EDGAR 10-K Filing

Company CIK: 1490906
Filing Year: 2022
Filename: 1490906_10-K_2022_0001490906-22-000038.json

---

ITEM 1. BUSINESS
Item 1. Business
General
The Company is a Maryland corporation with its 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 and in commercial loans, either secured by real estate or for commercial and industrial purposes. We also 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.
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 interest 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 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. Our business development efforts help to bring new business relationships to the Bank.
•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, 2022 was approximately $126.3 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. The Bank continues to invest in its infrastructure, which can increase costs. Following the pandemic and with high rates of inflation, there is also pressure to increase compensation for the Bank's staff.
•Asset Quality. We utilize underwriting standards for all of 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 that meet or exceed 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 2022 were $103.1 million, including a $0.20 per share, or $27.1 million, True Blue® Capitol Dividend paid in June 2022. 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 2023, 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 has also been enhanced through stock repurchases.
•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 three 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 6.4%, in the state of Kansas as reported in the June 30, 2022 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 filed reports. 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, 2022, 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, 2022, the Bank's lending limit under this restriction was $166.7 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 $124.4 million at September 30, 2022, 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, 2022.
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 not 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, 2022, 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, 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.
Insurance of Accounts and Regulation by the FDIC. 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. 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 capital adequacy, asset quality, management, earnings, liquidity, and sensitivity (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, 2022, the Bank paid $3.0 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. In October 2022, the FDIC announced that the assessment rate will be increasing from three basis points to five basis points beginning in January 2023.
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 Coronavirus Disease 2019 ("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, 2022, 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, 2022, 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, 2022, the Bank had a balance of $100.6 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 2019. 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, 2022, we had a total of 733 employees, including 91 part-time employees. The full-time equivalent of our total employees at September 30, 2022 was 707. 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 5,150 hours in volunteer time for local organizations and charities during fiscal year 2022.
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. Leadership development is supported through our Leadership Forum services, on a biannual basis, for mid-level leaders within the organization. Education for this program is provided by Washburn University's Center for Leadership. Annual employee educational requirements include 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.

---

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
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 inflationary trends and/or 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. For additional information about the interest-rate risk we face, see "Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk."
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. Stockholders' equity, specifically accumulated other comprehensive income (loss) ("AOCI"), is increased or decreased by the amount of change in the estimated fair value of our AFS securities, net of deferred income taxes. Increases in interest rates generally decrease the fair value of AFS securities, which adversely impacts stockholders' equity. For additional information, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Stockholders' Equity" and "Part II, Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 15. Accumulated Other Comprehensive Income."
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. Competition from other financial institutions and/or brokerage firms could affect our ability to attract and retain deposits and could result in us paying more 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 real estate 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 real estate participation loans, such as inflation, unemployment, supply chain disruptions, 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.
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.
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, labor and/or supply chain issues, 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.
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 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.
There are operational and reputation risks associated with the planned digital transformation.
Management is in the process of implementing a new core processing system ("digital transformation") for the Bank, which is expected to be operational by September 2023. The digital transformation is expected to better position the Bank for the future and allow for the introduction of new products and services to enhance customer experiences. This project may subject the Company to operational risks, such as disruptions in technology systems impacting customers. The Company will work to remediate any such disruptions, if they occur, but no assurance can be given that a potential adverse development will be quickly or completely remediated. If an adverse development arising from the digital transformation is not sufficiently remediated or is not remediated in a timely fashion, the Company's reputation could be significantly impacted which could result in loss of customer business, subject the Company to regulatory scrutiny, or expose the Company to possible litigation, any of which could have a material impact on the Company's 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. 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, the 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, the FRB 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, including those related to environmental, social, and governance initiatives, 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 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 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.

---

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

---

ITEM 2. PROPERTIES
Item 2. Properties
At September 30, 2022, 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. There are four of the Bank's in-store branch offices for which the leases will not be renewed at the time of their upcoming expiration in January 2023.
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.

---

ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
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.
On November 2, 2022, the Bank was served with a putative class action complaint alleging it improperly charged overdraft fees on (1) debit card transactions that were authorized for payment on sufficient funds but later settled against a negative account balance (commonly known as "authorize positive purportedly settle negative" or "APPSN" transactions) and (2) merchant re-presentments of previously rejected payment requests. The complaint asserts a breach of contract claim (including breach of an implied covenant of good faith and fair dealing) for each practice. The Bank believes that this lawsuit is without merit and intends to vigorously defend against the asserted claims.
The Company assesses the liabilities and loss contingencies in connection with pending or threatened legal and regulatory proceedings on at least a quarterly basis and establishes accruals when it is believed to be probable that a loss may be incurred and that the amount of such loss can be reasonably estimated.

---

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

---

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 17, 2022, there were approximately 7,790 Capitol Federal Financial, Inc. stockholders of record.
Share Repurchases
As of September 30, 2022, there was $44.7 million of common stock that could be repurchased under the Company's existing stock repurchase 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 2023. From the completion of the Company's second-step conversion in December 2010 through September 30, 2022, $393.4 million worth of common stock was repurchased.
The following table summarizes our share repurchase activity during the three months ended September 30, 2022 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, 2022 through
July 31, 2022 - $ - - $ 44,665,205
August 1, 2022 through
August 31, 2022 - - - 44,665,205
September 1, 2022 through
September 30, 2022 - - - 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, 2022 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, 2017 in the Company's common stock and in each of the indices, and assumes the reinvestment of all dividends. Historical stock price performance is not necessarily indicative of future stock price performance.
Period Ending
Index 9/30/2017 9/30/2018 9/30/2019 9/30/2020 9/30/2021 9/30/2022
Capitol Federal Financial, Inc. 100.00 92.67 108.03 76.51 101.82 78.95
NASDAQ Composite Index 100.00 125.17 125.82 177.36 231.03 170.38
S&P U.S. BMI Banks Index 100.00 108.42 108.77 79.86 145.30 111.62
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.

---

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

---

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 except where the context indicates otherwise.
Executive Summary
The following summary should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section in its entirety.
The Company recognized net income of $84.5 million, or $0.62 per share, for fiscal year 2022 compared to net income of $76.1 million, or $0.56 per share, for the prior fiscal year. The $8.4 million, or 11.0%, increase in net income was due to an increase in net interest income, partially offset by higher income tax expense and a lower negative provision for credit losses. The net interest margin was 1.79% for the current year compared to 1.90% for the prior year. When the leverage strategy discussed below is in place, it reduces the net interest margin due to the amount of earnings from the transaction in comparison to the size of the transaction. Excluding the effects of the leverage strategy, the net interest margin would have been 2.04% in the current year, a 14 basis point increase from the prior year. The increase in net interest margin excluding the effects of the leverage strategy was due mainly to a reduction in the weighted average cost of retail certificates of deposit. During the latter portion of the current year, as market interest rates increased, the Bank's cost of borrowings and deposits began increasing at a faster pace than the yield on assets. Management anticipates this may continue in the near term.
At times, the Bank has utilized a leverage strategy to increase earnings. The leverage strategy during the current year involved borrowing up to $2.60 billion by entering into short-term FHLB advances. The borrowings were repaid prior to each quarter end. The proceeds from the borrowings, net of the required FHLB stock holdings which yielded 6.75% during the current year, were deposited at the Federal Reserve Bank of Kansas City ("FRB of Kansas City"). Net income attributable to the leverage strategy is largely derived from the dividends received on FHLB stock holdings, plus the net interest rate spread between the yield on the cash deposited at the FRB of Kansas City and the rate paid on the related FHLB borrowings, less applicable federal insurance premiums and estimated taxes. Net income attributable to the leverage strategy was $3.1 million during the current year. Management continuously monitors the net interest rate spread and overall profitability of the strategy. It is expected that the strategy will be utilized as long as it remains profitable and/or the borrowing capacity and available capital does not need to be used for other operational purposes.
Total assets were $9.62 billion at September 30, 2022, a decrease of $6.3 million from September 30, 2021. Loans receivable increased $383.1 million, or 5.4%, during the current year to $7.46 billion at September 30, 2022. The loan growth was primarily in the one-to four-family correspondent and commercial loan portfolios. This growth was funded by cash flows from the securities portfolio and FHLB borrowings. The deposit portfolio decreased $402.5 million during the current year, to $6.19 billion at September 30, 2022. The decrease was primarily in the certificate of deposit portfolio, partially offset by increases in the retail checking, savings and money market accounts. During the third quarter of fiscal year 2022, management began increasing offered rates on certificates of deposit, which slowed the runoff in this portfolio. Due to deposit outflows and loan growth, the Bank entered into additional FHLB borrowings during the second half of the current fiscal year. FHLB borrowings increased $549.3 million during the year, to $2.13 billion at September 30, 2022. If deposit outflows continue, the Bank will likely increase FHLB borrowings. If that occurs, the leverage strategy transaction amount may decrease due to borrowing, collateral capacity and capital levels. Stockholder's equity was $1.10 billion at September 30, 2022, a decrease of $145.8 million from September 30, 2021. The decrease was due almost entirely to a reduction in AOCI as a result of changes in the fair value of AFS securities due to an increase in market interest rates during the year. The unrealized losses on AFS securities increased $211.3 million, resulting in a $159.8 million reduction in AOCI, net of tax.
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, 2022, loans 30 to 89 days delinquent were 0.09% of total loans receivable, net, and loans 90 or more days delinquent or in foreclosure were 0.12% 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 0.00%.
At September 30, 2022, the Bank had a one-year gap position of $(1.14) billion, or (11.9)% of total assets, meaning the amount of interest-bearing liabilities exceeds the amount of interest-earning assets maturing or repricing during the same period. See additional discussion in "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk."
Management is in the process of implementing a new core processing system ("digital transformation") for the Bank, which is expected to be operational by September 2023. We expect the new platform will allow us to introduce new products and services quickly to drive better efficiencies and provide a more personalized experience for our customers. Our customers will experience a more modern internet banking experience, including both desktop and mobile. Internet banking will deliver real-time alerts and provide our customers the ability to manage their own debit cards. Our customers will also have multiple options for real-time payments, which positions the Bank for faster payment channels in the future. Management anticipates information technology and related expenses will increase in fiscal year 2023 in conjunction with the digital transformation. See additional discussion in the "Comparison of Operating Results for the Years Ended September 30, 2022 and 2021" section below.
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 assessing 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 the 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 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, 2022 was four quarters. Prepayment and
curtailment assumptions are based on the Company's historical experience 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 economic forecast and/or discounted cash flow model, 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 changes in economic conditions, real estate values, and/or other economic developments. The qualitative factors applied by management at September 30, 2022 were (1) economic uncertainty that may not be adequately captured in the third party economic forecast scenarios and (2) other management considerations related to commercial loans to account for credit risks not fully reflected in the discounted cash flow model. The qualitative factors applied at September 30, 2022, 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, 2022.
The ACL and the reserves for off-balance sheet credit exposures was $16.4 million and $4.8 million, respectively at September 30, 2022, compared to $19.8 million and $5.7 million, respectively, at September 30, 2021. The $3.5 million decrease in the ACL and $992 thousand decrease in the reserves for off-balance sheet credit exposures was primarily attributable to a reduction in commercial loan qualitative factors, partially offset by an increase related to (1) growth in the loan portfolio and an increase in the balance of off-balance sheet credit exposures and (2) a less favorable economic forecast compared to the prior year. 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, 2022 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 values 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, 2022.
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:
2022 2021 Dollars Percent
(Dollars and shares in thousands)
Total assets $ 9,624,897 $ 9,631,246 $ (6,349) (0.1) %
AFS securities 1,563,307 2,014,608 (451,301) (22.4)
Loans receivable, net 7,464,208 7,081,142 383,066 5.4
Deposits 6,194,866 6,597,396 (402,530) (6.1)
Borrowings 2,132,154 1,582,850 549,304 34.7
Stockholders' equity 1,096,499 1,242,273 (145,774) (11.7)
Equity to total assets at end of period 11.4 % 12.9 %
Average number of basic shares outstanding 135,700 135,481 219 0.2
Average number of diluted shares outstanding 135,700 135,496 204 0.2
Loans Receivable. Total loans, net at September 30, 2022 was $7.46 billion, an increase of $383.1 million from September 30, 2021. The increase was primarily due to growth in the one- to four-family correspondent loan portfolio and commercial real estate and construction loan portfolio, along with a slow down in one- to four-family prepayment speeds due to higher market interest rates.
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 fiscal year 2021, the Bank recognized a significant amount of premium amortization due to prepayment and endorsement activity. Prepayment and endorsement activity slowed significantly during the last half of the current fiscal year due to the increase in market interest rates.
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.
As of September 30, 2022, there were $178.0 million of adjustable-rate one- to four-family loans in the portfolio for which the repricing index was tied to LIBOR, which is being discontinued and will no longer be available after June 30, 2023. The Bank's one- to four-family loan agreements 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 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 11 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. Total loans receivable increased $375.6 million, or 5.3%, during the current year. The rate on the portfolio increased 12 basis points during the current year due primarily to upward repricing of existing loans as a result of an increase in market interest rates, as well as originations and purchases at interest rates higher than the overall portfolio rate.
September 30, 2022 September 30, 2021
Amount Rate Amount Rate
(Dollars in thousands)
One- to four-family:
Originated $ 3,988,469 3.20 % $ 3,956,064 3.18 %
Correspondent purchased 2,201,886 3.10 2,003,477 3.02
Bulk purchased 147,939 1.24 173,662 1.65
Construction 66,164 2.90 39,142 2.82
Total 6,404,458 3.12 6,172,345 3.09
Commercial:
Commercial real estate 745,301 4.30 676,908 4.00
Commercial and industrial 79,981 4.30 66,497 3.83
Construction 141,062 5.34 85,963 4.03
Total 966,344 4.45 829,368 3.99
Consumer loans:
Home equity 92,203 6.28 86,274 4.60
Other 8,665 4.21 8,086 4.19
Total 100,868 6.10 94,360 4.57
Total loans receivable 7,471,670 3.33 7,096,073 3.21
Less:
ACL 16,371 19,823
Deferred loan fees/discounts 29,736 29,556
Premiums/deferred costs (38,645) (34,448)
Total loans receivable, net $ 7,464,208 $ 7,081,142
The following table presents the contractual maturity of our loan portfolio, along with associated weighted average yields, at September 30, 2022. Loans that 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 $ 1,015 4.09 % $ 70,518 3.60 % $ 1,330,747 2.88 % $ 2,586,189 3.43 % $ 3,988,469 3.25 %
Correspondent purchased 258 4.39 9,008 3.04 495,250 2.43 1,697,370 3.13 2,201,886 2.97
Bulk purchased 26 4.24 88 3.92 27,683 2.84 120,142 0.81 147,939 1.19
Construction(2)
- - - - 3,872 2.54 62,292 2.92 66,164 2.90
Total 1,299 4.15 79,614 3.53 1,857,552 2.76 4,465,993 3.24 6,404,458 3.10
Commercial:
Commercial real estate 83,792 5.69 190,307 4.24 358,310 4.16 112,892 4.50 745,301 4.40
Commercial and industrial 14,470 5.85 27,787 3.84 33,189 4.07 4,535 4.05 79,981 4.31
Construction(2)
7,514 5.87 58,085 3.91 25,506 6.23 49,957 6.46 141,062 5.34
Total 105,776 5.72 276,179 4.13 417,005 4.28 167,384 5.07 966,344 4.53
Consumer:
Home equity(3)
1,663 7.44 2,000 6.26 45,063 6.28 43,477 6.21 92,203 6.27
Other 1,141 3.74 6,900 4.17 624 6.15 - - 8,665 4.25
Total 2,804 5.93 8,900 4.64 45,687 6.28 43,477 6.21 100,868 6.09
Total loans receivable $ 109,879 5.71 $ 364,693 4.01 $ 2,320,244 3.10 $ 4,676,854 3.33 7,471,670 3.33
Less:
ACL 16,371
Deferred loan fees/discounts 29,736
Premiums/deferred costs (38,645)
Total loans receivable, net $ 7,464,208
(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, 2022, the amount of loans due after September 30, 2023, and whether these loans have fixed or adjustable interest rates.
Fixed Adjustable Total
(Dollars in thousands)
One- to four-family:
Originated $ 3,703,838 $ 283,616 $ 3,987,454
Correspondent purchased 1,965,671 235,957 2,201,628
Bulk purchased 4,585 143,328 147,913
Construction 61,435 4,729 66,164
Total 5,735,529 667,630 6,403,159
Commercial:
Commercial real estate 303,228 358,281 661,509
Commercial and industrial 39,447 26,064 65,511
Construction 40,335 93,213 133,548
Total 383,010 477,558 860,568
Consumer:
Home equity 14,330 76,210 90,540
Other 5,336 2,188 7,524
Total 19,666 78,398 98,064
Total loans receivable $ 6,138,205 $ 1,223,586 $ 7,361,791
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, deferred loan fees/discounts, 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, 2022 September 30, 2021
Amount Rate Amount Rate
(Dollars in thousands)
Beginning balance $ 7,096,073 3.21 % $ 7,224,996 3.55 %
Originated and refinanced 1,065,373 3.74 1,437,454 2.89
Purchased and participations 701,674 3.46 824,241 2.89
Change in undisbursed loan funds (53,811) (174,416)
Repayments (1,337,034) (2,215,585)
Principal recoveries/(charge-offs), net 186 (478)
Other (791) (139)
Ending balance $ 7,471,670 3.33 $ 7,096,073 3.21
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 $52.7 million of one- to four-family loans, reducing the average rate on those loans by 75 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, 2022 September 30, 2021
Amount Rate % of Total Amount Rate % of Total
(Dollars in thousands)
Fixed-rate:
One- to four-family $ 926,274 3.41 % 52.5 % $ 1,615,165 2.66 % 71.4 %
One- to four-family construction 120,615 3.19 6.8 125,309 2.77 5.5
Commercial:
Real estate 50,620 4.08 2.9 28,944 3.85 1.3
Commercial and industrial 23,846 4.14 1.3 49,857 2.45 2.2
Construction 86,023 3.47 4.9 42,505 3.65 1.9
Home equity 6,771 5.76 0.4 3,491 5.42 0.2
Other 3,923 5.66 0.2 2,994 5.48 0.1
Total fixed-rate 1,218,072 3.45 69.0 1,868,265 2.71 82.6
Adjustable-rate:
One- to four-family 230,640 3.51 13.0 59,813 2.52 2.6
One- to four-family construction 26,080 3.31 1.5 11,069 2.64 0.5
Commercial:
Real estate 137,150 4.21 7.8 120,202 3.70 5.3
Commercial and industrial 32,430 3.87 1.8 18,581 3.97 0.8
Construction 58,080 4.94 3.3 126,155 4.08 5.6
Home equity 62,832 4.97 3.5 55,740 4.42 2.5
Other 1,763 3.03 0.1 1,870 3.34 0.1
Total adjustable-rate 548,975 4.01 31.0 393,430 3.73 17.4
Total originated, refinanced and purchased $ 1,767,047 3.63 100.0 % $ 2,261,695 2.89 100.0 %
Purchased and participation loans included above:
Fixed-rate:
Correspondent purchased - one- to four-family $ 452,093 3.35 $ 671,077 2.65
Purchases and participations - commercial 87,365 3.47 40,314 3.66
Total fixed-rate purchased/participations 539,458 3.37 711,391 2.70
Adjustable-rate:
Correspondent purchased - one- to four-family 129,216 3.49 18,450 2.45
Purchases and participations - commercial 33,000 4.87 94,400 4.36
Total adjustable-rate purchased/participations 162,216 3.77 112,850 4.05
Total purchased/participation loans $ 701,674 3.46 $ 824,241 2.89
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, 2022. Credit scores are updated at least annually, with the latest update in September 2022, 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 $ 3,988,469 62.9 % 3.20 % 771 61 % $ 158
Correspondent purchased 2,201,886 34.8 3.10 766 64 416
Bulk purchased 147,939 2.3 1.24 770 57 287
$ 6,338,294 100.0 % 3.12 770 62 205
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 $ 722,300 3.42 % 72 % 766
Correspondent purchased 581,309 3.38 74 769
$ 1,303,609 3.40 73 767
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, 2022, along with associated weighted average rates. 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 $ 135,765 4.51 %
Correspondent 85,576 4.39
$ 221,341 4.46
Commercial Loans - During fiscal year 2022, the Bank originated $267.8 million of commercial loans and entered into commercial loan participations totaling $120.4 million. The Bank processed commercial loan disbursements, excluding lines of credit, of approximately $342.7 million at a weighted average rate of 4.26%.
As of September 30, 2022 and September 30, 2021, the Bank's commercial and industrial gross loan amounts (unpaid principal plus undisbursed amounts) totaled $100.4 million and $90.7 million, respectively, and commitments totaled $458 thousand and $16.9 million, respectively.
The following table presents the Bank's commercial real estate and commercial construction loans by type of primary collateral as of the dates indicated. As of September 30, 2022, the Bank had 25 commercial real estate and commercial construction loan commitments totaling $98.7 million, at a weighted average rate of 4.78%, which are not included in the table below. 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. Of the total commercial undisbursed amounts and commitments outstanding as of September 30, 2022, management anticipates approximately $90 million will be funded during the December 2022 quarter, $60 million during the March 2023 quarter, $50 million during the June 2023 quarter, and $46 million during the September 2023 quarter.
September 30, 2022 September 30, 2021
Unpaid Undisbursed Gross Loan Gross Loan
Count Principal Amount Amount Amount
(Dollars in thousands)
Senior housing 35 $ 255,075 $ 73,184 $ 328,259 $ 265,284
Retail building 138 199,223 30,930 230,153 208,539
Hotel 10 152,332 29,214 181,546 194,665
Multi-family 36 80,538 42,197 122,735 66,199
Office building 84 68,114 41,539 109,653 109,987
One- to four-family property 368 62,072 6,835 68,907 69,174
Single use building 24 21,272 20,636 41,908 47,028
Other 103 47,737 5,317 53,054 36,167
798 $ 886,363 $ 249,852 $ 1,136,215 $ 997,043
Weighted average rate 4.46 % 4.90 % 4.56 % 4.01 %
The following table summarizes the Bank's commercial real estate and commercial construction loans by state as of the dates indicated.
September 30, 2022 September 30, 2021
Unpaid Undisbursed Gross Loan Gross Loan
Count Principal Amount Amount Amount
(Dollars in thousands)
Kansas 602 $ 368,816 $ 54,981 $ 423,797 $ 348,835
Missouri 160 232,655 63,788 296,443 232,041
Texas 12 180,278 100,562 280,840 273,124
Colorado 6 20,867 13,510 34,377 36,099
Arkansas 3 21,796 11,618 33,414 33,763
Nebraska 6 32,988 4 32,992 33,468
Other 9 28,963 5,389 34,352 39,713
798 $ 886,363 $ 249,852 $ 1,136,215 $ 997,043
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, 2022.
Count Amount
(Dollars in thousands)
Greater than $30 million 6 $ 245,873
>$15 to $30 million 19 398,089
>$10 to $15 million 8 97,141
>$5 to $10 million 21 146,359
$1 to $5 million 115 259,906
Less than $1 million 1,241 188,419
1,410 $ 1,335,787
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. 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, 2022 and 2021, approximately 73% and 61%, respectively, were 59 days or less delinquent.
Loans Delinquent for 30 to 89 Days at September 30,
2022 2021
Number Amount Number Amount
(Dollars in thousands)
One- to four-family:
Originated 48 $ 4,134 48 $ 4,156
Correspondent purchased 7 1,104 7 2,590
Bulk purchased 3 913 4 541
Commercial - - 2 37
Consumer 24 345 25 498
82 $ 6,496 86 $ 7,822
Loans 30 to 89 days delinquent
to total loans receivable, net 0.09 % 0.11 %
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.
September 30,
2022 2021
Number Amount Number Amount
(Dollars in thousands)
Loans 90 or More Days Delinquent or in Foreclosure:
One- to four-family:
Originated 29 $ 2,919 50 $ 3,693
Correspondent purchased 12 3,737 10 3,210
Bulk purchased 3 1,148 9 2,974
Commercial 8 1,167 6 1,214
Consumer 9 154 21 498
61 9,125 96 11,589
Loans 90 or more days delinquent or in foreclosure
as a percentage of total loans 0.12 % 0.16 %
Nonaccrual loans less than 90 Days Delinquent:(1)
One- to four-family:
Originated 3 $ 222 7 $ 1,288
Correspondent purchased - - - -
Bulk purchased - - 1 131
Commercial 1 77 4 419
Consumer 1 19 1 9
5 318 13 1,847
Total nonaccrual loans 66 9,443 109 13,436
Nonaccrual loans as a percentage of total loans 0.13 % 0.19 %
OREO:
One- to four-family:
Originated(2)
4 $ 307 3 $ 170
Consumer 1 21 - -
5 328 3 170
Total non-performing assets 71 $ 9,771 112 $ 13,606
Non-performing assets as a percentage of total assets 0.10 % 0.14 %
(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.
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, 2022. 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, 2022, 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 $ 3,560,887 56.2 % $ 4,340 70.6 % $ 2,382 30.5 % 48 %
Missouri 1,081,666 17.1 898 14.6 1,641 21.0 62
Texas 576,213 9.1 - - 1,746 22.4 37
Other states 1,119,528 17.6 913 14.8 2,035 26.1 53
$ 6,338,294 100.0 % $ 6,151 100.0 % $ 7,804 100.0 % 50
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 decrease in commercial special mention loans at September 30, 2022 compared to September 30, 2021 was due mainly to three commercial loans moving to the pass classification during the year as the underlying economic conditions being monitored by management improved to levels deemed appropriate by the Company.
September 30, 2022 September 30, 2021
Special Mention Substandard Special Mention Substandard
(Dollars in thousands)
One- to four-family $ 12,950 $ 19,953 $ 14,332 $ 23,458
Commercial 565 2,733 99,729 3,259
Consumer 306 354 135 718
$ 13,821 $ 23,040 $ 114,196 $ 27,435
Allowance for Credit Losses. The distribution of our ACL at the dates indicated is summarized below.
September 30, 2022 September 30, 2021
% of % of
Amount Loans to Amount Loans to
of ACL Total Loans of ACL Total Loans
(Dollars in thousands)
One- to four-family:
Originated $ 2,012 53.4 % $ 1,590 55.8 %
Correspondent purchased 2,734 29.5 2,062 28.2
Bulk purchased 206 2.0 304 2.4
Construction 54 0.9 22 0.6
Total 5,006 85.8 3,978 87.0
Commercial:
Real estate 8,729 10.0 13,706 9.6
Commercial and industrial 490 1.0 344 0.9
Construction 1,901 1.9 1,602 1.2
Total 11,120 12.9 15,652 11.7
Consumer loans:
Home equity 136 1.2 126 1.2
Other consumer 109 0.1 67 0.1
Total consumer loans 245 1.3 193 1.3
$ 16,371 100.0 % $ 19,823 100.0 %
The ratio of ACL to loans receivable, by loan type, at the dates indicated is summarized below. The reduction in the ratio of ACL to loans receivable for commercial real estate loans and commercial construction loans from September 30, 2021 to September 30, 2022 was due to a reduction in commercial loan qualitative factors.
September 30, September 30,
2022 2021
One- to four-family:
Originated 0.05 % 0.04 %
Correspondent purchased 0.12 0.10
Bulk purchased 0.14 0.18
Construction 0.08 0.06
Total 0.08 0.06
Commercial:
Commercial real estate 1.17 2.02
Commercial and industrial 0.61 0.52
Construction 1.35 1.86
Total 1.15 1.89
Consumer 0.24 0.20
Total 0.22 0.28
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. On October 1, 2020, the Bank adopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments ("CECL"). The current year net recovery was due primarily to recoveries on one- to four-family originated loans and commercial real estate loans. The ratio of NCOs during the current year to average non-performing assets was lower than the prior year due to a net recovery in the current year compared to a net charge-off in the prior year. The ratio of ACL to nonaccrual loans was higher in the current year compared to the prior year due mainly to a lower balance of nonaccrual loans compared to the prior year period, partially offset by lower ACL at September 30, 2022. The ratio of ACL to loans receivable, net was lower in the current year compared to the prior year due primarily to a reduction in ACL.
At or For the Year Ended September 30,
2022 2021 2020
(Dollars in thousands)
Balance at beginning of period $ 19,823 $ 31,527 $ 9,226
Adoption of CECL - (4,761) -
Charge-offs (70) (715) (443)
Recoveries 256 237 444
Net recoveries (charge-offs) 186 (478) 1
Provision for credit losses (3,638) (6,465) 22,300
Balance at end of period $ 16,371 $ 19,823 $ 31,527
Ratio of NCOs during the period
to average non-performing assets (1.59) % 3.63 % (0.01) %
ACL to nonaccrual loans at end of period 173.37 147.54 252.42
ACL to loans receivable, net at end of period 0.22 0.28 0.44
ACL to NCOs N/M(1)
41.5x 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.
For the Year Ended September 30,
2022 2021 2020
NCOs Average Loans % of Average Loans NCOs Average Loans % of Average Loans NCOs Average Loans % of Average Loans
(Dollars in thousands)
One- to four-family:
Originated $ (129) $ 3,937,188 - % $ 20 $ 3,936,166 - % $ 23 $ 3,916,716 - %
Correspondent - 2,072,677 - - 2,010,823 - - 2,348,120 -
Bulk purchased - 159,152 - 21 191,029 0.01 (265) 230,720 (0.11)
Construction - 48,079 - - 29,893 - - 33,709 -
Total (129) 6,217,096 - 41 6,167,911 - (242) 6,529,265 -
Commercial:
Real estate (101) 692,115 (0.01) 465 637,712 0.07 215 602,482 0.04
Commercial and industrial 40 74,133 0.05 - 75,219 - 24 76,473 0.03
Construction - 117,878 - - 75,771 - - 106,172 -
Total (61) 884,126 (0.01) 465 788,702 0.06 239 785,127 0.03
Consumer:
Home equity 1 85,514 - (26) 92,495 (0.03) (13) 112,939 (0.01)
Other 3 8,030 0.04 (2) 8,782 (0.02) 15 10,395 0.14
Total 4 93,544 - (28) 101,277 (0.03) 2 123,334 -
$ (186) $ 7,194,766 - $ 478 $ 7,057,890 0.01 $ (1) $ 7,437,726 -
Securities. The following table presents the distribution of our securities portfolio, at amortized cost, at the dates indicated. Overall, fixed-rate securities comprised 95% of our securities portfolio at September 30, 2022. Weighted average yields on tax-exempt securities are not calculated on a fully tax-equivalent basis. The balance of securities decreased during the current fiscal year as cash flows from the securities portfolio were generally used to fund loan portfolio growth. The increase in the yield during the current year was due to purchases at yields higher than the overall portfolio and upward repricing of the adjustable-rate portion of the portfolio as a result of higher market interest rates. The increase in the WAL in the current year was also due primarily to higher market interest rates which lengthened the life of the securities by decreasing the amount of prepayments.
September 30, 2022 September 30, 2021
Amount Yield WAL(1)
Amount Yield WAL(1)
(Dollars in thousands)
MBS $ 1,243,270 1.57 % 4.7 $ 1,484,211 1.35 % 3.5
Government-sponsored enterprises ("GSE") debentures 519,977 0.61 2.9 519,971 0.61 3.7
Corporate bonds 4,000 5.12 9.6 - - -
Municipal bonds 1,243 2.63 6.5 4,274 1.81 0.3
$ 1,768,490 1.29 4.2 $ 2,008,456 1.16 3.5
(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 securities portfolio at September 30, 2022 is 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 $ 2,374 1.75 % $ 51,691 2.38 % $ 218,963 1.81 % $ 815,596 1.46 % $ 1,088,624 1.57 %
GSE debentures - - 469,827 0.61 - - - - 469,827 0.61
Corporate bonds - - - - 3,695 5.12 - - 3,695 5.12
Municipal bonds 210 3.00 - - 951 2.55 - - 1,161 2.63
$ 2,584 1.85 $ 521,518 0.78 $ 223,609 1.86 $ 815,596 1.46 $ 1,563,307 1.29
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 and ending balances are as of the first and last days of the periods presented and are generally derived from recent prepayment activity on the securities in the portfolio. The beginning and ending WALs are the estimated remaining principal repayment terms (in years) after three-month historical prepayment speeds and projected call option assumptions have been applied.
For the Year Ended
September 30, 2022 September 30, 2021
Amount Yield WAL Amount Yield WAL
(Dollars in thousands)
Beginning balance - carrying value $ 2,014,608 1.16 % 3.5 $ 1,560,950 1.63 % 3.1
Maturities and repayments (323,025) (594,294)
Net amortization of (premiums)/discounts (4,967) (6,206)
Purchases 88,026 2.56 4.3 1,079,351 1.01 5.0
Change in valuation on AFS securities (211,335) (25,193)
Ending balance - carrying value $ 1,563,307 1.29 4.2 $ 2,014,608 1.16 3.5
Liabilities. Total liabilities were $8.53 billion at September 30, 2022, compared to $8.39 billion at September 30, 2021. The increase in liabilities between September 30, 2021 and September 30, 2022 was due primarily to an increase in FHLB borrowings to fund deposit outflows and loan growth.
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.
At September 30,
2022 2021
% of % of
Amount Rate Total Amount Rate Total
(Dollars in thousands)
Non-interest-bearing checking $ 591,387 - % 9.5 % $ 543,849 - % 8.2 %
Interest-bearing checking 1,027,222 0.07 16.6 1,037,362 0.07 15.7
Savings 552,743 0.06 8.9 519,069 0.05 7.9
Money market 1,819,761 0.47 29.4 1,753,525 0.19 26.6
Retail certificates of deposit 2,073,542 1.34 33.5 2,341,531 1.41 35.5
Commercial certificates of deposit 36,275 0.97 0.6 190,215 0.66 2.9
Public unit certificates of deposit 93,936 1.61 1.5 211,845 0.21 3.2
$ 6,194,866 0.63 100.0 % $ 6,597,396 0.59 100.0 %
Deposits decreased $402.5 million during the current year. The decrease was primarily in the certificate of deposit portfolio, partially offset by an increase in retail checking, savings and money market accounts. Retail certificates of deposit decreased $268.0 million, with the decrease occurring in the medium-term and long-term categories. Commercial certificates of deposit decreased $153.9 million, which was primarily related to one commercial customer for which the reduction in the current year was anticipated.
During the third quarter of the current year, the Bank began increasing rates offered on retail certificates of deposit and money market accounts. Even with the increase in offered rates, management anticipates continued retail deposit outflows in future periods, primarily in transaction accounts, due to strong consumer spending, along with competition from other financial institutions and/or brokerage firms that may offer alternative higher yielding investment options.
As of September 30, 2022 and 2021, approximately $721.8 million and $866.0 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, 2022 (dollars in thousands).
3 months or less $ 93,136
Over 3 through 6 months 48,776
Over 6 through 12 months 66,990
Over 12 months 125,350
$ 334,252
Borrowings. Total borrowings at September 30, 2022 were $2.13 billion, an increase of $549.3 million from September 30, 2021. The $2.13 billion was composed of $1.70 billion in fixed-rate FHLB advances, $365.0 million in variable-rate advances tied to interest rate swaps, and $75.0 million on the FHLB line of credit. The increase in borrowings was a result of deposit outflows, loan growth and a slow-down in loan prepayment speeds due to an increase in market interest rates. If deposit outflows continue, the Bank will likely enter into additional FHLB borrowings.
During the current year, the Bank reimplemented the leverage strategy, as discussed in the "Executive Summary" section above. These borrowings were repaid prior to September 30, 2022. If the Bank enters into additional FHLB borrowings
during fiscal year 2023 to provide sufficient liquidity for operations, the amount of the leverage strategy transaction may decrease compared to the fiscal year 2022 amount due to borrowing and collateral capacity levels.
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 non-amortizing term borrowings, which consist entirely of FHLB advances, along with associated weighted average contractual and effective rates as of September 30, 2022. In addition to the borrowings in the table below, there were two straight-line amortizing FHLB advances outstanding at September 30, 2022, including a $47.5 million advance at a rate of 3.50% with quarterly payments of $2.5 million through June 2027 and a $100.0 million advance at a rate of 4.45% with quarterly payments of $4.9 million through October 2027.
Maturity by Contractual Effective
Fiscal Year Amount Rate Rate(1)
(Dollars in thousands)
2023 $ 300,000 1.70 % 1.81 %
2024 490,000 3.10 2.85
2025 450,000 2.21 2.24
2026 375,000 1.86 2.07
2027 200,000 1.56 1.80
2028 100,000 3.47 3.42
$ 1,915,000 2.29 2.31
(1)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. 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 effective rate is shown as a weighted average and includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. The weighted average maturity ("WAM") is the remaining weighted average contractual term in years. The beginning and ending WAMs represent the remaining maturity at each date presented. For new borrowings, the WAMs presented are as of the date of issue.
For the Year Ended September 30,
2022 2021
Effective Effective
Amount Rate WAM Amount Rate WAM
(Dollars in thousands)
Beginning balance $ 1,590,000 1.88 % 3.3 $ 1,790,000 2.31 % 3.0
Maturities and prepayments (177,500) 1.94 - (1,305,000) 2.18 -
New FHLB borrowings 650,000 3.68 3.7 1,105,000 1.96 3.7
Ending balance $ 2,062,500 2.44 2.5 $ 1,590,000 1.88 3.3
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 non-amortizing term borrowings for the next four quarters as of September 30, 2022.
December 31, March 31, June 30, September 30,
2022 2023 2023 2023 Total
(Dollars in thousands)
Retail/Commercial Certificates:
Amount $ 364,431 $ 265,239 $ 196,763 $ 282,207 $ 1,108,640
Repricing Rate 1.11 % 1.22 % 0.82 % 1.44 % 1.17 %
Public Unit Certificates:
Amount $ 46,907 $ 17,519 $ 3,674 $ 10,002 $ 78,102
Repricing Rate 1.82 % 0.77 % 0.27 % 1.04 % 1.41 %
Term Borrowings:
Amount $ - $ 100,000 $ 100,000 $ 100,000 $ 300,000
Repricing Rate - % 1.46 % 1.82 % 2.14 % 1.81 %
Total
Amount $ 411,338 $ 382,758 $ 300,437 $ 392,209 $ 1,486,742
Repricing Rate 1.19 % 1.26 % 1.15 % 1.61 % 1.31 %
The following table sets forth the WAM information for our certificates of deposit, in years, as of September 30, 2022.
Retail certificates of deposit 1.4
Commercial certificates of deposit 0.9
Public unit certificates of deposit 0.5
Total certificates of deposit 1.4
Stockholders' Equity. Total stockholders' equity at September 30, 2022 was $1.10 billion, a $145.8 million decrease from September 30, 2021. The decrease was almost entirely related to a reduction in AOCI as a result of unrealized losses on AFS securities due to an increase in market interest rates.
During the current year, the Company paid cash dividends totaling $103.1 million. These cash dividends totaled $0.76 per share and consisted of a $0.20 per share True Blue Capitol cash dividend, a $0.22 per share cash true-up dividend related to fiscal year 2021 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, 2022, this ratio was 9.9%. The increase in unrealized losses on AFS securities and the related impact on AOCI reduced the Bank's ratio of equity to total assets by approximately 150 basis points. For additional information, see "Part II, Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 15. Accumulated Other Comprehensive Income."
On October 25, 2022, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.6 million, payable on November 18, 2022 to stockholders of record as of the close of business on November 4, 2022. On October 26, 2022, the Company announced a fiscal year 2022 cash true-up dividend of $0.28 per share, or approximately $38.0 million, related to fiscal year 2022 earnings. The $0.28 per share cash true-up dividend was determined by taking the difference between total earnings for fiscal year 2022 and total regular quarterly cash dividends paid during fiscal year 2022, divided by the number of shares outstanding. The cash true-up dividend is payable on December 2, 2022 to stockholders of record as of the close of business on November 18, 2022, 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 2022.
At September 30, 2022, Capitol Federal Financial, Inc., at the holding company level, had $104.0 million in cash on deposit at the Bank. For fiscal year 2023, 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 2023 earnings in excess of the amount paid as regular quarterly cash dividends during fiscal year 2023. It is anticipated that the fiscal year 2023 cash true-up dividend will be paid in December 2023. 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 level.
As of September 30, 2022, there was $44.7 million authorized under an existing stock repurchase plan for purchases of the Company's common stock. This plan has no expiration date; however, the FRB's existing approval for the Company to repurchase shares extends through August 2023. On October 27, 2022, the Company announced its intention to resume repurchasing shares under the existing plan. The amount and timing of the stock repurchases is dependent on the market price of the Company's common stock. Subsequent to September 30, 2022 and through November 17, 2022, the Company repurchased 1,368,805 shares at an average price of $8.09 per share.
The Company works to find multiple ways to provide stockholder value. This has primarily been through the payment of cash dividends and stock repurchases. 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 in 2020, the Company elected to defer the True Blue dividend originally planned for June 2020. In June 2021, the Company paid a True Blue Capitol cash dividend of $0.40 per share. This 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. In June 2022, the Company paid a True Blue Capitol cash dividend of $0.20 per share. 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 Capitol dividend.
The following table presents regular quarterly cash dividends and special cash dividends paid in calendar years 2022, 2021, and 2020. The amounts represent cash dividends paid during each period. The 2022 true-up dividend amount presented represents the dividend payable on December 2, 2022 to stockholders of record as of November 18, 2022.
Calendar Year
2022 2021 2020
Amount Per Share Amount Per Share Amount Per Share
(Dollars in thousands, except per share amounts)
Regular quarterly dividends paid
Quarter ended March 31 $ 11,535 $ 0.085 $ 11,518 $ 0.085 $ 11,733 $ 0.085
Quarter ended June 30 11,534 0.085 11,516 0.085 11,733 0.085
Quarter ended September 30 11,534 0.085 11,518 0.085 11,733 0.085
Quarter ended December 31 11,508 0.085 11,535 0.085 11,514 0.085
True-up dividends paid 37,701 0.280 29,850 0.220 17,614 0.130
True Blue Capitol dividends paid 27,143 0.200 54,210 0.400 - -
Calendar year-to-date dividends paid $ 110,955 $ 0.820 $ 130,147 $ 0.960 $ 64,327 $ 0.470
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 2022 to 2021. For the comparison of fiscal years 2021 to 2020, 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, 2021. 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,
2022 vs. 2021
Increase (Decrease) Due to
Volume(1)
Rate Total
(Dollars in thousands)
Interest-earning assets:
Loans receivable $ 5,333 $ (6,699) $ (1,366)
MBS (1,338) (655) (1,993)
Investment securities 246 197 443
FHLB stock 4,530 1,585 6,115
Cash and cash equivalents 9,569 8,591 18,160
Total interest-earning assets 18,340 3,019 21,359
Interest-bearing liabilities:
Checking 63 (82) (19)
Savings 31 (11) 20
Money market 606 (156) 450
Certificates of deposit (6,461) (7,940) (14,401)
Borrowings 19,856 (2,140) 17,716
Total interest-bearing liabilities 14,095 (10,329) 3,766
Net change in net interest income $ 4,245 $ 13,348 $ 17,593
(1)The increases attributable to changes in volume related to FHLB stock, cash and cash equivalents, and borrowings were due primarily to the leverage strategy being utilized during the current year and not being utilized during the prior year.
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 2020 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, 2021. 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,
2022 2021
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 $ 3,985,267 $ 129,392 3.25 % $ 3,966,059 $ 137,461 3.47 %
Correspondent purchased 2,072,677 55,227 2.66 2,010,823 48,066 2.39
Bulk purchased 159,152 2,053 1.29 191,029 3,601 1.89
Total one- to four-family loans 6,217,096 186,672 3.00 6,167,911 189,128 3.07
Commercial loans 884,126 37,223 4.15 788,702 36,085 4.51
Consumer loans 93,544 4,636 4.96 101,277 4,684 4.63
Total loans receivable(1)
7,194,766 228,531 3.17 7,057,890 229,897 3.25
MBS(2)
1,354,080 19,406 1.43 1,446,466 21,399 1.48
Investment securities(2)(3)
523,170 3,268 0.62 482,641 2,825 0.59
FHLB stock(4)
149,236 10,031 6.72 77,250 3,916 5.07
Cash and cash equivalents(5)
1,562,274 18,304 1.16 131,798 144 0.11
Total interest-earning assets 10,783,526 279,540 2.59 9,196,045 258,181 2.80
Other non-interest-earning assets 343,311 443,724
Total assets $ 11,126,837 $ 9,639,769
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Checking $ 1,056,303 752 0.07 $ 972,920 772 0.08
Savings 543,609 299 0.06 487,146 280 0.06
Money market 1,840,898 4,578 0.25 1,598,838 4,128 0.26
Retail certificates 2,203,452 27,664 1.26 2,491,427 40,475 1.62
Commercial certificates 103,865 666 0.64 197,384 1,559 0.79
Wholesale certificates 150,689 497 0.33 252,623 1,192 0.47
Total deposits 5,898,816 34,456 0.58 6,000,338 48,406 0.81
Borrowings(6)
3,288,348 52,490 1.58 1,636,399 34,774 2.11
Total interest-bearing liabilities 9,187,164 86,946 0.94 7,636,737 83,180 1.09
Non-interest-bearing deposits 573,954 509,778
Other non-interest-bearing liabilities 178,526 219,328
Stockholders' equity 1,187,193 1,273,926
Total liabilities and stockholders' equity $ 11,126,837 $ 9,639,769
Net interest income(7)
$ 192,594 $ 175,001
Net interest-earning assets $ 1,596,362 $ 1,559,308
Net interest margin(8)(9)
1.79 1.90
Ratio of interest-earning assets to interest-bearing liabilities 1.17x 1.20x
(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 $1.7 million and $6.6 million for the years ended September 30, 2022 and 2021, respectively.
(4)Included in this line, for the year ended September 30, 2022, is FHLB stock related to the leverage strategy with an average outstanding balance $71.0 million and dividend income of $4.8 million at a weighted average yield of 6.75%, and FHLB stock not related to the leverage strategy with an average outstanding balance of $78.2 million and dividend income of $5.2 million at a weighted average yield of 6.69%. There was no FHLB stock related to the leverage strategy during the year ended September 30, 2021.
(5)The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $1.51 billion during the year ended September 30, 2022. There were no cash and cash equivalents related to the leverage strategy during the year ended September 30, 2021.
(6)Included in this line, for the year ended September 30, 2022, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $1.58 billion and interest paid of $18.5 million, at a weighted average rate of 1.15%, and FHLB borrowings not related to the leverage strategy with an average outstanding balance of $1.71 billion and interest paid of $34.0 million, at a weighted average rate of 1.98%. There were no FHLB borrowings related to the leverage strategy during the year ended September 30, 2021. 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.
(7)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.
(8)Net interest margin represents net interest income as a percentage of average interest-earning assets.
(9)The table below provides a reconciliation between certain performance ratios presented in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the performance ratios excluding the effects of the leverage strategy, which are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide the performance ratios without the leverage strategy because of the unique nature of the leverage strategy. The leverage strategy reduces some of our performance ratios due to the amount of earnings associated with the transaction in comparison to the size of the transaction, while increasing our net income. The pre-tax yield on the leverage strategy was 0.25% for the year ended September 30, 2022.
For the Year Ended September 30,
2022 2021
Actual Leverage Adjusted Actual Leverage Adjusted
(GAAP) Strategy (Non-GAAP) (GAAP) Strategy (Non-GAAP)
Yield on interest-earning assets 2.59 % (0.19) % 2.78 % 2.80 % - % 2.80 %
Cost of interest-bearing liabilities 0.94 0.04 0.90 1.09 - 1.09
Net interest margin 1.79 (0.25) 2.04 1.90 - 1.90
Comparison of Operating Results for the Years Ended September 30, 2022 and 2021
The Company recognized net income of $84.5 million, or $0.62 per share, for the current year compared to net income of $76.1 million, or $0.56 per share, for the prior year. The increase in net income was due to an increase in net interest income, partially offset by higher income tax expense and a lower negative provision for credit losses. The net interest margin decreased 11 basis points, from 1.90% for the prior year to 1.79% for the current year. Excluding the effects of the leverage strategy, the net interest margin would have increased 14 basis points, from 1.90% for the prior year to 2.04% for the current year. The increase in net interest margin excluding the effects of the leverage strategy was due mainly to a reduction in the weighted average cost of retail certificates of deposit.
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:
2022 2021 Dollars Percent
(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable $ 228,531 $ 229,897 $ (1,366) (0.6) %
MBS 19,406 21,399 (1,993) (9.3)
Cash and cash equivalents 18,304 144 18,160 12,611.1
FHLB stock 10,031 3,916 6,115 156.2
Investment securities 3,268 2,825 443 15.7
Total interest and dividend income $ 279,540 $ 258,181 $ 21,359 8.3
The decrease in interest income on loans receivable was due to a lower weighted average rate on the originated and correspondent one- to four-family loan portfolio during the current year, mostly offset by an increase in the average balance of the loan portfolio. The lower weighted average rate was due to endorsements, refinances, originations and purchases at lower market rates at the time of the transactions in the prior fiscal year, which are being fully reflected in the current year. Premium amortization related to the one- to four-family correspondent loan portfolio decreased significantly compared to the prior year due to the slow-down in prepayments and endorsements resulting from the increase in market interest rates during the last half of the current fiscal year, partially offsetting the reduction in interest income related to a lower weighted average rate on the one- to four-family portfolio mentioned above.
The decrease in interest income on the MBS portfolio was due primarily to a decrease in the average balance of the portfolio, as repayments were primarily used to fund loan growth.
The increase in interest income on cash and cash equivalents and the increase in dividend income on FHLB stock were due mainly to the leverage strategy being utilized during the current year and not being utilized during the prior year. Additionally, market interest rates increased during the year resulting in an increase in the yield on cash, and FHLB increased the dividend rate paid during the year.
The increase in interest income on investment securities was due primarily to an increase in the average balance of the portfolio, along with an increase in the yield due to purchases at higher market yields during the current year.
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:
2022 2021 Dollars Percent
(Dollars in thousands)
INTEREST EXPENSE:
Borrowings $ 52,490 $ 34,774 $ 17,716 50.9 %
Deposits 34,456 48,406 (13,950) (28.8)
Total interest expense $ 86,946 $ 83,180 $ 3,766 4.5
The increase in interest expense on borrowings was due to the leverage strategy being utilized during a portion of the current year and not being utilized during the prior year. Interest expense on borrowings associated with the leverage strategy totaled $18.5 million during the current year. Interest expense on FHLB borrowings not associated with the leverage strategy was lower in the current year due to terminating or not renewing certain interest rate swap agreements, not replacing some maturing FHLB advances and prepaying certain advances during fiscal year 2021, partially offset by an increase in the average balance due to an increase in FHLB borrowings to fund operational needs during the latter portion of the current year.
The decrease in interest expense on deposits was due mainly to a decrease in the weighted average rate paid and the average balance of the retail certificate of deposit portfolio. Retail certificates of deposit repriced downward during the prior year and first half of the current year as they were renewed or were replaced at lower offered rates at the time of the renewal, along with some certificates of deposit not renewing. During the third quarter of fiscal year 2022, management began to increase rates offered on retail certificates of deposit and money market accounts to help reduce the outflow from these portfolios.
Provision for Credit Losses
The Bank recorded a negative provision for credit losses during the current year of $4.6 million, compared to a negative provision for credit losses of $8.5 million during the prior year. The negative provision in the current year was comprised of a $3.6 million decrease in the ACL for loans and a $992 thousand decrease in reserves for off-balance sheet credit exposures. The negative provision for credit losses associated with the ACL in the current year was due primarily to a reduction in commercial loan qualitative factors, partially offset by an increase in ACL related to loan growth during the current year and a less favorable economic forecast compared to the prior year. The negative provision for credit losses associated with the reserve for off-balance sheet credit exposures in the current year was due primarily to a reduction in commercial loan qualitative factors, partially offset by growth in commercial construction exposures. See additional discussion regarding the Bank's ACL and reserve for off-balance sheet credit exposures at September 30, 2022 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:
2022 2021 Dollars Percent
(Dollars in thousands)
NON-INTEREST INCOME:
Deposit service fees $ 13,798 $ 12,282 $ 1,516 12.3 %
Insurance commissions 2,947 3,030 (83) (2.7)
Gain on sale of Visa Class B shares - 7,386 (7,386) (100.0)
Other non-interest income 6,085 5,388 697 12.9
Total non-interest income $ 22,830 $ 28,086 $ (5,256) (18.7)
The increase in deposit service fees was due primarily to an increase in debit card income and service charges as a result of higher transaction and settlement volume, in addition to an increase in the average transaction amount. During the prior year, the Bank sold its Visa Class B shares, resulting in a $7.4 million gain, with no similar transaction during the current year. The increase in other non-interest income was due primarily to a gain on a loan-related financial derivative agreement.
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:
2022 2021 Dollars Percent
(Dollars in thousands)
NON-INTEREST EXPENSE:
Salaries and employee benefits $ 56,600 $ 56,002 $ 598 1.1 %
Information technology and related expense 18,311 17,922 389 2.2
Occupancy, net 14,370 14,045 325 2.3
Regulatory and outside services 6,192 5,764 428 7.4
Advertising and promotional 5,178 5,133 45 0.9
Federal insurance premium 3,020 2,545 475 18.7
Deposit and loan transaction costs 2,797 2,761 36 1.3
Office supplies and related expense 1,951 1,715 236 13.8
Loss on interest rate swap termination - 4,752 (4,752) (100.0)
Other non-interest expense 4,432 4,930 (498) (10.1)
Total non-interest expense $ 112,851 $ 115,569 $ (2,718) (2.4)
The increase in salaries and employee benefits was due primarily to merit increases and higher benefits expense, partially offset by a lower employee count during the current year. The increase in regulatory and outside services was due to higher consulting expenses related to the Bank's upcoming digital transformation project. The increase in federal insurance premium expense was due mainly to an increase in average assets as a result of the leverage strategy being utilized during the current year. During the prior year, the Bank terminated $200.0 million of interest rate swaps, resulting in a loss of $4.8 million, with no similar transaction in the current fiscal year. The decrease in other non-interest expense was due primarily to the write-down during the prior year of a property that had previously served as one of the Bank's branch locations, partially offset by higher debit card fraud losses in the current year.
The Company's efficiency ratio was 52.39% for the current year compared to 56.91% for the prior year. The improvement in the efficiency ratio was due primarily to higher net interest income.
Management anticipates information technology and related expenses will be approximately $6 million higher in fiscal year 2023 due to the digital transformation. In addition, it is expected there will be approximately $1 million more of information technology and related expenses in fiscal year 2023 associated with projects outside of the digital transformation and due to general cost increases. Overall, it is anticipated information technology and related expenses will be approximately $7 million higher in fiscal year 2023, or approximately $25 million for the year. Salaries and employee benefits is expected to be approximately $3.5 million higher in fiscal year 2023 due primarily to merit increases and salary adjustments. Federal insurance premium expense is anticipated to be approximately $2 million higher in fiscal year 2023, due to the increase in the assessment rate beginning in January 2023, and reflecting the anticipation that leverage strategy utilization in fiscal year 2023 will be lower than fiscal year 2022.
In fiscal year 2024, information technology and related expense is expected to decrease approximately $3 million from fiscal year 2023 levels due to a reduction in professional service costs.
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 and effective tax rate.
For the Year Ended
September 30, Change Expressed in:
2022 2021 Dollars Percent
(Dollars in thousands)
Income before income tax expense $ 107,203 $ 96,028 $ 11,175 11.6 %
Income tax expense 22,750 19,946 2,804 14.1
Net income $ 84,453 $ 76,082 $ 8,371 11.0
Effective Tax Rate 21.2 % 20.8 %
The increase in income tax expense was due primarily to higher pretax income in the current year. Management anticipates the effective tax rate for fiscal year 2023 will be approximately 20% to 21%.
Comparison of Operating Results for the Years Ended September 30, 2021 and 2020
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, 2021 and 2020" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2021.
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 long-term liquidity needs and the Bank's interest rate risk with the intention to improve the earnings of the Bank while maintaining capital ratios that meet the 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 FHLB borrowing limit was 50% of Bank Call Report total assets as of September 30, 2022, as approved by the president of FHLB. When the leverage strategy is in place, the Bank maintains the resulting excess cash reserves from the FHLB borrowings at the FRB of Kansas City, which can be used to meet any short-term liquidity needs. Additionally, FHLB borrowings may exceed 40% of Bank Call Report total assets as long as the Bank continues its leverage strategy and FHLB senior management continues to approve the Bank's borrowing limit being in excess of 40% of Call Report total assets. All or a portion of the short-term FHLB borrowings in conjunction with the leverage strategy can be repaid at maturity, if necessary or desired. 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 that is not in conjunction with a planned strategy, such as the leverage strategy, the Bank will likely utilize long-term wholesale borrowing sources such as FHLB advances and/or repurchase agreements to provide long-term, fixed-rate funding. The maturities of these long-term borrowings are generally staggered in order to mitigate the risk of a highly negative cash flow position at maturity. The Bank's internal policy limits total borrowings to 55% of total assets. At September 30, 2022, the Bank had total borrowings, at par, of $2.14 billion, or approximately 22% of total assets, all of which were FHLB borrowings. Of this amount, $329.7 million were advances scheduled to mature in the next 12 months. FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB. Additionally, the Bank had pledged securities with an estimated fair value of $572.9 million as collateral for FHLB borrowings at September 30, 2022.
At September 30, 2022, 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, 2022, the Bank had $863.0 million 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, 2022, the Bank's policy allowed for combined brokered and public unit certificates of deposit up to 15% of total deposits. At September 30, 2022, the Bank did not have any brokered certificates of deposit and public unit certificates of deposit were approximately 2% of total deposits. The Bank had pledged securities with an estimated fair value
of $125.5 million as collateral for public unit certificates of deposit at September 30, 2022. 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, 2022, $1.19 billion of the Bank's certificate of deposit portfolio was scheduled to mature within the next 12 months, including $78.1 million of public unit certificates of deposit and $27.0 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. Due to the nature of commercial certificates of deposit, retention rates are not as predictable as for retail certificates of deposit.
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.

---

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.
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. The MVPE is defined as the net of the present value of cash flows from existing assets, liabilities, and off-balance sheet instruments. The present values are determined based upon market conditions as of the date of the analysis, as well as in alternative interest rate environments providing potential changes in the MVPE under those alternative interest rate environments. Net interest income is projected in the same alternative interest rate environments with both a static balance sheet and management strategies considered. The MVPE and net interest income analyses are also conducted to estimate our sensitivity to rates for future time horizons based upon market conditions as of the date of the analysis. In addition to the interest rate environments presented below, management also reviews the impact of non-parallel rate shock scenarios on a quarterly basis. These scenarios consist of flattening and steepening the yield curve by changing short-term and long-term interest rates independent of each other, and simulating cash flows and determining valuations as a result of these hypothetical changes in interest rates to identify rate environments that pose the greatest risk to the Bank. 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, 2022.
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 generally means more cash flows from assets are expected to reprice than cash flows from liabilities and suggests in a rising rate environment, that earnings should increase. A negative gap generally means more cash flows from liabilities are expected to reprice than cash flows from assets and suggests, 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)
$ 1,343,380 $ 1,592,317 $ 1,317,900 $ 3,217,807 $ 7,471,404
Securities(2)
308,433 651,405 408,640 400,012 1,768,490
Other interest-earning assets 27,280 - - - 27,280
Total interest-earning assets 1,679,093 2,243,722 1,726,540 3,617,819 9,267,174
Interest-bearing liabilities:
Non-maturity deposits(3)
1,230,019 418,354 361,496 2,085,221 4,095,090
Certificates of deposit 1,186,743 677,678 338,809 523 2,203,753
Borrowings(4)
406,166 1,002,478 635,185 129,438 2,173,267
Total interest-bearing liabilities 2,822,928 2,098,510 1,335,490 2,215,182 8,472,110
Excess (deficiency) of interest-earning assets over
interest-bearing liabilities $ (1,143,835) $ 145,212 $ 391,050 $ 1,402,637 $ 795,064
Cumulative excess (deficiency) of interest-earning assets over
interest-bearing liabilities $ (1,143,835) $ (998,623) $ (607,573) $ 795,064
Cumulative excess (deficiency) of interest-earning assets over interest-bearing
liabilities as a percent of total Bank assets at:
September 30, 2022 (11.9) % (10.4) % (6.3) % 8.3 %
September 30, 2021 (6.9)
Cumulative one-year gap - interest rates +200 bps at:
September 30, 2022 (12.1)
September 30, 2021 (13.4)
(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. All other securities are presented based on contractual maturities, term to call dates or pre-refunding dates as of September 30, 2022, 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 $4.01 billion, for a cumulative one-year gap of (41.7)% 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, 2022, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(1.14) billion, or (11.89)% of total assets, compared to $(664.1) million, or (6.9)% of total assets, at September 30, 2021. 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.
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, 2022, the Bank's one-year gap is projected to be $(1.17) billion, or (12.1)% 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 interest rate environment. This compares to a one-year gap of $(1.29) billion, or (13.4)% of total assets, if interest rates were to have increased 200 basis points as of September 30, 2021.
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. At September 30, 2021, multiple yields along the yield curve were less than one percent, so the -100 basis points and -200 basis points scenarios were 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) 2022 2021
in Interest Rates(1)
Amount ($) Change ($) Change (%) Amount ($) Change ($) Change (%)
(Dollars in thousands)
-200 bp $ 182,458 $ (775) (0.4) % N/A N/A N/A
-100 bp 183,363 130 0.1 N/A N/A N/A
000 bp 183,233 - - $ 185,285 $ - - %
+100 bp 182,737 (496) (0.3) 190,060 4,775 2.6
+200 bp 182,081 (1,152) (0.6) 191,998 6,713 3.6
+300 bp 181,394 (1,839) (1.0) 192,590 7,305 3.9
(1)Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities.
The net interest income projection was lower in the base case scenario at September 30, 2022 compared to September 30, 2021 due to higher interest expense projections on the Bank's liabilities than interest income projections on the Bank's assets as a result of higher interest rates at September 30, 2022. This was driven primarily by a faster increase in the cost of liabilities during fiscal year 2022 compared to the rate of increase in asset yields. In the rising interest rate scenarios, the cost of liabilities is projected to continue to increase at a faster pace than asset yields, resulting in a projected decrease in net
interest income in these interest rate scenarios. This was not the case at September 30, 2021, as interest rates were lower than at September 30, 2022, resulting in more mortgage-related cash flows projected to reprice as interest rates increased.
In the decreasing interest rate scenarios at September 30, 2022, the net interest income projection remained relatively flat as the projected increase in mortgage-related assets repricing to lower interest rates was largely offset by liability cash flows repricing to lower interest rates as well.
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. At September 30, 2021, multiple yields along the yield curve were less than one percent, so the -100 basis points and -200 basis points scenarios were 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) 2022 2021
in Interest Rates(1)
Amount ($) Change ($) Change (%) Amount ($) Change ($) Change (%)
(Dollars in thousands)
-200 bp $ 1,299,340 $ 404,353 45.2 % N/A N/A N/A
-100 bp 1,024,167 129,180 14.4 N/A N/A N/A
000 bp 894,987 - - $ 1,451,795 $ - - %
+100 bp 759,165 (135,822) (15.2) 1,354,766 (97,029) (6.7)
+200 bp 625,864 (269,123) (30.1) 1,170,646 (281,149) (19.4)
+300 bp 500,730 (394,257) (44.1) 968,543 (483,252) (33.3)
(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, 2022 and September 30, 2021 was negative in all rising interest rate scenarios. The negative impact to the Bank's MVPE was greater at September 30, 2022 compared to September 30, 2021 due primarily to an increase in the duration of the Bank's mortgage-related assets at September 30, 2022 compared to September 30, 2021. This was a result of higher interest rates at September 30, 2022. 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 interest 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 increases the sensitivity of their market value to changes in interest rates.
In the decreasing interest rate scenarios at September 30, 2022, the Bank's MVPE increased due to a larger increase in the market value of the Bank's assets than the Bank's liabilities. This is because the Bank's mortgage-related assets continue to have a higher duration in these interest rate scenarios which results in greater sensitivity in market value as interest rates change.
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, 2022. 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 $ 1,563,307 1.29 % 4.3 17.0 %
Loans receivable:
Fixed-rate one- to four-family 5,675,341 3.15 6.7 76.0 % 61.8
Fixed-rate commercial 420,266 4.12 3.8 5.6 4.6
All other fixed-rate loans 82,027 3.56 7.2 1.1 0.9
Total fixed-rate loans 6,177,634 3.22 6.5 82.7 67.3
Adjustable-rate one- to four-family 662,953 2.74 4.2 8.9 7.2
Adjustable-rate commercial 546,078 4.85 7.7 7.3 5.9
All other adjustable-rate loans 85,005 6.05 2.9 1.1 0.9
Total adjustable-rate loans 1,294,036 3.85 5.6 17.3 14.0
Total loans receivable 7,471,670 3.33 6.4 100.0 % 81.3
FHLB stock 100,624 7.72 2.7 1.1
Cash and cash equivalents 49,194 1.75 - 0.6
Total interest-earning assets $ 9,184,795 3.02 5.9 100.0 %
Non-maturity deposits $ 3,399,726 0.28 5.9 60.7 % 43.9 %
Retail certificates of deposit 2,073,542 1.34 1.4 37.0 26.8
Commercial certificates of deposit 36,275 0.97 0.9 0.6 0.5
Public unit certificates of deposit 93,936 1.61 0.5 1.7 1.2
Total interest-bearing deposits 5,603,479 0.70 4.1 100.0 % 72.4
Term borrowings 2,062,500 2.44 2.5 96.5 % 26.6
Line of credit borrowings 75,000 3.15 - 3.5 1.0
Total borrowings 2,137,500 2.47 2.4 100.0 % 27.6
Total interest-bearing liabilities $ 7,740,979 1.19 3.7 100.0 %

---

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.
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, 2022, 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, 2022, 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, 2022, of the Company and our report dated November 23, 2022, 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 23, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Capitol Federal Financial, Inc.
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, 2022 and 2021, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2022, 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, 2022, 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 23, 2022, 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 the ACL, including the third party provided economic forecast used and 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 significant estimates and assumptions.
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, 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 factor adjustments to the outputs of the modeled ACL.
•We evaluated the weighted economic forecast used including reasonableness and basis for the selected economic forecast by comparing to internal and external sources.
•We evaluated the qualitative factor 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 23, 2022
We have served as the Company's auditor since 1974.
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2022 and 2021 (Dollars in thousands, except per share amounts)
2022 2021
ASSETS:
Cash and cash equivalents (includes interest-earning deposits of $27,467 and $24,289)
$ 49,194 $ 42,262
Available-for-sale ("AFS") securities, at estimated fair value (amortized cost of $1,768,490 and $2,008,456)
1,563,307 2,014,608
Loans receivable, net (allowance for credit losses ("ACL") of $16,371 and $19,823)
7,464,208 7,081,142
Federal Home Loan Bank Topeka ("FHLB") stock, at cost 100,624 73,421
Premises and equipment, net 94,820 99,127
Income taxes receivable, net 1,266 -
Deferred income tax assets, net 33,884 -
Other assets 317,594 320,686
TOTAL ASSETS $ 9,624,897 $ 9,631,246
LIABILITIES:
Deposits $ 6,194,866 $ 6,597,396
Borrowings 2,132,154 1,582,850
Advances by borrowers 80,067 72,729
Income taxes payable, net - 918
Deferred income tax liabilities, net - 5,810
Other liabilities 121,311 129,270
Total liabilities 8,528,398 8,388,973
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, 138,858,884 and 138,832,284 shares issued and outstanding as of September 30, 2022 and 2021, respectively
1,388 1,388
Additional paid-in capital 1,190,213 1,189,633
Unearned compensation, Employee Stock Ownership Plan ("ESOP") (29,735) (31,387)
Retained earnings 80,266 98,944
Accumulated other comprehensive (loss) income ("AOCI"), net of tax (145,633) (16,305)
Total stockholders' equity 1,096,499 1,242,273
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,624,897 $ 9,631,246
See accompanying notes to consolidated financial statements.
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2022, 2021, and 2020 (Dollars in thousands, except per share amounts)
2022 2021 2020
INTEREST AND DIVIDEND INCOME:
Loans receivable $ 228,531 $ 229,897 $ 270,494
Mortgage-backed securities ("MBS") 19,406 21,399 23,009
Cash and cash equivalents 18,304 144 1,181
FHLB stock 10,031 3,916 5,827
Investment securities 3,268 2,825 4,467
Total interest and dividend income 279,540 258,181 304,978
INTEREST EXPENSE:
Borrowings 52,490 34,774 48,045
Deposits 34,456 48,406 67,598
Total interest expense 86,946 83,180 115,643
NET INTEREST INCOME 192,594 175,001 189,335
PROVISION FOR CREDIT LOSSES (4,630) (8,510) 22,300
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 197,224 183,511 167,035
NON-INTEREST INCOME:
Deposit service fees 13,798 12,282 11,285
Insurance commissions 2,947 3,030 2,487
Gain on sale of Visa Class B shares - 7,386 -
Other non-interest income 6,085 5,388 5,827
Total non-interest income 22,830 28,086 19,599
NON-INTEREST EXPENSE:
Salaries and employee benefits 56,600 56,002 52,996
Information technology and related expense 18,311 17,922 16,974
Occupancy, net 14,370 14,045 13,870
Regulatory and outside services 6,192 5,764 5,762
Advertising and promotional 5,178 5,133 4,889
Federal insurance premium 3,020 2,545 914
Deposit and loan transaction costs 2,797 2,761 2,890
Office supplies and related expense 1,951 1,715 2,195
Loss on interest rate swap termination - 4,752 -
Other non-interest expense 4,432 4,930 5,514
Total non-interest expense 112,851 115,569 106,004
INCOME BEFORE INCOME TAX EXPENSE 107,203 96,028 80,630
INCOME TAX EXPENSE 22,750 19,946 16,090
NET INCOME $ 84,453 $ 76,082 $ 64,540
Basic earnings per share ("EPS") $ 0.62 $ 0.56 $ 0.47
Diluted EPS $ 0.62 $ 0.56 $ 0.47
See accompanying notes to consolidated financial statements.
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2022, 2021, and 2020 (Dollars in thousands)
2022 2021 2020
Net income $ 84,453 $ 76,082 $ 64,540
Other comprehensive income (loss), net of tax:
Changes in unrealized gains/losses on AFS securities, net of taxes of $51,565, $6,116, and $(4,359)
(159,770) (19,077) 13,578
Changes in unrealized gains/losses on cash flow hedges, net of taxes of $(9,824), $(6,153), and $4,875
30,442 19,277 (15,184)
Comprehensive (loss) income $ (44,875) $ 76,282 $ 62,934
See accompanying notes to consolidated financial statements.
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2022, 2021, and 2020 (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, 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 Accounting Standards Update ("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
Net income, fiscal year 2022 84,453 84,453
Other comprehensive loss, net of tax (129,328) (129,328)
ESOP activity 88 1,652 1,740
Restricted stock activity, net (6) (6)
Stock-based compensation 498 498
Cash dividends to stockholders ($0.76 per share)
(103,131) (103,131)
Balance at September 30, 2022 $ 1,388 $ 1,190,213 $ (29,735) $ 80,266 $ (145,633) $ 1,096,499
See accompanying notes to consolidated financial statements.
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2022, 2021, and 2020 (Dollars in thousands)
2022 2021 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 84,453 $ 76,082 $ 64,540
Adjustments to reconcile net income to net cash provided by operating activities:
FHLB stock dividends (10,031) (3,916) (5,827)
Provision for credit losses (4,630) (8,510) 22,300
Originations of loans receivable held-for-sale ("LHFS") (1,088) (1,780) -
Proceeds from sales of LHFS 1,113 1,825 -
Amortization and accretion of premiums and discounts on securities 4,967 6,206 1,661
Depreciation and amortization of premises and equipment 9,365 9,372 9,133
Amortization of intangible assets 1,372 1,578 1,964
Amortization of deferred amounts related to FHLB advances, net 1,804 1,582 539
Common stock committed to be released for allocation - ESOP 1,740 2,036 1,988
Stock-based compensation 498 496 570
Provision for deferred income taxes 2,047 (1,668) (5,588)
Gain on the sale of Visa Class B shares - (7,386) -
Changes in:
Unrestricted cash collateral received from derivative counterparties, net 12,050 - -
Other assets, net 6,661 12,751 9,105
Income taxes payable/receivable, net (2,197) 105 774
Other liabilities (10,823) (14,306) (8,231)
Net cash provided by operating activities 97,301 74,467 92,928
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of AFS securities (88,026) (1,079,351) (1,007,763)
Proceeds from calls, maturities and principal reductions of AFS securities 323,025 594,294 667,952
Proceeds from the redemption of FHLB stock 302,243 25,386 10,421
Purchase of FHLB stock (319,415) (1,029) -
Net change in loans receivable (381,561) 132,800 191,359
Purchase of premises and equipment (5,557) (9,410) (14,742)
Proceeds from sale of other real estate owned ("OREO") 692 194 993
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 1,023 443 490
Net cash used in investing activities (167,576) (326,668) (151,290)
(Continued)
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2022, 2021, and 2020 (Dollars in thousands)
2022 2021 2020
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (103,131) (117,890) (93,862)
Net change in deposits (402,530) 405,988 609,541
Proceeds from borrowings 1,454,402 1,143,800 1,665,600
Repayments on borrowings (906,902) (1,346,800) (2,112,600)
Change in advances by borrowers 7,338 7,008 35
Payment of FHLB prepayment penalties - (5,077) (4,215)
Repurchase of common stock - (4,568) (20,767)
Stock options exercised - 324 638
Net cash provided by financing activities 49,177 82,785 44,370
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (21,098) (169,416) (13,992)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
Beginning of year 70,292 239,708 253,700
End of year $ 49,194 $ 70,292 $ 239,708
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income tax payments $ 13,559 $ 13,057 $ 13,045
Interest payments $ 83,833 $ 83,646 $ 118,610
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Operating lease right-of-use assets obtained $ - $ - $ 16,841
Operating lease liabilities obtained $ - $ - $ 16,726
See accompanying notes to consolidated financial statements. (Concluded)
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2022, 2021, and 2020
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.
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 and Restricted Cash - Cash, cash equivalents, and restricted cash reported in the statement of cash flows included cash and cash equivalents of $49.2 million and $42.3 million at September 30, 2022 and 2021, respectively, and included restricted cash of $28.0 million at September 30, 2021 which was included in other assets on the consolidated balance sheet. There was no restricted cash at September 30, 2022. The restricted cash relates 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."
Net Presentation of Cash Flows Related to Borrowings - At times, the Bank enters into certain FHLB advances with contractual maturities of 90 days or less. Cash flows related to these advances are reported on a net basis in the consolidated statements of cash flows.
Securities - Securities include MBS and agency debentures issued primarily by United States Government-Sponsored Enterprises ("GSEs"), including Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and the Federal Home Loan Banks, United States Government agencies, including Government National Mortgage Association (GNMA), corporate bonds, and municipal bonds. Securities are classified as held-to-maturity ("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 and totaled $4.2 million and $2.9 million at September 30, 2022 and 2021, respectively. The Company excludes accrued interest from the amortized cost of securities and does not measure ACL for accrued interest. 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, 2022 and 2021, 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, 2022 and 2021, 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. The ACL is limited by the amount that the fair value is less than the amortized cost basis.
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 September 30, 2022 and 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 fees and costs. Net loan 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 the related ACL.
Interest on loans receivable is accrued based on the principal amount outstanding. Accrued interest receivable for loans is reported in other assets on the consolidated balance sheet and totaled $19.4 million and $18.7 million at September 30, 2022 and 2021, respectively. The Company does not calculate ACL for accrued interest. Interest accrued but not received is reversed against interest income.
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, 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.
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 generally 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 troubled debt restructuring ("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 accrued 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, such as 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 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 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 March 2022, the Financial Accounting Standards Board (FASB) issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, this ASU requires that an entity disclose current-period gross write-offs by year of origination for financing receivables within the scope of ASC 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost. This ASU is effective for the Company on October 1, 2023. While the adoption of this ASU is expected to result in enhanced disclosures, the Company does not expect the adoption of this ASU to have a material impact on the Company's consolidated financial condition and results of operations.
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,
2022 2021 2020
(Dollars in thousands, except per share amounts)
Net income $ 84,453 $ 76,082 $ 64,540
Income allocated to participating securities (45) (50) (52)
Net income available to common stockholders $ 84,408 $ 76,032 $ 64,488
Total basic average common shares outstanding 135,700,447 135,481,232 137,896,704
Effect of dilutive stock options - 14,363 4,484
Total diluted average common shares outstanding 135,700,447 135,495,595 137,901,188
Net EPS:
Basic $ 0.62 $ 0.56 $ 0.47
Diluted $ 0.62 $ 0.56 $ 0.47
Antidilutive stock options, excluded from the diluted average
common shares outstanding calculation 516,603 206,284 437,731
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, 2022
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in thousands)
MBS $ 1,243,270 $ 365 $ 155,011 $ 1,088,624
GSE debentures 519,977 - 50,150 469,827
Corporate bonds 4,000 - 305 3,695
Municipal bonds 1,243 - 82 1,161
$ 1,768,490 $ 365 $ 205,548 $ 1,563,307
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
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, 2022
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 $ 338,013 $ 22,563 $ 715,281 $ 132,448
GSE debentures - - 469,827 50,150
Corporate bonds 3,695 305 - -
Municipal bonds 1,161 82 - -
$ 342,869 $ 22,950 $ 1,185,108 $ 182,598
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
The unrealized losses at September 30, 2022 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 an ACL on securities in an unrealized loss position at September 30, 2022 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, 2022, 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 $ 210 $ 210
One year through five years 519,978 469,827
Five years through ten years 5,032 4,646
525,220 474,683
MBS 1,243,270 1,088,624
$ 1,768,490 $ 1,563,307
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,
2022 2021 2020
(Dollars in thousands)
Taxable $ 3,234 $ 2,710 $ 4,242
Non-taxable 34 115 225
$ 3,268 $ 2,825 $ 4,467
The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of the dates presented.
September 30,
2022 2021
(Dollars in thousands)
FHLB advances $ 572,913 $ -
Public unit deposits 125,496 264,885
Federal Reserve Bank of Kansas City ("FRB of Kansas City") borrowings 46,283 64,707
Commercial deposits - 66,256
$ 744,692 $ 395,848
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 2022, 2021, and 2020 were the result of principal repayments, calls, or maturities.
4. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES
Loans receivable, net at September 30, 2022 and 2021 is summarized as follows:
2022 2021
(Dollars in thousands)
One- to four-family:
Originated $ 3,988,469 $ 3,956,064
Correspondent purchased 2,201,886 2,003,477
Bulk purchased 147,939 173,662
Construction 66,164 39,142
Total 6,404,458 6,172,345
Commercial:
Commercial real estate 745,301 676,908
Commercial and industrial 79,981 66,497
Construction 141,062 85,963
Total 966,344 829,368
Consumer:
Home equity 92,203 86,274
Other 8,665 8,086
Total 100,868 94,360
Total loans receivable 7,471,670 7,096,073
Less:
ACL 16,371 19,823
Deferred loan fees/discounts 29,736 29,556
Premiums/deferred costs (38,645) (34,448)
$ 7,464,208 $ 7,081,142
As of September 30, 2022 and 2021, the Bank serviced loans for others aggregating $49.8 million and $63.4 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 $1.1 million and $1.4 million as of September 30, 2022 and 2021, 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, Missouri, and Texas.
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. 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 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. 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 commercial and industrial loans. As a result of these additional complexities, variables and risks, commercial and industrial loans require more thorough underwriting and servicing than other types of loans.
Consumer loans - The Bank offers a variety of consumer loans, the majority of which are home equity loans and 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 the dates indicated, 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, 2022 and September 30, 2021, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.
September 30, 2022
Current Fiscal Fiscal Fiscal Fiscal Revolving
Fiscal Year Year Year Year Prior Line of
Year 2021 2020 2019 2018 Years Credit Total
(Dollars in thousands)
One- to four-family:
Originated
Pass $ 563,460 $ 930,019 $ 624,274 $ 281,342 $ 212,037 $ 1,406,444 $ - $ 4,017,576
Special Mention 47 457 1,111 518 428 7,641 - 10,202
Substandard 158 - 278 1,106 256 8,968 - 10,766
Correspondent purchased
Pass 494,854 651,363 273,626 69,752 104,150 627,390 - 2,221,135
Special Mention - - - 355 1,186 1,197 - 2,738
Substandard - - - 168 513 4,783 - 5,464
Bulk purchased
Pass - - - - - 144,840 - 144,840
Special Mention - - - - - - - -
Substandard - - - - - 3,637 - 3,637
1,058,519 1,581,839 899,289 353,241 318,570 2,204,900 - 6,416,358
Commercial:
Commercial real estate
Pass 366,794 221,001 111,689 86,456 41,322 46,383 7,436 881,081
Special Mention 565 - - - - - - 565
Substandard 436 - 594 221 239 30 - 1,520
Commercial and industrial
Pass 38,442 17,453 5,708 4,212 919 630 11,413 78,777
Special Mention - - - - - - - -
Substandard - - 78 - 73 10 1,052 1,213
406,237 238,454 118,069 90,889 42,553 47,053 19,901 963,156
Consumer:
Home equity
Pass 6,447 2,375 1,486 982 992 2,020 77,448 91,750
Special Mention - 66 - - - - 233 299
Substandard - - - 18 - 3 331 352
Other
Pass 4,207 1,977 843 408 651 201 369 8,656
Special Mention - - 7 - - - - 7
Substandard 1 - - - - - - 1
10,655 4,418 2,336 1,408 1,643 2,224 78,381 101,065
Total $ 1,475,411 $ 1,824,711 $ 1,019,694 $ 445,538 $ 362,766 $ 2,254,177 $ 98,282 $ 7,480,579
In the table below, certain commercial loans are presented in the "Fiscal Year 2021" column and are reported as special mention or substandard. These loans were generally first originated in prior years but were renewed or modified in fiscal year 2021.
September 30, 2021
Fiscal Fiscal Fiscal Fiscal Fiscal Revolving
Year Year Year Year Year Prior Line of
2021 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
Delinquency Status - The following tables set forth, as of the dates indicated, 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 as of the dates indicated. All revolving lines of credit are presented separately, regardless of origination year.
September 30, 2022
Current Fiscal Fiscal Fiscal Fiscal Revolving
Fiscal Year Year Year Year Prior Line of
Year 2021 2020 2019 2018 Years Credit Total
(Dollars in thousands)
One- to four-family:
Originated
Current $ 563,507 $ 930,476 $ 625,110 $ 282,598 $ 212,549 $ 1,417,268 $ - $ 4,031,508
30-89 - - 553 - 64 3,506 - 4,123
90+/FC 158 - - 368 108 2,279 - 2,913
Correspondent purchased
Current 494,854 651,363 273,626 70,107 105,336 629,150 - 2,224,436
30-89 - - - - - 1,117 - 1,117
90+/FC - - - 168 513 3,103 - 3,784
Bulk purchased
Current - - - - - 146,399 - 146,399
30-89 - - - - - 921 - 921
90+/FC - - - - - 1,157 - 1,157
1,058,519 1,581,839 899,289 353,241 318,570 2,204,900 - 6,416,358
Commercial:
Commercial real estate
Current 367,795 221,001 111,689 86,456 41,322 46,383 7,436 882,082
30-89 - - - - - - - -
90+/FC - - 594 221 239 30 - 1,084
Commercial and industrial
Current 38,442 17,453 5,786 4,212 919 630 12,465 79,907
30-89 - - - - - - - -
90+/FC - - - - 73 10 - 83
406,237 238,454 118,069 90,889 42,553 47,053 19,901 963,156
Consumer:
Home equity
Current 6,447 2,441 1,429 1,000 980 1,999 77,633 91,929
30-89 - - 57 - 12 24 226 319
90+/FC - - - - - - 153 153
Other
Current 4,205 1,964 844 404 651 201 368 8,637
30-89 2 13 6 4 - - 1 26
90+/FC 1 - - - - - - 1
10,655 4,418 2,336 1,408 1,643 2,224 78,381 101,065
Total $ 1,475,411 $ 1,824,711 $ 1,019,694 $ 445,538 $ 362,766 $ 2,254,177 $ 98,282 $ 7,480,579
September 30, 2021
Fiscal Fiscal Fiscal Fiscal Fiscal Revolving
Year Year Year Year Year Prior Line of
2021 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 the dates indicated, 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 loans. At September 30, 2022 and 2021, all loans 90 or more days delinquent were on nonaccrual status.
September 30, 2022
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 $ 4,123 $ 2,913 $ 7,036 $ 4,031,508 $ 4,038,544
Correspondent purchased 1,117 3,784 4,901 2,224,436 2,229,337
Bulk purchased 921 1,157 2,078 146,399 148,477
Commercial:
Commercial real estate - 1,084 1,084 882,082 883,166
Commercial and industrial - 83 83 79,907 79,990
Consumer:
Home equity 319 153 472 91,929 92,401
Other 26 1 27 8,637 8,664
$ 6,506 $ 9,175 $ 15,681 $ 7,464,898 $ 7,480,579
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
The amortized cost of mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of September 30, 2022 and 2021 was $2.0 million and $799 thousand, 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 $328 thousand at September 30, 2022 and $170 thousand at September 30, 2021.
The following table presents the amortized cost at September 30, 2022 and September 30, 2021, by class, of loans classified as nonaccrual. Additionally, the amortized cost of nonaccrual loans that had no related ACL is presented all of which were individually evaluated for loss and any identified losses have been charged off.
2022 2021
Nonaccrual Loans Nonaccrual Loans with No ACL Nonaccrual Loans Nonaccrual Loans with No ACL
(Dollars in thousands)
One- to four-family:
Originated $ 3,135 $ 1,018 $ 4,965 $ 2,237
Correspondent purchased 3,784 304 3,257 307
Bulk purchased 1,157 630 3,134 1,564
Commercial:
Commercial real estate 1,084 449 1,496 485
Commercial and industrial 161 161 134 86
Consumer:
Home equity 172 19 494 84
Other 1 - 13 -
$ 9,494 $ 2,581 $ 13,493 $ 4,763
TDRs - The following tables present the amortized cost for the years ended September 30, 2022 and 2021 and the recorded investment for the year ended September 30, 2020, which was prior to the adoption of ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments ("CECL"), 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, 2022
Number Pre- Post-
of Restructured Restructured
Contracts Outstanding Outstanding
(Dollars in thousands)
One- to four-family:
Originated 3 $ 156 $ 156
Correspondent purchased - - -
Bulk purchased - - -
Commercial:
Commercial real estate - - -
Commercial and industrial 2 124 124
Consumer:
Home equity 1 19 19
Other - - -
6 $ 299 $ 299
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
The following table provides information on TDRs that became delinquent during the periods presented within 12 months after being restructured.
For the Years Ended
September 30, 2022 September 30, 2021 September 30, 2020
Number of Amortized Number of Amortized Number of Recorded
Contracts Cost Contracts Cost Contracts Investment
(Dollars in thousands)
One- to four-family:
Originated 2 $ 697 - $ - 1 $ 38
Correspondent purchased - - - - - -
Bulk purchased - - - - 1 134
Commercial:
Commercial real estate - - - - - -
Commercial and industrial - - - - - -
Consumer:
Home equity 1 19 - - 1 9
Other - - - - - -
3 $ 716 - $ - 3 $ 181
Impaired Loans - The following information pertains to impaired loans, by class, for the year ended 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.
With no related allowance recorded With an allowance recorded Total
Average Interest Average Interest Average Interest
Recorded Income Recorded Income Recorded Income
Investment Recognized Investment Recognized Investment Recognized
(Dollars in thousands)
One- to four-family:
Originated $ 13,918 $ 606 $ - $ - $ 13,918 $ 606
Correspondent purchased 1,878 73 - - 1,878 73
Bulk purchased 4,720 179 - - 4,720 179
Commercial:
Commercial real estate 725 15 51 - 776 15
Commercial and industrial 41 - 1,413 91 1,454 91
Consumer:
Home equity 318 20 - - 318 20
Other - - - - - -
$ 21,600 $ 893 $ 1,464 $ 91 $ 23,064 $ 984
Allowance for Credit Losses - The following is a summary of ACL activity, by loan portfolio segment, for the periods presented. Activity during fiscal year 2020 occurred prior to the adoption of CECL.
For the Year Ended September 30, 2022
One- to Four-Family
Correspondent Bulk
Originated Purchased Purchased Total Commercial Consumer Total
(Dollars in thousands)
Beginning balance $ 1,612 $ 2,062 $ 304 $ 3,978 $ 15,652 $ 193 $ 19,823
Charge-offs (9) - - (9) (40) (21) (70)
Recoveries 138 - - 138 101 17 256
Provision for credit losses 325 672 (98) 899 (4,593) 56 (3,638)
Ending balance $ 2,066 $ 2,734 $ 206 $ 5,006 $ 11,120 $ 245 $ 16,371
The decrease in ACL during the current year was primarily a result of a negative provision for credit losses due to a reduction in commercial loan qualitative factors, partially offset by an increase in ACL related to loan growth and a less favorable economic forecast compared to the prior year.
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
The key assumptions in the Company's ACL model at September 30, 2022 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, 2022. The key assumptions utilized in estimating the Company's ACL at September 30, 2022 are discussed below.
•Economic Forecast - Management considered several economic forecasts provided by a third party and selected a weighted economic forecast that was the most appropriate considering the facts and circumstances at September 30, 2022. The forecasted economic indices applied to the model at September 30, 2022 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, 2022 was the national unemployment rate. The forecasted national unemployment rate in the economic scenario selected by management at September 30, 2022 had the national unemployment rate gradually increasing to 4.7% at September 30, 2023 which was the end of our four quarter forecast time period.
•Forecast and reversion to mean time periods - The forecasted time period and the reversion to mean time period were each four quarters for all of the economic indices at September 30, 2022.
•Prepayment and curtailment assumptions - The assumptions used at September 30, 2022 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, 2022 included the following:
◦The economic uncertainties related to the unemployment rate, the labor force composition, and the labor participation rate that are not captured in the economic forecasts; and
◦Other management considerations related to commercial real estate loans that were not captured via the model.
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 periods indicated. At September 30, 2022 and 2021, the Bank's off-balance sheet credit exposures totaled $992.6 million and $883.8 million, respectively. The negative provision for credit losses in the current year was due primarily to a reduction in the commercial loan qualitative factors, partially offset by growth in commercial construction exposures.
For the Year Ended For the Year Ended
September 30, 2022 September 30, 2021
(Dollars in thousands)
Beginning balance $ 5,743 Beginning balance $ -
Provision for credit losses (992) Adoption of CECL 7,788
Ending balance $ 4,751 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, 2022 and 2021 was as follows:
2022 2021
(Dollars in thousands)
Land $ 16,222 $ 15,706
Building and improvements 122,196 120,065
Furniture, fixtures and equipment 49,795 57,129
Total premises and equipment 188,213 192,900
Less accumulated depreciation 93,393 93,773
Premises and equipment, net $ 94,820 $ 99,127
During fiscal year 2021, 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 for branches, ATMs, and certain equipment. These leases have remaining terms that range from five months to 45 years, some of which include exercising renewal options that the Company considers to be reasonably certain. As of September 30, 2022, a right-of-use asset of $11.6 million was included in other assets and a lease liability of $11.8 million was included in other liabilities on the consolidated balance sheets. As of September 30, 2022, for the Company's operating leases, the weighted average remaining lease term was 24.7 years and the weighted average discount rate was 2.54%.
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,
2022 2021 2020
(Dollars in thousands)
Operating lease expense $ 1,397 $ 1,404 $ 1,511
Variable lease expense 164 176 201
Short-term lease expense 2 2 17
Cash paid for amounts included in the measurement of lease liabilities 1,312 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, 2022 (dollars in thousands):
Fiscal year 2023 $ 1,113
Fiscal year 2024 993
Fiscal year 2025 759
Fiscal year 2026 711
Fiscal year 2027 667
Thereafter 12,809
Total future minimum lease payments 17,052
Amounts representing interest (5,239)
Present value of net future minimum lease payments $ 11,813
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 $111.9 million and $101.2 million at September 30, 2022 and 2021, respectively. The Bank's obligations related to unfunded commitments, which are included in other liabilities in the consolidated balance sheets, were $57.9 million and $51.6 million at September 30, 2022 and 2021, respectively. The majority of the commitments at September 30, 2022 are projected to be funded through the end of calendar year 2025.
For fiscal year 2022, 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 2022, 2021 and 2020 was $9.3 million, $8.4 million and $7.9 million, respectively, and the amount of affordable housing tax credits and other related tax benefits was $11.6 million, $10.5 million and $9.8 million, respectively, resulting in a net income tax benefit of $2.3 million, $2.1 million and $1.9 million, respectively. There were no impairment losses during fiscal years 2022, 2021, or 2020 resulting from the forfeiture or ineligibility of tax credits or other circumstances.
7. INTANGIBLE ASSETS
Changes in the carrying amount of the Company's intangible assets associated with an acquisition in 2018, 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, 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
Less: Amortization - (1,372)
Balance at September 30, 2022 $ 9,324 $ 2,589
As of September 30, 2022, 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, 2022 is presented in the following table (dollars in thousands):
2023 $ 1,069
2024 774
2025 523
2026 223
2027 -
8. DEPOSITS AND BORROWED FUNDS
Deposits - Non-interest-bearing deposits totaled $591.4 million and $543.8 million as of September 30, 2022 and 2021, respectively. Certificates of deposit with a minimum denomination of $250 thousand were $334.3 million and $597.4 million as of September 30, 2022 and 2021, respectively. Deposits in excess of $250 thousand may not be fully insured by the Federal Deposit Insurance Corporation.
Borrowings - FHLB borrowings at September 30, 2022 consisted of $2.06 billion in FHLB advances, of which $1.70 billion were fixed-rate advances and $365.0 million were variable-rate advances, and $75.0 million was borrowed against the variable-rate FHLB line of credit. 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. Additionally, the Bank is authorized to borrow from the Federal Reserve Bank's "discount window."
FHLB advances at September 30, 2022 and 2021 were comprised of the following:
2022 2021
(Dollars in thousands)
FHLB advances $ 2,062,500 $ 1,590,000
Deferred prepayment penalty (5,346) (7,150)
$ 2,057,154 $ 1,582,850
Weighted average contractual interest rate on FHLB advances 2.42 % 1.18 %
Weighted average effective interest rate on FHLB advances(1)
2.44 1.88
(1)The effective interest rate includes the net impact of deferred amounts and interest rate swaps related to the adjustable-rate FHLB advances.
At both September 30, 2022 and 2021, the Bank had entered into interest rate swap agreements with a total notional amount of $365.0 million in order to hedge the variable cash flows associated with $365.0 million of adjustable-rate FHLB advances. At September 30, 2022 and 2021, the interest rate swap agreements had an average remaining term to maturity of 3.1 years and 4.1 years, respectively. 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. At September 30, 2022, the interest rate swaps were in a gain position with a total fair value of $12.5 million which was reported in other assets on the consolidated balance sheet. At September 30, 2021, the interest rate swaps were in a loss position with a total fair value of $27.7 million which was reported in other liabilities on the consolidated balance sheet. During fiscal year 2022, $5.1 million was reclassified from AOCI as an increase to interest expense. 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. At September 30, 2022, the Company estimated that $5.8 million of interest expense associated with the interest rate swaps would be reclassified from AOCI as a decrease 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 held cash collateral of $12.1 million at September 30, 2022 and posted cash collateral of $28.0 million at September 30, 2021.
During the current year, the Bank utilized a leverage strategy (the "leverage strategy") to increase earnings. The leverage strategy involved borrowing up to $2.60 billion by entering into short-term FHLB advances, with all of the balance being paid down at each quarter end, or earlier if the strategy is not profitable. The proceeds of the borrowings, net of the required FHLB stock holdings, were deposited at the FRB of Kansas City.
During the prior 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 was no longer probable that the original forecasted transactions subject to the cash flow hedges would 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 prior 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 was 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 2022, the president of FHLB approved an increase, through July 2023, in the Bank's FHLB borrowing limit to 50% of Bank Call Report total assets. At September 30, 2022, the ratio of the par value of the Bank's FHLB borrowings to the Bank's Call Report total assets was 22%.
Scheduled Repayment of Borrowed Funds and Maturity of Certificates of Deposit - The following table presents the scheduled repayment of FHLB advances, at par, and the maturity of certificates of deposit as of September 30, 2022. Excluded from the table is $75.0 million borrowed against the FHLB line of credit at September 30, 2022, which does not have a scheduled repayment date. With the exception of amortizing advances, FHLB advances are payable at maturity. At September 30, 2022, the Bank's FHLB advances had maturities ranging from March 2023 to June 2028.
FHLB Certificates
Advances of Deposit
Amount Amount
(Dollars in thousands)
2023 $ 329,672 $ 1,186,742
2024 519,672 469,700
2025 479,672 207,145
2026 404,672 297,133
2027 227,172 42,395
Thereafter 101,640 638
$ 2,062,500 $ 2,203,753
9. INCOME TAXES
Income tax expense for the years ended September 30, 2022, 2021, and 2020 consisted of the following:
2022 2021 2020
(Dollars in thousands)
Current:
Federal $ 17,105 $ 17,586 $ 17,610
State 3,598 4,028 4,068
20,703 21,614 21,678
Deferred:
Federal 1,632 (1,405) (4,857)
State 415 (263) (731)
2,047 (1,668) (5,588)
$ 22,750 $ 19,946 $ 16,090
The Company's effective tax rates were 21.2%, 20.8%, and 20.0% for the years ended September 30, 2022, 2021, and 2020, 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:
2022 2021 2020
Amount % Amount % Amount %
(Dollars in thousands)
Federal income tax expense
computed at statutory Federal rate $ 22,513 21.0 % $ 20,166 21.0 % $ 16,932 21.0 %
Increases (decreases) in taxes resulting from:
State taxes, net of Federal tax effect 3,399 3.2 3,102 3.2 2,626 3.3
Low income housing tax credits, net (2,238) (2.1) (2,085) (2.1) (1,897) (2.4)
ESOP related expenses, net (641) (0.6) (662) (0.7) (525) (0.6)
Acquired BOLI policies - - - - (636) (0.8)
Other (283) (0.3) (575) (0.6) (410) (0.5)
$ 22,750 21.2 % $ 19,946 20.8 % $ 16,090 20.0 %
The components of the net deferred income tax assets (liabilities) as of September 30, 2022 and 2021 were as follows:
2022 2021
(Dollars in thousands)
Deferred income tax assets:
Unrealized loss on AFS securities $ 50,064 $ -
ACL 3,438 4,163
Lease liabilities 2,883 3,129
Salaries, deferred compensation and employee benefits 2,044 2,017
ESOP compensation 1,472 1,422
Reserve for off-balance sheet credit exposures 1,159 1,402
Low income housing partnerships 337 522
Net purchase discounts related to acquired loans 102 287
Unrealized loss on interest rate swaps - 6,763
Other 891 417
Gross deferred income tax assets 62,390 20,122
Valuation allowance (80) (72)
Gross deferred income tax asset, net of valuation allowance 62,310 20,050
Deferred income tax liabilities:
FHLB stock dividends 14,590 12,563
Premises and equipment 3,614 4,256
ACL 3,145 2,892
Unrealized gain on interest rate swaps 3,061 -
Lease right-of-use assets 2,821 3,088
Deposit intangible 692 1,047
Unrealized gain on AFS securities - 1,501
Other 503 513
Gross deferred income tax liabilities 28,426 25,860
Net deferred tax assets (liabilities) $ 33,884 $ (5,810)
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, 2022 and 2021, the Company had a valuation allowance of $80 thousand and $72 thousand, respectively, related to the net operating losses generated by the Company's consolidated Kansas corporate income tax return as management believes there will not be sufficient taxable income to fully utilize these deferred tax assets. For this reason, a valuation allowance was recorded for the related amounts at September 30, 2022 and 2021. No additional valuation allowances were recorded for the Company's other deferred tax assets as management believes it is more likely than not that these amounts will be realized through the reversal of the Company's existing taxable temporary differences and projected future taxable income.
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, 2022, 2021, and 2020 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 2019.
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 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, 2022, 165,198 shares were released from collateral. On September 30, 2023, 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 $1.7 million for the year ended September 30, 2022, $2.3 million for the year ended September 30, 2021, and $2.0 million for the year ended September 30, 2020. Of these amounts, $88 thousand, $383 thousand, and $336 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, 2022, 2021, and 2020, respectively. There was no compensation expense for dividends on unallocated ESOP shares in excess of the debt service payments for the years ended September 30, 2022 or 2020; for the year ended September 30, 2021, the amount of dividends on unallocated ESOP shares in excess of the debt service payments was $219 thousand.
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, 2022 and 2021:
2022 2021
(Dollars in thousands)
Allocated ESOP shares 4,276,467 4,168,102
Unreleased ESOP shares 2,973,564 3,138,762
Total ESOP shares 7,250,031 7,306,864
Fair value of unreleased ESOP shares $ 24,681 $ 36,064
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, 2022, the Company had 4,378,029 stock options still available for future grants under this plan. The Equity Incentive 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, 2022, the Company had 381,374 stock options outstanding with a weighted average exercise price of $12.51 per option and a weighted average contractual life of 3.3 years, all of which were exercisable. 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, 2022, the Company had 1,585,719 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, 2022, the Company had 69,950 unvested shares of restricted stock with a weighted average grant date fair value of $12.26 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 period. Compensation expense attributable to restricted stock awards during the years ended September 30, 2022, 2021, and 2020 totaled $492 thousand, $480 thousand, and $540 thousand, respectively. The fair value of restricted stock that vested during the years ended September 30, 2022, 2021, and 2020 totaled $408 thousand, $441 thousand, and $535 thousand, respectively. As of September 30, 2022, there was $541 thousand of unrecognized compensation cost related to unvested restricted stock to be recognized over a weighted average period of 2.5 years.
12. COMMITMENTS AND CONTINGENCIES
The following table summarizes the Bank's loan commitments as of September 30, 2022 and 2021:
2022 2021
(Dollars in thousands)
Originate fixed-rate $ 103,618 $ 85,492
Originate adjustable-rate 73,749 52,288
Purchase/participate fixed-rate 74,490 124,128
Purchase/participate adjustable-rate 73,461 6,767
$ 325,318 $ 268,675
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 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, 2022 and 2021, there were no significant loan-related commitments that met the definition of derivatives or commitments to sell mortgage loans. As of September 30, 2022 and 2021, the Bank had approved but unadvanced lines of credit of $282.4 million and $287.9 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, 2022, 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 the Board of Governors of the Federal Reserve System ("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 Coronavirus Aid, Relief, and Economic Security (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 the requirement returned to 9% in calendar year 2022.
Management believes, as of September 30, 2022, 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, 2022 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, 2022
Bank $ 1,090,222 9.0 % $ 1,090,015 9.0 %
Company 1,230,851 10.2 1,089,869 9.0
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
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, 2022, the balance of this liquidation account was $92.5 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 the fair value of its financial instruments on the price that would be received from the sale of an 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, 2022 and 2021. 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)
•Corporate Bonds and 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, 2022 and 2021. (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, 2022 or 2021.
September 30, 2022
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 $ 1,088,624 $ - $ 1,088,624 $ -
GSE debentures 469,827 - 469,827 -
Corporate bonds 3,695 - 3,695 -
Municipal bonds 1,161 - 1,161 -
1,563,307 - 1,563,307 -
Interest rate swaps 12,547 - 12,547 -
$ 1,575,854 $ - $ 1,575,854 $ -
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 $ -
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 - 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. The fair value of collateral dependent loans/loans individually evaluated for loss on a non-recurring basis during fiscal years 2022 and 2021 that were still held in the portfolio as of September 30, 2022 and 2021 was $4.7 million and $7.4 million, respectively. 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.
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 adjust 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, 2022 were downward adjustments to the book value of the collateral for lack of marketability. During fiscal year 2022, the adjustments ranged from 8% to 100%, with a weighted average of 21%. During fiscal year 2021, the adjustments ranged from 7% to 50%, with a weighted average of 21%. The basis utilized in calculating the weighted averages for these adjustments was the original unadjusted value of each collateral item.
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 2022 and 2021 that was still held in the portfolio as of September 30, 2022 and 2021 was $328 thousand and $170 thousand, respectively. The carrying value of the properties equaled the fair value of the properties at September 30, 2022 and 2021.
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 $ 49,194 $ 49,194 $ 49,194 $ - $ -
AFS securities 1,563,307 1,563,307 - 1,563,307 -
Loans receivable 7,464,208 6,889,211 - - 6,889,211
FHLB stock 100,624 100,624 100,624 - -
Interest rate swaps 12,547 12,547 - 12,547 -
Liabilities:
Deposits 6,194,866 6,124,835 3,991,114 2,133,721 -
Borrowings 2,132,154 1,910,779 75,000 1,835,779 -
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 -
15. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following tables present the changes in the components of AOCI, net of tax, for the years presented. The amounts reclassified from AOCI related to the Bank's cash flow hedges are reported as increases in interest expense within the consolidated statements of operations for each year presented, except for $3.6 million in fiscal year 2021, which was reported in the loss on interest rate swap termination line item within the consolidated statements of operations. See "Note 8. Deposits and Borrowed Funds" for additional information regarding reclassifications from AOCI related to the Bank's cash flow hedges.
For the Year Ended September 30, 2022
Unrealized Unrealized
Gains (Losses) Gains (Losses)
on AFS on Cash Flow Total
Securities Hedges AOCI
(Dollars in thousands)
Beginning balance $ 4,651 $ (20,956) $ (16,305)
Other comprehensive income (loss), before reclassifications (159,770) 25,339 (134,431)
Amount reclassified from AOCI, net of taxes of $(1,647)
- 5,103 5,103
Other comprehensive income (loss) (159,770) 30,442 (129,328)
Ending balance $ (155,119) $ 9,486 $ (145,633)
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)
16. REVENUE RECOGNITION
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 2022, 2021 and 2020, revenue from contracts with customers totaled $18.1 million, $16.5 million and $14.8 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, $3.6 million and $3.2 million for fiscal years 2022, 2021 and 2020, 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. Contingent insurance commissions are accrued based upon management's expectations.
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 services are provided and the Company assesses fees 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, 2022 and 2021
(Dollars in thousands, except per share amounts)
2022 2021
ASSETS:
Cash and cash equivalents $ 103,977 $ 75,553
Investment in the Bank 955,871 1,110,339
Note receivable - ESOP 35,767 37,213
Receivable from the Bank - 18,158
Income taxes receivable, net 454 467
Other assets 583 625
TOTAL ASSETS $ 1,096,652 $ 1,242,355
LIABILITIES:
Deferred income tax liabilities, net $ 72 $ 82
Payable to the Bank 81 -
Total liabilities 153 82
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, 138,858,884 and 138,832,284 shares issued and outstanding as of September 30, 2022 and 2021, respectively
1,388 1,388
Additional paid-in capital 1,190,213 1,189,633
Unearned compensation - ESOP (29,735) (31,387)
Retained earnings 80,266 98,944
AOCI, net of tax (145,633) (16,305)
Total stockholders' equity 1,096,499 1,242,273
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,096,652 $ 1,242,355
STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2022, 2021, and 2020
(Dollars in thousands)
2022 2021 2020
INTEREST AND DIVIDEND INCOME:
Dividend income from the Bank $ 111,745 $ 132,063 $ 68,329
Interest income from other investments 1,484 1,509 2,036
Total interest and dividend income 113,229 133,572 70,365
NON-INTEREST EXPENSE:
Salaries and employee benefits 843 908 988
Regulatory and outside services 259 287 292
Other non-interest expense 614 608 622
Total non-interest expense 1,716 1,803 1,902
INCOME BEFORE INCOME TAX EXPENSE AND EQUITY IN
EXCESS OF DISTRIBUTION OVER EARNINGS OF SUBSIDIARY 111,513 131,769 68,463
INCOME TAX (BENEFIT) EXPENSE (49) (62) 28
INCOME BEFORE EQUITY IN EXCESS OF
DISTRIBUTION OVER EARNINGS OF SUBSIDIARY 111,562 131,831 68,435
EQUITY IN EXCESS OF DISTRIBUTION OVER EARNINGS OF SUBSIDIARY (27,109) (55,749) (3,895)
NET INCOME $ 84,453 $ 76,082 $ 64,540
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2022, 2021, and 2020
(Dollars in thousands)
2022 2021 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 84,453 $ 76,082 $ 64,540
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in excess of distribution over earnings of subsidiary 27,109 55,749 3,895
Depreciation of equipment 46 45 45
Provision for deferred income taxes (10) (9) 91
Changes in:
Receivable from/payable to the Bank 18,239 (18,257) -
Income taxes receivable/payable 13 25 (63)
Other assets (10) 21 (60)
Other liabilities - (5) 13
Net cash provided by operating activities 129,840 113,651 68,461
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on note receivable from ESOP 1,446 1,401 1,357
Net cash provided by investing activities 1,446 1,401 1,357
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payment from subsidiary related to restricted stock awards 269 169 319
Cash dividends paid (103,131) (117,890) (93,862)
Repurchase of common stock - (4,568) (20,767)
Stock options exercised - 324 638
Net cash used in financing activities (102,862) (121,965) (113,672)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 28,424 (6,913) (43,854)
CASH AND CASH EQUIVALENTS:
Beginning of year 75,553 82,466 126,320
End of year $ 103,977 $ 75,553 $ 82,466

---

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

---

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, 2022. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of September 30, 2022, 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, 2022. 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, 2022.
The Company's independent registered public accounting firm, Deloitte & Touche LLP, Kansas City, Missouri (Auditor Firm ID: 34), who audited the consolidated financial statements included in Item 8 of this annual report, has issued an audit report on the Company's internal control over financial reporting as of September 30, 2022 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, 2022 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

---

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

---

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 2023, 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 2023, 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.

---

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 2023, a copy of which will be filed not later than 120 days after the close of the fiscal year.

---

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 2023, 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, 2022 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 381,374 $ 12.51 5,963,748 (1)
Equity compensation plans not
approved by stockholders N/A N/A N/A
381,374 $ 12.51 5,963,748
(1)This amount includes 1,585,719 shares available for future grants of restricted stock under the Equity Incentive Plan.

---

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 2023, a copy of which will be filed not later than 120 days after the close of the fiscal year.

---

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 2023, a copy of which will be filed not later than 120 days after the close of the fiscal year.
PART IV

---

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, 2022 and 2021.
3.Consolidated Statements of Income for the Years Ended September 30, 2022, 2021, and 2020.
4.Consolidated Statements of Comprehensive Income for the Years Ended September 30, 2022, 2021, and 2020.
5.Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 2022, 2021, and 2020.
6.Consolidated Statements of Cash Flows for the Years Ended September 30, 2022, 2021, and 2020.
7.Notes to Consolidated Financial Statements for the Years Ended September 30, 2022, 2021, and 2020.
(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."