$
76,333

 
3.40
%
Correspondent
5,862

 
60,136

 
9,621

 
75,619

 
3.65

 
$
22,688

 
$
104,964

 
$
24,300

 
$
151,952

 
3.53

 
 
 
 
 
 
 
 
 
 
Rate
2.95
%
 
3.73
%
 
3.18
%
 
 
 
 


Commercial Loans: During the current fiscal year, the Bank originated $164.1 million of commercial loans and entered into commercial real estate loan participations totaling $96.0 million. During the quarter ended September 30, 2019, the Bank processed commercial loan disbursements, excluding lines of credit, of approximately $40 million at a weighted average rate of 4.93%. Additionally, a single $45 million commercial real estate participation loan was repaid in full during the current quarter.

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 September 30, 2019. Included in the gross loan amounts in the table, which does not include outstanding commitments, are fixed-rate loans totaling $487.1 million at a weighted average rate of 4.33% and adjustable-rate loans totaling $342.8 million at a weighted average rate of 4.99%. The weighted average rate of fixed-rate loans is lower than that of adjustable-rate loans due primarily to the majority of the fixed-rate loans in the portfolio at September 30, 2019 having shorter terms to maturity.
 
Unpaid
 
Undisbursed
 
Gross Loan
 
Outstanding
 
 
 
% of
 
Principal
 
Amount
 
Amount
 
Commitments
 
Total
 
Total
 
(Dollars in thousands)
Real estate rental and leasing
$
262,652

 
$
44,558

 
$
307,210

 
$
3,123

 
$
310,333

 
33.7
%
Health care and social assistance
219,715

 
38,981

 
258,696

 
28,426

 
287,122

 
31.2

Accommodation and food services
116,313

 
29,984

 
146,297

 
48,100

 
194,397

 
21.1

Arts, entertainment, and recreation
35,009

 

 
35,009

 

 
35,009

 
3.8

Retail trade
27,628

 
2,794

 
30,422

 

 
30,422

 
3.3

Construction
14,446

 
1,962

 
16,408

 
404

 
16,812

 
1.8

Other
31,013

 
4,774

 
35,787

 
11,225

 
47,012

 
5.1

 
$
706,776

 
$
123,053

 
$
829,829

 
$
91,278

 
$
921,107

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average rate
4.53
%
 
4.99
%
 
4.60
%
 
5.28
%
 
4.67
%
 
 


17



The following table summarizes the Bank's commercial real estate loans and loan commitments by state as of September 30, 2019.
 
Unpaid
 
Undisbursed
 
Gross Loan
 
Outstanding
 
 
 
% of
 
Principal
 
Amount
 
Amount
 
Commitments
 
Total
 
Total
 
(Dollars in thousands)
Kansas
$
284,113

 
$
14,211

 
$
298,324

 
$
14,547

 
$
312,871

 
34.0
%
Missouri
208,888

 
53,337

 
262,225

 
30,931

 
293,156

 
31.8

Texas
118,911

 
46,721

 
165,632

 
40,000

 
205,632

 
22.3

Nebraska
29,752

 
4,010

 
33,762

 

 
33,762

 
3.7

Kentucky
22,285

 
3,274

 
25,559

 

 
25,559

 
2.8

California
6,107

 

 
6,107

 
5,800

 
11,907

 
1.3

Other
36,720

 
1,500

 
38,220

 

 
38,220

 
4.1

 
$
706,776

 
$
123,053

 
$
829,829

 
$
91,278

 
$
921,107

 
100.0
%

The following table presents the Bank's commercial loan portfolio and outstanding loan commitments, categorized by gross loan amount (unpaid principal plus undisbursed amounts) or outstanding loan commitment amount, as of September 30, 2019.
 
Count
 
Amount
 
(Dollars in thousands)
Greater than $30 million
5

 
$
190,672

>$15 to $30 million
11

 
271,702

>$10 to $15 million
5

 
60,614

>$5 to $10 million
15

 
94,058

$1 to $5 million
88

 
194,876

Less than $1 million
1,181

 
187,054

 
1,305

 
$
998,976


18


Asset Quality
The following tables present loans 30 to 89 days delinquent, non-performing loans, and other real estate owned ("OREO") as of the dates indicated. Of the loans 30 to 89 days delinquent at September 30, 2019, approximately 67% were 59 days or less delinquent. Non-performing loans are loans that are 90 or more days delinquent or in foreclosure, and nonaccrual loans that are less than 90 days delinquent but are required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements even if the loans are current. Non-performing assets include non-performing loans and OREO. Over the past 12 months, OREO properties acquired in settlement of one- to four-family loans were owned by the Bank, on average, for approximately four months before they were sold.
 
Loans Delinquent for 30 to 89 Days at:
 
September 30, 2019
 
June 30, 2019
 
March 31, 2019
 
December 31, 2018
 
September 30, 2018
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
90

 
$
7,223

 
94

 
$
7,749

 
79

 
$
8,694

 
118

 
$
9,765

 
129

 
$
10,647

Correspondent purchased
9

 
2,721

 
14

 
3,727

 
13

 
4,133

 
10

 
1,969

 
18

 
3,803

Bulk purchased
16

 
3,581

 
13

 
2,249

 
13

 
2,722

 
15

 
2,780

 
15

 
3,502

Commercial
8

 
826

 
12

 
1,699

 
13

 
1,361