CAPITOL FEDERAL FINANCIAL, INC. The following discussion and analysis is intended to assist in understanding the financial condition, results of operations, liquidity, and capital resources of the Company. The Bank comprises almost all of the consolidated assets and liabilities of the Company and the Company is dependent primarily upon the performance of the Bank for the results of its operations. Because of this relationship, references to management actions, strategies and results of actions apply to both the Bank and the Company. Executive Summary The following summary should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section in its entirety. The Company provides a full range of banking services through the Bank, which is a wholly-owned subsidiary of the Company headquartered inTopeka, Kansas . The Bank has 45 traditional and nine in-store banking offices serving primarily the metropolitan areas ofTopeka ,Wichita ,Lawrence ,Manhattan ,Emporia andSalina, Kansas and portions of theKansas City metropolitan area. We have been, and intend to continue to be, a community-oriented financial institution offering a variety of financial services to meet the needs of the communities we serve. The Company's results of operations are primarily dependent on net interest income, which is the difference between the interest earned on loans, securities, and cash, and the interest paid on deposits and borrowings.
Company's Actions and Impact on Operations as a Result of the COVID-19 Pandemic
Management's actions related to the COVID-19 pandemic and the impact of the pandemic on certain aspects of the Company's business during fiscal year 2020 are summarized below.
Bank operations - Inmid-March 2020 , 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 Bank offices, and preventative cleaning at offices and branches. Lobby services were limited to appointment only while drive-through, mobile, and online banking became the Bank's primary channels of serving customers. Retail loan closings were conducted with customers coming to our drive-through facilities and commercial loans were closed in person only when necessary. All employees continued to be paid their regular salary and receive full benefits. Inmid-May 2020 , lobbies reopened with limitations on the number of customers in a branch at one time. We also implemented operational measures to promote social distancing when customers visit branches and installed sneeze guards. There are several other precautions being taken at our locations such as extra cleaning in high traffic/touch areas and providing locations with additional cleaning supplies, hand sanitizer and masks. In earlyJune 2020 , back-office employees started to return to the office in phases. Due to the increase in COVID-19 cases in late June intoJuly 2020 , management rolled back the changes to the lobbies that occurred mid-May and adjusted the return to office phases, where necessary, for back-office employees and lobby services were again by appointment only. Inmid-September 2020 , lobbies were reopened once again. Management continues to monitor COVID-19 cases and will adjust operational plans as necessary. Loan modification programs - In lateMarch 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 of principal, interest and, in some cases, escrow. COVID-19 loan modifications of commercial loans mainly consist of a six-month interest-only payment period. See "Financial Condition - Loans Receivable" below for additional discussion regarding COVID-19 loan modifications. As ofSeptember 30, 2020 , the Bank had 193 one- to four-family loans totaling$39.8 million and 27 consumer loans totaling$795 thousand that were still in their deferral period. The deferral period concluded bySeptember 30, 2020 for$199.7 million of one- to four-family loans and$1.6 million of consumer loans. As ofSeptember 30, 2020 , the Bank had 204 commercial loans with a combined gross loan amount of$367.4 million , which includes undisbursed amounts, that were still in their deferral period. The deferral period concluded bySeptember 30, 2020 for$43.5 million , or 11%, of the commercial loans subject to COVID-19 loan modifications. All of these loans were current 44 --------------------------------------------------------------------------------
as of
Small Business Administration Paycheck Protection Program loans - As ofSeptember 30, 2020 , the Bank had originated and funded 791 PPP loans totaling$43.9 million , with a median loan amount of$19 thousand , and received origination fees totaling$1.9 million associated with these loans. These loans are fully guaranteed by the SBA. The program endedAugust 8, 2020 . ThroughNovember 16, 2020 ,$12.2 million of the Bank's PPP loans have been forgiven by the SBA. OnOctober 8, 2020 the SBA released a streamlined loan forgiveness application for PPP loans in amounts of$50 thousand or less. Of the PPP loans originated by the Bank, 611 loans totaling$9.6 million , or 22% of the Bank's aggregate PPP loan balance, were in amounts less than$50 thousand and will be eligible for the streamlined forgiveness process. Capital, liquidity, and dividends - Management performed stress test scenarios duringApril 2020 . Based on the Company's existing capital levels, deposit inflows, loan underwriting policies, loan concentration, and geographical diversification, no liquidity or capital concerns were identified as a result of the stress tests. Management continues to anticipate being able to manage the economic risks and uncertainties associated with the COVID-19 pandemic and the Bank remaining well capitalized with sufficient liquidity to serve our customers. Deposit balances have increased due primarily to the economic stimulus payments, a reduction in consumer spending, and PPP loan proceeds being deposited at the Bank. As a result, management is currently faced with the challenge of excess liquidity. Due to the nature of deposit cash flows, management does not know how long the excess liquidity will continue. As such, management has elected, for the time being, to reduce the Bank's level of borrowings and increase the balance of securities using the excess liquidity from the deposit portfolio. With earnings of$0.47 per share for fiscal year 2020, and a cash balance at the holding company level of$82.5 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 state of economic uncertainty and how that may play out with the credit risk exposure in the Bank's loan portfolio, the Company elected to defer the annual True Blue dividend inJune 2020 and did not ask at that time for a regulatory non-objection to move capital from the Bank to the Company to pay that dividend. It is management's intention to ask for a regulatory non-objection at some point in the future to pay this dividend when economic conditions are more certain. It is currently the Company's intention to pay out 100% of its fiscal year 2021 earnings. Management's Evolving Response to COVID-19 - There is continued concern about a resurgence of COVID-19 as we enter the winter months. In October andNovember 2020 , COVID-19 cases, hospitalizations, and deaths nationally and in our local market areas increased compared to the summer months, including to new record levels in some areas. TheKansas Governor recently issued an executive order establishing a statewide face-covering protocol as part of her administration's strategy to keep schools and businesses open and to protect the economy. We continue to be confronted with a significant and unfamiliar degree of uncertainty as to how a resurgence will impact our customers, employees, and operations and how actions taken by governmental authorities and other third parties in response to a resurgence will impact our customers, employees, and operations. We will continue to monitor COVID-19 cases and will adjust operational plans as necessary. We will also continue to assist our customers as necessary during these uncertain times. See "Part I, Item 1A. Risk Factors - Risks Related to Macroeconomic Conditions" for additional discussion regarding the impact the COVID-19 pandemic may have on our business, results of operations and financial condition.
Impact on Market Interest Rates as a Result of
TheFederal Reserve , in response to economic risks resulting from the COVID-19 pandemic, returned to a zero-interest rate policy inMarch 2020 . This was after most broader market rates decreased significantly in response to evolving news about the COVID-19 pandemic. The dramatic lowering of interest rates in a short period of time impacted the operations and performance of the Bank. Deteriorating economic conditions included more than 20 million people becoming unemployed inthe United States in one month's time, with more than 58 million in total filing for unemployment benefits, along with immediate reductions in consumer spending on almost all categories of purchases except groceries and staples, and closure or significantly reduced operations of restaurants, bars, airlines, hotels, and entertainment and hospitality venues, among others, and had a devastating impact on the economy. Since that time, many areas of consumer spending have rebounded, generally locally and not related to travel and entertainment. As previously described, we adjusted our operations in response to the 45 -------------------------------------------------------------------------------- COVID-19 pandemic 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 CARES Act have allowed. There is increasing concern about the longer lasting impact on local business as well as travel and entertainment resulting from the COVID-19 pandemic. This could cause a longer recovery time for all sectors of the economy and could make it challenging for sectors that have had better recoveries to maintain that recovery in the long run. We have been responding and expect to continue to respond to local market conditions regarding the loan and deposit rates we offer. We responded to lower market rates for lending by lowering rates offered on our one- to four-family loan products over the course of the year. Given current market interest rates, rates offered on new loans and the recent volume of one- to four-family refinances and endorsements allowing borrowers to take advantage of the lower current market interest rates, the yield on the total loan portfolio is likely to continue to decrease. Additionally, with significant cash inflows realized due to investment securities being called and prepayments on MBS increasing, the yields on reinvested funds into new securities are lower than portfolio yields. Since the onset of the pandemic the Bank lowered its offered rates on all retail deposit products except checking and savings accounts. Changes in the rates paid on money market accounts have an immediate impact on the cost of our deposits, while the impact of reducing rates offered on our certificate of deposit products lower the cost of deposits only as certificates of deposit reprice lower when they mature. As the Bank further monitors rates offered and the cost of borrowings, we anticipate that the average cost of our interest-bearing liabilities will continue to decrease. Considering the drastic changes in market rates and the ongoing economic uncertainty, even with the changes the Bank has made to its cost of funding, with the lower rates on new mortgage loans, refinances, endorsements and new securities also at lower rates, our net interest margin could continue to decrease, with further downside risk as a result of high levels of prepayments and premium amortization on correspondent one- to four-family loans and MBS.
Summary of Results of Operation and Financial Condition
The Company recognized net income of$64.5 million , or$0.47 per share, for the year endedSeptember 30, 2020 compared to net income of$94.2 million , or$0.68 per share, for the year endedSeptember 30, 2019 . The decrease in net income was due primarily to a$21.6 million increase in provision for credit losses and a decrease in net interest income, partially offset by a decrease in income tax expense. Net interest income decreased$17.1 million , or 8.3%, from the prior year to$189.3 million for the current year. The leverage strategy was suspended at certain times during the prior year and during all of the current year due to the negative interest rate spreads between the related FHLB borrowings and cash held at the FRB ofKansas City , making the transaction unprofitable. Excluding the effects of the leverage strategy, net interest income decreased$16.9 million , or 8.2% compared to the prior year. The decrease in net interest income excluding the effects of the leverage strategy was due to a$20.9 million decrease in interest and dividend income, partially offset by a$4.0 million decrease in interest expense. Interest and dividend income decreased across all interest-earning asset types, with the most significant being a$13.7 million decrease in interest income on loans receivable, primarily related to correspondent loans. Interest income on correspondent loans decreased due primarily to a reduction in the portfolio balance and rate related to payoffs exceeding purchases, new loans purchased at lower market interest rates, and downward repricing of existing loans, along with an increase in premium amortization due to payoffs and endorsements. Interest expense on borrowings, excluding the effects of the leverage strategy, decreased$5.4 million due to replacing FHLB advances at lower market rates and a reduction in the rate and usage of the Bank's FHLB line of credit. This was partially offset by a$1.4 million increase in interest expense on deposits due to an increase in the cost of the retail/business certificate of deposit portfolio. The net interest margin decreased 14 basis points, from 2.26% for the prior year to 2.12% for the current year. When the leverage strategy is in place, it increases our net interest income but 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 18 basis points, from 2.30% for the prior year to 2.12% for the current year. The decrease in the net interest margin, excluding the effects of the leverage strategy, was due mainly to a decrease in the loan portfolio yield, specifically the yield on the correspondent one- to four-family loan portfolio. 46 -------------------------------------------------------------------------------- Total assets atSeptember 30, 2020 were$9.49 billion , an increase of$147.2 million , or 1.6% fromSeptember 30, 2019 . The increase was due mainly to an increase in securities, partially offset by a decrease in loans receivable. Securities were purchased with cash flows from payments on the loan portfolio and growth in the deposit portfolio. Total loans decreased$213.9 million fromSeptember 30, 2019 toSeptember 30, 2020 . The decrease was primarily in the one- to four-family correspondent loans and one- to four-family bulk purchased loans, partially offset by an increase in one- to four-family originated loans and commercial loans. During the current year, the Bank originated and refinanced$1.00 billion of one- to four-family and consumer loans with a weighted average rate of 3.27% and purchased$448.0 million of one- to four-family loans from correspondent lenders with a weighted average rate of 3.29%. The Bank also originated$165.5 million of commercial loans with a weighted average rate of 3.52% and entered into commercial real estate loan participations of$93.6 million at a weighted average rate of 4.16%. The commercial loan portfolio totaled$829.7 million atSeptember 30, 2020 and was composed of 75% commercial real estate, 12% commercial and industrial, and 13% commercial construction. Total commercial real estate and commercial construction potential exposure, including undisbursed amounts and outstanding commitments totaling$205.5 million , was$937.5 million atSeptember 30, 2020 . Total commercial and industrial potential exposure, including undisbursed amounts and outstanding commitments of$21.7 million , was$119.3 million atSeptember 30, 2020 . Total deposits atSeptember 30, 2020 were$6.19 billion , an increase of$609.5 million , or 10.9%, fromSeptember 30, 2019 . Non-maturity deposits increased$575.9 million , including a$242.8 million increase in checking accounts, a$220.8 million increase in money market accounts, and a$112.3 million increase in savings accounts. Retail/business certificates of deposit increased$73.7 million during the current year, mainly in the business-related certificates of deposit category. These increases were partially offset by a$40.1 million decrease in public unit certificates of deposit. Total borrowings atSeptember 30, 2020 were$1.79 billion , a decrease of$450.7 million , or 20.1%, fromSeptember 30, 2019 . The decrease was due to not renewing a portion of the FHLB advances and repurchase agreements that matured during the current year and repaying the FHLB line of credit balance. Cash flows from the deposit portfolio were used to pay off maturing borrowings and the FHLB line of credit. Stockholders' equity was$1.28 billion atSeptember 30, 2020 compared to$1.34 billion atSeptember 30, 2019 . The$51.5 million decrease was due primarily to the payment of cash dividends totaling$93.9 million and the repurchase of common stock totaling$23.8 million , partially offset by net income of$64.5 million during the current year. During the current fiscal year, the Company repurchased 2,558,100 shares of common stock. In the long run, management considers the Bank's equity to total assets ratio of at least 10% an appropriate level of capital. AtSeptember 30, 2020 , this ratio was 12.3%. The cash dividends paid during the current year totaled$0.68 per share and consisted of a$0.34 per share cash true-up dividend related to fiscal year 2019 earnings, paid inDecember 2019 , per the Company's dividend policy, and four regular quarterly cash dividends of$0.085 per share, totaling$0.34 per share. Critical Accounting Policies Our most critical accounting policies are the methodologies used to determine the ACL and fair value measurements. These policies are important to the presentation of our financial condition and results of operations, involve a high degree of complexity, and require management to make difficult and subjective judgments that may require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could affect reported results materially. These critical accounting policies and their application are reviewed at least annually by our audit committee. The following is a description of our critical accounting policies and an explanation of the methods and assumptions underlying their application. Allowance for Credit Losses. The Company maintains an ACL to absorb inherent losses in the loan portfolio based upon ongoing quarterly assessments of the loan portfolio. The ACL is maintained through provisions for credit losses which are either charged or credited to income. The methodology for determining the ACL is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in economic conditions that could result in changes to the amount of the recorded ACL. Additionally, bank regulators review the ACL and could have a differing view from management regarding the ACL balance, which could result in an increase in the ACL and/or the recognition of additional charge-offs. Although management believes that the Bank has established and maintained the ACL at appropriate levels, additions may be necessary if economic and other conditions worsen substantially from the current operating environment, and/or if bank regulators have a differing view from management regarding the ACL balance. 47 -------------------------------------------------------------------------------- Our lending emphasis on the origination and purchase of one- to four-family loans and, to a lesser extent, consumer loans secured by one- to four-family residential properties, has resulted in a loan concentration in one- to four-family residential mortgage loans. We believe the primary risks inherent in our one- to four-family and consumer loan portfolios are a decline in economic conditions, elevated levels of unemployment or underemployment, and declines in residential real estate values. Adverse changes in any one or a combination of these events may negatively affect borrowers' ability to repay their loans, resulting in increased delinquencies, non-performing assets, loan losses, and future loan loss provisions. Although the commercial loan portfolio is subject to the same risk of declines in economic conditions, the primary risk characteristics inherent in this portfolio include the ability of the borrower to sustain sufficient cash flows from leases and business operations, the ability to control operational or business expenses to satisfy their contractual debt payments, and the ability to utilize personal or business resources to pay their contractual debt payments if the cash flows are not sufficient. Additionally, if the Bank were to repossess the secured collateral of a commercial real estate loan, the pool of potential buyers is more limited than that for a residential property. Therefore, the Bank could hold the property for an extended period of time, or potentially be forced to sell at a discounted price, resulting in additional losses. Our commercial and industrial loans are primarily secured by accounts receivable, inventory and equipment, which may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. Each quarter, we prepare a formula analysis model which segregates our loan portfolio into categories based on certain risk characteristics such as loan type (one- to four-family, commercial, etc.), interest payments (fixed-rate and adjustable-rate), loan source (originated, correspondent purchased, or bulk purchased), LTV ratios, borrower's credit score and payment status (i.e. current or number of days delinquent). Consumer loans, such as second mortgages and home equity lines of credit, with the same underlying collateral as a one- to four-family loan are combined with the one- to four-family loan in the formula analysis model to calculate a combined LTV ratio. Historical loss factors are applied to each loan category in the formula analysis model. Additionally, qualitative factors that management believes impact the collectability of the loan portfolio as of the evaluation date are applied to each loan category. Qualitative loss factors increase as loans are classified or become delinquent. See "Part II, Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 1. Summary of Significant Accounting Policies" for additional information related to the historical and qualitative loss factors utilized in the formula analysis model. The historical loss and qualitative factors applied in the formula analysis model are reviewed quarterly by management to assess whether the factors adequately cover probable and estimable losses inherent in the loan portfolio. Our ACL methodology permits modifications to the formula analysis model in the event that, in management's judgment, significant factors which affect the collectability of the portfolio or any category of the loan portfolio, as of the evaluation date, have changed from the current formula analysis model. Management's evaluation of the qualitative factors with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with a specific problem loan or portfolio segment. During the current fiscal year, management increased the historical loss and qualitative factors applied in the formula analysis model for all loan categories and added a COVID-19 qualitative loss factor to the Bank's commercial loan portfolio. The increase in the factors and the addition of the new qualitative factor was in response to the deterioration of economic conditions due to the COVID-19 pandemic. Management considered several items when determining the appropriate historical loss and qualitative factors to apply in the formula analysis model. Such considerations included: national and state unemployment and unemployment benefit claim information, amount and timing of governmental financial assistance, the Bank's COVID-19 loan modification program, consumer spending information, industries most impacted by the COVID-19 pandemic and a loan analysis completed by the commercial lending team. Management also evaluated the Bank's historical and peer ACL to loan ratios and charge-off ratios taking into consideration the economic conditions during those time periods. After applying the higher and new factors in the formula analysis model, management then considered the calculated ACL to loans ratio compared to historical and peer ratios to determine the appropriate amount of ACL atSeptember 30, 2020 , considering the economic conditions at that point in time. Non-PCI loans that have not become impaired subsequent to the acquisition date are included in the formula analysis model. For these loans, the Company estimates a hypothetical amount of ACL. The Company applies the same historical and qualitative loss factors as the Bank's formula analysis model to establish the hypothetical amount of ACL. This amount is compared with the remaining net purchase discount for the non-PCI loans to test for credit quality deterioration and the 48 -------------------------------------------------------------------------------- possible need for an additional loan loss provision. To the extent the remaining net purchase discount of the pool is greater than the hypothetical ACL, no additional ACL is necessary. If the remaining net purchase discount of the pool is less than the hypothetical ACL, the difference results in an increase to the ACL recorded through a provision for credit losses. Management will continue to closely monitor economic conditions and will work with borrowers as necessary to assist them through this challenging economic climate. If economic conditions worsen or do not improve in the near term, and if future government programs, if any, do not provide adequate relief to borrowers, it is possible the Bank's ACL will need to increase in future periods. In addition, the adequacy of the Company's ACL is reviewed during bank regulatory examinations. We consider any comments from our regulators when assessing the appropriateness of our ACL. Management seeks to apply the ACL methodology in a consistent manner; however, the methodology may be modified in response to changing conditions. ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments became effective for the Company onOctober 1, 2020 . See "Part II, Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 1. Summary of Significant Accounting Policies" for additional information. Fair Value Measurements. The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with Accounting Standards Codification ("ASC") 820 and ASC 825. The Company groups its financial instruments at fair value in three levels based on the markets in which the instruments are traded and the reliability of the assumptions used to determine fair value, with Level 1 (quoted prices for identical assets in an active market) being considered the most reliable, and Level 3 having the most unobservable inputs and therefore being considered the least reliable. The Company bases its fair values on the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company's AFS securities are measured at fair value on a recurring basis. Changes in the fair value of AFS securities are recorded, net of tax, as AOCI in stockholders' equity. The Company primarily uses prices obtained from third-party pricing services to determine the fair value of its AFS securities. Various modeling techniques are used to determine pricing for the Company's securities, including option pricing, discounted cash flow models, and similar techniques. The inputs to these models may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. All AFS securities are classified as Level 2. The Company's interest rate swaps are measured at fair value on a recurring basis. The estimated fair value of the interest rate swaps are obtained from the counterparty and are determined by a discounted cash flow analysis using observable market-based inputs. Changes in the fair value of the interest rate swaps are recorded, net of tax, as AOCI in stockholders' equity. The Company did not have any other financial instruments that were measured at fair value on a recurring basis atSeptember 30, 2020 . Recent Accounting Pronouncements For a discussion of Recent Accounting Pronouncements, see "Part II, Item 8. Financial Statements and Supplementary Data - Notes to Financial Statements - Note 1. Summary of Significant Accounting Policies." 49 -------------------------------------------------------------------------------- Management Strategy We are a community-oriented financial institution dedicated to serving the needs of customers in our market areas. Our commitment is to provide qualified borrowers the broadest possible access to home ownership through our mortgage lending programs and to offer a complete set of personal and commercial banking products and services to our customers. We strive to enhance stockholder value while maintaining a strong capital position. To achieve these goals, we focus on the following strategies: •Lending. We are one of the leading originators of one- to four-family loans in the state ofKansas . We originate these loans primarily for our own portfolio, and we service the loans we originate. We also purchase one- to four-family loans from correspondent lenders. In addition, we offer several commercial lending options to our customers and participate in commercial loans with other lenders. We offer both fixed- and adjustable-rate products with various terms to maturity and pricing options. We maintain strong relationships with local real estate agents to attract mortgage loan business. We rely on our marketing efforts and customer service reputation to attract mortgage business from walk-in customers, customers that apply online, and existing customers. •Deposit Services. We offer a wide array of retail and business deposit products and services. These products include checking, savings, money market, certificates of deposit, and retirement accounts. Our deposit services are provided through a branch network of 54 locations, including traditional branches and retail in-store locations, our call center which operates on extended hours, mobile banking, telephone banking, and online banking and bill payment services. •Cost Control. We generally are very effective at controlling our costs of operations. By using technology, we are able to centralize our loan servicing and deposit support functions for efficient processing. We serve a broad range of customers through relatively few branch locations. Our average deposit base per traditional branch atSeptember 30, 2020 was approximately$123.6 million . This large average deposit base per branch helps to control costs. Our one- to four-family lending strategy and our effective management of credit risk allows us to service a large portfolio of loans at efficient levels because it costs less to service a portfolio of performing loans. We recognize it is more expensive to offer a full suite of commercial products and services, but we will continue our efforts to control those costs. •Asset Quality. We utilize underwriting standards for our lending products, including the loans we purchase and participate in, that are designed to limit our exposure to credit risk. We require complete documentation for both originated and purchased loans, and make credit decisions based on our assessment of the borrower's ability to repay the loan in accordance with its terms. Additionally, we monitor the asset quality of existing loans and strive to work proactively with customers who face challenging financial conditions. •Capital Position. Our policy has always been to protect the safety and soundness of the Bank through credit and operational risk management, balance sheet strength, and sound operations. The end result of these activities has been a capital ratio in excess of the well-capitalized standards set by the OCC. We believe that maintaining a strong capital position safeguards the long-term interests of the Bank, the Company, and our stockholders. •Stockholder Value. We strive to provide stockholder value while maintaining a strong capital position. One way that we continue to provide returns to stockholders is through our dividend payments. Total dividends declared and paid during fiscal year 2020 were$93.9 million . The Company's cash dividend payout policy is reviewed quarterly by management and the Board of Directors, and the ability to pay dividends under the policy depends 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 level. For fiscal year 2021, it is the intention of the Board of Directors to continue the payout of 100% of the Company's earnings to its stockholders through regular quarterly dividends and a true-up dividend. Stockholder value is also provided through common stock repurchases. During fiscal year 2020, the Company repurchased$23.8 million , or 2,558,100 shares, of common stock. •Interest Rate Risk Management. Changes in interest rates are our primary market risk as our balance sheet is almost entirely comprised of interest-earning assets and interest-bearing liabilities. As such, fluctuations in interest rates have a significant impact not only upon our net income but also upon the cash flows related to those assets and liabilities and the market value of our assets and liabilities. In order to maintain what we believe to be acceptable levels of net interest income in varying interest rate environments, we actively manage our interest rate risk and assume a moderate amount of interest rate risk consistent with board policies. 50 -------------------------------------------------------------------------------- Financial Condition Assets. Total assets atSeptember 30, 2020 were$9.49 billion , an increase of$147.2 million , or 1.6% fromSeptember 30, 2019 . The increase was due mainly to an increase in securities, partially offset by a decrease in loans receivable. Securities were purchased with cash flows from the loan portfolio and growth in the deposit portfolio. Loans Receivable. The following table presents the balance and weighted average rate of our loan portfolio as of the dates indicated. Approximately 67% of the one- to four-family loan portfolio balance atSeptember 30, 2020 was comprised of loans that had a balance of$510 thousand or less at the time of origination. The weighted average interest rate on our loan portfolio decreased 26 basis points, to 3.55% atSeptember 30, 2020 . The decrease was due primarily to the downward repricing of the one- to four-family originated and correspondent purchased portfolios as a result of endorsements, payoffs of loans with higher rates, and originations and purchases at lower market rates during the year. September 30, 2020 September 30, 2019 Amount Rate Amount Rate (Dollars in thousands) One- to four-family: Originated$ 3,937,310 3.50 %$ 3,873,851 3.74 % Correspondent purchased 2,101,082 3.49 2,349,877 3.64 Bulk purchased 208,427 2.41 252,347 2.94 Construction 34,593 3.30 36,758 4.00 Total 6,281,412 3.46 6,512,833 3.68 Commercial: Commercial real estate 626,588 4.29 583,617 4.48 Commercial and industrial 97,614 2.79 61,094 5.14 Construction 105,458 4.04 123,159 4.81 Total 829,660 4.08 767,870 4.58 Consumer loans: Home equity 103,838 4.66 120,587 6.15 Other 10,086 4.40 11,183 4.57 Total 113,924 4.64 131,770 6.02 Total loans receivable 7,224,996 3.55 7,412,473 3.81 Less: ACL 31,527 9,226 Discounts/unearned loan fees 29,190 31,058 Premiums/deferred costs (38,572) (44,558) Total loans receivable, net$ 7,202,851 $ 7,416,747 51
-------------------------------------------------------------------------------- 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 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 fiscal year 2020, the Bank endorsed$695.4 million of one- to four-family loans, reducing the average rate on those loans by 83 basis points. Commercial loan renewals are not included in the activity in the following table unless new funds are disbursed at the time of renewal. During the initial days of the COVID-19 pandemic, correspondent one- to four-family loan application acceptance was suspended by the Bank but existing correspondent applications and commitments continued to progress through the approval and funding process. One- to four-family correspondent new loan application acceptance resumed inmid-June 2020 . For the Three Months Ended September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 Amount Rate Amount Rate Amount Rate Amount Rate (Dollars in thousands) Beginning balance$ 7,407,442 3.64 %$ 7,493,280 3.74 %$ 7,424,834 3.77 %$ 7,412,473 3.81 % Originated and refinanced: Fixed 265,424 2.98 277,904 2.83 172,891 3.44 233,693 3.52 Adjustable 44,625 3.68 60,626 3.75 55,946 4.11 55,126 4.30 Purchased and participations: Fixed 61,435 3.07 131,739 3.28 125,612 3.46 123,118 3.77 Adjustable 4,396 2.76 62,510 3.76 18,985 2.96 13,801 3.06 Change in undisbursed loan funds 13,898 (32,202) 24,049 (9,743) Repayments (572,536) (586,434) (328,644) (403,361) Principal recoveries/(charge-offs), net 312 19 (314) (16) Other - - (79) (257) Ending balance$ 7,224,996 3.55$ 7,407,442 3.64$ 7,493,280 3.74$ 7,424,834 3.77 For the Year Ended September 30, 2020 2019 Amount Rate Amount Rate (Dollars in thousands) Beginning balance$ 7,412,473 3.81 %$ 7,507,645 3.74 % Originated and refinanced: Fixed 949,912 3.15 505,334 4.10 Adjustable 216,323 3.97 319,608 4.77 Purchased and participations: Fixed 441,904 3.44 186,135 4.64 Adjustable 99,692 3.47 76,305 4.40 Change in undisbursed loan funds (3,998) 52,220 Repayments (1,890,975) (1,233,157) Principal recoveries, net 1 13 Other (336) (1,630) Ending balance$ 7,224,996 3.55$ 7,412,473 3.81 52
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The following table presents loan origination, refinance, and purchase activity
for the periods indicated, excluding endorsement activity, along with associated
weighted average rates and percent of total. Commercial loan renewals are not
included in the activity in the following table except to the extent new funds
are disbursed at the time of renewal. Loan originations, purchases, and
refinances are reported together. During fiscal year 2019, the Bank discontinued
the use of LIBOR for adjustable-rate one- to four-family loan originations and
no longer purchases correspondent one- to four-family loans that use LIBOR,
since LIBOR is expected to be discontinued by the end of calendar year 2021.
Adjustable-rate one- to four-family loan originations and purchases are now tied
to the one-year CMT index, which, to date, does not appear to have had any
impact on our ability and opportunities to originate and purchase
adjustable-rate one- to four-family loans.
For the Year Ended
September 30, 2020 September 30, 2019
Amount Rate % of Total Amount Rate % of Total
(Dollars in thousands)
Fixed-rate:
One- to four-family:(1)
<= 15 years $ 384,937 2.79 % 22.5 % $ 106,966 3.56 % 9.8 %
> 15 years 804,898 3.41 47.1 420,243 4.14 38.6
One- to four-family
construction 44,754 3.28 2.6 51,663 4.13 4.8
Commercial:
Commercial real estate 44,005 4.17 2.7 27,886 6.21 2.6
Commercial and industrial 65,174 1.92 3.8 15,291 5.24 1.4
Commercial construction 39,346 4.71 2.3 59,108 4.85 5.4
Home equity 4,493 5.83 0.3 5,411 6.20 0.5
Other 4,209 5.67 0.2 4,901 5.29 0.5
Total fixed-rate 1,391,816 3.24 81.5 691,469 4.24 63.6
Adjustable-rate:
One- to four-family:(2)
<= 36 months 5,800 2.80 0.3 9,786 3.57 0.9
> 36 months 125,865 2.95 7.4 139,511 3.70 12.8
One- to four-family
construction 12,984 2.97 0.8 19,364 3.86 1.8
Commercial:
Commercial real estate 50,697 4.56 3.0 100,142 4.84 9.2
Commercial and industrial 6,360 4.72 0.4 27,496 5.63 2.5
Commercial construction 53,563 4.06 3.1 30,251 5.39 2.8
Home equity 58,709 4.95 3.4 66,893 6.33 6.2
Other 2,037 3.86 0.1 2,470 3.51 0.2
Total adjustable-rate 316,015 3.81 18.5 395,913 4.70 36.4
Total originated,
refinanced and purchased $ 1,707,831 3.35 100.0 % $ 1,087,382 4.41 100.0 %
Purchased and participation loans included
above:
Fixed-rate:
Correspondent - one- to
four-family $ 395,778 3.34 $ 118,758 4.31
Participations - commercial 46,126 4.29 67,377 5.24
Total fixed-rate
purchased/participations 441,904 3.44 186,135 4.64
Adjustable-rate:
Correspondent - one- to
four-family 52,192 2.94 47,655 3.83
Participations - commercial 47,500 4.04 28,650 5.35
Total adjustable-rate
purchased/participations 99,692 3.47 76,305 4.40
Total
purchased/participation
loans $ 541,596 3.44 $ 262,440 4.57
(1)The fixed-rate one- to four-family loans less than or equal to 15 years have
an original maturity at origination of less than or equal to 15 years, while
fixed-rate one- to four-family loans greater than 15 years have an original
maturity at origination of greater than 15 years.
(2)The adjustable-rate one- to four-family loans less than or equal to 36 months
have a term to first reset of less than or equal to 36 months at origination and
adjustable-rate one- to four-family loans greater than 36 months have a term to
first reset of greater than 36 months at origination.
53
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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 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 2020 , from a nationally recognized consumer rating agency. The LTV
ratios were based on the current loan balance and either the lesser of the
purchase price or original appraisal, or the most recent Bank appraisal, if
available. In most cases, the most recent appraisal was obtained at the time of
origination.
September 30, 2020
% of Credit Average
Amount Total Score LTV Balance
(Dollars in thousands)
Originated $ 3,937,310 63.0 % 771 62 % $ 145
Correspondent purchased 2,101,082 33.6 765 64 379
Bulk purchased 208,427 3.4 767 60 300
$ 6,246,819 100.0 % 768 63 187
September 30, 2019
% of Credit Average
Amount Total Score LTV Balance
(Dollars in thousands)
Originated $ 3,873,851 59.8 % 768 62 % $ 140
Correspondent purchased 2,349,877 36.3 765 65 371
Bulk purchased 252,347 3.9 762 61 304
$ 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. Included in the "Refinanced by Bank
customers" line item are correspondent loans that were refinanced with the Bank.
Of the loans originated during the current year, $300.4 million were refinanced
from other lenders. Of the loans originated and refinanced during the current
year, 76% had loan values of $510 thousand or less. Of the correspondent loans
purchased during the current year, 20% had loan values of $510 thousand or less.
For the Year Ended
September 30, 2020 September 30, 2019
Credit Credit
Amount LTV Score Amount LTV Score
(Dollars in thousands)
Originated $ 662,678 74 % 767 $ 494,739 78 % 760
Refinanced by Bank
customers 268,590 67 765 86,381 68 752
Correspondent purchased 447,970 71 768 166,413 73 762
$ 1,379,238 72 767 $ 747,533 76 760
54-------------------------------------------------------------------------------- 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 year endedSeptember 30, 2020 . State Amount % of Total Rate (Dollars in thousands) Kansas$ 804,919 58.4 % 3.15 % Missouri 234,730 17.0 3.20 Texas 177,752 12.9 3.23 Other states 161,837 11.7 3.32$ 1,379,238 100.0 % 3.19 ThroughSeptember 30, 2020 , the Bank had processed COVID-19 loan modifications for 942 one- to four-family loans totaling$239.5 million , of which$39.8 million , or 17%, were still in the deferral period as ofSeptember 30, 2020 . Of the COVID-19 loan modifications that had completed the deferral period bySeptember 30, 2020 and were not delinquent prior to requesting assistance,$1.4 million were 30 to 89 days delinquent and none were 90 or more days delinquent as ofSeptember 30, 2020 . The modifications still in the deferral period as ofSeptember 30, 2020 are summarized in the table below, along with the weighted average credit score and weighted average LTV as ofSeptember 30, 2020 . Credit scores were updated inSeptember 2020 from a nationally recognized consumer rating agency. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. In most cases, the most recent appraisal was obtained at the time of origination. Credit Count Amount Score LTV (Dollars in thousands) Originated 159$ 26,859 715 67 % Correspondent purchased 34 12,984 749 67 193$ 39,843 727 67 The following table summarizes our one- to four-family loan origination and refinance commitments and one- to four-family correspondent loan purchase commitments as ofSeptember 30, 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
15,687 49,912 5,080 70,679 2.89
$ 51,556 $ 106,022 $ 16,380 $ 173,958 2.88
Rate 2.49 % 3.08 % 2.79 %
Commercial Loans - During fiscal year 2020, the Bank originated $165.5 million
of commercial loans, of which $43.9 million were PPP loans, entered into
commercial real estate loan participations totaling $93.6 million , and processed
commercial loan disbursements, excluding lines of credit, of approximately
$228.7 million at a weighted average rate of 3.78%.
55
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The following table presents the Bank's commercial real estate and commercial
construction loans and loan commitments by type of primary collateral, as of
September 30, 2020 . Included in the gross loan amounts in the table, which does
not include outstanding commitments, are fixed-rate loans totaling $534.6
million at a weighted average rate of 4.15% and adjustable-rate loans totaling
$331.1 million at a weighted average rate of 4.38%. The weighted average rate of
fixed-rate loans is lower than that of adjustable-rate loans due primarily to
the majority of the fixed-rate loans in the portfolio at September 30, 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
Count Principal Amount Amount Commitments Total Total
(Dollars in thousands)
Senior housing 25 $ 225,062 $ 32,638 $ 257,700 $ - $ 257,700 27.5 %
Hotel 9 129,488 49,686 179,174 - 179,174 19.1
Retail
building 133 126,439 11,960 138,399 1,771 140,170 14.9
Office
building 98 56,131 4,745 60,876 60,875 121,751 13.0
Multi-family 40 63,115 18,801 81,916 2,800 84,716 9.0
One- to
four-family
property 391 57,754 7,251 65,005 215 65,220 7.0
Single use
building 21 43,596 5,163 48,759 1,500 50,259 5.4
Other 91 30,461 3,459 33,920 4,598 38,518 4.1
808 $ 732,046 $ 133,703 $ 865,749 $ 71,759 $ 937,508 100.0 %
Weighted
average rate 4.25 % 4.19 % 4.24 % 4.05 % 4.23 %
The following table summarizes the Bank's commercial real estate and commercial
construction loans and loan commitments by state as of
Unpaid Undisbursed Gross Loan Outstanding % of
Count Principal Amount Amount Commitments Total Total
(Dollars in thousands)
8,254 $ 309,182 33.0 %
Missouri 149 227,101 56,545 283,646 2,005 285,651 30.5
Texas 9 117,675 53,107 170,782 60,000 230,782 24.6
Nebraska 6 33,820 16 33,836 - 33,836 3.6
Kentucky 1 25,450 109 25,559 - 25,559 2.7
California 3 5,843 4,300 10,143 1,500 11,643 1.2
Other 13 36,973 3,882 40,855 - 40,855 4.4
808 $ 732,046 $ 133,703 $ 865,749 $ 71,759 $ 937,508 100.0 %
The following table presents the Bank's commercial and industrial loans and loan
commitments by business purpose, as of
Unpaid Undisbursed Gross Loan Outstanding % of
Count Principal Amount Amount Commitments Total Total
(Dollars in thousands)
Working capital 942 $ 56,348 $ 17,237 $ 73,585 $ 331 $ 73,916 62.0 %
Equipment 119 14,184 303 14,487 850 15,337 12.9
Purchase/lease autos 178 11,275 97 11,372 - 11,372 9.5
Business investment 70 11,029 80 11,109 - 11,109 9.3
Other 22 4,778 2,785 7,563 - 7,563 6.3
1,331 $ 97,614 $ 20,502 $ 118,116 $ 1,181 $ 119,297 100.0 %
56--------------------------------------------------------------------------------
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
Count Amount
(Dollars in thousands)
Greater than $30 million $ 4 $ 181,677
>$15 to $30 million 13 314,054
>$10 to $15 million 3 34,761
>$5 to $10 million 13 81,202
$1 to $5 million 103 217,178
Less than $1 million 2,003 227,933
$ 2,139 $ 1,056,805
The Bank's commercial lending team is working proactively with our commercial
customers as the COVID-19 pandemic continues to present challenging operating
conditions. Through September 30, 2020 , we have modified $410.9 million of
commercial loans under our COVID-19 loan modification program. Of this amount,
$43.5 million had completed the deferral period by September 30, 2020 , all of
which were current, and $367.4 million , or 89%, were still in the deferral
period as of September 30, 2020 . We have also processed 791 PPP loans for $43.9
million , for which we received approximately $1.9 million in fees. Approximately
60% of PPP loans processed were in the following industries: construction,
professional/scientific/technical, health care/social assistance, and retail
trade. Through November 16, 2020 , $12.2 million of the Bank's PPP loans have
been forgiven by the SBA.
The following table presents the gross loan amount, including undisbursed
balances, of the Bank's commercial real estate loans by type of primary
collateral, and commercial and industrial loans by business purpose, that have
been modified per the Bank's COVID-19 loan modification program, and had not
completed the deferral period as of September 30, 2020 . The information is
presented by type of modification and as a percentage of total modifications, as
well as by a percentage of the total gross loan amount and undisbursed balances
of the related property type or business purpose category. Of the loans
presented in the table below, $258.8 million , or 70%, completed their deferral
period by November 16, 2020 , and an additional $57.4 million was paid off in
October 2020 .
Modification Type % of
Interest Payment % of Property Type/
Only Deferral Total Total Business Purpose
(Dollars in thousands)
Commercial real estate
Senior housing $ 115,082 $ 57,258 $ 172,340 46.9 % 66.9 %
Hotel 76,208 10,049 86,257 23.5 48.1
Retail building 27,197 5,815 33,012 9.0 23.9
Multi-family 30,304 1,625 31,929 8.7 65.5
One- to four-family property 14,618 4,375 18,993 5.2 31.2
Office building 7,643 336 7,979 2.2 12.3
Single use building 7,390 - 7,390 2.0 9.0
Other 2,318 - 2,318 0.6 6.8
280,760 79,458 360,218 98.1 41.6
Commercial and industrial
Working capital 4,136 - 4,136 1.1 32.7
Equipment 848 - 848 0.2 1.2
Business investment 719 - 719 0.2 5.5
Purchase/lease autos 651 - 651 0.2 5.7
Other 786 - 786 0.2 32.6
7,140 - 7,140 1.9 6.0
Total $ 287,900 $ 79,458 $ 367,358 100.0 % 37.3
57-------------------------------------------------------------------------------- Of the commercial loans modified under the COVID-19 loan modification program, throughNovember 16, 2020 , we have received or are expecting to receive requests for additional assistance on loans with a combined gross loan amount, including undisbursed balances, of$87.4 million . This amount includes$14.6 million of loans that had exited the initial deferral period bySeptember 30, 2020 , and$72.8 million that are included in the table above, of which$69.0 million were in their second deferral as ofSeptember 30, 2020 . The Bank is evaluating requests for additional assistance as they are received. Securities. Securities increased$338.2 million from$1.19 billion atSeptember 30, 2019 to$1.53 billion atSeptember 30, 2020 . The weighted average yield on the securities portfolio decreased 92 basis points, from 2.54% atSeptember 30, 2019 to 1.62% atSeptember 30, 2020 , due primarily to purchases at lower market yields during the current year. The following table presents the distribution of our securities portfolio, at amortized cost, at the dates indicated. Overall, fixed-rate securities comprised 87% of our securities portfolio atSeptember 30, 2020 . The weighted average life ("WAL") is the estimated remaining maturity (in years) after three-month historical prepayment speeds and projected call option assumptions have been applied. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis. September 30, 2020 September 30, 2019 Amount Yield WAL Amount Yield WAL (Dollars in thousands) Fixed-rate securities: MBS $ 945,432 1.82 % 3.7 $ 625,840 2.46 % 2.9 GSE debentures 369,967 0.62 1.7 249,828 2.15 0.7 Municipal bonds 9,716 1.69 0.7 18,371 1.63 1.0 Total fixed-rate securities 1,325,115 1.49 3.1
894,039 2.35 2.3
Adjustable-rate securities: MBS 204,490 2.49 2.9
297,416 3.10 4.7
Total securities portfolio
The following table presents the carrying value of MBS in our portfolio by issuer at the dates presented.
At September 30,
2020 2019
(Dollars in thousands)
FNMA $ 809,232 $ 656,799
FHLMC 327,167 208,745$ 1,180,803 $ 936,487 58 --------------------------------------------------------------------------------Mortgage-Backed Securities - The balance of MBS, which primarily consists of securities ofU.S. GSEs, increased$244.3 million to$1.18 billion atSeptember 30, 2020 from$936.5 million atSeptember 30, 2019 . The following tables summarize the activity in our portfolio of MBS for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yields for the ending balances are as of the last day of the period presented and are generally derived from recent prepayment activity on the securities in the portfolio as of the dates presented. The beginning and ending WAL are the estimated remaining principal repayment term (in years) after three-month historical prepayment speeds have been applied. For the Three Months Ended September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 Amount Yield WAL Amount Yield WAL Amount Yield WAL Amount Yield WAL (Dollars in thousands)
Beginning balance -
carrying value $ 982,587 2.35 % 3.3
$ 936,487 2.67 % 3.5 Maturities and repayments (95,842) (75,293) (65,767) (72,635) Net amortization of (premiums)/discounts (608) (363) (279) (248) Purchases: Fixed 297,024 1.06 5.9 77,455 1.29 5.0 88,863 1.80 4.5
74,359 2.05 3.8
Adjustable - - - - - - - - - - - -
Change in valuation on
AFS securities (2,358) 7,470 13,184 (646)
Ending balance -
carrying value $ 1,180,803 1.94 3.5 $ 982,587 2.35 3.3 $ 973,318 2.50 3.6 $ 937,317 2.61 3.3 For the Year Ended September 30, 2020 2019 Amount Yield WAL Amount Yield WAL (Dollars in thousands) Beginning balance - carrying value$ 936,487 2.67 % 3.5$ 1,036,990 2.57 % 3.4 Maturities and repayments (309,537) (275,116) Net amortization of (premiums)/discounts (1,498) (1,304) Purchases: Fixed 537,701 1.35 5.2 77,755 2.53 4.1 Adjustable - - - 84,138 2.74 4.4 Valuation transferred from HTM to AFS - 3,039 Change in valuation on AFS securities 17,650 10,985 Ending balance - carrying value$ 1,180,803 1.94 3.5$ 936,487 2.67 3.5 59
--------------------------------------------------------------------------------Investment Securities - Investment securities, which consist ofU.S. GSE debentures (primarily issued byFNMA , FHLMC, or Federal Home Loan Banks) and municipal investments, increased$111.8 million to$380.1 million atSeptember 30, 2020 from$268.4 million atSeptember 30, 2019 . Municipal investments totaled$9.7 million atSeptember 30, 2020 . The following tables summarize the activity of investment securities for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yields for the ending balances are as of the last day of the period presented. The beginning and ending WALs represent the estimated remaining principal repayment terms (in years) of the securities after projected call dates have been considered, based upon market rates at each date presented. For the Three Months Ended September 30, 2020 June 30, 2020 March 31, 2020
Amount Yield WAL Amount Yield WAL Amount Yield WAL Amount Yield WAL
(Dollars in thousands)
Beginning balance -
carrying value $ 237,467 1.23 % 0.8 $
262,719 1.87 % 0.3
$ 268,376 2.11 % 0.8 Maturities, calls and sales (102,115) (125,000) (80,125) (51,175) Net amortization of (premiums)/discounts (54) (80) (49) 20 Purchases: Fixed 244,975 0.51 3.2 99,990 0.58 1.2 50,097 1.42 0.4 75,000 1.90 1.7 Change in valuation on AFS securities (126) (162) 526 49 Ending balance - carrying value$ 380,147 0.65 1.7$ 237,467 1.23 0.8$ 262,719 1.87 0.3
$ 292,270 2.00 0.8 For the Year Ended September 30, 2020 2019 Amount Yield WAL Amount Yield WAL (Dollars in thousands) Beginning balance - carrying value$ 268,376 2.11 % 0.8$ 289,942 2.05 % 2.2 Maturities, calls and sales (358,415) (249,771) Net amortization of (premiums)/discounts (163) 62 Purchases: Fixed 470,062 0.84 2.3 224,809 2.44 0.9 Valuation transferred from HTM to AFS - 47 Change in valuation on AFS securities 287 3,287
Ending balance - carrying value
$ 268,376 2.11 0.8 60
--------------------------------------------------------------------------------
Liabilities. Total liabilities at
Deposits. Total deposits were$6.19 billion atSeptember 30, 2020 , an increase of$609.5 million , or 10.9%, fromSeptember 30, 2019 . The increase in retail and business deposit balances was due primarily to economic stimulus payments, a reduction in consumer spending, and PPP loan proceeds being deposited at the Bank. Also, the Bank secured a new business deposit relationship during the current year which brought in$163.6 million of new deposit balances. Because some of these deposits related to the new business deposit relationship are COVID-19 related payments, we do not expect the full balance of the deposits received during fiscal year 2020 to be retained through fiscal year 2021. As previously noted, since the onset of the COVID-19 pandemic, the Bank has lowered rates paid on money market accounts and certificate of deposit products. Despite this, money market accounts increased$220.8 million and certificate of deposit accounts increased$73.8 million during the current fiscal year. The increase in the certificate of deposit accounts was primarily related to business accounts. As retail certificates of deposit matured during the current year, not all were renewed. Rather, customers moved some of those funds to more liquid investment options, such as the Bank's money market accounts. During fiscal year 2020, the Bank's weighted average retention rate of maturing retail certificates of deposit was approximately 80%, compared to approximately 85% during fiscal year 2019. The following table presents the amount, weighted average rate and percent of total for the components of our deposit portfolio at the dates presented. At September 30, 2020 2019 % of % of Amount Rate Total Amount Rate Total (Dollars in thousands) Non-interest-bearing checking$ 451,394 - % 7.3 %$ 357,284 - % 6.4 % Interest-bearing checking 865,782 0.10 14.0 717,121 0.09 12.8 Savings 433,808 0.06 7.0 321,494 0.05 5.8 Money market 1,419,180 0.37 22.9 1,198,343 0.70 21.5 Retail/business certificates of deposit 2,766,461 1.83 44.7 2,692,770 2.08 48.2 Public unit certificates of deposit 254,783 0.74 4.1 294,855 2.29 5.3$ 6,191,408 0.95 100.0 %$ 5,581,867 1.29 100.0 %
The following tables set forth scheduled maturity information for our
certificates of deposit, including public unit certificates of deposit, along
with associated weighted average rates, at
61
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Amount Due
More than More than
1 year 1 year to 2 years to 3 More than Total
Rate range or less 2 years years 3 years Amount Rate
(Dollars in thousands)
0.00 - 0.99%
1,374
1.00 - 1.99% 713,300 355,888 104,335
186,939 1,360,462 1.65
2.00 - 2.99% 342,326 362,353 313,831
127,632 1,146,142 2.38
3.00 - 3.99% - - 251 - 251 3.00
$ 1,505,501 $ 773,278 $ 426,520 $ 315,945 $ 3,021,244 1.74
Percent of total 49.8 % 25.6 % 14.1 % 10.5 %
Weighted average
rate 1.46 1.99 2.16 1.88
Weighted average
maturity (in
years) 0.5 1.5 2.4 3.7 1.4
Weighted average maturity for the retail/business certificate of deposit portfolio (in
years) 1.5
Amount Due
Over Over
3 months 3 to 6 6 to 12 Over
or less months months 12 months Total
(Dollars in thousands)
Retail/business certificates of
deposit less than $100,000 $ 177,414 $ 167,073 $ 337,599 $ 840,713 $ 1,522,799
Retail/business certificates of
deposit of $100,000 or more 134,441 140,790 310,654 657,777 1,243,662
Public unit certificates of deposit of$100,000 or more 100,761 39,310 97,459 17,253 254,783$ 412,616 $ 347,173 $ 745,712 $ 1,515,743 $ 3,021,244 Borrowings. Total borrowings atSeptember 30, 2020 were$1.79 billion , a decrease of$450.7 million , or 20.1%, fromSeptember 30, 2019 . As a result of excess liquidity due primarily to the inflow of deposits, management elected to reduce the Bank's level of borrowing during the current fiscal year. Not all maturing FHLB advances and repurchase agreement were renewed and the FHLB line of credit balance was paid off during the year. 62 -------------------------------------------------------------------------------- The following tables present borrowing activity for the periods shown. The borrowings presented in the table have original contractual terms of one year or longer or are tied to interest rate swaps with original contractual terms of one year or longer. Excluded from this table is a$3.0 million FHLB advance that had an original contractual term of less than one year. FHLB advances are presented at par. The effective rate is shown as a weighted average and includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. The weighted average maturity ("WAM") is the remaining weighted average contractual term in years. The beginning and ending WAMs represent the remaining maturity at each date presented. For new borrowings, the WAMs presented are as of the date of issue. For the Three Months Ended September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 Effective Effective Effective Effective Amount Rate WAM Amount Rate WAM Amount Rate WAM Amount Rate WAM (Dollars in thousands) Beginning balance$ 1,990,000 2.29 % 2.9$ 2,090,000 2.25 % 3.0$ 2,090,000 2.37 %
2.6
(440,000) 2.49 (200,000) 2.35 (415,000) 2.45 (350,000) 2.40
Repurchase agreements (100,000) 2.53 - - - - - -
New FHLB borrowings:
Fixed-rate - - - - - - 350,000 1.70 4.7 100,000 1.96 5.0
Interest rate swaps(1) 340,000 2.73 3.5 100,000 3.20 8.0 65,000 2.61 4.0 200,000 2.57 2.5
Ending balance $ 1,790,000 2.31 3.0 $ 1,990,000 2.29 2.9 $ 2,090,000 2.25 3.0 $ 2,090,000 2.37 2.6
For the Year Ended September 30,
2020 2019
Effective Effective
Amount Rate WAM Amount Rate WAM
(Dollars in thousands)
Beginning balance $ 2,140,000 2.38 % 2.6 $ 2,185,052 2.17 % 2.9
Maturities and prepayments:
FHLB advances (1,405,000) 2.44 (875,000) 2.10
Repurchase agreements (100,000) 2.53 - -
CCB acquisition -
junior subordinated
debentures assumed
(redeemed) - - - (10,052) 8.76 12.3
New FHLB borrowings:
Fixed-rate 450,000 1.76 4.8 200,000 2.77 4.5
Interest rate swaps(1) 705,000 2.74 3.9 640,000 2.67 5.0
Ending balance $ 1,790,000 2.31 3.0 $ 2,140,000 2.38 2.6
(1)Represents adjustable-rate FHLB advances for which the Bank has entered into
interest rate swaps to hedge the variability in cash flows associated with the
advances. The effective rate and WAM presented include the effect of the
interest rate swaps.
63
--------------------------------------------------------------------------------
Maturities - The following table presents the maturity of term borrowings (which
includes FHLB advances, at par, and repurchase agreements), along with
associated weighted average contractual and effective rates as of September 30,
2020 . The weighted average effective rate for term borrowings decreased seven
basis points during fiscal year 2020, to 2.31% at September 30, 2020 . The
decrease in the effective rate was due primarily to FHLB advances being replaced
at lower market interest rates.
Term Borrowings Amount
Maturity by Interest rate Total Effective
Fiscal Year Fixed-rate swaps(1) Amount Rate(2)
(Dollars in thousands)
2021 203,000 640,000 843,000 2.56 %
2022 200,000 - 200,000 2.23
2023 300,000 - 300,000 1.81
2024 100,000 - 100,000 3.39
2025 250,000 - 250,000 1.94
2026 100,000 - 100,000 1.60
$ 1,153,000 $ 640,000 $ 1,793,000 2.31
(1)Represents adjustable-rate FHLB advances for which the Bank has entered into
interest rate swaps with a notional amount of $640.0 million to hedge the
variability in cash flows associated with the advances. These advances are
presented based on their contractual maturity dates and will be renewed
periodically until the maturity or termination of the interest rate swaps. The
expected WAL of the interest rate swaps was 3.5 years at September 30, 2020 .
(2)The effective rate includes the impact of interest rate swaps and the
amortization of deferred prepayment penalties resulting from FHLB advances
previously prepaid.
The following table presents the maturity and weighted average repricing rate,
which is also the weighted average effective rate, of certificates of deposit,
split between retail/business and public unit amounts, and term borrowings for
the next four quarters as of September 30, 2020 .
Retail/ Business Public Unit Term
Maturity by Certificate Repricing Certificate Repricing Borrowings Repricing Repricing
Quarter End Amount Rate Amount Rate Amount(1) Rate Total Rate
(Dollars in thousands)
December 31, 2020 $ 311,855 1.76 % $ 100,761 0.43 % $ 53,000 1.98 % $ 465,616 1.50 %
March 31, 2021 307,863 1.78 39,310 1.19 150,000 1.97 497,173 1.79
June 30, 2021 342,662 1.51 49,185 0.48 - - 391,847 1.38
September 30, 2021 305,591 1.40 48,274 0.95 75,000 2.99 428,865 1.63
$ 1,267,971 1.61 $ 237,530 0.67 $ 278,000 2.24 $ 1,783,501 1.59
(1)The maturity date for FHLB advances tied to interest rate swaps is based on the maturity date of the related interest rate swap.
64
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Stockholders' Equity. Stockholders' equity was $1.28 billion at September 30,
2020 compared to $1.34 billion at September 30, 2019 . The $51.5 million decrease
was due primarily to the payment of cash dividends totaling $93.9 million and
the repurchase of common stock totaling $23.8 million , partially offset by net
income of $64.5 million during the current year. The cash dividends paid during
the current year totaled $0.68 per share and consisted of a $0.34 per share cash
true-up dividend related to fiscal year 2019 earnings, paid in December 2019 ,
per the Company's dividend policy, and four regular quarterly cash dividends of
$0.085 per share, totaling $0.34 per share. In the long run, management
considers the Bank's equity to total assets ratio of at least 10% an appropriate
level of capital. At September 30, 2020 , this ratio was 12.3%.
On October 20, 2020 , the Company announced a regular quarterly cash dividend of
$0.085 per share, or approximately $11.5 million , payable on November 20, 2020
to stockholders of record as of the close of business on November 6, 2020 . On
October 28, 2020 , the Company announced a fiscal year 2020 cash true-up dividend
of $0.13 per share, or approximately $17.6 million , related to fiscal year 2020
earnings. The $0.13 per share cash true-up dividend was determined by taking the
difference between total earnings for fiscal year 2020 and total regular
quarterly cash dividends paid during fiscal year 2020, divided by the number of
shares outstanding as of October 16, 2020 . The cash true-up dividend is payable
on December 4, 2020 to stockholders of record as of the close of business on
November 20, 2020 , and is the result of the Board of Directors' commitment to
distribute to stockholders 100% of the annual earnings of the Company for fiscal
year 2020.
During the current fiscal year, the Company repurchased $23.8 million , or
2,558,100 shares, of common stock. Subsequent to September 30, 2020 , through
November 24, 2020 , the Company repurchased an additional $1.5 million , or
164,400 shares, of common stock. As of November 24, 2020 , there was still $44.7
million authorized under the existing stock repurchase plan for additional
purchases of the Company's common stock. Shares may be repurchased from time to
time based upon market conditions, available liquidity and other factors. This
plan has no expiration date; however, the Federal Reserve Bank's approval for
the Company to repurchase shares extends through August 2021 .
At September 30, 2020 , Capitol Federal Financial, Inc. , at the holding company
level, had $82.5 million on deposit at the Bank. For fiscal year 2021, it is
currently the intention of the Board of Directors to continue the payout of 100%
of the Company's earnings to the Company's stockholders. The payout is expected
to be in the form of regular quarterly cash dividends of $0.085 per share,
totaling $0.34 for the year, and a cash true-up dividend equal to fiscal year
2021 earnings in excess of the amount paid as regular quarterly cash dividends
during fiscal year 2021. It is anticipated that the fiscal year 2021 cash
true-up dividend will be paid in December 2021 . 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 works to find multiple ways to provide stockholder value. This has
primarily been through the payment of cash dividends and stock buybacks. The
Company has maintained a policy of paying out 100% of its earnings to
stockholders in the form of quarterly cash dividends and an annual cash true-up
dividend in December of each year. In order to provide additional stockholder
value, the Company has paid a True Blue Capitol cash dividend of $0.25 per share
in June of each of the past six years. The Company has paid the True Blue
Capitol dividend primarily due to excess capital levels at the Company and Bank.
The Company considers various business strategies and their impact on capital
and asset measures on both a current and future basis, as well as regulatory
capital levels and requirements, in determining the amount, if any, and timing
of the True Blue dividend. Given the state of economic uncertainty and how that
may play out with the credit risk exposure in the Bank's loan portfolio, the
Company elected to defer the annual True Blue dividend in June 2020 and did not
ask for a regulatory non-objection at that time to move capital from the Bank to
the Company to pay that dividend. It is management's intention to ask for a
regulatory non-objection at some point in the future and to pay this dividend
when economic conditions are more certain. It remains the Company's intention to
pay out 100% of its earnings.
65
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The following table presents regular quarterly cash dividends and special cash
dividends paid in calendar years 2020, 2019, and 2018. The amounts represent
cash dividends paid during each period. The 2020 true-up dividend amount
presented represents the dividend payable on December 6, 2020 to stockholders of
record as of November 22, 2020 .
Calendar Year
2020 2019 2018
Amount Per Share Amount Per Share Amount Per Share
(Dollars in thousands, except per share amounts)
Regular quarterly dividends paid
Quarter ended March 31 $ 11,733 $ 0.085 $ 11,700 $ 0.085 $ 11,427 $ 0.085
Quarter ended June 30 11,733 0.085 11,708 0.085 11,429 0.085
Quarter ended September
30 11,733 0.085 11,713 0.085 11,430 0.085
Quarter ended December 31 11,517 0.085 11,731 0.085 11,696 0.085
True-up dividends paid 17,614 0.130 46,932 0.340 53,666 0.390
True Blue dividends paid - - 34,446 0.250 33,614 0.250
Calendar year-to-date
dividends paid $ 64,330 $ 0.470 $ 128,230 $ 0.930 $ 133,262 $ 0.980
Weighted Average Yields and Rates. The following table presents the weighted
average yields on interest-earning assets, the weighted average rates paid on
interest-bearing liabilities, and the resultant interest rate spreads at the
dates indicated. The weighted average yields and rates include amortization of
fees, costs, premiums and discounts, which are considered adjustments to
yields/rates. The weighted average rate on FHLB borrowings includes the impact
of interest rate swaps. Weighted average yields on tax-exempt securities are not
calculated on a fully taxable equivalent basis.
At September 30,
2020 2019 2018
Yield on:
Loans receivable 3.57 % 3.81 % 3.74 %
MBS 1.94 2.67 2.57
Investment securities 0.65 2.11 2.05
FHLB stock 4.64 7.47 7.22
Cash and cash equivalents 0.09 1.80 2.19
Combined yield on interest-earning assets 3.18 3.64 3.57
Rate paid on:
Checking 0.07 0.06 0.05
Savings 0.06 0.05 0.07
Money market 0.37 0.70 0.47
Retail/business certificates 1.83 2.08 1.79
Wholesale certificates 0.74 2.29 1.89
Total deposits 0.95 1.29 1.06
Total borrowings 2.31 2.37 2.18
Combined rate paid on interest-bearing liabilities 1.26 1.60 1.39
Net interest rate spread 1.92 2.04 2.18
66-------------------------------------------------------------------------------- Rate/Volume Analysis. The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing fiscal years 2020 to 2019. For the comparison of fiscal years 2019 to 2018, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 . For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate, and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. For the Year Ended September 30, 2020 vs. 2019 Increase (Decrease) Due to Volume Rate Total (Dollars in thousands) Interest-earning assets: Loans receivable$ (2,074) $ (11,661) $ (13,735) MBS (612) (2,109) (2,721) Investment securities (236) (1,663) (1,899) FHLB stock (406) (1,590) (1,996) Cash and cash equivalents (1,322) (3,303) (4,625) Total interest-earning assets (4,650) (20,326)
(24,976)
Interest-bearing liabilities: Checking 65 82 147 Savings 29 66 95 Money market (14) (2,200) (2,214) Certificates of deposit 2,048 1,321 3,369 Borrowings (8,876) (442) (9,318) Total interest-bearing liabilities (6,748) (1,173)
(7,921)
Net change in net interest income$ 2,098 $ (19,153) $ (17,055) 67
-------------------------------------------------------------------------------- Average Balance Sheets. The following table presents the average balances of our assets, liabilities, and stockholders' equity, and the related weighted average yields and rates on our interest-earning assets and interest-bearing liabilities for the periods indicated. For fiscal year 2018 information, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 . Weighted average yields are derived by dividing annual income by the average balance of the related assets, and weighted average rates are derived by dividing annual expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis. For the Year Ended September 30, 2020 2019 Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Amount Paid Rate Amount Paid Rate Assets: (Dollars in thousands) Interest-earning assets: One- to four-family loans$ 6,529,265 $ 226,703 3.47 %$ 6,681,441 $ 240,919 3.61 % Commercial loans 785,127 37,320 4.68 701,771 34,810 4.90 Consumer loans 123,334 6,471 5.25 135,683 8,500 6.26 Total loans receivable(1) 7,437,726 270,494 3.63 7,518,895 284,229 3.77 MBS(2) 954,197 23,009 2.41 977,925 25,730 2.63 Investment securities(2)(3) 270,683 4,467 1.65 281,490 6,366 2.26 FHLB stock 100,251 5,827 5.81 106,057 7,823 7.38 Cash and cash equivalents(4) 179,142 1,181 0.65 251,015 5,806 2.28 Total interest-earning assets(1)(2) 8,941,999 304,978 3.40 9,135,382 329,954 3.61 Other non-interest-earning assets 461,614 385,803 Total assets$ 9,403,613 $ 9,521,185 Liabilities and stockholders' equity: Interest-bearing liabilities: Checking$ 1,180,110 762 0.06$ 1,073,825 615 0.06 Savings 388,662 292 0.08 342,617 197 0.06 Money market 1,252,992 6,647 0.53 1,255,001 8,861 0.71 Retail/business certificates 2,716,945 55,238 2.03 2,531,923 48,496 1.92 Wholesale certificates 282,947 4,659 1.65 369,282 8,032 2.18 Total deposits 5,821,656 67,598 1.16 5,572,648 66,201 1.19 Borrowings(5) 2,065,966 48,045 2.31 2,441,002 57,363 2.34 Total interest-bearing liabilities 7,887,622 115,643 1.46 8,013,650 123,564 1.54 Other non-interest-bearing liabilities 203,990 149,156 Stockholders' equity 1,312,001 1,358,379 Total liabilities and stockholders' equity$ 9,403,613 $ 9,521,185 Net interest income(6)$ 189,335 $ 206,390 Net interest rate spread(7)(8) 1.94 2.07 Net interest-earning assets$ 1,054,377 $
1,121,732
Net interest margin(8)(9) 2.12 2.26
Ratio of interest-earning assets to interest-bearing
liabilities 1.13x 1.14x
68-------------------------------------------------------------------------------- (1)Balances are adjusted for unearned loan fees and deferred costs. Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent. (2)AFS securities are adjusted for unamortized purchase premiums or discounts. (3)The average balance of investment securities includes an average balance of nontaxable securities of$13.8 million , and$21.6 million , for the years endedSeptember 30, 2020 and 2019, respectively. (4)There were no cash and cash equivalents related to the leverage strategy during the year endedSeptember 30, 2020 . The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of$150.7 million for the year endedSeptember 30, 2019 . (5)There were no borrowings related to the leverage strategy during the year endedSeptember 30, 2020 . Included in this line item, for the year endedSeptember 30, 2019 , are borrowings related to the leverage strategy with an average outstanding balance of$157.8 million and interest paid of$3.9 million , at a weighted average rate of 2.46%, and borrowings not related to the leverage strategy with an average outstanding balance of$2.28 billion and interest paid of$53.4 million , at a weighted average rate of 2.33%. The FHLB advance amounts and rates included in this line item include the effect of interest rate swaps and are net of deferred prepayment penalties. (6)Net interest income represents the difference between interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income depends on the average balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them. (7)Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (8)The table below provides a reconciliation between certain performance ratios presented in accordance with GAAP and the performance ratios excluding the effects of the leverage strategy, which are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide the performance ratios without the leverage strategy because of the unique nature of the leverage strategy. The leverage strategy reduces some of our performance ratios due to the small amount of earnings associated with the transaction in comparison to the size of the transaction, while increasing our net income. The leverage strategy was not in place during fiscal year 2020. The pre-tax yield on the leverage strategy was 0.03% for the year endedSeptember 30, 2019 . For the Year Ended September 30, 2019 Actual Leverage Adjusted (GAAP) Strategy (Non-GAAP) Net interest margin 2.26 % (0.04) % 2.30 % Net interest rate spread 2.07 (0.03) 2.10
(9)Net interest margin represents net interest income as a percentage of average interest-earning assets.
69
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Comparison of Operating Results for the Years Ended September 30, 2020 and 2019
The Company recognized net income of $64.5 million , or $0.47 per share, for the
year ended September 30, 2020 compared to net income of $94.2 million , or $0.68
per share, for the year ended September 30, 2019 . The decrease in net income was
due primarily to a $21.6 million increase in provision for credit losses and a
$17.1 million decrease in net interest income, partially offset by a decrease in
income tax expense.
Net interest income decreased $17.1 million , or 8.3%, from the prior year to
$189.3 million for the current year. The net interest margin decreased 14 basis
points, from 2.26% for the prior year to 2.12% for the current year. The
leverage strategy was suspended at certain times during the prior year and
during all of the current year due to the negative interest rate spreads between
the related FHLB borrowings and cash held at the FRB of Kansas City , making the
transaction unprofitable. When the leverage strategy is in place, it increases
our net interest income but 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 18 basis points, from 2.30% for the prior year to 2.12% for the
current year. The decrease in the net interest margin, excluding the effects of
the leverage strategy, was due mainly to a decrease in the loan portfolio yield,
specifically the yield on the correspondent one- to four-family loan portfolio.
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, 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. The leverage strategy was not in place during
the current year. 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.
Interest and Dividend Income
The weighted average yield on total interest-earning assets decreased 21 basis
points, from 3.61% for the prior year to 3.40% for the current year, and the
average balance of interest-earning assets decreased $193.4 million . Absent the
impact of the leverage strategy, the weighted average yield on total
interest-earning assets would have decreased 22 basis points, from 3.62% for the
prior year to 3.40% for the current year, and the average balance of
interest-earning assets would have decreased $35.6 million . The decrease in the
weighted average yield between periods was due primarily to a decrease in the
loan portfolio yield. The following table presents the components of interest
and dividend income for the time periods presented, along with the change
measured in dollars and percent.
For the Year Ended
September 30, Change Expressed in:
2020 2019 Dollars Percent
(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable $ 270,494 $ 284,229 $ (13,735) (4.8) %
MBS 23,009 25,730 (2,721) (10.6)
FHLB stock 5,827 7,823 (1,996) (25.5)
Investment securities 4,467 6,366 (1,899) (29.8)
Cash and cash equivalents 1,181 5,806 (4,625) (79.7)
Total interest and dividend
income $ 304,978 $ 329,954 $ (24,976) (7.6)
The decrease in interest income on loans receivable was due mainly to a decrease
in yield on correspondent loans, including a $5.8 million increase in the
amortization of premiums related to increases in 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
$152.2 million , or 2.3%, partially offset by a $64.9 million , or 9.2%, increase
in the average balance of higher-yielding commercial loans, excluding PPP loans.
The weighted average yield on the loans receivable portfolio decreased 14 basis
points, from 3.77% for the prior year to 3.63% for the current year.
70
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The decrease in interest income on the MBS portfolio was due primarily to a 22
basis point decrease in the weighted average yield to 2.41% in the current year
as a result of new purchases at lower market yields and the repricing of
existing adjustable-rate MBS to lower market yields. The decrease in dividend
income on FHLB stock was due mainly to a decrease in the dividend rate paid by
FHLB, as well as to the leverage strategy not being in place during the current
year. The decrease in interest income on investment securities was due mainly to
a 61 basis point decrease in the weighted average yield to 1.65% in the current
year as a result of calls and maturities either being replaced at lower market
rates or not being replaced. The decrease in interest income on cash and cash
equivalents was due primarily to the leverage strategy being in place for a
portion of the prior year and not being in place during the current year, along
with a decrease in the yield earned on cash held at the FRB of Kansas City .
Interest Expense
The weighted average rate paid on total interest-bearing liabilities decreased
eight basis points, from 1.54% for the prior year to 1.46% for the current year,
and the average balance of interest-bearing liabilities decreased $126.0
million . Absent the impact of the leverage strategy, the weighted average rate
paid on total interest-bearing liabilities would have decreased six basis
points, from 1.52% for the prior year to 1.46% for the current year, while the
average balance of interest-bearing liabilities would have increased $31.8
million . The following table presents the components of interest expense for the
time periods presented, along with the change measured in dollars and percent.
For the Year Ended
September 30, Change Expressed in:
2020 2019 Dollars Percent
(Dollars in thousands)
INTEREST EXPENSE:
Deposits $ 67,598 $ 66,201 $ 1,397 2.1 %
Borrowings 48,045 57,363 (9,318) (16.2)
Total interest expense $ 115,643 $ 123,564 $ (7,921) (6.4)
The increase in interest expense on deposits was due to an increase in the cost of the retail/business certificate of deposit portfolio, partially offset by decreases in the cost of wholesale certificates of deposit and money market accounts. The weighted average rate of the retail/business certificate of deposit portfolio increased 11 basis points, to 2.03% for the current year, and the average balance increased$185.0 million , or approximately 7%. 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. During the fourth quarter of fiscal year 2019, the Bank held the unTraditional campaign with above-market rates, resulting in growth in the short-term and certain intermediate-term certificates of deposit. Since the onset of the COVID-19 pandemic, the retail/business certificate of deposit portfolio has been gradually repricing down as certificates renew to lower offered rates. 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$5.4 million from the prior year due primarily to a decrease in the average balance of such borrowings, as certain maturing FHLB advances and repurchase agreements were not replaced and the Bank paid down its FHLB line of credit with funds generated from the increase in deposits. Interest expense on FHLB borrowings associated with the leverage strategy decreased$3.9 million from the prior year due to the leverage strategy being in place for a portion of the prior year and not being in place at all during the current year. Provision for Credit Losses The Bank recorded a provision for credit losses during the current year of$22.3 million , compared to$750 thousand during the prior year. The$22.3 million provision for credit losses in the current year was primarily related to the deterioration of economic conditions as a result of COVID-19. See "Part I, Item 1. Business - Asset Quality - Allowance for credit losses and Provision for credit losses" for additional discussion regarding management's evaluation of the adequacy of the Bank's ACL atSeptember 30, 2020 . 71 -------------------------------------------------------------------------------- Non-Interest Income The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent. For the Year Ended September 30, Change Expressed in: 2020 2019 Dollars Percent (Dollars in thousands) NON-INTEREST INCOME: Deposit service fees$ 11,285 $ 12,740 $ (1,455) (11.4) % Insurance commissions 2,487 2,821 (334) (11.8) Other non-interest income 5,827 6,397 (570) (8.9) Total non-interest income$ 19,599 $ 21,958 $ (2,359) (10.7) The decrease in deposit service fees was due mainly to a decrease in service charge income, primarily resulting from a decrease in consumer activity related to the COVID-19 pandemic, along with the discontinuation of point-of-sale service charges, which the Bank ceased charging inApril 2019 . The decrease in insurance commissions was due primarily to a decrease in the amount of annual contingent insurance commissions. The decrease in other non-interest income was due mainly to a decrease in loan-related fees, primarily prepayment fees and late charges, compared to the prior year. Non-Interest Expense The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent. For the Year Ended September 30, Change Expressed in: 2020 2019 Dollars Percent (Dollars in thousands) NON-INTEREST EXPENSE: Salaries and employee benefits$ 52,996 $ 53,145 $ (149) (0.3) % Information technology and related expense 16,974 17,615 (641) (3.6) Occupancy, net 13,870 13,032 838 6.4 Regulatory and outside services 5,762 5,813 (51) (0.9) Advertising and promotional 4,889 5,244 (355) (6.8) Deposit and loan transaction costs 2,890 2,478 412 16.6 Office supplies and related expense 2,195 2,439 (244) (10.0) Federal insurance premium 914 1,172 (258) (22.0) Other non-interest expense 5,514 6,006 (492) (8.2) Total non-interest expense$ 106,004 $ 106,944 $ (940) (0.9) The decrease in information technology and related expense was due mainly to the prior year including costs related to the integration of the operations of CCB. The increase in occupancy, net was due primarily to an increase in facility-related costs resulting from the impact of the COVID-19 pandemic, along with an increase in depreciation expense. The decrease in advertising and promotional expenses was due mainly to adjustments in advertising schedules, postponements of campaigns, and cancellations of certain sponsorships as a result of the COVID-19 pandemic. The increase in deposit and loan transaction costs was due mainly to the timing of loan origination-related costs. The decrease in the federal insurance premium was due mainly to the Bank utilizing an assessment credit from theFDIC during the majority of the current year. The decrease in other non-interest expense was due primarily to a decrease in amortization of deposit intangibles, as well as a decrease in debit card fraud losses. 72 -------------------------------------------------------------------------------- The Company's efficiency ratio was 50.74% for the current year compared to 46.83% for the prior year. The change in the efficiency ratio was due to lower net interest income in the current year compared to the prior year. The efficiency ratio is a measure of a financial institution's total non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income. A higher value indicates that the financial institution is generating revenue with a proportionally higher level of expense, relative to the net interest margin. Income Tax Expense The following table presents pretax income, income tax expense, and net income for the time periods presented, along with the change measured in dollars and percent. For the Year Ended September 30, Change Expressed in: 2020 2019 Dollars Percent (Dollars in thousands) Income before income tax expense$ 80,630 $ 120,654 $ (40,024) (33.2) % Income tax expense 16,090 26,411 (10,321) (39.1) Net income$ 64,540 $ 94,243 $ (29,703) (31.5) Effective Tax Rate 20.0 % 21.9 % The decrease in income tax expense was due primarily to lower pretax income in the current year. The lower effective tax rate in the current year compared to the prior year was due mainly to the Company's permanent differences, such as low income housing partnership tax credits, which generally reduce our tax expense, having a proportionately larger impact given the lower pretax income in the current year period. Additionally, an income tax benefit was recognized during the current year as a result of favorable federal tax guidance issued during the current year related to certain bank-owned life insurance policies added in the CCB acquisition. Management anticipates the effective income tax rate for fiscal year 2021 will be approximately 21% to 22%. Comparison of Operating Results for the Years EndedSeptember 30, 2019 and 2018 For this discussion, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Operating Results for the Years EndedSeptember 30, 2019 and 2018" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
Liquidity and Capital Resources
Liquidity refers to our ability to generate sufficient cash to fund ongoing
operations, to repay maturing certificates of deposit and other deposit
withdrawals, to repay maturing borrowings, and to fund loan commitments.
Liquidity management is both a daily and long-term function of our business
management. The Company's most available liquid assets are represented by cash
and cash equivalents, AFS securities, and short-term investment securities. The
Bank's primary sources of funds are deposits, FHLB borrowings, repurchase
agreements, repayments and maturities of outstanding loans and MBS and other
short-term investments, and funds provided by operations. The Bank's long-term
borrowings primarily have been used to manage the Bank's interest rate risk with
the intention to improve the earnings of the Bank while maintaining capital
ratios in excess of regulatory standards for well-capitalized financial
institutions. In addition, the Bank's focus on managing risk has provided
additional liquidity capacity by maintaining a balance of MBS and investment
securities available as collateral for borrowings.
We generally intend to manage cash reserves sufficient to meet short-term
liquidity needs, which are routinely forecasted for 10, 30, and 365 days.
Additionally, on a monthly basis, we perform a liquidity stress test in
accordance with the Interagency Policy Statement on Funding and Liquidity Risk
Management. The liquidity stress test incorporates both short-term and long-term
liquidity scenarios in order to identify and to quantify liquidity risk.
Management also monitors key liquidity statistics related to items such as
wholesale funding gaps, borrowings capacity, and available unpledged collateral,
as well as various liquidity ratios. See the "Executive Summary" above for
information regarding the impact of the COVID-19 pandemic on our liquidity.
73
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In the event short-term liquidity needs exceed available cash, the Bank has
access to a line of credit at FHLB and the FRB of Kansas City's discount window.
See "Part I, Item 1. Business - Sources of Funds" for information regarding
limits on the Bank's FHLB borrowings. The amount that can be borrowed from the
FRB of Kansas City's discount window is based upon the fair value of securities
pledged as collateral and certain other characteristics of those securities.
Management tests the Bank's access to the FRB of Kansas City's discount window
annually with a nominal, overnight borrowing.
If management observes a trend in the amount and frequency of line of credit
utilization and/or short-term borrowings that is not in conjunction with a
planned strategy, such as the leverage strategy, the Bank will likely utilize
long-term wholesale borrowing sources such as FHLB advances and/or repurchase
agreements to provide long-term, fixed-rate funding. The maturities of these
long-term borrowings are generally staggered in order to mitigate the risk of a
highly negative cash flow position at maturity. The Bank's internal policy
limits total borrowings to 55% of total assets. At September 30, 2020 , the Bank
had total borrowings, at par, of $1.79 billion , or approximately 19% of total
assets, all of which were FHLB advances.
The amount of FHLB borrowings outstanding at September 30, 2020 was $1.79
billion , of which $843.0 million were advances scheduled to mature in the next
12 months, including $640.0 million of one-year floating-rate FHLB advances tied
to interest rate swaps. All FHLB borrowings are secured by certain qualifying
loans pursuant to a blanket collateral agreement with FHLB. At September 30,
2020 , the ratio of the par value of the Bank's FHLB borrowings to Call Report
total assets was 19%.
At September 30, 2020 , the Bank had no repurchase agreements. The Bank may enter
into repurchase agreements as management deems appropriate, not to exceed 15% of
total assets, and subject to the total borrowings internal policy limit of 55%
as discussed above.
The Bank could utilize the repayment and maturity of outstanding loans, MBS, and
other investments for liquidity needs rather than reinvesting such funds into
the related portfolios. At September 30, 2020 , the Bank had $1.22 billion of
securities that were eligible but unused as collateral for borrowing or other
liquidity needs.
The Bank has access to other sources of funds for liquidity purposes, such as
brokered and public unit certificates of deposit. As of September 30, 2020 , the
Bank's policy allowed for combined brokered and public unit certificates of
deposit up to 15% of total deposits. At September 30, 2020 , the Bank did not
have any brokered certificates of deposit and public unit certificates of
deposit were approximately 4% of total deposits. The Bank had pledged securities
with an estimated fair value of $331.0 million as collateral for public unit
certificates of deposit at September 30, 2020 . The securities pledged as
collateral for public unit certificates of deposit are held under joint custody
with FHLB and generally will be released upon deposit maturity.
At September 30, 2020 , $1.51 billion of the Bank's certificate of deposit
portfolio was scheduled to mature within the next 12 months, including $237.5
million of public unit certificates of deposit. Based on our deposit retention
experience and our current pricing strategy, we anticipate the majority of the
maturing retail certificates of deposit will renew or transfer to other deposit
products of the Bank at prevailing rates, although no assurance can be given in
this regard. We also anticipate the majority of the maturing public unit
certificates of deposit will be replaced with similar wholesale funding
products, depending on availability and pricing.
While scheduled payments from the amortization of loans and MBS and payments on
short-term investments are relatively predictable sources of funds, deposit
flows, prepayments on loans and MBS, and calls of investment securities are
greatly influenced by general interest rates, economic conditions, and
competition, and are less predictable sources of funds. To the extent possible,
the Bank manages the cash flows of its loan and deposit portfolios by the rates
it offers customers.
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The following table presents the contractual maturities of our loan, MBS, and
investment securities portfolios at September 30, 2020 , along with associated
weighted average yields. Loans and securities which have adjustable interest
rates are shown as maturing in the period during which the contract is due. The
table does not reflect the effects of possible prepayments or enforcement of due
on sale clauses. As of September 30, 2020 , the amortized cost of investment
securities in our portfolio which are callable or have pre-refunding dates
within one year was $228.0 million .
Loans(1) MBS Investment Securities Total
Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands)
Amounts due:
Within one year $ 261,605 4.17 % $ 3,664 2.63 % After one year: Over one to two years 110,991 3.11 1,715 3.08 5,583 1.84 118,289 3.05 Over two to three years 62,534 4.46 32,457 1.61 75,269 0.41 170,260 2.13 Over three to five years 128,088 4.46 24,752 2.19 295,286 0.68 448,126 1.84 Over five to ten years 777,216 3.70 272,681 2.34 - - 1,049,897 3.35 Over ten to fifteen years 1,424,450 3.23 570,142 1.70 - - 1,994,592 2.79 After fifteen years 4,460,112 3.59 275,392 2.06 - - 4,735,504 3.50 Total due after one year 6,963,391 3.54 1,177,139 1.94
376,138 0.64 8,516,668 3.19
$ 7,224,996 3.57 $ 1,180,803 1.94 $ 380,147 0.65 $ 8,785,946 3.22
(1)The maturity date for home equity loans, including those that do not have a
stated maturity date, assumes the customer always makes the required minimum
payment. All other loans that do not have a stated maturity date and overdraft
loans are included in the amounts due within one year. Construction loans are
presented based on the estimated term to complete construction.
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--------------------------------------------------------------------------------Limitations on Dividends and Other Capital Distributions
OCC regulations impose restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Under FRB and OCC safe harbor regulations, savings institutions generally may make capital distributions during any calendar year equal to earnings of the previous two calendar years and current year-to-date earnings. A savings institution that is a subsidiary of a savings and loan holding company, such as the Company, that proposes to make a capital distribution must submit written notice to the OCC and FRB 30 days prior to such distribution. The OCC and FRB may object to the distribution during that 30-day period based on safety and soundness or other concerns. Savings institutions that desire to make a larger capital distribution, are under special restrictions, or are not, or would not be, sufficiently capitalized following a proposed capital distribution must obtain regulatory non-objection prior to making such a distribution. The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company. So long as the Bank remains well capitalized after each capital distribution (as evidenced by maintaining a CBLR greater than the required percentage), and operates in a safe and sound manner, it is management's belief that the OCC and FRB will continue to allow the Bank to distribute its earnings to the Company, although no assurance can be given in this regard.
Capital
Consistent with our goal to operate a sound and profitable financial
organization, we actively seek to maintain a well-capitalized status for the
Bank per the regulatory framework for prompt corrective action ("PCA").
Qualifying institutions that elect to use the CBLR framework, such as the Bank
and the Company, that maintain a the required minimum leverage ratio 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 capital requirements for the well capitalized category under the agencies'
PCA framework. As of September 30, 2020 , the Bank's CBLR was 12.4% and the
Company's CBLR was 13.7%, which exceeded the minimum requirements. See "Part I,
Item 1. Business - Regulation and Supervision - Regulatory Capital Requirements"
for additional information related to regulatory capital.
The following table presents a reconciliation of equity under GAAP to regulatory
capital amounts, as of September 30, 2020 , for the Bank and the Company (dollars
in thousands):
Bank Company
Total equity as reported under GAAP$ 1,165,813 $ 1,284,859 AOCI 16,505
16,505
Goodwill and other intangibles, net of associated deferred taxes (13,510) (13,510) Total tier 1 capital$ 1,168,808 $ 1,287,854 Contingencies
In the normal course of business, the Company and the Bank are named defendants
in various lawsuits and counter claims. In the opinion of management, after
consultation with legal counsel, none of the currently pending suits are
expected to have a materially adverse effect on the Company's consolidated
financial statements for the year ended
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--------------------------------------------------------------------------------Off-Balance Sheet Arrangements, Commitments and Contractual Obligations
The following table summarizes our contractual obligations, along with
associated weighted average contractual rates, as of
Maturity Range
Less than 1 to 3 3 to 5 More than
Total 1 year years years 5 years
(Dollars in thousands)
Operating leases $ 20,842 $ 1,192 $ 2,512 $ 1,830 $ 15,308
Certificates of deposit $ 3,021,244 $ 1,505,501 $ 1,199,798 $ 315,041 $ 904
Rate 1.74 % 1.46 % 2.05 % 1.88 % 1.53 %
Borrowings $ 1,793,000 $ 843,000 $ 500,000 $ 350,000 $ 100,000
Rate 1.41 % 0.76 % 1.91 % 2.27 % 1.28 %
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of customers. These
financial instruments consist primarily of commitments to originate, purchase,
or participate in loans or fund lines of credit, along with standby letters of
credit. Standby letters of credit generally are contingent upon the failure of
the customer to perform according to the terms of an underlying contract with a
third party. The credit risks associated with these off-balance-sheet
commitments are essentially the same as those involved with extending loans to
customers and these commitments are subject to normal credit policies. The
contractual amounts of these off-balance sheet financial instruments as of
September 30, 2020 were as follows (dollars in thousands):
Commitments to originate and purchase/participate in loans $ 248,607
Commitments to fund unused lines of credit 283,199
Standby letters of credit 1,372
Total $ 533,178
It is expected that some of the commitments will expire unfunded; therefore, the
amounts reflected in the table above are not necessarily indicative of future
liquidity requirements. Additionally, the Bank is not obligated to honor
commitments to fund unused lines of credit if a customer is delinquent or
otherwise in violation of the loan agreement.
The Company has investments in several low income housing partnerships. These
partnerships supply funds for the construction and operation of apartment
complexes that provide affordable housing to that segment of the population with
lower family income. If these developments successfully attract a specified
percentage of residents falling in that lower income range, federal income tax
credits are made available to the partners. The tax credits are normally
recognized over ten years, and they play an important part in the anticipated
yield from these investments. In order to continue receiving the tax credits
each year over the life of the partnership, the low-income residency targets
must be maintained. Under the terms of the partnership agreements, the Company
has a commitment to fund a specified amount that will be due in installments
over the life of the agreements. The majority of the commitments at
September 30, 2020 are projected to be funded through the end of calendar year
2022. At September 30, 2020 , the investments totaled $89.7 million and are
included in other assets in the consolidated balance sheet. Unfunded
commitments, which are recorded as liabilities, totaled $44.5 million
at September 30, 2020 .
We anticipate we will continue to have sufficient funds, through repayments and
maturities of loans and securities, deposits and borrowings, to meet our current
commitments.
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