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

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false0001490906 0001490906 2020-04-29 2020-04-29


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

FORM 8-K

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

Date of Report (Date of earliest event reported)
April 29, 2020

 
 
 
 
 
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 April 29, 2020, announcing financial results for the quarter ended March 31, 2020 is attached hereto as Exhibit 99, and is incorporated herein by reference.

ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(d) Exhibits

Exhibit 99 – Press release announcing earnings dated April 29, 2020
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: April 29, 2020
By: /s/ Kent G. Townsend
 
 
 
 
 
 
 
 
Kent G. Townsend, Executive Vice-President,
 
 
Chief Financial Officer, and Treasurer
 


(Back To Top)

Section 2: EX-99 (PRESS RELEASE ANNOUNCING EARNINGS)

Exhibit



403791198_cffnlogo.jpg
NEWS RELEASE
FOR IMMEDIATE RELEASE
April 29, 2020
CAPITOL FEDERAL FINANCIAL, INC.® 
REPORTS SECOND QUARTER FISCAL YEAR 2020 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 quarter ended March 31, 2020. Detailed results will be available in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, which will be filed with the Securities and Exchange Commission ("SEC") on or about May 8, 2020 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 $4.3 million;
provision for credit losses of $22.1 million reflecting the deterioration of economic conditions due to the Coronavirus Disease 2019 ("COVID-19") pandemic;
basic and diluted earnings per share of $0.03;
net interest margin of 2.19%;
annualized loan growth of 3.7%;
annualized deposit growth of 13.5% due mainly to a successful President's Day certificate of deposit campaign during February 2020;
paid dividends of $11.7 million, or $0.085 per share; and
on April 21, 2020, announced a cash dividend of $0.085 per share, payable on May 15, 2020 to stockholders of record as of the close of business on May 1, 2020.

Response to and Impact of the COVID-19 Pandemic

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

Lobby services have been changed to appointment only while drive-through, mobile, and online banking have become the Bank's primary channels of serving customers. Retail loan closings have been conducted with customers coming to our drive-through facilities and commercial loans are closed in person only when necessary. All employees continue to be paid their regular salary and receive full benefits.

Loan modification programs - In late March 2020, the Bank announced loan modification programs to support and provide relief for its borrowers during the COVID-19 pandemic. Generally, loan modifications under these programs ("COVID-19 loan modifications") for one- to four-family loans and consumer loans consist of a three-month payment forbearance, with the deferred principal, interest, and escrow added to the loan payoff amount.  COVID-19 loan modifications of commercial loans mainly consist of a six-month interest-only payment period. The COVID-19 loan modifications are not considered troubled debt restructurings per current accounting principles generally accepted in the United States of America ("GAAP").

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As of April 22, 2020, the Bank had processed COVID-19 loan modifications for 254 one- to four-family loans totaling $62.7 million, for which the borrowers had a weighted average credit score of 729, and 90 consumer loans totaling $2.4 million.  As of April 22, 2020, 289 additional COVID-19 loan modification agreements had been sent to one- to four-family borrowers but were still pending.  The pending COVID-19 loan modifications had a total balance of $56.0 million and a weighted average credit score of 729.

As of April 22, 2020, the Bank had processed 102 COVID-19 loan modifications of commercial loans totaling $115.6 million, and were in the process of modifying an additional 79 commercial loans totaling $157.0 million.  

Small Business Administration ("SBA") Payroll Protection Program ("PPP") loans - The PPP authorized up to $349 billion in forgivable loans to small businesses to pay their employees during the first eight weeks after receiving their loan proceeds with loan payments deferred for six months and the final balance due 24 months after funding, subject to potential debt forgiveness. These loans are fully guaranteed by the SBA. The PPP application process started April 3, 2020 and the full $349 billion was exhausted on April 16, 2020. The Bank processed 338 applications for PPP loans totaling $33.7 million, of which $29.6 million had been funded as of April 22, 2020. The origination fees associated with the PPP loans processed by the Bank are expected to be $1.4 million. Based on discussions with borrowers, we anticipate that more than 75% of the balances of these loans will be forgiven after eight weeks from the funding date. On April 24, 2020, new COVID-19 aid legislation was enacted which included more than $320 billion in additional PPP loan funding. The Bank continues to accept applications for PPP loans.

Provision for credit losses and allowance for credit losses - As a result of the deterioration of economic conditions due to the COVID-19 pandemic, the Bank recorded a provision for credit losses of $22.1 million during the current quarter. The provision for credit losses increased the allowance for credit losses ("ACL") to $31.2 million at March 31, 2020 resulting in an ACL to loans receivable ratio of 0.42% compared to 0.13% at December 31, 2019. The ACL to loans receivable ratio for one- to four-family loans was 0.16% at March 31, 2020 compared to 0.06% at December 31, 2019 and the ACL to loans receivable ratio for commercial loans was 2.63% at March 31, 2020 compared to 0.72% at December 31, 2019. See additional discussion regarding the Bank's ACL and loan portfolio composition in the Financial Condition section below.

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

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

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

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

Markets responded to the COVID-19 pandemic with a dramatic lowering of interest rates in a short period of time. However, while liability costs decreased mortgage rates did not, primarily due to a rapid and unexpected increase in refinance activity. The Bank was able to restructure the cost of $350.0 million of its Federal Home Loan Bank Topeka ("FHLB") advances by lowering their cost 72 bps, which reduced our interest expense on those advances immediately and primarily led to the stability in our net interest margin. Given current levels of yields on new loans and the amount of one- to four-family refinances and endorsements of terms to lower current market rates, the yield on the total loan portfolio is likely to continue to decrease. Additionally, yields on new securities are lower than the portfolio yield. While the Bank had begun to lower deposit rates in February, by late March and into the month of April, the Bank was able to lower deposit rates further in response to the changes in market rates and competition. Considering the drastic changes in market rates and the continued economic uncertainty, it is likely that with the changes the Bank has made to its cost of funding, if the rates on mortgage loans are reduced as capacity constraints are lessened in the mortgage origination market, our net

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

 
$
69,914

 
$
(301
)
 
(0.4
)%
Mortgage-backed securities ("MBS")
5,866

 
6,102

 
(236
)
 
(3.9
)
FHLB stock
1,714

 
1,826

 
(112
)
 
(6.1
)
Investment securities
1,382

 
1,507

 
(125
)
 
(8.3
)
Cash and cash equivalents
380

 
687

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

 
$
80,036

 
$
(1,081
)
 
(1.4
)

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

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

 
$
17,962

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

 
13,377

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

 
$
31,339

 
$
(1,052
)
 
(3.4
)

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

Provision for Credit Losses
The Bank recorded a provision for credit losses during the current quarter of $22.1 million, compared to a provision for credit losses during the prior quarter of $225 thousand. The $22.1 million provision for credit losses in the current quarter was in recognition of the deterioration of economic conditions as a result of the COVID-19 pandemic. The provision for credit losses during the current quarter increased the ACL to $31.2 million at March 31, 2020 resulting in an ACL to loans receivable ratio of 0.42%, compared to $9.4

3



million of ACL at December 31, 2019 and an ACL to loans receivable ratio of 0.13%. See additional discussion regarding the composition of the Bank's loan portfolio at March 31, 2020 in the Financial Condition sections below.

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

 
$
3,062

 
$
(279
)
 
(9.1
)%
Insurance commissions
400

 
691

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

 
1,751

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

 
$
5,504

 
$
(833
)
 
(15.1
)

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

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

 
$
13,471

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

 
4,141

 
127

 
3.1

Occupancy, net
3,449

 
3,207

 
242

 
7.5

Advertising and promotional
1,359

 
1,410

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

 
1,343

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

 
711

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

 
519

 
73

 
14.1

Other non-interest expense
1,286

 
1,698

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

 
$
26,500

 
$
(336
)
 
(1.3
)

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

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


4



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

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

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

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

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

 
$
142,429

 
$
(2,902
)
 
(2.0
)%
MBS
11,968

 
12,824

 
(856
)
 
(6.7
)
FHLB stock
3,540

 
3,802

 
(262
)
 
(6.9
)
Investment securities
2,889

 
2,946

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

 
2,457

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

 
$
164,458

 
$
(5,467
)
 
(3.3
)

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

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

5




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

 
$
31,821

 
$
3,945

 
12.4
 %
Borrowings
25,860

 
27,739

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

 
$
59,560

 
$
2,066

 
3.5


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

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

Provision for Credit Losses
The Bank recorded a provision for credit losses during the current period of $22.3 million, compared to no provision for credit losses during the prior year period. The $22.3 million provision for credit losses in the current period was primarily related to the deterioration of economic conditions as a result of COVID-19.

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

 
$
6,443

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

 
1,167

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

 
2,815

 
424

 
15.1

Total non-interest income
$
10,175

 
$
10,425

 
$
(250
)
 
(2.4
)

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

6




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

 
$
25,751

 
$
955

 
3.7
 %
Information technology and related expense
8,409

 
8,883

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

 
6,544

 
112

 
1.7

Advertising and promotional
2,769

 
2,150

 
619

 
28.8

Regulatory and outside services
2,640

 
2,822

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

 
1,201

 
188

 
15.7

Office supplies and related expense
1,111

 
1,195

 
(84
)
 
(7.0
)
Federal insurance premium

 
1,187

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

 
3,190

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

 
$
52,923

 
$
(259
)
 
(0.5
)

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

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

The Company's efficiency ratio was 48.97% for the current period compared to 45.89% for the prior year period. The change in the efficiency ratio was due to lower net interest income in the current period compared to the prior year period.

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


7



Financial Condition as of March 31, 2020
The Federal Reserve, in response to economic risks resulting from COVID-19 responses by businesses, individuals, and government entities, returned to a zero-interest rate policy in March 2020. This was after most broader market rates decreased significantly in response to evolving news about COVID-19. Deteriorating economic conditions include more than 20 million people unemployed in the United States in about one month's time, cuts in consumer spending on almost all categories of purchases except groceries and staples, closure or significantly reduced operations of restaurants, bars, travel, and entertainment and hospitality venues. In our local markets, governments put stay-at-home orders into effect which only allows for essential businesses to remain open. As previously described, we adjusted our operations in response to the orders and have worked with both our retail and commercial customers to help them manage their debt during this period of economic uncertainty as our regulators or The Coronavirus Aid, Relief, and Economic Security ("CARES") Act have allowed. Given the current level of total assets and the economic and interest rate environment, it is unlikely that the total loan portfolio will increase materially during the remainder of fiscal year 2020. We have been responding and expect to continue to respond to local market conditions regarding the loan and deposit rates we offer.

Total assets were $9.37 billion at March 31, 2020, an increase of $134.6 million, or 1.5%, from December 31, 2019, due primarily to increases in the loan portfolio and cash and cash equivalents. The increase in cash and cash equivalents was due mainly to increasing the amount of cash on hand in anticipation of customer cash needs during the COVID-19 pandemic. Total loans were $7.48 billion at March 31, 2020, an increase of $47.6 million, or 0.6%, from December 31, 2019. The increase was primarily in the one- to four-family correspondent loan portfolio and commercial construction portfolio, partially offset by an increase in ACL. During the current quarter, the Bank originated and refinanced $193.6 million of one- to four-family and consumer loans with a weighted average rate of 3.45% and purchased $144.6 million of one- to four-family loans from correspondent lenders with a weighted average rate of 3.40%. The Bank also originated $35.2 million of commercial loans with a weighted average rate of 4.42%.

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

Total assets increased $31.2 million, or 0.3% from September 30, 2019 to March 31, 2020, due mainly to loan portfolio growth. Total loans increased $60.1 million from September 30, 2019 to March 31, 2020. The increase was primarily in the originated one- to four-family loan portfolio. During the current year period, the Bank originated and refinanced $450.0 million of one- to four-family and consumer loans with a weighted average rate of 3.49% and purchased $253.1 million of one- to four-family loans from correspondent lenders with a weighted average rate of 3.42%. The Bank also originated $67.6 million of commercial loans with a weighted average rate of 4.65% and entered into commercial real estate loan participations of $28.4 million at a weighted average rate of 4.65%. The commercial loan portfolio totaled $772.7 million at March 31, 2020 and was composed of 76% commercial real estate, 16% commercial construction, and 8% commercial and industrial. Total commercial real estate and commercial construction potential exposure, including undisbursed amounts and outstanding commitments totaling $167.2 million, was $877.7 million at March 31, 2020. Total commercial and industrial potential exposure, including undisbursed amounts and outstanding commitments of $18.8 million, was $80.9 million at March 31, 2020.

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

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

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


8



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

At March 31, 2020, Capitol Federal Financial, Inc., at the holding company level, had $101.0 million on deposit at the Bank. For fiscal year 2020, it is currently the intent of the Board of Directors to continue the payout of 100% of the Company's earnings to the Company's stockholders. Dividend payments depend upon a number of factors including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company.

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

The following table presents the balance of stockholders' equity and related information as of the dates presented.
 
March 31,
 
September 30,
 
March 31,
 
2020
 
2019
 
2019
 
(Dollars in thousands)
Stockholders' equity
$
1,287,793

 
$
1,336,326

 
$
1,355,983

Equity to total assets at end of period
13.7
%
 
14.3
%
 
14.2
%

The following table presents a reconciliation of total to net shares outstanding as of March 31, 2020.
Total shares outstanding
141,512,165

Less unallocated Employee Stock Ownership Plan ("ESOP") shares and unvested restricted stock
(3,500,660
)
Net shares outstanding
138,011,505


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. In September 2019, the regulatory agencies, including the Office of the Comptroller of the Currency and Board of Governors of the Federal Reserve System, adopted a final rule, effective January 1, 2020, creating a community bank leverage ratio ("CBLR") for institutions with total consolidated assets of less than $10 billion and that meet other qualifying criteria. The CBLR provides for a simple measure of capital adequacy for qualifying institutions. According to the final rule, qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules and to have met the well-capitalized ratio requirements. In April 2020, the federal bank regulatory agencies announced the issuance of two interim final rules, effective immediately, to provide temporary relief to community banking organizations. Under the interim final rules, the CBLR requirement is a minimum of 8% for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. The Bank elected the CBLR framework during the current quarter. As of March 31, 2020, the Bank's CBLR was 12.4%, which exceeded the minimum requirement.

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

Accumulated Other Comprehensive Income ("AOCI")
21,978

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



9



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: potential adverse impacts of the ongoing COVID-19 pandemic and any governmental or societal responses thereto on the economic conditions in the Company's local market areas and other market areas where the Bank has lending relationships, on other aspects of the Company's business operations and on financial markets; 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)
 
March 31,
 
September 30,
 
2020
 
2019
ASSETS:
 
 
 
Cash and cash equivalents (includes interest-earning deposits of $5,512 and $198,809)
$
118,374

 
$
220,370

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

 
1,204,863

Loans receivable, net (ACL of $31,196 and $9,226)
7,476,805

 
7,416,747

FHLB stock, at cost
101,575

 
98,456

Premises and equipment, net
98,589

 
96,784

Income taxes receivable, net
4,255

 
2

Other assets
335,558

 
302,796

TOTAL ASSETS
$
9,371,193

 
$
9,340,018

 
 
 
 
LIABILITIES:
 
 
 
Deposits
$
5,774,619

 
$
5,581,867

Borrowings
2,115,869

 
2,239,989

Advance payments by borrowers for taxes and insurance
55,306

 
65,686

Deferred income tax liabilities, net
10,236

 
14,282

Accounts payable and accrued expenses
127,370

 
101,868

Total liabilities
8,083,400

 
8,003,692

 
 
 
 
STOCKHOLDERS' EQUITY:
 
 
 
Preferred stock, $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, 141,512,165 and 141,440,030
 
 
 shares issued and outstanding as of March 31, 2020 and September 30, 2019, respectively
1,415

 
1,414

Additional paid-in capital
1,211,466

 
1,210,226

Unearned compensation, ESOP
(33,866
)
 
(34,692
)
Retained earnings
130,756

 
174,277

AOCI, net of tax
(21,978
)
 
(14,899
)
Total stockholders' equity
1,287,793

 
1,336,326

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

 
$
9,340,018


11



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

 
$
69,914

 
$
139,527

 
$
142,429

MBS
5,866

 
6,102

 
11,968

 
12,824

FHLB stock
1,714

 
1,826

 
3,540

 
3,802

Investment securities
1,382

 
1,507

 
2,889

 
2,946

Cash and cash equivalents
380

 
687

 
1,067

 
2,457

Total interest and dividend income
78,955

 
80,036

 
158,991

 
164,458

 
 
 
 
 
 
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
17,804

 
17,962

 
35,766

 
31,821

Borrowings
12,483

 
13,377

 
25,860

 
27,739

Total interest expense
30,287

 
31,339

 
61,626

 
59,560

 
 
 
 
 
 
 
 
NET INTEREST INCOME
48,668

 
48,697

 
97,365

 
104,898

 
 
 
 
 
 
 
 
PROVISION FOR CREDIT LOSSES
22,075

 
225

 
22,300

 

NET INTEREST INCOME AFTER
 
 
 
 
 
 
 
PROVISION FOR CREDIT LOSSES
26,593

 
48,472

 
75,065

 
104,898

 
 
 
 
 
 
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Deposit service fees
2,783

 
3,062

 
5,845

 
6,443

Insurance commissions
400

 
691

 
1,091

 
1,167

Other non-interest income
1,488

 
1,751

 
3,239

 
2,815

Total non-interest income
4,671

 
5,504

 
10,175

 
10,425

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

 
13,471

 
26,706

 
25,751

Information technology and related expense
4,268

 
4,141

 
8,409

 
8,883

Occupancy, net
3,449

 
3,207

 
6,656

 
6,544

Advertising and promotional
1,359

 
1,410

 
2,769

 
2,150

Regulatory and outside services
1,297

 
1,343

 
2,640

 
2,822

Deposit and loan transaction costs
678

 
711

 
1,389

 
1,201

Office supplies and related expense
592

 
519

 
1,111

 
1,195

Federal insurance premium

 

 

 
1,187

Other non-interest expense
1,286

 
1,698

 
2,984

 
3,190

Total non-interest expense
26,164

 
26,500

 
52,664

 
52,923

INCOME BEFORE INCOME TAX EXPENSE
5,100

 
27,476

 
32,576

 
62,400

INCOME TAX EXPENSE
824

 
4,965

 
5,789

 
13,463

NET INCOME
$
4,276

 
$
22,511

 
$
26,787

 
$
48,937



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 Six Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2020
 
2019
 
2020
 
2019
 
(Dollars in thousands, except per share amounts)
Net income
$
4,276

 
$
22,511

 
$
26,787

 
$
48,937

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

 
$
22,492

 
$
26,765

 
$
48,918

 
 
 
 
 
 
 
 
Average common shares outstanding
137,926,574

 
137,897,561

 
137,911,988

 
137,571,533

Average committed ESOP shares outstanding
41,753

 
449

 
20,988

 
20,876

Total basic average common shares outstanding
137,968,327

 
137,898,010

 
137,932,976

 
137,592,409

 
 
 
 
 
 
 
 
Effect of dilutive stock options
32,007

 
78,112

 
55,673

 
48,717

 
 
 
 
 
 
 
 
Total diluted average common shares outstanding
138,000,334

 
137,976,122

 
137,988,649

 
137,641,126

 
 
 
 
 
 
 
 
Net earnings per share:
 
 
 
 
 
 
 
Basic
$
0.03

 
$
0.16

 
$
0.19

 
$
0.36

Diluted
$
0.03

 
$
0.16

 
$
0.19

 
$
0.36

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

 
435,750

 
387,979

 
529,261




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.
 
March 31, 2020
 
December 31, 2019
 
September 30, 2019
 
 
 
 
 
% of
 
 
 
 
 
% of
 
 
 
 
 
% of
 
Amount
 
Rate
 
Total
 
Amount
 
Rate
 
Total
 
Amount
 
Rate
 
Total
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
$
3,944,782

 
3.68
%
 
52.6
%
 
$
3,927,015

 
3.71
%
 
52.9
%
 
$
3,873,851

 
3.74
%
 
52.2
%
Correspondent purchased
2,385,907

 
3.60

 
31.8

 
2,343,750

 
3.62

 
31.6

 
2,349,877

 
3.64

 
31.7

Bulk purchased
228,730

 
2.88

 
3.1

 
237,691

 
2.93

 
3.2

 
252,347

 
2.94

 
3.4

Construction
35,798

 
3.61

 
0.5

 
38,771

 
3.82

 
0.5

 
36,758

 
4.00

 
0.5

Total
6,595,217

 
3.62

 
88.0

 
6,547,227

 
3.65

 
88.2

 
6,512,833

 
3.68

 
87.8

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
584,236

 
4.45

 
7.8

 
583,848

 
4.48

 
7.9

 
583,617

 
4.48

 
7.9

Commercial and industrial
62,153

 
4.62

 
0.8

 
57,019

 
4.97

 
0.8

 
61,094

 
5.14

 
0.8

Construction
126,266

 
4.40

 
1.7

 
107,372

 
4.68

 
1.4

 
123,159

 
4.81

 
1.7

Total
772,655

 
4.45

 
10.3

 
748,239

 
4.54

 
10.1

 
767,870

 
4.58

 
10.4

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
114,571

 
5.67

 
1.5

 
118,491

 
5.73

 
1.6

 
120,587

 
6.15

 
1.6

Other
10,837

 
4.56

 
0.2

 
10,877

 
4.58

 
0.1

 
11,183

 
4.57

 
0.2

Total
125,408

 
5.58

 
1.7

 
129,368

 
5.63

 
1.7

 
131,770

 
6.02

 
1.8

Total loans receivable
7,493,280

 
3.74

 
100.0
%
 
7,424,834

 
3.77

 
100.0
%
 
7,412,473

 
3.81

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ACL
31,196

 
 
 
 
 
9,435

 
 
 
 
 
9,226

 
 
 
 
Discounts/unearned loan fees
29,645

 
 
 
 
 
30,323

 
 
 
 
 
31,058

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

 
 
 
 
 
$
7,429,207

 
 
 
 
 
$
7,416,747

 
 
 
 


14



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

 
3.77
%
 
$
7,412,473

 
3.81
%
 
$
7,501,741

 
3.83
%
 
$
7,564,076

 
3.82
%
Originated and refinanced:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
172,891

 
3.44

 
233,693

 
3.52

 
188,753

 
3.60

 
121,871

 
4.09

Adjustable
55,946

 
4.11

 
55,126

 
4.30

 
59,550

 
4.37

 
63,341

 
4.87

Purchased and participations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
125,612

 
3.46

 
123,118

 
3.77

 
49,161

 
4.12

 
29,447

 
4.65

Adjustable
18,985

 
2.96

 
13,801

 
3.06

 
12,305

 
3.55

 
10,018

 
3.85

Change in undisbursed loan funds
24,049

 
 
 
(9,743
)
 
 
 
12,293

 
 
 
34,742

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

 
3.74

 
$
7,424,834

 
3.77

 
$
7,412,473

 
3.81

 
$
7,501,741

 
3.83

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

 
3.81
%
 
$
7,507,645

 
3.74
%
Originated and refinanced:
 
 
 
 
 
 
 
Fixed
406,584

 
3.48

 
194,710

 
4.58

Adjustable
111,072

 
4.20

 
196,717

 
4.87

Purchased and participations:
 
 
 
 
 
 
 
Fixed
248,730

 
3.61

 
107,527

 
4.88

Adjustable
32,786

 
3.00

 
53,982

 
4.70

Change in undisbursed loan funds
14,306

 
 
 
5,185

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

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

 
3.74

 
$
7,564,076

 
3.82


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 annually, with the latest update in September 2019, from a nationally recognized consumer rating agency. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. In most cases, the most recent appraisal was obtained at the time of origination.
 
March 31, 2020
 
September 30, 2019
 
 
 
% of
 
Credit
 
 
 
Average
 
 
 
% of
 
Credit
 
 
 
Average
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
(Dollars in thousands)
Originated
$
3,944,782

 
60.1
%
 
767

 
62
%
 
$
143

 
$
3,873,851

 
59.8
%
 
768

 
62
%
 
$
140

Correspondent purchased
2,385,907

 
36.4

 
764

 
65

 
375

 
2,349,877

 
36.3

 
765

 
65

 
371

Bulk purchased
228,730

 
3.5

 
763

 
61

 
302

 
252,347

 
3.9

 
762

 
61

 
304

 
$
6,559,419

 
100.0
%
 
766

 
63

 
189

 
$
6,476,075

 
100.0
%
 
767

 
63

 
186


The following 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 year period, $127.4 million were refinanced from other lenders.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31, 2020
 
March 31, 2020
 
 
 
 
 
Credit
 
 
 
 
 
Credit
 
Amount
 
LTV
 
Score
 
Amount
 
LTV
 
Score
 
(Dollars in thousands)
Originated
$
133,513

 
75
%
 
764

 
$
305,899

 
75
%
 
766

Refinanced by Bank customers
43,470

 
68

 
758

 
107,993

 
68

 
760

Correspondent purchased
144,597

 
71

 
766

 
253,090

 
71

 
767

 
$
321,580

 
73

 
764

 
$
666,982

 
72

 
765


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 current year period.
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
March 31, 2020
 
March 31, 2020
State
 
Amount
 
% of Total
 
Rate
 
Amount
 
% of Total
 
Rate
 
 
(Dollars in thousands)
Kansas
 
$
153,911

 
47.8
%
 
3.30
%
 
$
361,548

 
54.2
%
 
3.33
%
Missouri
 
59,433

 
18.5

 
3.37

 
119,514

 
17.9

 
3.38

Texas
 
59,371

 
18.5

 
3.29

 
103,439

 
15.5

 
3.32

Other states
 
48,865

 
15.2

 
3.47

 
82,481

 
12.4

 
3.48

 
 
$
321,580

 
100.0
%
 
3.34

 
$
666,982

 
100.0
%
 
3.35


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 March 31, 2020, along with associated weighted average rates. Loan commitments generally have fixed expiration dates or other termination clauses and may require the payment of a rate lock fee. It is expected that some of the loan commitments will expire unfunded, so the amounts reflected in the table below are not necessarily indicative of our future cash needs.
 
Fixed-Rate
 
 
 
 
 
 
 
15 years
 
More than
 
Adjustable-
 
Total
 
or less
 
15 years
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Originate/refinance
$
27,472

 
$
49,544

 
$
12,376

 
$
89,392

 
3.27
%
Correspondent
28,065

 
68,986

 
15,668

 
112,719

 
3.25

 
$
55,537

 
$
118,530

 
$
28,044

 
$
202,111

 
3.26

 
 
 
 
 
 
 
 
 
 
Rate
2.90
%
 
3.50
%
 
2.96
%
 
 
 
 


Commercial Loans: During the current year-to-date period, the Bank originated $67.6 million of commercial loans, entered into commercial real estate loan participations totaling $28.4 million, and processed commercial loan disbursements, excluding lines of credit, of approximately $49 million at a weighted average rate of 4.56%.

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

 
$
45,545

 
$
272,647

 
$

 
$
272,647

 
31.1
%
Hotel
117,462

 
19,137

 
136,599

 
43,757

 
180,356

 
20.5

Retail building
120,333

 
21,609

 
141,942

 
4,999

 
146,941

 
16.7

Multi-family
59,294

 
15,452

 
74,746

 
1,720

 
76,466

 
8.7

One- to four-family property
57,434

 
4,882

 
62,316

 
1,652

 
63,968

 
7.3

Office building
53,469

 
1,039

 
54,508

 
590

 
55,098

 
6.3

Single use building
44,539

 
4,556

 
49,095

 
807

 
49,902

 
5.7

Other
30,869

 
787

 
31,656

 
675

 
32,331

 
3.7

 
$
710,502

 
$
113,007

 
$
823,509

 
$
54,200

 
$
877,709

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


17



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

 
$
10,817

 
$
296,100

 
$
2,919

 
$
299,019

 
34.1
%
Missouri
227,267

 
66,363

 
293,630

 
3,401

 
297,031

 
33.8

Texas
99,316

 
27,934

 
127,250

 
43,697

 
170,947

 
19.5

Nebraska
31,919

 
1,690

 
33,609

 

 
33,609

 
3.8

Kentucky
25,230

 
330

 
25,560

 

 
25,560

 
2.9

California
5,941

 
4,300

 
10,241

 

 
10,241

 
1.2

Other
35,546

 
1,573

 
37,119

 
4,183

 
41,302

 
4.7

 
$
710,502

 
$
113,007

 
$
823,509

 
$
54,200

 
$
877,709

 
100.0
%

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

 
$
13,116

 
$
30,905

 
$
2,910

 
$
33,815

 
41.8
%
Equipment
16,943

 
536

 
17,479

 
70

 
17,549

 
21.7

Business investment
11,993

 
80

 
12,073

 
125

 
12,198

 
15.1

Purchase/lease autos
8,954

 
95

 
9,049

 

 
9,049

 
11.2

Other
6,474

 
1,825

 
8,299

 

 
8,299

 
10.2

 
$
62,153

 
$
15,652

 
$
77,805

 
$
3,105

 
$
80,910

 
100.0
%

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

 
$
121,748

>$15 to $30 million
12

 
296,150

>$10 to $15 million
4

 
50,192

>$5 to $10 million
13

 
83,795

$1 to $5 million
95

 
214,002

Less than $1 million
1,223

 
192,732

 
1,350

 
$
958,619



18



The Bank's commercial lending team is working proactively with our commercial customers as the COVID-19 pandemic continues to present challenging operating conditions. As discussed above, through April 22, 2020, we have modified or are in the process of modifying $272.6 million of commercial loans under our COVID-19 loan modification program. We have also processed 338 PPP loans for $33.7 million, for which we expect to receive approximately $1.4 million in fees. Approximately 60% of PPP loans processed are in the following industries: construction, professional/scientific/technical, health care/social assistance, and retail trade. The following table presents the unpaid principal balance of Bank's commercial real estate loans, by type of primary collateral, and commercial and industrial loans, by business purpose, that either have been modified or are in the process of being modified as of April 22, 2020. The information is split by type of modification and presented as a percentage of total modifications, as well as by a percentage of the related unpaid principal balance of the related property type or business purpose category.
 
Modification Type
 
 
 
% of
 
Interest
 
Payment
 
 
 
% of
 
Property Type/
 
Only
 
Deferral
 
Total
 
Total
 
Business Purpose
 
(Dollars in thousands)
 
 
Commercial real estate
 
 
 
 
 
 
 
 
 
Hotel
$
76,249

 
$
19,266

 
$
95,515

 
35.0
%
 
81.3
%
Senior housing
48,104

 
14,473

 
62,577

 
23.0

 
27.6

Retail building
35,632

 
3,119

 
38,751

 
14.2

 
32.2

Single use building
30,450

 
1,442

 
31,892

 
11.7

 
71.6

Office building
16,415

 
4,375

 
20,790

 
7.6

 
38.9

Multi-family
8,233

 

 
8,233

 
3.0

 
13.9