EDGAR 10-K Filing

Company CIK: 1490906
Filing Year: 2021
Filename: 1490906_10-K_2021_0001490906-21-000065.json

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ITEM 1. BUSINESS
Item 1. Business
General
The Company is a Maryland corporation with common stock traded on the Global Select tier of the NASDAQ Stock Market. The Bank is a wholly-owned subsidiary of the Company and is a federally chartered and insured savings bank headquartered in Topeka, Kansas. 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. We attract deposits primarily from the general public and from businesses, and invest those funds primarily in permanent loans secured by first mortgages on owner-occupied, one- to four-family residences. We also originate and participate with other lenders in commercial loans, originate consumer loans primarily secured by mortgages on one- to four-family residences, and invest in certain investment securities and mortgage-backed securities ("MBS") using funding from deposits and Federal Home Loan Bank Topeka ("FHLB") borrowings. We offer a variety of deposit accounts having a wide range of interest rates and terms, which generally include savings accounts, money market accounts, interest-bearing and non-interest-bearing checking accounts, and certificates of deposit with terms ranging from 91 days to 120 months.
In August 2018, the Company completed the acquisition of Capital City Bancshares, Inc. and its wholly-owned subsidiary Capital City Bank, a commercial bank with $450 million in assets that was headquartered in Topeka, Kansas. The acquisition of Capital City Bank allowed us to advance our commercial banking strategy while staying under $10 billion in assets, and allowed us to offer trust and brokerage services. The Bank competes for commercial banking business through a wide variety of commercial deposit and expanded lending products.
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. On a weekly basis, management reviews deposit flows, loan demand, cash levels, and changes in several market rates to assess all pricing strategies. The Bank's pricing strategy for first mortgage loan products includes setting interest rates based on secondary market prices and competitor pricing for our local lending markets, and secondary market prices and competitor pricing for our correspondent lending markets. Pricing for commercial loans is generally based on competitor pricing and the credit risk of the borrower with consideration given to the overall relationship of the borrower. Generally, deposit pricing is based upon a survey of competitors in the Bank's market areas, and the need to attract funding and retain maturing deposits. The majority of our loans are fixed-rate products with maturities up to 30 years, while the majority of our retail deposits are either non-maturity deposits or have stated maturities of less than two years.
The Company is significantly affected by prevailing economic conditions, including federal monetary and fiscal policies and federal regulation of financial institutions. Deposit balances are influenced by a number of factors, including interest rates paid on competing investment products, the level of personal income, and the personal rate of savings within our market areas. Lending activities are influenced by the demand for housing and business activity levels, our loan underwriting guidelines compared to those of our competitors, as well as interest rate pricing competition from other lending institutions.
Management Strategy
We seek 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 of Kansas. 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 and participate in commercial loans with other lenders, both locally and outside our market areas. 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 loan business. We rely on our marketing efforts and customer service reputation to attract 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 our network of 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. We 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 at September 30, 2021 was approximately $129.7 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 capital ratios in excess of the well-capitalized standards set by the Office of the Comptroller of the Currency (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. We continue to generate returns to stockholders through dividend payments. Total dividends declared and paid during fiscal year 2021 were $117.9 million, including a $0.40 per share, or $54.2 million, True Blue® Capitol Dividend paid in June 2021. The True Blue Capitol Dividend represented a $0.20 per share cash dividend for fiscal year 2020 and a $0.20 per share cash dividend for fiscal year 2021. 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, anticipated growth opportunities and market and economic conditions, 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 2022, it is the current 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 enhanced through common stock repurchases. During fiscal year 2021, the Company repurchased $1.5 million, or 164,400 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.
Market Area and Competition
Our corporate office is located in Topeka, Kansas. We currently have a network of 54 branches (45 traditional branches and nine in-store branches) located in nine counties throughout Kansas and two counties in Missouri. We primarily serve the metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia, and Salina, Kansas and a portion of the metropolitan area of greater Kansas City.
The Bank ranked second in deposit market share, at 6.87%, in the state of Kansas as reported in the June 30, 2021 Federal Deposit Insurance Corporation ("FDIC") "Summary of Deposits - Market Share Report." Management considers our well-established banking network together with our reputation for financial strength and customer service to be major factors in our success at attracting and retaining customers in our market areas.
The Bank consistently has been one of the top one- to four-family lenders with regard to mortgage loan origination volume in the state of Kansas. This has been achieved through strong relationships with real estate agents and our other marketing efforts, which are based on our reputation and competitive pricing. Competition in originating one- to four-family loans primarily comes from other savings institutions, commercial banks, credit unions, and mortgage bankers.
Available Information
Our website address is www.capfed.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports can be obtained free of charge from our website. These reports are available on our website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. These reports are also available on the SEC's website at http://www.sec.gov.
Regulation and Supervision
The Bank is examined and regulated by the OCC, its primary regulator, and its deposits are insured up to applicable limits by the Deposit Insurance Fund ("DIF"), which is administered by the FDIC. The Company, as a savings and loan holding company, is examined and regulated by the FRB.
Set forth below is a description of certain laws and regulations that are applicable to Capitol Federal Financial, Inc. and the Bank. This description is intended as a brief summary of selected features of such laws and regulations and is qualified in its entirety by references to the laws and regulations applicable to the Company and the Bank.
General. The Bank, as a federally chartered savings bank, is subject to regulation and oversight by the OCC extending to all aspects of its operations. This regulation of the Bank is intended for the protection of depositors and other customers and not for the purpose of protecting the Company's stockholders. The investment and lending authority of the Bank is prescribed by federal laws and regulations and the Bank is prohibited from engaging in any activities not permitted by such laws and regulations. The Bank and Company are required to maintain minimum levels of regulatory capital and the Bank is subject to some limitations on capital distributions to the Company.
The Company is a unitary savings and loan holding company within the meaning of the Home Owners' Loan Act ("HOLA"). As such, the Company is registered with the FRB and subject to the FRB regulations, examinations, supervision, and reporting requirements. In addition, the FRB has enforcement authority over the Company. Among other things, this authority permits the FRB to restrict or prohibit activities that are determined to be a serious risk to the Bank.
The OCC and FRB enforcement authority includes, among other things, the ability to assess civil monetary penalties, to issue cease-and-desist or removal orders, and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed. Except under certain circumstances, public disclosure of final enforcement actions by the OCC or the FRB is required by law.
As a federally chartered savings bank, the Bank is required to maintain a significant portion of its assets in residential housing related loans and investments. An institution that fails to do so is immediately subject to restrictions on its operations, including a prohibition against capital distributions, except with the prior approval of both the OCC and the FRB. Failure to
meet this qualification is a statutory violation subject to enforcement action. As of September 30, 2021, the Bank met the qualification.
The Bank's relationship with its depositors and borrowers is regulated to a great extent by federal laws and regulations, especially in such matters as the ownership of savings accounts and the form and content of mortgage requirements. In addition, the branching authority of the Bank is regulated by the OCC. The Bank is generally authorized to branch nationwide.
The Bank is subject to a statutory lending limit on aggregate loans to one person or a group of related persons. The general limit is 15% of our unimpaired capital and surplus, plus an additional 10% for loans fully secured by readily marketable collateral. At September 30, 2021, the Bank's lending limit under this restriction was $171.0 million. The Bank has no loans or loan relationships in excess of its lending limit. Total loan commitments and loans outstanding to the Bank's largest borrowing relationship was $128.1 million at September 30, 2021, all of which was current according to its terms.
The OCC has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure, and compensation and other employee benefits. The Bank is subject to periodic examinations by the OCC regarding these and related matters. During these examinations, the examiners may require the Bank to increase its ACL, change the classification of loans, and/or recognize additional charge-offs based on their judgments, which can impact our capital and earnings.
Regulatory Capital Requirements. The Bank and Company are required to maintain specified levels of regulatory capital under regulations of the OCC and FRB, respectively. See "Part II, Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 13. Regulatory Capital Requirements" for additional regulatory capital information, including the Bank's and Company's Community Bank Leverage Ratio ("CBLR") as of September 30, 2021.
The OCC has the ability to establish individual minimum capital requirements for a particular institution which vary from the capital levels that would otherwise be required under the applicable capital regulations based on such factors as concentrations of credit risk, levels of interest rate risk, the risks of non-traditional activities, and other circumstances. The OCC has not imposed any such requirements on the Bank.
The OCC is authorized and, under certain circumstances, required to take certain actions against federal savings banks that are considered not to be adequately capitalized because they fail to meet the minimum requirements associated with their elected capital framework. Any such institution must submit a capital restoration plan for OCC approval and may be restricted in, among other things, increasing its assets, acquiring another institution, establishing a branch or engaging in any new activities, and may not make capital distributions. As of September 30, 2021, the Bank and the Company met all capital adequacy requirements to which they are subject.
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 (to the extent not previously distributed). 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. The Bank also is subject to regulation and examination by the FDIC, which insures the deposits of the Bank to the maximum extent permitted by law.
Insurance of Accounts and Regulation by the FDIC. The DIF of the FDIC insures deposit accounts in the Bank up to applicable limits, with a maximum amount of deposit insurance for banks, savings institutions, and credit unions of $250 thousand per separately insured deposit ownership right or category.
The FDIC assesses deposit insurance premiums on all FDIC-insured institutions quarterly based on annualized rates. Under these rules, assessment rates for an institution with total assets of less than $10 billion are determined by weighted average CAMELS composite ratings and certain financial ratios, and range from 1.5 to 30.0 basis points, subject to certain adjustments. For the fiscal year ended September 30, 2021, the Bank paid $2.5 million in FDIC premiums. Assessment rates are applied to an institution's assessment base, which is its average consolidated total assets minus its average tangible equity during the assessment period.
The FDIC has authority to increase insurance assessments, and any significant increases would have an adverse effect on the operating expenses and results of operations of the Company. Management cannot predict what assessment rates will be in the future. In a banking industry emergency, the FDIC may also impose a special assessment.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition, or violation that may lead to termination of our deposit insurance.
Community Reinvestment and Consumer Protection Laws. In connection with its lending activities, the Bank is subject to a number of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. These include the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 ("SAFE Act"), and the Community Reinvestment Act ("CRA"). In addition, federal banking regulators have enacted regulations limiting the ability of banks and other financial institutions to disclose nonpublic consumer information to non-affiliated third parties. The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated third parties. With respect to federal consumer protection laws, regulations are generally promulgated by the Consumer Financial Protection Bureau ("CFPB"), but the OCC examines the Bank for compliance with such laws.
The CRA requires the appropriate federal banking agency, in connection with its examination of an FDIC-insured institution, to assess its record in meeting the credit needs of the communities served by the institution, including low and moderate income neighborhoods. The federal banking regulators take into account the institution's record of performance under the CRA when considering applications for mergers, acquisitions, and branches. Under the CRA, institutions are assigned a rating of outstanding, satisfactory, needs to improve, or substantial non-compliance. The Bank received a satisfactory rating in its most recently completed CRA evaluation.
Bank Secrecy Act /Anti-Money Laundering Laws. The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws, including the USA PATRIOT Act of 2001 and regulations thereunder. These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity and source of deposits and wealth of its customers. Violations of these laws and regulations can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers and acquisitions.
Federal Reserve System. The FRB requires all depository institutions to maintain reserves at specified levels against their transaction accounts, primarily checking accounts. In response to the COVID-19 pandemic, the FRB reduced reserve requirement ratios to zero percent effective on March 26, 2020, to support lending to households and businesses. At September 30, 2021, the reserve requirement of zero percent was still in place.
The Bank is authorized to borrow from the Federal Reserve Bank "discount window." An eligible institution need not exhaust other sources of funds before going to the discount window, nor are there restrictions on the purposes for which the institution can use primary credit. At September 30, 2021, the Bank had no outstanding borrowings from the discount window.
Federal Home Loan Bank System. The Bank is a member of one of 11 regional Federal Home Loan Banks, each of which serves as a reserve, or central bank, for its members within its assigned region and is funded primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System. The Federal Home Loan Banks make loans, called advances, to members and provide access to a line of credit in accordance with policies and procedures established by the Board of Directors of FHLB, which are subject to the oversight of the Federal Housing Finance Agency.
As a member, the Bank is required to purchase and maintain capital stock in FHLB. The minimum required FHLB stock amount is generally 4.5% of the Bank's FHLB advances and outstanding balance against the FHLB line of credit, and 2% of the outstanding principal balance of loans sold into the Mortgage Partnership Finance Program. At September 30, 2021, the Bank had a balance of $73.4 million in FHLB stock, which was in compliance with the FHLB's stock requirement. In past years, the Bank has received dividends on its FHLB stock, although no assurance can be given that these dividends will continue. See "Part II, Item 8. Financial Statements and Supplementary Data - Notes to Financial Statements - Note 1. Summary of Significant Accounting Policies" for additional information regarding FHLB stock.
Federal Savings and Loan Holding Company Regulation. The HOLA prohibits a savings and loan holding company (directly or indirectly, or through one or more subsidiaries) from acquiring another savings association, or holding company thereof, without prior written approval from the FRB; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings association, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of a depository institution that is not federally insured. In evaluating applications by savings and loan holding companies to acquire savings associations, the FRB must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community, competitive factors, and other factors.
The FRB has long set forth in its regulations its "source of strength" policy, which requires bank holding companies to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress. This policy now also applies to savings and loan holding companies.
Transactions with Affiliates. Transactions between the Bank and its affiliates are required to be on terms as favorable to the institution as transactions with non-affiliates, and certain of these transactions are restricted to a percentage of the Bank's capital, and, in the case of loans, require eligible collateral in specified amounts. In addition, the Bank may not lend to any affiliate engaged in activities not permissible for a bank holding company or purchase or invest in the securities of affiliates.
Taxation
Federal Taxation. The Company and the Bank are subject to federal income taxation in the same general manner as other corporations. The Company files a consolidated federal income tax return. The Company is no longer subject to federal income tax examination for fiscal years prior to 2018. For federal income tax purposes, the Bank currently reports its income and expenses on the accrual method of accounting and uses a fiscal year ending on September 30 for filing its federal income tax return. Changes to the corporate federal income tax rate would result in changes to the Company's effective income tax rate and would require the Company to remeasure its deferred tax assets and liabilities based on the tax rate in the years in which those temporary differences are expected to be recovered or settled.
State Taxation. The earnings/losses of Capitol Federal Financial, Inc., Capitol Funds, Inc. and Capital City Investments, Inc. are combined for purposes of filing a consolidated Kansas corporate tax return. The Kansas corporate tax rate is 4.0%, plus a surcharge of 3.0% on earnings greater than $50 thousand.
The Bank files a Kansas privilege tax return. For Kansas privilege tax purposes, the minimum tax rate is 4.5% of earnings, which is calculated based on federal taxable income, subject to certain adjustments. The Bank has not received notification from the state of any potential tax liability for any years still subject to audit.
Additionally, the Bank files state tax returns in various other states where it has significant purchased loans and/or foreclosure activities. In these states, the Bank has either established nexus under an economic nexus theory or has exceeded enumerated nexus thresholds based on the amount of interest derived from sources within the state.
Employees and Human Capital Resources
At September 30, 2021, we had a total of 750 employees, including 101 part-time employees. The full-time equivalent of our total employees at September 30, 2021 was 721. Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good. We believe our ability to attract and retain employees is a key to our success. Accordingly, we strive to offer competitive salaries and employee benefits to all employees and monitor salaries in our market areas. Physical well-being is supported by the Company's health, dental, vision, life and various other insurances, and a wellness program that incentivizes employees to live a healthy and balanced lifestyle. Volunteer opportunities are provided and encouraged for all employees. Capitol Federal employees recorded over 3,400 hours in volunteer time for local organizations and charities during fiscal year 2021.
Our Company respects, values and encourages diversity in our employees and customers. We seek to recognize and develop the unique contributions which each individual brings to our Company, and we are fully committed to supporting a culture of diversity as a pillar of our values and our success. These efforts are supported by our Board of Directors. Since 1977, at least one woman has served as a director of the Bank and, since its inception in 1999, at least one woman has served on the Board of Directors of the Company. In addition, since 2012, at least one underrepresented minority has served as a director of the Company and the Bank. The Board of Directors annually reviews the Company's diversity recruitment efforts and employment statistics.
To assist in expanding diversity, the Company recruits employees through sources and organizations targeted at diverse communities. The Company also provides multiple opportunities for professional development and growth, including continuing education when applicable and specialty education within banking, using universities that offer banking management programs. Leadership development is supported through our Leadership Forum services, on a biannual basis, for mid-level leaders within the organization. We have also used outside consultants for business simulations for training purposes, and this is expected to continue. During fiscal year 2021, the annual employee educational requirements included targeted diversity, equity and inclusion training for all managers. All employees receive annual training on providing fair service, which is targeted at addressing implicit bias in providing customer service.
The Company actively participates in initiatives to promote diversity and inclusion both internally and externally. Our employees, together with the Capitol Federal Foundation, contribute to programs that promote educational opportunities in all communities as well as housing in low-and-moderate income communities, including scholarships specifically for diverse candidates.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
There are risks inherent in the Bank's and Company's business. The following is a summary of material risks and uncertainties relating to the operations of the Bank and the Company. Adverse experiences with these could have a material impact on the Company's financial condition and results of operations. Some of these risks and uncertainties are interrelated, and the occurrence of one or more of them may exacerbate the effect of others. These material risks and uncertainties are not necessarily presented in order of significance. In addition to the risks set forth below and the other risks described in this Annual Report, there may be risks and uncertainties that are not currently known to us or that we currently deem to be immaterial that could materially and adversely affect our business, financial condition or operating results.
Risks Related to Macroeconomic Conditions
The impact of the COVID-19 pandemic on our customers, employees and business operations has had, and will likely continue to have, an adverse effect on our business, results of operations and financial condition.
The COVID-19 pandemic created a global public-health crisis that resulted in challenging economic conditions for households and businesses. The economic impact of the COVID-19 pandemic impacted a broad range of industries. Many areas of consumer spending have rebounded since the initial onset of the COVID-19 pandemic.
There is uncertainty surrounding the future economic conditions that will emerge in the months and years following the start of the COVID-19 pandemic. As a result, management is confronted with a significant and unfamiliar degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values. The Bank continues to have commercial borrowers that have deferred payments on their loans, and we recognize that those borrowers in the hotel and convention center industries are experiencing a slower recovery than certain other industries. The Bank has deferred foreclosures on
one- to four-family loans as a result of federal and state foreclosure moratoriums, and when foreclosures resume, we could experience losses on the impacted loans. The Bank has been forced to leave staff positions unfilled, as qualified candidates for open positions have been difficult to find. The changes in market rates of interest and their impact on our ability to price our products may continue to reduce our net interest income or negatively impact the demand for our products.
The Company continues to follow Centers for Disease Control and Prevention (CDC) guidelines and governmental mandates regarding COVID-19 protocols and vaccinations. While it is not possible to predict the administrative costs, compliance costs or impacts to our available workforce, the Company continues to develop compliance processes for implementation of the Occupational Safety and Health Administration (OSHA) testing and vaccination mandates. In addition, we are monitoring legal actions and pending state legislation regarding the mandates for further guidance.
The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
Changes in interest rates could have an adverse impact on our results of operations and financial condition.
Our results of operations are primarily dependent on net interest income, which is the difference between the interest earned on loans, securities, cash at the Federal Reserve Bank and dividends received on FHLB stock, and the interest paid on deposits and borrowings. Changes in interest rates could have an adverse impact on our results of operations and financial condition because the majority of our interest-earning assets are long-term, fixed-rate loans, while the majority of our interest-bearing liabilities are shorter term, and therefore subject to a greater degree of interest rate fluctuations. This type of risk is known as interest rate risk and is affected by prevailing economic and competitive conditions, including monetary policies of the FRB and fiscal policies of the United States federal government.
The impact of changes in interest rates is generally observed on the income statement. The magnitude of the impact will be determined by the difference between the amount of interest-earning assets and interest-bearing liabilities, both of which either reprice or mature within a given period of time. This difference provides an indication of the extent to which our net interest rate spread will be impacted by changes in interest rates. In addition, changes in interest rates will impact the expected level of repricing of the Bank's mortgage-related assets and callable debt securities. Generally, as interest rates decline, the amount of interest-earning assets expected to reprice will increase as borrowers have an economic incentive to reduce the cost of their mortgage or debt, which would negatively impact the Bank's interest income. Conversely, as interest rates rise, the amount of interest-earning assets expected to reprice will decline as the economic incentive to refinance the mortgage or debt is diminished. As this occurs, the amount of interest-earning assets repricing could diminish to the point where interest-bearing liabilities reprice to a higher interest rate at a faster pace than interest-earning assets, thus negatively impacting the Bank's net interest income.
Changes in interest rates can also have an adverse effect on our financial condition as available-for-sale ("AFS") securities are reported at estimated fair value. We increase or decrease our stockholders' equity, specifically accumulated other comprehensive income (loss) ("AOCI"), by the amount of change in the estimated fair value of our AFS securities, net of deferred taxes. Increases in interest rates generally decrease the fair value of AFS securities. Decreases in the fair value of AFS securities would, therefore, adversely impact stockholders' equity.
Changes in interest rates, as they relate to customers, can also have an adverse impact on our financial condition and results of operations. In times of rising interest rates, default risk may increase among borrowers with adjustable-rate loans as the rates on their loans adjust upward and their payments increase. Fluctuations in interest rates also affect customer demand for deposit products. Local competition could affect our ability to attract deposits, or could result in us paying more than competitors for deposits.
In addition to general changes in interest rates, changes that affect the shape of the yield curve could negatively impact the Bank. The Bank's interest-bearing liabilities are generally priced based on short-term interest rates while the majority of the Bank's interest-earning assets are priced based on long-term interest rates. Income for the Bank is primarily driven by the spread between these rates. As a result, a steeper yield curve, meaning long-term interest rates are significantly higher than short-term interest rates, would provide the Bank with a better opportunity to increase net interest income. When the yield curve is flat, meaning long-term interest rates and short-term interest rates are essentially the same, or when the yield curve is
inverted, meaning long-term interest rates are lower than short-term interest rates, the yield between interest-earning assets and interest-bearing liabilities that reprice is compressed or diminished and would likely negatively impact the Bank's net interest income. See "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for additional information about the Bank's interest rate risk management.
An economic downturn, especially one affecting our geographic market areas and certain regions of the country where we have correspondent loans secured by one- to four-family properties or commercial real estate participation loans, could have an adverse impact on our business and financial results.
Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans secured by residential properties. As we have grown our commercial real estate lending portfolio, we have continued to maintain relationships not only in our local markets but in geographically diverse markets. As a result, we are particularly exposed to downturns in regional housing and commercial real estate markets and, to a lesser extent, the U.S. housing and commercial real estate markets, along with changes in the levels of unemployment or underemployment. We monitor the current status and trends of local and national employment levels and trends and current conditions in the real estate and housing markets, as well as commercial real estate markets, in our local market areas and certain areas where we have correspondent loans and commercial participation loans. Decreases in local real estate values could adversely affect the value of the property used as collateral for our loans, which could cause us to realize a loss in the event of a foreclosure. Adverse conditions in our local economies and in certain areas where we have correspondent loans and commercial participation loans, such as inflation, unemployment, recession, natural disasters or pandemics, or other factors beyond our control, could impact the ability of our borrowers to repay their loans. Any one or a combination of these events may have an adverse impact on borrowers' ability to repay their loans, which could result in increased delinquencies, non-performing assets, loan losses, and future loan loss provisions.
Risks Related to Lending Activities
The increase in commercial loans in our loan portfolio exposes us to increased lending and credit risks, which could adversely impact our financial condition and results of operations.
A growing portion of our loan portfolio consists of commercial loans. These loan types tend to be larger than and in different geographic regions from most of our existing loan portfolio and are generally considered to have different and greater risks than one- to four-family residential real estate loans and may involve multiple loans to groups of related borrowers. A growing commercial loan portfolio also subjects us to greater regulatory scrutiny. Furthermore, these loan types can expose us to a greater risk of delinquencies, non-performing assets, loan losses, and future loan loss provisions than one- to four-family residential real estate loans because repayment of such loans often depends on the successful operation of a business or of the underlying property. Repayment of such loans may be affected by factors outside the borrower's control, such as adverse conditions in the real estate market, the economy, environmental factors, natural disasters or pandemics, and/or changes in government regulation. Also, there are risks inherent in commercial real estate construction lending as the value of the project is uncertain prior to the completion of construction and subsequent lease-up. A sudden downturn in the economy or other unforeseen events could result in stalled projects or collateral shortfalls, thus exposing us to increased credit risk.
Commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. The borrowers' cash flow may prove to be unpredictable, and collateral securing these loans may fluctuate in value. Most often, this collateral consists of accounts receivable, inventory and equipment. Significant adverse changes in a borrower's industries and businesses could cause rapid declines in values of, and collectability associated with, those business assets, which could result in inadequate collateral coverage for our commercial and industrial loans and expose us to future losses. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its clients. Inventory and equipment may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. If the cash flow from business operations is reduced, the borrower's ability to repay the loan may be impaired. An increase in valuation allowances and charge-offs related to our commercial and industrial loan portfolio could have an adverse effect on our business, financial condition, results of operations and future prospects.
The expected discontinuation of LIBOR, and the identification and use of alternative replacement reference rates, may adversely affect our results of operations and subject the Company to litigation risk.
LIBOR is used extensively in the United States as a reference rate for various financial contracts, including adjustable-rate loans, asset-backed securities, and interest rate swaps. In July 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. On November 30, 2020, authorities announced a plan to extend the date that most U.S. LIBOR values would cease being published from December 31, 2021 to June 30, 2023. The announcement means the continuation of LIBOR cannot be guaranteed after June 30, 2023.
In the United States, the Alternative Reference Rate Committee ("ARRC"), a group of diverse private-market participants assembled by the Federal Reserve Board and the Federal Reserve Bank of New York, was tasked with identifying alternative reference interest rates to replace LIBOR. The Secured Overnight Finance Rate ("SOFR") has emerged as the ARRC's preferred alternative rate for LIBOR; however, other market alternatives have been developed. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities in the repurchase agreement market. The use of SOFR continues to steadily grow. At this time, it is not possible to predict how markets will respond to alternative reference rates as markets continue to transition away from LIBOR.
The Company's LIBOR steering committee is composed of individuals from lending, compliance/risk, treasury and legal. The LIBOR steering committee has been charged with overseeing the coordination of the Company's enterprise-wide LIBOR transition program and evaluating and mitigating the risks associated with the transition from LIBOR. The LIBOR transition program includes a comprehensive review by management of the financial products, agreements, contracts and business processes that may use LIBOR as a reference rate. As financial products, agreements, contracts and business processes that use LIBOR are identified, the LIBOR steering committee works with management to develop a strategy to transition away from LIBOR. During the strategy development process, management and the LIBOR steering committee considers the financial, customer/counterparty, regulatory and legal impacts of all proposed strategies.
As of September 30, 2021, the Company has identified $268.6 million of adjustable-rate one- to four-family loans in its portfolio for which the repricing index was tied to LIBOR and the loan maturity date is after December 31, 2021. The majority of these loans have maturity dates after June 30, 2023. Our one- to four-family loan agreements generally allow the Bank to choose a new alternative reference rate based upon comparable information if the current index is no longer available. During the June 30, 2019 quarter, the Bank discontinued the use of LIBOR for the origination of adjustable-rate one- to four-family loans and no longer purchases correspondent one- to four-family loans that use LIBOR. The Bank began using the one-year Constant Maturity Treasury ("CMT") index for newly originated and correspondent purchased one- to four-family adjustable-rate loans. At September 30, 2021, none of the consumer or commercial loans in the Company's portfolio use a repricing index tied to LIBOR.
The Bank's swap agreements are governed by the International Swap Dealers Association ("ISDA"). ISDA is in the process of developing fallback language for swap agreements and is expected to establish a protocol to allow counterparties to modify legacy trades to include the new fallback language. During fiscal year 2021, the Bank began to preemptively transition its FHLB advances and interest rate swaps that were tied to LIBOR into SOFR instruments. The early transition was driven by the FHLB policy that no longer allows LIBOR-based advances with a maturity beyond December 31, 2021. The Bank has interest rate swaps maturing on December 1, 2021 with a notional amount of $100.0 million at September 30, 2021 that are tied to LIBOR.
The market transition away from LIBOR to an alternative reference rate is complex. If LIBOR rates are no longer available, and we are required to implement replacement reference rates for the calculation of interest rates under our loan agreements with borrowers, we may incur significant expense in effecting the transition and we may be subject to disputes or litigation with our borrowers over the appropriateness or comparability to LIBOR of the replacement reference rates. The replacement reference rates could also result in a reduction in our interest income. We may also receive inquiries and other actions from regulators with respect to the Company's preparation and readiness for the replacement of LIBOR with alternative reference rates.
Risks Related to Cybersecurity, Third Parties, and Technology
The occurrence of any information system failure or interruption, breach of security or cyber-attack, at the Company, at its third-party service providers or counterparties may have an adverse effect on our business, reputation, financial condition and results of operations.
Information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger, our deposits and our loans. In the normal course of our business, we collect, process, retain and transmit (by email and other electronic means) sensitive and confidential information regarding our customers, employees and others. We also outsource certain aspects of our data processing, data processing operations, remote network monitoring, engineering and managed security services to third-party service providers. In addition to confidential information regarding our customers, employees and others, we, and in some cases a third party, compile, process, transmit and store proprietary, non-public information concerning our business, operations, plans and strategies.
Information security risks for financial institutions continue to increase in part because of evolving technologies, the use of the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. Cyber criminals use a variety of tactics, such as ransomware, denial of service, and theft of sensitive business and customer information to extort payment or other concessions from victims. In some cases, these attacks have caused significant impacts on other businesses' access to data and ability to provide services. We are not able to anticipate or implement effective preventive measures against all incidents of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources, including attacks on third party vendors and their applications and products used by the Bank.
We use a variety of physical, procedural and technological safeguards to prevent or limit the impact of system failures, interruptions and security breaches and to protect confidential information from mishandling, misuse or loss, including detection and response mechanisms designed to contain and mitigate security incidents. However, there can be no assurance that such events will not occur or that they will be promptly detected and adequately addressed if they do, and early detection of security breaches may be thwarted by sophisticated attacks and malware designed to avoid detection. If there is a failure in or breach of our information systems, or those of a third-party service provider, the confidential and other information processed and stored in, and transmitted through, such information systems could be jeopardized, or could otherwise cause interruptions or malfunctions in our operations or the operations of our customers, employees, or others.
Our business and operations depend on the secure processing, storage and transmission of confidential and other information in our information systems and those of our third-party service providers. Although we devote significant resources and management focus to ensuring the integrity of our information systems through information security measures, risk management practices, relationships with threat intelligence providers and business continuity planning, our facilities, computer systems, software and networks, and those of our third-party service providers, may be vulnerable to external or internal security breaches, acts of vandalism, unauthorized access, misuse, computer viruses or other malicious code and cyber-attacks that could have a security impact. In addition, breaches of security may occur through intentional or unintentional acts by those having authorized or unauthorized access to our confidential or other information or the confidential or other information of our customers, employees or others. While we regularly conduct security and risk assessments on our systems and those of our third-party service providers, there can be no assurance that their information security protocols are sufficient to withstand a cyber-attack or other security breach. Across our industry, the cost of minimizing these risks and investigating incidents has continued to increase with the frequency and sophistication of these threats. To date, the Company has no knowledge of a material information security breach affecting its systems.
The occurrence of any of the foregoing could subject us to litigation or regulatory scrutiny, cause us significant reputational damage or erode confidence in the security of our information systems, products and services, cause us to lose customers or have greater difficulty in attracting new customers, have an adverse effect on the value of our common stock or subject us to financial losses that may not be covered by insurance, any of which could have an adverse effect on our business, financial condition and results of operations. As information security risks and cyber threats continue to evolve, we may be required to expend significant additional resources to further enhance or modify our information security measures and/or to investigate and remediate any information security vulnerabilities or other exposures arising from operational and security risks.
Furthermore, there continues to be heightened legislative and regulatory focus on privacy, data protection and information security. New or revised laws and regulations may significantly impact our current and planned privacy, data protection and
information security-related practices, the collection, use, sharing, retention and safeguarding of consumer and employee information, and current or planned business activities. Compliance with current or future privacy, data protection and information security laws could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have an adverse effect on our business, financial condition and results of operations.
Our customers are also targets of cyber-attacks and identity theft. There continues to be instances involving financial services and consumer-based companies reporting the unauthorized disclosure of client or customer information or the destruction or theft of corporate data. Large scale identity theft could result in customers' accounts being compromised and fraudulent activities being performed in their name. We have implemented certain safeguards against these types of activities but they may not fully protect us from fraudulent financial losses. The occurrence of a breach of security involving our customers' information, regardless of its origin, could damage our reputation and result in a loss of customers and business and subject us to additional regulatory scrutiny, and could expose us to litigation and possible financial liability. Any of these events could have an adverse effect on our financial condition and results of operations.
Third party vendors subject the Company to potential business, reputation and financial risks.
Third party vendors are sources of operational and information security risk to the Company, including risks associated with operations errors, information system interruptions or breaches, and unauthorized disclosures of sensitive or confidential customer information. The Company requires third party vendors to maintain certain levels of information security; however, vendors may remain vulnerable to breaches, unauthorized access, misuse, computer viruses, and/or other malicious attacks that could ultimately compromise sensitive information. We have developed procedures and processes for selecting and monitoring third party vendors, but ultimately we are dependent on these third party vendors to secure their information. If these vendors encounter any of these types of issues, or if we have difficulty communicating with them, we could be exposed to disruption of operations, loss of service or connectivity to customers, reputational damage, and litigation risk that could have an adverse effect on our business, financial condition and results of operations.
The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements, because of changes in the vendor's organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which could have an adverse effect on our business and, in turn, our financial condition and results of operations. Additionally, replacing certain third party vendors could also entail significant delay and expense.
We are heavily reliant on technology, and a failure to effectively implement technology initiatives or anticipate future technology needs or demands could adversely affect our business or performance.
Like most financial institutions, the Bank significantly depends on technology to deliver its products and other services and to otherwise conduct business. To remain technologically competitive and operationally efficient, the Bank invests in system upgrades, new technological solutions, and other technology initiatives. Many of these solutions and initiatives have a significant duration, are tied to critical information systems, and require substantial resources. Although the Bank takes steps to mitigate the risks and uncertainties associated with these solutions and initiatives, there is no guarantee that they will be implemented on time, within budget, or without negative operational or customer impact. The Bank also may not succeed in anticipating its future technology needs, the technology demands of its customers, or the competitive landscape for technology. If the Bank were to falter in any of these areas, it could have an adverse effect on our business, financial condition and results of operations.
Risks Related to Competition
Strong competition may limit growth and profitability.
While we are one of the largest mortgage loan originators in the state of Kansas, we compete in the same market areas as local, regional, and national banks, credit unions, mortgage brokerage firms, investment banking firms, investment brokerage firms, and savings institutions. We also compete with online investment and mortgage brokerages and online banks that are not confined to any specific market area. Many of these competitors operate on a national or regional level, are a conglomerate of various financial services providers housed under one corporation, or otherwise have substantially greater financial or technological resources than the Bank. We compete primarily on the basis of the interest rates offered to depositors, the terms of loans offered to borrowers, and the benefits afforded to customers as a local institution and portfolio lender. Our pricing strategy for loan and deposit products includes setting interest rates based on secondary market prices
and local competitor pricing for our local markets, and secondary market prices and national competitor pricing for our correspondent lending markets. Should we face competitive pressure to increase deposit rates or decrease loan rates, our net interest income could be adversely affected. Additionally, our competitors may offer products and services that we do not or cannot provide, as certain deposit and loan products fall outside of our accepted level of risk. Our profitability depends upon our ability to compete in our local market areas.
Risks Related to Regulation
We operate in a highly regulated environment which limits the manner and scope of our business activities and we may be adversely affected by new and/or changes in laws and regulations or interpretation of existing laws and regulations.
We are subject to extensive regulation, supervision, and examination by the OCC, FRB, and the FDIC. These regulatory authorities exercise broad discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank's operations, reclassify assets, determine the adequacy of a bank's ACL, and determine the level of deposit insurance premiums assessed. The CFPB has broad powers to supervise and enforce consumer protection laws, including a wide range of consumer protection laws that apply to all banks and savings institutions, like the authority to prohibit "unfair, deceptive or abusive" acts and practices. The CFPB also has examination and enforcement authority over all banks with regulatory assets exceeding $10 billion at four consecutive quarter-ends. The Bank has not exceeded $10 billion in regulatory assets at four consecutive quarter-ends, but it may at some point in the future. Smaller banks, like the Bank, will continue to be examined for compliance with the consumer laws and regulations of the CFPB by their primary bank regulators (the OCC, in the case of the Bank). The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.
Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation, interpretation or application, could have an adverse impact on our operations. Moreover, bank regulatory agencies have been active in responding to concerns and trends identified in examinations, and have issued formal enforcement orders requiring capital ratios in excess of regulatory requirements and/or assessing monetary penalties. Bank regulatory agencies, such as the OCC and the FDIC, govern the activities in which we may engage, primarily for the protection of depositors, and not for the protection or benefit of investors. The CFPB enforces consumer protection laws and regulations for the benefit of the consumer and not the protection or benefit of investors. In addition, new laws and regulations may continue to increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and securities, the products we offer, the fees we can charge and our ongoing operations, costs, and profitability.
The Company is also directly subject to the requirements of entities that set and interpret the accounting standards such as the Financial Accounting Standards Board, and indirectly subject to the actions and interpretations of the Public Company Accounting Oversight Board, which establishes auditing and related professional practice standards for registered public accounting firms and inspects registered firms to assess their compliance with certain laws, rules, and professional standards in public company audits. These regulations, along with the currently existing tax, accounting, securities, and monetary laws, regulations, rules, standards, policies and interpretations, control the methods by which financial institutions and their holding companies conduct business, engage in strategic and tax planning, implement strategic initiatives, and govern financial reporting.
The Company's failure to comply with laws, regulations or policies could result in civil or criminal sanctions and money penalties by state and federal agencies, and/or reputation damage, which could have an adverse effect on the Company's business, financial condition and results of operations. See "Part I, Item 1. Business - Regulation and Supervision" for more information about the regulations to which the Company is subject.
Other Risks
The Company's ability to pay dividends is subject to the ability of the Bank to make capital distributions to the Company.
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, and also on the availability of cash at the holding company level in the event
earnings are not sufficient to pay dividends. Under certain circumstances, capital distributions from the Bank to the Company may be subject to regulatory approvals. See "Item 1. Business - Regulation and Supervision" for additional information.
Our risk management and compliance programs and functions may not be effective in mitigating risk and loss.
We maintain an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the risks that we face. These risks include: interest-rate, credit, liquidity, operations, reputation, compliance and litigation. We also maintain a compliance program to identify, measure, assess, and report on our adherence to applicable laws, policies and procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk management or compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in our business. If conditions or circumstances arise that expose flaws or gaps in our risk management or compliance programs, or if our controls do not function as designed, the performance and value of our business could be adversely affected.
The Company may not be able to attract and retain skilled employees.
The Company's success depends, in large part, on its ability to attract and retain key people. Competition for the best people can be intense, and the Company spends considerable time and resources attracting and hiring qualified people for its operations. The unexpected loss of the services of one or more of the Company's key personnel could have an adverse impact on the Company's business because of their skills, knowledge of the Company's market, and years of industry experience, as well as the difficulty of promptly finding qualified replacement personnel.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
At September 30, 2021, we had 45 traditional branch offices and nine in-store branch offices. The Bank owns the office building and related land in which its home office and executive offices are located, and 35 of its other branch offices. The remaining 18 branches are either leased or partially owned.
For additional information regarding our lease obligations, see "Part II, Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5. Premises, Equipment and Leases."
Management believes that our current facilities are adequate to meet our present and immediately foreseeable needs. However, we will continue to monitor customer growth and expand our branching network, if necessary, to serve our customers' needs.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
The Company and the Bank are involved as plaintiff or defendant in various legal actions arising in the normal course of business. In our opinion, after consultation with legal counsel, we believe it unlikely that such pending legal actions will have a material adverse effect on our financial condition, results of operations or liquidity.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Stock Listing
Capitol Federal Financial, Inc. common stock is traded on the Global Select tier of the NASDAQ Stock Market under the symbol "CFFN". At November 18, 2021, there were approximately 7,970 Capitol Federal Financial, Inc. stockholders of record.
Share Repurchases
During the current fiscal year, the Company repurchased $1.5 million, or 164,400 shares, of common stock. There is $44.7 million of common stock that may be purchased under the Company's current plan, which was approved in October 2015 for $70.0 million. This plan has no expiration date; however, the Federal Reserve Bank's approval for the Company to repurchase shares extends through August 2022. Since the Company completed its second-step conversion in December 2010, $393.4 million worth of shares of common stock have been repurchased.
The following table summarizes our share repurchase activity during the three months ended September 30, 2021 and additional information regarding our share repurchase program.
Total Number of Approximate Dollar
Total Shares Purchased as Value of Shares
Number of Average Part of Publicly that May Yet Be
Shares Price Paid Announced Plans Purchased Under the
Purchased per Share or Programs Plans or Programs
July 1, 2021 through
July 31, 2021 - $ - - $ 44,665,205
August 1, 2021 through
August 31, 2021 - - - 44,665,205
September 1, 2021 through
September 30, 2021 - - - 44,665,205
Total - - - 44,665,205
Stockholders and General Inquiries
Copies of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 are available to stockholders at no charge in the Investor Relations section of our website, www.capfed.com.
Stockholder Return Performance Presentation
The information presented below assumes $100 invested on September 30, 2016 in the Company's common stock and in each of the indices, and assumes the reinvestment of all dividends. In prior years, the Company compared its stock price performance to the SNL U.S. Bank & Thrift index; however, this index is no longer available from the Company's service provider, and has been replaced with the S&P U.S. BMI Banks index. Historical stock price performance is not necessarily indicative of future stock price performance.
Period Ending
Index 9/30/2016 9/30/2017 9/30/2018 9/30/2019 9/30/2020 9/30/2021
Capitol Federal Financial, Inc. 100.00 110.76 102.64 119.65 84.74 112.78
NASDAQ Composite Index 100.00 123.68 154.82 155.63 219.37 285.75
S&P U.S. BMI Banks Index 100.00 142.24 154.22 154.71 113.59 206.67
Source: S&P Global Market Intelligence
Restrictions on the Payments of Dividends
The Company's ability to pay dividends is dependent, in part, upon its ability to obtain capital distributions from the Bank. The dividend policy of the Company is subject to the discretion of the Board of Directors and will 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 level.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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.
Net income for fiscal year 2021 increased $11.5 million, or 17.9% compared to the prior year, due primarily to recording a $22.3 million provision for credit losses during the prior year compared to recording a negative provision for credit losses of $8.5 million in the current year, as a result of improvements in economic conditions between periods. This was partially offset by a decrease in net interest income and an increase in income tax expense.
The net interest margin was 1.90% for the current year compared to 2.12% in the prior year. The decrease in the net interest margin was due primarily to a reduction in asset yields due to the low interest rate environment, partially offset by a decrease in the cost of deposits and borrowings. Additionally, cash flows from the one-to four-family loan portfolio not reinvested into loans were used to purchase lower yielding securities, which also decreased the overall asset yield. During the latter portion of the current year, the pace of loan refinance and payoff activity slowed, resulting in lower premium amortization related to correspondent one- to four-family loans compared to earlier in the year, and there was a reduction in the purchases of lower-yielding securities as cash flows from the loan and deposit portfolios slowed, all of which helped stabilize the net interest margin.
As discussed above, the Bank experienced high levels of loan refinance and payoff activity for the majority of the current year, before slowing later in the year. This was a trend continued from the last half of the prior year. Additionally, there was significant deposit growth during the latter part of the prior year and the first half of the current year due to a reduction in customer spending and high levels of government assistance. The loan portfolio decreased $121.7 million, or 1.7%, during the current year, primarily in the correspondent one-to four-family loan portfolio, while the securities portfolio increased $453.7 million, or 29.1%. Deposit growth during the current year was used to pay down certain maturing advances and purchase securities. The deposit portfolio increased $406.0 million, or 6.6%, during the current year, while borrowings decreased $206.5 million, or 11.5%. The deposit growth was primarily in non-maturity deposit accounts, partially offset by a decrease in retail certificates of deposit as customers moved some of the funds from maturing certificates into more liquid investment options such as the Bank's retail money market accounts. There is some uncertainty regarding how long the increased balance of non-maturity deposits will be retained by the Bank as customers return to more normal spending habits and/or choose to invest in higher-yielding investment options outside of the Bank. The Bank may be required to replace deposit outflows with higher costing borrowings, which would increase the cost of funds over time.
The Bank's asset quality continued to remain strong during the current fiscal year, reflected in low delinquency and charge-off ratios. At September 30, 2021, loans 30 to 89 days delinquent were 0.11% of total loans receivable, net, and loans 90 or more days delinquent or in foreclosure were 0.16% of total loans receivable, net. The ratio of net charge-offs (recoveries) ("NCOs") during the current year to average loans outstanding during the current year was 0.01%. In March 2020, the Bank initiated loan modification programs to support and provide relief to borrowers during the COVID-19 pandemic ("COVID-19 modifications"). As of September 30, 2021, $2.7 million of one- to four-family loans and $146.4 million of commercial loans with COVID-19 modifications were still in their deferral period, compared to $39.8 million and $367.4 million, respectively, as of September 30, 2020. We have observed very low delinquency rates for loans that were previously subject to COVID-19 modifications and have since resumed full payments. Additionally, in March 2020, the Bank suspended the initiation of foreclosure proceedings for owner-occupied one- to four-family loans, and this suspension remained in place at September 30, 2021. Approximately 75% of non-performing one- to four family loans at September 30, 2021 either had foreclosure proceedings initiated prior to the foreclosure suspension or would have had foreclosure proceedings initiated if the suspension were not in place.
At September 30, 2021, the Bank had a one-year gap position of $(664.1) million, or (6.9)% of total assets, meaning the amount of interest-bearing liabilities exceeds the amount of interest-earning assets maturing or repricing during the same period. Despite the negative gap, net interest income is projected to increase in a rising interest rate environment due to the assumption that the Bank's deposit balances are not expected to reprice to the full extent of the interest rate change. This assumption is based on a historical analysis of the Bank's deposit pricing behavior. See additional discussion in "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk."
Critical Accounting Estimates
Our most critical accounting estimates are the methodologies used to determine the ACL and reserve for off-balance sheet credit exposures and fair value measurements. These estimates 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 about highly uncertain matters. The use of different judgments, assumptions, and estimates could affect reported results materially. These critical accounting estimates and their application are reviewed at least annually by our audit committee. The following is a description of our critical accounting estimates and an explanation of the methods and assumptions underlying their application.
Allowance for Credit Losses and Reserve for Off-Balance Sheet Credit Exposures. The ACL is a valuation amount that is deducted from the amortized cost basis of loans and represents management's estimate of lifetime credit losses expected on the Company's loan portfolio as of the balance sheet date. The reserve for off-balance sheet credit exposures represents expected credit losses on unfunded portions of existing loans and commitments to originate or purchase loans that are not unconditionally cancellable by the Company.
Management estimates the ACL by projecting future loss rates which are dependent upon forecasted economic indices and applying qualitative factors when deemed appropriate by management. The key assumptions used in projecting future loss rates include the economic forecast, the forecast and reversion to mean time periods, and prepayment and curtailment assumptions. The assumptions are used to calculate and aggregate estimated cash flows for the time period that remains in each loan's contractual life. The cash flows are discounted back to the balance sheet date using each loan's effective yield, to arrive at a present value of future cash flows, which is compared to the amortized cost basis of the loan pool to determine the amount of ACL required by the calculation. Management then considers qualitative factors when accessing the overall level of ACL. See "Allowance for Credit Losses on Loans Receivable" and "Reserve for Off-Balance Sheet Credit Exposures" within "Part II, Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 1. Summary of Significant Accounting Policies" for additional information.
One of the most significant judgments used in projecting loss rates when estimating the ACL and reserves for off-balance sheet credit exposures is the macro-economic forecast provided by a third party. The economic indices sourced from the macro-economic forecast and used in projecting loss rates are national unemployment rate, changes in commercial real estate prices, changes in home values, and changes in the United States gross domestic product. The economic index used in the calculation to which the calculation is most sensitive is the national unemployment rate. Each reporting period, several macro-economic forecast scenarios are considered by management. Management selects the macro-economic forecast(s) that is/are most reflective of expectations at that point in time. Changes in the macro-economic forecast, especially for the national unemployment rate, could significantly impact the calculated estimated credit losses between reporting periods.
Other key assumptions in the calculation of the ACL and reserve for off-balance sheet credit exposures estimates include the forecast and reversion to mean time periods and prepayment and curtailment assumptions. The calculation is much less sensitive to these assumptions than the macro-economic forecasts. The macro-economic forecast is applied for a reasonable and supportable time period before reverting to long-term historical averages for each economic index. The forecast and reversion to mean time period used for each economic index at September 30, 2021 was four quarters. Prepayment and curtailment assumptions are based on the Company's historical experience over the trailing 12 months and are adjusted by management as deemed necessary. The prepayment and curtailment assumptions vary based on loan product type.
The ACL and reserves for off-balance sheet credit exposures may be materially affected by qualitative factors, especially during periods of economic uncertainty, for items not reflected in the lifetime credit loss calculation, but which are deemed appropriate by management's current assessment of the risks related to the loan portfolio and/or external factors. Such qualitative factors may include changes in the Bank's loan portfolio composition and credit concentrations, changes in the balances and/or trends in asset quality and/or loan credit performance, changes in lending underwriting standards, the effect
of other external factors such as significant unique events or conditions, and actual and/or expected change in economic conditions, real estate values, and/or other economic developments. The qualitative factors applied by management at September 30, 2021 were (1) the balance and trending of large-dollar special mention loans, (2) economic uncertainties related to the job market and the unevenness of the recovery in certain industries, and (3) COVID-19 loan modifications related to commercial real estate loans. The qualitative factors applied at September 30, 2021, and the importance and levels of the qualitative factors applied, may change in future periods depending on the level of changes to items such as the uncertainty of economic conditions and management's assessment of the level of credit risk within the loan portfolio as a result of such changes, compared to the amount of ACL calculated by the model. The evaluation of qualitative factors is inherently imprecise and requires significant management judgment. See "Part II, Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 4. Loans Receivable and Allowance for Credit Losses - Allowance for Credit Losses" for additional information regarding the qualitative factors applied at September 30, 2021.
The ACL and the reserves for off balance sheet credit exposures was $19.8 million and $5.7 million, respectively at September 30, 2021, compared to $26.8 million and $7.8 million, respectively, at October 1, 2020, which was the date we adopted Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The $7.0 million decrease in the ACL and $2.0 million decrease in the reserves for off-balance sheet credit exposures was primarily attributable to the improved economic conditions between time periods, specifically in the national unemployment rate. The average national unemployment rate during the four-quarter macro-economic forecast selected by management as of October 1, 2020 was 10.8%, compared to 3.8% during the four-quarter macro-economic forecast selected at September 30, 2021. See "Part II, Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 4. Loans Receivable and Allowance for Credit Losses - Allowance for Credit Losses" for additional information regarding the assumptions used in the Company's September 30, 2021 estimate of ACL.
While management utilizes its best judgment and information available, the adequacy of the ACL and reserve for off-balance sheet credit exposures is determined by certain factors outside of the Company's control, such as the performance of our portfolios, changes in the economic environment including economic uncertainty, changes in interest rates, and the view of the regulatory authorities toward classification of assets and the level of ACL and reserves for off-balance sheet credit exposures. Additionally, the level of ACL and reserves for off-balance sheet credit exposures may fluctuate based on the balance and mix of the loan portfolio and off-balance sheet credit exposures. If actual results differ significantly from our assumptions, our ACL and reserve for off-balance sheet credit exposures may not be sufficient to cover inherent losses in our loan portfolio, resulting in additions to our ACL and an increase in the provision for credit losses.
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, not related to credit loss, 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 at September 30, 2021.
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."
Financial Condition
The following table summarizes the Company's financial condition at the dates indicated.
September 30, Change expressed in:
2021 2020 Dollars Percent
(Dollars in thousands)
Total assets $ 9,631,246 $ 9,487,218 $ 144,028 1.5 %
AFS securities 2,014,608 1,560,950 453,658 29.1
Loans receivable, net 7,081,142 7,202,851 (121,709) (1.7)
Deposits 6,597,396 6,191,408 405,988 6.6
Borrowings 1,582,850 1,789,313 (206,463) (11.5)
Stockholders' equity 1,242,273 1,284,859 (42,586) (3.3)
Equity to total assets at end of period 12.9 % 13.5 %
Average number of basic shares outstanding 135,481 137,897 (2,416) (1.8)
Average number of diluted shares outstanding 135,496 137,901 (2,405) (1.7)
Assets. Total assets increased due mainly to an increase in the securities portfolio, partially offset by decreases in cash and cash equivalents and loans receivable. Cash flows from the deposit portfolio were used to purchase securities and pay down certain maturing borrowings.
Loans Receivable. Originating and purchasing loans secured by one- to four-family residential properties is the Bank's primary lending business, resulting in a concentration in residential first mortgage loans secured by properties located in Kansas and Missouri. The Bank also originates and participates in commercial loans, and originates consumer loans and construction loans.
The Bank purchases one- to four-family loans, on a loan-by-loan basis, from a select group of correspondent lenders ("correspondent purchased"). Loan purchases enable the Bank to attain geographic diversification in the one- to four-family loan portfolio. We generally pay a premium of 0.50% to 1.0% of the loan balance to purchase these loans, and 1.0% of the loan balance to purchase the servicing of these loans. The premium paid is amortized against the interest earned over the life of the loan, which reduces the loan yield. If a loan pays off before the scheduled maturity date, the remaining premium is recognized as reduction in interest income. During the current fiscal year, the Bank recognized a significant amount of premium amortization due to payoffs and endorsements.
In the past, the Bank has also purchased one- to four-family loans from correspondent and nationwide lenders in bulk loan packages ("bulk purchased"). The majority of the Bank's bulk purchased loans were guaranteed by one seller. The Bank has not experienced any losses with this group of loans since the loan package was purchased in August 2012.
The Bank originates owner-occupied construction-to-permanent loans secured by one- to four-family residential real estate. The majority of these loans are secured by property located within the Bank's Kansas City market area. The Bank's owner-occupied construction-to-permanent loan program combines the construction loan and the permanent loan into one loan, allowing the borrower to secure the same interest rate structure throughout the construction period and the permanent loan term.
The Bank offers a variety of secured consumer loans, including home equity loans and lines of credit, home improvement loans, vehicle loans, and loans secured by savings deposits. The Bank also originates a very limited amount of unsecured loans. Generally, consumer loans are originated in the Bank's market areas. The majority of our consumer loan portfolio is comprised of home equity lines of credit which have adjustable interest rates. For a majority of the home equity lines of credit, the Bank has the first mortgage or the Bank is in the first lien position.
The Bank's commercial loan portfolio is composed of commercial real estate loans, commercial construction loans and commercial and industrial loans. Our commercial real estate loans include a variety of property types, including hotels, office and retail buildings, senior housing facilities, and multi-family dwellings located in Kansas, Missouri, and 12 other states. The Bank's commercial and industrial loan portfolio consists largely of loans secured by accounts receivable, inventory and equipment.
Commercial borrowers are generally required to provide financial information annually, including borrower financial statements, subject property rental rates and income, maintenance costs, updated real estate property tax and insurance payments, and personal financial information for the guarantor(s). This allows the Bank to monitor compliance with loan covenants and review the borrower's performance, including cash flows from operations, debt service coverage, and comparison of performance to projections and year-over-year performance trending. Additionally, the Bank monitors and performs site visits, or in the case of participation loans, obtains updates from the lead bank as needed to determine the condition of the collateral securing the loan. Depending on the financial strength of the project and/or the complexity of the borrower's financials, the Bank may also perform a global analysis of cash flows to account for all other properties owned by the borrower or guarantor. If signs of weakness are identified, the Bank may begin performing more frequent financial and/or collateral reviews or will initiate contact with the borrower, or the lead bank will contact the borrower if the loan is a participation loan, to ensure cash flows from operations are maintained at a satisfactory level to meet the debt requirements. Both macro-level and loan-level stress-test scenarios based on existing and forecasted market conditions are part of the on-going portfolio management process for the commercial real estate portfolio. The Bank mitigates the risk of commercial real estate construction lending during the construction period by monitoring inspection reports from an independent third-party, project budget, percentage of completion, on-site inspections and percentage of advanced funds. Commercial and industrial loans are monitored through a review of borrower performance as indicated by borrower financial statements, borrowing base reports, accounts receivable aging reports, and inventory aging reports. These reports are required to be provided by the borrowers monthly, quarterly, or annually depending on the nature of the borrowing relationship. The Bank regularly monitors the level of risk in the entire commercial loan portfolio, including concentrations in such factors as geographic locations, collateral types, tenant brand name, borrowing relationships, and lending relationships in the case of participation loans, among other factors.
The following table presents the balance and weighted average rate of our loan portfolio as of the dates indicated.
September 30, 2021 September 30, 2020
Amount Rate Amount Rate
(Dollars in thousands)
One- to four-family:
Originated $ 3,956,064 3.18 % $ 3,937,310 3.50 %
Correspondent purchased 2,003,477 3.02 2,101,082 3.49
Bulk purchased 173,662 1.65 208,427 2.41
Construction 39,142 2.82 34,593 3.30
Total 6,172,345 3.09 6,281,412 3.46
Commercial:
Commercial real estate 676,908 4.00 626,588 4.29
Commercial and industrial 66,497 3.83 97,614 2.79
Construction 85,963 4.03 105,458 4.04
Total 829,368 3.99 829,660 4.08
Consumer loans:
Home equity 86,274 4.60 103,838 4.66
Other 8,086 4.19 10,086 4.40
Total 94,360 4.57 113,924 4.64
Total loans receivable 7,096,073 3.21 7,224,996 3.55
Less:
ACL 19,823 31,527
Discounts/unearned loan fees 29,556 29,190
Premiums/deferred costs (34,448) (38,572)
Total loans receivable, net $ 7,081,142 $ 7,202,851
The following table presents the contractual maturity of our loan portfolio, along with associated weighted average yields, at September 30, 2021. Loans 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.
One year or less(1)
Over one year to five years Over five years to 15 years Over 15 years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands)
One- to four-family:
Originated $ 845 4.17 % $ 63,633 3.81 % $ 1,438,945 2.93 % $ 2,452,641 3.39 % $ 3,956,064 3.23 %
Correspondent purchased 79 3.63 4,515 3.16 508,895 2.49 1,489,988 3.05 2,003,477 2.91
Bulk purchased 6 5.88 313 4.39 34,651 2.10 138,692 1.42 173,662 1.56
Construction(2)
- - - - 2,568 2.71 36,574 2.83 39,142 2.82
Total 930 4.13 68,461 3.77 1,985,059 2.80 4,117,895 3.20 6,172,345 3.08
Commercial:
Commercial real estate 117,713 3.75 142,047 4.46 329,868 4.25 87,280 4.08 676,908 4.18
Commercial and industrial 17,626 4.17 34,216 4.00 9,615 4.59 5,040 4.17 66,497 4.14
Construction(2)
6,369 4.05 38,260 3.87 15,706 3.78 25,628 4.57 85,963 4.07
Total 141,708 3.81 214,523 4.28 355,189 4.24 117,948 4.19 829,368 4.17
Consumer:
Home equity(3)
1,672 4.83 2,071 5.74 44,874 4.51 37,657 4.57 86,274 4.57
Other 868 3.02 6,770 4.30 448 6.64 - - 8,086 4.29
Total 2,540 4.21 8,841 4.64 45,322 4.53 37,657 4.57 94,360 4.55
Total loans receivable $ 145,178 3.82 $ 291,825 4.17 $ 2,385,570 3.05 $ 4,273,500 3.24 7,096,073 3.23
Less:
ACL 19,823
Discounts/unearned loan fees 29,556
Premiums/deferred costs (34,448)
Total loans receivable, net $ 7,081,142
(1)Includes demand loans, loans having no stated maturity, and overdraft loans.
(2)Construction loans are presented based upon the contractual maturity date, which includes the permanent financing period for construction-to-permanent loans.
(3)For home equity loans, including those that do not have a stated maturity date, the maturity date calculated assumes the borrower always makes the required minimum payment. The majority of home equity loans assume a maximum term of 240 months.
The following table presents, as of September 30, 2021, the amount of loans due after September 30, 2022, and whether these loans have fixed or adjustable interest rates.
Fixed Adjustable Total
(Dollars in thousands)
One- to four-family:
Originated $ 3,709,020 $ 246,199 $ 3,955,219
Correspondent purchased 1,838,138 165,260 2,003,398
Bulk purchased 5,477 168,179 173,656
Construction 36,492 2,650 39,142
Total 5,589,127 582,288 6,171,415
Commercial:
Commercial real estate 304,031 255,164 559,195
Commercial and industrial 35,197 13,674 48,871
Construction 37,956 41,638 79,594
Total 377,184 310,476 687,660
Consumer:
Home equity 11,518 $ 73,084 84,602
Other 5,262 1,956 7,218
Total 16,780 75,040 91,820
Total loans receivable $ 5,983,091 $ 967,804 $ 6,950,895
Loan Activity - The following table summarizes activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, discounts/unearned loan fees, and premiums/deferred costs. Loans that were paid off as a result of refinances 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. Commercial loan renewals are not included in the activity in the following table unless new funds are disbursed at the time of renewal. The renewal balance and rate are included in the ending loan portfolio balance and rate.
For the Year Ended
September 30, 2021 September 30, 2020
Amount Rate Amount Rate
(Dollars in thousands)
Beginning balance $ 7,224,996 3.55 % $ 7,412,473 3.81 %
Originated and refinanced 1,437,454 2.89 1,166,235 3.30
Purchased and participations 824,241 2.89 541,596 3.44
Change in undisbursed loan funds (174,416) (3,998)
Repayments (2,215,585) (1,890,975)
Principal recoveries/(charge-offs), net (478) 1
Other (139) (336)
Ending balance $ 7,096,073 3.21 $ 7,224,996 3.55
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. During the current fiscal year, the Bank endorsed $765.5 million of one- to four-family loans, reducing the average rate on those loans by 92 basis points. 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.
For the Year Ended
September 30, 2021 September 30, 2020
Amount Rate % of Total Amount Rate % of Total
(Dollars in thousands)
Fixed-rate:
One- to four-family $ 1,615,165 2.66 % 71.4 % $ 1,189,835 3.21 % 69.6 %
One- to four-family construction 125,309 2.77 5.5 44,754 3.28 2.6
Commercial:
Real estate 28,944 3.85 1.3 44,005 4.17 2.7
Commercial and industrial 49,857 2.45 2.2 65,174 1.92 3.8
Construction 42,505 3.65 1.9 39,346 4.71 2.3
Home equity 3,491 5.42 0.2 4,493 5.83 0.3
Other 2,994 5.48 0.1 4,209 5.67 0.2
Total fixed-rate 1,868,265 2.71 82.6 1,391,816 3.24 81.5
Adjustable-rate:
One- to four-family 59,813 2.52 2.6 131,665 2.94 7.7
One- to four-family construction 11,069 2.64 0.5 12,984 2.97 0.8
Commercial:
Real estate 120,202 3.70 5.3 50,697 4.56 3.0
Commercial and industrial 18,581 3.97 0.8 6,360 4.72 0.4
Construction 126,155 4.08 5.6 53,563 4.06 3.1
Home equity 55,740 4.42 2.5 58,709 4.95 3.4
Other 1,870 3.34 0.1 2,037 3.86 0.1
Total adjustable-rate 393,430 3.73 17.4 316,015 3.81 18.5
Total originated, refinanced and purchased $ 2,261,695 2.89 100.0 % $ 1,707,831 3.35 100.0 %
Purchased and participation loans included above:
Fixed-rate:
Correspondent purchased - one- to four-family $ 671,077 2.65 $ 395,778 3.34
Participations - commercial 40,314 3.66 46,126 4.29
Total fixed-rate purchased/participations 711,391 2.70 441,904 3.44
Adjustable-rate:
Correspondent purchased - one- to four-family 18,450 2.45 52,192 2.94
Participations - commercial 94,400 4.36 47,500 4.04
Total adjustable-rate purchased/participations 112,850 4.05 99,692 3.47
Total purchased/participation loans $ 824,241 2.89 $ 541,596 3.44
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 rate, weighted average credit score, weighted average loan-to-value ("LTV") ratio, and average balance per loan as of September 30, 2021. Credit scores are updated at least annually, with the latest update in September 2021, 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.
% of Credit Average
Amount Total Rate Score LTV Balance
(Dollars in thousands)
Originated $ 3,956,064 64.5 % 3.18 % 771 61 % $ 152
Correspondent purchased 2,003,477 32.7 3.02 765 64 407
Bulk purchased 173,662 2.8 1.65 771 58 294
$ 6,133,203 100.0 % 3.09 769 62 194
The following table presents originated and correspondent purchased activity in our one- to four-family loan portfolio, excluding endorsement activity, along with associated weighted average rates, weighted average LTVs and weighted average credit scores for the current fiscal year.
Credit
Amount Rate LTV Score
(Dollars in thousands)
Originated $ 1,121,829 2.68 % 70 % 767
Correspondent purchased 689,527 2.64 69 772
$ 1,811,356 2.66 70 769
The following table summarizes our one- to four-family loan origination and refinance commitments and one- to four-family correspondent loan purchase commitments as of September 30, 2021, 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.
Amount Rate
(Dollars in thousands)
Originate/refinance $ 87,117 2.78 %
Correspondent 95,395 2.54
$ 182,512 2.65
Commercial Loans - During fiscal year 2021, the Bank originated $251.5 million of commercial loans, including $22.8 million of Paycheck Protection Program ("PPP") loans, and entered into commercial loan participations totaling $134.7 million. The Bank also processed commercial loan disbursements, excluding lines of credit, of approximately $270.0 million at a weighted average rate of 3.59%. Additionally, during the current fiscal year, $63.5 million of PPP loans were paid off, primarily by the U.S. Small Business Administration (SBA) following completion of the loan forgiveness process.
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, 2021. Because the commitments to pay out undisbursed funds are not cancellable by the Bank, unless the loan is in default, we generally anticipate fully funding the related projects.
Unpaid Undisbursed Gross Loan Outstanding % of
Count Principal Amount Amount Commitments Total Total
(Dollars in thousands)
Senior housing 34 $ 229,082 $ 36,202 $ 265,284 $ 30,500 $ 295,784 27.8 %
Retail building 135 158,834 49,705 208,539 11,622 220,161 20.7
Hotel 10 137,301 57,364 194,665 - 194,665 18.3
Office building 92 49,608 60,379 109,987 - 109,987 10.3
One- to four-family property 385 61,717 7,457 69,174 1,453 70,627 6.6
Single use building 25 42,155 4,873 47,028 21,300 68,328 6.4
Multi-family 38 53,173 13,026 66,199 690 66,889 6.3
Other 101 31,001 5,166 36,167 1,502 37,669 3.6
820 $ 762,871 $ 234,172 $ 997,043 $ 67,067 $ 1,064,110 100.0 %
Weighted average rate 4.00 % 4.03 % 4.01 % 3.73 % 3.99 %
The following table summarizes the Bank's commercial real estate and commercial construction loans and loan commitments by state as of September 30, 2021.
Unpaid Undisbursed Gross Loan Outstanding % of
Count Principal Amount Amount Commitments Total Total
(Dollars in thousands)
Kansas 636 $ 327,419 $ 21,416 $ 348,835 $ 44,302 $ 393,137 36.9 %
Texas 11 135,644 137,480 273,124 - 273,124 25.7
Missouri 146 205,989 26,052 232,041 21,265 253,306 23.8
Colorado 7 16,087 20,012 36,099 - 36,099 3.4
Arkansas 3 12,143 21,620 33,763 - 33,763 3.2
Nebraska 6 33,464 4 33,468 - 33,468 3.1
Other 11 32,125 7,588 39,713 1,500 41,213 3.9
820 $ 762,871 $ 234,172 $ 997,043 $ 67,067 $ 1,064,110 100.0 %
The following table presents the Bank's commercial loan portfolio and outstanding loan commitments, categorized by gross loan amount (unpaid principal plus undisbursed amounts) or outstanding loan commitment amount, as of September 30, 2021.
Count Amount
(Dollars in thousands)
Greater than $30 million 4 $ 180,500
>$15 to $30 million 16 363,129
>$10 to $15 million 7 85,141
>$5 to $10 million 15 96,776
$1 to $5 million 111 251,794
Less than $1 million 1,324 194,423
1,477 $ 1,171,763
Asset Quality
Delinquent and nonaccrual loans and other real estate owned ("OREO"). The following table presents the Company's 30 to 89 day delinquent loans at the dates indicated. Loans subject to payment forbearance under the Bank's COVID-19 loan modification program are not reported as delinquent during the forbearance time period. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. Of the loans 30 to 89 days delinquent at September 30, 2021 and 2020, approximately 61% and 70%, respectively, were 59 days or less delinquent.
Loans Delinquent for 30 to 89 Days at September 30,
2021 2020
Number Amount Number Amount
(Dollars in thousands)
One- to four-family:
Originated 48 $ 4,156 42 $ 3,012
Correspondent purchased 7 2,590 8 3,123
Bulk purchased 4 541 12 2,532
Commercial 2 37 2 45
Consumer 25 498 26 398
86 $ 7,822 90 $ 9,110
Loans 30 to 89 days delinquent
to total loans receivable, net 0.11 % 0.13 %
The following table presents the Company's nonaccrual loans and OREO at the dates indicated. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. Nonaccrual loans are loans that are 90 or more days delinquent or in foreclosure and other loans required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements and/or internal policies, even if the loans are current. At all dates presented, there were no loans 90 or more days delinquent that were still accruing interest. Non-performing assets include nonaccrual loans and OREO. OREO primarily includes assets acquired in settlement of loans. In late March 2020, the Bank suspended the initiation of foreclosure proceedings for owner-occupied one- to four-family loans. At September 30, 2021, there were $7.4 million of nonaccrual one- to four-family loans for which foreclosure proceedings either had been initiated prior to the foreclosure suspension or would have been initiated if the foreclosure suspension were not in place.
September 30,
2021 2020
Number Amount Number Amount
(Dollars in thousands)
Loans 90 or More Days Delinquent or in Foreclosure:
One- to four-family:
Originated 50 $ 3,693 51 $ 4,362
Correspondent purchased 10 3,210 6 2,397
Bulk purchased 9 2,974 12 2,903
Commercial 6 1,214 5 1,360
Consumer 21 498 14 304
96 11,589 88 11,326
Loans 90 or more days delinquent or in foreclosure
as a percentage of total loans 0.16 % 0.16 %
Nonaccrual loans less than 90 Days Delinquent:(1)
One- to four-family:
Originated 7 $ 1,288 9 $ 691
Correspondent purchased - - - -
Bulk purchased 1 131 - -
Commercial 4 419 3 464
Consumer 1 9 1 9
13 1,847 13 1,164
Total nonaccrual loans 109 13,436 101 12,490
Nonaccrual loans as a percentage of total loans 0.19 % 0.17 %
OREO:
One- to four-family:
Originated(2)
3 $ 170 4 $ 183
Total non-performing assets 112 $ 13,606 105 $ 12,673
Non-performing assets as a percentage of total assets 0.14 % 0.13 %
(1)Includes loans required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements and/or internal policies, even if the loans are current.
(2)Real estate-related consumer loans where we also hold the first mortgage are included in the one- to four-family category as the underlying collateral is one- to four-family property.
Of the one- to four-family COVID-19 loan modifications that had completed the deferral period by September 30, 2021, $2.2 million were 30 to 89 days delinquent and $2.8 million were 90 or more days delinquent as of September 30, 2021. Of the commercial COVID-19 loan modifications that had completed the deferral period by September 30, 2021, $3 thousand were 30 to 89 days delinquent and none were 90 or more days delinquent as of September 30, 2021.
The following table presents the states where the properties securing five percent or more of the total amount of our one- to four-family loans are located and the corresponding balance of loans 30 to 89 days delinquent, 90 or more days delinquent or in foreclosure, and weighted average LTV ratios for loans 90 or more days delinquent or in foreclosure at September 30, 2021. 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. At September 30, 2021, potential losses, after taking into consideration anticipated private mortgage insurance proceeds and estimated selling costs, have been charged-off.
Loans 30 to 89 Loans 90 or More Days Delinquent
One- to Four-Family Days Delinquent or in Foreclosure
State Amount % of Total Amount % of Total Amount % of Total LTV
(Dollars in thousands)
Kansas $ 3,516,327 57.3 % $ 3,900 53.5 % $ 3,511 35.6 % 57 %
Missouri 1,042,467 17.0 1,316 18.1 1,442 14.6 56
Texas 597,161 9.8 - - 1,929 19.5 41
Other states 977,248 15.9 2,071 28.4 2,995 30.3 56
$ 6,133,203 100.0 % $ 7,287 100.0 % $ 9,877 100.0 % 53
Classified Assets. In accordance with the Bank's asset classification policy, management regularly reviews the problem assets in the Bank's portfolio to determine whether any assets require classification. See "Part II, Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 4. Loans Receivable and Allowance for Credit Losses" for asset classification definitions.
The following table presents loans classified as special mention or substandard at the dates presented. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. The increase in commercial special mention loans at September 30, 2021 compared to September 30, 2020 was due mainly to the addition of two commercial loans for which the borrowers have been impacted by the COVID-19 pandemic. Both of these loans were subject to COVID-19 loan modifications during fiscal year 2020 and have since resumed full payments. Subsequent to September 30, 2021, the underlying economic considerations being monitored for these two loans returned to levels deemed appropriate by the Company, and the loans were removed from special mention, resulting in a $49.4 million reduction in the balance of special mention loans. The special mention ACL associated with these two loans at September 30, 2021 was approximately $2.2 million.
September 30, 2021 September 30, 2020
Special Mention Substandard Special Mention Substandard
(Dollars in thousands)
One- to four-family $ 14,332 $ 23,458 $ 11,339 $ 25,630
Commercial 99,729 3,259 52,006 4,914
Consumer 135 718 332 589
$ 114,196 $ 27,435 $ 63,677 $ 31,133
Allowance for Credit Losses. The distribution of our ACL at the dates indicated is summarized below. The Company adopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments on October 1, 2020. The ASU, as amended, replaces the incurred loss methodology in accounting principles generally accepted in the United States of America ("GAAP"), which required credit losses to be recognized when it is probable that a loss has been incurred, with an expected credit loss methodology, which is commonly known as the current expected credit loss ("CECL") methodology. Information as of October 1, 2020 is included in the tables below for comparability purposes.
September 30, 2021 October 1, 2020 September 30, 2020
% of % of % of
Amount Loans to Amount Loans to Amount Loans to
of ACL Total Loans of ACL Total Loans of ACL Total Loans
(Dollars in thousands)
One- to four-family:
Originated $ 1,590 55.8 % $ 1,609 54.5 % $ 6,044 54.5 %
Correspondent purchased 2,062 28.2 2,324 29.1 2,691 29.1
Bulk purchased 304 2.4 903 2.9 467 2.9
Construction 22 0.6 25 0.5 41 0.5
Total 3,978 87.0 4,861 87.0 9,243 87.0
Commercial:
Real estate 13,706 9.6 16,595 8.6 16,869 8.6
Commercial and industrial 344 0.9 559 1.4 1,451 1.4
Construction 1,602 1.2 4,452 1.5 3,480 1.5
Total 15,652 11.7 21,606 11.5 21,800 11.5
Consumer loans:
Home equity 126 1.2 81 1.4 370 1.4
Other consumer 67 0.1 218 0.1 114 0.1
Total consumer loans 193 1.3 299 1.5 484 1.5
$ 19,823 100.0 % $ 26,766 100.0 % $ 31,527 100.0 %
The ratio of ACL to loans receivable, by loan type, at the dates indicated is summarized below.
September 30, October 1, September 30,
2021 2020 2020
One- to four-family:
Originated 0.04 % 0.04 % 0.15 %
Correspondent purchased 0.10 0.11 0.13
Bulk purchased 0.18 0.43 0.22
Construction 0.06 0.07 0.12
Total 0.06 0.08 0.15
Commercial:
Commercial real estate 2.02 2.65 2.69
Commercial and industrial 0.52 0.57 1.49
Construction 1.86 4.22 3.30
Total 1.89 2.60 2.63
Consumer 0.20 0.26 0.42
Total 0.28 0.37 0.44
See "Part II, Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 1. Summary of Significant Accounting Policies and Note 4. Loans Receivable and Allowance for Credit Losses” for additional information regarding the Bank's ACL.
The following tables present ACL activity and related ratios at the dates and for the periods indicated. The current year NCOs were primarily in the commercial loan portfolio. The ratio of NCOs during the current year to average non-performing assets was higher than the prior year due to higher NCOs in the current year compared to a net recovery in the prior year. The ACL to nonaccrual loans at end of period ratio and ACL to loans receivable, net at end of period ratio were lower in the current year compared to the prior year due primarily to a lower ACL balance at September 30, 2021. As discussed above, on October 1, 2020, the Company adopted CECL, which is a different credit loss estimate methodology than the methodology applicable at September 30, 2020.
Year Ended September 30,
2021 2020 2019
(Dollars in thousands)
Balance at beginning of period $ 31,527 $ 9,226 $ 8,463
Adoption of CECL (4,761) - -
Charge-offs (715) (443) (262)
Recoveries 237 444 275
Net (charge-offs) recoveries (478) 1 13
Provision for credit losses (6,465) 22,300 750
Balance at end of period $ 19,823 $ 31,527 $ 9,226
Ratio of NCOs during the period
to average non-performing assets 3.63 % (0.01) % (0.12) %
ACL to nonaccrual loans at end of period 147.54 252.42 121.99
ACL to loans receivable, net at end of period 0.28 0.44 0.12
ACL to NCOs 41.5x N/M(1)
N/M(1)
(1)This ratio is not presented for the time periods noted due to loan recoveries exceeding loan charge-offs during the periods.
The following table presents NCOs, average loans, and NCOs as a percentage of average loans, by loan type, for the periods indicated.
Year Ended September 30,
2021 2020 2019
NCOs Average Loans NCOs as a % of Average Loans NCOs Average Loans NCOs as a % of Average Loans NCOs Average Loans NCOs as a % of Average Loans
(Dollars in thousands)
One- to four-family:
Originated $ 20 $ 3,936,166 0.00 % $ 23 $ 3,916,716 0.00 % $ 53 $ 3,892,585 0.00 %
Correspondent - 2,010,823 0.00 - 2,348,120 0.00 - 2,487,560 0.00
Bulk purchased 21 191,029 0.01 (265) 230,720 (0.11) (80) 274,289 (0.03)
Construction - 29,893 0.00 - 33,709 0.00 - 27,007 0.00
Total 41 6,167,911 0.00 (242) 6,529,265 0.00 (27) 6,681,441 0.00
Commercial:
Real estate 465 637,712 0.07 215 602,482 0.04 (22) 535,151 0.00
Commercial and industrial - 75,219 0.00 24 76,473 0.03 122 61,044 0.20
Construction - 75,771 0.00 - 106,172 0.00 (25) 105,576 (0.02)
Total 465 788,702 0.06 239 785,127 0.03 75 701,771 0.01
Consumer:
Home equity (26) 92,495 (0.03) (13) 112,939 (0.01) (52) 125,164 (0.04)
Other (2) 8,782 (0.02) 15 10,395 0.14 (9) 10,519 (0.09)
Total (28) 101,277 (0.03) 2 123,334 0.00 (61) 135,683 (0.04)
$ 478 $ 7,057,890 0.01 $ (1) $ 7,437,726 0.00 $ (13) $ 7,518,895 0.00
Securities. The following table presents the distribution of our securities portfolio, at amortized cost, at the dates indicated. Overall, fixed-rate securities comprised 94% of our securities portfolio at September 30, 2021. During the current fiscal year purchases exceeded maturities and repayments, resulting in a $453.7 million increase in the balance. Securities were purchased with cash flows from the loan portfolio and growth in the deposit portfolio that was not used to pay down maturing borrowings. The portfolio weighted average yield decreased due to purchases of securities at yields lower than the existing portfolio due to the low interest rate environment during the current year. Weighted average yields on tax-exempt securities are not calculated on a fully tax-equivalent basis.
September 30, 2021 September 30, 2020
Amount Yield WAL(1)
Amount Yield WAL(1)
(Dollars in thousands)
Fixed-rate securities:
MBS $ 1,363,645 1.30 % 3.5 $ 945,432 1.82 % 3.7
U.S. government-sponsored enterprises ("GSE") debentures 519,971 0.61 3.7 369,967 0.62 1.7
Municipal bonds 4,274 1.81 0.3 9,716 1.69 0.7
Total fixed-rate securities 1,887,890 1.11 3.6 1,325,115 1.49 3.1
Adjustable-rate securities:
MBS 120,566 1.99 3.2 204,490 2.49 2.9
Total securities portfolio $ 2,008,456 1.16 3.5 $ 1,529,605 1.62 3.1
(1)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.
The composition and maturities of the investment and MBS portfolio at September 30, 2021 are indicated in the following table by remaining contractual maturity, without consideration of call features or pre-refunding dates, along with associated weighted average yields. The weighted average yields were calculated by multiplying each carrying value by its yield and dividing the sum of these results by the total carrying values. Yields on tax-exempt investments are not calculated on a fully tax equivalent basis.
1 year or less More than 1 to 5 years More than 5 to 10 years Over 10 years Total Securities
Carrying Carrying Carrying Carrying Carrying
Value Yield Value Yield Value Yield Value Yield Value Yield
(Dollars in thousands)
MBS $ 325 2.87 % $ 58,838 2.48 % $ 277,200 1.65 % $ 1,157,630 1.23 % $ 1,493,993 1.35 %
GSE debentures - - 491,475 0.59 24,851 1.00 - - 516,326 0.61
Municipal bonds 4,079 1.80 210 2.00 - - - - 4,289 1.81
$ 4,404 1.87 $ 550,523 0.79 $ 302,051 1.60 $ 1,157,630 1.23 $ 2,014,608 1.16
The following table summarizes the activity in our securities portfolio 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 WALs are the estimated remaining principal repayment terms (in years) after three-month historical prepayment speeds have been applied.
For the Year Ended
September 30, 2021 September 30, 2020
Amount Yield WAL Amount Yield WAL
(Dollars in thousands)
Beginning balance - carrying value $ 1,560,950 1.63 % 3.1 $ 1,204,863 2.55 % 2.9
Maturities and repayments (594,294) (667,952)
Net amortization of (premiums)/discounts (6,206) (1,661)
Purchases 1,079,351 1.01 5.0 1,007,763 1.11 3.9
Change in valuation on AFS securities (25,193) 17,937
Ending balance - carrying value $ 2,014,608 1.16 3.5 $ 1,560,950 1.63 3.1
Liabilities. Total liabilities increased $186.6 million, or 2.3% during the current year, due to an increase in deposits, partially offset by a decrease in borrowings, as cash flows from deposit growth were used to pay off maturing borrowings.
Deposits. The following table presents the amount, weighted average rate and percent of total for the components of our deposit portfolio at the dates presented. The decrease in the deposit portfolio rate during the current year was due to a reduction in offered rates due to the low interest rate environment, which resulted in certificates of deposit repricing to lower offered rates as balances renewed, along with growth in lower costing non-maturity deposits.
At September 30,
2021 2020
% of % of
Amount Rate Total Amount Rate Total
(Dollars in thousands)
Non-interest-bearing checking $ 543,849 - % 8.2 % $ 451,394 - % 7.3 %
Interest-bearing checking 1,037,362 0.07 15.7 865,782 0.10 14.0
Savings 519,069 0.05 7.9 433,808 0.06 7.0
Money market 1,753,525 0.19 26.6 1,419,180 0.37 22.9
Retail certificates of deposit 2,341,531 1.41 35.5 2,623,336 1.88 42.4
Commercial certificates of deposit 190,215 0.66 2.9 143,125 1.05 2.3
Public unit certificates of deposit 211,845 0.21 3.2 254,783 0.74 4.1
$ 6,597,396 0.59 100.0 % $ 6,191,408 0.95 100.0 %
The following table sets forth the weighted average maturity ("WAM") information for our certificates of deposit, in years, as of September 30, 2021.
Retail certificates of deposit 1.3
Commercial certificates of deposit 0.5
Public unit certificates of deposit 0.5
Total certificates of deposit 1.1
As of September 30, 2021 and 2020, approximately $866.0 million and $557.0 million, respectively, of our deposit portfolio was uninsured. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements.
The following table sets forth the portion of the Bank's time deposits, by account, that are in excess of the FDIC insurance limit, by remaining time until maturity, as of September 30, 2021 (dollars in thousands).
3 months or less $ 179,393
Over 3 through 6 months 130,300
Over 6 through 12 months 158,123
Over 12 months 129,588
$ 597,404
Borrowings. The Bank primarily uses long-term fixed-rate borrowings with no embedded options to lengthen the average life of the Bank's liabilities. The fixed-rate characteristics of these borrowings lock-in the cost until maturity and thus decrease the amount of liabilities repricing as interest rates move higher compared to funding with lower-cost short-term borrowings. These borrowings are laddered in order to prevent large amounts of liabilities repricing in any one period.
The following table presents the maturity of term borrowings, which consist entirely of FHLB advances, along with associated weighted average contractual and effective rates as of September 30, 2021.
Maturity by FHLB Interest rate Contractual Effective
Fiscal Year Advances swaps(1)
Rate Rate(2)
(Dollars in thousands)
2022 $ 75,000 $ 100,000 0.26 % 1.92 %
2023 300,000 - 1.70 1.81
2024 150,000 165,000 1.32 2.46
2025 300,000 100,000 1.33 2.09
2026 250,000 - 0.96 1.27
2027 150,000 - 0.93 1.24
$ 1,225,000 $ 365,000 1.18 1.88
(1)Represents adjustable-rate FHLB advances for which the Bank has entered into interest rate swaps with a notional amount of $365.0 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 4.1 years at September 30, 2021.
(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 borrowing activity for the periods shown with borrowings being reported at par. 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. The decrease in total borrowings during the current year was due to not renewing borrowings that matured. Cash flows from deposit growth were used to pay off maturing borrowings. 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 decrease in the effective rate during the current year was due primarily to terminating certain interest rate swaps, prepaying certain advances, and replacing maturing advances at lower market interest rates. The 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 Year Ended
September 30, 2021 September 30, 2020
Effective Effective
Amount Rate WAM Amount Rate WAM
(Dollars in thousands)
Beginning balance $ 1,790,000 2.31 % 3.0 $ 2,140,000 2.38 % 2.6
Maturities and prepayments (1,305,000) 2.18 - (1,505,000) 2.44 -
New FHLB borrowings 1,105,000 1.96 3.7 1,155,000 2.36 4.3
Ending balance $ 1,590,000 1.88 3.3 $ 1,790,000 2.31 3.0
Maturities of Interest-Bearing Liabilities. 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/commercial and public unit amounts, and term borrowings for the next four quarters as of September 30, 2021.
December 31, March 31, June 30, September 30,
2021 2022 2022 2022 Total
(Dollars in thousands)
Retail/Commercial Certificates:
Amount $ 385,038 $ 329,419 $ 314,758 $ 432,378 $ 1,461,593
Repricing Rate 1.09 % 1.15 % 1.15 % 1.40 % 1.21 %
Public Unit Certificates:
Amount $ 69,063 $ 70,776 $ 32,175 $ 21,501 $ 193,515
Repricing Rate 0.26 % 0.28 % 0.09 % 0.09 % 0.22 %
Term Borrowings:(1)
Amount $ - $ - $ - $ 75,000 $ 75,000
Repricing Rate - % - % - % 0.29 % 0.29 %
Total
Amount $ 454,101 $ 400,195 $ 346,933 $ 528,879 $ 1,730,108
Repricing Rate 0.96 % 0.99 % 1.05 % 1.19 % 1.06 %
(1)The maturity date for FHLB advances tied to interest rate swaps is based on the maturity date of the related interest rate swap.
Stockholders' Equity. During the current year, the Company paid cash dividends totaling $117.9 million and repurchased common stock totaling $1.5 million. The cash dividends paid during the current year totaled $0.87 per share and consisted of a $0.40 per share True Blue Capitol cash dividend, a $0.13 per share cash true-up dividend related to fiscal year 2020 earnings, 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 9% an appropriate level of capital. At September 30, 2021, this ratio was 11.5%.
On October 19, 2021, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.5 million, payable on November 19, 2021 to stockholders of record as of the close of business on November 5, 2021. On October 28, 2021, the Company announced a fiscal year 2021 cash true-up dividend of $0.22 per share, or approximately $29.9 million, related to fiscal year 2021 earnings. The $0.22 per share cash true-up dividend was determined by taking the difference between total earnings for fiscal year 2021 and total regular quarterly cash dividends paid during fiscal year 2021, divided by the number of shares outstanding. The cash true-up dividend is payable on December 3, 2021 to stockholders of record as of the close of business on November 19, 2021, 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 2021.
There remains $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 FRB's existing approval for the Company to repurchase shares extends through August 2022.
At October 1, 2021, Capitol Federal Financial, Inc., at the holding company level, had $93.8 million on deposit at the Bank. For fiscal year 2022, it is 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 2022 earnings in excess of the amount paid as regular quarterly cash dividends during fiscal year 2022. It is anticipated that the fiscal year 2022 cash true-up dividend will be paid in December 2022. 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 paid a True Blue Capitol cash dividend of $0.25 per share in June for six consecutive years ending in 2019. Given the state of economic uncertainty, the Company elected to defer the annual True Blue dividend in June 2020. In June 2021, the Company paid a True Blue Capitol cash dividend of $0.40 per share. The $0.40 per share True Blue Capitol cash dividend represented a $0.20 per share cash dividend from fiscal year 2020 and a $0.20 per share cash dividend from fiscal year 2021. 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.
The following table presents regular quarterly cash dividends and special cash dividends paid in calendar years 2021, 2020, and 2019. The amounts represent cash dividends paid during each period. The 2021 true-up dividend amount presented represents the dividend payable on December 3, 2021 to stockholders of record as of November 19, 2021.
Calendar Year
2021 2020 2019
Amount Per Share Amount Per Share Amount Per Share
(Dollars in thousands, except per share amounts)
Regular quarterly dividends paid
Quarter ended March 31 $ 11,518 $ 0.085 $ 11,733 $ 0.085 $ 11,700 $ 0.085
Quarter ended June 30 11,516 0.085 11,733 0.085 11,708 0.085
Quarter ended September 30 11,518 0.085 11,733 0.085 11,713 0.085
Quarter ended December 31 11,534 0.085 11,514 0.085 11,731 0.085
True-up dividends paid 29,853 0.220 17,614 0.130 46,932 0.340
True Blue dividends paid 54,210 0.400 - - 34,446 0.250
Calendar year-to-date dividends paid $ 130,149 $ 0.960 $ 64,327 $ 0.470 $ 128,230 $ 0.930
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 2019 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 ended September 30, 2020. 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,
2021 2020
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:
Originated $ 3,966,059 $ 137,461 3.47 % $ 3,950,425 $ 150,526 3.81 %
Correspondent purchased 2,010,823 48,066 2.39 2,348,120 70,112 2.99
Bulk purchased 191,029 3,601 1.89 230,720 6,065 2.63
Total one- to four-family loans 6,167,911 189,128 3.07 6,529,265 226,703 3.47
Commercial loans 788,702 36,085 4.51 785,127 37,320 4.68
Consumer loans 101,277 4,684 4.63 123,334 6,471 5.25
Total loans receivable(1)
7,057,890 229,897 3.25 7,437,726 270,494 3.63
MBS(2)
1,446,466 21,399 1.48 954,197 23,009 2.41
Investment securities(2)(3)
482,641 2,825 0.59 270,683 4,467 1.65
FHLB stock 77,250 3,916 5.07 100,251 5,827 5.81
Cash and cash equivalents 131,798 144 0.11 179,142 1,181 0.65
Total interest-earning assets 9,196,045 258,181 2.80 8,941,999 304,978 3.40
Other non-interest-earning assets 443,724 461,614
Total assets $ 9,639,769 $ 9,403,613
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Checking $ 1,482,698 772 0.05 $ 1,180,110 762 0.06
Savings 487,146 280 0.06 388,662 292 0.08
Money market 1,598,838 4,128 0.26 1,252,992 6,647 0.53
Retail/commercial certificates 2,688,811 42,034 1.56 2,716,945 55,238 2.03
Wholesale certificates 252,623 1,192 0.47 282,947 4,659 1.65
Total deposits 6,510,116 48,406 0.74 5,821,656 67,598 1.16
Borrowings(4)
1,636,399 34,774 2.11 2,065,966 48,045 2.31
Total interest-bearing liabilities 8,146,515 83,180 1.02 7,887,622 115,643 1.46
Other non-interest-bearing liabilities 219,328 203,990
Stockholders' equity 1,273,926 1,312,001
Total liabilities and stockholders' equity $ 9,639,769 $ 9,403,613
Net interest income(5)
$ 175,001 $ 189,335
Net interest rate spread(6)
1.78 1.94
Net interest-earning assets $ 1,049,530 $ 1,054,377
Net interest margin(7)
1.90 2.12
Ratio of interest-earning assets to interest-bearing liabilities 1.13x 1.13x
(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 $6.6 million, and $13.8 million, for the years ended September 30, 2021 and 2020, respectively.
(4)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.
(5)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.
(6)Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(7)Net interest margin represents net interest income as a percentage of average interest-earning assets.
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 2021 to 2020. For the comparison of fiscal years 2020 to 2019, 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 ended September 30, 2020. 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,
2021 vs. 2020
Increase (Decrease) Due to
Volume Rate Total
(Dollars in thousands)
Interest-earning assets:
Loans receivable $ (13,055) $ (27,542) $ (40,597)
MBS 9,247 (10,857) (1,610)
Investment securities 2,261 (3,903) (1,642)
FHLB stock (1,235) (676) (1,911)
Cash and cash equivalents (250) (787) (1,037)
Total interest-earning assets (3,032) (43,765) (46,797)
Interest-bearing liabilities:
Checking 172 (163) 9
Savings 65 (77) (12)
Money market 1,495 (4,014) (2,519)
Certificates of deposit (1,154) (15,516) (16,670)
Borrowings (7,892) (5,379) (13,271)
Total interest-bearing liabilities (7,314) (25,149) (32,463)
Net change in net interest income $ 4,282 $ (18,616) $ (14,334)
Comparison of Operating Results for the Years Ended September 30, 2021 and 2020
The Company recognized net income of $76.1 million, or $0.56 per share, for fiscal year 2021 compared to net income of $64.5 million, or $0.47 per share, for fiscal year 2020. The increase in net income was due primarily to recording a $22.3 million provision for credit losses during the prior year compared to recording a negative provision for credit losses of $8.5 million in the current year, partially offset by a decrease in net interest income and an increase in income tax expense. Net interest income decreased $14.3 million, or 7.6%, from the prior year to $175.0 million for the current year. The net interest margin decreased 22 basis points, from 2.12% for the prior year to 1.90% for the current year. The decreases in net interest income and net interest margin were due mainly to a decrease in asset yields, along with a change in asset mix as cash flows from the loan portfolio have been used to purchase lower yielding securities, partially offset by a decrease in the cost of deposits and borrowings.
Interest and Dividend Income
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:
2021 2020 Dollars Percent
(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable $ 229,897 $ 270,494 $ (40,597) (15.0) %
MBS 21,399 23,009 (1,610) (7.0)
FHLB stock 3,916 5,827 (1,911) (32.8)
Investment securities 2,825 4,467 (1,642) (36.8)
Cash and cash equivalents 144 1,181 (1,037) (87.8)
Total interest and dividend income $ 258,181 $ 304,978 $ (46,797) (15.3)
The decrease in interest income on loans receivable was due mainly to a decrease in the weighted average yield, primarily in the one- to four-family loan portfolio. The decrease in the weighted average yield on the one- to four-family loan portfolio was due to endorsements and refinances to lower market rates, higher premium amortization related to correspondent one- to four-family loans due to high payoff and endorsement activity, along with adjustable-rate loans repricing to lower market rates, and the origination and purchase of new loans at lower market rates. Additionally, the average balance of the portfolio decreased compared to the prior year due primarily to a reduction in the correspondent one-to four-family loan portfolio. See "Average Balance Sheets" above.
The decrease in interest income on the MBS portfolio was due to a decrease in the weighted average yield as a result of purchases at lower market yields and the repricing of existing adjustable-rate MBS to lower market yields, partially offset by an increase in the average balance of the portfolio. Cash flows from the loan portfolio were used to purchase securities during the current fiscal year.
The decrease in dividend income on FHLB stock was due mainly to a decrease in the average balance of FHLB stock, along with a decrease in the dividend rate paid by FHLB. The average balance decreased as the Bank did not replace certain maturing FHLB advances between periods, which reduced the amount of FHLB stock owned by the Bank per FHLB requirements.
The decrease in interest income on investment securities was due to a decrease in the weighted average yield as a result of purchases at lower market yields, partially offset by an increase in the average balance of the portfolio.
The decrease in interest income on cash and cash equivalents was due primarily to a decrease in the yield earned on cash held at the Federal Reserve Bank of Kansas City ("FRB of Kansas City").
Interest Expense
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:
2021 2020 Dollars Percent
(Dollars in thousands)
INTEREST EXPENSE:
Deposits $ 48,406 $ 67,598 $ (19,192) (28.4) %
Borrowings 34,774 48,045 (13,271) (27.6)
Total interest expense $ 83,180 $ 115,643 $ (32,463) (28.1)
The decrease in interest expense on deposits was due mainly to a decrease in the weighted average rate paid on retail certificates of deposit, money market accounts, and wholesale certificates of deposit. Since the onset of the COVID-19 pandemic, retail certificates of deposit have been repricing downward as they renew or are replaced at lower offered rates, and rates on money market accounts have been lowered.
The decrease in interest expense on borrowings was due primarily to a decrease in the average balance, as certain maturing FHLB advances and repurchase agreements were not replaced and the Bank paid down its FHLB line of credit with liquidity generated from the deposit portfolio. The decrease in interest expense on borrowings was also a result of lowering the cost of FHLB advances by prepaying certain advances during the current and prior years.
Provision for Credit Losses
The Bank recorded a negative provision for credit losses during the current year of $8.5 million, compared to a $22.3 million provision for credit losses during the prior year. The negative provision in the current fiscal year was composed of a $6.5 million decrease in the ACL for loans and a $2.0 million decrease in reserves for off-balance sheet credit exposures. The negative provision for credit losses in the current fiscal year was due primarily to favorable forecasted economic outlooks during the year, largely related to commercial loans. See additional discussion regarding the Bank's ACL and reserve for off-balance sheet credit exposures at September 30, 2021 in the "Asset Quality" section and in the "Critical Accounting Estimates - Allowance for Credit Losses and Reserve for Off-Balance Sheet Credit Exposures" section above.
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:
2021 2020 Dollars Percent
(Dollars in thousands)
NON-INTEREST INCOME:
Deposit service fees $ 12,282 $ 11,285 $ 997 8.8 %
Gain on sale of Visa Class B shares 7,386 - 7,386 N/A
Insurance commissions 3,030 2,487 543 21.8
Other non-interest income 5,388 5,827 (439) (7.5)
Total non-interest income $ 28,086 $ 19,599 $ 8,487 43.3
The increase in deposit service fees was due primarily to an increase in debit card income as a result of higher transaction volume. During the current year, the Bank sold its Visa Class B Shares, resulting in a $7.4 million gain. The increase in insurance commissions was due primarily to higher annual contingent insurance commissions received in the current year compared to the prior year. The decrease in other non-interest income was primarily related to lower income from bank-
owned life insurance ("BOLI"), due to a reduction in the yield as a result of lower market rates and reduced death benefit receipts.
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:
2021 2020 Dollars Percent
(Dollars in thousands)
NON-INTEREST EXPENSE:
Salaries and employee benefits $ 56,002 $ 52,996 $ 3,006 5.7 %
Information technology and related expense 17,922 16,974 948 5.6
Occupancy, net 14,045 13,870 175 1.3
Regulatory and outside services 5,764 5,762 2 -
Advertising and promotional 5,133 4,889 244 5.0
Loss on interest rate swap termination 4,752 - 4,752 N/A
Deposit and loan transaction costs 2,761 2,890 (129) (4.5)
Federal insurance premium 2,545 914 1,631 178.4
Office supplies and related expense 1,715 2,195 (480) (21.9)
Other non-interest expense 4,930 5,514 (584) (10.6)
Total non-interest expense $ 115,569 $ 106,004 $ 9,565 9.0
The increase in salaries and employee benefits was due primarily to an increase in incentive compensation, as well as an increase in loan commissions related to higher loan origination activity. The increase in information technology and related expense was due mainly to an increase in software licensing expense and professional services expense. During the current fiscal year, the Bank terminated interest rate swaps designated as cash flow hedges with a notional amount of $200.0 million resulting in the reclassification of unrealized losses totaling $4.8 million from AOCI into earnings. The increase in the federal insurance premium was due mainly to the Bank utilizing an assessment credit from the FDIC during the prior year.
The Company's efficiency ratio was 56.91% for the current year compared to 50.74% for the prior year. The change in the efficiency ratio was due to lower net interest income and higher non-interest expense, partially offset by higher non-interest income. 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 and non-interest income. Management continues to strive to control operating costs. The increase in the efficiency ratio in the current year related to higher non-interest expense was due primarily to the loss on the termination of interest rate swaps, which was a unique transaction during the current year, along with higher federal insurance premium expense as the Bank utilized an assessment credit from the FDIC during the prior year.
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:
2021 2020 Dollars Percent
(Dollars in thousands)
Income before income tax expense $ 96,028 $ 80,630 $ 15,398 19.1 %
Income tax expense 19,946 16,090 3,856 24.0
Net income $ 76,082 $ 64,540 $ 11,542 17.9
Effective Tax Rate 20.8 % 20.0 %
The increase in income tax expense was due primarily to higher pretax income in the current year, as well as a higher effective tax rate compared to the prior year. The effective tax rate was lower in the prior year due primarily to a discrete benefit recognized in the prior year related to certain previously acquired BOLI policies. Management anticipates the effective income tax rate for fiscal year 2022 will be approximately 21% to 22%, absent any tax law changes.
Comparison of Operating Results for the Years Ended September 30, 2020 and 2019
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 Ended September 30, 2020 and 2019" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020.
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, 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.
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. Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40% of Bank Call Report total assets without the pre-approval of FHLB senior management. The Bank's borrowing limit was 50% of Bank Call Report total assets during the current year, as approved by the president of FHLB. 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 unusual trends in the amount and frequency of line of credit utilization and/or short-term borrowings, 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, 2021, the Bank had total borrowings, at par, of $1.59 billion, or approximately 16% of total assets, all of which were FHLB advances.
The amount of FHLB borrowings outstanding at September 30, 2021 was $1.59 billion, of which $175.0 million were advances scheduled to mature in the next 12 months, all of which were 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, 2021, 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, 2021, the Bank had $1.68 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, 2021, the Bank's policy allowed for combined brokered and public unit certificates of deposit up to 15% of total deposits. At September 30, 2021, the Bank did not have any brokered certificates of deposit and public unit certificates of deposit were approximately 3% of total deposits. The Bank had pledged securities with an estimated fair value of $264.9 million as collateral for public unit certificates of deposit at September 30, 2021. 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, 2021, $1.66 billion of the Bank's certificate of deposit portfolio was scheduled to mature within the next 12 months, including $193.5 million of public unit certificates of deposit and $176.6 million of commercial 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. The same is anticipated for our commercial certificates of deposit; however, due to the nature of these funds, retention rates are not as predictable as for retail certificates of deposit. 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.
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. Additionally, the Company has investments in several low income housing partnerships and, under the terms of the agreements, the Company has a commitment to fund a specified amount that will be due in installments over the life of the agreements. See "Part II, Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 6. Low Income Housing Partnerships and Note 12. Commitments and Contingencies" for additional information regarding these commitments.
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. We anticipate we will continue to have sufficient funds, through the repayments and maturities of loans and securities, deposits and borrowings, to meet our current commitments.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Asset and Liability Management and Market Risk
The rates of interest the Bank earns on its assets and pays on its liabilities are generally established contractually for a period of time. Fluctuations in interest rates have a significant impact not only upon our net income, but also upon the cash flows and market values of our assets and liabilities. Our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our interest-earning assets and interest-bearing liabilities. Risk associated with changes in interest rates on the earnings of the Bank and the market value of its financial assets and liabilities is known as interest rate risk. Interest rate risk is our most significant market risk, and our ability to adapt to changes in interest rates is known as interest rate risk management.
On a weekly basis, management reviews deposit flows, loan demand, cash levels, and changes in several market rates to assess all pricing strategies. The Bank's pricing strategy for first mortgage loan products includes setting interest rates based on secondary market prices and competitor pricing for our local and correspondent lending markets. Pricing for commercial loans is generally based on competitor pricing and the credit risk of the borrower with consideration given to the overall relationship of the borrower. Generally, deposit pricing is based upon a survey of competitors in the Bank's market areas, and the need to attract funding and retain maturing deposits. The majority of our loans are fixed-rate products with maturities up to 30 years, while the majority of our retail deposits have stated maturities or repricing dates of less than two years.
The general objective of our interest rate risk management program is to determine and manage an appropriate level of interest rate risk while maximizing net interest income in a manner consistent with our policy to manage, to the extent practicable, the exposure of net interest income to changes in market interest rates. The Board of Directors and Asset and Liability Management Committee ("ALCO") regularly review the Bank's interest rate risk exposure by forecasting the impact of hypothetical, alternative interest rate environments on net interest income and the market value of portfolio equity ("MVPE") at various dates. In addition to the interest rate environments presented below, management reviews the impact of non-parallel rate shock scenarios on a quarterly basis. This analysis helps management quantify the Bank's exposure to changes in the shape of the yield curve.
General assumptions used by management to evaluate the sensitivity of our financial performance to changes in interest rates presented in the tables below are utilized in, and set forth under, the gap table and related notes. Although management finds these assumptions reasonable, the interest rate sensitivity of our assets and liabilities and the estimated effects of changes in interest rates on our net interest income and MVPE indicated in the below tables could vary substantially if different assumptions were used or actual experience differs from these assumptions. To illustrate this point, the projected cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities within the next 12 months as a percent of total assets ("one-year gap") is also provided for an up 200 basis point scenario, as of September 30, 2021.
Qualitative Disclosure about Market Risk
Gap Table. The following gap table summarizes the anticipated maturities or repricing periods of the Bank's interest-earning assets and interest-bearing liabilities based on the information and assumptions set forth in the notes below. Cash flow projections for mortgage-related assets are calculated based in part on prepayment assumptions at current and projected interest rates. Prepayment projections are subjective in nature, involve uncertainties and assumptions and, therefore, cannot be determined with a high degree of accuracy. Although certain assets and liabilities may have similar maturities or periods to repricing, they may react differently to changes in market interest rates. Assumptions may not reflect how actual yields and costs respond to market interest rate changes. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the gap table below. A positive gap indicates more cash flows from assets are expected to reprice than cash flows from liabilities and would indicate, in a rising rate environment, that earnings should increase. A negative gap indicates more cash flows from liabilities are expected to reprice than cash flows from assets and would indicate, in a rising rate environment, that earnings should decrease. For additional
information regarding the impact of changes in interest rates, see the following Change in Net Interest Income and Change in MVPE discussions and tables.
More Than More Than
Within One Year to Three Years Over
One Year Three Years to Five Years Five Years Total
Interest-earning assets: (Dollars in thousands)
Loans receivable(1)
$ 1,768,041 $ 1,769,152 $ 1,100,966 $ 2,451,152 $ 7,089,311
Securities(2)
441,934 512,654 638,319 415,549 2,008,456
Other interest-earning assets 24,347 - - - 24,347
Total interest-earning assets 2,234,322 2,281,806 1,739,285 2,866,701 9,122,114
Interest-bearing liabilities:
Non-maturity deposits(3)
1,166,875 442,353 376,637 1,943,493 3,929,358
Certificates of deposit 1,655,108 906,752 181,364 367 2,743,591
Borrowings(4)
76,446 618,036 653,236 279,495 1,627,213
Total interest-bearing liabilities 2,898,429 1,967,141 1,211,237 2,223,355 8,300,162
Excess (deficiency) of interest-earning assets over
interest-bearing liabilities $ (664,107) $ 314,665 $ 528,048 $ 643,346 $ 821,952
Cumulative excess of interest-earning assets over
interest-bearing liabilities $ (664,107) $ (349,442) $ 178,606 $ 821,952
Cumulative excess of interest-earning assets over interest-bearing
liabilities as a percent of total Bank assets at:
September 30, 2021 (6.90) % (3.63) % 1.85 % 8.53 %
September 30, 2020 4.58
Cumulative one-year gap - interest rates +200 bps at:
September 30, 2021 (13.40)
September 30, 2020 (6.44)
(1)Adjustable-rate loans are included in the period in which the rate is next scheduled to adjust or in the period in which repayments are expected to occur, or prepayments are expected to be received, prior to their next rate adjustment, rather than in the period in which the loans are due. Fixed-rate loans are included in the periods in which they are scheduled to be repaid, based on scheduled amortization and prepayment assumptions. Balances are net of undisbursed amounts and deferred fees and exclude loans 90 or more days delinquent or in foreclosure.
(2)MBS reflect projected prepayments at amortized cost. Investment securities are presented based on contractual maturities, term to call dates or pre-refunding dates as of September 30, 2021, at amortized cost.
(3)Although the Bank's checking, savings, and money market accounts are subject to immediate withdrawal, management considers a substantial amount of these accounts to be core deposits having significantly longer effective maturities. The decay rates (the assumed rates at which the balances of existing accounts decline) used on these accounts is based on assumptions developed from our actual experiences with these accounts. If all of the Bank's checking, savings, and money market accounts had been assumed to be subject to repricing within one year, interest-bearing liabilities which were estimated to mature or reprice within one year would have exceeded interest-earning assets with comparable characteristics by $3.43 billion, for a cumulative one-year gap of (35.6)% of total assets.
(4)Borrowings exclude deferred prepayment penalty costs. Included in this line item are $365.0 million of FHLB adjustable-rate advances tied to interest rate swaps. The repricing for these liabilities is projected to occur at the maturity date of each interest rate swap.
At September 30, 2021, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(664.1) million, or (6.9)% of total assets, compared to $436.4 million, or 4.6% of total assets, at September 30, 2020. The change in the one-year gap amount was due primarily to a decrease in the amount of assets projected to reprice as higher interest rates resulted in lower prepayment projections on the Bank's mortgage-related assets. In addition, the lower balance of cash at September 30, 2021 compared to September 30, 2020 resulted in a decrease in the assets repricing in the one-year horizon.
The majority of interest-earning assets anticipated to reprice in the coming year are repayments and prepayments on one- to four-family loans and MBS, both of which include the option to prepay without a fee being paid by the contract holder. The amount of interest-bearing liabilities expected to reprice in a given period is not typically impacted significantly by changes in interest rates, because the Bank's borrowings and certificate of deposit portfolios have contractual maturities and generally cannot be terminated early without a prepayment penalty. If interest rates were to increase 200 basis points, as of September 30, 2021, the Bank's one-year gap is projected to be $(1.29) billion, or (13.4)% of total assets. The change in the gap compared to when there is no change in rates is due to lower anticipated net cash flows primarily due to lower repayments on mortgage-related assets in the higher rate environment. This compares to a one-year gap of $(609.6) million, or (6.4)% of total assets, if interest rates were to have increased 200 basis points as of September 30, 2020.
Change in Net Interest Income. The Bank's net interest income projections are a reflection of the response to interest rates of the assets and liabilities that are expected to mature or reprice over the next year. Repricing occurs as a result of cash flows that are received or paid on assets or due on liabilities which would be replaced at then current market interest rates or on adjustable-rate products that reset during the next year. The Bank's borrowings and certificate of deposit portfolios have stated maturities and the cash flows related to the Bank's liabilities do not generally fluctuate as a result of changes in interest rates. Cash flows from mortgage-related assets and callable agency debentures can vary significantly as a result of changes in interest rates. As interest rates decrease, borrowers have an economic incentive to lower their cost of debt by refinancing or endorsing their mortgage to a lower interest rate. Similarly, agency debt issuers are more likely to exercise embedded call options for agency securities and issue new securities at a lower interest rate.
For each date presented in the following table, the estimated change in the Bank's net interest income is based on the indicated instantaneous, parallel and permanent change in interest rates. The change in each interest rate environment represents the difference between estimated net interest income in the 0 basis point interest rate environment ("base case," assumes the forward market and product interest rates implied by the yield curve are realized) and the estimated net interest income in each alternative interest rate environment (assumes market and product interest rates have a parallel shift in rates across all maturities by the indicated change in rates). Projected cash flows for each scenario are based upon varying prepayment assumptions to model likely customer behavior changes as market rates change. For the current year, multiple yields along the yield curve were less than one percent, so the -100 basis points scenario was not applicable. Estimations of net interest income used in preparing the table below were based upon the assumptions that the total composition of interest-earning assets and interest-bearing liabilities does not change materially and that any repricing of assets or liabilities occurs at anticipated product and market rates for the alternative rate environments as of the dates presented. The estimation of net interest income does not include any projected gains or losses related to the sale of loans or securities, or income derived from non-interest income sources, but does include the use of different prepayment assumptions in the alternative interest rate environments. It is important to consider that estimated changes in net interest income are for a cumulative four-quarter period. These do not reflect the earnings expectations of management.
Change Net Interest Income At September 30,
(in Basis Points) 2021 2020
in Interest Rates(1)
Amount ($) Change ($) Change (%) Amount ($) Change ($) Change (%)
(Dollars in thousands)
000 bp $ 185,285 $ - - % $ 183,596 $ - - %
+100 bp 190,060 4,775 2.58 188,084 4,488 2.44
+200 bp 191,998 6,713 3.62 188,417 4,821 2.63
+300 bp 192,590 7,305 3.94 186,441 2,845 1.55
(1)Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities.
The net interest income projection was higher in the base case scenario at September 30, 2021 compared to September 30, 2020 due to a larger decrease in the projected interest expense than interest income compared to the prior year. This was caused by the decrease in the cost of the Bank's deposits and borrowings during the year, mostly offset by a decrease in the yield on loans receivable.
Despite a negative gap, net interest income increases in all rising interest rate scenarios due to the assumption that the Bank's deposit balances are not expected to reprice to the full extent of the interest rate change. This assumption is based on a historical analysis of the Bank's deposit pricing behavior.
Change in MVPE. Changes in the estimated market values of our financial assets and liabilities drive changes in estimates of MVPE. The market value of an asset or liability reflects the present value of all the projected cash flows over its remaining life, discounted at market interest rates. As interest rates rise, generally the market value for both financial assets and liabilities decrease. The opposite is generally true as interest rates fall. The MVPE represents the theoretical market value of capital that is calculated by netting the market value of assets, liabilities, and off-balance sheet instruments. If the market values of financial assets increase at a faster pace than the market values of financial liabilities, or if the market values of financial liabilities decrease at a faster pace than the market values of financial assets, the MVPE will increase. The market value of shorter term-to-maturity financial instruments is less sensitive to changes in interest rates than are longer term-to-maturity financial instruments. Because of this, the market values of our certificates of deposit (which generally have relatively shorter average lives) tend to display less sensitivity to changes in interest rates than do our mortgage-related assets (which generally have relatively longer average lives). The average life expected on our mortgage-related assets varies under different interest rate environments because borrowers have the ability to prepay their mortgage loans. Therefore, as interest rates decrease, the WAL of mortgage-related assets decrease as well. As interest rates increase, the WAL would be expected to increase, as well as increasing the sensitivity of these assets in higher rate environments.
The following table sets forth the estimated change in the MVPE for each date presented based on the indicated instantaneous, parallel, and permanent change in interest rates. The change in each interest rate environment represents the difference between the MVPE in the base case (assumes the forward market interest rates implied by the yield curve are realized) and the MVPE in each alternative interest rate environment (assumes market interest rates have a parallel shift in rates). Projected cash flows for each scenario are based upon varying prepayment assumptions to model likely customer behavior as market rates change. For the current year, multiple yields along the yield curve were less than one percent, so the -100 basis points scenario was not applicable. The estimations of the MVPE used in preparing the table below were based upon the assumptions that the total composition of interest-earning assets and interest-bearing liabilities does not change, that any repricing of assets or liabilities occurs at current product or market rates for the alternative rate environments as of the dates presented, and that different prepayment rates were used in each alternative interest rate environment. The estimated MVPE results from the valuation of cash flows from financial assets and liabilities over the anticipated lives of each for each interest rate environment. The table below presents the effects of the changes in interest rates on our assets and liabilities as they mature, repay, or reprice, as shown by the change in the MVPE for alternative interest rates.
Change Market Value of Portfolio Equity At September 30,
(in Basis Points) 2021 2020
in Interest Rates(1)
Amount ($) Change ($) Change (%) Amount ($) Change ($) Change (%)
(Dollars in thousands)
000 bp $ 1,451,795 $ - - % $ 1,301,409 $ - - %
+100 bp 1,354,766 (97,029) (6.68) 1,290,877 (10,532) (0.81)
+200 bp 1,170,646 (281,149) (19.37) 1,157,368 (144,041) (11.07)
+300 bp 968,543 (483,252) (33.29) 967,997 (333,412) (25.62)
(1)Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities.
The percentage change in the Bank's MVPE at September 30, 2021 and September 30, 2020 was negative in all scenarios. The negative impact to the Bank's MVPE is greater at September 30, 2021 compared to September 30, 2020 due primarily to an increase in the duration of the Bank's mortgage-related assets at September 30, 2021 compared to September 30, 2020, due in part to higher interest rates at September 30, 2021. As interest rates increase, borrowers have less economic incentive to refinance their mortgages and agency debt issuers have less economic incentive or opportunity to exercise their call options in
order to issue new debt at lower interest rates, resulting in lower projected cash flows on these assets. As interest rates increase in the rising rate scenarios, repayments on mortgage-related assets are more likely to decrease and only be realized through significant changes in borrowers' lives such as divorce, death, job-related relocations, or other events as there is less economic incentive for borrowers to prepay their debt, resulting in an increase in the average life of mortgage-related assets. Similarly, call projections for the Bank's callable agency debentures decrease as interest rates rise, which results in cash flows related to these assets moving closer to the contractual maturity dates. The higher expected average lives of these assets, relative to the assumptions in the base case interest rate environment, increases the sensitivity of their market value to changes in interest rates. In addition, as mortgage loans are refinanced or endorsed to lower interest rates, their average lives also increase as further prepayments are expected to be diminished.
The following table presents the weighted average yields/rates and WALs (in years), after applying prepayment, call assumptions, and decay rates for our interest-earning assets and interest-bearing liabilities as of September 30, 2021. Yields presented for interest-earning assets include the amortization of fees, costs, premiums and discounts, which are considered adjustments to the yield. The interest rate presented for term borrowings is the effective rate, which includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. The WAL presented for term borrowings includes the effect of interest rate swaps.
Amount Yield/Rate WAL % of Category % of Total
(Dollars in thousands)
Securities 2,014,608 1.16 3.9 21.8 %
Loans receivable:
Fixed-rate one- to four-family 5,553,556 3.14 5.4 78.3 % 60.2
Fixed-rate commercial 451,166 4.21 3.8 6.3 4.9
All other fixed-rate loans 53,793 3.73 6.4 0.8 0.6
Total fixed-rate loans 6,058,515 3.23 5.3 85.4 65.7
Adjustable-rate one- to four-family 579,647 2.46 4.0 8.2 6.3
Adjustable-rate commercial 378,202 4.12 7.2 5.3 4.1
All other adjustable-rate loans 79,709 4.25 2.5 1.1 0.8
Total adjustable-rate loans 1,037,558 3.20 5.1 14.6 11.2
Total loans receivable 7,096,073 3.23 5.2 100.0 % 76.9
FHLB stock 73,421 5.21 2.9 0.8
Cash and cash equivalents 42,262 0.09 - 0.5
Total interest-earning assets $ 9,226,364 2.78 4.9 100.0 %
Non-maturity deposits $ 3,853,805 0.11 5.9 58.4 % 47.1 %
Retail certificates of deposit 2,341,531 1.41 1.3 35.5 28.6
Commercial certificates of deposit 190,215 0.66 0.5 2.9 2.3
Public unit certificates of deposit 211,845 0.21 0.5 3.2 2.6
Total deposits 6,597,396 0.59 3.9 100.0 % 80.6
Term borrowings 1,590,000 1.88 3.3 19.4
Total interest-bearing liabilities $ 8,187,396 0.84 3.8 100.0 %

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Capitol Federal Financial, Inc. and subsidiary
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Capitol Federal Financial, Inc. and subsidiary (the "Company") as of September 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended September 30, 2021, of the Company and our report dated November 24, 2021, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
November 24, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Capitol Federal Financial, Inc. and subsidiary
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Capitol Federal Financial, Inc. and subsidiary (the "Company") as of September 30, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended September 30, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 24, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses - Refer to Notes 1 and 4 to the financial statements
Critical Audit Matter Description
The allowance for credit losses (ACL) is a valuation amount that is deducted from the amortized cost basis of loans which represents management's current expectations of total expected credit losses included in the Company's loan portfolio as of the balance sheet date. In management's ACL model, average historical loss rates on loan pools with similar risk characteristics are compared to historical data and a correlation is estimated using regression analysis. Each quarter, the Company's ACL model pairs the results of the regression analysis with a third party provided economic forecast in order to project future loss rates for a reasonable and supportable time period before reverting back to long-term historical averages for each economic index. The forecast-adjusted loss rate is applied to the loans over their remaining contractual lives, adjusted for prepayments and curtailments. The ACL model generates aggregated estimated cash flows for the time period that remains in each loan's contractual life which are discounted back to the reporting date using each loan's effective yield, to arrive at a present value of future cash flows which is compared to the amortized cost basis of the loan pool to determine
the amount of ACL necessary. Management evaluates qualitative factors not included in historical loss rates, macroeconomic forecasts, or other model inputs and/or other ACL processes, considering risks related to loan portfolio attributes and external factors and adjusts the modeled ACL as deemed appropriate based upon the assessment.
We identified the allowance for credit losses as a critical audit matter because of the significant estimates and assumptions required by management in determining qualitative factor adjustments. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our credit specialists, when performing audit procedures to evaluate the reasonableness of management's qualitative factor adjustments.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the ACL model included the following, among others:
•We tested the effectiveness of controls over the Company's ACL model including those over the determination of the qualitative adjustments and management's review of the adequacy of the ACL.
•With the assistance of our credit specialists, we evaluated the appropriateness of the ACL model, evaluated data elements utilized in the ACL model such as portfolio segmentation into loan pools, forecast and reversion to mean time periods, and economic forecasts, and evaluated reasonableness of the use of qualitative adjustments to the outputs of the modeled ACL.
•We evaluated the qualitative adjustments including reasonableness and basis for the adjustments which include market and economic conditions and/or portfolio performance metrics.
•We evaluated the appropriateness and relevance of the data elements by comparing to relevant internal and external sources.
•We evaluated the magnitude and proportion of the overall allowance, including the directional consistency and magnitude of the qualitative adjustments.
•We reviewed independent economic statistics such as common macroeconomic indicators, as well as industry peers, and we used data analytics to identify changes in the loan portfolio to assess the completeness of management's qualitative adjustments.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
November 24, 2021
We have served as the Company's auditor since 1974.
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2021 and 2020 (Dollars in thousands, except per share amounts)
2021 2020
ASSETS:
Cash and cash equivalents (includes interest-earning deposits of $24,289 and $172,430)
$ 42,262 $ 185,148
Available-for-sale ("AFS") securities, at estimated fair value (amortized cost of $2,008,456 and $1,529,605)
2,014,608 1,560,950
Loans receivable, net (allowance for credit losses ("ACL") of $19,823 and $31,527)
7,081,142 7,202,851
Federal Home Loan Bank Topeka ("FHLB") stock, at cost 73,421 93,862
Premises and equipment, net 99,127 101,875
Other assets 320,686 342,532
TOTAL ASSETS $ 9,631,246 $ 9,487,218
LIABILITIES:
Deposits $ 6,597,396 $ 6,191,408
Borrowings 1,582,850 1,789,313
Advance payments by borrowers for taxes and insurance 72,729 65,721
Income taxes payable, net 918 795
Deferred income tax liabilities, net 5,810 8,180
Other liabilities 129,270 146,942
Total liabilities 8,388,973 8,202,359
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 100,000,000 shares authorized, no shares issued or outstanding
- -
Common stock, $.01 par value; 1,400,000,000 shares authorized, 138,832,284 and 138,956,296 shares issued and outstanding as of September 30, 2021 and 2020, respectively
1,388 1,389
Additional paid-in capital 1,189,633 1,189,853
Unearned compensation, Employee Stock Ownership Plan ("ESOP") (31,387) (33,040)
Retained earnings 98,944 143,162
Accumulated other comprehensive (loss) income ("AOCI"), net of tax (16,305) (16,505)
Total stockholders' equity 1,242,273 1,284,859
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,631,246 $ 9,487,218
See accompanying notes to consolidated financial statements.
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2021, 2020, and 2019 (Dollars in thousands, except per share amounts)
2021 2020 2019
INTEREST AND DIVIDEND INCOME:
Loans receivable $ 229,897 $ 270,494 $ 284,229
Mortgage-backed securities ("MBS") 21,399 23,009 25,730
FHLB stock 3,916 5,827 7,823
Investment securities 2,825 4,467 6,366
Cash and cash equivalents 144 1,181 5,806
Total interest and dividend income 258,181 304,978 329,954
INTEREST EXPENSE:
Deposits 48,406 67,598 66,201
Borrowings 34,774 48,045 57,363
Total interest expense 83,180 115,643 123,564
NET INTEREST INCOME 175,001 189,335 206,390
PROVISION FOR CREDIT LOSSES (8,510) 22,300 750
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 183,511 167,035 205,640
NON-INTEREST INCOME:
Deposit service fees 12,282 11,285 12,740
Gain on sale of Visa Class B shares 7,386 - -
Insurance commissions 3,030 2,487 2,821
Other non-interest income 5,388 5,827 6,397
Total non-interest income 28,086 19,599 21,958
NON-INTEREST EXPENSE:
Salaries and employee benefits 56,002 52,996 53,145
Information technology and related expense 17,922 16,974 17,615
Occupancy, net 14,045 13,870 13,032
Regulatory and outside services 5,764 5,762 5,813
Advertising and promotional 5,133 4,889 5,244
Loss on interest rate swap termination 4,752 - -
Deposit and loan transaction costs 2,761 2,890 2,478
Federal insurance premium 2,545 914 1,172
Office supplies and related expense 1,715 2,195 2,439
Other non-interest expense 4,930 5,514 6,006
Total non-interest expense 115,569 106,004 106,944
INCOME BEFORE INCOME TAX EXPENSE 96,028 80,630 120,654
INCOME TAX EXPENSE 19,946 16,090 26,411
NET INCOME $ 76,082 $ 64,540 $ 94,243
Basic earnings per share ("EPS") $ 0.56 $ 0.47 $ 0.68
Diluted EPS $ 0.56 $ 0.47 $ 0.68
See accompanying notes to consolidated financial statements.
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2021, 2020, and 2019 (Dollars in thousands)
2021 2020 2019
Net income $ 76,082 $ 64,540 $ 94,243
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on AFS securities arising during the period, net of taxes of $6,116, $(4,359), and $(3,468)
(19,077) 13,578 10,804
Unrealized gains on securities reclassified from held-to-maturity ("HTM") to AFS during the period, net of taxes of $0, $0, and $(750)
- - 2,336
Changes in unrealized gains (losses) on cash flow hedges, net of taxes of $(6,153), $4,875, and $10,394
19,277 (15,184) (32,379)
Comprehensive income $ 76,282 $ 62,934 $ 75,004
See accompanying notes to consolidated financial statements.
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2021, 2020, and 2019 (Dollars in thousands, except per share amounts)
Additional Unearned Total
Common Paid-In Compensation Retained Stockholders'
Stock Capital ESOP Earnings AOCI Equity
Balance at September 30, 2018 $ 1,412 $ 1,207,644 $ (36,343) $ 214,569 $ 4,340 $ 1,391,622
Net income, fiscal year 2019 94,243 94,243
Other comprehensive loss, net of tax (19,239) (19,239)
Cumulative effect of adopting Accounting Standards Update ("ASU") 2014-09 394 394
ESOP activity 549 1,651 2,200
Restricted stock activity, net 1 (3) (2)
Stock-based compensation 552 552
Stock options exercised 1 1,484 1,485
Cash dividends to stockholders ($0.98 per share)
(134,929) (134,929)
Balance at September 30, 2019 1,414 1,210,226 (34,692) 174,277 (14,899) 1,336,326
Net income, fiscal year 2020 64,540 64,540
Cumulative effect of adopting ASU 2016-02 88 88
Other comprehensive loss, net of tax (1,606) (1,606)
ESOP activity 336 1,652 1,988
Restricted stock activity, net (19) (19)
Stock-based compensation 570 570
Repurchase of common stock (26) (21,897) (1,881) (23,804)
Stock options exercised 1 637 638
Cash dividends to stockholders ($0.68 per share)
(93,862) (93,862)
Balance at September 30, 2020 1,389 1,189,853 (33,040) 143,162 (16,505) 1,284,859
Cumulative effect of adopting ASU 2016-13 (2,288) (2,288)
Net income, fiscal year 2021 76,082 76,082
Other comprehensive income, net of tax 200 200
ESOP activity 383 1,653 2,036
Restricted stock activity, net (16) (16)
Stock-based compensation 496 496
Repurchase of common stock (1) (1,407) (122) (1,530)
Stock options exercised 324 324
Cash dividends to stockholders ($0.87 per share)
(117,890) (117,890)
Balance at September 30, 2021 $ 1,388 $ 1,189,633 $ (31,387) $ 98,944 $ (16,305) $ 1,242,273
See accompanying notes to consolidated financial statements.
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2021, 2020, and 2019 (Dollars in thousands)
2021 2020 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 76,082 $ 64,540 $ 94,243
Adjustments to reconcile net income to net cash provided by operating activities:
FHLB stock dividends (3,916) (5,827) (7,823)
Provision for credit losses (8,510) 22,300 750
Originations of loans receivable held-for-sale ("LHFS") (1,780) - -
Proceeds from sales of LHFS 1,825 - -
Amortization and accretion of premiums and discounts on securities 6,206 1,661 1,242
Depreciation and amortization of premises and equipment 9,372 9,133 9,143
Amortization of intangible assets 1,578 1,964 2,316
Amortization of deferred amounts related to FHLB advances, net 1,582 539 8
Common stock committed to be released for allocation - ESOP 2,036 1,988 2,200
Stock-based compensation 496 570 552
Provision for deferred income taxes (1,668) (5,588) (361)
Gain on the sale of Visa Class B shares (7,386) - -
Changes in:
Unrestricted cash collateral (provided to)/received from derivative counterparties, net - - (9,970)
Other assets, net 12,751 9,105 6,220
Income taxes payable/receivable, net 105 774 2,173
Other liabilities (14,306) (8,231) (19,746)
Net cash provided by operating activities 74,467 92,928 80,947
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of AFS securities (1,079,351) (1,007,763) (386,702)
Proceeds from calls, maturities and principal reductions of AFS securities 594,294 667,952 359,551
Proceeds from calls, maturities and principal reductions of HTM securities - - 165,336
Proceeds from the redemption of FHLB stock 25,386 10,421 197,054
Purchase of FHLB stock (1,029) - (187,961)
Net change in loans receivable 132,800 191,359 95,358
Purchase of premises and equipment (9,410) (14,742) (11,732)
Proceeds from sale of other real estate owned ("OREO") 194 993 2,053
Proceeds from the redemption of common equity securities related to the redemption of junior subordinated debentures - - 302
Proceeds from the sale of Visa Class B shares 7,386 - -
Proceeds from sale of assets held-for-sale 2,619 - -
Proceeds from bank-owned life insurance ("BOLI") death benefit 443 490 -
Net cash (used in) provided by investing activities (326,668) (151,290) 233,259
(Continued)
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2021, 2020, and 2019 (Dollars in thousands)
2021 2020 2019
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (117,890) (93,862) (134,929)
Net change in deposits 405,988 609,541 (21,487)
Proceeds from borrowings 1,143,800 1,665,600 5,518,700
Repayments on borrowings (1,346,800) (2,112,600) (5,563,752)
Change in advance payments by borrowers for taxes and insurance 7,008 35 422
Payment of FHLB prepayment penalties (5,077) (4,215) -
Repurchase of common stock (4,568) (20,767) -
Stock options exercised 324 638 1,485
Net cash provided by financing activities 82,785 44,370 (199,561)
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS (169,416) (13,992) 114,645
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS:
Beginning of year 239,708 253,700 139,055
End of year $ 70,292 $ 239,708 $ 253,700
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income tax payments $ 13,057 $ 13,045 $ 17,779
Interest payments $ 83,646 $ 118,610 $ 123,508
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Operating lease right-of-use assets obtained $ - $ 16,841 $ -
Operating lease liabilities obtained $ - $ 16,726 $ -
Transfer of HTM securities, at amortized cost, to AFS securities $ - $ - $ 444,732
See accompanying notes to consolidated financial statements. (Concluded)
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2021, 2020, and 2019
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Capitol Federal Financial, Inc. (the "Company") provides a full range of retail banking services through its wholly-owned subsidiary, Capitol Federal Savings Bank (the "Bank"), a federal savings bank, which has 45 traditional and nine in-store banking offices serving primarily the metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia and Salina, Kansas and portions of the Kansas City metropolitan area. The Bank emphasizes mortgage lending, primarily originating and purchasing one- to four-family loans, and providing personal retail financial services, along with offering commercial banking and lending products. The Bank is subject to competition from other financial institutions and other companies that provide financial services.
Basis of Presentation - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank. The Bank has two wholly owned subsidiaries, Capitol Funds, Inc. and Capital City Investments, Inc. Capitol Funds, Inc. has a wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company. Capital City Investments, Inc. is a real estate and investment holding company. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates and assumptions.
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Cash, cash equivalents, restricted cash and restricted cash equivalents reported in the statement of cash flows include cash and cash equivalents of $42.3 million and $185.1 million at September 30, 2021 and 2020, respectively, and restricted cash and cash equivalents of $28.0 million and $54.6 million at September 30, 2021 and 2020, respectively, which was included in other assets on the consolidated balance sheet. The restricted cash and cash equivalents relate to the collateral postings to/from the Bank's derivative counterparties associated with the Bank's interest rate swaps. See additional discussion regarding the interest rate swaps in "Note 8. Deposits and Borrowed Funds."
Regulations of the Board of Governors of the Federal Reserve System ("FRB") have required federally chartered savings banks to maintain cash reserves against their transaction accounts. Required reserves were required to be maintained in the form of vault cash, an account at a Federal Reserve Bank, or a pass-through account as defined by the FRB. The amount of interest-earning deposits held at the Federal Reserve Bank of Kansas City ("FRB of Kansas City") as of September 30, 2021 and 2020 was $24.1 million and $172.2 million, respectively. In March 2020, the FRB eliminated reserve requirements for all depository institutions; thus, there was no reserve requirement in place at September 30, 2021 or 2020.
Securities - Securities include MBS and agency debentures issued primarily by United States Government-Sponsored Enterprises ("GSEs"), including Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and the Federal Home Loan Banks, United States Government agencies, including Government National Mortgage Association, and municipal bonds. Securities are classified as HTM, AFS, or trading based on management's intention for holding the securities on the date of purchase. Generally, classifications are made in response to liquidity needs, asset/liability management strategies, and the market interest rate environment at the time of purchase.
Accrued interest receivable for all securities is reported in other assets on the consolidated balance sheet. When the Company adopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, the practical expedient to exclude accrued interest from all required disclosures of amortized cost was elected. Additionally, an election was made to not measure ACL for accrued interest receivables. Interest accrued but not received is reversed against interest income.
Securities that management has the intention and ability to hold to maturity are classified as HTM and reported at amortized cost. Such securities are adjusted for the amortization of premiums and discounts which are recognized as adjustments to
interest income over the life of the securities using the level-yield method. At September 30, 2021 and 2020, the portfolio did not contain any securities classified as HTM.
Securities that management may sell if necessary for liquidity or asset management purposes are classified as AFS and reported at fair value, with unrealized gains and non-credit losses reported as a component of AOCI within stockholders' equity, net of deferred income taxes. The amortization of premiums and discounts are recognized as adjustments to interest income over the life of the securities using the level-yield method. Gains or losses on the disposition of AFS securities are recognized using the specific identification method. The Company primarily uses prices obtained from third-party pricing services to determine the fair value of securities. See additional discussion of fair value of AFS securities in "Note 14. Fair Value of Financial Instruments."
Securities that are purchased and held principally for resale in the near future are classified as trading securities and are reported at fair value, with unrealized gains and losses included in non-interest income in the consolidated statements of income. During the fiscal years ended September 30, 2021 and 2020, neither the Company nor the Bank maintained a trading securities portfolio.
Allowance for Credit Losses on AFS Debt Securities - Management monitors AFS debt securities for impairment on an ongoing basis and performs a formal review quarterly. If an AFS debt security is in an unrealized loss position at the time of the quarterly review, the Company first assesses whether it intends to sell, or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost. If either condition is met, the entire loss in fair value is recognized in current earnings. If neither condition is met, and the Company does not expect to recover the amortized cost basis, the Company determines whether the decline in fair value resulted from credit losses or other factors. In making this assessment, management considers the security structure, the cause(s) and severity of the loss, expectations of future performance including recent events specific to the issuer or industry including the issuer's financial condition and current ability to make future payments in a timely manner, and external credit ratings and recent downgrades in such ratings. Management's assessment involves a high degree of subjectivity and judgment that is based on information available at a point in time. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected is compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss has occurred, and an ACL is recorded, which became effective October 1, 2020 when the Company adopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. Accrued interest receivable on AFS debt securities is excluded from the estimate of credit losses. The ACL is limited by the amount that the fair value is less than the amortized cost basis. Any impairment not recorded through the provision for credit losses is recognized in other comprehensive income. Prior to the adoption of ASU 2016-13, management assessed all known facts and circumstances to determine whether an other-than-temporary loss should be recognized for impaired securities. If an other-than-temporary impairment had occurred, the difference between the amortized cost and fair value was recognized as a loss in earnings and the security was written down to fair value.
Changes in the ACL on AFS debt securities are recorded as an increase or decrease in the provision for credit losses on the consolidated statements of income. Losses are charged against the ACL on securities when management believes the collectability of an AFS security is in doubt or when either of the conditions regarding intent or requirement to sell is met. Interest accrued on AFS debt securities but not received is also reversed against interest income. As of October 1, 2020 and September 30, 2021, the Company did not identify any credit losses related to the Company's AFS debt securities so there was no ACL on AFS debt securities as of those dates.
Loans Receivable - Loans receivable that management has the intention and ability to hold for the foreseeable future are carried at amortized cost, excluding accrued interest. Amortized cost is the amount of unpaid principal, net of undisbursed loan funds, unamortized premiums and discounts, and deferred loan origination fees and costs. Net loan origination fees and costs, and premiums and discounts are amortized as yield adjustments to interest income using the level-yield method. Loans are presented on the consolidated balance sheet net of ACL on loans.
Interest on loans is accrued based on the principal amount outstanding. When the Company adopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, the practical expedient to exclude all accrued interest receivable from all required disclosures of amortized cost was elected. Additionally, an election was made to not measure ACL for accrued interest receivables.
Loan endorsements - Certain existing one- to four- family loan customers, including customers whose loans were purchased from a correspondent lender, have the opportunity, for a fee, to endorse their original loan terms to current loan terms being offered by the Bank, without being required to complete the standard application and underwriting process. The fee received for each endorsement is deferred and amortized as an adjustment to interest income over the life of the loan. If the change in loan terms resulting from the endorsement is deemed to be more than minor, the loan is treated as a new loan and all existing unamortized deferred loan origination fees and costs are recognized at the time of endorsement. If the change in loan terms is deemed to be minor, the fee received for the endorsement is added to the net remaining unamortized deferred fee or deferred cost balance.
Coronavirus Disease 2019 ("COVID-19") loan modifications - In March 2020, the Bank announced loan modification programs to support and provide relief for its borrowers during the COVID-19 pandemic ("COVID-19 loan modifications"). The Company has followed the loan modification criteria within the Coronavirus Aid, Relief, and Economic Security ("CARES") Act or Interagency guidance when determining if a borrower's modification is subject to troubled debt restructuring ("TDR") classification. If it is determined that the modification does not meet the criteria under the CARES Act or Interagency guidance to be excluded from TDR classification, the Company evaluates the loan modifications under its existing TDR framework. Loans subject to forbearance as a result of COVID-19 loan modifications are not reported as past due or placed on nonaccrual status during the forbearance time period, and interest income continues to be recognized over the contractual life of the loans. Loans reported as COVID-19 loan modifications include all loans modified under the programs, including loans classified as TDRs.
Troubled debt restructurings - For borrowers experiencing financial difficulties, the Bank may grant a concession to the borrower. Such concessions generally involve extensions of loan maturity dates, the granting of periods during which reduced payment amounts are required, and/or reductions in interest rates. The Bank does not forgive principal or interest, nor does it commit to lend additional funds to these borrowers, except for situations generally involving the capitalization of delinquent interest and/or escrow on one- to four-family loans and consumer loans, not to exceed the original loan amount. In the case of commercial loans, the Bank does not forgive principal or interest or commit to lend additional funds unless the borrower provides additional collateral or other enhancements to improve the credit quality.
Delinquent loans - A loan is considered delinquent when payment has not been received within 30 days of its contractual due date. The number of days delinquent is determined by the number of scheduled payments that remain unpaid, assuming a period of 30 days between each scheduled payment.
Nonaccrual loans - The accrual of income on loans is generally discontinued when interest or principal payments are 90 days in arrears. We also report certain TDR loans as nonaccrual loans that are required to be reported as such pursuant to regulatory reporting requirements. Loans on which the accrual of income has been discontinued are designated as nonaccrual and outstanding interest previously credited beyond 90 days delinquent is reversed, except in the case of commercial loans in which all delinquent accrued interest is reversed. A nonaccrual one- to four-family or consumer loan is returned to accrual status once the contractual payments have been made to bring the loan less than 90 days past due or, in the case of a TDR loan, the borrower has made the required consecutive loan payments. A nonaccrual commercial loan is returned to accrual status once the loan has been current for a minimum of six months, all fees and interest are paid current, the loan has a sufficient debt service coverage ratio, and the loan is well secured and within policy.
Allowance for Credit Losses on Loans Receivable - The ACL is a valuation amount that is deducted from the amortized cost basis of loans. It represents management's current expectations of total expected credit losses included in the Company's loan portfolio as of the balance sheet date and is determined using relevant information about past events, including historical credit loss experience on loans with similar risk characteristics, current conditions, and reasonable and supportable forecasts, along with the application of qualitative factors when necessary. The ACL is recorded upon origination or purchase of a loan and is updated at subsequent reporting dates. Changes in the ACL are recorded through increases or decreases to the provision for credit losses in the consolidated statements of income. The ACL is an estimate that requires significant judgment including projections of the macroeconomic environment as of a point in time. The macroeconomic environment continuously changes, which can cause fluctuations in estimated expected losses.
The Bank's ACL is measured on a collective ("pool") basis, with loans aggregated into pools based on similar risk characteristics such as collateral type, historical loss experience, loan-to-value ("LTV") for one- to four-family loans, and payment sources for commercial loans. Loans that do not share similar risk characteristics are evaluated on an individual
basis. Charge-offs against the related ACL amounts for any loan type may be recorded at any time if the Bank has knowledge of the existence of a probable loss.
One- to four-family loans and consumer home equity loans are deemed to be collateral dependent and individually evaluated for loss when the loan is generally 180 days delinquent, and any identified losses are charged-off at that time. Losses are based on new collateral values obtained through appraisals, less estimated costs to sell. Anticipated private mortgage insurance proceeds are taken into consideration when calculating the loss amount. If the Bank holds the first and second mortgage, both loans are combined when evaluating whether there is a potential loss on the loan. When a non-real estate secured consumer loan is 120 days delinquent, any identified losses are charged-off. For commercial loans, loans are individually evaluated for loss if management determines they exhibit unique risk characteristics. Specific allocations of ACL are established and/or losses are charged-off prior to a loan becoming 120 days delinquent when it is determined, through the analysis of any available current financial information regarding the borrower, that the borrower is not able to service the debt and there is little or no prospect for near term improvement. In the case of secured loans, the loan is deemed to be collateral dependent when this occurs, and the specific allocation of ACL and/or charge-off amount is based on a comparison of the amounts due from the borrower and calculated current fair value of the collateral after consideration of estimated costs to sell.
The primary credit risk characteristics inherent in the 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. Any one or a combination of these events may adversely affect the ability of borrowers to repay their loans, resulting in increased delinquencies, non-performing assets, charge-offs, and provisions for credit losses. 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 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.
For loans evaluated for credit losses on a pool basis, average historical loss rates are calculated for each pool using the Company's historical charge-offs, or peer data when the Company's own historical loss rates are not reflective of future loss expectations, and outstanding loan balances during a historical time period. The historical time periods can be different based on the individual pool and represent management's credit expectations for the pool of loans over the remaining contractual life. Generally, the historical time periods are at least one economic cycle. These historical loss rates are compared to historical data related to economic variables including national unemployment rate, changes in commercial real estate price index, changes in home values, and changes in the United States gross domestic product during the same time periods over which the historical loss rates were calculated, and a correlation is estimated using regression analysis. Each quarter, the Company's ACL model pairs the results of the regression analysis with an economic forecast of these same macroeconomic variables, which is provided by a third party, in order to project future loss rates. The forecast is applied for a reasonable and supportable time period, as determined by management, before reverting back to long-term historical averages at the macroeconomic variable level using a straight-line method. The forecast-adjusted loss rate is applied to the loans over their remaining contractual lives, adjusted for expected prepayments and curtailments. The contractual term excludes expected extensions, renewals and modifications unless there is a reasonable expectation that a TDR will be executed. In the case of revolving lines of credit, since the rate of principal reduction is generally at the discretion of the borrower, remaining contractual lives are calculated by estimating future cash flows expected to be received from the borrower until the outstanding balance has been reduced to zero.
Using all of these inputs, the ACL model generates aggregated estimated cash flows for the time period that remains in each loan's contractual life. These cash flows are discounted back to the reporting date using each loan's effective yield, to arrive at a present value of future cash flows. Each loan pool's ACL is equal to the aggregate shortage, if any, of the present value of future cash flows compared to the amortized cost basis of the loan pool.
Additionally, qualitative factors are considered for items not included in historical loss rates, macroeconomic forecasts, or other model inputs and/or other ACL processes, as deemed appropriate by management's current assessment of risks related to loan portfolio attributes and external factors. Such qualitative factor considerations include changes in the Bank's loan portfolio composition and credit concentrations, changes in the balances and/or trends in asset quality and/or loan credit performance, changes in lending underwriting standards, the effect of other external factors such as significant unique events or conditions, and actual and/or expected changes in economic conditions, real estate values, and/or other economic developments in which the Bank operates. Management assesses the potential impact of such items and adjusts the modeled ACL as deemed appropriate based upon the assessment.
Reserve for Off-Balance Sheet Credit Exposures - The Company's off-balance sheet credit exposures are comprised of unfunded portions of existing loans, such as lines of credit and construction loans, and commitments to originate or purchase loans that are not unconditionally cancellable by the Company. Expected credit losses on these amounts are calculated using the same methodology that is applied in the ACL model; however, the estimate of credit risk for off-balance sheet credit exposures also takes into consideration the likelihood that funding of the unfunded amount/commitment will occur. The reserve for these off-balance sheet credit exposures is recorded as a liability and is presented in other liabilities on the consolidated balance sheet. Changes to the reserve on off-balance sheet credit exposures are recorded through increases or decreases to the provision for credit losses on the consolidated statements of income.
Federal Home Loan Bank Stock - As a member of FHLB, the Bank is required to acquire and hold shares of FHLB stock. The Bank's holding requirement varies based on the Bank's activities, primarily the Bank's outstanding borrowings, with FHLB. FHLB stock is carried at cost and is considered a restricted asset because it cannot be pledged as collateral or bought or sold on the open market and it also has certain redemption restrictions. Management conducts a quarterly evaluation to determine if any FHLB stock impairment exists. The quarterly impairment evaluation focuses primarily on the capital adequacy and liquidity of FHLB, while also considering the impact that legislative and regulatory developments may have on FHLB. Stock and cash dividends received on FHLB stock are reflected as dividend income in the consolidated statements of income.
Premises, Equipment, and Leases - Land is carried at cost. Buildings, leasehold improvements, and furniture, fixtures and equipment are carried at cost less accumulated depreciation and leasehold amortization. Buildings, furniture, fixtures and equipment are depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the respective leases. The costs for major improvements and renovations are capitalized, while maintenance, repairs and minor improvements are charged to operating expenses as incurred. Gains and losses on dispositions are recorded as non-interest income or non-interest expense as incurred.
The Company leases real estate property for branches, ATMs, and certain equipment. All of the leases in which the Company is the lessee are classified as operating leases. The Company determines if an arrangement is a lease at inception and if the lease is an operating lease or a finance lease.
Operating lease right-of-use assets represent the Company's right to use an underlying asset during the lease term and operating lease liabilities represent the Company's obligation to make lease payments arising from the lease. The right-of-use assets associated with operating leases are recorded in other assets in the Company's consolidated balance sheets. The lease liabilities associated with operating leases are included in other liabilities on the consolidated balance sheets. The period over which the right-of-use asset is amortized is generally the lesser of the expected remaining term or the remaining useful life of the leased asset. The lease liability is decreased as periodic lease payments are made. The Company performs impairment assessments for right-of-use assets when events or changes in circumstances indicate that their carrying values may not be recoverable.
The calculated amounts of the right-of-use assets and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of the minimum remaining lease payments. The Company's lease agreements often include one or more options to renew at the Company's discretion. If, at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company includes the extended term in the calculation of the right-of-use asset and lease liability. Generally, the Company cannot practically determine the interest rate implicit in the lease so the Company's incremental borrowing rate is used as the discount rate for the lease. The Company uses FHLB advance interest rates, which have been deemed as the Company's incremental borrowing rate, at lease inception
based upon the term of the lease. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Lease expense, variable lease expense and short-term lease expense are included in occupancy expense in the Company's consolidated statements of income. For facility-related leases, the Company elected, by lease class, to not separate lease and non-lease components. Lease expense is recognized on a straight-line basis over the lease term. Variable lease expense primarily represents payments such as common area maintenance, real estate taxes, and utilities and are recognized as expense in the period when those payments are incurred. Short-term lease expense relates to leases with an initial term of 12 months or less. The Company has elected to not record a right-of-use asset or lease liability for short-term leases.
Low Income Housing Partnerships - As part of the Bank's community reinvestment initiatives, the Bank invests in affordable housing limited partnerships ("low income housing partnerships") that make equity investments in affordable housing properties. The Bank is a limited partner in each partnership in which it invests. A separate, unrelated third party is the general partner. The Bank receives affordable housing tax credits and other tax benefits for these investments.
Other Assets - Included in other assets on the consolidated balance sheet are the Company's intangible assets, which consist of goodwill, deposit intangibles and other intangibles.
Goodwill is assessed for impairment on an annual basis, or more frequently in certain circumstances. The test for impairment is performed by comparing the fair value of the reporting unit with its carrying amount. If the fair value is determined to be less than the carrying amount, an impairment is recorded.
The Company's intangible assets primarily relate to core deposits. These intangible assets are amortized based upon the expected economic benefit over an estimated life determined at the time of acquisition and are tested for impairment whenever events or circumstances change.
Interest Rate Swaps - The Company uses interest rate swaps as part of its interest rate risk management strategy to hedge the variable cash outflows associated with certain borrowings. Interest rate swaps are carried at fair value in the Company's consolidated financial statements. For interest rate swaps that are designated and qualify as cash flow hedges, the effective portion of changes in the fair value of such agreements are recorded in AOCI and are subsequently reclassified into interest expense in the period that interest on the borrowings affects earnings. The ineffective portion of the change in fair value of the interest rate swap is recognized directly in earnings. Effectiveness is assessed using regression analysis. At the inception of a hedge, the Company documents certain items, including the relationship between the hedging instrument and the hedged item, the risk management objective and the nature of the risk being hedged, a description of how effectiveness will be measured and an evaluation of hedged transaction effectiveness.
Income Taxes - The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Deferred income tax expense (benefit) represents the change in deferred income tax assets and liabilities excluding the tax effects of the change in net unrealized gain (loss) on AFS securities and interest rate swaps. Income tax related penalties and interest, if any, are included in income tax expense in the consolidated statements of income.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. To the extent that management considers it more likely than not that a deferred tax asset will not be recovered, a valuation allowance is recorded. All positive and negative evidence is reviewed in determining how much of a valuation allowance is recognized on a quarterly basis.
Accounting Standards Codification ("ASC") Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an uncertain tax position taken, or expected to be taken, in a tax return. Interest and penalties related to unrecognized tax benefits are recognized in income tax expense in the consolidated statements of income. Accrued interest and penalties related to unrecognized tax benefits are included within the related tax liabilities line in the consolidated balance sheet.
Employee Stock Ownership Plan - The funds borrowed by the ESOP from the Company to purchase the Company's common stock are being repaid from dividends paid on unallocated ESOP shares and, if necessary, contributions by the Bank. The ESOP shares pledged as collateral are reported as a reduction of stockholders' equity at cost. As ESOP shares are committed to be released from collateral each quarter, the Company records compensation expense based on the average market price of the Company's stock during the quarter. Additionally, the ESOP shares become outstanding for EPS computations once they are committed to be released.
Stock-based Compensation - The Company has share-based plans under which stock options and restricted stock awards have been granted. Compensation expense is recognized over the service period of the share-based payment award. The Company utilizes a fair-value-based measurement method in accounting for the share-based payment transactions. The Company applies the modified prospective method in which compensation cost is recognized over the service period for all awards granted.
Trust Asset Management - Assets (other than cash deposits with the Bank) held in fiduciary or agency capacities for customers are not included in the accompanying consolidated balance sheets, since such items are not assets of the Company or its subsidiaries.
Revenue Recognition - Non-interest income within the scope of ASC Topic 606 is recognized by the Company when performance obligations, under the terms of the contract, are satisfied. This income is measured as the amount of consideration expected to be received in exchange for the providing of services. The majority of the Company's applicable non-interest income continues to be recognized at the time when services are provided to its customers. See "Note 16. Revenue Recognition" for additional information.
Segment Information - As a community-oriented financial institution, substantially all of the Bank's operations involve the delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an ongoing review of these community banking operations, which constitute the Company's only operating segment for financial reporting purposes.
Earnings Per Share - Basic EPS is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options) were exercised or resulted in the issuance of common stock. These potentially dilutive shares would then be included in the weighted average number of shares outstanding for the period using the treasury stock method. Shares issued and shares reacquired during any period are weighted for the portion of the period that they were outstanding.
In computing both basic and diluted EPS, the weighted average number of common shares outstanding includes the ESOP shares previously allocated to participants and shares committed to be released for allocation to participants and shares of restricted stock which have vested. ESOP shares that have not been committed to be released are excluded from the computation of basic and diluted EPS. Unvested restricted stock awards contain nonforfeitable rights to dividends and are treated as participating securities in the computation of EPS pursuant to the two-class method.
Recent Accounting Pronouncements - In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU, as amended, replaces the incurred loss methodology in GAAP, which required credit losses to be recognized when it is probable that a loss has been incurred, with an expected credit loss methodology, which is commonly known as the current expected credit loss ("CECL") methodology. The CECL methodology requires an entity to measure, at each reporting date, the expected credit losses of financial assets not measured at fair value, such as loans and off-balance sheet credit exposures, over their remaining contractual lives. Under the CECL methodology, expected credit losses are measured at each reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU amended the credit loss measurements for AFS debt securities. Credit losses related to AFS debt securities are now recorded through the ACL rather than as a direct write-down. The ASU also requires enhanced disclosures related to credit quality and significant estimates and judgments used by management when estimating credit losses. The ASU, as amended, became effective for the Company on October 1, 2020.
The Company adopted the ASU, as amended, on October 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Financial results for reporting periods beginning on or after October 1, 2020 are reported in accordance with the new ASU, as amended, while prior period amounts continue to be reported in accordance with previous GAAP. Upon adoption, the Company recorded a cumulative-effect adjustment for the change in the ACL and reserve for off-balance sheet credit exposures of $2.3 million, net of tax of $739 thousand, which was recognized as a decrease in retained earnings. The following table presents the impact of the cumulative-effect adjustment for the change in the ACL and reserve for off-balance sheet credit exposures.
September 30,
2020 October 1, 2020
Balance Cumulative-Effect Adjustment Balance
(Dollars in thousands)
ACL
One- to four-family:
Originated $ 6,085 $ (4,452) $ 1,633
Correspondent purchased 2,691 (367) 2,324
Bulk purchased 467 436 903
Commercial:
Commercial real estate 20,349 699 21,048
Commercial and industrial 1,451 (892) 559
Consumer:
Home equity 370 (289) 81
Other 114 104 218
Total ACL 31,527 (4,761) 26,766
Reserve for off-balance sheet credit exposures - 7,788 7,788
ACL and reserve for off-balance sheet credit exposures $ 31,527 $ 3,027 $ 34,554
The Company elected the practical expedient to exclude accrued interest receivable from the amortized cost of financing receivables and AFS debt securities. Accrued interest totaled $18.7 million and $2.9 million at September 30, 2021 for loans receivable and AFS securities, respectively, and was included in other assets on the consolidated balance sheet. Additionally, an election was made not to measure ACL for accrued interest receivables.
The enhanced disclosures required by the ASU, as amended, are included in the relevant significant accounting policies above and in "Note 4. Loans Receivable and Allowance for Credit Losses."
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosures Requirements for Fair Value Measurement. This ASU eliminates, modifies and adds certain disclosure requirements for fair value measurements. The ASU adds disclosure requirements for the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU, which was adopted on October 1, 2020, did not have a material impact on the Company's consolidated financial condition, results of operations, or disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include internal-use software licenses). The ASU was adopted by the Company on October 1, 2020. The Company includes hosting arrangements that are service contracts in its evaluation of projects for capitalization. The adoption of this ASU did not have a material impact on the Company's consolidated financial condition, results of operations, or disclosures.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This ASU makes clarifications and corrections to the application of the guidance contained in each of the amended topics. According to the provisions of the ASU, entities that have not adopted ASU 2017-12 prior to the issuance of ASU 2019-04 must adopt the provisions of both ASUs at the same time. Since the Company previously adopted ASU 2017-12, the related provisions included in ASU 2019-04 were adopted at the same time. The Company adopted the non-hedging amendments contained in ASU 2019-04, including amendments related to ASU 2016-13, on October 1, 2020. The adoption of this ASU did not have a material impact on the Company's consolidated financial condition, results of operations, or disclosures. For additional information regarding the impact of adopting ASU 2016-13, see ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments above.
2. EARNINGS PER SHARE
Shares acquired by the ESOP are not included in basic average shares outstanding until the shares are committed for allocation or vested to an employee's individual account. Unvested shares awarded pursuant to the Company's restricted stock benefit plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security.
For the Year Ended September 30,
2021 2020 2019
(Dollars in thousands, except per share amounts)
Net income $ 76,082 $ 64,540 $ 94,243
Income allocated to participating securities (50) (52) (55)
Net income available to common stockholders $ 76,032 $ 64,488 $ 94,188
Average common shares outstanding 135,418,774 137,834,304 137,614,465
Average committed ESOP shares outstanding 62,458 62,400 62,458
Total basic average common shares outstanding 135,481,232 137,896,704 137,676,923
Effect of dilutive stock options 14,363 4,484 58,478
Total diluted average common shares outstanding 135,495,595 137,901,188 137,735,401
Net EPS:
Basic $ 0.56 $ 0.47 $ 0.68
Diluted $ 0.56 $ 0.47 $ 0.68
Antidilutive stock options, excluded from the diluted average
common shares outstanding calculation 206,284 437,731 470,938
3. SECURITIES
The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of AFS securities at the dates presented. The majority of the MBS and investment securities portfolios are composed of securities issued by GSEs.
September 30, 2021
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in thousands)
MBS $ 1,484,211 $ 18,690 $ 8,908 $ 1,493,993
GSE debentures 519,971 - 3,645 516,326
Municipal bonds 4,274 15 - 4,289
$ 2,008,456 $ 18,705 $ 12,553 $ 2,014,608
September 30, 2020
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in thousands)
MBS $ 1,149,922 $ 31,212 $ 331 $ 1,180,803
GSE debentures 369,967 414 41 370,340
Municipal bonds 9,716 91 - 9,807
$ 1,529,605 $ 31,717 $ 372 $ 1,560,950
The following tables summarize the estimated fair value and gross unrealized losses of those AFS securities on which an unrealized loss at the dates presented was reported and the continuous unrealized loss position for less than 12 months and equal to or greater than 12 months as of the dates presented.
September 30, 2021
Less Than 12 Months Equal to or Greater Than 12 Months
Estimated Unrealized Estimated Unrealized
Fair Value Losses Fair Value Losses
(Dollars in thousands)
MBS $ 881,975 $ 8,843 $ 10,612 $ 65
GSE debentures 516,325 3,645 - -
Municipal bonds - - - -
$ 1,398,300 $ 12,488 $ 10,612 $ 65
September 30, 2020
Less Than 12 Months Equal to or Greater Than 12 Months
Estimated Unrealized Estimated Unrealized
Fair Value Losses Fair Value Losses
(Dollars in thousands)
MBS $ 207,071 $ 330 $ 118 $ 1
GSE debentures 74,959 41 - -
Municipal bonds - - - -
$ 282,030 $ 371 $ 118 $ 1
The unrealized losses at September 30, 2021 were a result of an increase in market yields from the time the securities were purchased. In general, as market yields rise, the fair value of securities will decrease; as market yields fall, the fair value of securities will increase. Management did not record ACL on securities in an unrealized loss position at September 30, 2021 because scheduled coupon payments have been made, management anticipates that the entire principal balance will be collected as scheduled, and neither does the Company intend to sell the securities, nor is it more likely than not that the Company will be required to sell the securities before the recovery of the remaining amortized cost amount, which could be at maturity.
The amortized cost and estimated fair value of AFS debt securities as of September 30, 2021, by contractual maturity, are shown below. Actual principal repayments may differ from contractual maturities due to prepayment or early call privileges by the issuer. In the case of MBS, borrowers on the underlying loans generally have the right to prepay their loans without penalty. For this reason, MBS are not included in the maturity categories.
Amortized Estimated
Cost Fair Value
(Dollars in thousands)
One year or less $ 4,064 $ 4,079
One year through five years 495,181 491,685
Five years through ten years 25,000 24,851
524,245 520,615
MBS 1,484,211 1,493,993
$ 2,008,456 $ 2,014,608
The following table presents the taxable and non-taxable components of interest income on investment securities for the periods presented.
For the Year Ended September 30,
2021 2020 2019
(Dollars in thousands)
Taxable $ 2,710 $ 4,242 $ 6,020
Non-taxable 115 225 346
$ 2,825 $ 4,467 $ 6,366
The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of the dates presented.
September 30,
2021 2020
(Dollars in thousands)
Public unit deposits $ 264,885 $ 330,986
FRB of Kansas City 64,707 259,851
Commercial deposits 66,256 -
$ 395,848 $ 590,837
During fiscal year 2021, the Company sold its Visa Class B shares. The proceeds and realized gain related to the sale of the Visa Class B shares were each $7.4 million. All other dispositions of securities during fiscal years 2021, 2020, and 2019 were the result of principal repayments, calls, or maturities.
4. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES
Loans receivable, net at September 30, 2021 and 2020 is summarized as follows:
2021 2020
(Dollars in thousands)
One- to four-family:
Originated $ 3,956,064 $ 3,937,310
Correspondent purchased 2,003,477 2,101,082
Bulk purchased 173,662 208,427
Construction 39,142 34,593
Total 6,172,345 6,281,412
Commercial:
Commercial real estate 676,908 626,588
Commercial and industrial 66,497 97,614
Construction 85,963 105,458
Total 829,368 829,660
Consumer:
Home equity 86,274 103,838
Other 8,086 10,086
Total 94,360 113,924
Total loans receivable 7,096,073 7,224,996
Less:
ACL 19,823 31,527
Discounts/unearned loan fees 29,556 29,190
Premiums/deferred costs (34,448) (38,572)
$ 7,081,142 $ 7,202,851
As of September 30, 2021 and 2020, the Bank serviced loans for others aggregating $63.4 million and $87.2 million, respectively. Such loans are not included in the accompanying consolidated balance sheets. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. Loan servicing income includes servicing fees withheld from investors and certain charges collected from borrowers, such as late payment fees. The Bank held borrowers' escrow balances on loans serviced for others of $1.4 million and $1.7 million as of September 30, 2021 and 2020, respectively.
Lending Practices and Underwriting Standards - Originating and purchasing one- to four-family loans is the Bank's primary lending business. The Bank also originates consumer loans primarily secured by one- to four-family residential properties and originates and participates in commercial loans. The Bank has a loan concentration in one- to four-family loans and a geographic concentration of these loans in Kansas and Missouri.
One- to four-family loans - Full documentation to support an applicant's credit and income, and sufficient funds to cover all applicable fees and reserves at closing, are required on all loans. Generally, loans are underwritten according to the "ability to repay" and "qualified mortgage" standards, as issued by the Consumer Financial Protection Bureau. Properties securing one- to four-family loans are appraised by either staff appraisers or fee appraisers, both of which are independent of the loan origination function.
The underwriting standards for loans purchased from correspondent lenders are generally similar to the Bank's internal underwriting standards. The underwriting of loans purchased from correspondent lenders on a loan-by-loan basis is performed by the Bank's underwriters.
The Bank also originates owner-occupied construction-to-permanent loans secured by one- to four-family residential real estate. Construction draw requests and the supporting documentation are reviewed and approved by designated personnel. The Bank also performs regular documented inspections of the construction project to ensure the funds are being used for the intended purpose and the project is being completed according to the plans and specifications provided.
Commercial loans - The Bank's commercial real estate and commercial construction loans are originated by the Bank or are in participation with a lead bank. When underwriting a commercial real estate or commercial construction loan, several factors are considered, such as the income producing potential of the property, cash equity provided by the borrower, the financial strength of the borrower, managerial expertise of the borrower or tenant, feasibility studies, lending experience with the borrower and the marketability of the property. For commercial real estate and commercial construction participation loans, the Bank performs the same underwriting procedures as if the loan was being originated by the Bank. At the time of origination, LTV ratios on commercial real estate loans generally do not exceed 85% of the appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.15. For commercial construction loans, LTV ratios generally do not exceed 80% of the projected appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.15, but it applies to the projected cash flows, and the borrower must have successful experience with the construction and operation of properties similar to the subject property. Appraisals on properties securing these loans are performed by independent state certified fee appraisers.
The Bank's commercial and industrial loans are generally made in the Bank's market areas and are underwritten on the basis of the borrower's ability to service the debt from income. With the exception of Paycheck Protection Program loans, which are unsecured but are generally guaranteed by the U.S. Small Business Administration, working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets. In general, commercial and industrial loans involve more credit risk than commercial real estate loans due to the type of collateral securing these loans. As a result of these additional complexities, variables and risks, these loans require more thorough underwriting and servicing than other types of loans.
Consumer loans - The Bank offers a variety of secured consumer loans, including home equity loans and lines of credit, home improvement loans, vehicle loans, and loans secured by deposits. The Bank also originates a very limited amount of unsecured consumer loans. The majority of the consumer loan portfolio is comprised of home equity lines of credit for which the Bank also has the first mortgage or the home equity line of credit is in the first lien position.
The underwriting standards for consumer loans include a determination of an applicant's payment history on other debts and an assessment of an applicant's ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of an applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security in relation to the proposed loan amount.
Credit Quality Indicators - Based on the Bank's lending emphasis and underwriting standards, management has segmented the loan portfolio into three segments: (1) one- to four-family; (2) consumer; and (3) commercial. See discussion regarding the credit risks for these loan segments in "Note 1. Summary of Significant Accounting Policies - Allowance for Credit Losses on Loans Receivable." These segments are further divided into classes for purposes of providing disaggregated credit quality information about the loan portfolio. The classes are: one- to four-family - originated, one- to four-family - correspondent purchased, one- to four-family - bulk purchased, consumer - home equity, consumer - other, commercial - commercial real estate, and commercial - commercial and industrial. One- to four-family construction loans are included in the originated class and commercial construction loans are included in the commercial real estate class. As part of the on-going monitoring of the credit quality of the Company's loan portfolio, management tracks certain credit quality indicators including trends related to loan classification and delinquency status.
Loan Classification - In accordance with the Bank's asset classification policy, management regularly reviews the problem loans in the Bank's portfolio to determine whether any loans require classification. Loan classifications are defined as follows:
•Special mention - These loans are performing loans on which known information about the collateral pledged or the possible credit problems of the borrower(s) have caused management to have doubts as to the ability of the borrower(s) to comply with present loan repayment terms and which may result in the future inclusion of such loans in the nonaccrual loan categories.
•Substandard - A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those characterized by the distinct possibility the Bank will sustain some loss if the deficiencies are not corrected.
•Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses present make collection or liquidation in full on the basis of currently existing facts and conditions and values highly questionable and improbable.
•Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as assets on the books is not warranted.
The following table sets forth, as of September 30, 2021, the amortized cost of loans by class of financing receivable, year of origination or most recent credit decision, and loan classification. All revolving lines of credit are presented separately, regardless of origination year. Loans classified as doubtful or loss are individually evaluated for loss. At September 30, 2021, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off. In the table below, certain commercial loans are presented in the "Current Fiscal Year" column and are reported as special mention or substandard. These loans were generally first originated in prior years but were renewed or modified in the current year.
September 30, 2021
Current Fiscal Fiscal Fiscal Fiscal Revolving
Fiscal Year Year Year Year Prior Line of
Year 2020 2019 2018 2017 Years Credit Total
(Dollars in thousands)
One- to four-family:
Originated
Pass $ 958,080 $ 705,561 $ 326,156 $ 250,846 $ 281,104 $ 1,434,455 $ - $ 3,956,202
Special Mention 402 443 501 678 237 7,805 - 10,066
Substandard - 966 867 51 192 11,192 - 13,268
Correspondent purchased
Pass 630,977 334,042 88,057 136,572 162,938 664,530 - 2,017,116
Special Mention 760 - 356 - - 3,160 - 4,276
Substandard - - 169 504 - 4,527 - 5,200
Bulk purchased
Pass - - - - - 169,519 - 169,519
Special Mention - - - - - - - -
Substandard - - - - - 4,848 - 4,848
1,590,219 1,041,012 416,106 388,651 444,471 2,300,036 - 6,180,495
Commercial:
Commercial real estate
Pass 272,329 149,244 94,972 61,214 38,962 35,591 5,231 657,543
Special Mention 50,352 - - - - 49,369 - 99,721
Substandard 810 627 225 669 - 34 - 2,365
Commercial and industrial
Pass 32,651 10,168 6,988 2,213 1,155 595 11,709 65,479
Special Mention - - - - - - - -
Substandard - - - 86 48 - 765 899
356,142 160,039 102,185 64,182 40,165 85,589 17,705 826,007
Consumer:
Home equity
Pass 3,295 2,218 1,428 1,563 536 2,473 74,036 85,549
Special Mention - - 37 12 - - 82 131
Substandard - 60 - - - 9 636 705
Other
Pass 3,491 1,631 1,086 944 465 105 339 8,061
Special Mention - - 4 - - - - 4
Substandard - 3 6 1 3 - - 13
6,786 3,912 2,561 2,520 1,004 2,587 75,093 94,463
Total $ 1,953,147 $ 1,204,963 $ 520,852 $ 455,353 $ 485,640 $ 2,388,212 $ 92,798 $ 7,100,965
The following table sets forth the recorded investment in loans classified as special mention or substandard, by class, at September 30, 2020 (prior to the adoption of CECL). At that date, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.
Special Mention Substandard
(Dollars in thousands)
One- to four-family:
Originated $ 9,249 $ 15,729
Correspondent purchased 2,076 4,512
Bulk purchased - 5,319
Commercial:
Commercial real estate 50,957 3,541
Commercial and industrial 1,040 1,368
Consumer:
Home equity 331 581
Other - 8
$ 63,653 $ 31,058
Delinquency Status - The following table sets forth, as of September 30, 2021, the amortized cost of current loans, loans 30 to 89 days delinquent, and loans 90 or more days delinquent or in foreclosure ("90+/FC"), by class of financing receivable and year of origination or most recent credit decision. All revolving lines of credit are presented separately, regardless of origination year.
September 30, 2021
Current Fiscal Fiscal Fiscal Fiscal Revolving
Fiscal Year Year Year Year Prior Line of
Year 2020 2019 2018 2017 Years Credit Total
(Dollars in thousands)
One- to four-family:
Originated
Current $ 958,482 $ 706,970 $ 327,408 $ 251,524 $ 281,341 $ 1,445,992 $ - $ 3,971,717
30-89 - - - 51 - 4,091 - 4,142
90+/FC - - 116 - 192 3,369 - 3,677
Correspondent purchased
Current 630,977 334,042 88,413 136,572 162,017 668,685 - 2,020,706
30-89 760 - - - 921 948 - 2,629
90+/FC - - 169 504 - 2,584 - 3,257
Bulk purchased
Current - - - - - 170,809 - 170,809
30-89 - - - - - 555 - 555
90+/FC - - - - - 3,003 - 3,003
1,590,219 1,041,012 416,106 388,651 444,471 2,300,036 - 6,180,495
Commercial:
Commercial real estate
Current 323,491 149,244 94,972 61,651 38,962 84,957 5,231 758,508
30-89 - - - - - 37 - 37
90+/FC - 627 225 232 - - - 1,084
Commercial and industrial
Current 32,651 10,168 6,988 2,212 1,155 595 12,474 66,243
30-89 - - - - - - - -
90+/FC - - - 87 48 - - 135
356,142 160,039 102,185 64,182 40,165 85,589 17,705 826,007
Consumer:
Home equity
Current 3,295 2,218 1,465 1,575 536 2,357 73,958 85,404
30-89 - - - - - 121 375 496
90+/FC - 60 - - - 4 421 485
Other
Current 3,491 1,631 1,088 944 465 105 339 8,063
30-89 - - 2 - - - - 2
90+/FC - 3 6 1 3 - - 13
6,786 3,912 2,561 2,520 1,004 2,587 75,093 94,463
Total $ 1,953,147 $ 1,204,963 $ 520,852 $ 455,353 $ 485,640 $ 2,388,212 $ 92,798 $ 7,100,965
Delinquent and Nonaccrual Loans - The following tables present the amortized cost at September 30, 2021 and, prior to the adoption of CECL, the recorded investment, which is identical to amortized cost, at September 30, 2020, by class, of loans 30 to 89 days delinquent, loans 90 or more days delinquent or in foreclosure, total delinquent loans, current loans, and total. At September 30, 2021 and 2020, all loans 90 or more days delinquent were on nonaccrual status.
September 30, 2021
90 or More Days Total Total
30 to 89 Days Delinquent or Delinquent Current Amortized
Delinquent in Foreclosure Loans Loans Cost
(Dollars in thousands)
One- to four-family:
Originated $ 4,142 $ 3,677 $ 7,819 $ 3,971,717 $ 3,979,536
Correspondent purchased 2,629 3,257 5,886 2,020,706 2,026,592
Bulk purchased 555 3,003 3,558 170,809 174,367
Commercial:
Commercial real estate 37 1,084 1,121 758,508 759,629
Commercial and industrial - 135 135 66,243 66,378
Consumer:
Home equity 496 485 981 85,404 86,385
Other 2 13 15 8,063 8,078
$ 7,861 $ 11,654 $ 19,515 $ 7,081,450 $ 7,100,965
September 30, 2020
90 or More Days Total Total
30 to 89 Days Delinquent or Delinquent Current Recorded
Delinquent in Foreclosure Loans Loans Investment
(Dollars in thousands)
One- to four-family:
Originated $ 3,001 $ 4,347 $ 7,348 $ 3,950,387 $ 3,957,735
Correspondent purchased 3,170 2,433 5,603 2,122,085 2,127,688
Bulk purchased 2,558 2,938 5,496 203,844 209,340
Commercial:
Commercial real estate 40 1,206 1,246 728,191 729,437
Commercial and industrial 5 157 162 96,124 96,286
Consumer:
Home equity 323 296 619 103,210 103,829
Other 75 8 83 9,980 10,063
$ 9,172 $ 11,385 $ 20,557 $ 7,213,821 $ 7,234,378
The amortized cost of mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of September 30, 2021 and 2020 was $799 thousand and $1.5 million, respectively, which is included in loans 90 or more days delinquent or in foreclosure in the tables above. The carrying value of residential OREO held as a result of obtaining physical possession upon completion of a foreclosure or through completion of a deed in lieu of foreclosure was $170 thousand at September 30, 2021 and $183 thousand at September 30, 2020.
The following table presents the amortized cost at September 30, 2021 and, prior to the adoption of CECL, the recorded investment at September 30, 2020, by class, of loans classified as nonaccrual. Additionally, the amortized cost of nonaccrual loans that had no related ACL is presented as of September 30, 2021, all of which were individually evaluated for loss and any identified losses have been charged off.
September 30, 2021 September 30, 2020
Nonaccrual Loans Nonaccrual Loans with No ACL Nonaccrual Loans
(Dollars in thousands)
One- to four-family:
Originated $ 4,965 $ 2,237 $ 5,037
Correspondent purchased 3,257 307 2,433
Bulk purchased 3,134 1,564 2,938
Commercial:
Commercial real estate 1,496 485 1,663
Commercial and industrial 134 86 157
Consumer:
Home equity 494 84 305
Other 13 - 8
$ 13,493 $ 4,763 $ 12,541
TDRs - The following tables present the amortized cost for the current year and, prior to the adoption of CECL, the recorded investment for prior years, prior to restructuring and immediately after restructuring in all loans restructured during the years presented. These tables do not reflect the amortized cost at the end of the periods indicated. Any increase in the amortized cost at the time of the restructuring was generally due to the capitalization of delinquent interest and/or escrow balances.
For the Year Ended September 30, 2021
Number Pre- Post-
of Restructured Restructured
Contracts Outstanding Outstanding
(Dollars in thousands)
One- to four-family:
Originated 7 $ 1,685 $ 1,576
Correspondent purchased - - -
Bulk purchased - - -
Commercial:
Commercial real estate - - -
Commercial and industrial - - -
Consumer:
Home equity - - -
Other - - -
7 $ 1,685 $ 1,576
For the Year Ended September 30, 2020
Number Pre- Post-
of Restructured Restructured
Contracts Outstanding Outstanding
(Dollars in thousands)
One- to four-family:
Originated 5 $ 241 $ 242
Correspondent purchased 1 192 191
Bulk purchased 1 75 134
Commercial:
Commercial real estate 1 837 837
Commercial and industrial 1 1,683 1,709
Consumer:
Home equity 2 45 44
Other - - -
11 $ 3,073 $ 3,157
For the Year Ended September 30, 2019
Number Pre- Post-
of Restructured Restructured
Contracts Outstanding Outstanding
(Dollars in thousands)
One- to four-family:
Originated 3 $ 385 $ 386
Correspondent purchased - - -
Bulk purchased 2 377 377
Commercial:
Commercial real estate - - -
Commercial and industrial - - -
Consumer:
Home equity - - -
Other - - -
5 $ 762 $ 763
The following table provides information on TDRs that became delinquent during the periods presented within 12 months after being restructured.
For the Year Ended
September 30, 2021 September 30, 2020 September 30, 2019
Number of Amortized Number of Recorded Number of Recorded
Contracts Cost Contracts Investment Contracts Investment
(Dollars in thousands)
One- to four-family:
Originated - $ - 1 $ 38 1 $ 45
Correspondent purchased - - - - - -
Bulk purchased - - 1 134 - -
Commercial:
Commercial real estate - - - - - -
Commercial and industrial - - - - - -
Consumer:
Home equity - - 1 9 - -
Other - - - - - -
- $ - 3 $ 181 1 $ 45
Impaired Loans - The following information pertains to impaired loans, by class, as of September 30, 2020 (prior to the adoption of CECL). Prior to the adoption of CECL, a loan was considered impaired when, based on current information and events, it was probable that the Bank would be unable to collect all amounts due, including principal and interest, according to the original contractual terms of the loan agreement.
Unpaid
Recorded Principal Related
Investment Balance ACL
(Dollars in thousands)
With no related allowance recorded
One- to four-family:
Originated $ 12,385 $ 12,813 $ -
Correspondent purchased 1,955 2,058 -
Bulk purchased 3,843 4,302 -
Commercial:
Commercial real estate 1,052 1,379 -
Commercial and industrial 99 244 -
Consumer:
Home equity 280 360 -
Other - 45 -
19,614 21,201 -
With an allowance recorded
One- to four-family:
Originated - - -
Correspondent purchased - - -
Bulk purchased - - -
Commercial:
Commercial real estate 660 660 83
Commercial and industrial 1,269 1,268 240
Consumer:
Home equity - - -
Other - - -
1,929 1,928 323
Total
One- to four-family:
Originated $ 12,385 $ 12,813 -
Correspondent purchased 1,955 2,058 -
Bulk purchased 3,843 4,302 -
Commercial:
Commercial real estate 1,712 2,039 83
Commercial and industrial 1,368 1,512 240
Consumer:
Home equity 280 360 -
Other - 45 -
$ 21,543 $ 23,129 $ 323
The following information pertains to impaired loans, by class, for the periods presented (prior to the adoption of CECL).
For the Year Ended
September 30, 2020 September 30, 2019
Average Interest Average Interest
Recorded Income Recorded Income
Investment Recognized Investment Recognized
(Dollars in thousands)
With no related allowance recorded
One- to four-family:
Originated $ 13,918 $ 606 $ 16,030 $ 671
Correspondent purchased 1,878 73 2,071 82
Bulk purchased 4,720 179 5,257 180
Commercial:
Commercial real estate 725 15 - -
Commercial and industrial 41 - 5 -
Consumer:
Home equity 318 20 417 28
Other - - - -
21,600 893 23,780 961
With an allowance recorded
One- to four-family:
Originated - - - -
Correspondent purchased - - - -
Bulk purchased - - - -
Commercial:
Commercial real estate 51 - - -
Commercial and industrial 1,413 91 - -
Consumer:
Home equity - - - -
Other - - - -
1,464 91 - -
Total
One- to four-family:
Originated 13,918 606 16,030 671
Correspondent purchased 1,878 73 2,071 82
Bulk purchased 4,720 179 5,257 180
Commercial:
Commercial real estate 776 15 - -
Commercial and industrial 1,454 91 5 -
Consumer:
Home equity 318 20 417 28
Other - - - -
$ 23,064 $ 984 $ 23,780 $ 961
Allowance for Credit Losses - The following is a summary of ACL activity, by loan portfolio segment, for the periods presented. Activity during fiscal years 2020 and 2019 occurred prior to the adoption of CECL.
For the Year Ended September 30, 2021
One- to Four-Family
Correspondent Bulk
Originated Purchased Purchased Total Commercial Consumer Total
(Dollars in thousands)
Beginning balance $ 6,085 $ 2,691 $ 467 $ 9,243 $ 21,800 $ 484 $ 31,527
Adoption of CECL (4,452) (367) 436 (4,383) (193) (185) (4,761)
Balance at October 1, 2020 1,633 2,324 903 4,860 21,607 299 26,766
Charge-offs (164) - (21) (185) (515) (15) (715)
Recoveries 144 - - 144 50 43 237
Provision for credit losses (1) (262) (578) (841) (5,490) (134) (6,465)
Ending balance $ 1,612 $ 2,062 $ 304 $ 3,978 $ 15,652 $ 193 $ 19,823
For the Year Ended September 30, 2020
One- to Four-Family
Correspondent Bulk
Originated Purchased Purchased Total Commercial Consumer Total
(Dollars in thousands)
Beginning balance $ 2,000 $ 1,203 $ 687 $ 3,890 $ 5,171 $ 165 $ 9,226
Charge-offs (64) - - (64) (349) (30) (443)
Recoveries 41 - 265 306 110 28 444
Provision for credit losses 4,108 1,488 (485) 5,111 16,868 321 22,300
Ending balance $ 6,085 $ 2,691 $ 467 $ 9,243 $ 21,800 $ 484 $ 31,527
For the Year Ended September 30, 2019
One- to Four-Family
Correspondent Bulk
Originated Purchased Purchased Total Commercial Consumer Total
(Dollars in thousands)
Beginning balance $ 2,953 $ 1,861 $ 925 $ 5,739 $ 2,556 $ 168 $ 8,463
Charge-offs (75) - (26) (101) (124) (37) (262)
Recoveries 22 - 106 128 49 98 275
Provision for credit losses (900) (658) (318) (1,876) 2,690 (64) 750
Ending balance $ 2,000 $ 1,203 $ 687 $ 3,890 $ 5,171 $ 165 $ 9,226
The following is a summary of the loan portfolio and related ACL balances by loan portfolio segment disaggregated by the Company's impairment method as of September 30, 2020 (prior to the adoption of CECL).
One- to Four-Family
Correspondent Bulk
Originated Purchased Purchased Total Commercial Consumer Total
(Dollars in thousands)
Recorded investment in loans:
Collectively evaluated for impairment $ 3,945,350 $ 2,125,733 $ 205,497 $ 6,276,580 $ 822,643 $ 113,612 $ 7,212,835
Individually evaluated for impairment 12,385 1,955 3,843 18,183 3,080 280 21,543
$ 3,957,735 $ 2,127,688 $ 209,340 $ 6,294,763 $ 825,723 $ 113,892 $ 7,234,378
ACL for loans:
Collectively evaluated for impairment $ 6,085 $ 2,691 $ 467 $ 9,243 $ 21,477 $ 484 $ 31,204
Individually evaluated for impairment - - - - 323 - 323
$ 6,085 $ 2,691 $ 467 $ 9,243 $ 21,800 $ 484 $ 31,527
The key assumptions in the Company's ACL model at September 30, 2021 include the economic forecast, the forecast and reversion to mean time periods, and prepayment and curtailment assumptions. Management also considered certain qualitative factors when evaluating the adequacy of the ACL at September 30, 2021. The key assumptions utilized in estimating the Company's ACL at September 30, 2021 are discussed below.
•Economic Forecast - Management considered several economic forecasts provided by a third party and selected the economic forecast believed to be the most appropriate considering the facts and circumstances at September 30, 2021. The forecasted economic indices applied to the model at September 30, 2021 were the national unemployment rate, changes in commercial real estate price index, changes in home values, and changes in the U.S. gross domestic product. The economic index most impactful to all loan pools within the model at September 30, 2021 was the national unemployment rate. The forecast national unemployment rate in the economic scenario selected by management at September 30, 2021 had the national unemployment rate gradually declining to 3.4% at September 30, 2022 which was the end of our four-quarter forecast time period.
•Forecast and reversion to mean time period - The forecasted time period and the reversion to mean time period were each four quarters for all of the economic indices at September 30, 2021.
•Prepayment and curtailment assumptions - The assumptions used at September 30, 2021 were generally based on actual historical prepayment and curtailment speeds for each respective loan pool in the model.
•Qualitative factors - The qualitative factors applied by management at September 30, 2021 included the following:
◦The balance and trending of large-dollar special mention commercial loans;
◦The economic uncertainties related to (1) the job market, specifically the unemployment rate and labor participation rate and how the significant federal aid may be impacting those measures and the true state of the financial position of borrowers and (2) the unevenness of the recovery in certain industries; and
◦COVID-19 loan modifications related to commercial real estate loans.
The decrease in ACL at September 30, 2021 compared to October 1, 2020 (CECL adoption date) was primarily a result of a negative provision for credit losses of $6.5 million. The negative provision for credit losses was due primarily to a reduction in the commercial loan ACL related to improvements in forecasted economic conditions since CECL adoption, partially offset by an increase in commercial loan qualitative factors as discussed above.
Reserve for Off-Balance Sheet Credit Exposures - The following is a summary of the changes in reserve for off-balance sheet credit exposures during the period indicated. The negative provision for credit losses was due primarily to a reduction in the commercial loan reserves related to improvements in forecasted economic conditions since CECL adoption.
For the Year Ended September 30, 2021
(Dollars in thousands)
Beginning balance $ -
Adoption of CECL 7,788
Balance at October 1, 2020 7,788
Provision for credit losses (2,045)
Ending balance $ 5,743
5. PREMISES, EQUIPMENT AND LEASES
A summary of the net carrying value of premises and equipment at September 30, 2021 and 2020 was as follows:
2021 2020
(Dollars in thousands)
Land $ 15,706 $ 16,566
Building and improvements 120,065 116,595
Furniture, fixtures and equipment 57,129 57,504
192,900 190,665
Less accumulated depreciation 93,773 88,790
$ 99,127 $ 101,875
During the current year, management decided to relocate one of the Bank's branches. As a result, the Company classified as held-for-sale and subsequently sold the property where the branch was previously located. The sale of this property resulted in a loss of $940 thousand, which was included in other non-interest expense on the consolidated statements of income.
The Company leases real estate property for branches, ATMs, and certain equipment. These leases have remaining terms that range from one year to 46 years, some of which include exercising renewal options that the Company considers to be reasonably certain. As of September 30, 2021, a right-of-use asset of $12.7 million was included in other assets and a lease liability of $12.8 million was included in other liabilities on the consolidated balance sheets.
As of September 30, 2021, for the Company's operating leases, the weighted average remaining lease term was 21.8 years and the weighted average discount rate was 2.51%.
The following table presents lease expenses and supplemental cash flow information related to the Company's leases for the years indicated.
For the Year Ended September 30,
2021 2020
(Dollars in thousands)
Operating lease expense $ 1,404 $ 1,511
Variable lease expense 176 201
Short-term lease expense 2 17
Cash paid for amounts included in the measurement of lease liabilities 1,301 1,357
The following table presents future minimum payments, rounded to the nearest thousand, for operating leases with initial or remaining terms in excess of one year as of September 30, 2021 (dollars in thousands):
Fiscal year 2022 $ 1,210
Fiscal year 2023 1,224
Fiscal year 2024 993
Fiscal year 2025 759
Fiscal year 2026 711
Thereafter 13,477
Total future minimum lease payments 18,374
Amounts representing interest (5,552)
Present value of net future minimum lease payments $ 12,822
6. LOW INCOME HOUSING PARTNERSHIPS
The Bank's investment in low income housing partnerships, which is included in other assets in the consolidated balance sheets, was $101.2 million and $89.7 million at September 30, 2021 and 2020, respectively. The Bank's obligations related to unfunded commitments, which are included in other liabilities in the consolidated balance sheets, were $51.6 million and $44.5 million at September 30, 2021 and 2020, respectively. The majority of the commitments at September 30, 2021 are projected to be funded through the end of calendar year 2023.
For fiscal year 2021, the net income tax benefit associated with these investments, which consists of proportional amortization expense and affordable housing tax credits and other related tax benefits, was reported in income tax expense in the consolidated statements of income. The amount of proportional amortization expense recognized during fiscal years 2021, 2020 and 2019 was $8.4 million, $7.9 million and $6.8 million, respectively, and the amount of affordable housing tax credits and other related tax benefits was $10.5 million, $9.8 million and $8.6 million, respectively, resulting in a net income tax benefit of $2.1 million, $1.9 million and $1.8 million, respectively. There were no impairment losses during fiscal years 2021, 2020, or 2019 resulting from the forfeiture or ineligibility of tax credits or other circumstances.
7. INTANGIBLE ASSETS
The Company recognized goodwill of $8.0 million associated with an acquisition in 2018. The goodwill was calculated as the consideration exchanged in excess of the fair value of assets, net of the fair value of liabilities assumed. Certain purchase accounting adjustments were applied during the measurement period in fiscal year 2019, resulting in a $1.3 million increase in goodwill associated with the acquisition. The Company also recognized $10.1 million of other intangible assets in conjunction with the acquisition which is largely composed of core deposit intangibles. These other intangible assets are being amortized over their estimated lives, which management determined to be 8.0 years at the time of acquisition.
Changes in the carrying amount of the Company's intangible assets, which are included in other assets on the consolidated balance sheet, are presented in the following table.
Core Deposit and
Goodwill Other Intangibles
(Dollars in thousands)
Balance at September 30, 2018 $ 7,989 $ 9,819
Purchase accounting adjustments 1,335 -
Less: Amortization - (2,316)
Balance at September 30, 2019 9,324 7,503
Less: Amortization - (1,964)
Balance at September 30, 2020 9,324 5,539
Less: Amortization - (1,578)
Balance at September 30, 2021 $ 9,324 $ 3,961
As of September 30, 2021, there was no impairment recorded on goodwill or other intangible assets.
The estimated amortization expense for the next five years related to the core deposit and other intangible assets as of September 30, 2021 is presented in the following table (dollars in thousands):
2022 $ 1,371
2023 1,069
2024 775
2025 523
2026 223
8. DEPOSITS AND BORROWED FUNDS
Deposits - Non-interest-bearing deposits totaled $543.8 million and $451.4 million as of September 30, 2021 and 2020, respectively. Certificates of deposit with a minimum denomination of $250 thousand were $597.4 million and $643.0 million as of September 30, 2021 and 2020, respectively. Deposits in excess of $250 thousand may not be fully insured by the Federal Deposit Insurance Corporation.
Borrowings - FHLB borrowings at September 30, 2021 consisted of $1.58 billion in FHLB advances, of which $1.23 billion were fixed-rate advances and $365.0 million were variable-rate advances, and no borrowings against the variable-rate FHLB line of credit. FHLB borrowings at September 30, 2020 consisted of $1.79 billion in FHLB advances, of which $1.15 billion were fixed-rate advances and $640.0 million were variable-rate advances, and no borrowings against the variable-rate FHLB line of credit. On November 12, 2021, the line of credit was renewed by FHLB for a one-year period. Additionally, the Bank is authorized to borrow from the Federal Reserve Bank's "discount window."
FHLB advances at September 30, 2021 and 2020 were comprised of the following:
2021 2020
(Dollars in thousands)
FHLB advances $ 1,590,000 $ 1,793,000
Deferred prepayment penalty (7,150) (3,687)
$ 1,582,850 $ 1,789,313
Weighted average contractual interest rate on FHLB advances 1.18 % 1.41 %
Weighted average effective interest rate on FHLB advances(1)
1.88 2.31
(1)The effective interest rate includes the net impact of deferred amounts and interest rate swaps related to the adjustable-rate FHLB advances.
At September 30, 2021 and 2020, the Bank had entered into interest rate swap agreements with a total notional amount of $365.0 million and $640.0 million, respectively, in order to hedge the variable cash flows associated with $365.0 million and $640.0 million, respectively, of adjustable-rate FHLB advances. At September 30, 2021 and 2020, the interest rate swap agreements had an average remaining term to maturity of 4.1 years and 3.5 years, respectively. The interest rate swaps were designated as cash flow hedges and involve the receipt of variable amounts from a counterparty in exchange for the Bank making fixed-rate payments over the life of the interest rate swap agreements. At September 30, 2021 and September 30, 2020, the interest rate swaps were in a loss position with a total fair value of $27.7 million and $53.1 million, respectively, which was reported in other liabilities on the consolidated balance sheet. During fiscal year 2021, $13.6 million was reclassified from AOCI. Of this amount, $10.0 million was recognized as an increase to interest expense and $3.6 million, net of tax, was reclassified as a result of the termination of the related interest rate swaps, as discussed below, and reported in the loss on interest rate swap termination line item within the consolidated statements of operations. During fiscal year 2020, $6.3 million was reclassified from AOCI as an increase to interest expense. At September 30, 2021, the Company estimated that $9.2 million of interest expense associated with the interest rate swaps will be reclassified from AOCI as an increase to interest expense on FHLB borrowings during the next 12 months. The Bank has minimum collateral posting thresholds with its derivative counterparties and posts collateral on a daily basis. The Bank posted cash collateral of $28.0 million at September 30, 2021 and $54.6 million at September 30, 2020.
During the current fiscal year, the Bank terminated interest rate swaps with a notional amount of $200.0 million which were tied to FHLB advances totaling $200.0 million. The interest rate swaps were designated as cash flow hedges and involved the receipt of variable amounts from a counterparty in exchange for the Bank making fixed-rate payments over the life of the interest rate swap agreements. Since it was management's intention to prepay the related FHLB advances, it is no longer probable that the original forecasted transactions subject to the cash flow hedges will occur. Therefore, the termination of the interest rate swaps resulted in the reclassification of unrealized losses, net of tax, totaling $3.6 million ($4.8 million pretax) from AOCI into earnings.
During the current fiscal year, the Bank prepaid fixed-rate FHLB advances totaling $400.0 million with a weighted average contractual interest rate of 1.29% and a weighted average remaining term of 0.9 years, and replaced these advances with fixed-rate FHLB advances totaling $400.0 million with a weighted average contractual interest rate of 0.80% and a weighted average term of 5.0 years. The Bank paid penalties of $5.1 million to FHLB as a result of prepaying these FHLB advances. The weighted average effective interest rate of the new advances is 1.03%. The majority of the prepayment penalties are being recognized in interest expense over the life of the new FHLB advances.
FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB and certain securities, when necessary. Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40% of a borrowing institution's regulatory total assets without the pre-approval of FHLB senior management. In July 2021, the president of FHLB approved an increase, through July 2022, in the Bank's borrowing limit to 50% of Bank Call Report total assets. At September 30, 2021, the ratio of the par value of the Bank's FHLB borrowings to the Bank's Call Report total assets was 16%.
Maturity of Borrowed Funds and Certificates of Deposit - The following table presents the scheduled maturity of FHLB advances, at par, and certificates of deposit as of September 30, 2021:
FHLB Certificates
Advances of Deposit
Amount Amount
(Dollars in thousands)
2022 $ 175,000 $ 1,655,108
2023 300,000 593,098
2024 315,000 313,206
2025 400,000 129,805
2026 250,000 51,530
Thereafter 150,000 844
$ 1,590,000 $ 2,743,591
9. INCOME TAXES
Income tax expense for the years ended September 30, 2021, 2020, and 2019 consisted of the following:
2021 2020 2019
(Dollars in thousands)
Current:
Federal $ 17,586 $ 17,610 $ 22,030
State 4,028 4,068 4,742
21,614 21,678 26,772
Deferred:
Federal (1,405) (4,857) (456)
State (263) (731) 95
(1,668) (5,588) (361)
$ 19,946 $ 16,090 $ 26,411
The Company's effective tax rates were 20.8%, 20.0%, and 21.9% for the years ended September 30, 2021, 2020, and 2019, respectively. The differences between such effective rates and the statutory Federal income tax rate computed on income before income tax expense resulted from the following:
2021 2020 2019
Amount % Amount % Amount %
(Dollars in thousands)
Federal income tax expense
computed at statutory Federal rate $ 20,166 21.0 % $ 16,932 21.0 % $ 25,337 21.0 %
Increases (decreases) in taxes resulting from:
State taxes, net of Federal tax effect 3,102 3.2 2,626 3.3 4,024 3.3
Low income housing tax credits, net (2,085) (2.1) (1,897) (2.4) (1,745) (1.4)
ESOP related expenses, net (662) (0.7) (525) (0.6) (757) (0.6)
Acquired BOLI policies - - (636) (0.8) - -
Other (575) (0.6) (410) (0.5) (448) (0.4)
$ 19,946 20.8 % $ 16,090 20.0 % $ 26,411 21.9 %
The components of the net deferred income tax liabilities as of September 30, 2021 and 2020 were as follows:
2021 2020
(Dollars in thousands)
Deferred income tax assets:
Unrealized loss on interest rate swaps $ 6,763 $ 12,916
ACL 4,163 6,553
Lease liabilities 3,129 3,590
Salaries, deferred compensation and employee benefits 2,017 1,622
ESOP compensation 1,422 1,360
Reserve for off-balance sheet credit exposures 1,402 -
Low income housing partnerships 522 655
Net purchase discounts related to acquired loans 287 577
Other 417 2,717
Gross deferred income tax assets 20,122 29,990
Valuation allowance (72) (1,808)
Gross deferred income tax asset, net of valuation allowance 20,050 28,182
Deferred income tax liabilities:
FHLB stock dividends 12,563 15,699
Premises and equipment 4,256 4,625
Lease right-of-use assets 3,088 3,588
ACL 2,892 2,388
Unrealized gain on AFS securities 1,501 7,617
Deposit intangible 1,047 1,475
Other 513 970
Gross deferred income tax liabilities 25,860 36,362
Net deferred tax liabilities $ 5,810 $ 8,180
The State of Kansas allows for a bad debt deduction on savings and loan institutions' privilege tax returns of up to 5% of Kansas taxable income. Due to the low level of net loan charge-offs experienced by the Bank historically, at times, the Bank's bad debt deduction on the Kansas privilege tax return has been in excess of actual net charge-offs, resulting in a state deferred tax liability, which is presented separately from the federal deferred tax asset related to ACL.
The Company assesses the available positive and negative evidence surrounding the recoverability of its deferred tax assets and applies its judgment in estimating the amount of valuation allowance necessary under the circumstances. At September 30, 2021 and 2020, the Company had a valuation allowance of $72 thousand and $1.8 million, respectively, related to the net operating losses generated by the Company's consolidated Kansas corporate income tax return. The companies included in the consolidated Kansas corporate income tax return are the holding company, Capitol Funds, Inc. and Capital City Investments, Inc., as the Bank files a Kansas privilege tax return. Based on the nature of the operations of the holding company, Capitol Funds, Inc. and Capital City Investments, Inc., management believes there will not be sufficient taxable income to fully utilize the deferred tax assets noted above; therefore, a valuation allowance has been recorded for the related amounts at September 30, 2021 and 2020. The decrease in the valuation allowance at September 30, 2021 compared to September 30, 2020 was due primarily to the expiration of operating losses generated during fiscal year 2011, which resulted in the removal of the related deferred tax asset and corresponding valuation allowance.
ASC 740 Income Taxes prescribes a process by which a tax position taken, or expected to be taken, on an income tax return is determined based upon the technical merits of the position, along with whether the tax position meets a more-likely-than-not-recognition threshold, to determine the amount, if any, of unrecognized tax benefits to recognize in the financial statements. Estimated penalties and interest related to unrecognized tax benefits are included in income tax expense in the consolidated statements of income. For the years ended September 30, 2021, 2020, and 2019 the Company had no unrecognized tax benefits.
The Company files income tax returns in the U.S. federal jurisdiction and the state of Kansas, as well as other states where it has either established nexus under an economic nexus theory or has exceeded enumerated nexus thresholds based on the amount of interest income derived from sources within a given state. With few exceptions, the Company is no longer subject to U.S. federal and state examinations by tax authorities for fiscal years ending before 2018.
10. EMPLOYEE STOCK OWNERSHIP PLAN
The ESOP trust acquired 3,024,574 shares (6,846,728 shares post-corporate reorganization) of common stock in the Company's initial public offering and 4,726,000 shares of common stock in the Company's corporate reorganization in December of 2010. Both acquisitions of common stock were made with proceeds from loans from the Company, secured by shares of the Company's stock purchased in each offering. The Bank has agreed to make cash contributions to the ESOP trust on an annual basis sufficient to enable the ESOP trust to make the required annual loan payments to the Company on September 30 of each year. The loan for the shares acquired in the initial public offering matured on September 30, 2013. The loan for the shares acquired in the corporate reorganization matures on September 30, 2040.
As annual loan payments are made on each September 30th, shares are released from collateral and allocated to qualified employees based on the proportion of their qualifying compensation to total qualifying compensation. On September 30, 2021, 165,198 shares were released from collateral. On September 30, 2022, 165,198 shares will be released from collateral. As ESOP shares are committed to be released from collateral, the Company records compensation expense. Dividends on unallocated ESOP shares are applied to the debt service payments of the loan secured by the unallocated shares. Dividends on unallocated ESOP shares in excess of the debt service payment are recorded as compensation expense and distributed to participants or participants' ESOP accounts. Compensation expense related to the ESOP was $2.3 million for the year ended September 30, 2021, $2.0 million for the year ended September 30, 2020, and $3.1 million for the year ended September 30, 2019. Of these amounts, $383 thousand, $336 thousand, and $549 thousand related to the difference between the market price of the Company's stock when the shares were acquired by the ESOP trust and the average market price of the Company's stock during the years ended September 30, 2021, 2020, and 2019, respectively. The amount included in compensation expense for dividends on unallocated ESOP shares in excess of the debt service payments was $219 thousand, $0 and $906 thousand for the years ended September 30, 2021, 2020, and 2019, respectively.
Shares may be withdrawn from the ESOP trust due to diversification (a participant may begin to diversify at least 25% of their ESOP shares at age 50), retirement, termination, or death of the participant. The following is a summary of shares held in the ESOP trust as of September 30, 2021 and 2020:
2021 2020
(Dollars in thousands)
Allocated ESOP shares 4,168,102 4,200,964
Unreleased ESOP shares 3,138,762 3,303,960
Total ESOP shares 7,306,864 7,504,924
Fair value of unreleased ESOP shares $ 36,064 $ 30,628
11. STOCK-BASED COMPENSATION
The Company has a Stock Option Plan, a Restricted Stock Plan, and an Equity Incentive Plan, all of which are considered share-based plans. The Stock Option Plan and Restricted Stock Plan expired in April 2015. No additional grants can be made from these two plans; however, awards granted under these two plans remain outstanding until they are individually vested, forfeited or expire. The objectives of the Equity Incentive Plan are to provide additional compensation to certain officers, directors and key employees by facilitating their acquisition of an equity interest in the Company and enable the Company to retain personnel of experience and ability in key positions of responsibility.
Stock Option Plans - There are currently 61,565 stock options outstanding as a result of grants awarded from the Stock Option Plan. The Equity Incentive Plan had 5,907,500 stock options originally eligible to be granted and, as of September 30, 2021, the Company had 4,214,316 stock options still available for future grants under this plan. This plan will expire on January 24, 2027 and no additional grants may be made after expiration, but awards granted under this plan remain outstanding until they are individually vested, forfeited, or expire.
The Company may issue incentive and nonqualified stock options under the Equity Incentive Plan. The incentive stock options expire no later than 10 years from the date of grant, and the nonqualified stock options expire no later than 15 years from the date of grant. The vesting period of the stock options under the Equity Incentive Plan generally has ranged from 3 years to 5 years. The stock option exercise price cannot be less than the market value at the date of the grant as defined by each plan. The fair value of stock option grants is estimated on the date of the grant using the Black-Scholes option pricing model.
At September 30, 2021, the Company had 545,087 stock options outstanding with a weighted average exercise price of $12.32 per option and a weighted average contractual life of 3.3 years, and 545,087 options exercisable with a weighted average exercise price of $12.32 per option and a weighted average contractual life of 3.3 years. The exercise price may be paid in cash, shares of common stock, or a combination of both. New shares are issued by the Company upon the exercise of stock options.
Restricted Stock Plans - The Equity Incentive Plan had 2,363,000 shares originally eligible to be granted as restricted stock and, as of September 30, 2021, the Company had 1,612,319 shares available for future grants of restricted stock under this plan. This plan will expire on January 24, 2027 and no additional grants may be made after expiration, but awards granted under this plan remain outstanding until they are individually vested or forfeited. The vesting period of the restricted stock awards under the Equity Incentive Plan has generally ranged from 3 years to 5 years. At September 30, 2021, the Company had 80,250 unvested shares of restricted stock with a weighted average grant date fair value of $13.43 per share.
Compensation expense is calculated based on the fair market value of the common stock at the date of the grant, as defined by the plan, and is recognized over the vesting time period. Compensation expense attributable to restricted stock awards during the years ended September 30, 2021, 2020, and 2019 totaled $480 thousand, $540 thousand, and $501 thousand, respectively. The fair value of restricted stock that vested during the years ended September 30, 2021, 2020, and 2019 totaled $441 thousand, $535 thousand, and $294 thousand, respectively. As of September 30, 2021, there was $760 thousand of unrecognized compensation cost related to unvested restricted stock to be recognized over a weighted average period of 2.2 years.
12. COMMITMENTS AND CONTINGENCIES
The following table summarizes the Bank's loan commitments as of September 30, 2021 and 2020:
2021 2020
(Dollars in thousands)
Originate fixed-rate $ 85,492 $ 96,126
Originate adjustable-rate 52,288 21,801
Purchase/participate fixed-rate 124,128 65,600
Purchase/participate adjustable-rate 6,767 65,080
$ 268,675 $ 248,607
Commitments to originate loans are commitments to lend to a customer. Commitments to purchase/participate in loans represent commitments to purchase loans from correspondent lenders on a loan-by-loan basis or participate in commercial loans with a lead bank. The Bank evaluates each borrower's creditworthiness on a case-by-case basis. Commitments generally have expiration dates or other termination clauses and one- to four-family loan commitments may require the payment of a rate lock fee. Some of the commitments are expected to expire without being fully drawn upon; therefore, the amount of total commitments disclosed in the table above does not necessarily represent future cash requirements. As of September 30, 2021 and 2020, there were no significant loan-related commitments that met the definition of derivatives or commitments to sell mortgage loans. As of September 30, 2021 and 2020, the Bank had approved but unadvanced lines of credit of $287.9 million and $283.2 million, respectively.
In the normal course of business, the Company and the Bank are named defendants in various lawsuits and counterclaims. 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 September 30, 2021, or future periods.
13. REGULATORY CAPITAL REQUIREMENTS
The Bank and the Company are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly additional discretionary, actions by regulators that, if undertaken, could have a material adverse effect on the Company's financial statements. Under regulatory capital adequacy guidelines, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Additionally, the Bank must meet specific capital guidelines to be considered well capitalized per the regulatory framework for prompt corrective action. The Company's and Bank's capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
The Bank and the Company must maintain certain minimum capital ratios as set forth in the table below for capital adequacy purposes. Effective January 1, 2020, the regulatory agencies, including the Office of the Comptroller of Currency and FRB, created a community bank leverage ratio ("CBLR") for institutions with total consolidated assets of less than $10 billion and that meet other qualifying criteria. Qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules and to have met the well-capitalized ratio requirements. Management elected to use the CBLR framework for the Bank and Company as of the effective date. In April 2020, as directed by Section 4012 of the CARES Act, the regulatory agencies introduced temporary changes to the CBLR. These changes, which subsequently were adopted as a final rule, temporarily reduced the CBLR requirement to 8% through the end of calendar year 2020. Beginning in calendar year 2021, the CBLR requirement increased to 8.5% and will return to 9% in calendar year 2022.
Management believes, as of September 30, 2021, that the Bank and Company meet all capital adequacy requirements to which they are subject and there were no conditions or events subsequent to September 30, 2021 that would change the Bank's or Company's category.
For Capital
Actual Adequacy Purposes
Amount Ratio Amount Ratio
(Dollars in thousands)
As of September 30, 2021
Bank $ 1,114,325 11.5 % $ 822,194 8.5 %
Company 1,246,259 12.9 822,053 8.5
As of September 30, 2020
Bank 1,168,808 12.4 754,884 8.0
Company 1,287,854 13.7 754,767 8.0
Generally, savings institutions, such as the Bank, may make capital distributions during any calendar year equal to the earnings of the previous two calendar years and current year-to-date earnings. It is generally required that the Bank remain well capitalized before and after the proposed distribution. The Company's ability to pay dividends is dependent, in part, upon its ability to obtain capital distributions from the Bank. So long as the Bank continues to remain well capitalized after each capital distribution and operates in a safe and sound manner, it is management's belief that the regulators will continue to allow the Bank to distribute its net income to the Company, although no assurance can be given in this regard.
In conjunction with the Company's corporate reorganization in December 2010, a "liquidation account" was established for the benefit of certain depositors of the Bank in an amount equal to Capitol Federal Savings Bank MHC's ownership interest in the retained earnings of Capitol Federal Financial as of June 30, 2010. As of September 30, 2021, the balance of this liquidation account was $103.9 million. Under applicable federal banking regulations, neither the Company nor the Bank is permitted to pay dividends on its capital stock to its stockholders if stockholders' equity would be reduced below the amount of the liquidation account at that time.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
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 ASC 820 and ASC 825. The Company's AFS securities and interest rate swaps are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other financial instruments on a non-recurring basis, such as OREO and loans individually evaluated for impairment. These non-recurring fair value adjustments involve the application of lower of cost or fair value accounting or write-downs of individual financial instruments.
The Company groups its financial instruments at fair value in three levels based on the markets in which the financial instruments are traded and the reliability of the assumptions used to determine fair value. These levels are:
•Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
•Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
•Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company's own estimates of assumptions that market participants would use in pricing the financial instrument. Valuation techniques include the use of option pricing models, discounted cash flow models, and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the financial instrument.
The Company bases its fair values on the price that would be received from the sale of a financial instrument in an orderly transaction between market participants at the measurement date under current market conditions. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
The following is a description of valuation methodologies used for financial instruments measured at fair value on a recurring basis.
AFS Securities - The Company's AFS securities portfolio is carried at estimated fair value. The majority of the securities within the AFS portfolio were issued by GSEs. The Company primarily uses prices obtained from third-party pricing services to determine the fair value of its securities. On a quarterly basis, management corroborates a sample of prices obtained from the third-party pricing service for Level 2 securities by comparing them to an independent source. If the price provided by the independent source varies by more than a predetermined percentage from the price received from the third-party pricing service, then the variance is researched by management. The Company did not have to adjust prices obtained from the third-party pricing service when determining the fair value of its securities during the years ended September 30, 2021 and 2020. The Company's major security types, based on the nature and risks of the securities, are:
•GSE Debentures - Estimated fair values are based on a discounted cash flow method. Cash flows are determined by taking any embedded options into consideration and are discounted using current market yields for similar securities. (Level 2)
•MBS - Estimated fair values are based on a discounted cash flow method. Cash flows are determined based on prepayment projections of the underlying mortgages and are discounted using current market yields for benchmark securities. (Level 2)
•Municipal Bonds - Estimated fair values are based on a discounted cash flow method. Cash flows are determined by taking any embedded options into consideration and are discounted using current market yields for securities with similar credit profiles. (Level 2)
Interest Rate Swaps - The Company's interest rate swaps are designated as cash flow hedges and are reported at fair value in other assets on the consolidated balance sheet if in a gain position, and in other liabilities if in a loss position, with any unrealized gains and losses, net of taxes, reported as AOCI in stockholders' equity. See "Note 8. Deposits and Borrowed Funds" for additional information. The estimated fair values of the interest rates swaps are obtained from the counterparty and are determined by a discounted cash flow analysis using observable market-based inputs. On a quarterly basis, management corroborates the estimated fair values by internally calculating the estimated fair value using a discounted cash flow analysis with independent observable market-based inputs from a third party. No adjustments were made to the estimated fair values obtained from the counterparty during the years ended September 30, 2021 and 2020. (Level 2)
The following tables provide the level of valuation assumption used to determine the carrying value of the Company's financial instruments measured at fair value on a recurring basis at the dates presented. The Company did not have any Level 3 financial instruments measured at fair value on a recurring basis at September 30, 2021 or 2020.
September 30, 2021
Quoted Prices Significant Significant
in Active Markets Other Observable Unobservable
Carrying for Identical Assets Inputs Inputs
Value (Level 1) (Level 2) (Level 3)
(Dollars in thousands)
Assets:
AFS Securities:
MBS $ 1,493,993 $ - $ 1,493,993 $ -
GSE debentures 516,326 - 516,326 -
Municipal bonds 4,289 - 4,289 -
$ 2,014,608 $ - $ 2,014,608 $ -
Liabilities:
Interest rate swaps $ 27,719 $ - $ 27,719 $ -
September 30, 2020
Quoted Prices Significant Significant
in Active Markets Other Observable Unobservable
Carrying for Identical Assets Inputs Inputs
Value (Level 1) (Level 2) (Level 3)
(Dollars in thousands)
Assets:
AFS Securities:
MBS $ 1,180,803 $ - $ 1,180,803 $ -
GSE debentures 370,340 - 370,340 -
Municipal bonds 9,807 - 9,807 -
$ 1,560,950 $ - $ 1,560,950 $ -
Liabilities:
Interest rate swaps $ 53,149 $ - $ 53,149 $ -
The following is a description of valuation methodologies used for significant financial instruments measured at fair value on a non-recurring basis. The significant unobservable inputs used in the determination of the fair value of assets classified as Level 3 have an inherent measurement uncertainty that, if changed, could result in higher or lower fair value measurements of these assets as of the reporting date.
Loans Receivable - With the adoption of CECL, collateral dependent assets are assets evaluated on an individual basis. Those collateral dependent assets that are evaluated on an individual basis are considered financial assets measured at fair value on a non-recurring basis. Prior to the adoption of CECL, loans identified as impaired were considered financial assets measured at fair value on a non-recurring basis. The valuation method for collateral dependent assets and impaired loans is identical.
The fair value of collateral dependent loans/loans individually evaluated for loss on a non-recurring basis during fiscal years 2021 and 2020 that were still held in the portfolio as of September 30, 2021 and 2020 was $7.4 million and $5.7 million, respectively.
The one- to four-family loans included in this amount were individually evaluated to determine if the carrying value of the loan was in excess of the fair value of the collateral, less estimated selling costs of 10%. Fair values were estimated through current appraisals. Management does not adjust or apply a discount to the appraised value of one- to four-family loans, except for the estimated sales cost noted above, and the primary unobservable input for these loans was the appraisal.
For commercial loans, if the most recent appraisal or book value of the collateral does not reflect current market conditions due to the passage of time and/or other factors, management will make adjustments to the existing appraised or book value based on knowledge of local market conditions, recent transactions, and estimated selling costs, if applicable. Adjustments to appraised or book values are generally based on assumptions not observable in the marketplace. The primary significant unobservable inputs for commercial loans individually evaluated during the year ended September 30, 2021 were downward adjustments to the book value of the collateral for lack of marketability. During fiscal year 2021, the adjustments ranged from 7% to 50%, with a weighted average of 21%. During fiscal year 2020, the adjustments ranged from 4% to 50%, with a weighted average of 18%. The basis utilized in calculating the weighted averages for these adjustments was the original unadjusted value of each collateral item.
Fair values of collateral dependent loans/loans individually evaluated for loss cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the loan and, as such, are classified as Level 3.
OREO - OREO primarily represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at lower of cost or fair value. The fair value for OREO is estimated through current appraisals or listing prices, less estimated selling costs of 10%. Management does not adjust or apply a discount to the appraised value or listing price, except for the estimated sales costs noted above. The primary significant unobservable input for OREO was the appraisal or listing price. Fair values of foreclosed property cannot be determined with precision and may not be realized in an actual sale of the property and, as such, are classified as Level 3. The fair value of OREO measured on a non-recurring basis during fiscal years 2021 and 2020 that was still held in the portfolio as of September 30, 2021 and 2020 was $170 thousand and $183 thousand, respectively. The carrying value of the properties equaled the fair value of the properties at September 30, 2021 and 2020.
Fair Value Disclosures - The Company estimated fair value amounts using available market information and a variety of valuation methodologies as of the dates presented. Considerable judgment is required to interpret market data to develop the estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company would realize from a current market exchange at subsequent dates.
The carrying amounts and estimated fair values of the Company's financial instruments by fair value hierarchy, at the dates presented, were as follows:
Carrying Estimated Fair Value
Amount Total Level 1 Level 2 Level 3
(Dollars in thousands)
Assets:
Cash and cash equivalents $ 42,262 $ 42,262 $ 42,262 $ - $ -
AFS securities 2,014,608 2,014,608 - 2,014,608 -
Loans receivable 7,081,142 7,534,278 - - 7,534,278
FHLB stock 73,421 73,421 73,421 - -
Liabilities:
Deposits 6,597,396 6,649,954 3,838,656 2,811,298 -
Borrowings 1,582,850 1,611,414 - 1,611,414 -
Interest rate swaps 27,719 27,719 - 27,719 -
Carrying Estimated Fair Value
Amount Total Level 1 Level 2 Level 3
(Dollars in thousands)
Assets:
Cash and cash equivalents $ 185,148 $ 185,148 $ 185,148 $ - $ -
AFS securities 1,560,950 1,560,950 - 1,560,950 -
Loans receivable 7,202,851 7,663,000 - - 7,663,000
FHLB stock 93,862 93,862 93,862 - -
Liabilities:
Deposits 6,191,408 6,259,080 3,170,164 3,088,916 -
Borrowings 1,789,313 1,840,605 - 1,840,605 -
Interest rate swaps 53,149 53,149 - 53,149 -
15. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following tables present the changes in the components of AOCI, net of tax, for the years presented.
For the Year Ended September 30, 2021
Unrealized Unrealized
Gains (Losses) Gains (Losses)
on AFS on Cash Flow Total
Securities Hedges AOCI
(Dollars in thousands)
Beginning balance $ 23,728 $ (40,233) $ (16,505)
Other comprehensive income (loss), before reclassifications (19,077) 5,712 (13,365)
Amount reclassified from AOCI, net of taxes of $(4,378)
- 13,565 13,565
Other comprehensive income (loss) (19,077) 19,277 200
Ending balance $ 4,651 $ (20,956) $ (16,305)
For the Year Ended September 30, 2020
Unrealized Unrealized
Gains (Losses) Gains (Losses)
on AFS on Cash Flow Total
Securities Hedges AOCI
(Dollars in thousands)
Beginning balance $ 10,150 $ (25,049) $ (14,899)
Other comprehensive income (loss), before reclassifications 13,578 (21,458) (7,880)
Amount reclassified from AOCI, net of taxes of $(2,014)
- 6,274 6,274
Other comprehensive income (loss) 13,578 (15,184) (1,606)
Ending balance $ 23,728 $ (40,233) $ (16,505)
For the Year Ended September 30, 2019
Unrealized Unrealized
Gains (Losses) Gains (Losses)
on AFS on Cash Flow Total
Securities Hedges AOCI
(Dollars in thousands)
Beginning balance $ (2,990) $ 7,330 $ 4,340
Transfer of HTM securities to AFS securities 2,336 - 2,336
Other comprehensive income (loss), before reclassifications 10,804 (32,817) (22,013)
Amount reclassified from AOCI, net of taxes of $(141)
- 438 438
Other comprehensive income (loss) 13,140 (32,379) (19,239)
Ending balance $ 10,150 $ (25,049) $ (14,899)
16. REVENUE RECOGNITION
On October 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, and all subsequent ASUs that modified the principles for recognizing revenue. The Company's primary sources of revenue consist of net interest income on financial assets and liabilities, which are not within the scope of the amended ASU. In addition, certain non-interest income revenue streams, such as loan servicing fees, derivatives, and BOLI, are not in-scope of the amended ASU. Based on an assessment of non-interest income revenue streams and a review of the related contracts with customers, the Company concluded the amended ASU did not significantly change the Company's revenue recognition methods. The Company elected to implement the amended ASU using the modified retrospective application with a cumulative adjustment, which increased opening retained earnings at October 1, 2018 by $394 thousand related to contracts that were not complete upon adoption. The amount was related to the change in the recognition of revenue related to certain insurance commissions.
Details of the Company's primary types of non-interest income revenue streams by financial statement line item reported in the consolidated statements of income that are within the scope of ASC Topic 606 are below. During fiscal years 2021, 2020 and 2019, revenue from contracts with customers totaled $16.5 million, $14.8 million and $16.6 million, respectively.
Deposit Service Fees
Interchange Transaction Fees - Interchange transaction fee income primarily consists of interchange fees earned on a transactional basis through card payment networks. The performance obligation for these types of transactions is satisfied as services are rendered for each transaction and revenue is recognized daily concurrently with the transaction processing services provided to the cardholder.
In order to participate in the card payment networks, the Company must pay various transaction related costs established by the networks ("interchange network charges"), including membership fees and a per unit charge for each transaction. The Company is acting as an agent for its debit card customers when they are utilizing the card payment networks; therefore interchange transaction fee income is reported net of interchange network charges. Interchange network charges totaled $3.6 million, $3.2 million and $3.4 million for fiscal years 2021, 2020 and 2019, respectively.
Service Charges on Deposit Accounts - Service charges on deposit accounts consist of account maintenance and transaction-based fees such as overdrafts, insufficient funds, wire transfers and the use of out-of-network ATMs. The Company's performance obligation is satisfied over a period of time, generally a month, for account maintenance and at the time of service for transaction-based fees. Revenue is recognized after the performance obligation is satisfied. Payments are typically collected from the customer's deposit account at the time the transaction is processed and/or at the end of the customer's statement cycle (typically monthly).
Insurance Commissions
Commissions are received on insurance product sales. The Company acts in the capacity of an agent between the Company's customer and the insurance carrier. The Company's performance obligation is satisfied when the terms of the policy have been agreed upon and the insurance policy becomes effective. Additionally, the Company earns performance-based incentives ("contingent insurance commissions") based on certain criteria established by the insurance carriers. Upon adoption of the amended ASU, contingent insurance commissions are accrued based upon management's expectations. Previously, contingent insurance commissions were recognized when the funds were received.
Other Non-Interest Income
Trust Asset Management Income - The Company provides trust asset management services to customers. The Company primarily earns fees for these services over time as the monthly services are provided and the Company assesses revenue at each month end. Fees are charged based on a tiered scale of the market value of the individual trust asset accounts at the end of the month.
17. PARENT COMPANY FINANCIAL INFORMATION (PARENT COMPANY ONLY)
The Company serves as the holding company for the Bank (see "Note 1. Summary of Significant Accounting Policies"). The Company's (parent company only) balance sheets at the dates presented, and the related statements of income and cash flows for each of the years presented are as follows:
BALANCE SHEETS
SEPTEMBER 30, 2021 and 2020
(Dollars in thousands, except per share amounts)
2021 2020
ASSETS:
Cash and cash equivalents $ 75,553 $ 82,466
Investment in the Bank 1,110,339 1,165,813
Note receivable - ESOP 37,213 38,614
Receivable from the Bank 18,158 -
Income taxes receivable, net 467 492
Other assets 625 707
TOTAL ASSETS $ 1,242,355 $ 1,288,092
LIABILITIES:
Deferred income tax liabilities, net 82 91
Other liabilities - 3,142
Total liabilities 82 3,233
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 100,000,000 shares authorized, no shares issued or outstanding
- -
Common stock, $.01 par value; 1,400,000,000 shares authorized, 138,832,284 and 138,956,296 shares issued and outstanding as of September 30, 2021 and 2020, respectively
1,388 1,389
Additional paid-in capital 1,189,633 1,189,853
Unearned compensation - ESOP (31,387) (33,040)
Retained earnings 98,944 143,162
AOCI, net of tax (16,305) (16,505)
Total stockholders' equity 1,242,273 1,284,859
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,242,355 $ 1,288,092
STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2021, 2020, and 2019
(Dollars in thousands)
2021 2020 2019
INTEREST AND DIVIDEND INCOME:
Dividend income from the Bank $ 132,063 $ 68,329 $ 129,409
Interest income from other investments 1,509 2,036 2,428
Total interest and dividend income 133,572 70,365 131,837
INTEREST EXPENSE - - 403
NET INTEREST INCOME 133,572 70,365 131,434
NON-INTEREST INCOME - - 14
NON-INTEREST EXPENSE:
Salaries and employee benefits 908 988 829
Regulatory and outside services 287 292 286
Other non-interest expense 608 622 652
Total non-interest expense 1,803 1,902 1,767
INCOME BEFORE INCOME TAX EXPENSE AND EQUITY IN
EXCESS OF DISTRIBUTION OVER EARNINGS OF SUBSIDIARY 131,769 68,463 129,681
INCOME TAX (BENEFIT) EXPENSE (62) 28 57
INCOME BEFORE EQUITY IN EXCESS OF
DISTRIBUTION OVER EARNINGS OF SUBSIDIARY 131,831 68,435 129,624
EQUITY IN EXCESS OF DISTRIBUTION OVER EARNINGS OF SUBSIDIARY (55,749) (3,895) (35,381)
NET INCOME $ 76,082 $ 64,540 $ 94,243
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2021, 2020, and 2019
(Dollars in thousands)
2021 2020 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 76,082 $ 64,540 $ 94,243
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in excess of distribution over earnings of subsidiary 55,749 3,895 35,381
Depreciation of equipment 45 45 37
Loss on disposal of premises and equipment - - 8
Provision for deferred income taxes (9) 91 -
Changes in:
Receivable from the Bank (18,257) - -
Income taxes receivable/payable 25 (63) 57
Other assets 21 (60) 54
Other liabilities (5) 13 (86)
Net cash provided by operating activities 113,651 68,461 129,694
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on note receivable from ESOP 1,401 1,357 1,314
Purchase of equipment - - (423)
Proceeds from the redemption of common equity securities related to the redemption of junior subordinated debentures - - 302
Net cash provided by investing activities 1,401 1,357 1,193
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payment from subsidiary related to restricted stock awards 169 319 1,245
Cash dividends paid (117,890) (93,862) (134,929)
Repurchase of common stock (4,568) (20,767) -
Repayment of other borrowings - - (10,052)
Stock options exercised 324 638 1,485
Net cash used in financing activities (121,965) (113,672) (142,251)
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,913) (43,854) (11,364)
CASH AND CASH EQUIVALENTS:
Beginning of year 82,466 126,320 137,684
End of year $ 75,553 $ 82,466 $ 126,320

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, the "Act") as of September 30, 2021. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of September 30, 2021, such disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Act is accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms.
Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Act). The Company's internal control system is a process designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair presentation of published financial statements.
The Company's internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or untimely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the Company's financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial reporting. Further, because of changes in conditions, the effectiveness of any system of internal control may vary over time. The design of any internal control system also factors in resource constraints and consideration for the benefit of the control relative to the cost of implementing the control. Because of these inherent limitations in any system of internal control, management cannot provide absolute assurance that all control issues and instances of fraud within the Company have been detected.
Management assessed the effectiveness of the Company's internal control over financial reporting as of September 30, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Management has concluded that the Company maintained an effective system of internal control over financial reporting based on these criteria as of September 30, 2021.
The Company's independent registered public accounting firm, Deloitte & Touche LLP, who audited the consolidated financial statements included in the Company's annual report, has issued an audit report on the Company's internal control over financial reporting as of September 30, 2021 and it is included in Item 8.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Act) that occurred during the Company's quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this item concerning the Company's directors and executive officers and any delinquent reports under Section 16(a) of the Act is incorporated herein by reference from the Company's definitive proxy statement for its Annual Meeting of Stockholders to be held in January 2022, a copy of which will be filed not later than 120 days after the close of the fiscal year.
Information required by this item regarding the audit committee of the Company's Board of Directors, including information regarding the audit committee financial experts serving on the committee, is incorporated herein by reference from the Company's definitive proxy statement for its Annual Meeting of Stockholders to be held in January 2022, a copy of which will be filed not later than 120 days after the close of the fiscal year.
Code of Ethics
We have adopted a written code of ethics within the meaning of Item 406 of SEC Regulation S-K that applies to our principal executive officer and senior financial officers, and to all of our other employees and our directors, a copy of which is available free of charge in the Investor Relations section of our website, www.capfed.com.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
Information required by this item concerning compensation is incorporated herein by reference from the Company's definitive proxy statement for its Annual Meeting of Stockholders to be held in January 2022, a copy of which will be filed not later than 120 days after the close of the fiscal year.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this item concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the Company's definitive proxy statement for its Annual Meeting of Stockholders to be held in January 2022, a copy of which will be filed not later than 120 days after the close of the fiscal year.
The following table sets forth information as of September 30, 2021 with respect to compensation plans under which shares of our common stock may be issued.
Equity Compensation Plan Information
Number of Shares
Remaining Available
for Future Issuance
Number of Shares Under Equity
to be issued upon Weighted Average Compensation Plans
Exercise of Exercise Price of (Excluding Shares
Outstanding Options, Outstanding Options, Reflected in the
Plan Category Warrants and Rights Warrants and Rights First Column)
Equity compensation plans
approved by stockholders 545,087 $ 12.32 5,826,635 (1)
Equity compensation plans not
approved by stockholders N/A N/A N/A
545,087 $ 12.32 5,826,635
(1)This amount includes 1,612,319 shares available for future grants of restricted stock under the Equity Incentive Plan.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this item concerning certain relationships, related transactions and director independence is incorporated herein by reference from the Company's definitive proxy statement for its Annual Meeting of Stockholders to be held in January 2022, a copy of which will be filed not later than 120 days after the close of the fiscal year.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
Information required by this item concerning principal accountant fees and services is incorporated herein by reference from the Company's definitive proxy statement for its Annual Meeting of Stockholders to be held in January 2022, a copy of which will be filed not later than 120 days after the close of the fiscal year.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a)The following is a list of documents filed as part of this report:
(1)Financial Statements:
The following financial statements are included under Part II, Item 8 of this Form 10-K:
1.Reports of Independent Registered Public Accounting Firm.
2.Consolidated Balance Sheets as of September 30, 2021 and 2020.
3.Consolidated Statements of Income for the Years Ended September 30, 2021, 2020, and 2019.
4.Consolidated Statements of Comprehensive Income for the Years Ended September 30, 2021, 2020, and 2019.
5.Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 2021, 2020, and 2019.
6.Consolidated Statements of Cash Flows for the Years Ended September 30, 2021, 2020, and 2019.
7.Notes to Consolidated Financial Statements for the Years Ended September 30, 2021, 2020, and 2019.
(2)Financial Statement Schedules:
All financial statement schedules have been omitted as the information is not required under the related instructions or is not applicable.
(3)Exhibits:
See "Index to Exhibits."