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Section 1: 10-Q (MARCH 31, 2020 FORM 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
Form 10-Q
________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __ to __
Commission file number: 001-34814
Capitol Federal Financial, Inc.
(Exact name of registrant as specified in its charter)

Maryland
27-2631712
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
 
 
700 South Kansas Avenue,
Topeka,
Kansas
66603
(Address of principal executive offices)
(Zip Code)

(785) 235-1341
(Registrant's telephone number, including area code)
_____________________________________
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock,
par value $0.01 per share
CFFN
The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer            Accelerated filer ☐        Non-accelerated filer ☐
Smaller reporting company         Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

As of May 1, 2020, there were 141,511,716 shares of Capitol Federal Financial, Inc. common stock outstanding.




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




PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except per share amounts)
 
 
 
 
 
March 31,
 
September 30,
 
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 (allowance for credit losses ("ACL") of $31,196 and $9,226)
7,476,805

 
7,416,747

Federal Home Loan Bank Topeka ("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, $.01 par value; 100,000,000 shares authorized, no shares issued or outstanding

 

Common stock, $.01 par value; 1,400,000,000 shares authorized, 141,512,165 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, Employee Stock Ownership Plan ("ESOP")
(33,866
)
 
(34,692
)
Retained earnings
130,756

 
174,277

Accumulated other comprehensive (loss) income ("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

 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 


3


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

 
$
71,657

 
$
139,527

 
$
142,429

Mortgage-backed securities ("MBS")
5,866

 
6,301

 
11,968

 
12,824

FHLB stock
1,714

 
1,831

 
3,540

 
3,802

Investment securities
1,382

 
1,505

 
2,889

 
2,946

Cash and cash equivalents
380

 
743

 
1,067

 
2,457

Total interest and dividend income
78,955

 
82,037

 
158,991

 
164,458

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
17,804

 
16,096

 
35,766

 
31,821

Borrowings
12,483

 
13,344

 
25,860

 
27,739

Total interest expense
30,287

 
29,440

 
61,626

 
59,560

NET INTEREST INCOME
48,668

 
52,597

 
97,365

 
104,898

PROVISION FOR CREDIT LOSSES
22,075

 

 
22,300

 

NET INTEREST INCOME AFTER
 
 
 
 
 
 
 
PROVISION FOR CREDIT LOSSES
26,593

 
52,597

 
75,065

 
104,898

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Deposit service fees
2,783

 
3,091

 
5,845

 
6,443

Insurance commissions
400

 
541

 
1,091

 
1,167

Other non-interest income
1,488

 
1,369

 
3,239

 
2,815

Total non-interest income
4,671

 
5,001

 
10,175

 
10,425

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

 
12,789

 
26,706

 
25,751

Information technology and related expense
4,268

 
4,284

 
8,409

 
8,883

Occupancy, net
3,449

 
3,292

 
6,656

 
6,544

Advertising and promotional
1,359

 
1,390

 
2,769

 
2,150

Regulatory and outside services
1,297

 
1,056

 
2,640

 
2,822

Deposit and loan transaction costs
678

 
465

 
1,389

 
1,201

Office supplies and related expense
592

 
736

 
1,111

 
1,195

Federal insurance premium

 
659

 

 
1,187

Other non-interest expense
1,286

 
1,470

 
2,984

 
3,190

Total non-interest expense
26,164

 
26,141

 
52,664

 
52,923

INCOME BEFORE INCOME TAX EXPENSE
5,100

 
31,457

 
32,576

 
62,400

INCOME TAX EXPENSE
824

 
6,903

 
5,789

 
13,463

NET INCOME
$
4,276

 
$
24,554

 
$
26,787

 
$
48,937

 
 
 
 
 
 
 
 
Basic earnings per share ("EPS")
$
0.03

 
$
0.18

 
$
0.19

 
$
0.36

Diluted EPS
$
0.03

 
$
0.18

 
$
0.19

 
$
0.36

 
 
 
 
 
 
 
 
Basic weighted average common shares
137,968,327

 
137,634,820

 
137,932,976

 
137,592,409

Diluted weighted average common shares
138,000,334

 
137,690,717

 
137,988,649

 
137,641,126

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 

4


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
 
 
 
 
 
 
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
March 31,
 
2020
 
2019
 
2020
 
2019
Net income
$
4,276

 
$
24,554

 
$
26,787

 
$
48,937

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on AFS securities arising during the period,
 
 
 
 
 
 
net of taxes of $(3,332), $(982), $(3,187) and $(2,115)
10,378

 
3,061

 
9,926

 
6,588

Changes in unrealized gains (losses) on cash flow hedges,
 
 
 
 
 
 
 
net of taxes of $7,200, $2,118, $5,459 and $5,246
(22,429
)
 
(6,600
)
 
(17,005
)
 
(16,344
)
Comprehensive (loss) income
$
(7,775
)
 
$
21,015

 
$
19,708

 
$
39,181

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 


5


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended March 31, 2020
 
 
 
Additional
 
Unearned
 
 
 
 
 
Total
 
Common
 
Paid-In
 
Compensation
 
Retained
 
 
 
Stockholders'
 
Stock
 
Capital
 
ESOP
 
Earnings
 
AOCI
 
Equity
Balance at September 30, 2019
$
1,414

 
$
1,210,226

 
$
(34,692
)
 
$
174,277

 
$
(14,899
)
 
$
1,336,326

Net income
 
 
 
 
 
 
22,511

 
 
 
22,511

Other comprehensive income, net of tax
 
 
 
 
 
 
 
4,972

 
4,972

Cumulative effect of adopting Accounting Standards Update ("ASU") 2016-02
 
 
 
 
 
 
88

 
 
 
88

ESOP activity
 
 
169

 
413

 
 
 
 
 
582

Restricted stock activity, net
 
 
(1
)
 
 
 
 
 
 
 
(1
)
Stock-based compensation
 
 
166

 
 
 
 
 
 
 
166

Stock options exercised
1

 
612

 
 
 
 
 
 
 
613

Cash dividends to stockholders ($0.425 per share)
 
 
 
 
 
(58,663
)
 
 
 
(58,663
)
Balance at December 31, 2019
$
1,415

 
$
1,211,172

 
$
(34,279
)
 
$
138,213

 
$
(9,927
)
 
$
1,306,594

Net income
 
 
 
 
 
 
4,276

 
 
 
4,276

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
(12,051
)
 
(12,051
)
ESOP activity
 
 
117

 
413

 
 
 
 
 
530

Stock-based compensation
 
 
152

 
 
 
 
 
 
 
152

Stock options exercised
 
 
25

 
 
 
 
 
 
 
25

Cash dividends to stockholders ($0.085 per share)
 
 
 
 
 
(11,733
)
 
 
 
(11,733
)
Balance at March 31, 2020
1,415

 
1,211,466

 
(33,866
)
 
130,756

 
(21,978
)
 
1,287,793

 
For the Six Months Ended March 31, 2019
 
 
 
Additional
 
Unearned
 
 
 
 
 
Total
 
Common
 
Paid-In
 
Compensation
 
Retained
 
 
 
Stockholders'
 
Stock
 
Capital
 
ESOP
 
Earnings
 
AOCI
 
Equity
Balance at September 30, 2018
$
1,412

 
$
1,207,644

 
$
(36,343
)
 
$
214,569

 
$
4,340

 
$
1,391,622

Net income
 
 
 
 
 
 
24,383

 
 
 
24,383

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

 
 
 
394

ESOP activity
 
 
118

 
413

 
 
 
 
 
531

Stock-based compensation
 
 
95

 
 
 
 
 
 
 
95

Stock options exercised
1

 
466

 
 
 
 
 
 
 
467

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

 
$
1,208,323

 
$
(35,930
)
 
$
173,984

 
$
(1,877
)
 
$
1,345,913

Net income
 
 
 
 
 
 
24,554

 
 
 
24,554

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

 
413

 
 
 
 
 
547

Stock-based compensation
 
 
90

 
 
 
 
 
 
 
90

Stock options exercised
 
 
118

 
 
 
 
 
 
 
118

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

 
1,208,665

 
(35,517
)
 
186,838

 
(5,416
)
 
1,355,983

 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 
 


6


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
 
For the Six Months Ended
 
March 31,
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
26,787

 
$
48,937

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
FHLB stock dividends
(3,540
)
 
(3,802
)
Provision for credit losses
22,300

 

Amortization and accretion of premiums and discounts on securities
556

 
737

Depreciation and amortization of premises and equipment
4,564

 
4,710

Amortization of intangible assets
997

 
1,189

Amortization of deferred amounts related to FHLB advances, net
95

 
4

Common stock committed to be released for allocation - ESOP
1,112

 
1,078

Stock-based compensation
318

 
185

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

 
(9,970
)
Other assets, net
3,649

 
1,418

Income taxes payable/receivable, net
(4,249
)
 
2,291

Deferred income tax liabilities, net
(1,800
)
 
(745
)
Accounts payable and accrued expenses
(12,413
)
 
(13,894
)
Net cash provided by operating activities
38,376

 
32,138

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of AFS securities
(288,319
)
 
(172,506
)
Proceeds from calls, maturities and principal reductions of AFS securities
269,702

 
149,524

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

 
83,692

Proceeds from the redemption of FHLB stock
421

 
97,096

Purchase of FHLB stock

 
(96,199
)
Net change in loans receivable
(82,595
)
 
(57,073
)
Purchase of premises and equipment
(6,497
)
 
(4,583
)
Proceeds from sale of other real estate owned ("OREO")
987

 
1,062

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

 

Net cash (used in) provided by investing activities
(105,811
)
 
1,013

 
 
 
 
 
 
 
(Continued)


7


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
 
For the Six Months Ended
 
March 31,
 
2020
 
2019
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Cash dividends paid
(70,396
)
 
(77,062
)
Net change in deposits
192,752

 
97,757

Proceeds from borrowings
1,186,600

 
2,680,000

Repayments on borrowings
(1,306,600
)
 
(2,625,052
)
Change in advance payments by borrowers for taxes and insurance
(10,380
)
 
(16,963
)
Payment of FHLB prepayment penalties
(4,215
)
 

Stock options exercised
638

 
585

Net cash (used in) provided by financing activities
(11,601
)
 
59,265

 
 
 
 
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS
(79,036
)
 
92,416

 
 
 
 
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS:
 
 
Beginning of period
253,700

 
139,055

End of period
$
174,664

 
$
231,471

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
Operating lease right-of-use assets obtained
$
15,658

 
$

Operating lease liabilities obtained
$
15,543

 
$

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
(Concluded)


8


Notes to Consolidated Financial Statements (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements include the accounts of Capitol Federal Financial, Inc.® (the "Company") and its wholly-owned subsidiary, Capitol Federal Savings Bank (the "Bank"). The Bank has two wholly-owned subsidiaries, Capitol Funds, Inc. and Capital City Investments, Inc. Capitol Funds, Inc. has a wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company. Capital City Investments, Inc. is a real estate and investment holding company. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019, filed with the Securities and Exchange Commission ("SEC"). Interim results are not necessarily indicative of results for a full year.

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Cash, cash equivalents, restricted cash and restricted cash equivalents reported in the statement of cash flows include cash and cash equivalents of $118.4 million and $220.4 million at March 31, 2020 and September 30, 2019, respectively, and restricted cash and cash equivalents of $56.3 million and $33.3 million at March 31, 2020 at September 30, 2019, respectively, which was included in other assets on the consolidated balance sheet.  The restricted cash and cash equivalents relate to the collateral postings to/from the Bank's derivative counterparties associated with the Bank's interest rate swaps.  See additional discussion regarding the interest rate swaps in Note 5. Borrowed Funds.

Net Presentation of Cash Flows Related to Borrowings - At times, the Bank enters into certain FHLB advances with contractual maturities of 90 days or less. Cash flows related to these advances are reported on a net basis in the consolidated statements of cash flows. There was no FHLB advance activity reported on a net basis in the consolidated statements of cash flows during the six months ended March 31, 2020 and 2019.

Leases - The Company leases real estate property for branches, ATMs, and certain equipment. All of the leases in which the Company is the lessee are classified as operating leases. The Company determines if an arrangement is a lease at inception and if the lease is an operating lease or a finance lease.

Operating lease right-of-use assets represent the Company's right to use an underlying asset during the lease term and operating lease liabilities represent the Company's obligation to make lease payments arising from the lease. The right-of-use assets associated with operating leases are recorded in other assets in the Company's consolidated balance sheets. The lease liabilities associated with operating leases are included in accounts payable and accrued expenses on the consolidated balance sheets. The period over which the right-of-use asset is amortized is generally the lesser of the expected remaining term or the remaining useful life of the leased asset. The lease liability is decreased as periodic lease payments are made. The Company performs impairment assessments for right-of-use assets when events or changes in circumstances indicate that their carrying values may not be recoverable.

The calculated amount of the right-of-use assets and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of the minimum remaining lease payments. The Company's lease agreements often include one or more options to renew at the Company's discretion. If, at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company includes the extended term in the calculation of the right-of-use asset and lease liability. Generally, the Company cannot practically determine the interest rate implicit in the lease so the Company's incremental borrowing rate is used as the discount rate for the lease. The Company uses FHLB advance interest rates, which have been deemed as the Company's incremental borrowing rate, at lease inception based upon the term of the lease. For operating leases existing prior to October 1, 2019, the rate for the remaining lease term as of October 1, 2019 was applied. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Lease expense, variable lease expense and short-term lease expense are included in occupancy expense in the Company's consolidated statements of income. For facility-related leases, the Company elected, by lease class, to not separate lease and non-lease components. Lease expense is recognized on a straight-line basis over the lease term. Variable lease expense primarily represents payments such as common area maintenance and utilities and are recognized as expense in the period when those payments are incurred. Short-term lease expense relates to leases with an initial term of 12 months or less. The Company has elected to not record a right-of-use asset or lease liability for short-term leases.

Recent Accounting Pronouncements - In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases. The ASU, as amended, revises lease accounting guidance by requiring that lessees recognize the assets and liabilities arising

9


from leases on the balance sheet. Additionally, the ASU requires entities to disclose both quantitative and qualitative information regarding their leasing activities. The accounting applied by a lessor is largely unchanged from that applied under the previous guidance. In July 2018, the FASB issued ASU 2018-11, Leases, which provides entities with relief from the costs of implementation by allowing the option to not restate comparative periods as part of the transition. The ASU, as amended, became effective for the Company on October 1, 2019. Upon adoption, the Company elected the modified retrospective approach and the optional transition method under which the Company used the effective date as the date of initial application of the amendments. The optional practical expedients the Company elected include: (1) not reassessing whether any expired or existing contracts are or contain leases, (2) not reassessing the classification of any expired or existing contracts, (3) not reassessing initial direct costs for existing leases, and (4) using hindsight for leases existing at adoption date. For leases with an initial term of 12 months or less, the Company elected the short-term lease option, which entails not recognizing right-of-use assets and lease liabilities for these leases. Additionally, the Company elected, for facility-related leases, the practical expedient that allows an entity to elect, by lease class, the ability to not separate lease and non-lease components. Upon adoption, the Company recognized a right-of-use asset of $15.7 million and a lease liability of $15.5 million, related to the Company's non-cancellable operating lease commitments based on the present value of the expected remaining lease payments as of October 1, 2019. The cumulative-effect adjustment to retained earnings at the time of adoption totaled $88 thousand. These ASUs did not have a material impact on the Company's results of operations and cash flows at the time of adoption. The disclosures required by the ASU are included in Note 9. Leases.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU, as amended, replaces the incurred loss impairment methodology in current GAAP, which requires credit losses to be recognized when it is probable that a loss has been incurred, with a new impairment methodology. The new impairment methodology requires an entity to measure, at each reporting date, the expected credit losses of financial assets not measured at fair value, such as loans and loan commitments, over their contractual lives. Under the new impairment methodology, expected credit losses will be measured at each reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU amends the current credit loss measurements for AFS debt securities. Credit losses related to AFS debt securities will be recorded through the ACL rather than as a direct write-down as per current GAAP. The ASU also requires enhanced disclosures related to credit quality and significant estimates and judgments used by management when estimating credit losses. The ASU will become effective for the Company on October 1, 2020. The Company continues to work with a software provider on the application and implementation of the new accounting guidance, which includes assistance with historical data analysis, loan segmentation, model development, and documentation. The integration of the Company's data with the software provider is complete, along with an analysis of the historical data entered into the software. Management is currently working with the software provider on loan portfolio segmentations and model development, including incorporating economic forecasting into the models. While we are currently unable to reasonably estimate the impact of adopting this ASU, we expect the impact of adoption will be influenced by the composition of our loan and securities portfolios as well as the economic conditions and forecasts at the time of adoption.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosures Requirements for Fair Value Measurement. This ASU eliminates, modifies and adds certain disclosure requirements for fair value measurements. The ASU adds disclosure requirements for the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The effective date of this ASU for the Company is October 1, 2020, with early adoption permitted. Entities are allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. Since this ASU only requires disclosure changes, it will not have a significant impact on the Company's consolidated financial condition and results of operations.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include internal-use software license). The effective date of this ASU for the Company is October 1, 2020, with early adoption permitted. The Company is currently evaluating the effect of the ASU on the Company's consolidated financial condition, results of operations and disclosures.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This ASU makes clarifications and corrections to the application of the guidance contained in each of the amended topics. According to the provisions of the ASU, entities that have not adopted ASU 2017-12 prior to the issuance of ASU 2019-04 shall adopt the provisions of both ASUs at the same time. The effective date of the non-hedging amendments contained in ASU 2019-04 for the Company is October 1, 2020. The Company is currently evaluating the effect of the non-hedging amendments contained in this ASU on the Company's consolidated financial condition, results of operations and disclosures.


10


2. EARNINGS PER SHARE
Shares acquired by the ESOP are not included in basic average shares outstanding until the shares are committed for allocation or vested to an employee's individual account. Unvested shares awarded pursuant to the Company's restricted stock benefit plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
March 31,
 
2020
 
2019
 
2020
 
2019
 
(Dollars in thousands, except per share amounts)
Net income
$
4,276

 
$
24,554

 
$
26,787

 
$
48,937

Income allocated to participating securities
(3
)
 
(10
)
 
(22
)
 
(19
)
Net income available to common stockholders
$
4,273

 
$
24,544

 
$
26,765

 
$
48,918

 
 
 
 
 
 
 
 
Average common shares outstanding
137,926,574

 
137,593,062

 
137,911,988

 
137,571,533

Average committed ESOP shares outstanding
41,753

 
41,758

 
20,988

 
20,876

Total basic average common shares outstanding
137,968,327

 
137,634,820

 
137,932,976

 
137,592,409

 
 
 
 
 
 
 
 
Effect of dilutive stock options
32,007

 
55,897

 
55,673

 
48,717

 
 
 
 
 
 
 
 
Total diluted average common shares outstanding
138,000,334

 
137,690,717

 
137,988,649

 
137,641,126

 
 
 
 
 
 
 
 
Net EPS:
 
 
 
 
 
 
 
Basic
$
0.03

 
$
0.18

 
$
0.19

 
$
0.36

Diluted
$
0.03

 
$
0.18

 
$
0.19

 
$
0.36

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

 
494,395

 
387,979

 
529,261




11


3. SECURITIES
The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of AFS securities at the dates presented. The majority of the MBS and investment securities portfolios are composed of securities issued by United States government-sponsored enterprises ("GSEs").
 
March 31, 2020
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
MBS
$
947,549

 
$
26,223

 
$
454

 
$
973,318

GSE debentures
250,080

 
699

 

 
250,779

Municipal bonds
11,887

 
53

 

 
11,940

 
$
1,209,516

 
$
26,975

 
$
454

 
$
1,236,037


 
September 30, 2019
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
MBS
$
923,256

 
$
15,571

 
$
2,340

 
$
936,487

GSE debentures
249,828

 
304

 
178

 
249,954

Municipal bonds
18,371

 
52

 
1

 
18,422

 
$
1,191,455

 
$
15,927

 
$
2,519

 
$
1,204,863



The following tables summarize the estimated fair value and gross unrealized losses of those AFS securities on which an unrealized loss at the dates presented was reported and the continuous unrealized loss position for less than 12 months and equal to or greater than 12 months as of the dates presented.
 
March 31, 2020
 
Less Than 12 Months
 
Equal to or Greater Than 12 Months
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
(Dollars in thousands)
MBS
$
53,830

 
$
451

 
$
1,985

 
$
3

GSE debentures

 

 

 

Municipal bonds

 

 

 

 
$
53,830

 
$
451

 
$
1,985

 
$
3


 
September 30, 2019
 
Less Than 12 Months
 
Equal to or Greater Than 12 Months
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
(Dollars in thousands)
MBS
$
111,368

 
$
126

 
$
199,442

 
$
2,214

GSE debentures

 

 
74,812

 
178

Municipal bonds
1,755

 
1

 

 

 
$
113,123

 
$
127

 
$
274,254

 
$
2,392




12


The unrealized losses at March 31, 2020 and September 30, 2019 were a result of an increase in market yields from the time the securities were purchased. In general, as market yields rise, the fair value of securities will decrease; as market yields fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in market yields as temporary. Therefore, these securities have not been classified as other-than-temporarily impaired. The impairment is also considered temporary because scheduled coupon payments have been made, it is anticipated that the entire principal balance will be collected as scheduled, and management neither intends to sell the securities, nor is it more likely than not that the Company will be required to sell the securities, before the recovery of the remaining amortized cost amount, which could be at maturity. As a result of the analysis, management has concluded that no other-than-temporary impairments existed at March 31, 2020 or September 30, 2019.
The amortized cost and estimated fair value of AFS debt securities as of March 31, 2020, by contractual maturity, are shown below.  Actual principal repayments may differ from contractual maturities due to prepayment or early call privileges by the issuer. In the case of MBS, borrowers on the underlying loans generally have the right to prepay their loans without prepayment penalty. For this reason, MBS are not included in the maturity categories.
 
Amortized
 
Estimated
 
Cost
 
Fair Value
 
(Dollars in thousands)
One year or less
$
55,179

 
$
55,245

One year through five years
206,788

 
207,474

 
261,967

 
262,719

MBS
947,549

 
973,318

 
$
1,209,516

 
$
1,236,037



The following table presents the taxable and non-taxable components of interest income on investment securities for the periods presented.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
March 31,
 
2020
 
2019
 
2020
 
2019
 
(Dollars in thousands)
Taxable
$
1,322

 
$
1,419

 
$
2,759

 
$
2,767

Non-taxable
60

 
86

 
130

 
179

 
$
1,382

 
$
1,505

 
$
2,889

 
$
2,946




The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of the dates presented.
 
March 31, 2020
 
September 30, 2019
 
(Dollars in thousands)
Federal Reserve Bank of Kansas City ("FRB of Kansas City")