Capitol Federal® Financial, Inc. had another True Blue® year with stable operations, announcing and
Capitol Federal® Financial, Inc. had another True Blue® year with stable operations, announcing and
closing its fi rst acquisition and setting a new record for net income of $98.9 million. On August 31, 2018
closing its fi rst acquisition and setting a new record for net income of $98.9 million. On August 31, 2018
Capital City Bancshares and its subsidiary Capital City Bank (together “CCB”) became a part of
Capital City Bancshares and its subsidiary Capital City Bank (together “CCB”) became a part of
Capitol Federal Savings.
Capitol Federal Savings.
Sedgwick County 8 branches
Sedgwick County 8 branches
Saline County 1 branch
Saline County 1 branch
The Company ended fi scal year 2018 at $9.4 billion in total assets, with $7.5 billion in loans and $5.6 billion
The Company ended fi scal year 2018 at $9.4 billion in total assets, with $7.5 billion in loans and $5.6 billion
in total deposits. Earnings for fi scal year 2018 were $98.9 million. The Company and its stockholders benefi ted
in total deposits. Earnings for fi scal year 2018 were $98.9 million. The Company and its stockholders benefi ted
from the Tax Cuts and Jobs Act signed into law on December 22, 2017. The reduction in tax rates, when combined
from the Tax Cuts and Jobs Act signed into law on December 22, 2017. The reduction in tax rates, when combined
with our operating results, added $0.10 per share to our annual dividends paid to our stockholders in calendar year
with our operating results, added $0.10 per share to our annual dividends paid to our stockholders in calendar year
2018. During calendar year 2018 we paid $0.98 per share, or $133.3 million in cash dividends, providing a dividend
2018. During calendar year 2018 we paid $0.98 per share, or $133.3 million in cash dividends, providing a dividend
payout ratio of approximately 135%.
payout ratio of approximately 135%.
Capital City Bancshares was a $437 million bank holding company which added $300 million of loans and
Capital City Bancshares was a $437 million bank holding company which added $300 million of loans and
$353 million of deposits. Strategically, this acquisition allows us to complement our current retail product offerings
$353 million of deposits. Strategically, this acquisition allows us to complement our current retail product offerings
by adding a full suite of commercial banking and trust services to all of our current and future customers. We are
by adding a full suite of commercial banking and trust services to all of our current and future customers. We are
pleased that a signifi cant number of employees were able to join the Bank and to continue to run a strong
pleased that a signifi cant number of employees were able to join the Bank and to continue to run a strong
commercial banking operation within the Bank. We are working now to fully integrate the two banks which we
commercial banking operation within the Bank. We are working now to fully integrate the two banks which we
expect to be completed in the second calendar quarter of 2019.
expect to be completed in the second calendar quarter of 2019.
To increase our net interest margin over the past fi ve years, we remixed our balance sheet by reinvesting
To increase our net interest margin over the past fi ve years, we remixed our balance sheet by reinvesting
cash fl ows from lower yielding securities into higher yielding loans as well as changing our funding mix from higher
cash fl ows from lower yielding securities into higher yielding loans as well as changing our funding mix from higher
costing borrowings to lower costing deposits. Leveraging this experience, to grow our commercial loan portfolio
costing borrowings to lower costing deposits. Leveraging this experience, to grow our commercial loan portfolio
without being at risk of crossing the $10.0 billion threshold, we expect to reinvest cash fl ows from our correspon-
without being at risk of crossing the $10.0 billion threshold, we expect to reinvest cash fl ows from our correspon-
dent residential loans to fund future growth in commercial loans. Growing the commercial lending portfolio should
dent residential loans to fund future growth in commercial loans. Growing the commercial lending portfolio should
continue to increase the yields on our assets while generally requiring shorter term funding needs. As deposits
continue to increase the yields on our assets while generally requiring shorter term funding needs. As deposits
grow, we anticipate being able to reduce outstanding borrowings.
grow, we anticipate being able to reduce outstanding borrowings.
®
®
Branch Locations by County
Branch Locations by County
Butler County 1 branch
Butler County 1 branch
Riley County 2 branches
Riley County 2 branches
Lyon County 1 branch
Lyon County 1 branch
Shawnee County 14 branches
Shawnee County 14 branches
Douglas County 6 branches
Douglas County 6 branches
Wyandotte County 1 branch
Wyandotte County 1 branch
Platte County 1 branch
Platte County 1 branch
Clay County 2 branches
Clay County 2 branches
Jackson County 1 branch
Jackson County 1 branch
Johnson County 20 branches
Johnson County 20 branches
The Capitol Federal Foundation continued to focus its support of organizations in our communities funding
The Capitol Federal Foundation continued to focus its support of organizations in our communities funding
grants totaling almost $5 million during the 2018 calendar year. This brings total giving by the Foundation since 1999
to $65 million. At September 30, 2018 the Foundation had assets totaling $106 million.
grants totaling almost $5 million during the 2018 calendar year. This brings total giving by the Foundation since 1999
to $65 million. At September 30, 2018 the Foundation had assets totaling $106 million.
The Company’s board and management wish to thank our employees for their hard work in helping us run
an effi cient and safe Bank. Their efforts allow us to provide a consistent return that our stockholders have come to
expect from the Company. We want to thank our stockholders for their continued commitment to Capitol Federal.
The Company’s board and management wish to thank our employees for their hard work in helping us run
an effi cient and safe Bank. Their efforts allow us to provide a consistent return that our stockholders have come to
expect from the Company. We want to thank our stockholders for their continued commitment to Capitol Federal.
Sincerely,
Sincerely,
Chairman, President & CEO
Chairman, President & CEO
S
S
A
A
S
S
N
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A
A
K
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I
I
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R
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S
S
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M
M
Home Offi ce, Topeka, KS
Home Offi ce, Topeka, KS
JULY 2010
JULY 2010
JULY 2010
JULY 2010
Financial Highlights
At September 30,
2018
2017
2016
2015
2014
(Dollars in thousands)
Selected Balance Sheet Data:
Total assets
Loans receivable, net
Securities
Federal Home Loan Bank stock
Deposits
Borrowings
Stockholders' equity
$ 9,449,547 $ 9,192,916 $ 9,267,247 $ 9,844,161 $ 9,865,028
6,233,170
2,393,489
213,054
4,655,272
3,589,677
1,492,882
7,514,485
1,326,932
99,726
5,603,354
2,285,033
1,391,622
6,625,027
2,029,293
150,543
4,832,520
3,470,521
1,416,226
7,195,071
1,243,569
100,954
5,309,868
2,373,808
1,368,313
6,958,024
1,628,175
109,970
5,164,018
2,572,389
1,392,964
For the Year Ended September 30,
2018
2017
2015
(Dollars and counts in thousands, except per share amounts)
2016
Selected Operations Data:
Total interest and dividend income
$
Total interest expense
Net interest and dividend income
Provision for credit losses
Net interest and dividend income after
provision for credit losses
Total non-interest income
Total non-interest expense
Income before income tax expense
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
$
$
$
321,892 $
123,119
198,773
—
313,186 $
117,804
195,382
—
301,113 $
108,931
192,182
(750)
297,362 $
107,594
189,768
771
198,773
22,035
96,902
123,906
24,979
98,927 $
195,382
22,196
89,658
127,920
43,783
84,137 $
192,932
23,312
94,305
121,939
38,445
83,494 $
188,997
21,140
94,369
115,768
37,675
78,093 $
0.73 $
0.73 $
0.63 $
0.63 $
0.63 $
0.63 $
0.58 $
0.58 $
Average diluted shares outstanding
134,759
134,244
133,176
135,409
2014
290,246
106,103
184,143
1,409
182,734
22,955
90,537
115,152
37,458
77,694
0.56
0.56
139,442
Financial Highlights
At or For the Year Ended September 30,
2018
2017
2016
2015
2014
$
$
0.94%
7.25
0.88
119.60%
0.92
43.89
1.95
$
0.75%
6.09
0.88
140.20%
0.80
41.21
1.79
$
0.74 %
5.95
0.84
133.86 %
0.84
43.76
1.75
$
0.70%
5.32
0.84
146.19%
0.84
44.74
1.73
0.82%
5.00
0.98
177.84%
0.96
43.72
2.00
0.14
0.15
77.01
0.11
14.7
14.9
13.0
58
0.20
0.23
50.58
0.12
14.9
12.3
10.8
47
0.35
0.42
29.32
0.12
15.0
12.3
10.9
47
0.31
0.39
36.41
0.14
14.4
12.6
11.3
47
0.29
0.40
37.04
0.15
15.1
N/A
13.2
47
Performance Ratios:
Return on average assets(1)
Return on average equity(1)
Dividends paid per share
Dividend payout ratio
Operating expense ratio
Efficiency ratio(1)
Net interest margin(1)
Asset Quality Ratios:
Non-performing assets to total assets
Non-performing loans to total loans
ACL to non-performing loans
ACL to loans receivable, net
Capital Ratios:
Equity to total assets at end of period
Company Tier 1 leverage ratio
Bank Tier 1 leverage ratio(2)
Number of branches
(1) 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 its unique nature. 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. Management can discontinue the leverage strategy at any
point in time.
2018
Non-
Leverage
Actual
(GAAP) Strategy GAAP
0.94%
7.25
43.89
1.95
(0.13)%
0.13
(0.30)
(0.29)
1.07%
7.12
44.19
2.24
For the Year Ended September 30,
2017
Non-
Leverage
(GAAP) Strategy GAAP
Actual
0.75%
6.09
41.21
1.79
(0.14)%
0.21
(0.63)
(0.36)
0.89 %
5.88
41.84
2.15
2016
Non-
Leverage
Actual
(GAAP) Strategy GAAP
0.74%
5.95
43.76
1.75
(0.14)%
0.17
(0.42)
(0.35)
0.88%
5.78
44.18
2.10
For the Year Ended September 30,
2015
Actual
Non-
Leverage
(GAAP) Strategy GAAP
2014
Non-
Leverage
(GAAP) Strategy GAAP
Actual
0.70%
5.32
44.74
1.73
(0.13)%
0.19
(0.61)
(0.34)
0.83%
5.13
45.35
2.07
0.82%
5.00
43.72
2.00
(0.03)%
0.03
(0.10)
(0.07)
0.85%
4.97
43.82
2.07
Return on average assets
Return on average equity
Efficiency ratio
Net interest margin
Return on average assets
Return on average equity
Efficiency ratio
Net interest margin
(2) Prior to September 30, 2015, this ratio was calculated using end-of-period total assets in the denominator in accordance with then applicable regulatory
capital requirements. Since September 30, 2015, this ratio has been calculated using current quarter average assets in the denominator in accordance
with current regulatory capital requirements.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __ to __
Commission file number: 001-34814
________________________________
Capitol Federal Financial, Inc.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of incorporation or organization)
700 South Kansas Avenue, Topeka, Kansas
(Address of principal executive offices)
27-2631712
(I.R.S. Employer Identification No.)
66603
(Zip Code)
Registrant's telephone number, including area code:
(785) 235-1341
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
The NASDAQ Stock Market LLC
(Name of Each Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company,"
and "emerging growth company" in Rule 12b-2 of the Exchange Act.
No
No
No
No
Large accelerated filer
Smaller Reporting Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Non-accelerated filer
Emerging Growth Company
Accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to
the average of the closing bid and asked price of such stock on the NASDAQ Stock Market as of March 31, 2018, was $1.68 billion.
As of November 21, 2018, there were issued and outstanding 141,238,239 shares of the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Portions of the proxy statement for the Annual Meeting of Stockholders for the year ended September 30, 2018.
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
Item 9A.
Controls and Procedures
Item 9B. Other Information
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV Item 15.
Exhibits, Financial Statement Schedules
INDEX TO EXHIBITS
SIGNATURES
Page No.
2
32
37
37
37
37
38
40
42
77
84
133
133
133
134
134
134
135
135
135
136
138
Private Securities Litigation Reform Act-Safe Harbor Statement
Capitol Federal Financial, Inc. (the "Company"), and Capitol Federal Savings Bank ("Capitol Federal Savings" or 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 the Securities and Exchange Commission ("SEC"). These forward-
looking statements may be included in this Annual Report on Form 10-K 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 by us 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 cost savings, synergies and other benefits from the acquisition of Capital City Bancshares, Inc.
("CCB") might not be realized within the anticipated time frames or at all, and costs or difficulties relating to
integration matters might be greater than expected;
our ability to extend the commercial banking expertise acquired from CCB through our existing branch footprint;
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 the U.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 allowance for credit losses ("ACL"), which may
adversely affect our business;
increases in 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 the Board of Governors of the Federal Reserve
System ("FRB");
the effects of, and changes in, trade and fiscal policies and laws of the United States government;
the effects of, and changes in, foreign and military policies of the 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;
1 •
•
•
•
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.
This list of important factors is not all inclusive. See "Part I, Item 1A. Risk Factors" for a discussion of risks and
uncertainties related to our business that could adversely impact our operations and/or financial results. 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.
PART I
As used in this Form 10-K, unless we specify otherwise, "the Company," "we," "us," and "our" refer to Capitol Federal
Financial, Inc. a Maryland corporation. "Capitol Federal Savings," and "the Bank," refer to Capitol Federal Savings Bank, a
federal savings bank and the wholly-owned subsidiary of Capitol Federal Financial, Inc.
Item 1. Business
General
The Company is a Maryland corporation that was incorporated in April 2010. The Company's common stock is traded on the
Global Select tier of the NASDAQ Stock Market under the symbol "CFFN."
The Bank is a wholly-owned subsidiary of the Company and is a federally chartered and insured savings bank headquartered
in Topeka, Kansas. The Bank is examined and regulated by the Office of the Comptroller of the Currency (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 Federal Deposit Insurance Corporation ("FDIC"). The Company, as a savings and loan holding
company, is examined and regulated by the FRB.
On August 31, 2018, the Company completed the acquisition of CCB and its wholly-owned subsidiary Capital City Bank,
headquartered in Topeka, Kansas. Capital City Bank owned and leased banking locations in Topeka, Lawrence, and
Overland Park, Kansas. As a result of the merger, the Bank is entering the commercial banking business through the
origination of commercial lending products and offering of commercial deposit services, and began offering trust and
brokerage services. The Company acquired loans and deposits with fair values of $299.7 million and $352.5 million,
respectively, at the date of acquisition. Under the terms of the acquisition agreement, the Company issued 3.0 million shares
of Company common stock for all outstanding shares of CCB capital stock, for a total merger consideration of $39.1 million,
based on the Company's closing stock price of $13.21 on August 31, 2018.
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 also from
businesses and invest those funds primarily in permanent loans secured by first mortgages on owner-occupied, one- to four-
family residences. We also originate and participate in commercial loans with other lenders, 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, repurchase agreements, 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 96 months. Our primary revenues are derived from interest on
loans, MBS, investment securities, and dividends on FHLB stock.
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 other loans, our loan underwriting guidelines
compared to those of our competitors, as well as interest rate pricing competition from other lending institutions.
Our executive offices are located at 700 South Kansas Avenue, Topeka, Kansas 66603, and our telephone number at that
address is (785) 235-1341.
2 Available Information
Our Internet 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.
Market Area and Competition
Our corporate office is located in Topeka, Kansas. We currently have a network of 58 branches (48 traditional branches and
10 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. In addition to providing full service banking offices, we provide services through our call center
which operates on extended hours, mobile banking, telephone banking, and online banking and bill payment services.
The Bank ranked second in deposit market share, at 7.26%, in the state of Kansas as reported in the June 30, 2018 FDIC
"Summary of Deposits - Market Share Report." Deposit market share is measured by total deposits, without consideration
for type of deposit. Prior to the acquisition of CCB, we did not offer commercial deposit accounts, while many of our
competitors have both commercial and retail deposits in their total deposit base. Some of our competitors also offer products
and services that we do not, which may add to their total deposits. Consumers also have the ability to utilize online financial
institutions and investment brokerages that are not confined to any specific market area. Management considers our well-
established retail 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. Through our strong relationships with real estate agents and marketing efforts, which reflect our
reputation, and pricing, we attract mortgage loan business from walk-in customers, customers that apply online, and existing
customers. Competition in originating one- to four-family loans primarily comes from other savings institutions, commercial
banks, credit unions, and mortgage bankers. Other savings institutions, commercial banks, credit unions, and finance
companies provide vigorous competition in consumer lending.
Lending Practices and Underwriting Standards
General. Originating and purchasing loans secured by one- to four-family residential properties is the Bank's primary
lending business, resulting in a loan concentration in residential first mortgage loans secured by properties located in Kansas
and Missouri. The Bank also originates consumer loans and construction loans secured by residential properties, and
originates and participates in commercial loans.
On August 31, 2018, the Bank acquired loans from CCB with fair values of $299.7 million as of that date. The acquired
loans are included in the September 30, 2018 loan discussions and tables, where applicable, throughout this Annual Report on
Form 10-K.
One- to Four-Family Residential Real Estate Lending. The Bank originates and services one- to four-family loans that are
not guaranteed or insured by the federal government, and purchases one- to four-family loans, on a loan-by-loan basis, from a
select group of correspondent lenders.
Originated Loans
While the Bank originates both fixed- and adjustable-rate loans, our origination volume is dependent upon customer demand
for loans in our market areas. Demand is affected by the local housing market, competition, and the interest rate
environment. During fiscal years 2018 and 2017, the Bank originated and refinanced $543.5 million and $619.0 million of
one- to four-family loans, respectively.
Correspondent Purchased Loans
The Bank purchases one- to four-family loans, on a loan-by-loan basis, from a select group of correspondent lenders. Loan
purchases enable the Bank to attain geographic diversification in the loan portfolio. At September 30, 2018, the Bank had
correspondent lending relationships in 28 states and the District of Columbia. During fiscal years 2018 and 2017, the Bank
3
purchased $391.6 million and $563.2 million, respectively, of one- to four-family loans from correspondent lenders. We
generally pay a premium of 0.50% to 1.0% of the loan balance to purchase these loans, and we pay 1.0% of the loan balance
to purchase the servicing of these loans.
The Bank has an agreement with a third-party mortgage sub-servicer to service loans originated by the Bank's correspondent
lenders in certain states. The sub-servicer has experience servicing loans in the market areas in which the Bank purchases
loans and services the loans according to the Bank's servicing standards, which is intended to allow the Bank greater control
over servicing and reporting and help maintain a standard of loan performance.
Bulk Purchased Loans
In the past, the Bank has also purchased one- to four-family loans from correspondent and nationwide lenders in bulk loan
packages. The last bulk loan package purchase by the Bank was in August 2012. The Bank no longer purchases bulk loan
packages. See "Part I, Item 1A. Risk Factors" for additional information regarding why the Bank no longer purchases bulk
loan packages.
The servicing rights associated with bulk purchased loans were generally retained by the lender/seller for the loans purchased
from nationwide lenders. The servicing by nationwide lenders is governed by a servicing agreement, which outlines
collection policies and procedures, as well as oversight requirements, such as servicer certifications attesting to and providing
proof of compliance with the servicing agreement.
At September 30, 2018, $194.1 million, or 66% of the Bank's bulk purchased loan portfolio, are loans guaranteed by one
seller. Based on the historical performance of these loans and the seller, the Bank believes the seller has the financial ability
to repurchase or replace loans if any loans were to become delinquent. The Bank has not experienced any losses with this
group of loans since the loan package was purchased in August 2012. For the $99.5 million of bulk purchased loans at
September 30, 2018 that do not have the above noted guarantee, the Bank has continued to experience a reduction in loan
losses due to an improvement in collateral values. A large portion of these loans were originally interest-only loans with
interest-only terms up to 10 years. All of the bulk purchased interest-only loans are now fully amortizing loans.
Underwriting
Full documentation to support an applicant's credit and income, and sufficient funds to cover all applicable fees and reserves
at closing, are required on all loans. Generally, loans are underwritten according to the "ability to repay" and "qualified
mortgage" standards, as issued by the Consumer Financial Protection Bureau ("CFPB"). Information pertaining to the
creditworthiness of the borrower generally consists of a summary of the borrower's credit history, employment stability,
sources of income, assets, net worth, and debt ratios. The value of the subject property must be supported by an appraisal
report prepared in accordance with our appraisal policy by either a staff appraiser or a fee appraiser, both of which are
independent of the loan origination function and who are approved by our Board of Directors.
Loans over $550 thousand, up to and including $800 thousand, must be underwritten by two senior underwriters. Loans over
$800 thousand, up to and including $3.0 million, must be approved by our Asset and Liability Management Committee
("ALCO"), while loans over $3.0 million must be approved by our Board of Directors. For loans requiring ALCO and/or
Board of Directors' approval, lending management is responsible for presenting to ALCO and/or the Board of Directors
information about the creditworthiness of the borrower and the market value of the subject property.
The underwriting standards for loans purchased from correspondent and nationwide lenders are generally similar to the
Bank's internal underwriting standards. The underwriting of correspondent loans is performed by the Bank's underwriters.
Our standard contractual agreement with the lender/seller includes recourse options for any breach of representation or
warranty with respect to the loans purchased. The Bank did not request any lenders/sellers to repurchase loans for breach of
representation during fiscal year 2018.
Adjustable-rate Mortgage ("ARM") Loans
ARM loans are offered with a three-year, five-year, or seven-year term to the initial repricing date. After the initial period,
the interest rate for each ARM loan adjusts annually for the remainder of the term of the loan. Currently, the repricing index
for loan originations and correspondent purchases is tied to London Interbank Offered Rates ("LIBOR"); however, other
indices have been used in the past. Current adjustable-rate one- to four-family loans originated by the Bank generally
provide for a specified rate limit or cap on the periodic adjustment to the interest rate, as well as a specified maximum
4 lifetime cap and minimum rate, or floor. As a consequence of using caps, the interest rates on these loans may not be as rate
sensitive as our cost of funds. Negative amortization of principal is not allowed. For three- and five-year ARM loans,
borrowers are qualified based on the principal, interest, tax, and insurance payments at the initial interest rate plus the life of
loan cap and the initial interest rate plus the first period cap, respectively. For seven-year ARM loans, borrowers are qualified
based on the principal, interest, tax, and insurance payments at the initial rate. After the initial three-, five-, or seven-year
period, the interest rate resets annually and the new principal and interest payment is based on the new interest rate,
remaining unpaid principal balance, and remaining term of the ARM loan. Our ARM loans are not automatically convertible
into fixed-rate loans; however, we do allow borrowers to pay an endorsement fee to convert an ARM loan into a fixed-rate
loan. ARM loans can pose greater credit risks than fixed-rate loans, primarily because as interest rates rise, the borrower's
payment also rises, increasing the potential for default. This specific type of risk is known as repricing risk.
Pricing
Our pricing strategy for one- to four-family loan products includes setting interest rates based on secondary market prices and
local competitor pricing for our local lending markets, and secondary market prices and national competitor pricing for our
correspondent markets.
Mortgage Insurance
For a one- to four-family loan with a loan-to-value ("LTV") ratio in excess of 80% at the time of origination, private
mortgage insurance ("PMI") is required in order to reduce the Bank's loss exposure. The Bank will lend up to 97% of the
lesser of the appraised value or purchase price for one- to four-family loans, provided PMI is obtained. Management
continuously monitors the claim-paying ability of our PMI counterparties. We believe our PMI counterparties have the
ability to meet potential claim obligations we may file in the foreseeable future.
Repayment
The Bank's one- to four-family loans are primarily fully amortizing fixed-rate or ARM loans. The contractual maturities for
fixed-rate loans and ARM loans can be up to 30 years; however, there are certain bulk purchased ARM loans that had original
contractual maturities of 40 years. Our one- to four-family loans are generally not assumable and do not contain prepayment
penalties. A "due on sale" clause, allowing the Bank to declare the unpaid principal balance due and payable upon the sale of
the secured property, is generally included in the security instrument.
Construction Lending
The Bank originates construction and 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. At September 30, 2018, we had $33.1 million in one- to four-family construction loans outstanding, representing 0.4%
of our total loan portfolio, of which $27.1 million were owner occupied construction-to-permanent loans.
The application process for a construction loan includes submission of complete plans, specifications, and costs of the project
to be constructed. All construction loans are manually underwritten using the Bank's internal underwriting standards.
Construction draw requests and the supporting documentation are reviewed and approved by authorized management or
experienced construction loan personnel. The Bank also performs regular documented inspections of the construction project
to ensure the funds are being used for the intended purpose. Interest is not capitalized during the construction period; it is
billed and collected monthly based on the amount of funds disbursed.
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. Once the construction period is complete on an owner-occupied construction-to-permanent loan, the
payment method is changed from interest-only to an amortized principal and interest payment for the remaining term of the
loan.
Loan Endorsement Program
In an effort to offset the impact of repayments and to retain our customers, existing loan customers, including customers
whose loans were purchased from a correspondent lender, have the opportunity, for a cash fee, to endorse their original loan
terms to current loan terms being offered. Customers whose loans have been sold to third parties, or have been delinquent on
their contractual loan payments during the previous 12 months, or are currently in bankruptcy, are not eligible to participate
in this program. The Bank does not solicit customers for this program, but considers it a valuable opportunity to retain
5 customers who, based on our initial underwriting criteria, could likely obtain similar financing elsewhere. During fiscal years
2018 and 2017, the Bank endorsed $19.4 million and $53.1 million of one- to four-family loans, respectively.
Loan Sales
One- to four-family loans may be sold on a bulk basis or on a flow basis as loans are originated. Loans originated by the
Bank and purchased from correspondent lenders are generally eligible for sale in the secondary market. Loans are generally
sold for portfolio restructuring purposes, to reduce interest rate risk and/or to maintain a certain liquidity position. The Bank
generally retains the servicing on these loans. ALCO determines the criteria upon which one- to four-family loans are to be
classified as held-for-sale or held-for-investment. One- to four-family loans classified as held-for-sale are to be sold in
accordance with policies set forth by ALCO. During fiscal years 2018 and 2017, the Bank sold $16.6 million and $6.7
million of one- to four-family loans, respectively. The loans sold during fiscal years 2018 and 2017 were completed in order
to test the Bank's loan sale processes for liquidity purposes.
Consumer Lending. 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. The Bank does not originate any consumer loans on an indirect basis, such as contracts
purchased from retailers of goods or services which have extended credit to their customers. Generally, consumer loans are
originated in the Bank's market areas. At September 30, 2018, our consumer loan portfolio totaled $139.6 million, or
approximately 2% of our total loan portfolio.
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.
Home equity lines of credit may be originated up to 90% of the value of the property securing the loan if no first mortgage
exists, or up to 90% of the value of the property securing the loans if taking into consideration an existing first mortgage.
Repaid principal may be re-advanced at any time during the draw period, not to exceed the original credit limit of the loan.
Closed-end home equity loans may be originated up to 95% of the value of the property securing the loans if taking into
consideration an existing first mortgage, or the lesser of up to $40 thousand or 25% of the value of the property securing the
loan if no first mortgage exists. Generally, loan terms are more limiting and rates are higher for a loan in the second lien
position. Home equity loans, including lines of credit and closed-end loans, comprised approximately 93% of our consumer
loan portfolio, or $129.6 million, at September 30, 2018; of that amount, 86% were adjustable-rate.
The underwriting standards for consumer loans include a determination of the applicant's payment history on other debts and
an assessment of the applicant's ability to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the 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.
Consumer loans generally have shorter terms-to-maturity or reprice more frequently, usually without periodic caps, which
reduces our exposure to credit risk and changes in interest rates, and usually carry higher rates of interest than do one- to
four-family loans. However, consumer loans may entail greater credit risk than do one- to four-family loans, particularly in
the case of consumer loans that are secured by rapidly depreciable assets, such as vehicles. Management believes that
offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the
number of customer relationships and providing cross-marketing opportunities.
Commercial Lending. At September 30, 2018, the Bank's commercial loans totaled $569.6 million, or approximately 8% of
our total loan portfolio. Of this amount, $296.4 million were participation loans. Total undisbursed loan amounts related to
commercial loans were $187.3 million, resulting in a total commercial loan concentration of $756.9 million at September 30,
2018. During fiscal year 2018 and 2017, the Bank entered into commercial real estate loan participations of $135.8 million
and $67.7 million, respectively. With the acquisition of CCB, the Bank began offering more commercial lending products.
At September 30, 2018, the Bank's commercial real estate loan portfolio totaled $506.7 million or approximately 89% of our
commercial loan portfolio. 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 Texas, Missouri, Kansas, Kentucky,
Nebraska, Colorado, Arkansas, California, Montana, and Arizona. Our largest commercial real estate loan was $50.0 million
at September 30, 2018. This loan was current according to its terms at September 30, 2018.
6 At September 30, 2018, the Bank's commercial and industrial loan portfolio totaled $62.9 million, or approximately 11% of
our commercial loan portfolio. The Bank's commercial and industrial loan portfolio consists largely of loans secured by
accounts receivable, inventory and equipment. The majority of the Bank's commercial and industrial loan portfolio was
purchased as part of the CCB acquisition.
Underwriting
The Bank performs more extensive due diligence in 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 real estate loan, the Bank performs the same underwriting procedures as if the
loan was being originated by the Bank. The primary source of repayment is funds from the operation of the subject property.
For secondary sources of repayment, the Bank generally requires personal guarantees and also evaluates the real estate
collateral.
When underwriting a commercial real estate loan, several factors are considered, such as the income producing potential of
the property to support the debt service, cash equity provided by the borrower, the financial strength of the borrower, tenant
and/or guarantor(s), managerial expertise of the borrower or tenant, feasibility studies from the borrower or an independent
third party, the marketability of the property and our lending experience with the borrower. For non-owner occupied
properties, the Bank has a pre-lease requirement, depending on the property type, and overall strength of the credit.
The loan approval method uses a hierarchy of individual credit authorities. Loan relationships over $750 thousand, up to and
including $10.0 million, are submitted to the Loan Committee for approval and also require the approval of both the Chief
Lending Officer and the Chief Commercial Banking Officer. Loan relationships over $10.0 million, up to and including
$40.0 million, are submitted to ALCO for approval and loan relationships over $40.0 million are submitted to the Board of
Directors for approval.
For non-construction properties, the historical net operating income, which is the income derived from the operation of the
property less all operating expenses, generally must be at least 1.20 times the required payments related to the outstanding
debt (debt service coverage ratio) at the time of origination. For construction projects, the minimum debt service coverage
ratio requirement of 1.20 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. As part of the underwriting process, the historical or
projected cash flows are stressed under various scenarios to measure the viability of the project given adverse conditions.
Generally, our maximum LTV ratios conform to supervisory limits, including 65% for raw land, 75% for land development
and 80% for commercial real estate loans. Full appraisals on properties securing these loans are performed by independent
state certified fee appraisers. Additionally, the Bank has an independent third-party perform a review of each appraisal. The
Bank generally requires at least 15% cash equity from the borrower for land acquisition, land development, and commercial
real estate construction loans. For non-acquisition, development or construction loans, the equity may be from a combination
of cash and the appraised value of the secured property.
Our commercial and industrial loans are primarily made in the Bank's market areas and are underwritten on the basis of the
borrower's ability to service the debt from income. Other sources of repayment include the collateral underlying the loans
and guarantees from business owners. 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. The increased risk in commercial and industrial loans is due to the type of collateral
securing these loans as well as the expectation that commercial and industrial loans generally will be serviced principally
from the operations of the business, and those operations may not be successful. Significant adverse changes in borrowers'
industries and businesses could cause a rapid decline in the values of, and collectability associated with, business assets
securing the loans, which could result in inadequate collateral coverage of our commercial and industrial loans. Additionally,
commercial and industrial loans secured by accounts receivable may be substantially dependent on the ability of the borrower
to collect amounts due from clients and loans secured by inventory and equipment are subject to depreciation over time and
may be difficult to appraise. As a result of these additional complexities, variables and risks, commercial and industrial loans
require more thorough underwriting and servicing than other types of commercial loans.
7 Loan Terms
Commercial loans generally have amortization terms of 15 to 30 years and maturities ranging from 90 days to 20 years,
which generally requires balloon payments of the remaining principal balance.
Commercial loans have either fixed or adjustable interest rates based on prevailing market rates. The interest rate on
adjustable-rate loans is based on a variety of indices, but is generally determined through negotiation with the borrower or
determined by the lead bank in the case of a loan participation.
For a construction loan, generally, the Bank allows interest-only payments during the construction phase of a project and for a
stabilization period of 6 to 12 months after occupancy. The Bank requires amortizing payments at the conclusion of the
stabilization period.
Additionally, the Bank may include covenants in the loan agreement that allow the Bank to take action when deterioration in
the financial strength of the project is detected to potentially prevent the credit from becoming impaired. The covenants are
specific to each loan agreement, based on factors such as the purpose of funds, the collateral type, and the financial strength
of the project, the borrower and the guarantor, among other factors.
Monitoring of Risk
For the Bank's commercial real estate loan portfolio, borrowers with a loan principal balance of $1.5 million or more are
required to provide financial information annually, including borrower financial statements, subject property rental rates and
income, maintenance costs, an update of real estate property tax and insurance payments, and personal financial information
for the guarantor(s). The annual review process for loans with a principal balance of $1.5 million or more 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 performs a site visit, schedules a drive-by site visit or obtains an update from the lead bank to obtain information
regarding the maintenance of the property and surrounding area. 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.
Commercial real estate construction lending generally involves a greater degree of risk than commercial real estate lending.
Repayment of a construction loan is, to a great degree, dependent upon the successful and timely completion of the
construction of the subject property. Construction delays, slower than anticipated stabilization or the financial impairment of
the builder may negatively affect the borrower's ability to repay the loan. The Bank takes these risks into consideration
during the underwriting process including the requirement of personal guarantees. 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.
Our commercial loans are generally large dollar loans and involve a greater degree of credit risk than one- to four-family
loans. Because payments on these loans are often dependent on the successful operation or management of the properties
and/or businesses, repayment of such loans may be subject to adverse conditions in the economy, the borrower's line of
business, and/or the real estate market. If the cash flows from the project or business operation is reduced, or if leases are not
obtained or renewed, the borrower's ability to repay the loan may become impaired. The Bank regularly monitors the level of
risk in the 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.
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The following table presents, as of September 30, 2018, the amount of loans due after September 30, 2019, and whether these
loans have fixed or adjustable interest rates.
Fixed
Adjustable
(Dollars in thousands)
Total
5,641,129
280,735
—
13,527
5,408
5,940,799
$
$
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155,782
472
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2,961
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$
$
One- to four-family
Commercial
Construction
Consumer loans:
Home equity
Other
Total
Asset Quality
The Bank's traditional underwriting guidelines have provided the Bank with generally low delinquencies and low levels of
non-performing assets compared to national levels. Of particular importance is the complete and full documentation required
for each loan the Bank originates, participates in or purchases. Generally, one- to four-family owner occupied loans are
underwritten according to the "ability to repay" and "qualified mortgage" standards, as issued by the CFPB. This allows the
Bank to make an informed credit decision based upon a thorough assessment of the borrower's ability to repay the loan.
For one- to four-family loans and consumer loans, when a borrower fails to make a loan payment within 10 to 15 days after
the due date, a late charge is assessed and a notice is mailed. Collection personnel review all delinquent loan accounts more
than 16 days past due. Attempts to contact the borrower occur by personal letter and, if no response is received, by
telephone, with the purpose of establishing repayment arrangements for the borrower to bring the loan current. Repayment
arrangements must be approved by a designated bank employee. For residential mortgage loans serviced by the Bank,
beginning at approximately the 31st day of delinquency, and again at approximately the 50th day of delinquency, information
notices are mailed to borrowers to inform them of the availability of payment assistance programs. Borrowers are
encouraged to contact the Bank to initiate the process of reviewing such opportunities. Once a loan becomes 90 days
delinquent, assuming a loss mitigation solution is not actively in process, a demand letter is issued requiring the loan be
brought current or foreclosure procedures will be implemented. Generally, when a loan becomes 120 days delinquent, and an
acceptable repayment plan or loss mitigation solution has neither been established nor is in the process of being negotiated,
the loan is forwarded to legal counsel to initiate foreclosure. We also monitor whether borrowers who have filed for
bankruptcy are meeting their obligation to pay the mortgage debt in accordance with the terms of the bankruptcy petition.
For purchased loans serviced by a third party, we monitor delinquencies using reports received from the servicers. The
reports generally provide total principal and interest due and length of delinquency, and are used to prepare monthly
management reports and perform delinquent loan trend analysis. The information from the sub-servicer of our correspondent
loans is generally received during the first week of the month while the information from the servicers of our bulk loans is
received later in the month. Management also utilizes information from the servicers to monitor property valuations and
identify the need to charge-off loan balances.
For commercial loans originated by the Bank, when a borrower fails to make a loan payment within 10 to 15 days after the
due date, a late notice is mailed. If the loan becomes 30 days or more past due, the Bank begins collection efforts including
sending legal notices for payment collection and contacting the borrower by telephone. The primary purpose of such contact
is to notify the borrower of the past due payment in case the loan payment was misplaced or lost and to identify any changes
in the borrower's income flow that may affect future loan performance. If it is determined that future loan performance may
be adversely affected, the Bank initiates discussions with the borrower regarding plans to ensure cash flow from operations is
sufficient to satisfy the debt requirements and meet the loan covenants. Generally, once a loan becomes 90 days delinquent,
foreclosure procedures are initiated. For participation loans, the lead bank is responsible for all collection efforts and contact
with the borrower. However, if the Bank does not receive an expected payment on a participation loan, the Bank contacts the
lead bank to determine the cause of the late payment and to initiate discussions with the lead bank of collection efforts, as
necessary. See "Lending Practices and Underwriting Standards – Commercial Lending – Monitoring of Risk" for additional
information.
11 Delinquent and non-performing loans and other real estate owned ("OREO")
The following table presents the Company's 30 to 89 day delinquent loans at the dates indicated. Of the loans 30 to 89 days
delinquent at September 30, 2018, 2017, and 2016, approximately 74%, 67%, and 75%, respectively, were 59 days or less
delinquent.
Loans Delinquent for 30 to 89 Days at September 30,
2016
2017
2018
Number
Amount
Number
Amount
Number
Amount
(Dollars in thousands)
129
$ 10,647
129
$ 13,257
143
$ 13,593
18
15
6
38
3,803
3,502
322
533
8
22
—
35
1,827
3,194
—
500
9
21
—
41
3,329
5,008
—
697
206
$ 18,807
194
$ 18,778
214
$ 22,627
0.25%
0.26%
0.33%
One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Commercial
Consumer
Loans 30 to 89 days delinquent
to total loans receivable, net
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14
The following table presents the states where the properties securing one 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,
2018. 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, 2018, potential losses, after taking into consideration
anticipated PMI proceeds and estimated selling costs, have been charged-off.
One- to Four-Family
Loans 30 to 89
Days Delinquent
Loans 90 or More Days Delinquent
or in Foreclosure
State
Amount
% of Total
Amount
% of Total
Amount
% of Total
LTV
(Dollars in thousands)
Kansas
Missouri
Texas
Tennessee
California
Pennsylvania
Georgia
Alabama
North Carolina
Other states
$
3,640,185
53.8% $
1,236,483
743,013
226,820
195,710
108,818
94,604
91,526
64,596
363,531
18.3
11.0
3.3
2.9
1.6
1.4
1.3
1.0
5.4
$
6,765,286
100.0% $
9,186
3,320
1,848
—
—
299
—
—
—
3,299
17,952
51.2% $
18.5
10.3
—
—
1.6
—
—
—
4,765
1,060
450
—
—
—
391
—
122
55.8%
62%
12.4
5.3
—
—
—
4.6
—
1.4
62
45
n/a
n/a
n/a
50
n/a
79
67
61
18.4
100.0% $
1,746
8,534
20.5
100.0%
Troubled Debt Restructurings. For borrowers experiencing financial difficulties, the Bank may grant a concession to the
borrower, resulting in a TDR. Such concessions generally involve extensions of loan maturity dates, the granting of periods
during which the payment of only interest and escrow is required, reductions in interest rates, and loans that have been
discharged under Chapter 7 bankruptcy proceedings where the borrower has not reaffirmed the debt. The Bank does not
forgive principal or interest, nor does it commit to lend additional funds, except for situations generally involving the
capitalization of delinquent interest and/or escrow not to exceed the original loan balance, to these borrowers. See "Part II,
Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of
Significant Accounting Policies and Note 5. Loans Receivable and Allowance for Credit Losses" for additional information
related to TDRs.
The following table presents the Company's TDRs, based on accrual status, at the dates indicated.
September 30,
2018
2017
2016
2015
2014
(Dollars in thousands)
Accruing TDRs
Nonaccrual TDRs(1)
$ 20,216
$ 27,383
$ 23,177
$ 24,331
$ 24,636
4,652
11,742
18,725
15,511
13,370
Total TDRs
$ 24,868
$ 39,125
$ 41,902
$ 39,842
$ 38,006
(1) Nonaccrual TDRs are included in the non-performing loan table above.
Impaired Loans. A loan is considered impaired when, based on current information and events, it is probable that the Bank
will be unable to collect all amounts due, including principal and interest, according to the original contractual terms of the
loan agreement. Interest income on impaired loans is recognized in the period collected unless the ultimate collection of
principal is considered doubtful. The unpaid principal balance of loans reported as impaired at September 30, 2018, 2017,
and 2016 was $29.9 million, $44.4 million, and $58.9 million, respectively. During the fourth quarter of fiscal year 2017,
management refined its methodology for classifying loans as impaired which, though not material, resulted in fewer loans
being classified as impaired in the current fiscal year.
15 See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1.
Summary of Significant Accounting Policies and Note 5. Loans Receivable and Allowance for Credit Losses" for additional
information related to impaired loans.
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 5. Loans Receivable and
Allowance for Credit Losses" for asset classification definitions.
The following table sets forth the recorded investment in assets, classified as either special mention or substandard, as of
September 30, 2018. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial
Statements – Note 5. Loans Receivable and Allowance for Credit Losses" for information regarding asset classification
definitions. At September 30, 2018, there were no loans classified as doubtful, and all loans classified as loss were fully
charged-off.
One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Commercial
Consumer Loans:
Home equity
Other
Total loans
OREO:
Originated
Bulk purchased
Commercial
Total OREO
Total classified assets
Special Mention
Substandard
Number
Amount
Number
Amount
(Dollars in thousands)
76
4
—
3
14
—
97
—
—
—
—
97
$
8,660
255
$
22,409
997
—
2,377
298
—
13
29
1
57
4
3,126
7,195
1,368
894
10
12,332
359
35,002
—
—
—
—
8
1
1
10
$
12,332
369
$
843
454
600
1,897
36,899
Allowance for credit losses and Provision for credit losses. Management maintains an ACL to absorb inherent losses in the
loan portfolio based on quarterly assessments of the loan portfolio. The ACL is maintained through provisions for credit
losses which are either charged to or credited to income. Our ACL methodology considers a number of factors including the
trend and composition of delinquent loans, trends in foreclosed property and short sale transactions and charge-off activity,
the current status and trends of local and national employment levels, trends and current conditions in the real estate and
housing markets, loan portfolio growth and concentrations, industry and peer charge-off activity and ACL ratios, and the
Bank's ACL ratios. For our commercial loan portfolio, we also consider qualitative factors such as geographic locations,
collateral types, tenant brand name, borrowing relationships, and lending relationships in the case of participation loans,
among other factors. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations – Critical Accounting Policies – Allowance for Credit Losses" and "Part II, Item 8. Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies"
for a full discussion of our ACL methodology. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to
Consolidated Financial Statements – Note 5. Loans Receivable and Allowance for Credit Losses" for additional information
on the ACL.
16 The Bank did not record a provision for credit losses during the current fiscal year or during the prior fiscal year. Based on
management's assessment of the ACL formula analysis model and several other factors, management determined that no
provision for credit losses was necessary. Net recoveries were $65 thousand during the current fiscal year and net charge-offs
were $142 thousand during the prior fiscal year. At September 30, 2018 and 2017, respectively, loans 30 to 89 days
delinquent were 0.25% and 0.26% of total loans and loans 90 or more days delinquent or in foreclosure were 0.12% and
0.13% of total loans.
The following table presents ACL activity and related ratios at the dates and for the periods indicated. Using the Bank's annualized
net historical loan losses from the Bank's ACL formula analysis model over the past five years, the Bank would have approximately
22 years of net loan loss coverage based on the ACL balance at September 30, 2018.
Balance at beginning of period
Charge-offs:
One- to four-family:
Originated
Correspondent
Bulk purchased
Total
Consumer:
Home equity
Other
Total
Total charge-offs
Recoveries:
One- to four-family:
Originated
Bulk purchased
Total
Consumer:
Home equity
Other
Total
Total recoveries
Net recoveries (charge-offs)
Provision for credit losses
Balance at end of period
2018
Year Ended September 30,
2017
2016
2015
2014
$ 8,398
$ 8,540
(Dollars in thousands)
$ 9,443
$ 9,227
$ 8,822
(136)
(128)
—
(264)
(32)
(6)
(38)
(302)
144
196
340
(72)
—
(216)
(288)
(51)
(9)
(60)
(348)
4
165
169
(200)
—
(342)
(542)
(83)
(5)
(88)
(630)
77
374
451
(424)
(11)
(228)
(663)
(29)
(43)
(72)
(735)
56
58
114
(284)
(96)
(653)
(1,033)
(103)
(6)
(109)
(1,142)
1
64
65
22
5
27
367
65
—
$ 8,463
26
11
37
206
(142)
—
$ 8,398
25
1
26
477
(153)
(750)
$ 8,540
64
2
66
180
(555)
771
$ 9,443
72
1
73
138
(1,004)
1,409
$ 9,227
Ratio of net charge-offs during the period to
average loans outstanding during the period
Ratio of net (recoveries) charge-offs during the
period to average non-performing assets
ACL to non-performing loans at end of period
ACL to loans receivable, net at end of period
ACL to net charge-offs
—%
—%
—%
0.01%
0.02%
(0.42)
77.01
0.11
N/M(1)
0.56
50.58
0.12
0.48
29.32
0.12
1.87
36.41
0.14
3.38
37.04
0.15
58.9x
55.8x
17.0x
9.2x
(1) This ratio is not presented for the time period noted due to loan recoveries exceeding loan charge-offs during the period.
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18
Investment Activities
Federally chartered savings institutions have the authority to invest in various types of liquid assets, including U.S. Treasury
obligations; securities of various federal agencies; government-sponsored enterprises ("GSEs"), including callable agency
securities; municipal bonds; certain certificates of deposit of insured banks and savings institutions; certain bankers'
acceptances; repurchase agreements; and federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in investment grade commercial paper, corporate debt securities, and mutual funds
whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make
directly. As a member of FHLB, the Bank is required to maintain a specified investment in FHLB stock. See "Regulation
and Supervision – Federal Home Loan Bank System" and "Office of the Comptroller of the Currency" for a discussion of
additional restrictions on our investment activities.
ALCO considers various factors when making investment decisions, including the liquidity, credit, interest rate risk, and tax
consequences of the proposed investment options. The composition of the investment portfolio will be affected by various
market conditions, including the slope of the yield curve, the level of interest rates, the impact on the Bank's interest rate risk,
the trend of net deposit flows, the volume of loan sales, repayments of borrowings, and loan originations and purchases.
The general objectives of the Bank's investment portfolio are to provide liquidity when loan demand is high, to assist in
maintaining earnings when loan demand is low, and to maximize earnings while satisfactorily managing liquidity risk,
interest rate risk, reinvestment risk, and credit risk. Liquidity may increase or decrease depending upon the availability of
funds and comparative yields on investments in relation to the return on loans. Cash flow projections are reviewed regularly
and updated to ensure that adequate liquidity is maintained.
We classify securities as either trading, available-for-sale ("AFS"), or held-to-maturity ("HTM") at the date of purchase.
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 reported in the consolidated statements of income. AFS securities are
reported at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income
(loss) ("AOCI") within stockholders' equity, net of deferred income taxes. HTM securities are reported at cost, adjusted for
amortization of premium and accretion of discount. We have both the ability and intent to hold our HTM securities to
maturity.
On a quarterly basis, management conducts a formal review of securities for the presence of an other-than-temporary
impairment. The process involves monitoring market events and other items that could impact issuers. See "Part II, Item 8.
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of
Significant Accounting Policies" for additional information. Management does not believe any other-than-temporary
impairments existed at September 30, 2018.
Investment Securities. Our investment securities portfolio consists primarily of debentures issued by GSEs (primarily
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal
Home Loan Banks) and non-taxable municipal bonds. At September 30, 2018, our investment securities portfolio totaled
$289.9 million. The portfolio consisted of securities classified as either HTM or AFS. See "Part II, Item 8. Financial
Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 4. Securities" and "Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Investment
Securities" for additional information.
Mortgage-Backed Securities. At September 30, 2018, our MBS portfolio totaled $1.04 billion. The portfolio consisted of
securities classified as either HTM or AFS and were primarily issued by GSEs. The principal and interest payments of MBS
issued by GSEs are collateralized by the underlying mortgage assets with principal and interest payments guaranteed by the
GSEs. The underlying mortgage assets are conforming mortgages that comply with FNMA and FHLMC underwriting
guidelines, as applicable, and are therefore not considered subprime. See "Part II, Item 8. Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – Note 4. Securities" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations – Financial Condition – Mortgage-Backed Securities" for
additional information.
19
MBS generally yield less than the loans that underlie such securities because of the servicing fee retained by the servicer and
the cost of payment guarantees or credit enhancements retained by the GSEs that reduce credit risk. However, MBS are
generally more liquid than individual mortgage loans and may be used to collateralize certain borrowings and public unit
deposits of the Bank. In general, MBS issued or guaranteed by FNMA and FHLMC are weighted at no more than 20% for
risk-based capital purposes compared to the 50% risk-weighting assigned to most non-securitized one- to four-family loans.
When securities are purchased for a price other than par value, the difference between the price paid and par is accreted to or
amortized against the interest earned over the life of the security, depending on whether a discount or premium to par was
paid. Movements in interest rates affect prepayment rates which, in turn, affect the average lives of MBS and the speed at
which the discount or premium is accreted to or amortized against earnings.
At September 30, 2018, the MBS portfolio included $145.5 million of collateralized mortgage obligations ("CMOs"). CMOs
are special types of MBS in which the stream of principal and interest payments on the underlying mortgages or MBS are
used to create investment classes with different maturities and, in some cases, different amortization schedules, as well as a
residual interest, with each such class possessing different risk characteristics. We do not purchase residual interest bonds.
While MBS issued by FNMA and FHLMC carry a reduced credit risk compared to whole mortgage loans, these securities
remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate of the underlying mortgage loans and
consequently affect both the prepayment speed and value of the securities. As noted above, the Bank, on some transactions,
pays a premium over par value on MBS purchased. Large premiums could cause significant negative yield adjustments due
to accelerated prepayments on the underlying mortgages. The balance of net premiums on our portfolio of MBS at
September 30, 2018 was $3.4 million.
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22
Sources of Funds
General. Our primary sources of funds are deposits, FHLB borrowings, repurchase agreements, repayments and maturities
of outstanding loans and MBS and other short-term investments, and funds provided by operations.
Deposits. We offer a variety of retail deposit accounts, and with the acquisition of CCB, we began offering commercial
deposit accounts and services. Our deposit account offerings have a wide range of interest rates and terms. Our deposits
consist of savings accounts, money market deposit accounts, interest-bearing and non-interest-bearing checking accounts, and
certificates of deposit. We rely primarily upon competitive pricing policies, marketing, and customer service to attract and
retain deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market
and prevailing interest rates, and competition. The variety of deposit accounts we offer has allowed us to utilize strategic
pricing to obtain funds and to respond with flexibility to changes in consumer demand. We seek to manage the pricing of our
deposits in keeping with our asset and liability management, liquidity, and profitability objectives. Based on our experience,
we believe that our deposits are stable sources of funds. Despite this stability, our ability to attract and maintain these
deposits and the rates paid on them has been, and will continue to be, significantly affected by market conditions.
With the acquisition of CCB on August 31, 2018, we started obtaining interest-bearing deposits through the Promontory
Interfinancial Network Insured Cash Sweep Service ("Promontory Cash Sweep deposits"). Through this service, customers
elect to place their deposit account funds in deposit accounts at various members of the insured cash sweep network, which
provides customers with access to additional FDIC insurance coverage. The average Promontory Cash Sweep deposits
totaled $49.8 million during the month of September 2018.
The Board of Directors has authorized the utilization of brokers to obtain deposits as a source of funds. Depending on market
conditions, the Bank may use brokered deposits to fund asset growth and gather deposits that may help to manage interest
rate risk. No brokered deposits were acquired during fiscal year 2018 and there were no brokered deposits outstanding at
September 30, 2018 or 2017.
The Board of Directors also has authorized the utilization of public unit deposits as a source of funds. In order to qualify to
obtain such deposits, the Bank must have a branch in each county in which it collects public unit deposits and, by law, must
pledge securities as collateral for all such balances in excess of the FDIC insurance limits. At September 30, 2018 and 2017,
the balance of public unit certificates of deposit was $407.7 million and $460.0 million, respectively.
As of September 30, 2018, the Bank's policy allows for combined brokered and public unit deposits up to 15% of total
deposits. At September 30, 2018, that amount was approximately 8% of total deposits.
Borrowings. We utilize borrowings when we need additional capacity to fund loan demand or when they help us meet our
asset and liability management objectives. Historically, our term borrowings have consisted primarily of FHLB advances.
FHLB advances may be made pursuant to several different credit programs, each of which has its own interest rate, maturity,
repayment, and embedded options, if any. At September 30, 2018, $1.60 billion of our FHLB advances were fixed-rate
advances with no embedded options and $475.0 million of our FHLB advances were variable-rate, also with no embedded
options. The variable-rate advances are tied to interest rate swaps, effectively converting the adjustable-rate borrowings into
fixed-rate liabilities. The Bank supplements FHLB borrowings with repurchase agreements, wherein the Bank enters into
agreements with Board approved counterparties to sell securities under agreements to repurchase them. These agreements
are recorded as financing transactions as the Bank maintains effective control over the transferred securities. Repurchase
agreements are made at mutually agreed upon terms between counterparties and the Bank. The use of repurchase agreements
allows for the diversification of funding sources and the use of securities that were not being leveraged as collateral. The
Bank also regularly uses its FHLB line of credit as a source of funding. The Bank's internal policy limits total borrowings to
55% of total assets.
During fiscal year 2018, the Bank continued, at times, to utilize a leverage strategy (the "leverage strategy") to increase
earnings. The leverage strategy during the current fiscal year involved borrowing up to $2.10 billion either on the Bank's
FHLB line of credit or by entering into short-term FHLB advances, depending on the rates offered by FHLB. The
borrowings were repaid prior to each quarter end, or earlier if the strategy was suspended. The proceeds of the borrowings,
net of the required FHLB stock holdings, were deposited at the Federal Reserve Bank of Kansas City ("FRB of Kansas
City"). Management suspended the strategy at times during fiscal year 2018 due to the negative interest rate spread, which
23 resulted in the strategy not being profitable. Management continues to monitor the net interest rate spread and overall
profitability of the strategy. It is expected that the strategy will be reimplemented if it reaches a position that is profitable.
At September 30, 2018, we had $2.08 billion of FHLB advances, at par, outstanding. Total FHLB borrowings are secured by
certain qualifying loans pursuant to a blanket collateral agreement with FHLB. 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. In
July 2018, the president of the FHLB renewed the approval of the increase in the Bank's borrowing limit to 55% of Bank Call
Report total assets through July 2019. This approval was also in place throughout fiscal year 2018. When the full leverage
strategy is in place, FHLB borrowings may be in excess of 40% of the Bank's Call Report total assets, and may continue to be
in excess of 40% 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.
At September 30, 2018, repurchase agreements totaled $100.0 million, or approximately 1% of total assets. The Bank may
enter into additional repurchase agreements as management deems appropriate, not to exceed 15% of total assets and subject
to the internal policy limit on total borrowings of 55%. The securities underlying the agreements continue to be reported in
the Bank's securities portfolio. At September 30, 2018, we had securities with a fair value of $107.4 million pledged as
collateral on repurchase agreements.
The following table sets forth certain information relating to the category of borrowings for which the average short-term
balance outstanding during the period was at least 30% of stockholders' equity at the end of each period shown. The
maximum balance, average balance, and weighted average contractual interest rate during the fiscal years shown reflect
borrowings that were scheduled to mature within one year at any month-end during those years.
Short-Term FHLB Borrowings:
Balance at end of period
Maximum balance outstanding at any month-end during the period
Average balance
Weighted average contractual interest rate during the period
Weighted average contractual interest rate at end of period
Subsidiary Activities
2018
2017
2016
(Dollars in thousands)
$ 975,000
$ 475,000
$ 500,000
2,975,000
2,189,483
2,675,000
2,520,217
2,600,000
2,436,749
1.65%
2.00
1.27%
1.91
0.70%
2.69
At September 30, 2018, the Company had one wholly-owned subsidiary, the Bank. The Bank provides a full range of retail
banking services through 58 banking offices serving primarily the metropolitan areas of Topeka, Wichita, Lawrence,
Manhattan, Emporia and Salina, Kansas and portions of the metropolitan area of greater Kansas City. At September 30,
2018, the Bank had two wholly-owned subsidiaries, Capitol Funds, Inc. and Capital City Investments, Inc. At September 30,
2018, Capitol Funds, Inc. had one wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company ("CFMRC"),
which serves as a reinsurance company for certain PMI companies the Bank uses in its normal course of operations. CFMRC
stopped writing new business for the Bank in January 2010. Capital City Investments, Inc. is a real estate and investment
holding company. Each wholly-owned subsidiary is reported with the Company on a consolidated basis.
Regulation and Supervision
Set forth below is a description of certain laws and regulations that are applicable to Capitol Federal Financial, Inc. 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 Bank is required to maintain minimum levels of regulatory
capital and is subject to some limitations on capital distributions to the Company. 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.
24 The Company is a unitary savings and loan holding company within the meaning of the Home Owners' Loan Act ("HOLA").
As such, the Company is registered with the FRB and subject to the FRB regulations, examinations, supervision, and
reporting requirements. In addition, the FRB has enforcement authority over the Company. Among other things, this
authority permits the FRB to restrict or prohibit activities that are determined to be a serious risk to the Bank.
The OCC and FRB enforcement authority includes, among other things, the ability to assess civil monetary penalties, to issue
cease-and-desist or removal orders, and to initiate injunctive actions. In general, these enforcement actions may be initiated
for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed. Except under certain circumstances, public disclosure of
final enforcement actions by the OCC or the FRB is required by law.
Office of the Comptroller of the Currency. 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.
As a federally chartered savings bank, the Bank is required to meet a Qualified Thrift Lender ("QTL") test. This test requires
the Bank to have at least 65% of its portfolio assets, as defined by statute, in qualified thrift investments at month-end for 9
out of every 12 months on a rolling basis. Under an alternative test, the Bank's business must consist primarily of acquiring
the savings of the public and investing in loans, while maintaining 60% of its assets in those assets specified in Section
7701(a)(19) of the Internal Revenue Code. Under either test, the Bank is required to maintain a significant portion of its
assets in residential housing related loans and investments. An institution that fails to qualify as a QTL based upon one of
these tests is immediately subject to certain restrictions on its operations, including a prohibition against capital distributions,
except with the prior approval of both the OCC and the FRB, as necessary to meet the obligations of a company controlling
the institution. If the Bank fails the QTL test and does not regain QTL status within one year, or fails the test for a second
time, the Company must immediately register as, and become subject to, the restrictions applicable to a bank holding
company. The activities authorized for a bank holding company are more limited than are the activities authorized for a
savings and loan holding company. Three years after failing the test, an institution must divest all investments and cease all
activities not permissible for both a national bank and a savings association. Failure to meet the QTL test is a statutory
violation subject to enforcement action. As of September 30, 2018, the Bank met the QTL test.
The Bank is subject to a 35% of total assets limit on non-real estate consumer loans, commercial paper and corporate debt
securities, and a 20% limit on commercial non-mortgage loans. At September 30, 2018, the Bank was in compliance with
these limits.
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 persons combined because of
certain common interests. The general limit is equal to 15% of our unimpaired capital and surplus, plus an additional 10%
for loans fully secured by readily marketable collateral. At September 30, 2018, the Bank's lending limit under this
restriction was $181.6 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 totaled $50.0 million at September 30, 2018,
all of which was current according to its terms.
The Bank is subject to periodic examinations by the OCC. During these examinations, the examiners may require the Bank
to increase its ACL and/or recognize additional charge-offs based on their judgments, which can impact our capital and
earnings. As a federally chartered savings bank, the Bank is subject to a semi-annual assessment, based upon its total assets,
to fund the operations of the OCC.
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. Any institution regulated by the OCC that fails to comply with these standards
must submit a compliance plan.
25 Insurance of Accounts and Regulation by the FDIC. The DIF of the FDIC insures deposit accounts in the Bank up to
applicable limits. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") permanently
increased the maximum amount of deposit insurance for banks, savings institutions, and credit unions to $250 thousand per
separately insured deposit ownership right or category.
Under the FDIC's system for assessing insurance premiums, insured institutions that have not reported assets of $10 billion or
more at the end of the quarter for at least four consecutive quarters on their Call Reports are assessed based on CAMELS
component ratings and certain financial ratios. For these institutions, total base assessment rates currently range from 1.5 to
16 basis points for institutions with CAMELS composite ratings of 1 or 2, 3 to 30 basis points for those with a CAMELS
composite score of 3, and 11 to 30 basis points for those with CAMELS composite scores of 4 or 5, all subject to
adjustments. For the fiscal year ended September 30, 2018, the Bank paid $2.9 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.
An institution that has reported total assets at the end of the quarter of $10 billion or more for at least four consecutive
quarters is assessed under a complex scorecard method employing many factors, including weighted average CAMELS
ratings; a performance score; leverage ratio; ability to withstand asset-related stress; certain measures of concentration, core
earnings, core deposits, credit quality, and liquidity; and a loss severity score and loss severity measure. Total base
assessment rates for these institutions currently range from 1.5 to 40 basis points, subject to certain adjustments. For all
institutions, the base assessment rates are expected to decrease when the reserve ratio increases to specified thresholds of 2%
and 2.5%.
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 an emergency, the FDIC may also impose a special assessment.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC. We do not currently know of any practice, condition, or violation that may lead to
termination of our deposit insurance.
The Dodd-Frank Act requires large institutions to bear the burden of raising the reserve ratio from 1.15% to 1.35%. To
implement this mandate, large and highly complex institutions must pay an annual surcharge of 4.5 basis points on their
assessment base. If the DIF reserve ratio has not reached 1.35% by December 31, 2018, the FDIC plans to impose a shortfall
assessment on large institutions on March 31, 2019.
Since established small institutions will be contributing to the DIF while the reserve ratio remains between 1.15% and 1.35%
and the large institutions are paying a surcharge, the FDIC will provide assessment credits to the established small institutions
for the portion of their assessments that contribute to the increase. When the reserve ratio reaches 1.38%, the FDIC will
automatically apply an established small institution's assessment credit to reduce its regular deposit insurance assessments.
FDIC-insured institutions are required to pay additional quarterly assessments called the FICO assessments in order to fund
the interest on bonds issued to resolve thrift failures in the 1980s. The rate for these assessments is adjusted quarterly and is
applied to the same base as used for the deposit insurance assessment. These assessments are expected to continue until the
bonds mature through 2019. For the fiscal year ended September 30, 2018, the Bank paid $377 thousand in FICO
assessments.
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.
26
Regulatory Capital Requirements. The Bank and Company are required to maintain specified levels of regulatory capital
under regulations of the OCC and FRB, respectively. The current regulatory capital rules, sometimes referred to as the Basel
III rules, became effective for the Company and Bank in January 2016, with some rules being transitioned into full
effectiveness over two-to-four years.
Under the Basel III rules, the minimum capital ratios are as follows:
•
•
•
•
4.5% common equity Tier 1 ("CET1") to risk-weighted assets.
6.0% Tier 1 capital to risk-weighted assets.
8.0% total capital to risk-weighted assets.
4.0% Tier 1 capital to average consolidated assets as reported on Call Reports, minus certain items deducted from
Tier 1 capital (known as the "leverage ratio").
CET1 capital and Tier 1 capital for the Company and the Bank generally consists of common stock plus related surplus and
retained earnings, adjusted for goodwill and other intangible assets and AOCI-related amounts. Also included in Tier 1
capital for the Company are trust preferred securities that were assumed in conjunction with the acquisition of CCB on
August 31, 2018. Tier 2 capital for the Company and the Bank includes the balance of ACL; however, the amount of
includable ACL in Tier 2 capital may be limited if the amount exceeds 1.25% of risk-weighted assets. At September 30,
2018, the Bank had $8.5 million of ACL, which was less than the 1.25% risk-weighted assets limit; therefore, the entire
amount of ACL was includable in Tier 2 and total risk-based capital. Total capital for the Company and the Bank consists of
Tier 1 capital plus the amount of includable ACL (Tier 2 capital).
The Basel III rules allow certain savings and loan holding companies to include certain hybrid securities, such as trust
preferred securities, in Tier 1 capital so long as the institution had less than $15 billion in assets as of December 31, 2009, and
the securities were issued before May 19, 2010. As mentioned above, the Company assumed trust preferred securities in
conjunction with the acquisition of CCB on August 31, 2018 and the amounts will be included in Tier 1 capital until they
have been redeemed, which management anticipates will occur in fiscal year 2019.
The Basel III rules require the Company and the Bank to maintain a capital conservation buffer above certain minimum
capital ratios in order to avoid certain restrictions on capital distributions and other payments including dividends, share
repurchases, and certain compensation. This requirement, which was 1.875% at September 30, 2018, became effective
January 1, 2016 and is being phased in over a four year period by increasing the required buffer amount by 0.625% each year.
At September 30, 2018 and 2017, the Bank and Company held capital in excess of the capital conservation buffer
requirement. Once the buffer requirement is fully phased-in on January 1, 2019, the Bank and Company must maintain a
balance of capital that exceeds by more than 2.5% each of the minimum risk-based capital ratios in order to satisfy the
requirement, so that the required ratios will bear: (1) a CET1 capital ratio of more than 7.0%, (2) a Tier 1 capital ratio of more
than 8.5%, and (3) a total capital (Tier 1 plus Tier 2) ratio of more than 10.5%.
The capital rules assign a risk weight to every asset and to certain off-balance sheet items, such as binding loan commitments,
which are multiplied by credit conversion factors to convert them into asset equivalents. The risk weights for the Bank's and
Company's assets and off-balance sheet items generally range from 0% to 150%. At September 30, 2018, the Bank and the
Company each had risk-weighted assets of $4.79 billion.
For the quarter ended September 30, 2018, the Bank reported in its Call Report quarterly average assets of $9.26 billion and
the Company reported to the FRB quarterly average assets of $9.28 billion.
A depository institution is considered to be well capitalized if it has (i) a total risk-based capital ratio of 10.0% or more, (ii) a
CET1 risk-based capital ratio of 6.5% or more, (iii) a Tier 1 risk-based capital ratio of 8.0% or more, and (iv) a leverage ratio
of 5.0% or more, and is not subject to any of certain specified requirements to meet and maintain a specific capital level for
any capital measure. An institution that is not well capitalized is subject to certain restrictions on brokered deposits,
including restrictions on the rates it can offer on its deposits generally. At September 30, 2018, the Bank was considered well
capitalized under OCC regulations. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to
Consolidated Financial Statements – Note 14. Regulatory Capital Requirements" and "Part II, Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources" for additional
regulatory capital information.
27 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 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 requirement on the Bank.
The OCC is authorized and, under certain circumstances, required to take certain actions against federal savings banks that
are considered not to be adequately capitalized because they fail to meet the minimum ratios under the Basel III rules. Any
such institution must submit a capital restoration plan for OCC approval and may not increase its assets, acquire another
institution, establish a branch or engage in any new activities, and may not make capital distributions. The OCC may impose
further restrictions. The plan must include a guaranty by the institution's holding company limited to the lesser of 5% of the
institution's assets when it became undercapitalized, or the amount necessary to restore the institution to adequately
capitalized status.
Federal regulations state that any institution that fails to comply with its capital plan or has a CET1 risk-based capital ratio of
less than 4.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a total risk-based capital ratio of less than 6.0%, or a
leverage ratio of less than 3.0% is considered significantly undercapitalized and must be made subject to one or more
additional specified actions and restrictions that may cover all aspects of its operations and may include a forced merger or
acquisition of the institution. An institution with tangible equity to total assets of less than 2.0% is critically undercapitalized
and becomes subject to further mandatory restrictions on its operations. The OCC generally is authorized to reclassify an
institution into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in
unsafe or unsound practices or is in an unsafe or unsound condition. The imposition by the OCC of any of these measures on
the Bank may have a substantial adverse effect on its operations and profitability. In general, the FDIC must be appointed
receiver for a critically undercapitalized institution whose capital is not restored within the time provided.
When the FDIC as receiver liquidates an institution, the claims of depositors and the FDIC as their successor (for deposits
covered by FDIC insurance) have priority over other unsecured claims against the institution.
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, pursuant to the Gramm-Leach-Bliley
Act, 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 parties. With respect to federal consumer
protection laws, regulations are generally promulgated by the 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 bank, 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 and regulations, including the USA PATRIOT Act of 2001. 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 requirements 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.
28
Stress Testing. As required by the Dodd-Frank Act and the regulations of the FRB and the OCC, FDIC-insured institutions
and their holding companies with average total consolidated assets greater than $10 billion must conduct annual, company-
run stress tests under the baseline, adverse and severely adverse scenarios provided by the federal banking regulators. The
Company and the Bank are not subject to this requirement as their average total consolidated assets for this purpose are not
greater than $10 billion.
Federal Securities Law. The common stock of the Company is registered with the SEC under the Securities Exchange Act
of 1934, as amended. The Company is subject to the information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Securities Exchange Act of 1934.
The Company stock held by persons who are affiliates of the Company may not be resold without registration or unless sold
in accordance with certain resale restrictions. For this purpose, affiliates are generally considered to be executive officers,
directors and principal stockholders. If the Company meets specified current public information requirements, each affiliate
of the Company will be able to sell in the public market, without registration, a limited number of shares in any three-month
period.
Federal Reserve System. The FRB requires all depository institutions to maintain reserves at specified levels against their
transaction accounts, primarily checking accounts. At September 30, 2018, the Bank was in compliance with these reserve
requirements. 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 borrower can use primary credit. At September 30, 2018, 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. It makes loans, called advances, to
members and provides 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 ("FHFA").
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 of loans sold into the Mortgage Partnership Finance program. At September 30, 2018, the Bank had
a balance of $99.7 million in FHLB stock, which was in compliance with this requirement. In past years, the Bank has
received dividends on its FHLB stock, although no assurance can be given that these dividends will continue. On a quarterly
basis, management conducts a review of FHLB to determine whether an other-than-temporary impairment of the FHLB stock
is present. At September 30, 2018, management concluded there was no such impairment.
Federal Savings and Loan Holding Company Regulation. The purpose and powers of the Company are to pursue any or all
of the lawful objectives of a savings and loan holding company and to exercise any of the powers accorded to a savings and
loan holding company.
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 Dodd-Frank Act extended to savings and loan holding companies and codified the FRB's "source of strength" doctrine,
which has long applied to bank holding companies. The FRB has promulgated regulations implementing its "source of
strength" policy, which requires 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.
29 2018 Regulatory Reform. In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the
"Regulatory Relief Act"), was enacted to modify or remove certain financial reform rules and regulations, including some of
those implemented under the Dodd-Frank Act. While the Regulatory Relief Act maintains most of the regulatory structure
established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions
with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could
result in meaningful regulatory changes for community banks such as the Bank, and their holding companies.
The Regulatory Relief Act, among other matters, expands the definition of qualified mortgages which may be held by a
financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total
consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single "Community
Bank Leverage Ratio" of between 8 and 10 percent. Any qualifying depository institution or its holding company that
exceeds the "community bank leverage ratio" will be considered to have met generally applicable leverage and risk-based
regulatory capital requirements and any qualifying depository institution that exceeds the new ratio will be considered to be
"well capitalized" under the prompt corrective action rules. In addition, the Regulatory Relief Act includes regulatory relief
for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading
prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
It is difficult at this time to predict when or how any new standards under the Regulatory Relief Act will ultimately be applied
to the Bank or the Company or what specific impact the Regulatory Relief Act and the yet-to-be-written implementing rules
and regulations will have on the Bank or the Company.
Taxation
Federal Taxation
General
The Company and the Bank are subject to federal income taxation in the same general manner as other corporations, with
some exceptions discussed below. 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 2015.
Method of Accounting
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.
Minimum Tax
The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus
certain tax preferences, called alternative minimum taxable income. The alternative minimum tax is payable to the extent
such alternative minimum taxable income is in excess of the regular tax. The Tax Cuts and Jobs Act (the "Tax Act") enacted
in December 2017 repealed the alternative minimum tax, but the repeal is not applicable to the Company until its September
30, 2019 federal income tax return. See additional information regarding the Tax Act in "Part II, Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary."
Net Operating Loss Carryovers
For federal income tax purposes, a financial institution may carry back net operating losses to the preceding two taxable years
and forward to the succeeding 20 taxable years. As of September 30, 2018, the Company assumed a net operating loss
carryover of $1.1 million ($266 thousand tax effected) with the acquisition of CCB.
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.
30 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
At September 30, 2018, we had a total of 775 employees, including 137 part-time employees. The full-time equivalent of our
total employees at September 30, 2018 was 733. Our employees are not represented by any collective bargaining group.
Management considers its employee relations to be good.
Executive Officers of the Registrant
John B. Dicus. Age 57 years. Mr. Dicus is Chairman of the Board of Directors, Chief Executive Officer, and President of
the Bank and the Company. He has served as Chairman since January 2009 and Chief Executive Officer since January 2003.
He has served as President of the Bank since 1996 and of the Company since its inception in March 1999. Prior to accepting
the responsibilities of Chief Executive Officer, he served as Chief Operating Officer of the Bank and the Company. Prior to
that, he served as the Executive Vice President of Corporate Services for the Bank for four years. He has been with the Bank
in various other positions since 1985.
Kent G. Townsend. Age 57 years. Mr. Townsend serves as Executive Vice President and Chief Financial Officer of the
Bank, its subsidiary, and the Company. Mr. Townsend also serves as Treasurer for the Company, Capitol Funds, Inc. and
CFMRC. Mr. Townsend was promoted to Executive Vice President, Chief Financial Officer and Treasurer on September 1,
2005. Prior to that, he served as Senior Vice President, a position he held since April 1999, and Controller of the Company, a
position he held since March 1999. He has served in similar positions with the Bank since September 1995. He served as the
Financial Planning and Analysis Officer with the Bank for three years and other financial related positions since joining the
Bank in 1984.
Rick C. Jackson. Age 53 years. Mr. Jackson serves as Executive Vice President, Chief Lending Officer and Community
Development Director of the Bank and the Company. He also serves as the President of Capitol Funds, Inc., a subsidiary of
the Bank and President of CFMRC. He has been with the Bank since 1993 and has held the position of Community
Development Director since that time. He has held the position of Chief Lending Officer since February 2010.
Natalie G. Haag. Age 59 years. Ms. Haag serves as Executive Vice President and General Counsel of the Bank and the
Company. Prior to joining the Bank and the Company in August 2012, Ms. Haag was 2nd Vice President, Director of
Governmental Affairs and Assistant General Counsel for Security Benefit Corporation and Security Benefit Life Insurance
Company in Topeka, Kansas. Security Benefit provides retirement products and services, including annuities and mutual
funds. Ms. Haag was employed by Security Benefit since 2003. The Security Benefit companies are not parents, subsidiaries
or affiliates of the Bank or the Company.
Carlton A. Ricketts. Age 61 years. Mr. Ricketts serves as Executive Vice President, Chief Corporate Services Officer of the
Bank and the Company. Prior to accepting those responsibilities in April 2012, he served as Chief Strategic Planning Officer
of the Bank, a position held since February 2007.
Daniel L. Lehman. Age 53 years. Mr. Lehman serves as Executive Vice President, Chief Retail Operations Officer of the
Bank and Company. Prior to accepting those responsibilities in October 2016, he served as First Vice President and
Accounting Director, a position held since May 2003 and Controller, a position held since 2005.
Robert D. Kobbeman. Age 63 years. Mr. Kobbeman joined the Bank and the Company at the time of the acquisition of
CCB and serves as Executive Vice President, Chief Commercial Banking Officer. Prior to joining the Bank and the
Company, Mr. Kobbeman was the President and Chief Executive Officer and a director of Capital City Bank since 2002.
From 1998 to 2002, Mr. Kobbeman served as Executive Vice President, Chief Lending Officer of Capital City Bank.
31 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 also be additional 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.
Changes in interest rates could have an adverse impact on our results of operations and financial condition.
Our results of operations are primarily dependent on net interest income, which is the difference between the interest earned
on loans, securities, cash at the Federal Reserve Bank and dividends received on FHLB stock, and the interest paid on
deposits and borrowings. Changes in interest rates could have an adverse impact on our results of operations and financial
condition because the majority of our interest-earning assets are long-term, fixed-rate loans, while the majority of our
interest-bearing liabilities are shorter term, and therefore subject to a greater degree of interest rate fluctuations. This type of
risk is known as interest rate risk and is affected by prevailing economic and competitive conditions, including monetary
policies of the FRB and fiscal policies of the United States federal government.
The impact of changes in interest rates is generally observed on the income statement. The magnitude of the impact will be
determined by the difference between the amount of interest-earning assets and interest-bearing liabilities, both of which
either reprice or mature within a given period of time. This difference provides an indication of the extent to which our net
interest rate spread will be impacted by changes in interest rates. In addition, changes in interest rates will impact the
expected level of repricing of the Bank's mortgage-related assets and callable debt securities. Generally, as interest rates
decline, the amount of interest-earning assets expected to reprice will increase as borrowers have an economic incentive to
reduce the cost of their mortgage or debt, which would negatively impact the Bank's interest income. Conversely, as interest
rates rise, the amount of interest-earning assets expected to reprice will decline as the economic incentive to refinance the
mortgage or debt is diminished. As this occurs, the amount of interest-earning assets repricing could diminish to the point
where interest-bearing liabilities reprice to a higher interest rate at a faster pace than interest-earning assets, thus negatively
impacting the Bank's net interest income.
Changes in interest rates can also have an adverse effect on our financial condition as AFS securities are reported at estimated
fair value. We increase or decrease our stockholders' equity, specifically AOCI (loss), by the amount of change in the
estimated fair value of our AFS securities, net of deferred taxes. Increases in interest rates generally decrease the fair value of
AFS securities. Decreases in the fair value of AFS securities would, therefore, adversely impact stockholders' equity.
Changes in interest rates, as they relate to customers, can also have an adverse impact on our financial condition and results
of operations. In times of rising interest rates, default risk may increase among borrowers with adjustable-rate loans as the
rates on their loans adjust upward and their payments increase. Fluctuations in interest rates also affect customer demand for
deposit products. Local competition could affect our ability to attract deposits, or could result in us paying more than
competitors for deposits.
As was announced in July 2017, LIBOR is anticipated to be phased out by the end of 2021. As of September 30, 2018, the
Bank's loan portfolio included $831.1 million of adjustable-rate loans for which the repricing index was tied to LIBOR.
Additionally, the Bank has interest rate swaps with a notional amount of $475.0 million tied to LIBOR. Our loan agreements
generally allow the Bank to choose a new index based upon comparable information if the current index is no longer
available. The use of a new index could reduce our interest income and therefore have an adverse effect on our results of
operations. Management continues to monitor the status and discussions regarding LIBOR.
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
32 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.
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 or 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.
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 potentially 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. The Company has not experienced any
material breaches.
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 a material adverse effect on our business,
financial condition or 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.
33 Furthermore, there has recently been 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 a material adverse effect on our business, financial condition or results of
operations.
Our customers are also the target of cyber-attacks and identity theft. There have been several recent 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 a material adverse effect on our financial condition and results of operations.
An economic downturn, especially one affecting our geographic market area and certain regions of the country where
we have correspondent loans, could adversely impact our business and financial results.
Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans on residential
properties; therefore, we are particularly exposed to downturns in regional housing markets and, to a lesser extent, the U.S.
housing market, 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 in our
local market areas and certain areas where we have correspondent loans. Adverse conditions in our local economies and in
certain areas where we have correspondent loans, such as inflation, unemployment, recession, natural disasters, 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. 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.
The increase in commercial loans in our loan portfolio exposes us to increased lending and credit risks.
A growing portion of our loan portfolio consists of commercial loans. In addition, as a result of the acquisition of CCB, it is
anticipated that commercial lending will continue to be a growing portion of our business. 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. 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 operations 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, and/or changes in government
regulation. Also, there are risks inherent in commercial real estate construction lending as the value of the project is
uncertain prior to the completion of construction and subsequent lease-up. A sudden downturn in the economy or other
unforeseen events could result in stalled projects or collateral shortfalls, thus exposing us to increased credit risk.
Additionally, a large portion of our commercial loans were originated/participated in during the past five fiscal years, which
makes it difficult to assess the future performance of these loans because of the borrowers' relatively limited income history
and loan payment history.
Our recently acquired 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
34 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 specific reserves and charge-offs related to our recently acquired
commercial and industrial loan portfolio could have an adverse effect on our business, financial condition, results of
operations and future prospects.
Our commercial loans generally have significantly larger average loan balances compared to one- to four-family residential
real estate loans and may involve multiple loans to groups of related borrowers. Our largest commercial lending relationship
was $50.0 million at September 30, 2018.
A growing commercial loan portfolio subjects us to greater regulatory scrutiny. Regulatory agencies have observed that
many commercial markets are experiencing substantial growth, and as a result, concentration levels of commercial loans have
been rising at some institutions.
We regularly monitor the risks in our commercial loan portfolio, including concentrations in such factors as geographic
locations, property types, tenant brand name, borrowing relationships, and lending relationships in the case of participation
loans, among other factors. We continually strive to maintain high underwriting standards, including selecting borrowers and
guarantors that are financially sound and experienced in the industry, and selecting projects that meet the Bank's lending
policies and risk appetite. The properties securing our commercial loan portfolio are diverse in terms of type and geographic
location. This diversity helps reduce our exposure to adverse economic events, environmental factors and natural disasters
that may affect any single market or industry. For additional information regarding our commercial loan underwriting and
monitoring of risk, see "Part 1, Item 1. Business - Lending Practices and Underwriting Standards - Commercial Lending."
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 or results of operations.
We may be required to provide remedial consideration to borrowers whose loans we purchase from correspondent
and nationwide lenders if it is discovered that the originating company did not properly comply with lending
regulations during the origination process.
We purchase whole one- to four-family loans from correspondent and nationwide lenders. While loans purchased on a loan-
by-loan basis from correspondent lenders are underwritten by the Bank's underwriters and loans purchased in bulk packages
from correspondent and nationwide lenders are evaluated on a certain set of criteria before being purchased, we are still
subject to some risks associated with the loan origination process itself. By law, loan originators are required to comply with
lending regulations at all times during the origination process. Even though the Bank can contractually pursue the originating
company, certain compliance related risks associated with the origination process itself may shift from the originating
company to the Bank once the Bank purchases the loan. Should it be discovered, at any point, that an instance of
noncompliance occurred by the originating company during the origination process, the Bank may still be held responsible
and required to remedy the issue for the loans it purchased from the originator. Remedial actions can include refunding
interest paid by the borrower and adjusting the contractual interest rate on the loan to the current market rate if advantageous
to the borrower. The Bank no longer purchases loans in bulk from nationwide lenders due primarily to these risks.
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 must 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
35 financial or technological resources than the Bank. We compete primarily on the basis of the interest rates offered to
depositors, the terms of loans offered to borrowers, and the benefits afforded to customers as a local institution and portfolio
lender. Our pricing strategy for loan and deposit products includes setting interest rates based on secondary market prices
and local competitor pricing for our local markets, and secondary market prices and national competitor pricing for our
correspondent lending markets. Should we face competitive pressure to increase deposit rates or decrease loan rates, our net
interest income could be adversely affected. Additionally, our competitors may offer products and services that we do not or
cannot provide, as certain deposit and loan products fall outside of our accepted level of risk. Our profitability depends upon
our ability to compete in our local market areas.
We operate in a highly regulated environment which limits the manner and scope of our business activities and we
may be adversely affected by new and/or changes in laws and regulations or interpretation of existing laws and
regulations.
We are subject to extensive regulation, supervision, and examination by the OCC, FRB, and the FDIC. These regulatory
authorities exercise broad discretion in connection with their supervisory and enforcement activities, including the ability to
impose restrictions on a bank's operations, reclassify assets, determine the adequacy of a bank's ACL, and determine the level
of deposit insurance premiums assessed. The Dodd-Frank Act created the CFPB with 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 a material adverse impact on our operations. Moreover, bank regulatory agencies have been active
in responding to concerns and trends identified in examinations, and have issued formal enforcement orders requiring capital
ratios in excess of regulatory requirements and/or assessing monetary penalties. Bank regulatory agencies, such as the OCC
and the FDIC, govern the activities in which we may engage, primarily for the protection of depositors, and not for the
protection or benefit of investors. The CFPB enforces consumer protection laws and regulations for the benefit of the
consumer and not the protection or benefit of investors. In addition, new laws and regulations may continue to increase our
costs of regulatory compliance and of doing business, and otherwise affect our operations. New laws and regulations may
significantly affect the markets in which we do business, the markets for and value of our loans and securities, the products
we offer, the fees we can charge and our ongoing operations, costs, and profitability.
The Company is also directly subject to the requirements of entities that set and interpret the accounting standards such as the
Financial Accounting Standards Board, and indirectly subject to the actions and interpretations of the Public Company
Accounting Oversight Board, which establishes auditing and related professional practice standards for registered public
accounting firms and inspects registered firms to assess their compliance with certain laws, rules, and professional standards
in public company audits. These regulations, along with the currently existing tax, accounting, securities, and monetary laws,
regulations, rules, standards, policies and interpretations, control the methods by which financial institutions and their
holding companies conduct business, engage in strategic and tax planning, implement strategic initiatives, and govern
financial reporting.
The Company's failure to comply with laws, regulations or policies could result in civil or criminal sanctions and money
penalties by state and federal agencies, and/or reputation damage, which could have a material 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.
The Company's ability to pay dividends is subject to the ability of the Bank to make capital distributions to the
Company.
The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to
make capital distributions to the Company, and also on the availability of cash at the holding company level in the event
earnings are not sufficient to pay dividends. Under certain circumstances, capital distributions from the Bank to the
36 Company may be subject to regulatory approvals. See "Part II, Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations – Limitations on Dividends and Other Capital Distributions" for additional information.
Our risk-management and compliance programs and functions may not be effective in mitigating risk and loss.
We maintain an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the
risks that we face. These risks include: interest-rate, credit, liquidity, operations, reputation, compliance and litigation. We
also maintain a compliance program to identify, measure, assess, and report on our adherence to applicable laws, policies and
procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk
management or compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in
our business. If conditions or circumstances arise that expose flaws or gaps in our risk management or compliance programs,
or if our controls do not function as designed, the performance and value of our business could be adversely affected.
The Company may not 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 a material
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.
The Company may not realize all of the anticipated benefits of the acquisition of CCB.
The success of the Company's acquisition of CCB will depend on, among other things, the ability to realize anticipated cost
savings and to combine the businesses of the companies in a manner that does not materially disrupt the existing customer
relationships of the companies or result in decreased revenues from customers. If the Company is unable to achieve these
objectives, the anticipated benefits of the acquisition may not be realized fully, if at all, or may take longer to realize than
expected. Additionally, the integration of the two companies could result in the loss of key employees, the disruption of each
company's ongoing businesses or inconsistencies in standards, weakness in our internal control over financial reporting,
procedures and policies that adversely affect the Company's ability to maintain relationships with clients, customers,
depositors and employees or to achieve the anticipated benefits of the acquisition. Integration efforts will also divert
management attention and resources.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
At September 30, 2018, we had 48 traditional branch offices and 10 in-store branch offices. The Bank owns the office
building and related land in which its home office and executive offices are located, and 34 of its other branch offices. The
remaining 23 branches are either leased or partially owned.
For additional information regarding our lease obligations, see "Part II, Item 8. Financial Statements and Supplementary Data
– Notes to Consolidated Financial Statements – Note 6. Premises and Equipment, net."
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
The Company and the Bank are involved as plaintiff or defendant in various legal actions arising in the normal course of
business. In our opinion, after consultation with legal counsel, we believe it unlikely that such pending legal actions will
have a material adverse effect on our financial condition, results of operations or liquidity.
Item 4. Mine Safety Disclosures
None.
37 PART II
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 21, 2018, there were approximately 9,220 Capitol Federal Financial, Inc. stockholders of
record.
Share Repurchases
On October 28, 2015, the Company announced a stock repurchase plan for up to $70.0 million of common stock. The plan
does not have an expiration date. Since the Company completed its second-step conversion in December 2010, $368.0
million worth of shares have been repurchased.
The following table summarizes our share repurchase activity during the three months ended September 30, 2018 and
additional information regarding our share repurchase program.
Total
Number of
Shares
Purchased
Average
Price Paid
per Share
Total Number of
Shares Purchased as
Approximate
Dollar Value of
Shares that May
Part of Publicly
Yet Be Purchased
Announced Plans
Under the Plan
— $
—
—
—
—
—
—
—
— $
70,000,000
—
—
—
70,000,000
70,000,000
70,000,000
July 1, 2018 through
July 31, 2018
August 1, 2018 through
August 31, 2018
September 1, 2018 through
September 30, 2018
Total
Stockholders and General Inquiries
Copies of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018 are available to stockholders at no
charge in the Investor Relations section of our website, www.capfed.com.
38 Stockholder Return Performance Presentation
The information presented below assumes $100 invested on September 30, 2013 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
9/30/2013
9/30/2014
9/30/2015
9/30/2016
9/30/2017
9/30/2018
Capitol Federal Financial, Inc.
NASDAQ Composite Index
SNL U.S. Bank & Thrift Index
Source: S&P Global Market Intelligence
100.00
100.00
100.00
103.05
120.61
117.86
113.10
125.43
120.33
139.97
146.03
124.41
155.01
180.62
174.98
143.51
226.08
188.09
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. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations –
Limitations on Dividends and Other Capital Distributions" for additional information regarding the Company's ability to pay
dividends.
39 Item 6. Selected Financial Data
The summary information presented below under "Selected Balance Sheet Data" and "Selected Operations Data" for, and as
of the end of, each of the years ended September 30 is derived from our audited consolidated financial statements. The
following information is only a summary and should be read in conjunction with our consolidated financial statements.
Selected Balance Sheet Data:
Total assets
Loans receivable, net
Securities:
AFS
HTM
FHLB stock
Deposits
Borrowings
Stockholders' equity
September 30,
2018
2017
2016
2015
2014
(Dollars in thousands)
$ 9,449,547
7,514,485
$ 9,192,916
7,195,071
$ 9,267,247
6,958,024
$ 9,844,161
6,625,027
$ 9,865,028
6,233,170
714,614
612,318
99,726
5,603,354
2,285,033
1,391,622
415,831
827,738
100,954
5,309,868
2,373,808
1,368,313
527,301
1,100,874
109,970
5,164,018
2,572,389
1,392,964
758,171
1,271,122
150,543
4,832,520
3,470,521
1,416,226
840,790
1,552,699
213,054
4,655,272
3,589,677
1,492,882
For the Year Ended September 30,
Selected Operations Data:
Total interest and dividend income
Total interest expense
Net interest and dividend income
Provision for credit losses
Net interest and dividend income after
provision for credit losses
Deposit service fees
Other non-interest income
Total non-interest income
Salaries and employee benefits
Other non-interest expense
Total non-interest expense
Income before income tax expense
Income tax expense
Net income
Basic earnings per share
Average basic shares outstanding
Diluted earnings per share
Average diluted shares outstanding
$
$
$
$
2018
321,892
123,119
198,773
—
198,773
15,636
6,399
22,035
46,563
50,339
96,902
123,906
24,979
98,927
0.73
134,698
0.73
134,759
2017
2015
(Dollars and counts in thousands, except per share amounts)
2016
$
$
$
$
313,186
117,804
195,382
—
195,382
15,053
7,143
22,196
43,437
46,221
89,658
127,920
43,783
84,137
0.63
134,082
0.63
134,244
$
$
301,113
108,931
192,182
(750)
192,932
14,835
8,477
23,312
42,378
51,927
94,305
121,939
38,445
83,494
0.63
133,045
0.63
133,176
$
$
$
$
$
$
297,362
107,594
189,768
771
188,997
14,897
6,243
21,140
43,309
51,060
94,369
115,768
37,675
78,093
0.58
135,384
0.58
135,409
$
$
$
$
2014
290,246
106,103
184,143
1,409
182,734
14,937
8,018
22,955
43,757
46,780
90,537
115,152
37,458
77,694
0.56
139,440
0.56
139,442
40 Performance Ratios:
Return on average assets(1)
Return on average equity(1)
Dividends paid per share
Dividend payout ratio
Operating expense ratio
Efficiency ratio(1)
Ratio of average interest-earning assets
to average interest-bearing liabilities
Net interest margin(1)
Interest rate spread information:
Average during period(1)
End of period
Asset Quality Ratios:
Non-performing assets to total assets
Non-performing loans to total loans
ACL to non-performing loans
ACL to loans receivable, net
Capital Ratios:
Equity to total assets at end of period
Average equity to average assets
Company Tier 1 leverage ratio
Bank Tier 1 leverage ratio(2)
Other Data:
Number of traditional offices
Number of in-store offices
2018
2017
2016
2015
2014
$
0.94%
7.25
0.88
119.60%
0.92
43.89
1.13x
1.95%
$
0.75%
6.09
0.88
140.20%
0.80
41.21
1.12x
1.79%
$
0.74%
5.95
0.84
133.86%
0.84
43.76
1.13x
1.75%
$
0.70%
5.32
0.84
146.19%
0.84
44.74
1.14x
1.73%
$
0.82%
5.00
0.98
177.84%
0.96
43.72
1.18x
2.00%
1.80
2.18
0.14
0.15
77.01
0.11
14.7
13.0
14.9
13.0
48
10
1.66
2.04
0.20
0.23
50.58
0.12
14.9
12.4
12.3
10.8
37
10
1.63
1.92
0.35
0.42
29.32
0.12
15.0
12.4
12.3
10.9
37
10
1.59
1.85
0.31
0.39
36.41
0.14
14.4
13.1
12.6
11.3
37
10
1.79
1.84
0.29
0.40
37.04
0.15
15.1
16.4
N/A
13.2
37
10
(1) 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 its unique nature. 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. Management can discontinue the leverage strategy at any
point in time.
Return on average assets
Return on average equity
Efficiency ratio
Net interest margin
Average interest rate spread
Actual
(GAAP)
0.94%
7.25
43.89
1.95
1.80
2018
Leverage
Strategy
(0.13)%
0.13
(0.30)
(0.29)
(0.26)
Non-
GAAP
1.07%
7.12
44.19
2.24
2.06
For the Year Ended September 30,
2017
Leverage
Strategy
Actual
(GAAP)
Non-
GAAP
0.75%
6.09
41.21
1.79
1.66
(0.14)%
0.21
(0.63)
(0.36)
(0.32)
0.89%
5.88
41.84
2.15
1.98
Actual
(GAAP)
0.74%
5.95
43.76
1.75
1.63
2016
Leverage
Strategy
(0.14)%
0.17
(0.42)
(0.35)
(0.30)
Non-
GAAP
0.88%
5.78
44.18
2.10
1.93
For the Year Ended September 30,
Actual
(GAAP)
0.70%
5.32
44.74
1.73
1.59
2015
Leverage
Strategy
(0.13)%
0.19
(0.61)
(0.34)
(0.28)
Non-
GAAP
Actual
(GAAP)
0.83%
5.13
45.35
2.07
1.87
0.82%
5.00
43.72
2.00
1.79
2014
Leverage
Strategy
(0.03)%
0.03
(0.10)
(0.07)
(0.05)
Non-
GAAP
0.85%
4.97
43.82
2.07
1.84
Return on average assets
Return on average equity
Efficiency ratio
Net interest margin
Average interest rate spread
(2) Prior to September 30, 2015, this ratio was calculated using end-of-period total assets in the denominator in accordance with then applicable regulatory
capital requirements. Since September 30, 2015, this ratio has been calculated using current quarter average assets in the denominator in accordance
with current regulatory capital requirements.
41 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to assist in understanding the financial condition, results of operations,
liquidity, and capital resources of the Company. The Bank comprises almost all of the consolidated assets and liabilities of
the Company and the Company is dependent primarily upon the performance of the Bank for the results of its operations.
Because of this relationship, references to management actions, strategies and results of actions apply to both the Bank and
the Company.
Executive Summary
The following summary should be read in conjunction with the Management's Discussion and Analysis of Financial
Condition and Results of Operations section in its entirety.
The Company provides a full range of retail banking services through the Bank, which is a wholly-owned subsidiary of the
Company, headquartered in Topeka Kansas. The Bank has 48 traditional and 10 in-store banking offices serving primarily
the metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia and Salina, Kansas and portions of the
metropolitan area of greater Kansas City. 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.
On August 31, 2018, the Company completed the acquisition of CCB, the parent company of Capital City Bank, a Kansas
state chartered bank headquartered in Topeka, Kansas. Immediately upon closing the merger, Capital City Bank merged with
and into the Bank. Capital City Bank owned and leased banking locations in Topeka, Lawrence, and Overland Park, Kansas.
The Company acquired loans and deposits with fair values of $299.7 million and $352.5 million, respectively, at the date of
acquisition. As a result of the merger, the Bank is entering the commercial banking business through the origination of
commercial lending products and offering of commercial deposit services and began offering trust and brokerage services.
Under the terms of the acquisition agreement, the Company issued 3.0 million shares of Company common stock for all
outstanding shares of CCB capital stock, for a total merger consideration of $39.1 million, based on the Company's closing
stock price of $13.21 on August 31, 2018. As of September 30, 2018, the Company recognized goodwill of $8.0 million,
which is calculated as the consideration exchanged in excess of the fair value of assets, net of the liabilities assumed.
Additionally, the Company recognized $9.8 million of core deposit and other intangibles. Integration of information systems
is anticipated to be completed early in the second calendar quarter of 2019. After integration, the Company will review its
branch network to determine which branches, if any, should be closed in order to maintain or improve its efficiency.
The Company's results of operations are primarily dependent on net interest income, which is the difference between the
interest earned on loans, securities, and cash, and the interest paid on deposits and borrowings. On a weekly basis,
management reviews deposit flows, loan demand, cash levels, and changes in several market rates to assess all pricing
strategies. The Bank's pricing strategy for first mortgage loan products includes setting interest rates based on secondary
market prices and competitor pricing for our local lending markets, and secondary market prices and competitor pricing for
our correspondent lending markets. Pricing for commercial loans is generally based on competitor pricing and the credit risk
of the borrower with consideration given to the overall relationship of the borrower. Generally, deposit pricing is based upon
a survey of competitors in the Bank's market areas, and the need to attract funding and retain maturing deposits. The majority
of our loans are fixed-rate products with maturities up to 30 years, while the majority of our retail deposits have stated
maturities or repricing dates of less than two years.
The Company is significantly affected by prevailing economic conditions, including federal monetary and fiscal policies and
federal regulation of financial institutions. Deposit balances are influenced by a number of factors, including interest rates
paid on competing investment products, the level of personal income, and the personal rate of savings within our market
areas. Lending activities are influenced by the demand for housing and other loans, our loan underwriting guidelines
compared to those of our competitors, as well as interest rate pricing competition from other lending institutions.
Local economic conditions have a significant impact on the ability of borrowers to repay loans and the value of the collateral
securing these loans. The industries in the Bank's local market areas, where the properties securing approximately 67% of the
Bank's one- to four-family loans are located, are diversified, especially in the Kansas City metropolitan statistical area, which
comprises the largest segment of our loan portfolio and deposit base. As of October 2018, the unemployment rate was 3.3%
for Kansas and 3.1% for Missouri, compared to the national average of 3.7% based on information from the Bureau of Labor
Statistics. The Kansas City market area has an average household income of approximately $87 thousand per annum, based
42 on 2018 estimates from Claritas Pop-Facts Premier. The average household income in our combined local market areas is
approximately $81 thousand per annum, with 91% of the population at or above the poverty level based on the 2018
estimates from Claritas Pop-Facts Premier. The FHFA price index for Kansas and Missouri continues to indicate relative
stability in property values in our local market areas. Management also monitors broad industry and economic indicators and
trends in the states and/or metropolitan statistical areas with the highest concentrations of correspondent purchased loans.
The Bank continued, at times, to utilize a leverage strategy to increase earnings in fiscal year 2018. The leverage strategy
during the current fiscal year involved borrowing up to $2.10 billion either on the Bank's FHLB line of credit or by entering
into short-term FHLB advances, depending on the rates offered by FHLB. The borrowings were repaid prior to each quarter
end, or earlier if the strategy was not profitable and therefore suspended. The proceeds from the borrowings, net of the
required FHLB stock holdings, which yielded approximately 6.7% during the current fiscal year, were deposited at the FRB
of Kansas City. Net income attributable to the leverage strategy is largely derived from the dividends received on FHLB
stock holdings, plus the net interest rate spread between the yield on the cash at the FRB of Kansas City and the rate paid on
the related FHLB borrowings, less applicable federal insurance premiums and estimated taxes. Net income attributable to the
leverage strategy was $1.7 million during the current fiscal year, compared to $2.8 million for the prior fiscal year. The
decrease was due mainly to the suspension of the strategy at certain times during the last half of the current fiscal year due to
the negative interest rate spread, which resulted in the strategy not being profitable. Management continues to monitor the
net interest rate spread and overall profitability of the strategy. It is expected that strategy will be reimplemented if it reaches
a position that is profitable.
For fiscal year 2018, the Company recognized net income of $98.9 million, or $0.73 per share, an increase of $14.8 million,
or 17.6%, from fiscal year 2017. The increase in net income was due primarily to a decrease in income tax expense. During
December 2017, the Tax Act was enacted which made significant changes to the U.S. corporate income tax laws, such as a
permanent reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018, and changes to and/
or limitations on certain income tax deductions. The Company has a fiscal year end of September 30, so the change in the
income tax rate resulted in the use of a blended federal income tax rate for fiscal year 2018. In accordance with GAAP, the
Company revalued its deferred tax assets and liabilities as of December 22, 2017 to account for the future impact of a lower
income tax rate. The revaluation of the Company's deferred tax assets and liabilities reduced income tax expense in the
current fiscal year by $7.5 million. The effective tax rate for the current fiscal year was 20.2%. Management estimates the
effective income tax rate for fiscal year 2019 will be approximately 22%.
The net interest margin increased 16 basis points, from 1.79% for the prior fiscal year to 1.95% for the current fiscal year.
Excluding the effects of the leverage strategy, the net interest margin would have increased nine basis points, from 2.15% for
the prior fiscal year to 2.24% for the current fiscal year. The increase in the net interest margin was due mainly to an increase
in interest-earning asset yields.
Total assets were $9.45 billion at September 30, 2018 compared to $9.19 billion at September 30, 2017. The $256.6 million
increase was due primarily to acquiring loans with a fair value of $299.7 million from CCB. The loans receivable portfolio,
net, totaled $7.51 billion at September 30, 2018 compared to $7.20 billion at September 30, 2017. During the current fiscal
year, the Bank originated and refinanced $633.4 million of loans with a weighted average rate of 4.17% and purchased
$391.6 million of one- to four-family loans from correspondent lenders with a weighted average rate of 3.80%. The Bank
also entered into participations of $135.8 million of commercial real estate loans with a weighted average rate of 4.22%, of
which $108.4 million had not yet been funded as of September 30, 2018.
The Bank is continuing to manage the size and mix of its loan portfolio, as it manages its liquidity levels, as measured by the
ratio of securities and cash to total assets, to a target level of approximately 15%. The ratio of securities and cash to total
assets was 15.5% at September 30, 2018. The size of the loan portfolio has been managed by controlling correspondent loan
volume primarily through the rates offered to correspondent lenders. Management intends to continue to manage the size of
the loan portfolio by utilizing cash flows from the correspondent loan portfolio to fund commercial loan growth. Given the
balance of total assets, it is unlikely that loan growth will substantially increase in the current environment. Generally, over
the past few years, cash flows from the securities portfolio have been used primarily to purchase loans and in part to pay
down FHLB advances. By moving cash from lower yielding assets to higher yielding assets and repaying higher costing
liabilities, we have been able to maintain our net interest margin. In addition to the repayment of securities, the Bank has
emphasized growth in the deposit portfolio in part to pay down term borrowings.
43 Total liabilities were $8.06 billion at September 30, 2018 compared to $7.82 billion at September 30, 2017. The $233.3
million increase was due mainly to acquiring deposits totaling $352.5 million from CCB. Deposits were $5.60 billion at
September 30, 2018 compared to $5.31 billion at September 30, 2017.
Stockholders' equity was $1.39 billion at September 30, 2018 compared to $1.37 billion at September 30, 2017. The $23.3
million increase was due primarily to net income of $98.9 million, along with the issuance of 3.0 million shares, or $39.1
million, related to the acquisition of CCB, partially offset by the payment of $118.3 million in cash dividends. In the long
run, management considers a 10% ratio of stockholders' equity to total assets at the Bank an appropriate level of capital. At
September 30, 2018, this ratio was 12.9%.
Critical Accounting Policies
Our most critical accounting policies are the methodologies used to determine the ACL and fair value measurements. These
policies are important to the presentation of our financial condition and results of operations, involve a high degree of
complexity, and require management to make difficult and subjective judgments that may require assumptions or estimates
about highly uncertain matters. The use of different judgments, assumptions, and estimates could cause reported results to
differ materially. These critical accounting policies and their application are reviewed at least annually by our audit
committee. The following is a description of our critical accounting policies and an explanation of the methods and
assumptions underlying their application.
Allowance for Credit Losses. The Company maintains an ACL to absorb inherent losses in the loan portfolio based upon
ongoing quarterly assessments of the loan portfolio. The ACL is maintained through provisions for credit losses which are
either charged or credited to income. The methodology for determining the ACL is considered a critical accounting policy by
management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for
changes in economic conditions that could result in changes to the amount of the recorded ACL. Additionally, bank
regulators review the ACL and could have a differing view from management regarding the ACL balance, which could result
in an increase in the ACL and/or the recognition of additional charge-offs. Although management believes that the Bank has
established and maintained the ACL at appropriate levels, additions may be necessary if economic and other conditions
worsen substantially from the current operating environment, and/or if bank regulators have a differing view from
management regarding the ACL balance.
Our primary lending emphasis is the origination and purchase of one- to four-family loans and, to a lesser extent, consumer
loans secured by one- to four-family residential properties, resulting in a loan concentration in residential mortgage
loans. We believe the primary risks inherent in our one- to four-family and consumer loan portfolios are a decline in
economic conditions, elevated levels of unemployment or underemployment, and declines in residential real estate
values. Changes in any one or a combination of these events may adversely affect borrowers' ability to repay their loans,
resulting in increased delinquencies, non-performing assets, loan losses, and future loan loss provisions. Although the
commercial loan portfolio is subject to the same risk of declines in economic conditions, the primary risk characteristics
inherent in this portfolio include the ability of the borrower to sustain sufficient cash flows from leases and business
operations and to control operational and/or business expenses to satisfy their contractual debt payments, and/or the ability to
utilize personal and/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 and/or potentially be forced to sell at a discounted price, resulting in additional losses. Our commercial and
industrial loans are primarily secured by accounts receivable, inventory and equipment, which may be difficult to appraise,
may be illiquid and may fluctuate in value based on the success of the business.
Each quarter, we prepare a formula analysis model which segregates our loan portfolio into categories based on certain risk
characteristics such as loan type (one- to four-family, commercial, etc.), interest payments (fixed-rate and adjustable-rate),
loan source (originated, correspondent purchased, bulk purchased, or participation), LTV ratios, borrower's credit score and
payment status (i.e. current or number of days delinquent). Consumer loans, such as second mortgages and home equity lines
of credit, with the same underlying collateral as a one- to four-family loan are combined with the one- to four-family loan in
the formula analysis model to calculate a combined LTV ratio.
44
Historical loss factors are applied to each loan category in the formula analysis model. Additionally, qualitative loss factors
that management believes impact the collectability of the loan portfolio as of the evaluation date are applied to each loan
category. Qualitative loss factors increase as loans are classified or become delinquent. See "Part II, Item 8. Financial
Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant
Accounting Policies" for additional information related to the loss factors utilized in the formula analysis model.
The loss factors applied in the formula analysis model are reviewed quarterly by management to assess whether the factors
adequately cover probable and estimable losses inherent in the loan portfolio. Our ACL methodology permits modifications
to the formula analysis model in the event that, in management's judgment, significant factors which affect the collectability
of the portfolio or any category of the loan portfolio, as of the evaluation date, have changed from the current formula
analysis model. Management's evaluation of the qualitative factors with respect to these conditions is subject to a higher
degree of uncertainty because they are not identified with a specific problem loan or portfolio segment.
Non-PCI loans that have not become impaired subsequent to the acquisition date are included in the formula analysis model.
For these loans, the Company estimates a hypothetical amount of ACL. The Company uses the acquired bank's past loss
history adjusted for qualitative factors to establish the hypothetical amount of ACL. This amount is compared with the
remaining net purchase discount for the non-PCI loans to test for credit quality deterioration and the possible need for an
additional loan loss provision. To the extent the remaining net purchase discount of the pool is greater than the hypothetical
ACL, no additional ACL is necessary. If the remaining net purchase discount of the pool is less than the hypothetical ACL,
the difference results in an increase to the ACL recorded through a provision for credit losses.
Management utilizes the formula analysis model, along with analyzing and considering several other relevant internal and
external data elements, when evaluating the adequacy of the ACL. Such data elements include the trend and composition of
delinquent and non-performing loans, trends in foreclosed property and short sale transactions and charge-off activity, the
current status and trends of local and national employment levels, trends and current conditions in the housing markets, loan
growth and concentrations, industry and peer charge-off and ACL information, and certain ACL ratios such as ACL to loans
receivable, net and annualized historical losses. Since our loan portfolio is primarily concentrated in one- to four-family real
estate, management monitors residential real estate market value trends in the Bank's local market areas and geographic
sections of the U.S. by reference to various industry and market reports, economic releases and surveys, and management's
general and specific knowledge of the real estate markets in which we lend, in order to determine what impact, if any, such
trends may have on the level of ACL. Reviewing these data elements assists management in evaluating the overall credit
quality of the loan portfolio and the reasonableness of the ACL on an ongoing basis, and whether changes need to be made to
our ACL methodology. In addition, the adequacy of the Company's ACL is reviewed during bank regulatory examinations.
We consider any comments from our regulators when assessing the appropriateness of our ACL. We seek to apply ACL
methodology in a consistent manner; however, the methodology can be modified in response to changing conditions.
Fair Value Measurements. The Company uses fair value measurements to record fair value adjustments to certain financial
instruments and to determine fair value disclosures in accordance with Accounting Standards Codification ("ASC") 820 and
ASC 825. The Company groups its financial instruments at fair value in three levels based on the markets in which the
instruments are traded and the reliability of the assumptions used to determine fair value, with Level 1 (quoted prices for
identical assets in an active market) being considered the most reliable, and Level 3 having the most unobservable inputs and
therefore being considered the least reliable. The Company bases its fair values on the price that would be received from the
sale of an asset in an orderly transaction between market participants at the measurement date. The Company maximizes the
use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
The Company's AFS securities are measured at fair value on a recurring basis. Changes in the fair value of AFS securities are
recorded, net of tax, as AOCI in stockholders' equity. The Company primarily uses prices obtained from third party pricing
services to determine the fair value of its AFS securities. Various modeling techniques are used to determine pricing for the
Company's securities, including option pricing, discounted cash flow models, and similar techniques. The inputs to these
models may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids,
offers and reference data. All AFS securities are classified as Level 2.
45 The Company's interest rate swaps are measured at fair value on a recurring basis. The Company uses a discounted cash flow
analysis using observable market-based inputs to determine the fair value of its interest rate swaps. 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, 2018.
Loans individually evaluated for impairment and OREO are measured at fair value on a non-recurring basis. These non-
recurring fair value adjustments involve the application of lower-of-cost-or-fair value accounting or write-downs of
individual assets. Fair values of loans individually evaluated for impairment are estimated through current appraisals.
OREO fair values are estimated using current appraisals or listing prices. Fair values may be adjusted by management to
reflect current economic and market conditions and, as such, are classified as Level 3.
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."
46 Management Strategy
We are a community-oriented financial institution dedicated to serving the needs of customers in our market areas. Our
commitment is to provide qualified borrowers the broadest possible access to home ownership through our mortgage lending
programs and to offer a complete set of personal and commercial banking products and services to our customers. We strive
to enhance stockholder value while maintaining a strong capital position. To achieve these goals, we focus on the following
strategies:
• Lending. We are one of the leading originators of one- to four-family loans in the state 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. We offer both fixed- and adjustable-rate products with various terms to
maturity and pricing options. We maintain strong relationships with local real estate agents to attract mortgage loan
business. With the acquisition of CCB, we can offer more commercial lending options to our customers. We rely on
our marketing efforts and customer service reputation to attract mortgage business from walk-in customers,
customers that apply online, and existing customers.
• Deposit Services. We offer a wide array of deposit products and services. These products include checking,
savings, money market, certificates of deposit, and retirement accounts. With the acquisition of CCB, we began
offering commercial deposit services. Our deposit services are provided through a branch network of 58 locations,
including traditional branches and retail in-store locations, our call center which operates on extended hours, mobile
banking, telephone banking, and online banking and bill payment services.
• Cost Control. We generally are very effective at controlling our costs of operations. By using technology, we are
able to centralize our loan servicing and deposit support functions for efficient processing. We serve a broad range
of customers through relatively few branch locations. Our average deposit base per traditional branch at
September 30, 2018 was approximately $101.9 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.
• Asset Quality. We utilize underwriting standards for our lending products 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.
• Capital Position. Our policy has always been to protect the safety and soundness of the Bank through credit and
operational risk management, balance sheet strength, and sound operations. The end result of these activities has
been a capital ratio in excess of the well-capitalized standards set by the OCC. We believe that maintaining a strong
capital position safeguards the long-term interests of the Bank, the Company, and our stockholders.
•
•
Stockholder Value. We strive to provide stockholder value while maintaining a strong capital position. One way
that we continue to provide returns to stockholders is through our dividend payments. Total dividends declared and
paid during fiscal year 2018 were $118.3 million, including a $0.25 per share, or $33.6 million, True Blue® Capitol
Dividend paid in June 2018. The Company's cash dividend payout policy is reviewed quarterly by management and
the Board of Directors, and the ability to pay dividends under the policy depends upon a number of factors,
including the Company's financial condition and results of operations, regulatory capital requirements, regulatory
limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding
company level. For fiscal year 2019, it is the intent of the Board of Directors and management to continue with the
payout of 100% of the Company's earnings to its stockholders through regular quarterly dividends and a true-up
dividend.
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.
47 Financial Condition
Assets. Total assets were $9.45 billion at September 30, 2018 compared to $9.19 billion at September 30, 2017. The $256.6
million increase was due primarily to an increase in loans receivable due to the acquisition of CCB.
Loans Receivable. Loans receivable, net, increased $319.4 million to $7.51 billion at September 30, 2018 from $7.20 billion
at September 30, 2017. The increase was due primarily to acquiring loans with a fair value of $299.7 million from CCB.
The following table presents the balance and weighted average rate of our loan portfolio as of the dates indicated. The
weighted average rate of the portfolio increased 13 basis points to 3.74% at September 30, 2018. The increase in the
weighted average rate was due primarily to the acquisition of loans from CCB and the repricing of existing loans to higher
market rates, along with the origination and purchase of loans at higher market rates. Approximately 60% of the one- to four-
family loan portfolio at September 30, 2018 had a balance of $453 thousand or less at the time of origination.
One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Construction
Total
Commercial:
Commercial real estate
Commercial and industrial
Construction
Total
Consumer loans:
Home equity
Other
Total
Total loans receivable
Less:
ACL
Discounts/unearned loan fees
Premiums/deferred costs
September 30, 2018
September 30, 2017
Amount
Rate
(Dollars in thousands)
Amount
Rate
$
3,965,692
3.74% $
3,959,232
3.70%
3.59
2.60
4.03
3.64
4.33
5.00
4.59
4.44
5.97
4.59
5.87
3.74
2,505,987
293,607
33,149
6,798,435
426,243
62,869
80,498
569,610
129,588
10,012
139,600
7,507,645
8,463
33,933
(49,236)
3.53
2.29
3.45
3.56
4.24
—
3.80
4.10
5.40
4.05
5.36
3.61
2,445,311
351,705
30,647
6,786,895
183,030
—
86,952
269,982
122,066
3,808
125,874
7,182,751
8,398
24,962
(45,680)
7,195,071
Total loans receivable, net
$
7,514,485
$
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49
The following table presents loan origination, refinance, and purchase activity for the periods indicated, excluding
endorsement and renewal activity and $299.7 million of loans at a rate of 4.77% purchased in connection with the acquisition
of CCB during fiscal year 2018, along with associated weighted average rates and percent of total. Loan originations,
purchases, and refinances are reported together. 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. 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.
Fixed-rate:
One- to four-family:
<= 15 years
> 15 years
One- to four-family construction
Commercial:
Commercial real estate
Commercial and industrial
Commercial construction
Home equity
Other
Total fixed-rate
Adjustable-rate:
One- to four-family:
<= 36 months
> 36 months
One- to four-family construction
Commercial:
Commercial real estate
Commercial and industrial
Commercial construction
Home equity
Other
Total adjustable-rate
For the Year Ended
September 30, 2018
September 30, 2017
Amount
Rate % of Total
Amount
Rate % of Total
(Dollars in thousands)
$ 160,099
530,606
43,604
3.51%
4.12
4.11
13.8% $ 202,997
736,429
45.7
45,600
3.8
3.04%
3.81
3.61
15.3%
55.4
3.4
10,644
1,579
60,417
4,758
691
812,398
8,233
173,775
18,791
570
325
69,543
74,042
3,089
348,368
4.48
5.24
4.30
6.18
7.54
4.03
3.39
3.49
3.58
5.03
5.81
4.16
5.66
3.24
4.09
0.9
0.1
5.2
0.4
0.1
70.0
0.7
15.0
1.6
—
—
6.0
6.4
0.3
30.0
11,714
—
53,982
3,510
464
1,054,696
5,074
168,785
23,271
2,992
—
—
72,245
2,284
274,651
3.97
—
4.04
5.87
9.87
3.68
2.77
3.06
3.07
3.25
—
—
5.03
3.40
3.58
0.9
—
4.0
0.3
—
79.3
0.4
12.7
1.8
0.2
—
—
5.4
0.2
20.7
Total originated, refinanced and purchased
$1,160,766
4.05
100.0% $1,329,347
3.66
100.0%
Purchased and participation loans included above:
Fixed-rate:
Correspondent - one- to four-family
Participations - commercial
Total fixed-rate purchased/participations
Adjustable-rate:
Correspondent - one- to four-family
Participations - commercial
Total adjustable-rate purchased/participations
Total purchased/participation loans
$ 298,299
66,209
364,508
93,330
69,543
162,873
$ 527,381
3.92
4.28
3.98
3.41
4.16
3.73
3.91
$ 478,772
64,701
543,473
84,404
2,992
87,396
$ 630,869
3.70
4.01
3.73
3.02
3.25
3.03
3.64
50 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 semiannually, with the latest update in September 2018, 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.
Originated
Correspondent purchased
Bulk purchased
Originated
Correspondent purchased
Bulk purchased
September 30, 2018
% of
Total
Credit
Score
LTV
Average
Balance
(Dollars in thousands)
58.6%
37.1
4.3
100.0%
767
764
758
765
62% $
67
62
64
138
378
304
186
September 30, 2017
% of
Total
Credit
Score
LTV
Average
Balance
(Dollars in thousands)
58.6%
36.2
5.2
100.0%
767
764
757
765
63% $
68
63
65
135
375
305
182
Amount
$ 3,965,692
2,505,987
293,607
$ 6,765,286
Amount
$ 3,959,232
2,445,311
351,705
$ 6,756,248
The following table presents originated, refinanced, and correspondent purchased activity in our one- to four-family loan
portfolio, excluding endorsement activity, along with associated weighted average LTVs and weighted average credit scores
for the periods indicated. Of the loans originated during the current year, $74.8 million were refinanced from other lenders.
Of the loans originated and refinanced during the current year, 77% had loan values of $453 thousand or less. Of the
correspondent loans purchased during the current year, 21% had loan values of $453 thousand or less.
For the Year Ended
September 30, 2018
September 30, 2017
Amount
LTV
Credit
Score
(Dollars in thousands)
Amount
Credit
Score
LTV
Originated
Refinanced by Bank customers
Correspondent purchased
$
$
473,140
70,339
391,629
935,108
77%
67
74
75
762
750
766
763
$
498,145
120,835
563,176
$ 1,182,156
77%
66
74
74
766
760
765
765
The following table presents the amount, percent of total, and weighted average rate, by state, of one- to four-family loan
originations and correspondent purchases where originations and purchases in the state exceeded five percent of the total
amount originated and purchased during the year ended September 30, 2018.
State
Kansas
Missouri
Texas
Other states
$
$
Amount
% of Total
(Dollars in thousands)
51.0%
18.6
16.5
13.9
100.0%
477,001
173,857
153,891
130,359
935,108
Rate
3.94%
3.92
3.74
3.79
3.88
51 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, 2018, 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 future cash needs.
Fixed-Rate
15 years
or less
More than
15 years
Adjustable-
Rate
Total
Amount
Rate
(Dollars in thousands)
Originate/refinance
Correspondent
$
$
9,651
1,822
11,473
$
$
28,915
58,897
87,812
$
$
11,920
10,669
22,589
$
50,486
71,388
$ 121,874
4.20%
4.26
4.23
Rate
3.98%
4.38%
3.80%
Commercial Loans - During the current fiscal year, the Bank entered into commercial loan participations of $135.8 million,
which included $129.8 million of commercial real estate construction loans. The majority of the $129.8 million of
commercial real estate construction loans had not yet been funded as of September 30, 2018.
The following table presents the Bank's commercial real estate loans and loan commitments by industry classification, as
defined by the North American Industry Classification System, as of September 30, 2018. Based on the terms of the
construction loans as of September 30, 2018, of the $166.6 million of undisbursed amounts in the table, which does not
include outstanding commitments, approximately $35.2 million is projected to be disbursed by December 31, 2018, and an
additional $92.2 million is projected to be disbursed by September 30, 2019. It is possible that not all of the funds will be
disbursed due to the nature of the funding of construction projects. Included in the gross loan amounts in the table, which
does not include outstanding commitments, are fixed-rate loans totaling $415.6 million at a weighted average rate of 4.20%
and adjustable-rate loans totaling $257.8 million at a weighted average rate of 4.80%. The weighted average rate of fixed-
rate loans is lower than that of adjustable-rate loans due primarily to the majority of the fixed-rate loans in the portfolio at
September 30, 2018 having shorter terms to maturity. Additionally, the credit risk for most of the Bank's commercial real
estate borrowing relationships is mitigated due to the amount of equity injected into the projects, strong debt service coverage
ratios, and the liquidity, personal cash flow and net worth of the guarantors. Several of these borrowing relationships have a
preference for fixed-rate loans and the market interest rates are typically lower for these types of borrowers.
Unpaid
Principal
Undisbursed Gross Loan
Amount
Amount
Outstanding
Commitments
Health care and social assistance
Accommodation and food services
Real estate rental and leasing
Retail trade
Multi-family
Arts, entertainment, and recreation
Other
$ 96,426
147,966
121,332
34,213
25,787
36,564
44,453
$506,741
$
$
87,478
32,706
24,671
1,385
18,609
—
1,743
166,592
$
$
$
(Dollars in thousands)
183,904
180,672
146,003
35,598
44,396
36,564
46,196
673,333
$
765
—
16,924
37,761
25,871
1,460
1,360
84,141
Total
$ 184,669
180,672
162,927
73,359
70,267
38,024
47,556
$ 757,474
% of
Total
24.4%
23.8
21.5
9.7
9.3
5.0
6.3
100.0%
Weighted average rate
4.37%
4.62%
4.43%
5.18%
4.51%
52 The following table summarizes the Bank's commercial real estate loans and loan commitments by state as of September 30,
2018.
Unpaid
Principal
Undisbursed
Amount
Gross Loan
Amount
Outstanding
Commitments
Total
% of
Total
Missouri
Kansas
Texas
Kentucky
Nebraska
Colorado
Arkansas
California
Montana
Arizona
$
$
146,870
200,811
129,956
—
4,295
9,064
7,766
6,290
1,397
292
506,741
$
$
95,008
10,605
41,324
—
17,857
148
150
—
1,500
—
166,592
$
$
(Dollars in thousands)
$
241,878
211,416
171,280
—
22,152
9,212
7,916
6,290
2,897
292
673,333
$
4,758
19,174
34,650
25,559
—
—
—
—
—
—
84,141
$
$
246,636
230,590
205,930
25,559
22,152
9,212
7,916
6,290
2,897
292
757,474
32.6%
30.4
27.2
3.4
2.9
1.2
1.1
0.8
0.4
—
100.0%
The following table presents the Bank's commercial and industrial loans and loan commitments by business purpose, as of
September 30, 2018.
Working capital
Equipment
Small Business Administration
Auto lease
Other
Unpaid
Principal
Undisbursed Gross Loan
Amount
Amount
Outstanding
Commitments
Total
(Dollars in thousands)
$
$
34,922
16,029
6,438
4,441
1,039
62,869
$
$
18,955
595
345
364
406
20,665
$
$
53,877
16,624
6,783
4,805
1,445
83,534
$
$
230
175
—
—
100
505
$
$
54,107
16,799
6,783
4,805
1,545
84,039
% of
Total
64.4%
20.0
8.1
5.7
1.8
100.0%
The following table presents the Bank's commercial loan portfolio and outstanding loan commitments, categorized by gross
loan amount (unpaid principal plus undisbursed amounts) or outstanding loan commitment amount, as of September 30,
2018.
Amount
(Dollars in thousands)
Greater than $30 million
$
>$15 to $30 million
>$10 to $15 million
>$5 to $10 million
$1 to $5 million
Less than $1 million
$
155,126
284,045
37,040
44,047
173,518
147,737
841,513
53 Securities. Securities increased $92.6 million from $1.24 billion at September 30, 2017 to $1.33 billion at September 30,
2018. The increase was due mainly to acquiring securities with a fair value of $91.6 million in the acquisition of CCB. The
following table presents the distribution of our securities portfolio, at amortized cost, at the dates indicated. Overall, fixed-
rate securities comprised 77% of our securities portfolio at September 30, 2018. The weighted average life ("WAL") is the
estimated remaining maturity (in years) after three-month historical prepayment speeds and projected call option assumptions
have been applied. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.
September 30, 2018
September 30, 2017
Amount
Yield
WAL
(Dollars in thousands)
Amount
Yield
WAL
Fixed-rate securities:
MBS
GSE debentures
Municipal bonds
Total fixed-rate securities
Adjustable-rate securities:
MBS
Trust preferred securities
Total adjustable-rate securities
$
732,095
2.43%
268,525
24,574
1,025,194
305,688
—
305,688
2.09
1.56
2.32
2.89
—
2.89
2.45
3.0
2.3
1.8
2.8
4.5
—
4.5
3.2
$
632,422
2.14%
271,300
28,337
932,059
304,153
2,067
306,220
$ 1,238,279
1.29
1.65
1.88
2.55
2.58
2.55
2.05
2.9
1.3
2.0
2.4
4.6
19.7
4.7
3.0
Total securities portfolio
$ 1,330,882
The following table presents the carrying value of MBS in our portfolio by issuer at the dates presented.
FNMA
FHLMC
Government National Mortgage Association
At September 30,
2018
2017
(Dollars in thousands)
$
680,717
$
265,441
90,832
575,142
306,196
61,109
$
1,036,990
$
942,447
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56
Liabilities. Total liabilities were $8.06 billion at September 30, 2018 compared to $7.82 billion at September 30, 2017. The
$233.3 million increase was due mainly to deposits of $352.5 million assumed in the acquisition of CCB, partially offset by a
decrease in public unit certificates of deposits and savings accounts both excluding the impact of acquired deposits.
Deposits - Deposits were $5.60 billion at September 30, 2018 compared to $5.31 billion at September 30, 2017. We continue
to be competitive on deposit rates and, in some cases, our offer rates for longer-term certificates of deposit have been higher
than peers. Offering competitive rates on longer-term certificates of deposit has been an on-going balance sheet strategy by
management in anticipation of higher interest rates. If interest rates continue to rise, our customers may move funds from
their checking, savings and money market accounts to higher yielding deposit products within the Bank or withdraw their
funds from these accounts, including certificates of deposit, to invest in higher yielding investments outside of the Bank.
The following table presents the amount, weighted average rate and percent of total for the components of our deposit
portfolio at the dates presented. The decrease in the savings rate at September 30, 2018 compared to September 30, 2017 was
due to the conversion of retirement savings accounts into a money market account type during the last quarter of fiscal year
2018.
2018
Amount
Rate
At September 30,
% of
Total
(Dollars in thousands)
Amount
2017
Rate
% of
Total
Non-interest-bearing checking
$
336,454
—%
6.0%
$
243,670
—%
4.6%
Interest-bearing checking
Savings
Money market
Retail/business certificates of deposit
Public unit certificates of deposit
724,066
352,896
1,252,881
2,529,368
407,689
$ 5,603,354
0.08
0.07
0.47
1.79
1.89
1.06
12.9
6.3
22.4
45.1
7.3
615,615
349,977
1,190,185
2,450,418
460,003
100.0%
$ 5,309,868
0.05
0.24
0.24
1.52
1.28
0.89
11.6
6.6
22.4
46.1
8.7
100.0%
The following tables set forth scheduled maturity information for our certificates of deposit, including public unit certificates
of deposit, along with associated weighted average rates, at September 30, 2018.
Rate range
0.00 – 0.99%
1.00 – 1.99%
2.00 – 2.99%
3.00 – 3.99%
Amount Due
More than More than
1 year
or less
1 year to
2 years to 3 More than
Total
2 years
years
3 years
Amount
Rate
(Dollars in thousands)
$ 214,426
$
4,433
$
2,681
$
46
$
221,586
0.73%
723,290
292,143
—
563,639
244,813
—
327,697
41,953
—
281,913
239,787
236
1,896,539
818,696
236
$1,229,859
$ 812,885
$ 372,331
$ 521,982
$ 2,937,057
1.68
2.37
3.00
1.80
Percent of total
Weighted average rate
41.8%
1.55
27.7%
1.94
12.7%
1.86
Weighted average maturity (in years)
Weighted average maturity for the retail/business certificate of deposit portfolio (in years)
1.4
0.5
2.5
17.8%
2.13
3.7
1.6
1.7
57 Amount Due
Over
3 to 6
Over
6 to 12
Over
3 months
or less
months
months
(Dollars in thousands)
12 months
Total
Retail/business certificates of deposit less than $100,000
$ 130,716
$ 124,939
$ 307,654
$ 946,966
$1,510,275
Retail/business certificates of deposit of $100,000 or more
76,775
Public unit certificates of deposit of $100,000 or more
117,693
57,856
53,305
203,485
157,436
680,977
1,019,093
79,255
407,689
$ 325,184
$ 236,100
$ 668,575
$1,707,198
$2,937,057
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60
Stockholders' Equity. Stockholders' equity was $1.39 billion at September 30, 2018 compared to $1.37 billion at
September 30, 2017. The $23.3 million increase was due primarily to net income of $98.9 million, along with the issuance of
3.0 million shares, or $39.1 million, related to the acquisition of CCB, partially offset by the payment of $118.3 million in
cash dividends. The cash dividends paid during the current fiscal year totaled $0.88 per share and consisted of a $0.29 per
share cash true-up dividend related to fiscal year 2017 earnings per the Company's dividend policy, a $0.25 per share True
Blue Capitol dividend, and four regular quarterly cash dividends totaling $0.34 per share.
On October 17, 2018, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.7
million, payable on November 16, 2018 to stockholders of record as of the close of business on November 2, 2018. On
October 26, 2018, the Company announced a fiscal year 2018 cash true-up dividend of $0.39 per share, or approximately
$53.7 million, related to fiscal year 2018 earnings. The $0.39 per share cash true-up dividend was determined by taking the
difference between total earnings for fiscal year 2018 and total regular quarterly cash dividends paid during fiscal year 2018,
divided by the number of shares outstanding as of October 23, 2018. The cash true-up dividend is payable on November 30,
2018 to stockholders of record as of the close of business on November 16, 2018, 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 2018.
At September 30, 2018, Capitol Federal Financial, Inc., at the holding company level, had $137.7 million on deposit at the
Bank. For fiscal year 2019, it is the intent of the Board of Directors and management to continue with the payout of 100% of
the Company's earnings to its 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 2019 earnings in excess of the
amount paid as regular quarterly cash dividends during fiscal year 2019. It is anticipated that the fiscal year 2019 cash true-
up dividend will be paid in December 2019. Dividend payments depend upon a number of factors including the Company's
financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to
make capital distributions to the Company, and the amount of cash at the holding company.
The Company works to find multiple ways to provide stockholder value. Recently, this has primarily been through the
payment of cash dividends and historically, the Company has also utilized stock buybacks. The Company has maintained a
dividend policy of paying out 100% of its earnings to stockholders in the form of quarterly cash dividends and an annual
true-up dividend in December of each year. In order to provide additional stockholder value, the Company has paid a True
Blue dividend of $0.25 cash per share in June of each of the past five years, including June 2018, and in December prior to
that. The Company has paid the True Blue dividend primarily due to excess capital levels at the Company and Bank. The
Company considers various business strategies and their impact on capital and asset measures on both a current and future
basis, as well as regulatory capital levels and requirements, in determining the amount, if any, and timing of the True Blue
dividend.
The following table presents regular quarterly dividends and special dividends paid in calendar years 2018, 2017, and 2016.
The amounts represent cash dividends paid during each period. The 2018 true-up dividend amount presented represents the
dividend payable on November 30, 2018 to stockholders of record as of November 16, 2018.
2018
Calendar Year
2017
2016
Amount
Per Share
Amount
Per Share
Amount
Per Share
(Dollars in thousands, except per share amounts)
Regular quarterly dividends paid
Quarter ended March 31
$
11,427
$
0.085
$
11,386
$
0.085
$
11,305
$
Quarter ended June 30
Quarter ended September 30
Quarter ended December 31
True-up dividends paid
11,429
11,430
11,696
53,666
True Blue dividends paid
Calendar year-to-date dividends paid
33,614
133,262
$
$
0.085
0.085
0.085
0.390
0.250
0.980
11,409
11,411
11,427
38,985
33,559
118,177
$
$
0.085
0.085
0.085
0.290
0.250
0.880
11,314
11,323
11,363
38,835
33,274
117,414
$
$
0.085
0.085
0.085
0.085
0.290
0.250
0.880
61 The Company has $70.0 million of common stock remaining on its stock repurchase plan. It is anticipated that shares will be
purchased from time to time based upon market conditions and available liquidity. There is no expiration for this repurchase
plan and no shares have been repurchased under this repurchase plan.
Weighted Average Yields and Rates. The following table presents the weighted average yields on interest-earning assets,
the weighted average rates paid on interest-bearing liabilities, and the resultant interest rate spreads at the dates indicated. As
previously discussed, the leverage strategy was not in place at September 30, 2018, 2017, and 2016, so the end of period
yields/rates presented in the table below do not reflect the effects of this strategy. The weighted average yields and rates
include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. The weighted
average rate on FHLB borrowings includes the impact of interest rate swaps. Weighted average yields on tax-exempt
securities are not calculated on a fully taxable equivalent basis.
Yield on:
Loans receivable
MBS
Investment securities
FHLB stock
Cash and cash equivalents
Combined yield on interest-earning assets
Rate paid on:
Checking
Savings
Money market
Retail/business certificates
Wholesale certificates
Total deposits
FHLB borrowings
Other borrowings
Total borrowings
Combined rate paid on interest-bearing liabilities
Net interest rate spread
At September 30,
2018
2017
2016
3.74%
3.59%
3.58%
2.57
2.05
7.22
2.19
3.57
0.05
0.07
0.47
1.79
1.89
1.06
2.13
3.10
2.18
1.39
2.18
2.28
1.33
6.47
1.25
3.32
0.04
0.24
0.24
1.52
1.28
0.89
2.09
2.94
2.16
1.28
2.04
2.19
1.20
5.98
0.49
3.22
0.04
0.17
0.24
1.43
0.70
0.80
2.24
2.94
2.29
1.30
1.92
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65
Comparison of Operating Results for the Years Ended September 30, 2018 and 2017
The Company recognized net income of $98.9 million, or $0.73 per share, for the fiscal year ended September 30, 2018
compared to net income of $84.1 million, or $0.63 per share, for the fiscal year ended September 30, 2017. The increase in
net income was due primarily to a decrease in income tax expense. During the current fiscal year, the Tax Act was enacted
which reduced the federal corporate income tax rate from 35% to 21% effective January 1, 2018. In accordance with GAAP,
the Company revalued its deferred tax assets and liabilities as of December 22, 2017 to account for the lower corporate
income tax rate. The revaluation of the Company's deferred income tax assets and liabilities reduced income tax expense by
$7.5 million. The effective tax rate for the current fiscal year was 20.2%. Management estimates the effective income tax
rate for fiscal year 2019 will be approximately 22%.
The net interest margin increased 16 basis points, from 1.79% for the prior fiscal year to 1.95% for the current fiscal year.
Excluding the effects of the leverage strategy, the net interest margin would have increased nine basis points, from 2.15% for
the prior fiscal year to 2.24% for the current fiscal year. The increase in the net interest margin was due mainly to an increase
in interest-earning asset yields.
Interest and Dividend Income
The weighted average yield on total interest-earning assets increased 29 basis points, from 2.87% for the prior fiscal year to
3.16% for the current fiscal year, while the average balance of interest-earning assets decreased $720.1 million from the prior
fiscal year. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have
increased 12 basis points, from 3.27% for the prior fiscal year to 3.39% for the current fiscal year, while the average balance
of interest-earning assets would have decreased $93.0 million. 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:
2018
2017
Dollars
Percent
(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable
Cash and cash equivalents
MBS
FHLB stock
Investment securities
$
260,198
$
253,393
$
23,443
22,619
10,962
4,670
19,389
23,809
12,233
4,362
Total interest and dividend income
$
321,892
$
313,186
$
6,805
4,054
(1,190)
(1,271)
308
8,706
2.7%
20.9
(5.0)
(10.4)
7.1
2.8
The increase in interest income on loans receivable was due to a six basis point increase in the weighted average yield on the
portfolio to 3.60% for the current fiscal year, as well as an $86.2 million increase in the average balance of the portfolio. The
increase in the weighted average yield was due primarily to adjustable-rate loans repricing to higher market rates, along with
the origination and purchase of new loans at higher market rates.
The table above includes interest income on cash and cash equivalents associated and not associated with the leverage
strategy. Interest income on cash and cash equivalents not related to the leverage strategy increased $1.4 million from the
prior fiscal year due to a 71 basis point increase in the weighted average yield. Interest income on cash associated with the
leverage strategy increased $2.7 million from the prior fiscal year due to a 61 basis point increase in the weighted average
yield. In both cases, the increase in the weighted average yield was related to cash balances held at the FRB of Kansas City.
The decrease in interest income on the MBS portfolio was due to a $127.2 million decrease in the average balance of the
portfolio, partially offset by a 16 basis point increase in the weighted average yield on the portfolio to 2.35% for the current
fiscal year. Cash flows not reinvested were used primarily to fund loan growth and pay off certain maturing term borrowings.
The increase in the weighted average yield was due primarily to adjustable-rate MBS repricing to higher market rates, as well
as a decrease in the impact of net premium amortization. Net premium amortization of $3.0 million during the current fiscal
year decreased the weighted average yield on the portfolio by 31 basis points. During the prior fiscal year, $4.2 million of net
66 premiums were amortized which decreased the weighted average yield on the portfolio by 39 basis points. As of
September 30, 2018, the remaining net balance of premiums on our portfolio of MBS was $3.4 million.
The decrease in dividend income on FHLB stock was due mainly to the leverage strategy being in place less often during the
current fiscal year, as the strategy was not always profitable. See additional discussion regarding the leverage strategy in the
Financial Condition section below.
Interest Expense
The weighted average rate paid on total interest-bearing liabilities increased 15 basis points, from 1.21% for the prior fiscal
year to 1.36% for the current fiscal year, while the average balance of interest-bearing liabilities decreased $693.7 million
from the prior fiscal year. Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing
liabilities would have increased four basis points, from 1.29% for the prior fiscal year to 1.33% for the current fiscal year,
while the average balance of interest-bearing liabilities would have decreased $68.6 million. The following table presents the
components of interest expense for the time periods presented, along with the change measured in dollars and percent.
For the Year Ended
September 30,
Change Expressed in:
2018
2017
Dollars
Percent
(Dollars in thousands)
INTEREST EXPENSE:
FHLB borrowings
$
67,120
$
68,871
$
Deposits
Other borrowings
52,625
3,374
42,968
5,965
Total interest expense
$
123,119
$
117,804
$
(1,751)
9,657
(2,591)
5,315
(2.5)%
22.5
(43.4)
4.5
The table above includes interest expense on FHLB borrowings associated and not associated with the leverage strategy.
Interest expense on FHLB borrowings not related to the leverage strategy decreased $5.4 million from the prior fiscal year
due to a 17 basis point decrease in the weighted average rate paid on the portfolio, to 2.07% for the current fiscal year, and an
$84.3 million decrease in the average balance of the portfolio. The decrease in the weighted average rate paid was due to
certain maturing advances being replaced at lower effective interest rates. Interest expense on FHLB borrowings associated
with the leverage strategy increased $3.6 million from the prior fiscal year due to a 66 basis point increase in the weighted
average rate paid as a result of an increase in interest rates between periods, partially offset by a decrease in the average
balance due the strategy not being in place as often during the current fiscal year.
The increase in interest expense on deposits was due primarily to a 17 basis point increase in the weighted average rate, to
0.99% for the current fiscal year. The increase in the weighted average rate was primarily related to the certificate of deposit
portfolio, which increased 24 basis points to 1.62% for the current fiscal year. The weighted average rate paid on wholesale
certificates increased 66 basis points, to 1.57% for the current fiscal year.
The decrease in interest expense on other borrowings was due mainly to the maturity of a $100.0 million repurchase
agreement, which was not replaced, during the current fiscal year.
Provision for Credit Losses
The Bank did not record a provision for credit losses during the current fiscal year or the prior fiscal year. Based on
management's assessment of the ACL formula analysis model and several other factors, it was determined that no provision
for credit losses was necessary. Net loan recoveries were $65 thousand during the current fiscal year compared to net charge-
offs of $142 thousand in the prior fiscal year. At September 30, 2018, loans 30 to 89 days delinquent were 0.25% of total
loans and loans 90 or more days delinquent or in foreclosure were 0.12% of total loans. At September 30, 2017, loans 30 to
89 days delinquent were 0.26% of total loans and loans 90 or more days delinquent or in foreclosure were 0.13% of total
loans.
67
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:
2018
2017
Dollars
Percent
(Dollars in thousands)
NON-INTEREST INCOME:
Deposit service fees
Income from bank-owned life insurance ("BOLI")
Other non-interest income
Total non-interest income
$
$
15,636
$
15,053
$
1,875
4,524
2,233
4,910
22,035
$
22,196
$
583
(358)
(386)
(161)
3.9%
(16.0)
(7.9)
(0.7)
The increase in deposit service fees was due mainly to increases in debit card income due to higher transaction volume in the
current year and a reduction in waived fees as customers and vendors more fully utilize the chip card technology. The
decrease in income from BOLI was due mainly to a one-time adjustment, in the current fiscal year, to the benchmark interest
rate associated with one of the policies. The decrease in other non-interest income was due mainly to a loss on the sale of
loans during the current fiscal year compared to a gain on the sale of loans during the prior fiscal year as management
tested loan sale processes for liquidity purposes.
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:
2018
2017
Dollars
Percent
(Dollars in thousands)
NON-INTEREST EXPENSE:
Salaries and employee benefits
Information technology and related expense
Occupancy, net
Regulatory and outside services
Deposit and loan transaction costs
Advertising and promotional
Federal insurance premium
Office supplies and related expense
Other non-interest expense
Total non-interest expense
$
46,563
$
43,437
$
13,999
11,455
5,709
5,621
5,034
3,277
1,888
3,356
11,282
10,814
5,821
5,284
4,673
3,539
1,981
2,827
3,126
2,717
641
(112)
337
361
(262)
(93)
529
$
96,902
$
89,658
$
7,244
7.2%
24.1
5.9
(1.9)
6.4
7.7
(7.4)
(4.7)
18.7
8.1
The increase in salaries and employee benefits expense was due primarily to an increase in payroll expense, as well as $1.0
million related to the 2018 Tax Savings Bonus Plan and approximately $730 thousand related to the addition of CCB
employees and other payroll-related costs associated with the acquisition. The 2018 Tax Savings Bonus plan is a one-time
bonus award to qualifying non-officer employees. Management anticipates salaries and employee benefits associated with
CCB employees, based on current staffing levels, will be approximately $5.6 million in fiscal year 2019. The increase in
information technology and related expense was due mainly to a change in the presentation of certain information technology
professional and consulting expenses beginning in fiscal year 2018. Information technology professional and consulting
expenses are now being reported in information technology and related expenses rather than regulatory and outside services.
Additionally, these expenses increased compared to the prior year due primarily to ongoing enhancements to the Bank's
68 online banking services, along with increases in information technology expenses related to software licensing and
depreciation. The change in the presentation of expenses resulted in a decrease in the amount of regulatory and outside
services expenses for the current fiscal year, but this was offset by approximately $875 thousand of acquisition-related
expenses. The increase in other non-interest expense was due primarily to $242 thousand of expense related to the
amortization of deposit intangibles associated with the CCB acquisition and an increase in OREO operations expense.
Management anticipates that the deposit intangible amortization expense will be approximately $2.4 million in fiscal year
2019.
The Company's efficiency ratio was 43.89% for the current fiscal year compared to 41.21% for the prior fiscal year. The
change in the efficiency ratio was due primarily to higher non-interest expense in the current fiscal year compared to the prior
fiscal year. The efficiency ratio is a measure of a financial institution's total non-interest expense as a percentage of the sum
of net interest income (pre-provision for credit losses) and non-interest income. A lower value indicates that the financial
institution is generating revenue with a proportionally lower level of expense.
Income Tax Expense
Income tax expense was $25.0 million for the current fiscal year compared to $43.8 million for the prior fiscal year. The
effective tax rate was 20.2% for the current fiscal year compared to 34.2% for the prior fiscal year. The decrease in the
effective tax rate was due mainly to the Tax Act being signed into law in December 2017.
Comparison of Operating Results for the Years Ended September 30, 2017 and 2016
For fiscal year 2017, the Company recognized net income of $84.1 million, or $0.63 per share, compared to net income of
$83.5 million, or $0.63 per share, for fiscal year 2016. The increase in net income was due primarily to a $3.2 million
increase in net interest income, partially offset by a $1.1 million decrease in non-interest income. Partially offsetting this
increase, no provision for credit losses was recorded in fiscal year 2017, compared to a negative provision for credit losses of
$750 thousand in fiscal year 2016.
The net interest margin increased four basis points, from 1.75% for fiscal year 2016 to 1.79% for fiscal year 2017. Excluding
the effects of the leverage strategy, the net interest margin would have increased five basis points, from 2.10% for fiscal year
2016 to 2.15% for fiscal year 2017. The increase in the net interest margin was due mainly to a shift in the mix of interest-
earning assets from relatively lower yielding securities to higher yielding loans, partially offset by a decrease in the weighted
average yield on loans. The positive impact of the decrease in interest expense on borrowings not related to the leverage
strategy was offset by an increase in interest expense on deposits.
Interest and Dividend Income
The weighted average yield on total interest-earning assets increased 13 basis points, from 2.74% for fiscal year 2016 to
2.87% for fiscal year 2017, while the average balance of interest-earning assets decreased $100.0 million. Absent the impact
of the leverage strategy, the weighted average yield on total interest-earning assets would have increased six basis points,
from 3.21% for fiscal year 2016 to 3.27% for fiscal year 2017, while the average balance would have decreased $59.6
million. 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:
2017
2016
Dollars
Percent
(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable
MBS
Cash and cash equivalents
FHLB Stock
Investment securities
$
253,393
$
243,311
$
23,809
19,389
12,233
4,362
29,794
9,831
12,252
5,925
Total interest and dividend income
$
313,186
$
301,113
$
10,082
(5,985)
9,558
(19)
(1,563)
12,073
4.1%
(20.1)
97.2
(0.2)
(26.4)
4.0
69 The increase in interest income on loans receivable was due to a $384.4 million increase in the average balance of the
portfolio, partially offset by a six basis point decrease in the weighted average yield on the portfolio to 3.54% for fiscal year
2017. Loan growth was funded through cash flows from the securities portfolio. The decrease in the weighted average yield
was due primarily to endorsements and refinances repricing loans to lower market rates, the origination and purchase of loans
at rates lower than the overall loan portfolio rate at certain points during each year, and an increase in the amortization of
premiums related to correspondent loans.
The decrease in interest income on the MBS portfolio was due to a $278.1 million decrease in the average balance of the
portfolio as cash flows not reinvested were used primarily to fund loan growth and pay off maturing FHLB borrowings. The
weighted average yield on the MBS portfolio increased one basis point, from 2.18% during fiscal year 2016 to 2.19% for
fiscal year 2017. Net premium amortization of $4.2 million during fiscal year 2017 decreased the weighted average yield on
the portfolio by 39 basis points. During fiscal year 2016, $5.0 million of net premiums were amortized, which decreased the
weighted average yield on the portfolio by 37 basis points. As of September 30, 2017, the remaining net balance of
premiums on our portfolio of MBS was $9.0 million.
The increase in interest income on cash and cash equivalents was due to a 45 basis point increase in the weighted average
yield resulting from an increase in the yield earned on balances held at the FRB of Kansas City.
The decrease in interest income on investment securities was due to a $140.1 million decrease in the average balance. Cash
flows not reinvested in the portfolio were used primarily to fund loan growth and pay off maturing FHLB borrowings.
Interest Expense
The weighted average rate paid on total interest-bearing liabilities increased 10 basis points, from 1.11% for fiscal year 2016
to 1.21% for fiscal year 2017, while the average balance of interest-bearing liabilities decreased $76.2 million. Absent the
impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased one
basis point, from 1.28% for fiscal year 2016 to 1.29% for fiscal year 2017, while the average balance of interest-bearing
liabilities would have decreased $35.8 million. The following table presents the components of interest expense for the time
periods presented, along with the change measured in dollars and percent.
For the Year Ended
September 30,
Change Expressed in:
2017
2016
Dollars
Percent
(Dollars in thousands)
INTEREST EXPENSE:
FHLB borrowings
$
68,871
$
65,091
$
Deposits
Repurchase agreements
42,968
5,965
37,859
5,981
Total interest expense
$
117,804
$
108,931
$
3,780
5,109
(16)
8,873
5.8%
13.5
(0.3)
8.1
The table above includes interest expense on FHLB borrowings both associated and not associated with the leverage strategy.
Interest expense on FHLB borrowings not related to the leverage strategy decreased $4.6 million from fiscal year 2016 due to
a $221.0 million decrease in the average balance of the portfolio as a result of not replacing all of the advances that matured
between periods. Funds generated from deposit growth were primarily used to pay off the maturing advances, along with
some cash flows from the securities portfolio. The weighted average rate paid on FHLB borrowings not related to the
leverage strategy increased one basis point, to 2.24% for fiscal year 2017. Interest expense on FHLB borrowings associated
with the leverage strategy increased $8.4 million from fiscal year 2016 due to a 43 basis point increase in the weighted
average rate paid as a result of an increase in interest rates between periods.
The increase in interest expense on deposits was due primarily to a seven basis point increase in the weighted average rate, to
0.82% for fiscal year 2017, along with growth in the portfolio. The increase in the weighted average rate was primarily
related to the retail certificate of deposit portfolio, which increased 10 basis points to 1.46% for fiscal year 2017. The
average balance of the deposit portfolio increased $185.2 million during fiscal year 2017, with the majority of the increase in
retail deposits.
70 Provision for Credit Losses
The Bank did not record a provision for credit losses during fiscal year 2017, compared to a negative provision for credit
losses of $750 thousand during fiscal year 2016. Based on management's assessment of the ACL formula analysis model and
several other factors, it was determined that no provision for credit losses was necessary for fiscal year 2017. Net loan
charge-offs were $142 thousand during fiscal year 2017 compared to $153 thousand in fiscal year 2016. At September 30,
2017, loans 30 to 89 days delinquent were 0.26% of total loans and loans 90 or more days delinquent or in foreclosure were
0.13% of total loans.
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:
2017
2016
Dollars
Percent
(Dollars in thousands)
NON-INTEREST INCOME:
Deposit service fees
Income from BOLI
Other non-interest income
Total non-interest income
$
$
15,053
$
14,835
$
2,233
4,910
3,420
5,057
22,196
$
23,312
$
218
(1,187)
(147)
(1,116)
1.5%
(34.7)
(2.9)
(4.8)
The decrease in income from BOLI was due mainly to the receipt of a death benefit during fiscal year 2016 with no such
death benefit in fiscal year 2017.
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.
NON-INTEREST EXPENSE:
Salaries and employee benefits
Information technology and related expense
Occupancy, net
Regulatory and outside services
Deposit and loan transaction costs
Advertising and promotional
Federal insurance premium
Office supplies and related expense
Low income housing partnerships
Other non-interest expense
Total non-interest expense
For the Year Ended
September 30,
Change Expressed in:
2017
2016
Dollars
Percent
(Dollars in thousands)
$
43,437
$
42,378
$
11,282
10,814
5,821
5,284
4,673
3,539
1,981
—
2,827
10,540
10,576
5,645
5,585
4,609
5,076
2,640
3,872
3,384
$
89,658
$
94,305
$
1,059
742
238
176
(301)
64
(1,537)
(659)
(3,872)
(557)
(4,647)
2.5%
7.0
2.3
3.1
(5.4)
1.4
(30.3)
(25.0)
(100.0)
(16.5)
(4.9)
The increase in salaries and employee benefits was due primarily to an increase in employee health care costs. The increase
in information technology and communications was due largely to software licensing expenses, website hosting expenses,
and communication network expenses. The decrease in federal insurance premiums was due primarily to a decrease in the
FDIC base assessment rate effective July 1, 2016. The decrease in office supplies and related expense was due primarily to
71 lower debit card expenses compared to fiscal year 2016, during which time the Bank began issuing debit cards enabled with
chip card technology. The decrease in low income housing partnerships expense was due to a change in the Bank's method of
accounting for those investments. The Bank had been accounting for these partnerships using the equity method of
accounting as two of the Bank's officers were involved in the operational management of the low income housing partnership
investment group. Effective September 30, 2016, those two Bank officers discontinued their involvement in the operational
management of the investment group. On October 1, 2016, the Bank began using the proportional method of accounting for
those investments rather than the equity method. As a result, the Bank no longer reports low income housing partnership
expenses in non-interest expense; rather, the pretax operating losses and related tax benefits from the investments are reported
as a component of income tax expense. The decrease in other non-interest expense was due mainly to a decrease in OREO
operations expense, along with lower deposit account charge-offs related to debit card fraud in fiscal year 2017.
The Company's efficiency ratio was 41.21% for fiscal year 2017 compared to 43.76% for fiscal year 2016. The improvement
in the efficiency ratio was due primarily to lower non-interest expense in fiscal year 2017 compared to fiscal year 2016.
Income Tax Expense
Income tax expense was $43.8 million for fiscal year 2017 compared to $38.4 million for fiscal year 2016. The effective tax
rate for fiscal year 2017 was 34.2% compared to 31.5% for fiscal year 2016. The increase in effective tax rate was due
mainly to the change in accounting method for low income housing partnerships as previously discussed.
Liquidity and Capital Resources
Liquidity refers to our ability to generate sufficient cash to fund ongoing operations, to repay maturing certificates of deposit
and other deposit withdrawals, to repay maturing borrowings, and to fund loan commitments. Liquidity management is both
a daily and long-term function of our business management. The Company's most available liquid assets are represented by
cash and cash equivalents, AFS securities, and short-term investment securities. The Bank's primary sources of funds are
deposits, FHLB borrowings, repurchase agreements, repayments and maturities of outstanding loans and MBS and other
short-term investments, and funds provided by operations. The Bank's long-term borrowings primarily have been used to
manage the Bank's interest rate risk with the intent to improve the earnings of the Bank while maintaining capital ratios in
excess of regulatory standards for well-capitalized financial institutions. In addition, the Bank's focus on managing risk has
provided additional liquidity capacity by maintaining a balance of MBS and investment securities available as collateral for
borrowings.
We generally intend to manage cash reserves sufficient to meet short-term liquidity needs, which are routinely forecasted for
10, 30, and 365 days. Additionally, on a monthly basis, we perform a liquidity stress test in accordance with the Interagency
Policy Statement on Funding and Liquidity Risk Management. The liquidity stress test incorporates both short-term and
long-term liquidity scenarios in order to identify and to quantify liquidity risk. Management also monitors key liquidity
statistics related to items such as wholesale funding gaps, borrowings capacity, and available unpledged collateral, as well as
various liquidity ratios.
In the event short-term liquidity needs exceed available cash, the Bank has access to a line of credit at FHLB and the FRB of
Kansas City's discount window. Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40% of regulatory
total assets without the pre-approval of FHLB senior management. In July 2018, the president of FHLB approved an
increase, through July 2019, in the Bank's borrowing limit to 55% of Bank Call Report total assets. 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. 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, and is used only when other sources of short-term liquidity are unavailable. Management tests the Bank's
access to the FRB of Kansas City's discount window annually with a nominal, overnight borrowing.
If management observes a trend in the amount and frequency of line of credit utilization and/or short-term borrowings that is
not in conjunction with a planned strategy, such as the leverage strategy, the Bank will likely utilize long-term wholesale
borrowing sources such as FHLB advances and/or repurchase agreements to provide long-term, fixed-rate funding. The
maturities of these long-term borrowings are generally staggered in order to mitigate the risk of a highly negative cash flow
position at maturity. The Bank's internal policy limits total borrowings to 55% of total assets. At September 30, 2018, the
Bank had total borrowings, at par, of $2.29 billion, or approximately 24% of total assets.
72 The amount of FHLB advances outstanding at September 30, 2018 was $2.18 billion, of which $875.0 million was scheduled
to mature in the next 12 months, including $475.0 million of FHLB advances tied to interest rate swaps. All FHLB
borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB. At September 30,
2018, the Bank's ratio of the par value of FHLB borrowings to Call Report total assets was 23%. When the full leverage
strategy is in place, FHLB borrowings may be in excess of 40% of the Bank's Call Report total assets, and may be in excess
of 40% 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 FHLB borrowings in conjunction
with the leverage strategy could be repaid at any point in time while the strategy is in effect, if necessary.
At September 30, 2018, the Bank had repurchase agreements of $100.0 million, or approximately 1% of total assets, none of
which were scheduled to mature in the next 12 months. The Bank may enter into additional repurchase agreements as
management deems appropriate, not to exceed 15% of total assets, and subject to the total borrowings limit of 55% as
discussed above. The Bank has pledged securities with an estimated fair value of $107.4 million as collateral for repurchase
agreements as of September 30, 2018. The securities pledged for the repurchase agreements will be delivered back to the
Bank when the repurchase agreements mature.
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, 2018, the Bank had $670.8 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 deposits. As of
September 30, 2018, the Bank's policy allowed for combined brokered and public unit deposits up to 15% of total deposits.
At September 30, 2018, the Bank did not have any brokered deposits and public units deposits were approximately 8% of
total deposits. Management continuously monitors the wholesale deposit market for opportunities to obtain funds at
attractive rates. The Bank had pledged securities with an estimated fair value of $506.1 million as collateral for public unit
deposits at September 30, 2018. The securities pledged as collateral for public unit deposits are held under joint custody with
FHLB and generally will be released upon deposit maturity.
At September 30, 2018, $1.23 billion of the Bank's certificate of deposit portfolio was scheduled to mature within one year,
including $328.4 million of public unit certificates of deposit. Based on our deposit retention experience and our current
pricing strategy, we anticipate the majority of the maturing retail certificates of deposit will renew or transfer to other deposit
products at the prevailing rate, although no assurance can be given in this regard. We also anticipate the majority of the
maturing public unit certificates of deposit will be replaced with similar wholesale funding products.
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.
73 d
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74
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. Savings institutions
must also maintain an applicable capital conservation buffer above minimum risk-based capital requirements in order to
avoid restrictions on capital distributions, including dividends. 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,
operates in a safe and sound manner, and maintains an applicable capital conservation buffer above its minimum risk-based
capital requirements, it is management's belief that the OCC and FRB will continue to allow the Bank to distribute its
earnings to the Company, although no assurance can be given in this regard.
Capital
Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-
capitalized status for the Bank per the regulatory framework for prompt corrective action. As of September 30, 2018, the
Bank and Company exceeded all regulatory capital requirements. See "Part II, Item 8. Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – Note 14. Regulatory Capital Requirements" for
additional information related to regulatory capital.
The following table presents a reconciliation of equity under GAAP to regulatory capital amounts, as of September 30, 2018,
for the Bank and the Company (dollars in thousands):
Total equity as reported under GAAP
$
AOCI
Goodwill and other intangibles, net of deferred tax liabilities
Additional tier 1 capital - trust preferred securities
Total tier 1 capital
ACL
Total capital
Bank
Company
$
1,221,706
(4,340)
(15,240)
—
1,202,126
8,463
1,391,622
(4,340)
(15,240)
9,750
1,381,792
8,463
$
1,210,589
$
1,390,255
75
Off-Balance Sheet Arrangements, Commitments and Contractual Obligations
The following table summarizes our contractual obligations, along with associated weighted average contractual rates as of
September 30, 2018.
Maturity Range
Total
Less than
1 year
1 to 3
years
3 to 5
years
More than
5 years
(Dollars in thousands)
Operating leases
$
6,462
$
1,364
$
2,008
Certificates of deposit
$ 2,937,057
$ 1,229,859
$ 1,185,216
$
$
1,517
520,840
$
$
Rate
1.80%
1.55%
1.91%
2.13%
FHLB advances
Rate
$ 2,075,000
$
875,000
$
900,000
$
300,000
$
2.07%
1.96%
2.16%
2.09%
Repurchase agreements
$
100,000
$
— $
100,000
$
Rate
2.53%
—%
2.53%
— $
—%
1,573
1,142
2.05%
—
—%
—
—%
As part of the acquisition of CCB, the Company acquired $10.1 million of junior subordinated debentures. Of the $10.1
million, $6.2 million bear interest at 10.6% with a maturity date of September 7, 2030 and $3.9 million bear interest at three-
month LIBOR plus 3.45% (5.82% at September 30, 2018) with a maturity date of June 26, 2032. The Company intends to
redeem the junior subordinated debentures during fiscal year 2019.
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,
participate in, or fund loans and lines of credit, along with standby letters of credit. Standby letters of credit generally are
contingent upon the failure of the customer to perform according to the terms of an underlying contract with a third party.
The credit risks associated with these off-balance-sheet commitments are essentially the same as that involved with extending
loans to customers and are subject to normal credit policies. The contractual amounts of these off-balance sheet financial
instruments as of September 30, 2018 were as follows (dollars in thousands):
Commitments to originate and purchase/participate in loans
Commitments to fund undisbursed portions of loans
Commitments to fund unused lines of credit
Standby letters of credit
Total
$
$
204,376
237,464
246,102
1,153
689,095
It is expected that some of the commitments will expire unfunded; therefore, the amounts reflected in the table above are not
necessarily indicative of future liquidity requirements. Additionally, the Bank is not obligated to honor commitments to fund
unused lines of credit if a customer is delinquent or otherwise in violation of the loan agreement.
The Company has investments in several low income housing partnerships. These partnerships supply funds for the construction
and operation of apartment complexes that provide affordable housing to that segment of the population with lower family
income. If these developments successfully attract a specified percentage of residents falling in that lower income range, federal
income tax credits are made available to the partners. The tax credits are normally recognized over ten years, and they play an
important part in the anticipated yield from these investments. In order to continue receiving the tax credits each year over the
life of the partnership, the low-income residency targets must be maintained. Under the terms of the partnership agreements,
the Company has a commitment to fund a specified amount that will be due in installments over the life of the agreements. The
76 majority of the commitments at September 30, 2018 are projected to be funded through the end of calendar year 2021.
At September 30, 2018, the investments totaled $74.5 million and are included in other assets in the consolidated balance sheet.
Unfunded commitments, which are recorded as liabilities, totaled $34.0 million at September 30, 2018.
We anticipate we will continue to have sufficient funds, through repayments and maturities of loans and securities, deposits
and borrowings, to meet our current commitments.
Contingencies
In the normal course of business, the Company and its subsidiary are named defendants in various lawsuits and counter
claims. In the opinion of management, after consultation with legal counsel, none of the currently pending suits are expected
to have a materially adverse effect on the Company's consolidated financial statements for the year ended September 30,
2018, or future periods.
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 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.
The ability to maximize net interest income is dependent largely upon the achievement of a positive interest rate spread that
can be sustained despite fluctuations in prevailing interest rates. The asset and liability repricing gap is a measure of the
difference between the amount of interest-earning assets and interest-bearing liabilities which either reprice or mature within
a given period of time. The difference provides an indication of the extent to which an institution's interest rate spread will be
affected by changes in interest rates. A gap is considered positive when the amount of interest-earning assets exceeds the
amount of interest-bearing liabilities maturing or repricing during the same period. A gap is considered negative when the
amount of interest-bearing liabilities exceeds the amount of interest-earning assets maturing or repricing during the same
period. Generally, during a period of rising interest rates, a negative gap within shorter repricing periods adversely affects net
interest income, while a positive gap within shorter repricing periods positively affects net interest income. During a period
of falling interest rates, the opposite would generally be true.
77 The shape of the yield curve also has an impact on our net interest income and, therefore, the Bank's net interest margin.
Historically, the Bank has benefited from a steeper yield curve as the Bank's mortgage loans are generally priced off of long-
term rates while deposits are priced off of short-term rates. A steeper yield curve (one with a greater difference between
short-term rates and long-term rates) allows the Bank to receive a higher rate of interest on its new mortgage-related assets
relative to the rate paid for the funding of those assets, which generally results in a higher net interest margin. As the yield
curve flattens, the spread between rates received on assets and paid on liabilities becomes compressed, which generally leads
to a decrease in net interest margin.
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, 2018.
Qualitative Disclosure about Market Risk
At September 30, 2018, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected
to reprice within one year was $(14.9) million, or (0.16)% of total assets, compared to $641.6 million, or 6.98% of total
assets, at September 30, 2017. The decrease in the one-year gap amount was due primarily to a decrease in cash flows from
mortgage-related assets, compared to September 30, 2017 as a result of higher interest rates. As interest rates rise, 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. In addition, the gap analysis at September 30, 2018 accounted for the adjustable-rate FHLB advances
with interest rate swaps differently than at September 30, 2017. The interest rate swaps effectively remove the repricing
associated with the adjustable-rate FHLB advances underlying the swaps during the life of the interest rate swaps. In the
September 30, 2018 gap analysis, the repricing for these liabilities was projected to occur at the maturity of each interest rate
swap, which is consistent with the behavior of a fixed-rate borrowing. In the September 30, 2017 gap analysis, the
adjustable-rate FHLB advances tied to interest rate swaps were repricing based on the term of the underlying advance, not the
maturity date of the related interest rate swap.
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, 2018, the Bank's one-year gap is projected to be $(394.8) million, or (4.18)% of total assets. This compares to
a one-year gap of $81.3 million, or 0.88% of total assets, if interest rates were to have increased 200 basis points as of
September 30, 2017. The decrease in the gap compared to no change in rates is due to lower anticipated cash flows in the
higher rate environment.
During the current fiscal year, loan repayments totaled $1.10 billion and cash flows from the securities portfolio totaled
$407.3 million. The asset cash flows of $1.51 billion were reinvested into new assets at current market interest rates. Total
cash flows from fixed-rate liabilities that matured and repriced into current market interest rates during the current fiscal year
were approximately $1.88 billion, including $575.0 million of term borrowings. These offsetting cash flows allow the Bank
to manage its interest rate risk and gap position more precisely than if the Bank did not have offsetting cash flows due to its
mix of assets or maturity structure of liabilities.
Other strategies include managing the Bank's wholesale assets and liabilities. 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 WAL of the Bank's term borrowings as of September 30, 2018 was 1.7
years. However, including the impact of interest rate swaps related to $475.0 million of adjustable-rate FHLB advances, the
78 WAL of the Bank's term borrowings as of September 30, 2018 was 2.8 years. The interest rate swaps effectively convert the
adjustable-rate borrowings into long-term, fixed-rate liabilities.
The Bank uses the securities portfolio to shorten the average life of the Bank's assets. Purchases in the securities portfolio
over the past few years have primarily been focused on callable agency debentures with maturities no longer than five years,
shorter duration MBS, and adjustable-rate MBS. These securities have a shorter average life and provide a steady source of
cash flow that can be reinvested as interest rates rise into higher-yielding assets. The WAL of the Bank's securities portfolio
as of September 30, 2018 was 2.9 years.
In addition to the wholesale strategies, the Bank has sought to increase non-maturity deposits and long-term certificates of
deposit. Non-maturity deposits are expected to reduce the risk of higher interest rates because their interest rates are not
expected to increase significantly as market interest rates rise. Specifically, checking accounts and savings accounts have had
minimal interest rate fluctuations throughout historical interest rate cycles, though no assurance can be given that this will be
the case in future interest rate cycles. The balances and rates of these accounts have historically tended to remain very stable
over time, giving them the characteristic of long-term liabilities. The Bank uses historical data pertaining to these accounts to
estimate their future balances. At September 30, 2018 the WAL of the Bank's non-maturity deposits was 12.2 years.
Over the last few years, the Bank has priced long-term certificates of deposit more aggressively than short-term certificates of
deposit with the goal of giving customers incentive to move funds into longer-term certificates of deposit when interest rates
were lower. Long-term certificates of deposit reduce the amount of liabilities repricing as interest rates rise in a given time
period.
Gap Table. The following gap table summarizes the anticipated maturities or repricing periods of the Bank's interest-earning
assets and interest-bearing liabilities based on the information and assumptions set forth in the notes below. Cash flow
projections for mortgage-related assets are calculated based in part on prepayment assumptions at current and projected
interest rates. Prepayment projections are subjective in nature, involve uncertainties and assumptions and, therefore, cannot
be determined with a high degree of accuracy. Although certain assets and liabilities may have similar maturities or periods
to repricing, they may react differently to changes in market interest rates. Assumptions may not reflect how actual yields
and costs respond to market interest rate changes. The interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes
in market interest rates. Certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal
levels would likely deviate significantly from those assumed in calculating the gap table below. A positive gap indicates
more cash flows from assets are expected to reprice than cash flows from liabilities and would indicate, in a rising rate
environment, that earnings should increase. A negative gap indicates more cash flows from liabilities are expected to reprice
than cash flows from assets and would indicate, in a rising rate environment, that earnings should decrease. For additional
information regarding the impact of changes in interest rates, see the following Change in Net Interest Income and Change in
MVPE discussions and tables.
79 Interest-earning assets:
Loans receivable(1)
Securities(2)
Other interest-earning assets
More Than More Than
Within
One Year to
Three Years
Over
One Year
Three Years
to Five Years
(Dollars in thousands)
Five Years
Total
$ 1,554,585
$ 1,867,969
$ 1,175,476
$2,900,512
$7,498,542
458,837
119,580
430,978
273,023
168,044
1,330,882
—
—
—
119,580
Total interest-earning assets
2,133,002
2,298,947
1,448,499
3,068,556
8,949,004
Interest-bearing liabilities:
Non-maturity deposits(3)
Certificates of deposit
Borrowings(4)
Total interest-bearing liabilities
307,342
1,340,388
500,000
2,147,730
409,124
1,076,136
1,075,000
2,560,260
297,968
519,495
400,000
1,789,547
1,038
341,285
1,217,463
2,131,870
2,803,981
2,937,057
2,316,285
8,057,323
Excess (deficiency) of interest-earning assets over
interest-bearing liabilities
$
(14,728)
$ (261,313)
$ 231,036
$ 936,686
$ 891,681
Cumulative (deficiency) excess of interest-earning assets over
interest-bearing liabilities
$
(14,728)
$ (276,041)
$
(45,005)
$ 891,681
Cumulative (deficiency) excess of interest-earning assets over interest-bearing
liabilities as a percent of total Bank assets at:
September 30, 2018
September 30, 2017
Cumulative one-year gap - interest rates +200 bps at:
September 30, 2018
September 30, 2017
(0.16)%
6.98
(4.18)
0.88
(2.91)%
(0.48)%
9.41%
(1) Adjustable-rate loans are included in the period in which the rate is next scheduled to adjust or in the period in which repayments are expected to occur,
or prepayments are expected to be received, prior to their next rate adjustment, rather than in the period in which the loans are due. Fixed-rate loans
are included in the periods in which they are scheduled to be repaid, based on scheduled amortization and prepayment assumptions. Balances are net
of undisbursed amounts and deferred fees and exclude loans 90 or more days delinquent or in foreclosure.
(2) MBS reflect projected prepayments at amortized cost. Investment securities are presented based on contractual maturities, term to call dates or pre-
refunding dates as of September 30, 2018, 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 $2.51 billion, for a
cumulative one-year gap of (26.6)% of total assets.
(4) Borrowings exclude deferred prepayment penalty costs. Included in this line are $475.0 million of FHLB adjustable-rate advances with interest rate
swaps. The repricing for these liabilities is projected to occur at the maturity date of each interest rate swap.
80 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 is presented. 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. 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
(in Basis Points)
in Interest Rates(1)
Net Interest Income At September 30,
2018
2017
Amount ($)
Change ($)
Change (%)
Amount ($)
Change ($)
Change (%)
-100 bp
000 bp
+100 bp
+200 bp
+300 bp
$
201,434
$
200,213
196,272
190,872
184,603
1,221
—
(3,941)
(9,341)
(15,610)
(Dollars in thousands)
0.61% $
181,200
$
—
(1.97)
(4.67)
(7.80)
187,823
189,259
188,508
186,299
(6,623)
—
1,436
685
(1,524)
(3.53)%
—
0.76
0.36
(0.81)
(1) Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities.
The net interest income projection was higher in the base case scenario at September 30, 2018 compared to September 30,
2017 due mainly to an increase in earning assets in connection with the acquisition of CCB. The net interest income
projections decreased from the base case in all rising rate scenarios at September 30, 2018, while at September 30, 2017 the
net interest income projection improved in the +100 and +200 basis point scenarios before decreasing in the +300 basis point
scenario. This change is consistent with the decrease in the one-year gap at September 30, 2018 compared to September 30,
2017. The projected decreases in the up rate scenarios was due to a reduction in cash flows from the Bank's mortgage-related
assets and callable agency debentures as a result of higher interest rates. At September 30, 2018, as interest rates move
higher, liabilities reprice to higher interest rates at a faster pace than assets and have a negative impact on the Bank's net
interest income projection. At September 30, 2017, modeled in the +300 basis point scenario, liabilities would reprice to
higher interest rates at a faster pace than assets and have a negative impact on the Bank's net interest income projection.
81 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. 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
(in Basis Points)
in Interest Rates(1)
Market Value of Portfolio Equity At September 30,
2018
2017
Amount ($)
Change ($)
Change (%)
Amount ($)
Change ($)
Change (%)
(Dollars in thousands)
-100 bp
000 bp
+100 bp
+200 bp
+300 bp
$
1,498,631
$
53,683
3.72% $
1,446,537
$
1,444,948
1,281,910
1,087,644
888,611
—
(163,038)
(357,304)
(556,337)
—
(11.28)
(24.73)
(38.50)
1,460,428
1,352,558
1,173,891
969,747
(13,891)
—
(107,870)
(286,537)
(490,681)
(0.95)%
—
(7.39)
(19.62)
(33.60)
(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, 2018 was more adversely impacted in the increasing interest
rate scenarios than at September 30, 2017. This was due primarily to an increase in interest rates between the two periods.
As long-term interest rates increase, repayments on mortgage-related assets are more likely to decrease and only be realized
through significant changes in borrowers' lives such as divorce, death, job-related relocations, or other events as there is less
economic incentive for borrowers to prepay their debt, resulting in an increase in the average life of mortgage-related assets.
Similarly, call projections for the Bank's callable agency debentures decrease as interest rates rise, which results in cash flows
related to these assets moving closer to the contractual maturity dates. The higher expected average lives of these assets,
relative to the assumptions in the base case interest rate environment, increases the sensitivity of their market value to
changes in interest rates. In addition, the WAL of the Bank's non-maturity deposits has decreased since September 30, 2017
due to an increase in interest rates. When the difference between deposit account interest rates and market interest rates
increases, the Bank's deposit model assumes a higher level of deposit balance runoff as depositors are more likely to move
funds from deposit accounts into higher yielding assets. The shorter expected average lives of these liabilities compared to
the prior year reduces the sensitivity of their market value to changes in interest rates.
82 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, 2018. 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. The maturity and repricing terms
presented for one- to four-family loans represent the contractual terms of the loan.
Amount
Yield/Rate WAL
Category % of Total
% of
(Dollars in thousands)
Investment securities
$
MBS - fixed
MBS - adjustable
Total securities
Loans receivable:
Fixed-rate one- to four-family:
<= 15 years
> 15 years
Fixed-rate commercial
All other fixed-rate loans
Total fixed-rate loans
Adjustable-rate one- to four-family:
<= 36 months
> 36 months
Adjustable-rate commercial
All other adjustable-rate loans
Total adjustable-rate loans
Total loans receivable
FHLB stock
Cash and cash equivalents
Total interest-earning assets
Non-maturity deposits
Retail/business certificates of deposit
Public unit certificates of deposit
Total deposits
Term borrowings
FHLB line of credit
Total borrowings
$
$
289,942
729,808
307,182
1,326,932
1,153,971
4,495,405
356,295
45,700
6,051,371
249,331
866,579
213,315
127,049
1,456,274
7,507,645
99,726
139,055
9,073,358
2,666,297
2,529,368
407,689
5,603,354
2,185,052
100,000
2,285,052
Total interest-bearing liabilities
$
7,888,406
2.05%
2.43
2.89
2.45
3.14
3.86
4.45
5.43
3.77
2.15
3.29
5.18
5.65
3.58
3.74
7.22
2.19
3.57
0.25
1.79
1.89
1.06
2.17
2.35
2.18
1.39
21.9%
55.0
23.1
100.0%
15.4%
59.9
4.7
0.6
80.6
3.3
11.6
2.8
1.7
19.4
100.0%
1.6
3.4
2.9
2.9
4.2
6.8
3.6
3.7
6.1
3.2
2.8
7.7
1.5
3.5
5.6
1.7
—
5.1
3.2%
8.0
3.4
14.6
12.7
49.5
4.0
0.5
66.7
2.7
9.6
2.4
1.4
16.1
82.8
1.1
1.5
100.0%
12.2
47.6%
33.8%
45.1
7.3
100.0%
95.6%
4.4
100.0%
1.7
0.7
6.7
2.9
—
2.7
5.5
32.0
5.2
71.0
27.7
1.3
29.0
100.0%
83 Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Capitol Federal Financial, Inc. and subsidiary
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Capitol Federal Financial, Inc. and subsidiary (the "Company") as of
September 30, 2018, 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, 2018, 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, 2018, of the Company and our report dated November
29, 2018, expressed an unqualified opinion on those consolidated financial statements.
As described in Management's Report on Internal Control Over Financial Reporting, management excluded from its assessment the
internal control over financial reporting at Capital City Bancshares, Inc., which was acquired on August 31, 2018 and whose financial
statements constitute approximately 4% of loans receivable, net, 6% of deposits, 5% of total assets, 1% of net interest income and 0%
of net income of the consolidated financial statement amounts as of and for the year ended September 30, 2018. Accordingly, our audit
did not include the internal control over financial reporting at Capital City Bancshares, Inc.
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.
Kansas City, Missouri
November 29, 2018
84 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Capitol Federal Financial, Inc. and subsidiary
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Capitol Federal Financial, Inc. and subsidiary (the "Company")
as of September 30, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 2018 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, 2018, 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 29, 2018, 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.
Kansas City, Missouri
November 29, 2018
We have served as the Company's auditor since 1974.
85 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2018 and 2017 (Dollars in thousands, except per share amounts)
ASSETS:
Cash and cash equivalents (includes interest-earning deposits of $122,733 and $340,748)
$ 139,055
$ 351,659
2018
2017
Securities:
Available-for-sale ("AFS"), at estimated fair value (amortized cost of $718,564 and $410,541)
Held-to-maturity ("HTM"), at amortized cost (estimated fair value of $601,071 and $833,009)
Loans receivable, net (allowance for credit losses ("ACL") of $8,463 and $8,398)
Federal Home Loan Bank Topeka ("FHLB") stock, at cost
Premises and equipment, net
Income taxes receivable, net
Other assets
TOTAL ASSETS
LIABILITIES:
Deposits
FHLB borrowings
Other borrowings
Advance payments by borrowers for taxes and insurance
Income taxes payable, net
Deferred income tax liabilities, net
Accounts payable and accrued expenses
Total liabilities
STOCKHOLDERS' EQUITY:
714,614
612,318
415,831
827,738
7,514,485
7,195,071
99,726
96,005
2,177
100,954
84,818
—
271,167
216,845
$9,449,547
$9,192,916
$5,603,354
$5,309,868
2,174,981
2,173,808
110,052
65,264
—
21,253
83,021
200,000
63,749
530
24,458
52,190
8,057,925
7,824,603
Preferred stock, $.01 par value; 100,000,000 shares authorized, no shares issued or outstanding
—
—
Common stock, $.01 par value; 1,400,000,000 shares authorized, 141,225,516 and 138,223,835
shares issued and outstanding as of September 30, 2018 and 2017, respectively
Additional paid-in capital
Unearned compensation, Employee Stock Ownership Plan ("ESOP")
Retained earnings
Accumulated other comprehensive income ("AOCI"), net of tax
Total stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
1,412
1,382
1,207,644
(36,343)
214,569
1,167,368
(37,995)
234,640
4,340
2,918
1,391,622
1,368,313
$9,449,547
$9,192,916
86 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2018, 2017, and 2016 (Dollars in thousands, except per share amounts)
INTEREST AND DIVIDEND INCOME:
Loans receivable
Cash and cash equivalents
Mortgage-backed securities ("MBS")
FHLB stock
Investment securities
Total interest and dividend income
INTEREST EXPENSE:
FHLB borrowings
Deposits
Other borrowings
Total interest expense
NET INTEREST INCOME
PROVISION FOR CREDIT LOSSES
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
NON-INTEREST INCOME:
Deposit service fees
Income from bank-owned life insurance ("BOLI")
Other non-interest income
Total non-interest income
NON-INTEREST EXPENSE:
Salaries and employee benefits
Information technology and related expense
Occupancy, net
Regulatory and outside services
Deposit and loan transaction costs
Advertising and promotional
Federal insurance premium
Office supplies and related expense
Low income housing partnerships
Other non-interest expense
Total non-interest expense
INCOME BEFORE INCOME TAX EXPENSE
INCOME TAX EXPENSE
NET INCOME
Basic earnings per share ("EPS")
Diluted EPS
Dividends declared per share
See accompanying notes to consolidated financial statements.
2018
2017
2016
$
$
$
$
$
260,198
23,443
22,619
10,962
4,670
321,892
67,120
52,625
3,374
123,119
198,773
—
198,773
15,636
1,875
4,524
22,035
46,563
13,999
11,455
5,709
5,621
5,034
3,277
1,888
—
3,356
96,902
123,906
24,979
98,927
0.73
0.73
0.88
$
$
$
$
$
253,393
19,389
23,809
12,233
4,362
313,186
68,871
42,968
5,965
117,804
195,382
—
195,382
15,053
2,233
4,910
22,196
43,437
11,282
10,814
5,821
5,284
4,673
3,539
1,981
—
2,827
89,658
127,920
43,783
84,137
0.63
0.63
0.88
$
$
$
$
$
243,311
9,831
29,794
12,252
5,925
301,113
65,091
37,859
5,981
108,931
192,182
(750)
192,932
14,835
3,420
5,057
23,312
42,378
10,540
10,576
5,645
5,585
4,609
5,076
2,640
3,872
3,384
94,305
121,939
38,445
83,494
0.63
0.63
0.84
87 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2018, 2017, and 2016 (Dollars in thousands)
Net income
Other comprehensive income (loss), net of tax:
Changes in unrealized gains (losses) on AFS securities,
2018
2017
2016
$
98,927
$
84,137
$
83,494
net of taxes of $2,499, $1,595, and $1,494
(6,741)
(2,625)
(2,459)
Changes in unrealized gains (losses) on cash flow hedges,
net of taxes of $(2,785), $226, and $0
Comprehensive income
7,496
$
99,682
$
(372)
81,140
—
$
81,035
See accompanying notes to consolidated financial statements.
88 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2018, 2017, and 2016 (Dollars in thousands, except per share amounts)
Balance at October 1, 2015
Net income, fiscal year 2016
Other comprehensive loss, net of tax
ESOP activity
Restricted stock activity, net
Stock-based compensation
Stock options exercised
Additional
Unearned
Total
Common
Paid-In
Compensation
Retained
Stockholders'
Stock
Capital
ESOP
Earnings
AOCI
Equity
$
1,371
$ 1,151,041
$
(41,299) $ 296,739
$ 8,374
$
1,416,226
522
48
1,121
4,123
1
3
83,494
(2,459)
1,652
83,494
(2,459)
2,174
49
1,121
4,126
Cash dividends to stockholders ($0.84 per share)
(111,767)
(111,767)
Balance at September 30, 2016
1,375
1,156,855
(39,647)
268,466
5,915
1,392,964
Net income, fiscal year 2017
Other comprehensive loss, net of tax
ESOP activity
Restricted stock activity, net
Stock-based compensation
Stock options exercised
784
57
506
7
9,166
84,137
(2,997)
1,652
84,137
(2,997)
2,436
57
506
9,173
Cash dividends to stockholders ($0.88 per share)
(117,963)
(117,963)
Balance at September 30, 2017
1,382
1,167,368
(37,995)
234,640
2,918
1,368,313
Net income, fiscal year 2018
Other comprehensive income, net of tax
Reclassification of certain tax effects related to
adopting Accounting Standards Update ("ASU")
2018-02
Cumulative effect of adopting ASU 2016-09
19
Capital City Bancshares, Inc. ("CCB")
acquisition
30
39,083
ESOP activity
Stock-based compensation
Stock options exercised
1,652
541
372
261
98,927
(667)
(19)
755
667
98,927
755
—
—
39,113
2,193
372
261
Cash dividends to stockholders ($0.88 per share)
(118,312)
(118,312)
Balance at September 30, 2018
$
1,412
$ 1,207,644
$
(36,343) $ 214,569
$ 4,340
$
1,391,622
See accompanying notes to consolidated financial statements.
89 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2018, 2017, and 2016 (Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
98,927
$
84,137
$
83,494
Adjustments to reconcile net income to net cash provided by operating activities:
2018
2017
2016
FHLB stock dividends
Provision for credit losses
Originations of loans receivable held-for-sale ("LHFS")
Proceeds from sales of LHFS
Amortization and accretion of premiums and discounts on securities
Depreciation and amortization of premises and equipment
Amortization of intangible assets
Amortization of deferred amounts related to FHLB advances, net
Common stock committed to be released for allocation - ESOP
Stock-based compensation
Provision for deferred income taxes
Changes in cash collateral received from derivative counterparty, net
Changes in:
Other assets, net
Income taxes payable, net
Accounts payable and accrued expenses
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of AFS securities
Purchase of HTM securities
Proceeds from calls, maturities and principal reductions of AFS securities
Proceeds from calls, maturities and principal reductions of HTM securities
Proceeds from sale of AFS securities
Proceeds from the redemption of FHLB stock
Purchase of FHLB stock
Net increase in loans receivable
Purchase of premises and equipment
Proceeds from sale of other real estate owned ("OREO")
Cash acquired from acquisition
Proceeds from BOLI death benefit
Net cash (used in) provided by investing activities
(10,962)
—
(777)
16,423
3,150
8,458
234
1,173
2,193
372
(4,540)
10,701
1,712
(2,262)
(639)
124,163
(411,459)
—
192,966
212,267
2,078
291,506
(277,552)
(37,537)
(11,761)
2,240
15,685
—
(21,567)
(12,233)
—
—
6,816
4,479
7,796
—
1,419
2,436
506
922
(731)
51
590
(10,743)
85,445
(37,425)
—
144,643
268,689
—
386,900
(365,651)
(246,882)
(9,128)
5,138
—
—
(12,252)
(750)
—
—
5,342
7,141
—
1,868
2,174
1,121
470
—
1,807
1,381
(6,840)
84,956
(99,927)
(144,392)
326,814
309,328
—
382,450
(329,625)
(336,056)
(14,854)
4,973
—
783
146,284
99,494
(Continued)
90 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2018, 2017, and 2016 (Dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid
Net change in deposits
Proceeds from borrowings
Repayments on borrowings
Change in advance payments by borrowers for taxes and insurance
Stock options exercised
Excess tax benefits from stock options
Net cash used in financing activities
2018
2017
2016
(118,312)
(58,988)
17,275,100
(17,414,200)
939
261
—
(315,200)
(117,963)
145,850
2,700,100
(2,900,100)
1,106
8,843
330
(161,834)
(111,767)
331,498
8,000,100
(8,900,100)
825
4,070
56
(675,318)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(212,604)
69,895
(490,868)
CASH AND CASH EQUIVALENTS:
Beginning of year
End of year
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income tax payments
Interest payments
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Loans transferred to LHFS
Acquisition:
Common stock issued
Fair value of assets acquired, excluding acquired cash and intangibles
Fair value of liabilities assumed
351,659
281,764
772,632
$
139,055
$
351,659
$
281,764
$
$
$
$
$
$
24,785
119,699
15,814
39,113
418,062
412,675
$
$
$
$
$
$
37,875
117,308
$
$
36,483
106,182
6,714
$
— $
— $
— $
—
—
—
—
See accompanying notes to consolidated financial statements.
(Concluded)
91 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2018, 2017, and 2016
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 48
traditional and 10 in-store banking offices serving primarily the metropolitan areas of Topeka, Wichita, Lawrence,
Manhattan, Emporia and Salina, Kansas and portions of the metropolitan area of greater Kansas City. The Bank emphasizes
mortgage lending, primarily originating and purchasing one- to four-family loans, and providing personal retail financial
services. The Bank is subject to competition from other financial institutions and other companies that provide financial
services.
Basis of Presentation - The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiary, the Bank. The Bank has two wholly owned subsidiaries, Capitol Funds, Inc. and Capital City Investments, Inc.
Capitol Funds, Inc. has a wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company. Capital City
Investments, Inc. is a real estate and investment holding company. All intercompany accounts and transactions have been
eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"), and require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from these estimates and assumptions.
The Company also owns 100 percent of Capital City Statutory Trust I ("CCST") and Capital City Statutory Trust II
("CCSTII") (collectively, the "Trusts"). The accounts of the Trusts do not qualify for consolidation accounting. The
Company reports its subordinated debentures issued to the Trusts as other borrowings in the consolidated balance sheets and
the common stock of the Trusts is reported as an equity method investment in other assets in the consolidated balance sheets.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand and amounts due from banks. Regulations of
the Board of Governors of the Federal Reserve System ("FRB") require federally chartered savings banks to maintain cash
reserves against their transaction accounts. Required reserves must be maintained in the form of vault cash, an account at a
Federal Reserve Bank, or a pass-through account as defined by the FRB. The amount of interest-earning deposits held at the
Federal Reserve Bank of Kansas City ("FRB of Kansas City") as of September 30, 2018 and 2017 was $120.8 million and
$337.5 million, respectively. The Bank is in compliance with the FRB requirements. For the years ended September 30,
2018 and 2017, the average daily balance of required reserves at the FRB of Kansas City was $11.0 million and $9.1 million,
respectively.
Net Presentation of Cash Flows Related to Borrowings - During the current fiscal year, the Bank entered 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 ("GSE"), including Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and the
Federal Home Loan Banks, United States Government agencies, including Government National Mortgage Association, and
municipal bonds. Securities are classified as HTM, AFS, or trading based on management's intention for holding the
securities on the date of purchase. Generally, classifications are made in response to liquidity needs, asset/liability
management strategies, and the market interest rate environment at the time of purchase.
Securities that management has the intent 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.
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 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
92 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 15. 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, 2018 and 2017, neither the Company nor the Bank maintained a
trading securities portfolio.
Management monitors securities in the investment portfolio for impairment on an ongoing basis and performs a formal
review quarterly. The process involves monitoring market events and other items that could impact issuers. The evaluation
includes, but is not limited to, such factors as: the nature of the investment, the length of time the security has had a fair
value less than the amortized cost basis, the cause(s) and severity of the loss, expectation of an anticipated recovery period,
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, external credit ratings and recent downgrades in such ratings, management's intent to sell and
whether it is more likely than not management would be required to sell prior to recovery for debt securities. Management
determines whether other-than-temporary losses should be recognized for impaired securities by assessing all known facts
and circumstances surrounding the securities. If management intends to sell an impaired security or if it is more likely than
not that management will be required to sell an impaired security before recovery of its amortized cost basis, an other-than-
temporary impairment has occurred and the difference between amortized cost and fair value will be recognized as a loss in
earnings and the security will be written down to fair value.
Loans Receivable - Loans receivable that management has the intent and ability to hold for the foreseeable future are carried
at the amount of unpaid principal, net of ACL, undisbursed loan funds, unamortized premiums and discounts, and deferred
loan origination fees and costs. Net loan origination fees and costs, and premiums and discounts are amortized as yield
adjustments to interest income using the level-yield method. Interest on loans is credited to income as earned and accrued
only if deemed collectible.
Troubled debt restructurings ("TDRs") - 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. If a concession requires assistance in the form of
an interest rate reduction to less than the current market rate, or should the borrower have been discharged from Chapter 7
bankruptcy without reaffirming the debt, then the loan is classified as a TDR. 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 not to exceed the original loan amount.
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, unless, in the case of commercial loans, the loan is well secured and in the process of collection. We also report
certain TDR loans as nonaccrual loans that are required to be reported as such pursuant to regulatory reporting requirements.
Loans on which the accrual of income has been discontinued are designated as nonaccrual and outstanding interest previously
credited beyond 90 days delinquent is reversed, except in the case of commercial loans in which all delinquent accrued
interest is reversed. A nonaccrual 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.
Impaired loans - A loan is considered impaired when, based on current information and events, it is probable that the Bank
will be unable to collect all amounts due, including principal and interest, according to the original contractual terms of the
loan agreement. Interest income on impaired loans is recognized in the period collected unless the ultimate collection of
principal is considered doubtful, in which case interest income is no longer recognized. Loans reported as impaired loans
include loans partially charged-off and TDRs.
93 Acquired Loans - Acquired loans are initially recorded at fair value based on a discounted cash flow valuation methodology
that considers, among other things, interest rates, projected prepayments, projected default rates, loss given default and
recovery rates, with no carryover of any existing ACL. Acquired loans with evidence of credit quality deterioration at
acquisition are reviewed to determine if it is probable that the Company will not be able to collect all contractual amounts
due, including both principal and interest. When both conditions exist, such loans are categorized and accounted for as
purchased credit impaired ("PCI") loans. When these conditions do not exist, the loans are categorized as non-PCI loans.
The Company has determined that the amount and timing of cash flows to be collected from PCI loans cannot be reasonably
estimated. As such, income related to PCI loans is recognized using the cost recovery method. Cash receipts are applied first
as a reduction to the carrying amount of the loan. Once the entire carrying amount has been recovered, additional income is
applied to any principal amounts previously written off, with any excess being recognized as interest income.
Allowance for Credit Losses - The ACL represents management's best estimate of the amount of inherent losses in the loan
portfolio as of the balance sheet date. It involves a high degree of complexity and requires management to make difficult and
subjective judgments and assumptions about highly uncertain matters. Management's methodology for assessing the
appropriateness of the ACL consists of a formula analysis model, along with analyzing and considering several other relevant
internal and external factors. The use of different judgments and assumptions could cause reported results to differ
significantly. Management maintains the ACL through provisions for credit losses that are either charged or credited to
income.
One- to four-family loans, including home equity loans, are individually evaluated for loss when the loan is generally 180
days delinquent and any losses are charged-off. 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. An updated appraisal is requested, at a minimum, every 12 months thereafter if the loan is 180 days or more
delinquent or in foreclosure. 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, generally losses are charged-off when the loan is more than 120 days
delinquent and it is determined, through the analysis of any available current financial information with regards to the
borrower, that the borrower is not able to service the debt and there is little or no prospect for near term improvement, or, in
the case of secured loans, it is determined, through the analysis of current information with regards to the Bank's collateral
position, that the amounts due from the borrower are in excess of the calculated current fair value of the collateral after
consideration of estimated costs to sell. Charge-offs for any loan type may also occur at any time if the Bank has knowledge
of the existence of a probable loss.
The primary risk characteristics inherent in the one- to four-family and consumer loan portfolios are a decline in economic
conditions, elevated levels of unemployment or underemployment, and declines in residential real estate values. Any one or
a combination of these events may adversely affect the ability of borrowers to repay their loans, resulting in increased
delinquencies, non-performing assets, loan losses, and future loan loss provisions. Although the commercial loan portfolio is
subject to the same risk of declines in economic conditions, the primary risk characteristics inherent in this portfolio include
the ability of the borrower to sustain sufficient cash flows from leases and business operations and to control operational and/
or business expenses to satisfy their contractual debt payments, and/or the ability to utilize personal and/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 and/or potentially be forced to sell at a
discounted price, resulting in additional losses. Our commercial and industrial loans are primarily secured by accounts
receivable, inventory and equipment, which may be difficult to appraise, may be illiquid and may fluctuate in value based on
the success of the business.
Each quarter end, a formula analysis is prepared which segregates the loan portfolio into categories based on certain risk
characteristics. The categories include the following: one- to four-family loans; commercial loans; consumer home equity
loans; and other consumer loans. Home equity loans with the same underlying collateral as a one- to four-family loan are
combined with the one- to four-family loan in the formula analysis model to calculate a combined loan-to-value ("LTV")
ratio. The one- to four-family loan portfolio and related home equity loans are segregated into additional categories based on
the following risk characteristics: loan source (originated, correspondent purchased, or bulk purchased), interest payments
(fixed-rate and adjustable-rate), LTV ratios, borrower's credit scores, and geographic location. The categories were derived
94 by management based on reviewing the historical performance of the one- to four-family loan portfolio and taking into
consideration current economic conditions, such as trends in residential real estate values in certain areas of the U.S. and
unemployment rates. The commercial loan portfolio is segregated into additional categories based on loan source (originated
or participation) and the type of loan (real estate loan, construction loan or commercial and industrial). Impaired loans are
not included in the formula analysis as they are individually evaluated for loss.
Historical loss factors are applied to each loan category in the formula analysis model. Each quarter end, management
reviews historical losses over a look-back time period and utilizes the historical loss time periods believed to be the most
appropriate considering the current economic conditions. The historical loss time period is then adjusted for a loss
emergence time period, which represents the estimated time period from the date of a loss event to the date we recognize a
charge-off/loss. Qualitative loss factors are utilized in the formula analysis model to reflect risks inherent in each loan
category that are not captured by the historical loss factors. The qualitative loss factors for one- to four-family and consumer
loan portfolios take into consideration such items as: unemployment rate trends, residential real estate value trends, credit
score trends, and delinquent loan trends. The qualitative loss factors for the commercial loan portfolio take into consideration
the composition of the portfolio along with industry and peer charge-off information and certain ACL ratios. As loans are
classified or become delinquent, the qualitative loss factors increase for each respective loan category. The qualitative loss
factors were derived by management based on a review of the historical performance of the respective loan portfolios and
industry and peer information for those loan portfolios with no or limited historical loss experience, along with consideration
of current economic conditions and the likely impact such conditions might have to the performance of the loan portfolio.
For non-PCI loans, the Company estimates a hypothetical amount of ACL. The Company uses the acquired bank's past loss
history adjusted for qualitative factors to establish the hypothetical amount of ACL. This amount is compared with the
remaining net purchase discount for the non-PCI loans to test for credit quality deterioration and the possible need for an
additional loan loss provision. To the extent the remaining net purchase discount of the pool is greater than the hypothetical
ACL, no additional ACL is necessary. If the remaining net purchase discount of the pool is less than the hypothetical ACL,
the difference results in an increase to the ACL recorded through a provision for credit losses.
Management utilizes the formula analysis model, along with analyzing and considering several other relevant internal and
external factors when evaluating the adequacy of the ACL. Such factors include the trend and composition of delinquent
loans and non-performing loans, trends in foreclosed property and short sale transactions and charge-off activity, the current
status and trends of local and national employment levels, trends and current conditions in the housing markets, loan growth
and concentrations, industry and peer charge-off and ACL information, and certain ACL ratios such as ACL to loans
receivable, net and annualized historical losses. Since the Bank's loan portfolio is primarily concentrated in one- to four-
family real estate, management monitors residential real estate market value trends in the Bank's local market areas and
geographic sections of the U.S. by reference to various industry and market reports, economic releases and surveys, and
management's general and specific knowledge of the real estate markets in which the Bank lends, in order to determine what
impact, if any, such trends may have on the level of ACL. Reviewing these data elements assists management in evaluating
the overall credit quality of the loan portfolio and the reasonableness of the ACL on an ongoing basis, and whether changes
need to be made to the Bank's ACL methodology. Management seeks to apply the ACL methodology in a consistent manner;
however, the methodology may be modified in response to changing conditions. Although management believes the ACL
was at a level adequate to absorb inherent losses in the loan portfolio at September 30, 2018, the level of the ACL remains an
estimate that is subject to significant judgment and short-term changes.
Federal Home Loan Bank Stock - As a member of FHLB Topeka, 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 and Equipment - 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
95 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.
Other Assets - Included in other assets on the consolidated balance sheet are the Company's intangible assets, recognized as a
result of the acquisition of CCB, 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 of approximately 8 years and are tested for impairment whenever events or
circumstances change.
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 and changes in the market value of restricted stock between
the grant date and vesting date. 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.
Certain accounting literature 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 with
employees, except for equity instruments held by the ESOP. The Company applies the modified prospective method in
which compensation cost is recognized over the service period for all awards granted.
Borrowed Funds - The Bank has entered into repurchase agreements, which are sales of securities under agreements to
repurchase, with approved counterparties. These agreements are recorded as financing transactions, and thereby reported as
liabilities on the consolidated balance sheet, with the related expense reported as interest expense on the consolidated
statements of income, as the Bank maintains effective control over the transferred securities and the securities continue to be
carried in the Bank's securities portfolio.
96 The Bank has obtained borrowings from FHLB in the form of advances and a line of credit. Total FHLB borrowings are
secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB and certain securities, as necessary.
Additionally, the Bank is authorized to borrow from the Federal Reserve Bank's "discount window."
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.
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.
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.
Previously, the Bank accounted for low income housing partnerships using the equity method of accounting as two of the
Bank's officers were involved in the operational management of the low income housing partnership investment group.
Effective September 30, 2016, those two Bank officers discontinued their involvement in the operational management of the
investment group. The Bank started using the proportional method of accounting for its low income housing partnership
investments on October 1, 2016. See "Note 7. Low Income Housing Partnerships" for additional information.
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 restricted
stock shares which have vested or have been allocated to participants. 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.
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.
Comprehensive Income - Comprehensive income consists of net income and other comprehensive income. Other
comprehensive income includes unrealized gains and losses on AFS securities and changes in the accumulated gains/losses
on effective cash flow hedging instruments, net of taxes.
Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU
2014-09, Revenue from Contracts with Customers. The ASU, as amended, implements a common revenue standard that
clarifies the principles for recognizing revenue. The core principle of the amended guidance is that an entity should
recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to
97 which the entity expects to be entitled in exchange for those goods or services. Additionally, the amended guidance identifies
specific steps an entity should apply in order to achieve this principle. The amended guidance requires entities to disclose
both quantitative and qualitative information regarding contracts with customers. ASU 2014-09 will become effective for the
Company on October 1, 2018. The majority of the Company's revenue is composed of interest income from loans and
securities which are explicitly excluded from the amended ASU. The Company completed its identification of revenue
within the scope of the ASU and has concluded that the new guidance does not require any significant changes in the revenue
recognition process. However, the Company believes it is appropriate to classify interchange network charges, currently
reported as expense, as a reduction in revenue upon adoption of the ASU. The Company intends to elect to implement the
ASU using the modified retrospective application, with the cumulative effect recorded as an adjustment to opening retained
earnings at October 1, 2018. The cumulative effect adjustment is not expected to be material to the consolidated financial
statements. Additionally, the expanded disclosures required by the ASU will be provided starting with the Company's first
quarter of 2019 Form 10-Q.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of
Financial Assets and Financial Liabilities. The ASU supersedes certain accounting guidance related to equity securities with
readily determinable fair values and the related impairment assessment. An entity's equity investments that are accounted for
under the equity method of accounting or result in consolidation of an investee are not included within the scope of this ASU.
The Company does not currently hold any equity investments included within the scope of the ASU. The ASU requires
public business entities to utilize the exit price notation in determining fair value for financial instruments measured at
amortized cost on the balance sheet. The ASU requires additional reporting in other comprehensive income for financial
liabilities measured at fair value in accordance with the fair value option. The ASU also requires separate presentation of
financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the
notes to the financial statements. ASU 2016-01 will become effective for the Company on October 1, 2018. The Company is
currently evaluating the impact the ASU may have on the Company's consolidated financial condition, results of operations
and disclosures. Based on the Company's preliminary analysis, the ASU it is not expected to have a material impact when
adopted. Upon adoption, the exit price notion will be utilized when determining the fair value of financial instruments
measured at amortized cost in the Company's fair value disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases. The ASU amends lease accounting guidance by requiring that
lessees recognize the assets and liabilities arising from leases on the balance sheet. Additionally, the ASU requires entities to
disclose both quantitative and qualitative information regarding their leasing activities. The accounting applied by a lessor is
largely unchanged from that applied under the previous guidance. ASU 2016-02 will become effective for the Company on
October 1, 2019. In July 2018, the FASB issued ASU 2018-11, Leases, which provides entities with relief from the costs of
implementation by allowing the option to not restate comparative periods as part of the transition. The Company expects to
select the transition relief provisions. The Company has completed its development of a lease inventory and an internal lease
data collection, organization, and computing platform for compliance with this ASU. The Company is continuing to evaluate
the impact this ASU may have on the Company's consolidated financial condition and results of operations. The Company
expects to recognize right-of-use assets and lease liabilities for substantially all of its operating lease commitments based on
the present value of the minimum commitments under non-cancellable leases as of the date of adoption. The Company's
current minimum commitments under non-cancellable operating leases are disclosed in Note 6, Premises and Equipment.
The Company is continuing to evaluate the impact this ASU may have to the Company's disclosures.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-
Based Payment Accounting. The ASU simplifies several aspects of the accounting for employee share-based payment
transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, along with
simplifying the classification in the statement of cash flows. The Company adopted the ASU on October 1, 2017. Upon
adoption, the Company elected to account for forfeitures of stock-based compensation awards when they occur. The
Company will recognize excess tax benefits and tax deficiencies in income tax expense on the consolidated statements of
income and present them within operating activities on the consolidated statements of cash flows. This ASU did not have a
material impact on the Company's consolidated financial condition or results of operations at the time of adoption. However,
the impact of tax benefits and the timing of their recognition within income tax expense is unpredictable, as these benefits are
recognized primarily as a result of stock options being exercised.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on
Financial Instruments. The ASU replaces the incurred loss impairment methodology in current GAAP, which requires credit
98 losses to be recognized when it is probable that a loss has been incurred, with a new impairment methodology. The new
impairment methodology requires an entity to measure, at each reporting date, the expected credit losses of financial assets
not measured at fair value, such as loans, HTM debt securities, and loan commitments, over their contractual lives. Under
the new impairment methodology, expected credit losses will be measured at each reporting date based on historical
experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU amends the current credit
loss measurements for AFS debt securities. Credit losses related to AFS debt securities will be recorded through the ACL
rather than as a direct write-down as per current GAAP. The ASU also requires enhanced disclosures related to credit quality
and significant estimates and judgments used by management when estimating credit losses. The ASU will become effective
for the Company on October 1, 2020. The Company has selected a third-party vendor solution to assist in the application of
this ASU and will begin implementation procedures in the first half of calendar year 2019. While we are currently unable to
reasonably estimate the impact of adopting this ASU, we expect the impact of adoption will be influenced by the composition
of our loan and securities portfolios as well as the economic conditions and forecasts at the time of adoption.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill
Impairment. The ASU simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill
impairment test, which required computing the implied fair value of goodwill. Under the amendments in this update, an
entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its
carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the
reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that
reporting unit. The effective date of this ASU for the Company is October 1, 2020, with early adoption permitted. The
Company elected to early-adopt this ASU during the current fiscal year.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for
Hedging Activities. The ASU amends the hedge accounting recognition and presentation requirements in current GAAP. The
purpose of the ASU was to improve transparency of hedging relationships in the financial statements and to reduce the
complexity of applying hedge accounting for preparers. The ASU will become effective for the Company on October 1,
2019. The Company is currently evaluating the effect of the ASU on the Company's consolidated financial condition, results
of operations and disclosures.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income: Reclassification of
Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU helps organizations address certain stranded
income tax effects in AOCI resulting from the tax legislation enacted by the U.S. government on December 22, 2017
commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act") by allowing the reclassification of these amounts from
AOCI to retained earnings. The effective date of this ASU for the Company is October 1, 2019, with early adoption
permitted. The Company elected to early-adopt this ASU during the current fiscal year and reclassify the related tax effects
from the enactment of the Tax Act, specifically those related to the change in the federal corporate tax rate, from AOCI to
retained earnings. The reclassification was applied prospectively and is reflected in the Consolidated Statements of
Stockholders' Equity. The Company releases the income tax effects of unrealized gains and losses related to AFS securities
on a portfolio basis.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the
Disclosures Requirements for Fair Value Measurement. This ASU eliminates, modifies and adds certain disclosure
requirements for fair value measurements. The ASU adds disclosure requirements for the changes in unrealized gains and
losses included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted
average of significant unobservable inputs used to develop Level 3 fair value measurements. The effective date of this ASU
for the Company is October 1, 2020, with early adoption permitted. Entities are allowed to elect early adoption of the
eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective
date. Since this ASU only requires disclosure changes, it will not have a significant impact on the Company's consolidated
financial condition and results of operations.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer's
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The ASU
aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with
the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting
arrangements that include internal-use software license). The effective date of this ASU for the Company is October 1, 2020,
99 with early adoption permitted. The Company is currently evaluating the effect of the ASU on the Company's consolidated
financial condition, results of operations and disclosures.
2. ACQUISITION
On August 31, 2018, the Company completed the acquisition of CCB and its wholly-owned subsidiary Capital City Bank
headquartered in Topeka, Kansas. Capital City Bank owned and leased banking locations in Topeka, Lawrence, and
Overland Park, Kansas. The acquisition was not considered significant to the Company's financial statements; therefore, pro-
forma financial data and related disclosures are not included.
The Company acquired loans and deposits with fair values of $299.7 million and $352.5 million, respectively, at the date of
acquisition. Included in the loans acquired from CCB at August 31, 2018 were PCI loans with contractually required cash
flows totaling $2.6 million. Of that amount, the Company expects to collect $1.9 million, which was also the fair value at the
date of acquisition. Under the terms of the acquisition agreement, the Company issued 3.0 million shares of common stock
for all outstanding shares of CCB capital stock, for a total merger consideration of $39.1 million, based on the Company's
closing stock price of $13.21 on August 31, 2018. See "Note 8. Intangible Assets" for additional information regarding the
acquisition of CCB.
During fiscal year 2018, the Company incurred $872 thousand of pre-tax merger-related expenses attributable to the CCB
acquisition. The merger-related expenses are reflected on the Company's consolidated statement of income and are reported
primarily in regulatory and outside services.
3. EARNINGS PER SHARE
Shares acquired by the ESOP are not considered in the 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,
2018
2017
2016
(Dollars in thousands, except per share amounts)
Net income
Income allocated to participating securities
Net income available to common stockholders
$
$
98,927
(40)
98,887
$
$
84,137
(44)
84,093
$
$
83,494
(66)
83,428
Average common shares outstanding
Average committed ESOP shares outstanding
Total basic average common shares outstanding
134,635,886
62,458
134,698,344
134,019,962
62,458
134,082,420
132,982,815
62,400
133,045,215
Effect of dilutive stock options
60,647
161,442
131,161
Total diluted average common shares outstanding
134,758,991
134,243,862
133,176,376
Net EPS:
Basic
Diluted
$
$
0.73
0.73
$
$
0.63
0.63
$
$
0.63
0.63
Antidilutive stock options, excluded from the diluted average
common shares outstanding calculation
541,418
200,800
886,417
100 4. SECURITIES
The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of AFS and HTM
securities at the dates presented. The majority of the MBS and investment securities portfolios are composed of securities
issued by GSEs.
AFS:
MBS
GSE debentures
Municipal bonds
HTM:
MBS
Municipal bonds
September 30, 2018
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
(Dollars in thousands)
$
$
$
$
445,883
$
3,270
$
4,063
$
268,525
4,156
718,564
591,900
20,418
612,318
$
$
$
30
—
3,300
4,514
—
4,514
$
$
$
3,157
30
7,250
15,589
172
15,761
$
$
$
445,090
265,398
4,126
714,614
580,825
20,246
601,071
September 30, 2017
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
(Dollars in thousands)
AFS:
GSE debentures
$
271,300
$
16
$
587
$
MBS
Trust preferred securities
Municipal bonds
HTM:
MBS
Municipal bonds
135,644
2,067
1,530
410,541
800,931
26,807
827,738
$
$
$
$
$
$
5,923
—
5
5,944
10,460
119
10,579
$
$
$
51
16
—
654
5,295
13
5,308
$
$
$
270,729
141,516
2,051
1,535
415,831
806,096
26,913
833,009
101 The following tables summarize the estimated fair value and gross unrealized losses of those 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, 2018
Less Than 12 Months
Equal to or Greater Than 12 Months
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
(Dollars in thousands)
324,563
$
3,797
$
8,129
$
101,735
4,126
1,231
30
148,049
—
430,424
$
5,058
$
156,178
$
58,233
18,345
76,578
$
$
904
171
1,075
$
$
362,806
685
363,491
$
$
266
1,926
—
2,192
14,685
1
14,686
September 30, 2017
Less Than 12 Months
Equal to or Greater Than 12 Months
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
(Dollars in thousands)
Unrealized
Losses
224,421
$
539
$
24,952
$
9,648
—
46
—
673
2,051
234,069
$
585
$
27,676
$
259,200
5,638
264,838
$
$
1,582
8
1,590
$
$
201,094
1,460
202,554
$
$
48
5
16
69
3,713
5
3,718
$
$
$
$
$
$
$
$
AFS:
MBS
GSE debentures
Municipal bonds
HTM:
MBS
Municipal bonds
AFS:
GSE debentures
MBS
Trust preferred securities
HTM:
MBS
Municipal bonds
The unrealized losses at September 30, 2018 and 2017 were primarily a result of an increase in market yields from the time
the securities were purchased. In general, as market yields rise, the fair value of securities will decrease; as market yields
fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in
interest rates as temporary. Therefore, these securities have not been classified as other-than-temporarily impaired. The
impairment is also considered temporary because scheduled coupon payments have been made, it is anticipated that the entire
principal balance will be collected as scheduled, and management neither intends to sell the securities, nor is it more likely
than not that the Company will be required to sell the securities before the recovery of the remaining amortized cost amount,
which could be at maturity. As a result of the analysis, management has concluded that no other-than-temporary impairments
existed at September 30, 2018 or 2017. See "Note 1. Summary of Significant Accounting Policies - Securities" for additional
information regarding our impairment review and classification process for securities.
102 The amortized cost and estimated fair value of debt securities as of September 30, 2018, by contractual maturity, are shown
below. Actual principal repayments may differ from contractual maturities due to prepayment or early call privileges by the
issuer. In the case of MBS, borrowers on the underlying loans generally have the right to prepay their loans without
prepayment penalty. For this reason, MBS are not included in the maturity categories.
AFS
HTM
Amortized
Estimated
Amortized
Estimated
Cost
Fair Value
Cost
Fair Value
(Dollars in thousands)
One year or less
$
54,627
$
54,476
$
4,161
$
One year through five years
MBS
218,054
272,681
445,883
215,048
269,524
445,090
16,257
20,418
591,900
$
718,564
$
714,614
$
612,318
$
4,152
16,094
20,246
580,825
601,071
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,
2018
2017
(Dollars in thousands)
Taxable
Non-taxable
$
$
4,275
395
4,670
$
$
3,847
515
4,362
$
$
2016
5,255
670
5,925
The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of
the dates presented.
September 30,
2018
2017
Public unit deposits
Repurchase agreements
FRB of Kansas City
$
$
$
(Dollars in thousands)
515,553
108,360
9,529
633,442
$
499,993
214,298
11,769
726,060
During the current fiscal year, the Company sold trust preferred securities and received proceeds of $2.1 million. The
Company recognized a gain of $9 thousand on the sale. All other dispositions of securities during fiscal years 2018, 2017,
and 2016 were the result of principal repayments, calls, or maturities.
103 5. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES
Loans receivable, net at September 30, 2018 and 2017 is summarized as follows:
One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Construction
Total
Commercial:
Commercial real estate
Commercial and industrial
Construction
Total
Consumer:
Home equity
Other
Total
2018
2017
(Dollars in thousands)
$
$
3,965,692
2,505,987
293,607
33,149
6,798,435
426,243
62,869
80,498
569,610
129,588
10,012
139,600
3,959,232
2,445,311
351,705
30,647
6,786,895
183,030
—
86,952
269,982
122,066
3,808
125,874
Total loans receivable
7,507,645
7,182,751
Less:
ACL
Discounts/unearned loan fees
Premiums/deferred costs
8,463
33,933
(49,236)
7,514,485
$
8,398
24,962
(45,680)
7,195,071
$
Included in the loan portfolio at September 30, 2018 were $296.5 million of non-PCI loans and $2.4 million of PCI loans
associated with the acquisition of CCB during fiscal year 2018. At September 30, 2018, the Company had $5.5 million of net
purchase discounts related to non-PCI loans and $516 thousand related to PCI loans.
As of September 30, 2018 and 2017, the Bank serviced loans for others aggregating $134.2 million and $101.2 million,
respectively. Such loans are not included in the accompanying consolidated balance sheets. Servicing loans for others
generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and
foreclosure processing. Loan servicing income includes servicing fees withheld from investors and certain charges collected
from borrowers, such as late payment fees. The Bank held borrowers' escrow balances on loans serviced for others of $2.4
million and $2.1 million as of September 30, 2018 and 2017, respectively.
Lending Practices and Underwriting Standards - Originating and purchasing one- to four-family loans is the Bank's primary
lending business. The Bank also originates consumer loans primarily secured by one- to four-family residential properties
and originates and participates in commercial loans. The Bank has a loan concentration in one- to four-family loans and a
geographic concentration of these loans in Kansas and Missouri.
One- to four-family loans - Full documentation to support an applicant's credit and income, and sufficient funds to cover all
applicable fees and reserves at closing, are required on all loans. Generally, loans are underwritten according to the "ability
to repay" and "qualified mortgage" standards, as issued by the Consumer Financial Protection Bureau. Properties securing
one- to four-family loans are appraised by either staff appraisers or fee appraisers, both of which are independent of the loan
origination function and approved by our Board of Directors.
104 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 construction and 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 loans are originated by the Bank or are in participation with a lead
bank. When underwriting a commercial real estate 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 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 80%
of the appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.20.
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 these loans, as well as the
expectation that commercial and industrial loans generally will be serviced principally from the operations of the business,
and those operations may not be successful. As a result of these additional complexities, variables and risks, these loans
require more thorough underwriting and servicing than other types of loans.
Consumer loans - The Bank offers a variety of secured consumer loans, including home equity loans and lines of credit,
home improvement loans, vehicle loans, and loans secured by deposits. The Bank also originates a very limited amount of
unsecured loans. The majority of the consumer loan portfolio is comprised of home equity lines of credit for which the Bank
also has the first mortgage or the home equity line of credit is in the first lien position.
The underwriting standards for consumer loans include a determination of an applicant's payment history on other debts and
an assessment of an applicant's ability to meet existing obligations and payments on the proposed loan. Although
creditworthiness of an applicant is a primary consideration, the underwriting process also includes a comparison of the value
of the security in relation to the proposed loan amount.
Credit Quality Indicators - Based on the Bank's lending emphasis and underwriting standards, management has segmented
the loan portfolio into three segments: (1) one- to four-family; (2) consumer; and (3) commercial. These segments are further
divided into classes for purposes of providing disaggregated information about the credit quality of 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.
The Bank's primary credit quality indicators for the one- to four-family and consumer - home equity loan portfolios are
delinquency status, asset classifications, LTV ratios, and borrower credit scores. The Bank's primary credit quality indicators
for the commercial and consumer - other loan portfolios are delinquency status and asset classifications.
105 The following tables present the recorded investment, by class, in loans 30 to 89 days delinquent, loans 90 or more days
delinquent or in foreclosure, total delinquent loans, current loans, and total recorded investment at the dates presented. The
recorded investment in loans is defined as the unpaid principal balance of a loan, less charge-offs and inclusive of unearned
loan fees and deferred costs. At September 30, 2018 and 2017, all loans 90 or more days delinquent were on nonaccrual
status.
One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Commercial:
Commercial real estate
Commercial and industrial
Consumer:
Home equity
Other
One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Commercial:
Commercial real estate
Commercial and industrial
Consumer:
Home equity
Other
30 to 89 Days
Delinquent
September 30, 2018
90 or More Days
Delinquent or
in Foreclosure
Total
Delinquent
Loans
(Dollars in thousands)
Current
Loans
Total
Recorded
Investment
$
$
$
10,613
3,846
3,521
76
250
472
61
18,839
$
$
5,025
458
3,063
15,638
4,304
6,584
$ 3,968,362
2,536,913
288,386
$ 3,984,000
2,541,217
294,970
—
—
76
250
501,932
61,255
502,008
61,505
521
10
9,077
$
993
71
27,916
128,351
9,833
$ 7,495,032
129,344
9,904
$ 7,522,948
30 to 89 Days
Delinquent
September 30, 2017
90 or More Days
Delinquent or
in Foreclosure
Total
Delinquent
Loans
(Dollars in thousands)
Current
Loans
Total
Recorded
Investment
$
$
$
13,216
1,855
3,233
—
—
467
33
18,804
$
$
5,500
92
3,399
18,716
1,947
6,632
$ 3,956,598
2,477,916
346,807
$ 3,975,314
2,479,863
353,439
—
—
—
—
268,979
—
268,979
—
406
4
9,401
$
873
37
28,205
121,193
3,771
$ 7,175,264
122,066
3,808
$ 7,203,469
The recorded investment in mortgage loans secured by residential real estate properties for which formal foreclosure
proceedings were in process as of September 30, 2018 and 2017 was $2.9 million and $4.3 million, respectively, which is
included in loans 90 or more days delinquent or in foreclosure in the table 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 $1.3 million at September 30, 2018 and $1.4 million at September 30, 2017.
106 The following table presents the recorded investment, by class, in loans classified as nonaccrual at the dates presented.
One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Commercial:
Commercial real estate
Commercial and industrial
Consumer:
Home equity
Other
September 30,
2018
2017
(Dollars in thousands)
$
6,503
863
3,063
—
—
530
10
10,969
$
10,054
1,804
4,264
—
—
519
4
16,645
$
$
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 non-performing 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 the recorded investment in loans classified as special mention or substandard, by class, at the
dates presented. Special mention and substandard loans are included in the ACL formula analysis model if the loans are not
individually evaluated for loss. Loans classified as doubtful or loss are individually evaluated for loss. At the dates
presented, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.
One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Commercial:
Commercial real estate
Commercial and industrial
Consumer:
Home equity
Other
September 30,
2018
2017
Special Mention
Substandard
Special Mention
Substandard
(Dollars in thousands)
$
$
$
8,660
997
—
1,251
1,126
298
—
12,332
$
$
22,409
3,126
7,195
1,368
—
894
10
35,002
$
$
7,031
261
—
—
—
9
—
7,301
$
30,059
3,800
8,005
—
—
1,032
4
42,900
107 The following table shows the weighted average credit score and weighted average LTV for one- to four-family loans and
consumer home equity loans at the dates presented. Borrower credit scores are intended to provide an indication as to the
likelihood that a borrower will repay their debts. Credit scores are updated at least semiannually, with the last update in
September 2018, from a nationally recognized consumer rating agency. The LTV ratios provide an estimate of the extent to
which the Bank may incur a loss on any given loan that may go into foreclosure. The consumer - home equity LTV does not
take into account the first lien position, if applicable. 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.
One- to four-family - originated
One- to four-family - correspondent
One- to four-family - bulk purchased
Consumer - home equity
September 30,
2018
2017
Credit Score
767
764
758
750
765
LTV
Credit Score
767
764
757
755
765
63%
67
62
22
63
LTV
63%
68
63
19
64
TDRs - The following tables present the recorded investment prior to restructuring and immediately after restructuring in all
loans restructured during the periods presented. These tables do not reflect the recorded investment at the end of the periods
indicated. Any increase in the recorded investment at the time of the restructuring was generally due to the capitalization of
delinquent interest and/or escrow balances. During the fourth quarter of fiscal year 2017, management refined its
methodology for assessing whether a loan modification qualifies as a TDR which, though not material, resulted in fewer
loans being classified as TDRs in the current fiscal year.
Number
of
Contracts
For the Year Ended September 30, 2018
Post-
Restructured
Outstanding
Pre-
Restructured
Outstanding
(Dollars in thousands)
One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Commercial:
Commercial real estate
Commercial and industrial
Consumer:
Home equity
Other
5
2
—
—
—
—
—
7
$
$
264
406
—
—
—
—
—
670
$
$
281
406
—
—
—
—
—
687
108 One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Commercial:
Commercial real estate
Commercial and industrial
Consumer:
Home equity
Other
One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Commercial:
Commercial real estate
Commercial and industrial
Consumer:
Home equity
Other
Number
of
Contracts
For the Year Ended September 30, 2017
Post-
Restructured
Outstanding
Pre-
Restructured
Outstanding
(Dollars in thousands)
112
12
3
—
—
17
—
144
$
$
$
11,940
2,443
1,031
—
—
368
—
15,782
$
12,402
2,459
1,048
—
—
380
—
16,289
Number
of
Contracts
For the Year Ended September 30, 2016
Post-
Restructured
Outstanding
Pre-
Restructured
Outstanding
(Dollars in thousands)
122
12
3
—
—
19
1
157
$
$
$
17,201
2,592
596
—
—
427
8
20,824
$
17,557
2,619
594
—
—
433
8
21,211
109 The following table provides information on TDRs that became delinquent during the periods presented within 12 months
after being restructured.
September 30, 2018
For the Years Ended
September 30, 2017
Number of Recorded Number of Recorded Number of Recorded
Investment
Contracts
Investment Contracts
Investment Contracts
September 30, 2016
One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Commercial:
Commercial real estate
Commercial and industrial
Consumer:
Home equity
Other
22
1
3
—
—
4
—
30
$
$
1,416
124
1,040
—
—
133
—
2,713
(Dollars in thousands)
46
2
2
—
—
16
—
66
$
$
4,561
148
698
—
—
440
—
5,847
48
3
—
—
—
6
—
57
$
$
5,330
548
—
—
—
174
—
6,052
Impaired loans - The following information pertains to impaired loans, by class, as of the dates presented. During the fourth
quarter of fiscal year 2017, management refined its methodology for classifying loans as impaired. The change resulting
from this refinement was immaterial. All impaired loans were individually evaluated for loss and all losses were charged-off,
resulting in no related ACL for these loans.
One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Commercial:
Commercial real estate
Commercial and industrial
Consumer:
Home equity
Other
September 30, 2018
Unpaid
Principal
Balance
Recorded
Investment
September 30, 2017
Unpaid
Principal
Balance
Recorded
Investment
(Dollars in thousands)
$
18,857
$
19,388
$
30,251
$
30,953
2,668
6,011
2,768
6,976
3,800
7,403
3,771
8,606
—
—
504
—
—
—
720
25
—
—
775
—
—
—
997
24
$
28,040
$
29,877
$
42,229
$
44,351
110 The following information pertains to impaired loans, by class, for the periods presented.
September 30, 2018
Average
Recorded
Investment Recognized
Interest
Income
For the Years Ended
September 30, 2017
Interest
Income
Average
Recorded
Investment Recognized
(Dollars in thousands)
September 30, 2016
Average
Recorded
Investment Recognized
Interest
Income
With no related allowance recorded
One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Commercial:
Commercial real estate
Commercial and industrial
Consumer:
Home equity
Other
With an allowance recorded
One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Commercial:
Commercial real estate
Commercial and industrial
Consumer:
Home equity
Other
Total
One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Commercial:
Commercial real estate
Commercial and industrial
Consumer:
Home equity
Other
$
$
23,847
3,204
6,438
—
—
588
—
34,077
—
—
—
—
—
—
—
—
23,847
3,204
6,438
—
—
990
112
191
—
—
39
—
1,332
—
—
—
—
—
—
—
—
990
112
191
—
—
$
$
24,122
3,346
9,852
—
—
988
7
38,315
11,469
2,018
1,160
—
—
457
10
15,114
35,591
5,364
11,012
—
—
917
118
194
—
—
86
—
1,315
434
65
20
—
—
36
1
556
1,351
183
214
—
—
$
$
12,063
495
11,022
—
—
628
13
24,221
24,199
2,669
2,219
—
—
895
13
29,995
36,262
3,164
13,241
—
—
588
—
34,077
$
39
—
1,332
$
$
1,445
17
53,429
$
122
1
1,871
$
1,523
26
54,216
$
470
18
196
—
—
93
1
778
983
50
27
—
—
64
1
1,125
1,453
68
223
—
—
157
2
1,903
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p
m
i
113
6. PREMISES AND EQUIPMENT
A summary of the net carrying value of premises and equipment at September 30, 2018 and 2017 was as follows:
Land
Building and improvements
Furniture, fixtures and equipment
Less accumulated depreciation
2018
2017
(Dollars in thousands)
13,536
107,580
48,852
169,968
73,963
96,005
$
$
11,670
96,401
43,410
151,481
66,663
84,818
$
$
The Bank has entered into non-cancelable operating lease agreements with respect to banking premises and equipment. It is
expected that many agreements will be renewed at expiration in the normal course of business. Rental expense was $1.2
million, $1.1 million, and $1.2 million for the years ended September 30, 2018, 2017, and 2016, respectively.
As of September 30, 2018, future minimum rental commitments, rounded to the nearest thousand, required under operating
leases that have initial or remaining non-cancelable lease terms in excess of one year were as follows:
2019
2020
2021
2022
2023
Thereafter
$
$
1,364
1,067
941
828
689
1,573
6,462
7. 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 $74.5 million and $66.1 million at September 30, 2018 and 2017, respectively. The Bank's obligations related to
unfunded commitments, which are included in accounts payable and accrued expenses in the consolidated balance sheets,
were $34.0 million and $29.4 million at September 30, 2018 and 2017, respectively. The majority of the commitments at
September 30, 2018 are projected to be funded through the end of calendar year 2021.
For fiscal year 2018, 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 2018
and 2017 was $7.0 million and $4.4 million, respectively, and the amount of affordable housing tax credits and other related
tax benefits was $7.5 million and $6.9 million, respectively, resulting in a net income tax benefit of $500 thousand and $2.5
million, respectively. The increase in proportional amortization expense was due primarily to a change in the tax rate
resulting from the Tax Act, as well as to changes in the life cycle stage of the investments. For fiscal year 2016, the expenses
were reported in the low income housing partnerships line of the consolidated statements of income, and the amount of
affordable housing tax credits and other related tax benefits was $6.0 million. There were no impairment losses during fiscal
years 2018, 2017, or 2016 resulting from the forfeiture or ineligibility of tax credits or other circumstances.
114 8. INTANGIBLE ASSETS
With the acquisition of CCB, the Company recognized goodwill of $8.0 million, which is calculated as the consideration
exchanged in excess of the fair value of assets, net of the fair value of liabilities assumed. The Company also recognized
$10.1 million of other intangible assets which is largely composed of core deposit intangibles. These assets will be amortized
over their estimated lives, which management has determined to be 8 years.
Changes in the carrying amount of the Company's intangible assets, which are included in other assets on the consolidated
balance sheet, for fiscal year 2018 are presented in the following table.
Goodwill
Core Deposit and
Other Intangibles
(Dollars in thousands)
Balance as of September 30, 2017 $
Add: Acquisition of CCB
Less: Amortization
Balance as of September 30, 2018 $
— $
7,989
—
7,989 $
—
10,052
(234)
9,819
As of September 30, 2018, 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, 2018 is presented in the following table (dollars in thousands):
2019
2020
2021
2022
2023
$
2,317
1,964
1,659
1,358
1,056
9. DEPOSITS AND BORROWED FUNDS
Deposits - Non-interest-bearing deposits totaled $336.5 million and $243.7 million as of September 30, 2018 and 2017,
respectively. Certificates of deposit with a minimum denomination of $250 thousand were $668.8 million and $676.1 million
as of September 30, 2018 and 2017, respectively. Deposits in excess of $250 thousand may not be fully insured by the
Federal Deposit Insurance Corporation.
FHLB Borrowings - FHLB borrowings at September 30, 2018 consisted of $2.07 billion in FHLB advances, of which $1.60
billion were fixed-rate advances and $475.0 million were variable-rate advances, and $100.0 million against the variable-rate
FHLB line of credit. FHLB borrowings at September 30, 2017 consisted of $2.17 billion in FHLB advances, of which $1.98
billion were fixed-rate advances and $200.0 million were variable-rate advances. There were no borrowings against the
variable-rate FHLB line of credit at September 30, 2017. The line of credit is set to expire on November 15, 2019, at which
time it is expected to be renewed by FHLB for a one year period.
115
FHLB advances at September 30, 2018 and 2017 were comprised of the following:
FHLB advances
Deferred prepayment penalty
2018
2017
(Dollars in thousands)
$
$
2,075,000
(19)
2,074,981
$
$
2,175,000
(1,192)
2,173,808
Weighted average contractual interest rate on FHLB advances
Weighted average effective interest rate on FHLB advances(1)
2.07%
2.12
1.96%
2.09
(1) The effective interest rate includes the net impact of deferred amounts and interest rate swaps related to the adjustable-rate FHLB advances.
During fiscal years 2018, 2017 and 2016, the Bank utilized a leverage strategy (the "leverage strategy") to increase earnings.
The leverage strategy involves borrowing up to $2.10 billion either on the Bank's FHLB line of credit or by entering into
short-term FHLB advances, depending on the rates offered by FHLB, with all of the balance being paid down at each quarter
end, or earlier if the strategy it is not profitable. The proceeds of the borrowings, net of the required FHLB stock holdings,
are deposited at the FRB of Kansas City. Management can discontinue the use of the leverage strategy at any point in time.
At September 30, 2018 and 2017, the Bank had entered into interest rate swap agreements with a total notional amount of
$475.0 million and $200.0 million, respectively, in order to hedge the variable cash flows associated with $475.0 million and
$200.0 million, respectively, of adjustable-rate FHLB advances. At September 30, 2018 and 2017, the interest rate swap
agreements had an average remaining term to maturity of 5.8 years and 5.9 years, respectively. The interest rate swaps were
designated as cash flow hedges and involve the receipt of variable amounts from a counterparty in exchange for the Bank
making fixed-rate payments over the life of the interest rate swap agreements. At September 30, 2018, the interest rate swaps
were in a gain position with a total fair value of $9.7 million, which was reported in other assets on the consolidated balance
sheet. At September 30, 2017, the interest rate swaps were in a loss position with a total fair value of $598 thousand, which
was reported in accounts payable and accrued expenses on the consolidated balance sheet. During fiscal years 2018 and
2017, $515 thousand and $134 thousand, respectively, were reclassified from AOCI as an increase to interest expense and no
hedge ineffectiveness was recognized in the consolidated statements of income during either period. At September 30, 2018,
the Company estimates that $755 thousand will be reclassified as a decrease to interest expense during the next 12 months.
The Bank has minimum collateral posting thresholds with its derivative counterparty and posts collateral on a daily basis.
The Bank held cash collateral of $10.0 million at September 30, 2018 and posted cash collateral of $731 thousand at
September 30, 2017.
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 2018, the president of
FHLB approved an increase, through July 2019, in the Bank's borrowing limit to 55% of Bank Call Report total assets. At
September 30, 2018, the ratio of the par value of the Bank's FHLB borrowings to the Bank's Call Report total assets was
23%. At times, the Bank's FHLB borrowings to the Bank's Call Report total assets may be in excess of 40% due to the
leverage strategy.
Repurchase Agreements - At September 30, 2018 and 2017, the Company had repurchase agreements outstanding in the
amount of $100.0 million and $200.0 million, respectively, with a weighted average contractual rate of 2.53% and 2.94%
respectively. The repurchase agreements are included in other borrowings on the consolidated balance sheet. All of the
Company's repurchase agreements at September 30, 2018 and 2017 were fixed-rate. See Note 4 for information regarding
the amount of securities pledged as collateral in conjunction with repurchase agreements. Securities are delivered to the party
with whom each transaction is executed and the party agrees to resell the same securities to the Bank at the maturity of the
agreement. The Bank retains the right to substitute similar or like securities throughout the terms of the agreements. The
repurchase agreements and collateral are subject to valuation at current market levels and the Bank may ask for the return of
excess collateral or be required to post additional collateral due to changes in the market values of these items. The Bank
may also be required to post additional collateral as a result of principal payments received on the securities pledged.
116 Maturity of Borrowed Funds and Certificates of Deposit - The following table presents the scheduled maturity of FHLB
advances, at par, repurchase agreements, and certificates of deposit as of September 30, 2018:
FHLB
Advances
Amount
Repurchase
Agreements
Amount
(Dollars in thousands)
Certificates
of Deposit
Amount
$
875,000
$
— $
1,229,859
350,000
550,000
200,000
100,000
—
100,000
—
—
—
—
812,885
372,331
401,527
119,313
1,142
$
2,075,000
$
100,000
$
2,937,057
2019
2020
2021
2022
2023
Thereafter
Junior Subordinated Debentures and Trust-Preferred Securities - In conjunction with the CCB acquisition, the Company
acquired $10.1 million of mandatorily redeemable capital trust-preferred securities that were previously issued by CCB-
sponsored trusts (the "Trusts") to third-party investors. The Company also acquired $302 thousand of common equity
securities that were issued by the Trusts which is included in other assets on the consolidated balance sheet. The proceeds
from such securities were invested in junior subordinated debentures issued by CCB. The junior subordinated debentures are
included in other borrowings on the consolidated balance sheet.
The terms of the trust-preferred securities are identical to those of the junior subordinated debentures. The trust-preferred
securities are subject to mandatory redemption upon repayment of the junior subordinated debentures at their stated maturity
dates or earlier redemption in an amount equal to their liquidation amount plus accumulated and unpaid distributions to the
date of redemption. The Company guarantees the payment of distributions and payments for redemption or liquidation of the
trust-preferred securities to the extent of funds held by the Trusts.
The junior subordinated debentures are unsecured with interest distributions payable quarterly. Of the $10.1 million, $6.2
million bear interest at 10.6% with a maturity date of September 7, 2030 and $3.9 million bear interest at three-month
London Interbank Offered Rate ("LIBOR") plus 3.45% (5.82% at September 30, 2018) with a maturity date of June 26, 2032.
The Company intends to redeem the trust-preferred securities and related junior subordinated debentures during fiscal year
2019.
10. INCOME TAXES
Income tax expense for the years ended September 30, 2018, 2017, and 2016 consisted of the following:
Current:
Federal
State
Deferred:
Federal
State
2018
2017
2016
(Dollars in thousands)
$
26,007
$
38,127
$
3,512
29,519
(5,956)
1,416
(4,540)
24,979
$
4,734
42,861
712
210
922
43,783
$
$
33,298
4,677
37,975
286
184
470
38,445
117 The Tax Act made significant changes to the U.S. corporate income tax laws, such as a permanent reduction in the federal
corporate income tax rate from 35% to 21% effective January 1, 2018, bonus depreciation that will allow full expensing of
qualified property, and other changes to and/or limitations on certain corporate income tax deductions. As required by
Section 15 of the Internal Revenue Code, the Company had a blended statutory federal income tax rate of 24.5% for the year
ended September 30, 2018, which is based on the applicable income tax rates prior to and subsequent to January 1, 2018 and
the number of days in the fiscal year. In accordance with GAAP, the Company revalued its deferred tax assets and liabilities
as of December 22, 2017 to account for the future impact of a lower federal income tax rate. The revaluation of the
Company's deferred tax assets and liabilities resulted in a $7.5 million reduction in income tax expense during the December
31, 2017 quarter and a corresponding reduction in the Company's net deferred tax liability. During the December 31, 2017
quarter, management reviewed the carrying value of the Bank's low income housing partnership investments in relation to the
remaining tax benefits, considering the reduction in the corporate income tax rate, and determined there was no impairment
present.
The Company's effective tax rates were 20.2%, 34.2%, and 31.5% for the years ended September 30, 2018, 2017, and 2016,
respectively. The decrease in the effective tax rate for the year ended September 30, 2018 was due primarily to the
revaluation of the Company's deferred tax assets and liabilities along with a lower blended statutory federal tax rate as a
result of the enactment of the Tax Act. The differences between such effective rates and the statutory Federal income tax rate
computed on income before income tax expense resulted from the following:
2018
2017
2016
Amount
%
%
Amount
(Dollars in thousands)
Amount
%
Federal income tax expense
computed at statutory Federal rate
$ 30,392
24.5% $ 44,772
35.0% $ 42,679
35.0%
Increases (decreases) in taxes resulting from:
State taxes, net of Federal tax effect
Deferred tax liability remeasurement, net
Low income housing tax credits, presented net
of proportional amortization in 2018 and 2017
ESOP related expenses, net
Other
3,986
(7,498)
3.2
(6.0)
3,452
—
2.7
—
3,308
—
2.7
—
(500)
(790)
(611)
$ 24,979
(2,468)
(0.4)
(1,052)
(0.6)
(921)
(0.5)
20.2% $ 43,783
(4,815)
(2.0)
(1,127)
(0.8)
(1,600)
(0.7)
34.2% $ 38,445
(4.0)
(0.9)
(1.3)
31.5%
Deferred income tax expense 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 and changes in the market value of
restricted stock between the grant date and vesting date. The sources of these differences and the tax effect of each as of
September 30, 2018, 2017, and 2016 were as follows:
2018
2017
2016
(Dollars in thousands)
ACL
$
1,827
$
Salaries, deferred compensation and employee benefits
Low income housing partnerships
FHLB stock dividends
Premises and equipment
Other, net
897
604
(7,692)
(122)
(54)
(4,540) $
$
185
437
285
4
14
(3)
922
$
$
480
(143)
(318)
(1,357)
1,593
215
470
118 The components of the net deferred income tax liabilities as of September 30, 2018 and 2017 were as follows:
Deferred income tax assets:
Salaries, deferred compensation and employee benefits
Net purchase discounts related to acquired loans
ESOP compensation
Unrealized loss on AFS securities
Low income housing partnerships
ACL
Other
Gross deferred income tax assets
$
2018
2017
(Dollars in thousands)
$
1,686
1,456
1,206
960
874
—
3,154
9,336
2,583
—
1,724
—
1,478
711
2,621
9,117
Valuation allowance
Gross deferred income tax asset, net of valuation allowance
(1,822)
7,514
(1,795)
7,322
Deferred income tax liabilities:
FHLB stock dividends
Premises and equipment
Deposit intangible
Unrealized gain on interest rate swap
ACL
Unrealized gain on AFS securities
Other
Gross deferred income tax liabilities
15,550
5,983
2,567
2,353
1,116
—
1,198
28,767
23,242
6,105
—
—
—
2,000
433
31,780
Net deferred tax liabilities
$
21,253
$
24,458
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, the Bank's bad
debt deduction on the Kansas privilege tax return has been in excess of actual net charge-offs for several years resulting in a
state deferred tax liability. At September 30, 2018, the state deferred tax liability associated with ACL was in excess of the
federal deferred tax asset.
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 both
September 30, 2018 and 2017, the Company had a valuation allowance of $1.8 million related to the net operating losses
generated by the Company's consolidated Kansas corporate income tax return. The companies included in the consolidated
Kansas corporate income tax return are the holding company, Capitol Funds, Inc. and Capital City Investments, Inc., as the
Bank files a Kansas privilege tax return. Based on the nature of the operations of the holding company, Capitol Funds, Inc.
and Capital City Investments, Inc., management believes there will not be sufficient taxable income to fully utilize the
deferred tax assets noted above; therefore, a valuation allowance has been recorded for the related amounts at September 30,
2018 and 2017.
Accounting Standards Codification ("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 year ended September 30, 2018 and 2017,
119 the Company had no unrecognized tax benefits. For the year ended September 30, 2016, the Company's unrecognized tax
benefits, estimated penalties and interest, and related activities were insignificant.
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 before 2015.
11. EMPLOYEE STOCK OWNERSHIP PLAN
The ESOP trust acquired 3,024,574 shares (6,846,728 shares post-corporate reorganization) of common stock in the
Company's initial public offering and 4,726,000 shares of common stock in the Company's corporate reorganization in
December of 2010. Both acquisitions of common stock were made with proceeds from loans from the Company, secured by
shares of the Company's stock purchased in each offering. The Bank has agreed to make cash contributions to the ESOP trust
on an annual basis sufficient to enable the ESOP trust to make the required annual loan payments to the Company on
September 30 of each year. The loan for the shares acquired in the initial public offering matured on September 30, 2013.
The loan for the shares acquired in the corporate reorganization matures on September 30, 2040.
As annual loan payments are made on September 30, 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, 2018, 165,198
shares were released from collateral. On September 30, 2019, 165,198 shares will be released from collateral. As ESOP
shares are committed to be released from collateral, the Company records compensation expense. Dividends on unallocated
ESOP shares are applied to the debt service payments of the loan secured by the unallocated shares. Dividends on
unallocated ESOP shares in excess of the debt service payment are recorded as compensation expense and distributed to
participants or participants' ESOP accounts. Compensation expense related to the ESOP was $2.9 million for the year ended
September 30, 2018, $3.3 million for the year ended September 30, 2017, and $3.0 million for the year ended September 30,
2016. Of these amounts, $541 thousand, $784 thousand, and $522 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, 2018, 2017, and 2016, respectively. The amount included in
compensation expense for dividends on unallocated ESOP shares in excess of the debt service payments was $688 thousand,
$833 thousand, and $813 thousand for the years ended September 30, 2018, 2017, and 2016, respectively.
Shares may be withdrawn from the ESOP trust due to diversification (a participant may begin to diversify at least 25% of
their ESOP shares at age 50), retirement, termination, or death of the participant. The following is a summary of shares held
in the ESOP trust as of September 30, 2018 and 2017:
Allocated ESOP shares
Unreleased ESOP shares
Total ESOP shares
2018
2017
(Dollars in thousands)
4,339,002
3,634,356
7,973,358
4,369,840
3,799,554
8,169,394
Fair value of unreleased ESOP shares
$
46,302
$
55,853
120 12. 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 stock 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 504,195 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, 2018, the Company had 4,184,316 stock options still available for future grants under this plan. This plan will
expire in January 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 Company may also
award stock appreciation rights, although no stock appreciation rights have been awarded to date. 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
three to five 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, 2018, the Company had 1,210,374 stock options outstanding with a weighted average exercise price of
$13.33 per option and a weighted average contractual life of 4.3 years, and 1,161,374 options exercisable with a weighted
average exercise price of $13.37 per option and a weighted average contractual life of 4.2 years. The exercise price may be
paid in cash, shares of common stock, or a combination of both. New shares are issued by the Company upon the exercise of
stock options.
Compensation expense attributable to stock option awards during the years ended September 30, 2018, 2017, and 2016
totaled $71 thousand, $118 thousand, and $335 thousand, respectively. The fair value of stock options vested during the
years ended September 30, 2018, 2017, and 2016 was $77 thousand, $174 thousand, and $652 thousand, respectively. As of
September 30, 2018, the total future compensation cost related to non-vested stock options not yet recognized in the
consolidated statements of income was $61 thousand, and the weighted average period over which these awards are expected
to be recognized was 1.2 years.
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, 2018, the Company had 1,738,750 shares available for future grants of restricted stock under this
plan. This plan will expire in January 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 three to five years. At September 30, 2018, the Company had
53,150 unvested restricted stock shares with a weighted average grant date fair value of $13.48 per share.
Compensation expense is calculated based on the fair market value of the common stock at the date of the grant, as defined
by the plan, and is recognized over the vesting time period. Compensation expense attributable to restricted stock awards
during the years ended September 30, 2018, 2017, and 2016 totaled $301 thousand, $388 thousand, and $787 thousand,
respectively. The fair value of restricted stock that vested during the years ended September 30, 2018, 2017, and 2016 totaled
$294 thousand, $563 thousand, and $1.6 million, respectively. As of September 30, 2018 there was $572 thousand of
unrecognized compensation cost related to unvested restricted stock to be recognized over a weighted average period of 2.7
years.
121 13. COMMITMENTS AND CONTINGENCIES
The following table summarizes the Bank's loan commitments as of September 30, 2018 and 2017:
Originate fixed-rate
Originate adjustable-rate
Purchase/participate fixed-rate
Purchase/participate adjustable-rate
2018
2017
(Dollars in thousands)
46,645
25,228
122,418
10,085
204,376
$
$
33,528
9,861
74,104
52,453
169,946
$
$
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
real estate loans with a lead bank. The Bank evaluates each borrower's creditworthiness on a case-by-case basis.
Commitments generally have expiration dates or other termination clauses and one-to four-family loan commitments may
require the payment of a rate lock fee. Some of the commitments are expected to expire without being fully drawn upon;
therefore, the amount of total commitments disclosed in the table above does not necessarily represent future cash
requirements. As of September 30, 2018 and 2017, there were no significant loan-related commitments that met the
definition of derivatives or commitments to sell mortgage loans. As of September 30, 2018 and 2017, the Bank had approved
but unadvanced lines of credit of $246.1 million and $240.0 million, respectively.
Upon the acquisition of CCB, the Company assumed certain standby letters of credit, which are conditional commitments to
guarantee the performance of a customer to a third party. Most guarantees have one-year terms. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At September 30,
2018, the Company had approximately $1.2 million in outstanding standby letters of credit, and no amounts have been
recorded as liabilities for the Company's potential obligations under these agreements.
In the normal course of business, the Company and its subsidiary 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, 2018, or future periods.
14. 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.
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, 2018, the balance of this
122 liquidation account was $145.4 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.
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, 2016, the Company and Bank were required to maintain a capital conservation buffer above
certain minimum capital ratios for capital adequacy purposes in order to avoid certain restrictions on capital distributions and
other payments including dividends, share repurchases, and certain compensation. The required capital conservation buffer is
being phased in over a four year period by increasing the required buffer amount by 0.625% each year. The capital
conservation buffer was 1.875% at September 30, 2018 and 1.25% at September 30, 2017. At September 30, 2018 and 2017,
the Bank and Company exceeded the capital conservation buffer requirement. Once fully phased-in, which will be on
January 1, 2019 for the Company and Bank, the organization must maintain a balance of capital that exceeds by more than
2.5% each of the minimum risk-based capital ratios in order to satisfy the requirement. Management believes, as of
September 30, 2018, 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, 2018 that would change the Bank's or Company's category.
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
(Dollars in thousands)
To Be Well
Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
$1,202,125
1,202,125
1,202,125
1,210,589
13.0% $ 370,559
215,764
25.1
287,685
25.1
383,580
25.2
4.0% $ 463,199
311,659
4.5
383,580
6.0
479,475
8.0
5.0%
6.5
8.0
10.0
1,201,863
1,201,863
1,201,863
1,210,261
1,381,791
1,381,791
1,381,791
1,390,255
1,365,395
1,365,395
1,365,395
1,373,793
10.8
27.2
27.2
27.3
14.9
28.6
28.8
29.0
12.3
30.8
30.8
31.0
444,877
199,181
265,575
354,100
370,475
215,793
287,724
383,632
444,785
199,195
265,594
354,125
4.0
4.5
6.0
8.0
4.0
4.5
6.0
8.0
4.0
4.5
6.0
8.0
556,097
287,706
354,100
442,625
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
5.0
6.5
8.0
10.0
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Bank
As of September 30, 2018
Tier 1 leverage
Common Equity Tier 1 ("CET1") capital
Tier 1 capital
Total capital
As of September 30, 2017
Tier 1 leverage
CET1 capital
Tier 1 capital
Total capital
Company
As of September 30, 2018
Tier 1 leverage
CET1 capital
Tier 1 capital
Total capital
As of September 30, 2017
Tier 1 leverage
CET1 capital
Tier 1 capital
Total capital
123 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair Value Measurements – The Company uses fair value measurements to record fair value adjustments to certain financial
instruments and to determine fair value disclosures in accordance with ASC 820 and ASC 825. The Company's AFS
securities and interest rate swaps are recorded at fair value on a recurring basis. Additionally, from time to time, the
Company may be required to record at fair value other financial instruments on a non-recurring basis, such as OREO and
loans individually evaluated for impairment. These non-recurring fair value adjustments involve the application of lower of
cost or fair value accounting or write-downs of individual financial instruments.
The Company groups its financial instruments at fair value in three levels based on the markets in which the financial
instruments are traded and the reliability of the assumptions used to determine fair value. These levels are:
• Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
• Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based valuation techniques for which
all significant assumptions are observable in the market.
• Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in
the market. These unobservable assumptions reflect the Company's own estimates of assumptions that market
participants would use in pricing the financial instrument. Valuation techniques include the use of option
pricing models, discounted cash flow models, and similar techniques. The results cannot be determined with
precision and may not be realized in an actual sale or immediate settlement of the financial instrument.
The Company bases its fair values on the price that would be received from the sale of a financial instrument in an orderly
transaction between market participants at the measurement date under current market conditions. The Company maximizes
the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
The following is a description of valuation methodologies used for financial instruments measured at fair value on a recurring
basis.
AFS Securities - The Company's AFS securities portfolio is carried at estimated fair value. The majority of the securities
within the AFS portfolio were issued by GSEs. The Company primarily uses prices obtained from third party pricing
services to determine the fair value of its securities. On a quarterly basis, management corroborates a sample of prices
obtained from the third party pricing service for Level 2 securities by comparing them to an independent source. If the price
provided by the independent source varies by more than a predetermined percentage from the price received from the third
party pricing service, then the variance is researched by management. The Company did not have to adjust prices obtained
from the third party pricing service when determining the fair value of its securities during the years ended September 30,
2018 and 2017. The Company's major security types, based on the nature and risks of the securities, are:
• GSE Debentures - Estimated fair values are based on a discounted cash flow method. Cash flows are
determined by taking any embedded options into consideration and are discounted using current market yields
for similar securities. (Level 2)
• MBS - Estimated fair values are based on a discounted cash flow method. Cash flows are determined based on
prepayment projections of the underlying mortgages and are discounted using current market yields for
benchmark securities. (Level 2)
• Municipal Bonds - Estimated fair values are based on a discounted cash flow method. Cash flows are
determined by taking any embedded options into consideration and are discounted using current market yields
for securities with similar credit profiles. (Level 2)
• Trust Preferred Securities - Estimated fair values are based on a discounted cash flow method. Cash flows are
determined by taking prepayment and underlying credit considerations into account. The discount rates are
derived from secondary trades and bid/offer prices. (Level 3)
124 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 accounts payable and accrued expenses if in a loss
position, with any unrealized gains and losses, net of taxes, reported as AOCI in stockholders' equity. See "Note 9. Deposits
and Borrowed Funds" for additional information. The estimated fair value of the interest rates swaps are obtained from the
counterparty and are determined using 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 using independent observable market-based inputs from a third party. The Company did not make any
adjustments to the estimated fair value during the years ended September 30, 2018 and 2017. (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
liabilities that were measured at fair value at September 30, 2018.
September 30, 2018
Quoted Prices
Significant
Significant
in Active Markets
Other Observable Unobservable
Carrying
for Identical Assets
Value
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
(Dollars in thousands)
$
445,090
$
— $
445,090
$
265,398
4,126
714,614
9,685
—
—
—
—
265,398
4,126
714,614
9,685
$
724,299
$
— $
724,299
$
—
—
—
—
—
—
September 30, 2017
Quoted Prices
Significant
Significant
in Active Markets
Other Observable Unobservable
Carrying
for Identical Assets
Value
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
(Dollars in thousands)
$
270,729
$
— $
141,516
1,535
2,051
—
—
—
270,729
$
141,516
1,535
—
415,831
$
— $
413,780
$
—
—
—
2,051
2,051
598
$
— $
598
$
—
Assets:
AFS Securities:
MBS
GSE debentures
Municipal bonds
Interest rate swaps
Assets:
AFS Securities:
GSE debentures
MBS
Municipal bonds
Trust preferred securities
Liabilities:
Interest rate swaps
$
$
125 The Company sold its Level 3 AFS security during fiscal year 2018, received proceeds of $2.1 million, and recognized a gain
on sale of $9 thousand, which is included in other non-interest income in the Company's consolidated statement of income.
The Company's Level 3 AFS securities had no activity during fiscal years 2017 and 2016 except for principal repayments of
$88 thousand and $97 thousand, respectively, and (decreases)/increases in net unrealized losses included in other
comprehensive income of $(218) thousand and $61 thousand, respectively.
The following is a description of valuation methodologies used for significant financial instruments measured at fair value on
a non-recurring basis.
Loans Receivable – The amount of loans individually evaluated for impairment on a non-recurring basis during fiscal years
2018 and 2017 that were still held in the portfolio as of September 30, 2018 and 2017 was $6.7 million and $18.4 million,
respectively. All of these loans were secured by residential real estate and 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, except for
the estimated sales cost noted above. The primary significant unobservable input for loans individually evaluated for
impairment was the appraisal. Fair values of loans individually evaluated for impairment 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.
Based on this evaluation, the Bank charged-off all loss amounts as of September 30, 2018 and 2017; therefore, the fair value
was equal to the carrying value and there was no ACL related to these loans.
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. Also included in OREO at September 30, 2018 was $889 thousand of OREO acquired
from CCB. The fair value for the OREO not acquired from CCB 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 2018 and 2017 that was still held in the portfolio as of September 30, 2018 and 2017 was $1.9 million and $1.4
million, respectively. The carrying value of the properties equaled the fair value of the properties at September 30, 2018 and
2017.
Fair Value Disclosures – The Company determined 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.
126 The carrying amounts and estimated fair values of the Company's financial instruments, at the dates presented, were as
follows:
2018
2017
Carrying
Amount
Estimated
Fair
Value
Carrying
Amount
Estimated
Fair
Value
(Dollars in thousands)
Assets:
Cash and cash equivalents
$
139,055
$
139,055
$
351,659
$
AFS securities
HTM securities
Loans receivable
FHLB stock
Interest rate swaps
Liabilities:
Deposits
FHLB borrowings
Other borrowings
Interest rate swaps
351,659
415,831
833,009
714,614
612,318
714,614
601,071
415,831
827,738
7,514,485
7,418,026
7,195,071
7,354,100
99,726
9,685
99,726
9,685
100,954
100,954
—
—
5,603,354
2,174,981
110,052
—
5,569,591
2,145,477
109,465
—
5,309,868
2,173,808
200,000
598
5,318,249
2,182,841
202,004
598
The following methods and assumptions were used to estimate the fair value of the financial instruments:
Cash and cash equivalents - The carrying amounts of cash and cash equivalents are considered to approximate their fair value
due to the nature of the financial assets. (Level 1)
HTM securities - Estimated fair values of securities are based on one of three methods: (1) quoted market prices where
available; (2) quoted market prices for similar instruments if quoted market prices are not available; (3) unobservable data
that represents the Bank's assumptions about items that market participants would consider in determining fair value where
no market data is available. HTM securities are carried at amortized cost. (Level 2)
Loans receivable - The fair value of one- to four-family loans and home equity loans are generally estimated using the
present value of expected future cash flows, assuming future prepayments and using discount factors determined by prices
obtained from securitization markets, less a discount for the cost of servicing and lack of liquidity. The estimated fair value
of the Bank's commercial and consumer loans are based on the expected future cash flows assuming future prepayments and
discount factors based on current offering rates. (Level 3)
FHLB stock - The carrying value and estimated fair value of FHLB stock equals cost, which is based on redemption at par
value. (Level 1)
Interest rate swaps - The fair value of the interest rate swaps was determined using discounted cash flow analysis using
observable market-based inputs. (Level 2)
Deposits - The estimated fair value of demand deposits, savings, and money market accounts is the amount payable on
demand at the reporting date. The estimated fair value of these deposits at September 30, 2018 and 2017 was $2.67 billion
and $2.40 billion, respectively. (Level 1) The fair value of certificates of deposit is estimated by discounting future cash
flows using current LIBOR. The estimated fair value of certificates of deposit at September 30, 2018 and 2017 was $2.90
billion and $2.92 billion, respectively. (Level 2)
127 FHLB borrowings and other borrowings - The fair value of fixed-maturity borrowed funds is estimated by discounting
estimated future cash flows using current offer rates. (Level 2) The carrying value of FHLB line of credit is considered to
approximate its fair value due to the nature of the financial liability. (Level 1) The fair value of the junior subordinated
debentures is estimated as the payoff value, as management intends to redeem these borrowings during fiscal year 2019.
(Level 1)
16. OTHER COMPREHENSIVE INCOME
The following tables present the changes in the components of AOCI, net of tax, for the years ended September 30, 2018 and
2017. During the year ended September 30, 2016, the only changes in AOCI, net of tax, were related to unrealized gains
(losses) on AFS securities and there were no amounts reclassified from AOCI.
For the Year Ended September 30, 2018
Unrealized
Unrealized
Gains (Losses) Gains (Losses)
on AFS
on Cash Flow
Securities
Hedges
Total
AOCI
(dollars in thousands)
Beginning balance
Other comprehensive income (loss), before reclassifications
Amount reclassified from AOCI
Other comprehensive income (loss)
Reclassification of certain income tax effects related to
adoption of ASU 2018-02
Ending balance
$
$
$
3,290
(6,741)
—
(6,741)
461
(2,990) $
(372) $
6,981
515
7,496
206
2,918
240
515
755
667
7,330
$
4,340
For the Year Ended September 30, 2017
Unrealized
Unrealized
Gains (Losses) Gains (Losses)
on AFS
Securities
on Cash Flow
Hedges
Total
AOCI
(dollars in thousands)
$
$
5,915
(2,625)
—
(2,625)
3,290
$
$
— $ 5,915
(3,131)
(506)
134
134
(372)
(2,997)
(372) $ 2,918
Beginning balance
Other comprehensive income (loss), before reclassifications
Amount reclassified from AOCI
Other comprehensive income (loss)
Ending balance
128
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized quarterly data for each of the years indicated for the Company.
First
Second
Third
Fourth
Quarter
Quarter
Quarter
(Dollars and counts in thousands, except per share amounts)
Quarter
Total
2018
Total interest and dividend income
$
80,644
$
81,774
$
82,161
$
77,313
$ 321,892
Net interest and dividend income
Provision for credit losses
Net income
Basic EPS
Diluted EPS
Dividends declared per share
Average number of basic shares outstanding
Average number of diluted shares outstanding
2017
49,374
49,889
49,433
50,077
198,773
—
—
—
—
—
31,836
23,330
22,372
21,389
98,927
0.24
0.24
0.375
134,373
134,467
0.17
0.17
0.085
134,428
134,475
0.17
0.17
0.335
134,484
134,530
0.16
0.16
0.085
135,500
135,556
0.73
0.73
0.88
134,698
134,759
Total interest and dividend income
$
75,322
$
77,660
$
79,630
$
80,574
$ 313,186
Net interest and dividend income
Provision for credit losses
Net income
Basic EPS
Diluted EPS
Dividends declared per share
Average number of basic shares outstanding
Average number of diluted shares outstanding
47,306
49,054
49,364
49,658
195,382
—
—
—
—
—
20,578
21,587
21,370
20,602
84,137
0.15
0.15
0.375
133,697
133,950
0.16
0.16
0.085
134,066
134,259
0.16
0.16
0.335
134,254
134,360
0.15
0.15
0.085
134,314
134,404
0.63
0.63
0.88
134,082
134,244
129 18. 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, 2018 and 2017
(Dollars in thousands, except per share amounts)
ASSETS:
Cash and cash equivalents
Investment in the Bank
Note receivable - ESOP
Other assets
Income taxes receivable, net
TOTAL ASSETS
LIABILITIES:
Income taxes payable, net
Junior subordinated debentures
Accounts payable and accrued expenses
Deferred income tax liabilities, net
Total liabilities
STOCKHOLDERS' EQUITY:
2018
2017
$ 137,684
$ 120,785
1,221,706
1,204,781
41,285
42,557
690
486
365
—
$1,401,851
$1,368,488
$
— $
10,052
177
—
10,229
88
—
52
35
175
Preferred stock, $.01 par value; 100,000,000 shares authorized, no shares issued or outstanding
—
—
Common stock, $.01 par value; 1,400,000,000 shares authorized, 141,225,516 and 138,223,835
shares issued and outstanding as of September 30, 2018 and 2017, respectively
Additional paid-in capital
Unearned compensation - ESOP
Retained earnings
AOCI, net of tax
Total stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
1,412
1,382
1,207,644
(36,343)
214,569
1,167,368
(37,995)
234,640
4,340
2,918
1,391,622
1,368,313
$1,401,851
$1,368,488
130 STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2018, 2017, and 2016
(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Dividend income from the Bank
Interest income from other investments
Total interest and dividend income
INTEREST EXPENSE
NET INTEREST INCOME
NON-INTEREST EXPENSE:
Salaries and employee benefits
Regulatory and outside services
Other non-interest expense
Total non-interest expense
INCOME BEFORE INCOME TAX EXPENSE AND EQUITY IN
EXCESS OF DISTRIBUTION OVER EARNINGS OF SUBSIDIARY
INCOME TAX (BENEFIT) EXPENSE
INCOME BEFORE EQUITY IN EXCESS OF
DISTRIBUTION OVER EARNINGS OF SUBSIDIARY
EQUITY IN EXCESS OF DISTRIBUTION OVER EARNINGS OF SUBSIDIARY
NET INCOME
2018
2017
2016
$ 134,540
$ 120,215
$ 117,513
1,951
1,715
1,725
136,491
121,930
119,238
62
—
—
136,429
121,930
119,238
1,031
1,129
581
2,741
896
247
561
827
261
558
1,704
1,646
133,688
(179)
120,226
117,592
4
28
133,867
(34,940)
$ 98,927
120,222
(36,085)
$ 84,137
117,564
(34,070)
$ 83,494
131 STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2018, 2017, and 2016
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
2018
2017
2016
$
98,927
$
84,137
$
83,494
Equity in excess of distribution over earnings of subsidiary
34,940
36,085
34,070
Depreciation of equipment
Provision for deferred income taxes
Changes in:
Other assets
Income taxes receivable/payable
Accounts payable and accrued expenses
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on notes receivable from ESOP
Cash acquired from acquisition
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payment from subsidiary related to restricted stock awards
Cash dividends paid
Stock options exercised
Net cash used in financing activities
30
(35)
29
(2)
(53)
(145)
(257)
133,407
(5)
(40)
(22)
120,182
30
2
1
445
14
118,056
1,272
18
1,290
1,233
—
1,233
1,194
—
1,194
253
(118,312)
261
(117,798)
293
(117,963)
8,843
(108,827)
473
(111,767)
4,070
(107,224)
NET INCREASE IN CASH AND CASH EQUIVALENTS
16,899
12,588
12,026
CASH AND CASH EQUIVALENTS:
Beginning of year
End of year
120,785
108,197
96,171
$ 137,684
$ 120,785
$ 108,197
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued for acquisition
Capital contribution to subsidiary in conjunction with acquisition of CCB
$
$
39,113
48,798
$
$
— $
— $
—
—
132 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
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, 2018. Based upon this evaluation, our Chief Executive Officer and
our Chief Financial Officer have concluded that, as of September 30, 2018, 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.
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, 2018.
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, 2018.
SEC guidance permits companies to exclude certain acquisitions from the assessment of internal control over financial
reporting during the first year following the acquisition. Accordingly, management excluded from its assessment the internal
control over financial reporting at CCB, which was acquired on August 31, 2018 and whose financial statements constitute
approximately 4% of loans receivable, net, 6% of deposits, 5% of total assets, 1% of net interest income and 0% of net
income of the consolidated financial statement amounts as of and for the fiscal year ended September 30, 2018.
The Company's independent registered public accounting firm, Deloitte & Touche LLP, who audited the consolidated
financial statements included in the Company's annual report, has issued an audit report on the Company's internal control
over financial reporting as of September 30, 2018 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, 2018 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B. Other Information
None.
133 PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this item concerning the Company's directors and compliance with Section 16(a) of the Act is
incorporated herein by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held in
January 2019, a copy of which will be filed not later than 120 days after the close of the fiscal year. Pursuant to General
Instruction G(3), information concerning executive officers of the Company is included in Part I, under the caption
"Executive Officers of the Registrant" of this Form 10-K.
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
definitive proxy statement for the Annual Meeting of Stockholders to be held in January 2019, 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
Information required by this item concerning compensation is incorporated herein by reference from the definitive proxy
statement for the Annual Meeting of Stockholders to be held in January 2019, 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 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 definitive proxy statement for the Annual Meeting of Stockholders to be held in
January 2019, 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, 2018 with respect to compensation plans under which shares
of our common stock may be issued.
Equity Compensation Plan Information
Number of Shares
Number of Shares
Remaining Available
for Future Issuance
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
Equity compensation plans not
approved by stockholders
1,210,374
$
N/A
1,210,374
$
13.33
N/A
13.33
5,923,066 (1)
N/A
5,923,066
(1) This amount includes 1,738,750 shares available for future grants of restricted stock under the Equity Incentive Plan.
134 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 definitive proxy statement for the Annual Meeting of Stockholders to be held in
January 2019, 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
Information required by this item concerning principal accounting fees and services is incorporated herein by reference from
the definitive proxy statement for the Annual Meeting of Stockholders to be held in January 2019, 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
(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.
2.
3.
4.
5.
6.
7.
Reports of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of September 30, 2018 and 2017.
Consolidated Statements of Income for the Years Ended September 30, 2018, 2017, and 2016.
Consolidated Statements of Comprehensive Income for the Years Ended September 30, 2018,
2017, and 2016.
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 2018, 2017,
and 2016.
Consolidated Statements of Cash Flows for the Years Ended September 30, 2018, 2017, and 2016.
Notes to Consolidated Financial Statements for the Years Ended September 30, 2018, 2017, and
2016.
(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."
135
INDEX TO EXHIBITS
Exhibit
Number
3(i)
3(ii)
10.1(i)
10.1(ii)
10.1(iii)
Document
Charter of Capitol Federal Financial, Inc., as filed on May 6, 2010, as Exhibit 3(i) to Capitol Federal
Financial, Inc.'s Registration Statement on Form S-1 (File No. 333-166578) and incorporated herein by
reference
Bylaws of Capitol Federal Financial, Inc., as amended, filed on September 30, 2016, as Exhibit 3.2 to Form
8-K for Capitol Federal Financial Inc. and incorporated herein by reference
Form of Change of Control Agreement with each of John B. Dicus, Kent G. Townsend, and Rick C. Jackson
filed on January 20, 2011 as Exhibit 10.1 to the Registrant's Current Report on Form 8-K and incorporated
herein by reference
Form of Change of Control Agreement with each of Natalie G. Haag and Carlton A. Ricketts filed on
November 29, 2012 as Exhibit 10.1(iv) to the Registrant's Annual Report on Form 10-K and incorporated
herein by reference
Form of Change of Control Agreement with Daniel L. Lehman filed on November 29, 2016 as Exhibit
10.1(v) to the Registrant's Annual Report on Form 10-K and incorporated herein by reference
10.1(iv)
Form of Change of Control Agreement with Robert D. Kobbeman
10.1(v)
Employment Agreement with Robert D. Kobbeman
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
11
14
21
23
31.1
31.2
Capitol Federal Financial's 2000 Stock Option and Incentive Plan (the "Stock Option Plan") filed on April
13, 2000 as Appendix A to Capitol Federal Financial's Revised Proxy Statement (File No. 000-25391) and
incorporated herein by reference
Capitol Federal Financial Deferred Incentive Bonus Plan, as amended
Form of Incentive Stock Option Agreement under the Stock Option Plan filed on February 4, 2005 as
Exhibit 10.5 to the December 31, 2004 Form 10-Q for Capitol Federal Financial and incorporated herein by
reference
Form of Non-Qualified Stock Option Agreement under the Stock Option Plan filed on February 4, 2005 as
Exhibit 10.6 to the December 31, 2004 Form 10-Q for Capitol Federal Financial and incorporated herein by
reference
Description of Director Fee Arrangements
Short-term Performance Plan filed on August 4, 2015 as Exhibit 10.10 to the Registrant's June 30, 2015
Form 10-Q and incorporated herein by reference
Capitol Federal Financial, Inc. 2012 Equity Incentive Plan (the "Equity Incentive Plan") filed on December
22, 2011 as Appendix A to Capitol Federal Financial, Inc.'s Proxy Statement (File No. 001-34814) and
incorporated herein by reference
Form of Incentive Stock Option Agreement under the Equity Incentive Plan filed on February 6, 2012 as
Exhibit 10.12 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
Form of Non-Qualified Stock Option Agreement under the Equity Incentive Plan filed on February 6, 2012
as Exhibit 10.13 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
Form of Stock Appreciation Right Agreement under the Equity Incentive Plan filed on February 6, 2012 as
Exhibit 10.14 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
Form of Restricted Stock Agreement under the Equity Incentive Plan filed on February 6, 2012 as Exhibit
10.15 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
Calculations of Basic and Diluted Earnings Per Share (See "Part II, Item 8. Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – Note 3. Earnings Per Share")
Code of Ethics*
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by John B. Dicus, Chairman,
President and Chief Executive Officer
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Kent G. Townsend,
Executive Vice President, Chief Financial Officer and Treasurer
136 32
101
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 made by John B. Dicus, Chairman, President and Chief Executive Officer, and Kent G.
Townsend, Executive Vice President, Chief Financial Officer and Treasurer
The following information from the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2018, filed with the SEC on November 29, 2018, has been formatted in eXtensible Business
Reporting Language: (i) Consolidated Balance Sheets at September 30, 2018 and 2017, (ii) Consolidated
Statements of Income for the fiscal years ended September 30, 2018, 2017, and 2016, (iii) Consolidated
Statements of Comprehensive Income for the fiscal years ended September 30, 2018, 2017, and 2016, (iv)
Consolidated Statement of Stockholders' Equity for the fiscal years ended September 30, 2018, 2017, and
2016, (v) Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2018, 2017, and
2016, and (vi) Notes to the Consolidated Financial Statements
*May be obtained free of charge in the Investor Relations section of our website, www.capfed.com.
137 SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 29, 2018
CAPITOL FEDERAL FINANCIAL, INC.
By:
/s/ John B. Dicus
John B. Dicus, Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the date indicated.
By:
/s/ John B. Dicus
John B. Dicus, Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
Date: November 29, 2018
By:
/s/ Kent G. Townsend
Kent G. Townsend, Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: November 29, 2018
By:
/s/ Jeffrey R. Thompson
Jeffrey R. Thompson, Director
Date: November 29, 2018
By:
/s/ Jeffrey M. Johnson
Jeffrey M. Johnson, Director
Date: November 29, 2018
By:
/s/ Morris J. Huey II
Morris J. Huey II, Director
Date: November 29, 2018
By:
/s/ Reginald L. Robinson
Reginald L. Robinson, Director
Date: November 29, 2018
By:
/s/ Michael T. McCoy, M.D.
Michael T. McCoy, M.D., Director
Date: November 29, 2018
By:
/s/ James G. Morris
James G. Morris, Director
Date: November 29, 2018
By:
/s/ Michel' P. Cole
Michel' P. Cole, Director
Date: November 29, 2018
By:
/s/ Tara D. Van Houweling
Tara D. Van Houweling, First Vice President
and Reporting Director
(Principal Accounting Officer)
Date: November 29, 2018
138
Capitol Federal® Financial, Inc. had another True Blue® year with stable operations, announcing and
Capitol Federal® Financial, Inc. had another True Blue® year with stable operations, announcing and
closing its fi rst acquisition and setting a new record for net income of $98.9 million. On August 31, 2018
closing its fi rst acquisition and setting a new record for net income of $98.9 million. On August 31, 2018
Capital City Bancshares and its subsidiary Capital City Bank (together “CCB”) became a part of
Capital City Bancshares and its subsidiary Capital City Bank (together “CCB”) became a part of
Capitol Federal Savings.
Capitol Federal Savings.
The Company ended fi scal year 2018 at $9.4 billion in total assets, with $7.5 billion in loans and $5.6 billion
The Company ended fi scal year 2018 at $9.4 billion in total assets, with $7.5 billion in loans and $5.6 billion
in total deposits. Earnings for fi scal year 2018 were $98.9 million. The Company and its stockholders benefi ted
in total deposits. Earnings for fi scal year 2018 were $98.9 million. The Company and its stockholders benefi ted
from the Tax Cuts and Jobs Act signed into law on December 22, 2017. The reduction in tax rates, when combined
from the Tax Cuts and Jobs Act signed into law on December 22, 2017. The reduction in tax rates, when combined
with our operating results, added $0.10 per share to our annual dividends paid to our stockholders in calendar year
with our operating results, added $0.10 per share to our annual dividends paid to our stockholders in calendar year
2018. During calendar year 2018 we paid $0.98 per share, or $133.3 million in cash dividends, providing a dividend
2018. During calendar year 2018 we paid $0.98 per share, or $133.3 million in cash dividends, providing a dividend
payout ratio of approximately 135%.
payout ratio of approximately 135%.
Capital City Bancshares was a $437 million bank holding company which added $300 million of loans and
Capital City Bancshares was a $437 million bank holding company which added $300 million of loans and
$353 million of deposits. Strategically, this acquisition allows us to complement our current retail product offerings
$353 million of deposits. Strategically, this acquisition allows us to complement our current retail product offerings
by adding a full suite of commercial banking and trust services to all of our current and future customers. We are
by adding a full suite of commercial banking and trust services to all of our current and future customers. We are
pleased that a signifi cant number of employees were able to join the Bank and to continue to run a strong
pleased that a signifi cant number of employees were able to join the Bank and to continue to run a strong
commercial banking operation within the Bank. We are working now to fully integrate the two banks which we
commercial banking operation within the Bank. We are working now to fully integrate the two banks which we
expect to be completed in the second calendar quarter of 2019.
expect to be completed in the second calendar quarter of 2019.
To increase our net interest margin over the past fi ve years, we remixed our balance sheet by reinvesting
To increase our net interest margin over the past fi ve years, we remixed our balance sheet by reinvesting
cash fl ows from lower yielding securities into higher yielding loans as well as changing our funding mix from higher
cash fl ows from lower yielding securities into higher yielding loans as well as changing our funding mix from higher
costing borrowings to lower costing deposits. Leveraging this experience, to grow our commercial loan portfolio
costing borrowings to lower costing deposits. Leveraging this experience, to grow our commercial loan portfolio
without being at risk of crossing the $10.0 billion threshold, we expect to reinvest cash fl ows from our correspon-
without being at risk of crossing the $10.0 billion threshold, we expect to reinvest cash fl ows from our correspon-
dent residential loans to fund future growth in commercial loans. Growing the commercial lending portfolio should
dent residential loans to fund future growth in commercial loans. Growing the commercial lending portfolio should
continue to increase the yields on our assets while generally requiring shorter term funding needs. As deposits
continue to increase the yields on our assets while generally requiring shorter term funding needs. As deposits
grow, we anticipate being able to reduce outstanding borrowings.
grow, we anticipate being able to reduce outstanding borrowings.
The Capitol Federal Foundation continued to focus its support of organizations in our communities funding
The Capitol Federal Foundation continued to focus its support of organizations in our communities funding
grants totaling almost $5 million during the 2018 calendar year. This brings total giving by the Foundation since 1999
grants totaling almost $5 million during the 2018 calendar year. This brings total giving by the Foundation since 1999
to $65 million. At September 30, 2018 the Foundation had assets totaling $106 million.
to $65 million. At September 30, 2018 the Foundation had assets totaling $106 million.
The Company’s board and management wish to thank our employees for their hard work in helping us run
The Company’s board and management wish to thank our employees for their hard work in helping us run
an effi cient and safe Bank. Their efforts allow us to provide a consistent return that our stockholders have come to
an effi cient and safe Bank. Their efforts allow us to provide a consistent return that our stockholders have come to
expect from the Company. We want to thank our stockholders for their continued commitment to Capitol Federal.
expect from the Company. We want to thank our stockholders for their continued commitment to Capitol Federal.
Sincerely,
Sincerely,
®
®
Branch Locations by County
Branch Locations by County
Sedgwick County 8 branches
Sedgwick County 8 branches
Saline County 1 branch
Saline County 1 branch
Butler County 1 branch
Butler County 1 branch
Riley County 2 branches
Riley County 2 branches
Lyon County 1 branch
Lyon County 1 branch
Shawnee County 14 branches
Shawnee County 14 branches
Douglas County 6 branches
Douglas County 6 branches
Wyandotte County 1 branch
Wyandotte County 1 branch
Platte County 1 branch
Platte County 1 branch
Clay County 2 branches
Clay County 2 branches
Jackson County 1 branch
Jackson County 1 branch
Johnson County 20 branches
Johnson County 20 branches
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Chairman, President & CEO
Chairman, President & CEO
Home Offi ce, Topeka, KS
Home Offi ce, Topeka, KS
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JULY 2010
JULY 2010
JULY 2010
JULY 2010