CAPITOL FEDERAL FINANCIAL: Management report and analysis of the financial situation and operating results (form 10-Q)
The Company and the Bank may from time to time make written or oral "forward-looking statements," including statements contained in documents filed or furnished by the Company with theSEC . These forward-looking statements may be included in this Quarterly Report on Form 10-Q and the exhibits attached to it, in the Company's reports to stockholders, in the Company's press releases, and in other communications by the Company, which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause our future results to differ materially from the beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in the forward-looking statements: •our ability to maintain overhead costs at reasonable levels; •our ability to originate and purchase a sufficient volume of one- to four-family loans in order to maintain the balance of that portfolio at a level desired by management; •our ability to invest funds in wholesale or secondary markets at favorable yields compared to the related funding source; •our ability to access cost-effective funding; •the expected synergies and other benefits from our acquisition activities; •our ability to extend our commercial banking and trust asset management expertise; •fluctuations in deposit flows; •the future earnings and capital levels of the Bank and the continued non-objection by our primary federal banking regulators, to the extent required, to distribute capital from the Bank to the Company, which could affect the ability of the Company to pay dividends in accordance with its dividend policy; •the strength of theU.S. economy in general and the strength of the local economies in which we conduct operations, including areas where we have purchased large amounts of correspondent loans; •changes in real estate values, unemployment levels, and the level and direction of loan delinquencies and charge-offs may require changes in the estimates of the adequacy of the ACL, which may adversely affect our business; •potential adverse impacts of the ongoing COVID-19 pandemic and any governmental or societal responses thereto on economic conditions in the Company's local market areas and other market areas where the Bank has lending relationships, on other aspects of the Company's business operations and on financial markets; •increases in classified and/or non-performing assets, which may require the Bank to increase the ACL, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets; •results of examinations of the Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our ACL; •changes in accounting principles, policies, or guidelines; •the effects of, and changes in, monetary and interest rate policies of theBoard of Governors of theFederal Reserve System ("FRB"); •the effects of, and changes in, trade and fiscal policies and laws ofthe United States government; •the effects of, and changes in, foreign and military policies ofthe United States government; •inflation, interest rate, market, monetary, and currency fluctuations; •the timely development and acceptance of new products and services and the perceived overall value of these products and services by users, including the features, pricing, and quality compared to competitors' products and services; •the willingness of users to substitute competitors' products and services for our products and services; •our success in gaining regulatory approval of our products and services and branching locations, when required; •the impact of interpretations of, and changes in, financial services laws and regulations, including laws concerning taxes, banking, securities, consumer protection, trust and insurance and the impact of other governmental initiatives affecting the financial services industry; •implementing business initiatives may be more difficult or expensive than anticipated; •significant litigation; •technological changes; •our ability to maintain the security of our financial, accounting, technology, and other operating systems and facilities, including the ability to withstand cyber-attacks; •acquisitions and dispositions; •changes in consumer spending, borrowing and saving habits; and •our success at managing the risks involved in our business. 37 -------------------------------------------------------------------------------- This list of important factors is not all inclusive. For a discussion of risks and uncertainties related to our business that could adversely impact our operations and/or financial results, see "Part I, Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020 and Part II, Item 1A. Risk Factors within this Quarterly Report on Form 10-Q. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank. As used in this Form 10-Q, unless we specify or the context indicates otherwise, "the Company," "we," "us," and "our" refer toCapitol Federal Financial, Inc. aMaryland corporation, and its subsidiaries. "Capitol Federal Savings," and "the Bank," refer toCapitol Federal Savings Bank , a federal savings bank and the wholly-owned subsidiary ofCapitol Federal Financial, Inc. The following discussion and analysis is intended to assist in understanding the financial condition, results of operations, liquidity, and capital resources of the Company. The Bank comprises almost all of the consolidated assets and liabilities of the Company and the Company is dependent primarily upon the performance of the Bank for the results of its operations. Because of this relationship, references to management actions, strategies and results of actions apply to both the Bank and the Company. This discussion and analysis should be read in conjunction with Management's Discussion and Analysis included in the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 , filed with theSEC . Executive Summary
The following summary should be read in conjunction with the section Management’s Discussion and Analysis of Financial Condition and Results of Operations in its entirety.
The Company recognized net income of$57.5 million , or$0.42 per share, for the nine month period endedJune 30, 2021 compared to net income of$46.3 million , or$0.34 per share, for the nine month period endedJune 30, 2020 . The increase in net income was due primarily to recording a$22.3 million provision for credit losses during the prior year period compared to recording a negative provision for credit losses of$7.2 million in the current year period, partially offset by a decrease in net interest income and an increase in income tax expense. Net interest income decreased$14.2 million , or 9.9%, from the prior year period to$129.5 million for the current year period. Net interest margin decreased 27 basis points, from 2.15% for the prior year period to 1.88% for the current year period. The decrease in net interest income and net interest margin was due mainly to a decrease in asset yields, along with a change in asset mix as cash flows from the loan portfolio have been used to purchase lower yielding securities, partially offset by a decrease in the cost of deposits and borrowings. Total assets were$9.65 billion atJune 30, 2021 , an increase of$162.4 million , or 1.7% fromSeptember 30, 2020 , due mainly to an increase in securities, partially offset by decreases in loans receivable and cash and cash equivalents. Securities were purchased with cash flows from the loan portfolio and growth in the deposit portfolio that was not used to pay down maturing borrowings. Total securities increased$454.7 million , or 29.1%, fromSeptember 30, 2020 toJune 30, 2021 , including a$338.2 million increase in MBS and a$116.5 million increase in investment securities. Total loans were$7.03 billion atJune 30, 2021 , a decrease of$169.0 million fromSeptember 30, 2020 . The decrease was primarily in the one- to four-family correspondent loan portfolio. During the current year nine month period, the Bank originated and refinanced$948.6 million of one- to four-family and consumer loans with a weighted average rate of 2.75% and purchased$505.0 million of one- to four-family loans from correspondent lenders with a weighted average rate of 2.63%. The Bank also originated$208.5 million of commercial loans with a weighted average rate of 3.30% and entered into commercial loan participations of$115.1 million at a weighted average rate of 4.17%. The commercial loan portfolio totaled$815.0 million atJune 30, 2021 and was composed of 84% commercial real estate loans, 9% commercial and industrial loans, and 7% commercial construction loans. Total commercial real estate and commercial construction potential exposure, including undisbursed amounts and outstanding commitments totaling$267.0 million , was$1.01 billion atJune 30, 2021 . Total commercial and industrial potential exposure, including undisbursed amounts and outstanding commitments of$23.7 million , was$97.4 million atJune 30, 2021 , of which$18.3 million related to PPP loans.
Total deposits were
Total borrowings atJune 30, 2021 were$1.58 billion , a decrease of$206.9 million , or 11.6%, fromSeptember 30, 2020 . The decrease was due to not renewing borrowings that matured during the current year period. Cash flows from deposit growth were used to pay off maturing borrowings. Stockholders' equity atJune 30, 2021 was$1.24 billion , a decrease of$47.2 million , or 3.7%, fromSeptember 30, 2020 . During the current year nine month period, the Company paid cash dividends totaling$106.4 million and repurchased common stock totaling$1.5 million , partially offset by net income of$57.5 million . The cash dividends paid during the current year nine month period totaled 38 --------------------------------------------------------------------------------$0.785 per share and consisted of a$0.40 per share True Blue Capitol cash dividend, a$0.13 per share cash true-up dividend related to fiscal year 2020 earnings and three regular quarterly cash dividends of$0.085 per share. OnJuly 20, 2021 , the Company announced a regular quarterly cash dividend of$0.085 per share, or approximately$11.5 million , payable onAugust 20, 2021 to stockholders of record as of the close of business onAugust 6, 2021 . In the long run, management considers the Bank's equity to total assets ratio of at least 9% an appropriate level of capital. AtJune 30, 2021 , this ratio was 11.5%. Available Information Financial and other Company information, including press releases, 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 investor relations website, http://ir.capfed.com.SEC filings are available on our website immediately after they are electronically filed with or furnished to theSEC , and are also available on theSEC's website at www.sec.gov. Critical Accounting Policies Our most critical accounting policies are the methodologies used to determine the ACL and reserve for off-balance sheet credit exposures and fair value measurements. These policies are important to the presentation of our financial condition and results of operations, involve a high degree of complexity, and require management to make difficult and subjective judgments that may require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could affect reported results materially. These critical accounting policies and their application are reviewed at least annually by our audit committee. The following is a description of our critical accounting policies and an explanation of the methods and assumptions underlying their application. Allowance for Credit Losses 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 current expectations of total expected credit losses included in 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. The reserve for off-balance sheet credit exposures is reported as a liability and is presented in other liabilities on the consolidated balance sheet. The ACL and reserve for off-balance sheet credit exposures is maintained through provisions for credit losses which are either charged or credited to income. The methodology for determining the ACL is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in forecasted macroeconomic conditions that could result in fluctuations in the amount of the recorded ACL. The reserve for off-balance sheet credit exposures is calculated using the same methodology as the ACL; however, the estimate of credit risk for off-balance sheet credit exposures takes into consideration the likelihood that funding of the commitment will occur. At each quarter end, the Company prepares an ACL model to calculate expected credit losses. The Company aggregates loans into pools in the ACL model based on similar risk characteristics. Loans that do not share similar risk characteristics are evaluated on an individual basis and are not included in the ACL model. The key assumptions in the Company's ACL model include the economic forecast, the forecast and reversion to mean time periods, and prepayment and curtailment assumptions. Using all of these inputs and assumptions, the ACL model generates aggregated estimated cash flows for the time period that remains for each loan's contractual life. The cash flows are discounted back to the reporting date using each loan's effective yield, to arrive at the present value of future cash flows. Each loan pool's ACL is equal to the aggregate shortage, if any, of the present value of the future cash flows compared to the amortized cost basis of the loan pool. Management considers qualitative factors when evaluating the adequacy of the ACL and reserve for off-balance sheet credit exposures calculated by the ACL model. The qualitative factors considered include such items as: 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 may increase or decrease the ACL and reserve for off-balance sheet credit exposures based on the evaluation of the qualitative factors. 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, 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. 39 --------------------------------------------------------------------------------
See “Provision for credit losses” and “Reserve for off-balance sheet credit risks” in “Note 1. Summary of significant accounting policies” above for more information.
Fair Value Measurements. The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with ASC 820 and ASC 825. The Company groups its financial instruments at fair value in three levels based on the markets in which the instruments are traded and the reliability of the assumptions used to determine fair value, with Level 1 (quoted prices for identical assets in an active market) being considered the most reliable, and Level 3 having the most unobservable inputs and therefore being considered the least reliable. The Company bases its fair values on the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company's AFS securities are measured at fair value on a recurring basis. Changes in the fair value of AFS securities, not related to credit loss, are recorded, net of tax, as AOCI in stockholders' equity. The Company primarily uses prices obtained from third-party pricing services to determine the fair value of its AFS securities. Various modeling techniques are used to determine pricing for the Company's securities, including option pricing, discounted cash flow models, and similar techniques. The inputs to these models may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. All AFS securities are classified as Level 2. The Company's interest rate swaps are measured at fair value on a recurring basis. The estimated fair value of the interest rate swaps are obtained from the counterparty and are determined by a discounted cash flow analysis using observable market-based inputs. Changes in the fair value of the interest rate swaps are recorded, net of tax, as AOCI in stockholders' equity. The Company did not have any other financial instruments that were measured at fair value on a recurring basis atJune 30, 2021 orSeptember 30, 2020 . 40 -------------------------------------------------------------------------------- Financial Condition The following table presents selected balance sheet information as of the dates indicated. June 30, March 31, December 31, September 30, June 30, 2021 2021 2020 2020 2020 (Dollars in thousands) Total assets$ 9,649,665 $ 9,698,019 $ 9,606,964 $ 9,487,218 $ 9,558,814 Cash and cash equivalents 95,305 139,472 168,032 185,148 396,219 AFS securities 2,015,705 2,095,924 1,913,866 1,560,950 1,220,054 Loans receivable, net 7,033,827 6,973,536 7,004,094 7,202,851 7,388,090 FHLB stock, at cost 73,630 74,464 84,693 93,862 102,782 Deposits 6,638,294 6,650,865 6,410,842 6,191,408 6,069,684 Borrowings 1,582,400 1,581,955 1,734,275 1,789,313 1,989,089 Stockholders' equity 1,237,624 1,278,595 1,276,548 1,284,859 1,300,520 Equity to total assets at end of period 12.8 % 13.2 % 13.3 % 13.5 % 13.6 % Total assets were$9.65 billion atJune 30, 2021 , a decrease of$48.4 million , or 0.5%, fromMarch 31, 2021 , due primarily to decreases in securities and cash, partially offset by an increase in loans receivable. The Company paid$65.7 million in dividends during the current quarter which reduced excess operating cash. Cash flows from the securities portfolio were generally used to fund loan growth during the current quarter. Total loans were$7.03 billion atJune 30, 2021 , an increase of$60.3 million , or 0.9%, fromMarch 31, 2021 . The increase was mainly in the one- to four-family correspondent loan portfolio and commercial real estate portfolio. During the current quarter, the Bank originated and refinanced$299.2 million of one- to four-family and consumer loans with a weighted average rate of 2.85% and purchased$235.8 million of one- to four-family loans from correspondent lenders with a weighted average rate of 2.54%. The Bank also originated$51.2 million of commercial loans with a weighted average rate of 3.48% and entered into commercial loan participations of$17.0 million at a weighted average rate of 6.00%. Total deposits were$6.64 billion atJune 30, 2021 , a decrease of$12.6 million , or 0.2%, fromMarch 31, 2021 . The decrease was due primarily to a$100.0 million decrease in retail certificates of deposit, partially offset by an$85.8 million increase in money market accounts, as customers moved some of the funds from maturing certificates to more liquid investment options such as the Bank's retail money market accounts. 41 --------------------------------------------------------------------------------
Ready to receive. The following table presents the balance and the weighted average rate of our loan portfolio on the dates indicated.
June 30, 2021 March 31, 2021 September 30, 2020
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
One- to four-family:
Originated $ 3,977,129 3.23 % $ 3,967,008 3.29 % $ 3,937,310 3.50 %
Correspondent purchased 1,953,185 3.09 1,915,027 3.27 2,101,082 3.49
Bulk purchased 179,019 1.90 188,733 2.09 208,427 2.41
Construction 30,325 2.96 28,582 3.11 34,593 3.30
Total 6,139,658 3.14 6,099,350 3.24 6,281,412 3.46
Commercial:
Commercial real estate 680,664 3.99 664,533 4.04 626,588 4.29
Commercial and industrial 73,713 3.24 77,210 3.08 97,614 2.79
Construction 60,614 4.11 53,271 4.25 105,458 4.04
Total 814,991 3.93 795,014 3.96 829,660 4.08
Consumer loans:
Home equity 88,587 4.63 90,052 4.64 103,838 4.66
Other 8,389 4.26 8,743 4.36 10,086 4.40
Total 96,976 4.60 98,795 4.61 113,924 4.64
Total loans receivable 7,051,625 3.26 6,993,159 3.34 7,224,996 3.55
Less:
ACL 20,724 23,397 31,527
Discounts/unearned loan fees 30,593 30,295 29,190
Premiums/deferred costs (33,519) (34,069) (38,572)
Total loans receivable, net $ 7,033,827 $ 6,973,536 $ 7,202,851
42
-------------------------------------------------------------------------------- Loan Activity - The following tables summarize activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, discounts/unearned loan fees, and premiums/deferred costs. Loans that were paid off as a result of refinances are included in repayments. Loan endorsements are not included in the activity in the following table because a new loan is not generated at the time of the endorsement. The endorsed balance and rate are included in the ending loan portfolio balance and rate. During the current year-to-date period, the Bank endorsed$699.2 million of one- to four-family loans, reducing the average rate on those loans by 93 basis points ($285.2 million were endorsed during theDecember 31, 2020 quarter, reducing the average rate on those loans by 87 basis points,$242.3 million were endorsed during theMarch 31, 2021 quarter, reducing the average rate on those loans by 96 basis points, and$171.7 million were endorsed during theJune 30, 2021 quarter, reducing the average rate on those loans by 98 basis points). Commercial loan renewals are not included in the activity in the following table unless new funds are disbursed at the time of renewal. The renewal balance and rate are included in the ending loan portfolio balance and rate. For the Three Months Ended June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Amount Rate Amount Rate Amount Rate Amount Rate (Dollars in thousands) Beginning balance$ 6,993,159 3.34 %$ 7,023,626 3.46 %$ 7,224,996 3.55 %$ 7,407,442 3.64 % Originated and refinanced: Fixed 279,170 2.78 326,570 2.54 318,690 2.75 265,424 2.98 Adjustable 71,216 3.58 112,483 3.43 48,946 3.60 44,625 3.68 Purchased and participations: Fixed 232,335 2.54 192,262 2.82 100,518 2.86 61,435 3.07 Adjustable 20,499 5.36 9,150 2.42 65,315 3.89 4,396 2.76 Change in undisbursed loan funds (33,512) (63,925) (70,323) 13,898 Repayments (511,222) (606,937) (664,052) (572,536) Principal recoveries/(charge-offs), net 52 (70) (464) 312 Other (72) - - - Ending balance$ 7,051,625 3.26$ 6,993,159 3.34$ 7,023,626 3.46$ 7,224,996 3.55 For the Nine Months Ended June 30, 2021 June 30, 2020 Amount Rate Amount Rate (Dollars in thousands) Beginning balance$ 7,224,996 3.55 %$ 7,412,473 3.81 % Originated and refinanced: Fixed 924,430 2.69 684,488 3.22 Adjustable 232,645 3.51 171,698 4.04 Purchased and participations: Fixed 525,115 2.70 380,469 3.50 Adjustable 94,964 4.07 95,296 3.50 Change in undisbursed loan funds (167,760) (17,896) Repayments (1,782,211) (1,318,439) Principal charge-offs, net (482) (311) Other (72) (336) Ending balance$ 7,051,625 3.26$ 7,407,442 3.64 43
--------------------------------------------------------------------------------
The following tables present loan origination, refinance, and purchase activity
for the periods indicated, excluding endorsement activity, along with associated
weighted average rates and percent of total. Commercial loan renewals are not
included in the activity in the following table except to the extent new funds
are disbursed at the time of renewal. Loan originations, purchases, and
refinances are reported together.
For the Three Months Ended
June 30, 2021 June 30, 2020
Amount Rate % of Total Amount Rate % of Total
(Dollars in thousands)
Fixed-rate:
One- to four-family:(1)
<= 15 years $ 112,335 2.18 % 18.6 % $ 126,378 2.79 % 23.7 %
> 15 years 346,115 2.79 57.4 205,047 3.39 38.5
One- to four-family
construction 39,012 2.83 6.5 11,005 3.27 2.1
Commercial:
Commercial real estate 2,221 3.94 0.4 19,333 3.71 3.6
Commercial and industrial 9,000 2.72 1.5 46,609 1.23 8.8
Commercial construction 627 3.75 0.1 - - -
Home equity 1,150 5.55 0.2 774 5.98 0.1
Other 1,045 5.35 0.2 497 6.76 0.1
Total fixed-rate 511,505 2.67 84.9 409,643 2.98 76.9
Adjustable-rate:
One- to four-family:(2)
<= 36 months 1,133 2.34 0.2 1,610 2.74 0.3
> 36 months 12,786 2.50 2.1 40,099 2.93 7.5
One- to four-family
construction 5,612 2.68 0.9 932 3.06 0.2
Commercial:
Commercial real estate 33,973 3.57 5.6 16,035 4.58 3.0
Commercial and industrial 4,447 3.96 0.7 1,504 3.79 0.3
Commercial construction 17,935 5.91 3.0 50,237 4.03 9.4
Home equity 15,187 4.47 2.5 12,390 4.42 2.3
Other 642 3.77 0.1 329 3.48 0.1
Total adjustable-rate 91,715 3.98 15.1 123,136 3.75 23.1
Total originated,
refinanced and purchased $ 603,220 2.87 100.0 % $ 532,779 3.16 100.0 %
Purchased and participation loans included
above:
Fixed-rate:
Correspondent - one- to
four-family $ 232,335 2.54 $ 114,039 3.22
Participations - commercial - - 17,700 3.70
Total fixed-rate
purchased/participations 232,335 2.54 131,739 3.28
Adjustable-rate:
Correspondent - one- to
four-family 3,499 2.24 15,010 2.87
Participations - commercial 17,000 6.00 47,500 4.04
Total adjustable-rate
purchased/participations 20,499 5.36 62,510 3.76
Total
purchased/participation
loans $ 252,834 2.77 $ 194,249 3.44
44
--------------------------------------------------------------------------------
For the Nine Months Ended
June 30, 2021 June 30, 2020
Amount Rate % of Total Amount Rate % of Total
(Dollars in thousands)
Fixed-rate:
One- to four-family:(1)
<= 15 years $ 394,798 2.26 % 22.2 % $ 279,441 2.88 % 21.0 %
> 15 years 848,249 2.83 47.7 613,890 3.50 46.1
One- to four-family
construction 98,852 2.76 5.6 36,107 3.38 2.7
Commercial:
Commercial real estate 18,481 3.62 1.1 32,605 4.23 2.5
Commercial and industrial 42,582 2.22 2.4 60,648 1.84 4.6
Commercial construction 42,165 3.65 2.4 36,253 4.72 2.7
Home equity 2,095 5.47 0.1 3,261 5.91 0.2
Other 2,323 5.43 0.1 2,752 5.76 0.2
Total fixed-rate 1,449,545 2.69 81.6 1,064,957 3.32 80.0
Adjustable-rate:
One- to four-family:(2)
<= 36 months 2,245 2.31 0.1 5,279 2.82 0.4
> 36 months 51,228 2.52 2.9 106,407 2.99 8.0
One- to four-family
construction 11,069 2.64 0.6 10,929 3.03 0.8
Commercial:
Commercial real estate 105,348 3.63 5.9 42,557 4.62 3.2
Commercial and industrial 9,492 3.78 0.5 5,979 4.75 0.4
Commercial construction 105,555 4.10 6.0 51,724 4.07 3.9
Home equity 41,207 4.43 2.3 42,359 5.16 3.2
Other 1,465 3.45 0.1 1,760 3.94 0.1
Total adjustable-rate 327,609 3.67 18.4 266,994 3.85 20.0
Total originated,
refinanced and purchased $ 1,777,154 2.87 100.0 % $ 1,331,951 3.42 100.0 %
Purchased and participation loans
included above:
Fixed-rate:
Correspondent - one- to
four-family $ 487,001 2.63 $ 334,343 3.39
Participations - commercial 38,114 3.62 46,126 4.29
Total fixed-rate
purchased/participations 525,115 2.70 380,469 3.50
Adjustable-rate:
Correspondent - one- to
four-family 17,964 2.46 47,796 2.96
Participations - commercial 77,000 4.44 47,500 4.04
Total adjustable-rate
purchased/participations 94,964 4.07 95,296 3.50
Total
purchased/participation
loans $ 620,079 2.91 $ 475,765 3.50
(1)The fixed-rate one- to four-family loans less than or equal to 15 years have
an original maturity at origination of less than or equal to 15 years, while
fixed-rate one- to four-family loans greater than 15 years have an original
maturity at origination of greater than 15 years.
(2)The adjustable-rate one- to four-family loans less than or equal to 36 months
have a term to first reset of less than or equal to 36 months at origination and
adjustable-rate one- to four-family loans greater than 36 months have a term to
first reset of greater than 36 months at origination.
45
--------------------------------------------------------------------------------
One- to Four-Family Loans - The following table presents, for our portfolio of
one- to four-family loans, the amount, percent of total, weighted average credit
score, weighted average LTV ratio, and average balance per loan as of the dates
presented. Credit scores are updated at least annually, with the latest update
in March 2021 , from a nationally recognized consumer rating agency. The LTV
ratios were based on the current loan balance and either the lesser of the
purchase price or original appraisal, or the most recent Bank appraisal, if
available. In most cases, the most recent appraisal was obtained at the time of
origination.
June 30, 2021 September 30, 2020
% of Credit Average % of Credit Average
Amount Total Score LTV Balance Amount Total Score LTV Balance
(Dollars in thousands)
Originated $ 3,977,129 65.1 % 772 61 % $ 150 $ 3,937,310 63.0 % 771 62 % $ 145
Correspondent purchased 1,953,185 32.0 766 63 396 2,101,082 33.6 765 64 379
Bulk purchased 179,019 2.9 773 59 295 208,427 3.4 767 60 300
$ 6,109,333 100.0 % 770 62 191 $ 6,246,819 100.0 % 768 63 187
The following tables present originated, refinanced, and correspondent purchased
activity in our one- to four-family loan portfolio, excluding endorsement
activity, along with associated weighted average LTVs and weighted average
credit scores for the periods indicated. Included in the "Refinanced by Bank
customers" line item are correspondent loans that were refinanced with the Bank.
Of the loans originated during the current year nine month period, $287.8
million were refinanced from other lenders.
For the Three Months Ended
June 30, 2021 June 30, 2020
Credit Credit
Amount LTV Score Amount LTV Score
(Dollars in thousands)
Originated $ 207,706 73 % 766 $ 173,851 73 % 763
Refinanced by Bank customers 73,453 67 761 82,171 67 767
Correspondent purchased 235,834 68 773 129,049 70 771
$ 516,993 70 769 $ 385,071 71 766
For the Nine Months Ended
June 30, 2021 June 30, 2020
Credit Credit
Amount LTV Score Amount LTV Score
(Dollars in thousands)
Originated $ 613,068 71 % 768 $ 479,751 74 % 765
Refinanced by Bank customers 288,408 66 767 190,163 68 763
Correspondent purchased 504,965 69 774 382,139 71 768
$ 1,406,441 69 770 $ 1,052,053 72 766
46
--------------------------------------------------------------------------------
The following table presents the amount, percent of total, and weighted average
rate, by state, of one- to four-family loan originations and correspondent
purchases where originations and purchases in the state exceeded five percent of
the total amount originated and purchased during the current year period.
For the Three Months Ended
For the nine months ended
June 30, 2021 June 30, 2021
State Amount % of Total Rate Amount % of Total Rate
(Dollars in thousands)
Kansas $ 237,868 46.0 % 2.74 % $ 767,443 54.6 % 2.67 %
Missouri 79,200 15.3 2.72 236,666 16.8 2.67
Texas 54,766 10.6 2.50 105,370 7.5 2.61
Pennsylvania 44,959 8.7 2.50 89,420 6.4 2.54
Tennessee 29,063 5.6 2.53 77,992 5.5 2.65
Other states 71,137 13.8 2.53 129,550 9.2 2.61
$ 516,993 100.0 % 2.65 $ 1,406,441 100.0 % 2.65
As of June 30, 2021 , there were $5.3 million of one- to-four family loans with
COVID-19 loan modifications that were still in their deferral period. There were
$195.5 million of one- to four-family loans with COVID-19 loan modifications
that were out of their deferral period by June 30, 2021 . See "Asset Quality"
below for additional information regarding the performance of loans that have
exited the deferral period.
One- to Four-Family Loan Commitments - 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 June 30, 2021 , along
with associated weighted average rates. Loan commitments generally have fixed
expiration dates or other termination clauses and may require the payment of a
rate lock fee. It is expected that some of the loan commitments will expire
unfunded, so the amounts reflected in the table below are not necessarily
indicative of our future cash needs.
Fixed-Rate
15 years More than Adjustable- Total
or less 15 years Rate Amount Rate
(Dollars in thousands)
Originate/refinance $ 23,472 $ 77,739 $ 4,617 $ 105,828 2.81 %
Correspondent 23,105 117,205 1,604 141,914 2.63
$ 46,577 $ 194,944 $ 6,221 $ 247,742 2.71
Rate 2.25 % 2.82 % 2.52 %
Commercial Loans - During the current year nine-month period, the Bank
originated $208.5 million of commercial loans, including $22.8 million of PPP
loans, and entered into commercial loan participations totaling $115.1 million .
The Bank also processed commercial loan disbursements, excluding lines of
credit, of approximately $208.7 million at a weighted average rate of 3.45%.
Additionally, during the current year nine-month period, $48.3 million of PPP
loans were paid off, primarily by the U.S. Small Business Administration ("SBA")
following completion of the loan forgiveness process.
47
--------------------------------------------------------------------------------
The following table presents the Bank's commercial real estate and commercial
construction loans and loan commitments by type of primary collateral, as of
June 30, 2021 . Because the commitments to pay out undisbursed funds are not
cancellable by the Bank, unless the loan is in default, we generally anticipate
fully funding the related projects.
Unpaid Undisbursed Gross Loan Outstanding % of
Count Principal Amount Amount Commitments Total Total
(Dollars in thousands)
Senior housing 34 $ 221,351 $ 43,271 $ 264,622 $ 2,200 $ 266,822 26.5 %
Hotel 10 135,255 59,887 195,142 - 195,142 19.3
Retail
building 130 149,313 43,123 192,436 750 193,186 19.2
Office
building 95 51,200 60,462 111,662 520 112,182 11.1
Multi-family 42 52,642 13,431 66,073 14,583 80,656 8.0
One- to
four-family
property 379 58,298 7,587 65,885 618 66,503 6.6
Single use
building 23 42,383 4,927 47,310 9,005 56,315 5.6
Other 100 30,836 3,910 34,746 2,677 37,423 3.7
813 $ 741,278 $ 236,598 $ 977,876 $ 30,353 $ 1,008,229 100.0 %
Weighted average rate 4.00 % 4.03 % 4.01 % 4.15 % 4.01 %
The following table summarizes the Bank’s commercial real estate and commercial construction loans and loan commitments by state in
Unpaid Undisbursed Gross Loan Outstanding % of
Count Principal Amount Amount Commitments Total Total
(Dollars in thousands)
Kansas 637 $ 323,816 $ 20,705 $ 344,521 $ 14,541 $ 359,062 35.6 %
Texas 11 126,557 131,063 257,620 - 257,620 25.6
Missouri 138 201,517 30,674 232,191 14,312 246,503 24.4
Colorado 7 14,197 22,000 36,197 - 36,197 3.6
Arkansas 3 9,309 24,539 33,848 - 33,848 3.4
Nebraska 6 33,560 4 33,564 - 33,564 3.3
Other 11 32,322 7,613 39,935 1,500 41,435 4.1
813 $ 741,278 $ 236,598 $ 977,876 $ 30,353 $ 1,008,229 100.0 %
The following table presents the Bank's commercial and industrial loans and loan
commitments by business purpose, as of June 30, 2021 . Included in the working
capital line item are $18.3 million of PPP loans.
Unpaid Undisbursed Gross Loan Outstanding % of
Count Principal Amount Amount Commitments Total Total
(Dollars in thousands)
Working capital 529 $ 29,483 $ 17,140 $ 46,623 $ - $ 46,623 47.9 %
Purchase/lease autos 249 17,153 49 17,202 - 17,202 17.6
Equipment 116 13,161 406 13,567 1,424 14,991 15.4
Business investment 57 7,350 214 7,564 450 8,014 8.2
Other 26 6,566 4,017 10,583 - 10,583 10.9
977 $ 73,713 $ 21,826 $ 95,539 $ 1,874 $ 97,413 100.0 %
48
-------------------------------------------------------------------------------- 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 ofJune 30, 2021 . Count Amount (Dollars in thousands) Greater than$30 million 3$ 150,000 >$15 to$30 million 15 347,216 >$10 to$15 million 6 69,055 >$5 to$10 million 14 88,662$1 to$5 million 108 243,940 Less than$1 million 1,644 206,769 1,790$ 1,105,642 As ofJune 30, 2021 , there were commercial loans with an aggregate gross balance, including undisbursed amounts, of$133.9 million with COVID-19 loan modifications that were still in their deferral period and making interest-only payments. There were$261.9 million of commercial loans with COVID-19 loan modifications that were out of their deferral period byJune 30, 2021 . See "Asset Quality" below for additional information regarding the performance of loans that have exited the deferral period. 49 -------------------------------------------------------------------------------- Asset Quality. The Bank's traditional one- to four-family underwriting guidelines have provided the Bank with generally low delinquencies and low levels of non-performing assets within this loan category compared to national levels. Of particular importance is the complete and full documentation required for each loan the Bank originates, participates in or purchases. This allows the Bank to make an informed credit decision based upon a thorough assessment of the borrower's ability to repay the loan. The Bank performs more extensive due diligence when underwriting commercial loans than loans secured by one- to four-family residential properties due to the larger loan amounts, the more complex sources of repayment and the riskier nature of such loans. When participating in a commercial loan, the Bank performs the same underwriting procedures as if the loan was being originated by the Bank. See additional discussion regarding underwriting standards in "Part I, Item 1. Business - Lending Practices and Underwriting Standards" in the Company's Annual Report on
Form 10-K for the completed fiscal year
Delinquent and non-performing loans and OREO - Of the one- to four-family COVID-19 loan modifications that had completed the deferral period byJune 30, 2021 ,$4.4 million were 30 to 89 days delinquent and$2.1 million were 90 or more days delinquent as ofJune 30, 2021 . None of the commercial COVID-19 loan modifications that had completed the deferral period byJune 30, 2021 were delinquent as ofJune 30, 2021 . The following table presents the Company's 30 to 89 day delinquent loans at the dates indicated. Loans subject to payment forbearance under the Bank's COVID-19 loan modification program are not reported as delinquent during the forbearance time period. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. Of the loans 30 to 89 days delinquent atJune 30, 2021 , approximately 78% were 59 days or less delinquent.
Loans 30 to 89 days past due at:
June 30, March 31, December 31, September 30, June 30,
2021 2021 2020 2020 2020
Number Amount Number Amount Number Amount Number Amount Number Amount
(Dollars in thousands)
One- to four-family:
Originated 51 $ 5,141 45 $ 4,151 62 $ 5,844 42 $ 3,012 57 $ 5,085
Correspondent purchased 9 3,650 9 2,910 13 4,694 8 3,123 10 2,919
Bulk purchased 6 958 5 352 9 1,750 12 2,532 19 4,536
Commercial 1 35 5 806 8 1,047 2 45 9 1,543
Consumer 25 354 17 287 30 515 26 398 21 431
92 $ 10,138 81 $ 8,506 122 $ 13,850 90 $ 9,110 116 $ 14,514
Loans 30 to 89 days delinquent
to total loans receivable, net 0.14 % 0.12 % 0.20 % 0.13 % 0.20 %
The following table presents the Company's non-performing 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. Non-performing 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 non-performing loans and OREO.
OREO primarily includes assets acquired in settlement of loans. In late March
2020 , the Bank suspended the initiation of foreclosure proceedings for
owner-occupied one- to four-family loans. At June 30, 2021 , there were $7.8
million of non-performing one- to four-family loans for which foreclosure
proceedings either had been initiated prior to the foreclosure suspension or
would have been initiated if the foreclosure suspension were not in place.
50
--------------------------------------------------------------------------------
Non-performing loans and OREOs at:
June 30, March 31, December 31, September 30, June 30,
2021 2021 2020 2020 2020
Number Amount Number Amount Number Amount Number Amount Number Amount
(Dollars in thousands)
Loans 90 or More Days Delinquent or in
Foreclosure:
One- to four-family:
Originated 53 $ 3,696 55 $ 4,433 51 $ 4,370 51 $ 4,362 47 $ 4,026
Correspondent
purchased 12 4,230 10 3,749 9 3,371 6 2,397 7 2,740
Bulk purchased 7 2,596 10 3,172 13 3,724 12 2,903 3 1,291
Commercial 7 1,278 6 1,068 5 820 5 1,360 4 709
Consumer 23 445 26 531 26 473 14 304 23 278
102 12,245 107 12,953 104 12,758 88 11,326 84 9,044
Loans 90 or more days delinquent or in
foreclosure
as a percentage of
total loans 0.17 % 0.19 % 0.18 % 0.16 % 0.12 %
Nonaccrual loans less than 90 Days
Delinquent:(1)
One- to four-family:
Originated 7 $ 1,392 9 $ 1,646 9 $ 968 9 $ 691 14 $ 1,132
Correspondent
purchased - - - - - - - - - -
Bulk purchased 1 131 - - - - - - - -
Commercial 3 403 4 642 3 411 3 464 1 6
Consumer - - - - 1 9 1 9 1 33
11 1,926 13 2,288 13 1,388 13 1,164 16 1,171
Total non-performing
loans 113 14,171 120 15,241 117 14,146 101 12,490 100 10,215
Non-performing loans as a
percentage of total loans 0.20 % 0.22 % 0.20 % 0.17 % 0.14 %
OREO:
One- to four-family:
Originated(2) 3 $ 177 2 $ 105 3 $ 129 4 $ 183 4 $ 183
Total non-performing
assets 116 $ 14,348 122 $ 15,346 120 $ 14,275 105 $ 12,673 104 $ 10,398
Non-performing assets as a
percentage of total assets 0.15 % 0.16 % 0.15 % 0.13 % 0.11 %
(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.
51
--------------------------------------------------------------------------------
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 June 30, 2021 . The LTV ratios were
based on the current loan balance and either the lesser of the purchase price or
original appraisal, or the most recent Bank appraisal, if available. At June 30,
2021 , potential losses, after taking into consideration anticipated private
mortgage insurance proceeds and estimated selling costs, have been charged-off.
Loans 30 to 89 Loans 90 or More Days Delinquent
One- to Four-Family Days Delinquent or in Foreclosure
State Amount % of Total Amount % of Total Amount % of Total LTV
(Dollars in thousands)
Kansas $ 3,534,330 57.8 % $ 5,126 52.6 % $ 3,757 35.7 % 56 %
Missouri 1,042,747 17.1 1,667 17.1 825 7.9 39
Texas 578,503 9.5 - - 2,550 24.2 58
Other states 953,753 15.6 2,956 30.3 3,390 32.2 65
$ 6,109,333 100.0 % $ 9,749 100.0 % $ 10,522 100.0 % 58
Classified loans - The following table presents loans classified as special
mention or substandard at the dates presented. The amounts in the table
represent the unpaid principal balance of the loans less related charge-offs, if
any. The increase in commercial special mention loans at June 30, 2021 compared
to September 30, 2020 was due mainly to the addition of two commercial loans
totaling $50.0 million for which the borrowers have been impacted by the
COVID-19 pandemic. Both of these loans were subject to COVID-19 loan
modifications during fiscal year 2020 and have since resumed full payments.
There are underlying economic considerations that management is monitoring in
association with these loans resulting in the special mention classification.
June 30, 2021 September 30, 2020 June 30, 2020
Special Special
Mention Substandard Special Mention Substandard Mention Substandard
(Dollars in thousands)
One to four families
$ 25,630 $ 12,309 $ 26,788 Commercial 100,019 4,057 52,006 4,914 52,054 5,128 Consumer 237 670 332 589 320 564$ 115,141 $ 29,166 $ 63,677 $ 31,133 $ 64,683 $ 32,480 Allowance for Credit Losses and Reserve for Off-Balance Sheet Credit Exposures - As discussed previously, ASU 2016-13 became effective for the Company onOctober 1, 2020 . This ASU replaced the incurred loss impairment methodology for calculating ACL under GAAP with a new impairment methodology, commonly known as the CECL methodology. The new methodology requires the Company to measure, at each reporting date, the expected credit losses for loans and loan commitments over their contractual lives based on historical experience, current conditions, and reasonable and supportable forecasts. Upon adoption of the ASU, the Company recorded a cumulative-effect adjustment to retained earnings of$2.3 million (net of tax of$739 thousand ), which reduced the ACL by$4.8 million , to$26.8 million , and established a reserve for off-balance sheet credit exposures of$7.8 million , which is recorded in other liabilities in the consolidated balance sheet. The Bank's off-balance sheet credit exposures are comprised of unfunded portions of existing loans and commitments to originate or purchase new loans that are not unconditionally cancellable by the Bank. The Bank is utilizing a discounted cash flow approach for estimating expected credit losses for pooled loans and loan commitments. The credit loss estimate for off-balance sheet credit exposures also takes into consideration the likelihood that the commitment will be funded. The economic indices used for the reasonable and supportable forecasted time period are the national unemployment rate, changes in commercial real estate price index, changes in home values, and changes inthe United States gross domestic product. Management considers several economic forecast scenarios provided by a third party and selects the scenario(s) believed to be the most appropriate considering the facts and circumstances at quarter end. Management also considers several qualitative factors. The qualitative factors account for items not included in historical loss rates, the macroeconomic forecast, and/or other model inputs/assumptions. Any changes to the ACL and reserves on off-balance sheet credit exposures are recorded through increases/decreases in the provision for credit losses on the consolidated statements of income. The economic forecast scenarios selected by management improved atJune 30, 2021 compared toMarch 31, 2021 which resulted in a reduction in the ACL calculated by the model. Management applied qualitative factors at bothJune 30, 2021 andMarch 31, 2021 to account for the continued economic uncertainties, along with the balance and trending of large-dollar special mention commercial 52 -------------------------------------------------------------------------------- loans. The total ACL amount assigned to these qualitative factors also decreased atJune 30, 2021 compared toMarch 31, 2021 . The economic uncertainties were related to (1) the job market, specifically the unemployment rate, labor participation rate and the effectiveness of the latest federal stimulus package to the unemployed and the economic stimulus payments to qualifying households, (2) the impact to the housing market as a result of the foreclosure moratorium and how the housing market may react when the foreclosure moratorium is eventually lifted, and (3) the unevenness of the recovery in certain industries.
The following table summarizes the changes in the ACL and the reserve for off-balance sheet credit exposures that arose during the quarter ended.
© Edgar online, source