Item 2. Management’s Discussion and Analysis
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The Company and the Bank may from time to time make written or oral "forward-looking statements," including statements contained in documents filed or furnished by the Company with the SEC. These forward-looking statements may be included in this Quarterly Report on Form 10-Q and the exhibits attached to it, in the Company's reports to stockholders, in the Company's press releases, and in other communications by the Company, which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause our future results to differ materially from the beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in the forward-looking statements:
• our ability to maintain overhead costs at reasonable levels;
• our ability to originate and purchase a sufficient volume of one- to four-family loans in order to maintain the balance of that portfolio at a level desired by management;
• our ability to invest funds in wholesale or secondary markets at favorable yields compared to the related funding source;
• our ability to access cost-effective funding;
• the expected synergies and other benefits from our acquisition activities;
• our ability to extend our commercial banking and trust asset management expertise;
• fluctuations in deposit flows;
• the future earnings and capital levels of the Bank and the continued non-objection by our primary federal banking regulators, to the extent required, to distribute capital from the Bank to the Company, which could affect the ability of the Company to pay dividends in accordance with its dividend policy;
• the strength of 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 ACL, which may adversely affect our business;
• potential adverse impacts of the ongoing COVID-19 pandemic and any governmental or societal responses thereto on economic conditions in the Company's local market areas and other market areas where the Bank has lending relationships, on other aspects of the Company's business operations and on financial markets;
• increases in classified and/or non-performing assets, which may require the Bank to increase the ACL, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets;
• results of examinations of the Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our ACL;
• changes in accounting principles, policies, or guidelines;
• the effects of, and changes in, monetary and interest rate policies of 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;
• 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.
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This list of important factors is not all inclusive. For a discussion of risks and uncertainties related to our business that could adversely impact our operations and/or financial results, see "Part I, Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2021 and Part II, Item 1A. Risk Factors within this Quarterly Report on Form 10-Q. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank.
As used in this Form 10-Q, unless we specify or the context indicates otherwise, "the Company," "we," "us," and "our" refer to Capitol Federal Financial, Inc. a Maryland corporation, and its subsidiaries. "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.
The following discussion and analysis is intended to assist in understanding the financial condition, results of operations, liquidity, and capital resources of the Company. The Bank comprises almost all of the consolidated assets and liabilities of the Company and the Company is dependent primarily upon the performance of the Bank for the results of its operations. Because of this relationship, references to management actions, strategies and results of actions apply to both the Bank and the Company. This discussion and analysis should be read in conjunction with Management's Discussion and Analysis included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2021, filed with the SEC.
Executive Summary
The following summary should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section in its entirety.
The Company recognized net income of $22.2 million, or $0.16 per share, for the current quarter compared to net income of $18.9 million, or $0.14 per share, for the prior year quarter. The increase in net income was due primarily to a higher negative provision for credit losses in the current quarter and an increase in net interest income. The net interest margin increased seven basis points, from 1.92% for the prior year quarter to 1.99% for the current quarter. The increase in net interest income and net interest margin was due mainly to a reduction in the cost of retail certificates of deposit and borrowings, which outpaced the decrease in asset yields.
The Bank's asset quality continued to remain strong during the current quarter, reflected in low delinquency and a net recovery during the quarter. At December 31, 2021, loans 30 to 89 days delinquent were 0.18% of total loans receivable, net, and loans 90 or more days delinquent or in foreclosure were 0.15% of total loans receivable, net. During the current quarter, net recoveries were $31 thousand.
At December 31, 2021, the Bank had a one-year gap position of $(928.0) million, or (9.7)% of total assets, meaning the amount of interest-bearing liabilities exceeds the amount of interest-earning assets maturing or repricing during the same period. Despite the negative gap, net interest income is projected to increase in a rising interest rate environment due to the assumption that the Bank's deposit balances are not expected to reprice to the full extent of the interest rate change. This assumption is based on a historical analysis of the Bank's deposit pricing behavior.
At times, the Bank has utilized a leverage strategy to increase earnings. The leverage strategy involves borrowing on either the Bank's FHLB line of credit or by entering into short-term FHLB advances with the proceeds from the borrowings, net of the required FHLB stock holdings, being deposited at the Federal Reserve Bank of Kansas City. The leverage strategy was not in place during the current quarter or in recent years as the strategy was not profitable. The strategy did, however, become profitable again in January 2022, and management reimplemented the strategy by entering into $1.80 billion of short-term FHLB advances. It is expected that the strategy will continue to be used as long as it is profitable. The borrowing level related to the strategy may fluctuate while the strategy is in place.
Available Information
Financial and other Company information, including press releases, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports can be obtained free of charge from our investor relations website, http://ir.capfed.com. SEC filings are available on our website immediately after they are electronically filed with or furnished to the SEC, and are also available on the SEC's website at www.sec.gov.
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Critical Accounting Estimates
Our most critical accounting estimates are the methodologies used to determine the ACL and reserve for off-balance sheet credit exposures and fair value measurements. These estimates are important to the presentation of our financial condition and results of operations, involve a high degree of complexity, and require management to make difficult and subjective judgments that may require assumptions about highly uncertain matters. The use of different judgments, assumptions, and estimates could affect reported results materially. These critical accounting estimates and their application are reviewed at least annually by our audit committee. For a full discussion of our critical accounting estimates, see "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2021.
Financial Condition
The following table summarizes the Company's financial condition at the dates indicated.
Annualized
December 31, September 30, Percent
2021 2021 Change
(Dollars in thousands)
Total assets $ 9,609,157 $ 9,631,246 (0.9) %
AFS securities 1,890,653 2,014,608 (24.6)
Loans receivable, net 7,095,605 7,081,142 0.8
Deposits 6,648,004 6,597,396 3.1
Borrowings 1,583,303 1,582,850 0.1
Stockholders' equity 1,216,660 1,242,273 (8.2)
Equity to total assets at end of period 12.7 % 12.9 %
Average number of basic shares outstanding 135,627 135,571 0.2
Average number of diluted shares outstanding 135,627 135,571 0.2
The decrease in total assets was due primarily to a decrease in securities, partially offset by an increase in cash and cash equivalents. The decrease in securities was due to not reinvesting all of the cash flows from the securities portfolio during the quarter. The increase in deposits was due primarily to an increase in non-maturity deposits, partially offset by a decrease in the certificate of deposit portfolio, as customers moved some of their funds from maturing certificates to more liquid investment options, such as the Bank's money market accounts. There is some uncertainty regarding how long the increased balance of non-maturity deposits will be retained by the Bank as customers return to more normal spending habits and/or choose to invest in higher-yielding investment options outside of the Bank. The Bank may be required to replace deposit outflows with higher costing borrowings, which would increase the cost of funds over time, or with cash flows from maturing securities.
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Loans Receivable. The following table presents the balance and weighted average rate of our loan portfolio as of the dates indicated.
December 31, 2021 September 30, 2021
Amount Rate Amount Rate
(Dollars in thousands)
One- to four-family:
Originated $ 3,941,568 3.15 % $ 3,956,064 3.18 %
Correspondent purchased 1,991,944 2.97 2,003,477 3.02
Bulk purchased 165,339 1.52 173,662 1.65
Construction 47,508 2.76 39,142 2.82
Total 6,146,359 3.05 6,172,345 3.09
Commercial:
Commercial real estate 687,518 3.98 676,908 4.00
Commercial and industrial 76,254 3.85 66,497 3.83
Construction 105,702 4.04 85,963 4.03
Total 869,474 3.98 829,368 3.99
Consumer loans:
Home equity 84,400 4.59 86,274 4.60
Other 7,825 4.13 8,086 4.19
Total 92,225 4.55 94,360 4.57
Total loans receivable 7,108,058 3.18 7,096,073 3.21
Less:
ACL 17,535 19,823
Discounts/unearned loan fees 29,363 29,556
Premiums/deferred costs (34,445) (34,448)
Total loans receivable, net $ 7,095,605 $ 7,081,142
Loan Activity - The following table summarizes activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, discounts/unearned loan fees, and premiums/deferred costs. Loans that were paid off as a result of refinances are included in repayments. Loan endorsements are not included in the activity in the following table because a new loan is not generated at the time of the endorsement. The endorsed balance and rate are included in the ending loan portfolio balance and rate. Commercial loan renewals are not included in the activity in the following table unless new funds are disbursed at the time of renewal. The renewal balance and rate are included in the ending loan portfolio balance and rate.
For the Three Months Ended
December 31, 2021 December 31, 2020
Amount Rate Amount Rate
(Dollars in thousands)
Beginning balance $ 7,096,073 3.21 % $ 7,224,996 3.55 %
Originated and refinanced 258,685 3.05 367,636 2.86
Purchased and participations 167,216 2.80 165,833 3.26
Change in undisbursed loan funds (21,926) (70,323)
Repayments (391,779) (664,052)
Principal recoveries/(charge-offs), net 31 (464)
Other (242) —
Ending balance $ 7,108,058 3.18 $ 7,023,626 3.46
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The following table presents loan origination, refinance, and purchase activity for the periods indicated, excluding endorsement activity, along with associated weighted average rates and percent of total. Commercial loan renewals are not included in the activity in the following table except to the extent new funds are disbursed at the time of renewal. Loan originations, purchases, and refinances are reported together.
For the Three Months Ended
December 31, 2021 December 31, 2020
Amount Rate % of Total Amount Rate % of Total
(Dollars in thousands)
Fixed-rate:
One- to four-family $ 278,612 2.70 % 65.4 % $ 364,165 2.72 % 68.2 %
One- to four-family construction 34,263 2.80 8.1 34,021 2.76 6.4
Commercial:
Real estate 2,843 4.26 0.7 10,127 3.60 1.9
Commercial and industrial 2,670 3.69 0.6 5,444 3.57 1.0
Construction 31,663 3.25 7.4 4,043 3.89 0.8
Home equity 348 5.17 0.1 473 5.44 0.1
Other 700 5.78 0.2 935 5.27 0.2
Total fixed-rate 351,099 2.79 82.5 419,208 2.77 78.6
Adjustable-rate:
One- to four-family 6,520 2.54 1.6 18,984 2.60 3.5
One- to four-family construction 5,265 2.73 1.2 2,709 2.70 0.5
Commercial:
Real estate 27,326 3.89 6.4 16,978 3.88 3.2
Commercial and industrial 20,344 3.66 4.8 1,138 4.05 0.2
Construction 1,062 3.85 0.2 60,337 4.00 11.3
Home equity 14,095 4.42 3.3 13,790 4.40 2.6
Other 190 2.60 — 325 2.70 0.1
Total adjustable-rate 74,802 3.73 17.5 114,261 3.76 21.4
Total originated, refinanced and purchased $ 425,901 2.96 100.0 % $ 533,469 2.99 100.0 %
Purchased and participation loans included above:
Fixed-rate:
Correspondent purchased - one- to four-family $ 129,696 2.65 $ 100,518 2.86
Participations - commercial 31,663 3.25 — —
Total fixed-rate purchased/participations 161,359 2.77 100,518 2.86
Adjustable-rate:
Correspondent purchased - one- to four-family 857 2.18 5,315 2.66
Participations - commercial 5,000 4.00 60,000 4.00
Total adjustable-rate purchased/participations 5,857 3.73 65,315 3.89
Total purchased/participation loans $ 167,216 2.80 $ 165,833 3.26
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One- to Four-Family Loans - The following table presents, for our portfolio of one- to four-family loans, the amount, percent of total, weighted average rate, weighted average credit score, weighted average LTV ratio, and average balance per loan as of December 31, 2021. Credit scores are updated at least annually, with the latest update in September 2021, from a nationally recognized consumer rating agency. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. In most cases, the most recent appraisal was obtained at the time of origination.
% of Credit Average
Amount Total Rate Score LTV Balance
(Dollars in thousands)
Originated $ 3,941,568 64.6 % 3.15 % 771 61 % $ 153
Correspondent purchased 1,991,944 32.7 2.97 766 64 410
Bulk purchased 165,339 2.7 1.52 771 58 290
$ 6,098,851 100.0 % 3.05 769 62 196
T he following ta ble presents originated and correspondent purchased activity in our one- to four-family loan portfolio, excluding endorsement activity, along with associated weighted average rates, weighted average LTVs, and weighted average credit scores for the current year-to-date period.
Credit
Amount Rate LTV Score
(Dollars in thousands)
Originated $ 194,107 2.75 % 70 % 764
Correspondent purchased 130,553 2.65 72 775
$ 324,660 2.71 71 769
The following table summarizes our one- to four-family loan origination and refinance commitments and one- to four-family correspondent loan purchase commitments as of December 31, 2021, along with associated weighted average rates. Loan commitments generally have fixed expiration dates or other termination clauses and may require the payment of a rate lock fee. It is expected that some of the loan commitments will expire unfunded, so the amounts reflected in the table below are not necessarily indicative of our future cash needs.
Amount Rate
(Dollars in thousands)
Originate/refinance $ 84,954 2.85 %
Correspondent 66,225 2.63
$ 151,179 2.75
Commercial Loans - During the current year period, the Bank originated $49.2 million of commercial loans and entered into commercial loan participations totaling $36.7 million. The Bank also processed commercial loan disbursements, excluding lines of credit, of approximately $70.6 million at a weighted average rate of 3.89%.
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The following table presents the Bank's commercial real estate and commercial construction loans and loan commitments by type of primary collateral, as of December 31, 2021. Because the commitments to pay out undisbursed funds are not cancellable by the Bank, unless the loan is in default, we generally anticipate fully funding the related projects.
Unpaid Undisbursed Gross Loan Outstanding % of
Count Principal Amount Amount Commitments Total Total
(Dollars in thousands)
Senior housing 34 $ 237,020 $ 58,909 $ 295,929 $ — $ 295,929 27.6 %
Retail building 140 170,725 44,868 215,593 4,750 220,343 20.5
Hotel 11 136,717 51,755 188,472 6,300 194,772 18.2
Office building 93 49,717 60,134 109,851 1,420 111,271 10.4
Multi-family 37 55,681 10,158 65,839 6,503 72,342 6.7
One- to four-family property 397 61,599 7,693 69,292 1,716 71,008 6.6
Single use building 26 47,639 4,832 52,471 15,750 68,221 6.4
Other 101 34,122 3,765 37,887 230 38,117 3.6
839 $ 793,220 $ 242,114 $ 1,035,334 $ 36,669 $ 1,072,003 100.0 %
Weighted average rate 3.99 % 3.92 % 3.97 % 4.18 % 3.98 %
The following table summarizes the Bank's commercial real estate and commercial construction loans and loan commitments by state as of December 31, 2021.
Unpaid Undisbursed Gross Loan Outstanding % of
Count Principal Amount Amount Commitments Total Total
(Dollars in thousands)
Kansas 639 $ 335,579 $ 50,753 $ 386,332 $ 9,996 $ 396,328 37.0 %
Texas 12 138,982 130,790 269,772 3,350 273,122 25.5
Missouri 163 221,409 18,534 239,943 21,823 261,766 24.4
Colorado 6 17,438 18,114 35,552 — 35,552 3.3
Arkansas 3 15,414 18,262 33,676 — 33,676 3.1
Nebraska 6 33,366 4 33,370 — 33,370 3.1
Other 10 31,032 5,657 36,689 1,500 38,189 3.6
839 $ 793,220 $ 242,114 $ 1,035,334 $ 36,669 $ 1,072,003 100.0 %
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 December 31, 2021.
Count Amount
(Dollars in thousands)
Greater than $30 million 4 $ 178,756
>$15 to $30 million 16 361,649
>$10 to $15 million 7 84,921
>$5 to $10 million 17 107,297
$1 to $5 million 113 255,218
Less than $1 million 1,270 190,396
1,427 $ 1,178,237
As of December 31, 2021 and September 30, 2021, there were commercial loans with an aggregate gross balance, including undisbursed amounts, of $143.5 million and $146.4 million, respectively, with modifications under the Bank's program to support and provide relief to borrowers during the COVID-19 pandemic ("COVID-19 loan modifications") that were still in their deferral period.
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Asset Quality
Delinquent and nonaccrual loans and OREO. The following table presents the Company's 30 to 89 day delinquent loans at the dates indicated. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. Of the loans 30 to 89 days delinquent at December 31, 2021, approximately 73% were 59 days or less delinquent.
Loans Delinquent for 30 to 89 Days at:
December 31, September 30,
2021 2021
Number Amount Number Amount
(Dollars in thousands)
One- to four-family:
Originated 74 $ 7,009 48 $ 4,156
Correspondent purchased 11 5,133 7 2,590
Bulk purchased 1 154 4 541
Commercial 2 222 2 37
Consumer 16 164 25 498
104 $ 12,682 86 $ 7,822
Loans 30 to 89 days delinquent
to total loans receivable, net 0.18 % 0.11 %
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The following table presents the Company's nonaccrual loans and OREO at the dates indicated. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. Nonaccrual loans are loans that are 90 or more days delinquent or in foreclosure and other loans required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements and/or internal policies, even if the loans are current. At all dates presented, there were no loans 90 or more days delinquent that were still accruing interest. Non-performing assets include nonaccrual loans and OREO. Of the one- to four-family COVID-19 loan modifications that had completed the deferral period by December 31, 2021, $5.7 million were 30 to 89 days delinquent and $2.3 million were 90 or more days delinquent as of December 31, 2021. In late March 2020, the Bank suspended the initiation of foreclosure proceedings for owner-occupied one- to four-family loans. At December 31, 2021, there were $5.5 million of nonaccrual one- to four-family loans for which foreclosure proceedings either had been initiated prior to the foreclosure suspension or would have been initiated if the foreclosure suspension were not in place. The foreclosure suspension was lifted in January 2022 resulting in foreclosure proceedings continuing or starting on a portion of the $5.5 million of such loans.
Nonaccrual Loans and OREO at:
December 31, September 30,
2021 2021
Number Amount Number Amount
(Dollars in thousands)
Loans 90 or More Days Delinquent or in Foreclosure:
One- to four-family:
Originated 48 $ 3,943 50 $ 3,693
Correspondent purchased 10 3,115 10 3,210
Bulk purchased 6 1,945 9 2,974
Commercial 6 1,170 6 1,214
Consumer 25 477 21 498
95 10,650 96 11,589
Loans 90 or more days delinquent or in foreclosure
as a percentage of total loans 0.15 % 0.16 %
Nonaccrual loans less than 90 Days Delinquent: (1)
One- to four-family:
Originated 5 $ 451 7 $ 1,288
Correspondent purchased — — — —
Bulk purchased — — 1 131
Commercial 3 62 4 419
Consumer — — 1 9
8 513 13 1,847
Total nonaccrual loans 103 11,163 109 13,436
Nonaccrual loans as a percentage of total loans 0.16 % 0.19 %
OREO:
One- to four-family:
Originated (2)
2 $ 319 3 $ 170
Total non-performing assets 105 $ 11,482 112 $ 13,606
Non-performing assets as a percentage of total assets 0.12 % 0.14 %
(1) Includes loans required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements and/or internal policies, even if the loans are current.
(2) Real estate-related consumer loans where we also hold the first mortgage are included in the one- to four-family category as the underlying collateral is one- to four-family property.
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The following table presents the states where the properties securing five percent or more of the total amount of our one- to four-family loans are located and the corresponding balance of loans 30 to 89 days delinquent, 90 or more days delinquent or in foreclosure, and weighted average LTV ratios for loans 90 or more days delinquent or in foreclosure at December 31, 2021. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. At December 31, 2021, potential losses, after taking into consideration anticipated private mortgage insurance proceeds and estimated selling costs, have been charged-off.
Loans 30 to 89 Loans 90 or More Days Delinquent
One- to Four-Family Days Delinquent or in Foreclosure
State Amount % of Total Amount % of Total Amount % of Total LTV
(Dollars in thousands)
Kansas $ 3,504,868 57.5 % $ 5,864 47.7 % $ 3,805 42.3 % 60 %
Missouri 1,027,282 16.8 2,644 21.5 689 7.7 42
Texas 594,542 9.8 1,489 12.1 2,150 23.8 48
Other states 972,159 15.9 2,299 18.7 2,359 26.2 56
$ 6,098,851 100.0 % $ 12,296 100.0 % $ 9,003 100.0 % 55
Classified loans. The following table presents loans classified as special mention or substandard at the dates presented. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. The decrease in commercial special mention loans at December 31, 2021 compared to September 30, 2021 was due mainly to two commercial loans moving to the pass classification during the current quarter as the underlying economic considerations being monitored by management improved to levels deemed appropriate by the Company.
December 31, 2021 September 30, 2021
Special Mention Substandard Special Mention Substandard
(Dollars in thousands)
One- to four-family $ 12,971 $ 21,835 $ 14,332 $ 23,458
Commercial 47,093 3,362 99,729 3,259
Consumer 321 676 135 718
$ 60,385 $ 25,873 $ 114,196 $ 27,435
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Allowance for Credit Losses. The distribution of our ACL and the ratio of ACL to loans receivable, by loan type, at the dates indicated is summarized below. See "Note 4. Loans Receivable and Allowance for Credit Losses" for additional information related to the calculation of ACL as of December 31, 2021.
Distribution of ACL Ratio of ACL to
Loans Receivable
December 31, September 30, December 31, September 30,
2021 2021 2021 2021
(Dollars in thousands)
One- to four-family:
Originated $ 1,611 $ 1,590 0.04 % 0.04 %
Correspondent purchased 2,082 2,062 0.10 0.10
Bulk purchased 268 304 0.16 0.18
Construction 28 22 0.06 0.06
Total 3,989 3,978 0.06 0.06
Commercial:
Real estate 11,257 13,706 1.64 2.02
Commercial and industrial 376 344 0.49 0.52
Construction 1,720 1,602 1.63 1.86
Total 13,353 15,652 1.54 1.89
Consumer 193 193 0.21 0.20
Total $ 17,535 $ 19,823 0.25 0.28
The following table presents ACL activity and related ratios at the dates and for the periods indicated. The ratio of net charge-offs (recoveries) ("NCOs") during the current year period to average non-performing assets was a negative percentage compared to a positive percentage in the prior year period due to a net recovery in the current year period and a net charge-off in the prior year period. The ACL to nonaccrual loans at end of period ratio and ACL to loans receivable, net at end of period ratio were lower in the current year period compared to the prior year period due primarily to a lower ACL balance at December 31, 2021. See "Note 4. Loans Receivable and Allowance for Credit Losses" for additional information related to ACL activity by specific loan categories.
At or For the Three Months Ended
December 31, 2021 December 31, 2020
(Dollars in thousands)
Balance at beginning of period $ 19,823 $ 31,527
Adoption of CECL — (4,761)
Charge-offs (15) (532)
Recoveries 46 68
Net (charge-offs) recoveries 31 (464)
Provision for credit losses (2,319) (177)
Balance at end of period $ 17,535 $ 26,125
Ratio of NCOs during the period
to average non-performing assets (0.25) % 3.44 %
ACL to nonaccrual loans at end of period 157.08 184.68
ACL to loans receivable, net at end of period 0.25 0.37
ACL to NCOs (annualized) N/M (1)
14.1x
(1) This ratio is not presented due to loan recoveries exceeding loan charge-offs during the period.
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The following table presents NCOs, average loans, and NCOs as a percentage of average loans, by loan type, for the periods indicated.
For the Three Months Ended
December 31, 2021 December 31, 2020
NCOs Average Loans NCOs as a % of Average Loans NCOs Average Loans NCOs as a % of Average Loans
(Dollars in thousands)
One- to four-family:
Originated $ (5) $ 3,929,658 0.00 % $ (20) $ 3,918,273 0.00 %
Correspondent — 2,035,631 0.00 — 2,064,912 0.00
Bulk purchased — 170,537 0.00 — 205,803 0.00
Construction — 41,391 0.00 — 31,216 0.00
Total (5) 6,177,217 0.00 (20) 6,220,204 0.00
Commercial:
Real estate (36) 683,277 (0.01) 503 583,853 0.09
Commercial and industrial 10 64,476 0.02 — 85,643 0.00
Construction — 93,464 0.00 — 100,600 0.00
Total (26) 841,217 0.00 503 770,096 0.07
Consumer:
Home equity — 84,886 0.00 (19) 100,432 (0.02)
Other — 7,908 0.00 — 9,616 0.00
Total — 92,794 0.00 (19) 110,048 (0.02)
$ (31) $ 7,111,228 0.00 $ 464 $ 7,100,348 0.01
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Securities. The following table presents the distribution of our securities portfolio, at amortized cost, at the dates indicated. Overall, fixed-rate securities comprised 94% of our securities portfolio at December 31, 2021. Weighted average yields on tax-exempt securities are not calculated on a fully tax-equivalent basis.
December 31, 2021 September 30, 2021
Amount Yield WAL (1)
Amount Yield WAL (1)
(Dollars in thousands)
Fixed-rate securities:
MBS $ 1,266,516 1.29 % 3.4 $ 1,363,645 1.30 % 3.5
GSE debentures 519,972 0.61 3.6 519,971 0.61 3.7
Municipal bonds 3,344 1.86 0.1 4,274 1.81 0.3
Total fixed-rate securities 1,789,832 1.10 3.5 1,887,890 1.11 3.6
Adjustable-rate securities:
MBS 109,195 2.07 4.6 120,566 1.99 3.2
Total securities portfolio $ 1,899,027 1.15 3.5 $ 2,008,456 1.16 3.5
(1) The weighted average life ("WAL") is the estimated remaining maturity (in years) after three-month historical prepayment speeds and projected call option assumptions have been applied.
The following table summarizes the activity in our securities portfolio for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning and ending balances are as of the first and last days of the periods presented and are generally derived from recent prepayment activity on the securities in the portfolio. The beginning and ending WALs are the estimated remaining principal repayment terms (in years) after three-month historical prepayment speeds have been applied.
For the Three Months Ended
December 31, 2021 December 31, 2020
Amount Yield WAL Amount Yield WAL
(Dollars in thousands)
Beginning balance - carrying value $ 2,014,608 1.16 % 3.5 $ 1,560,950 1.63 % 3.1
Maturities and repayments (107,665) (152,396)
Net amortization of (premiums)/discounts (1,764) (1,017)
Purchases — — — 504,780 0.90 4.9
Change in valuation on AFS securities (14,526) 1,549
Ending balance - carrying value $ 1,890,653 1.16 3.5 $ 1,913,866 1.40 3.3
40
Liabilities. Total liabilities were $8.39 billion at both December 31, 2021 and September 30, 2021. During the current quarter, deposits increased $50.6 million, largely offset by a seasonal decrease in advance payments by borrowers for taxes and insurance.
Deposits. The following table presents the amount, weighted average rate and percent of total for the components of our deposit portfolio at the dates presented. The decrease in the deposit portfolio rate from September 30, 2021 to December 31, 2021 was due primarily to retail certificates of deposit repricing to lower offered rates as balances renewed, along with growth in lower costing non-maturity deposits and a decrease in the balance of retail certificates of deposit.
December 31, 2021 September 30, 2021
% of % of
Amount Rate Total Amount Rate Total
(Dollars in thousands)
Non-interest-bearing checking $ 599,969 — % 9.0 % $ 543,849 — % 8.2 %
Interest-bearing checking 1,092,342 0.07 16.4 1,037,362 0.07 15.7
Savings 526,714 0.05 7.9 519,069 0.05 7.9
Money market 1,840,049 0.19 27.7 1,753,525 0.19 26.6
Retail certificates of deposit 2,254,560 1.31 33.9 2,341,531 1.41 35.5
Commercial certificates of deposit 137,419 0.64 2.1 190,215 0.66 2.9
Public unit certificates of deposit 196,951 0.17 3.0 211,845 0.21 3.2
$ 6,648,004 0.53 100.0 % $ 6,597,396 0.59 100.0 %
Borrowings. The Bank primarily uses long-term fixed-rate borrowings with no embedded options to lengthen the average life of the Bank's liabilities. The fixed-rate characteristics of these borrowings lock-in the cost until maturity and thus decrease the amount of liabilities repricing as interest rates move higher compared to funding with lower-cost short-term borrowings. These borrowings are laddered in order to prevent large amounts of liabilities repricing in any one period.
The following table presents the maturity of term borrowings, which consist entirely of FHLB advances, along with associated weighted average contractual and effective rates as of December 31, 2021.
Term Borrowings Amount
Maturity by FHLB Interest rate Total Contractual Effective
Fiscal Year Advances swaps (1)
Amount Rate Rate (2)
(Dollars in thousands)
2022 $ 75,000 $ — $ 75,000 0.29 % 0.29 %
2023 300,000 — 300,000 1.70 1.81
2024 150,000 165,000 315,000 1.32 2.46
2025 300,000 100,000 400,000 1.33 2.09
2026 250,000 — 250,000 0.96 1.27
2027 150,000 — 150,000 0.93 1.24
2028 — 100,000 100,000 0.56 3.44
$ 1,225,000 $ 365,000 $ 1,590,000 1.20 1.90
(1) Represents adjustable-rate FHLB advances for which the Bank has entered into interest rate swaps with a notional amount of $365.0 million to hedge the variability in cash flows associated with the advances. These advances are presented based on their contractual maturity dates and will be renewed periodically until the maturity or termination of the interest rate swaps. The expected WAL of the interest rate swaps was 3.8 years at December 31, 2021.
(2) The effective rate includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid.
41
The following table presents borrowing activity for the periods shown. The borrowings presented in the table have original contractual terms of one year or longer or are tied to interest rate swaps with original contractual terms of one year or longer. The effective rate is shown as a weighted average and includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. The weighted average maturity ("WAM") is the remaining weighted average contractual term in years. The beginning and ending WAMs represent the remaining maturity at each date presented. For new borrowings, the WAMs presented are as of the date of issue.
For the Three Months Ended
December 31, 2021 December 31, 2020
Effective Effective
Amount Rate WAM Amount Rate WAM
(Dollars in thousands)
Beginning balance $ 1,590,000 1.88 % 3.3 $ 1,790,000 2.31 % 3.0
Maturities and prepayments: (100,000) 3.14 — (350,000) 2.40 —
New FHLB borrowings: 100,000 3.44 6.5 300,000 2.12 2.7
Ending balance $ 1,590,000 1.90 3.1 $ 1,740,000 2.26 3.0
Maturities of Interest-Bearing Liabilities. The following table presents the maturity and weighted average repricing rate, which is also the weighted average effective rate, of certificates of deposit, split between retail/commercial and public unit amounts, and term borrowings for the next four quarters as of December 31, 2021.
March 31, June 30, September 30, December 31,
2022 2022 2022 2022 Total
(Dollars in thousands)
Retail/Commercial Certificates:
Amount $ 335,106 $ 372,663 $ 425,009 $ 314,564 $ 1,447,342
Repricing Rate 1.12 % 1.01 % 1.39 % 1.24 % 1.20 %
Public Unit Certificates:
Amount $ 83,428 $ 66,181 $ 29,003 $ 5,000 $ 183,612
Repricing Rate 0.25 % 0.11 % 0.09 % 0.10 % 0.17 %
Term Borrowings: (1)
Amount $ — $ — $ 75,000 $ — $ 75,000
Repricing Rate — % — % 0.29 % — % 0.29 %
Total
Amount $ 418,534 $ 438,844 $ 529,012 $ 319,564 $ 1,705,954
Repricing Rate 0.94 % 0.88 % 1.17 % 1.22 % 1.05 %
(1) The maturity date for FHLB advances tied to interest rate swaps is based on the maturity date of the related interest rate swap.
The following table sets forth the WAM information for our certificates of deposit, in years, as of December 31, 2021.
Retail certificates of deposit 1.2
Commercial certificates of deposit 0.5
Public unit certificates of deposit 0.4
Total certificates of deposit 1.1
42
Stockholders' Equity. During the current quarter, the Company paid cash dividends totaling $41.4 million. These cash dividends totaled $0.305 per share and consisted of a $0.22 per share cash true-up dividend related to fiscal year 2021 earnings and a regular quarterly cash dividend of $0.085 per share. On January 25, 2022, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.5 million, payable on February 18, 2022 to stockholders of record as of the close of business on February 4, 2022. In the long run, management considers the Bank's equity to total assets ratio of at least 9% an appropriate level of capital. At December 31, 2021, this ratio was 11.5%.
At December 31, 2021, Capitol Federal Financial, Inc., at the holding company level, had $70.8 million in cash on deposit at the Bank. For fiscal year 2022, it is the intention of the Board of Directors to continue the payout of 100% of the Company's earnings to the Company's stockholders. Dividend payments depend upon a number of factors, including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company level.
There remains $44.7 million authorized under the existing stock repurchase plan for additional purchases of the Company's common stock. Shares may be repurchased from time to time based upon market conditions, available liquidity and other factors. This plan has no expiration date; however, the FRB's existing approval for the Company to repurchase shares extends through August 2022.
The Company works to find multiple ways to provide stockholder value. This has primarily been through the payment of cash dividends and stock buybacks. The Company has maintained a policy of paying out 100% of its earnings to stockholders in the form of quarterly cash dividends and an annual cash true-up dividend in December of each year. In order to provide additional stockholder value, the Company paid a True Blue Capitol cash dividend of $0.25 per share in June for six consecutive years ending in 2019. Given the state of economic uncertainty, the Company elected to defer the True Blue dividend originally planned for June 2020. In June 2021, the Company paid a True Blue Capitol cash dividend of $0.40 per share. This cash dividend represented a $0.20 per share cash dividend from fiscal year 2020 and a $0.20 per share cash dividend from fiscal year 2021. The Company has paid the True Blue Capitol dividend primarily due to excess capital levels at the Company and Bank. The Company considers various business strategies and their impact on capital and asset measures on both a current and future basis, as well as regulatory capital levels and requirements, in determining the amount, if any, and timing of the True Blue dividend.
The following table presents regular quarterly cash dividends and special cash dividends paid in calendar years 2022, 2021, and 2020. The amounts represent cash dividends paid during each period. For the quarter ending March 31, 2022, the amount presented represents the dividend payable on February 18, 2022 to stockholders of record as of the close of business on February 4, 2022.
Calendar Year
2022 2021 2020
Amount Per Share Amount Per Share Amount Per Share
(Dollars in thousands, except per share amounts)
Regular quarterly dividends paid
Quarter ended March 31 $ 11,535 $ 0.085 $ 11,518 $ 0.085 $ 11,733 $ 0.085
Quarter ended June 30 — — 11,516 0.085 11,733 0.085
Quarter ended September 30 — — 11,518 0.085 11,733 0.085
Quarter ended December 31 — — 11,535 0.085 11,514 0.085
True-up dividends paid — — 29,850 0.220 17,614 0.130
True Blue dividends paid — — 54,210 0.400 — —
Calendar year-to-date dividends paid $ 11,535 $ 0.085 $ 130,147 $ 0.960 $ 64,327 $ 0.470
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Operating Results
The following table presents selected income statement and other information for the quarters indicated.
For the Three Months Ended
December 31, September 30, June 30, March 31, December 31,
2021 2021 2021 2021 2020
(Dollars in thousands, except per share data)
Interest and dividend income:
Loans receivable $ 55,788 $ 57,139 $ 54,779 $ 57,285 $ 60,694
MBS 4,625 4,900 5,360 5,429 5,710
FHLB stock 1,231 952 944 951 1,069
Investment securities 808 750 763 629 683
Cash and cash equivalents 14 27 26 40 51
Total interest and dividend income 62,466 63,768 61,872 64,334 68,207
Interest expense:
Deposits 9,267 10,335 11,475 12,529 14,067
Borrowings 7,585 7,889 7,826 8,732 10,327
Total interest expense 16,852 18,224 19,301 21,261 24,394
Net interest income 45,614 45,544 42,571 43,073 43,813
Provision for credit losses (3,439) (1,323) (2,691) (2,964) (1,532)
Net interest income
(after provision for credit losses) 49,053 46,867 45,262 46,037 45,345
Non-interest income 5,506 5,303 5,236 12,477 5,070
Non-interest expense 26,694 28,247 27,602 32,653 27,067
Income tax expense 5,679 5,370 4,709 5,417 4,450
Net income $ 22,186 $ 18,553 $ 18,187 $ 20,444 $ 18,898
Efficiency ratio 52.22 % 55.55 % 57.73 % 58.78 % 55.37 %
Basic EPS $ 0.16 $ 0.14 $ 0.13 $ 0.15 $ 0.14
Diluted EPS 0.16 0.14 0.13 0.15 0.14
Average Balance Sheet
Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.
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For the Three Months Ended
December 31, 2021 September 30, 2021 December 31, 2020
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Amount Paid Rate Amount Paid Rate Amount Paid Rate
(Dollars in thousands)
Assets:
Interest-earning assets:
One- to four-family loans:
Originated $ 3,971,049 $ 32,422 3.27 % $ 3,974,876 $ 32,979 3.32 % $ 3,949,489 $ 35,961 3.64 %
Correspondent purchased 2,035,631 12,746 2.50 2,024,372 12,942 2.56 2,064,912 12,932 2.50
Bulk purchased 170,537 610 1.43 177,233 730 1.65 205,803 1,112 2.16
Total one- to four-family loans 6,177,217 45,778 2.96 6,176,481 46,651 3.02 6,220,204 50,005 3.22
Commercial loans 841,217 8,943 4.16 811,731 9,378 4.52 770,096 9,404 4.78
Consumer loans 92,794 1,067 4.56 95,449 1,110 4.61 110,048 1,285 4.65
Total loans receivable (1)
7,111,228 55,788 3.13 7,083,661 57,139 3.21 7,100,348 60,694 3.41
MBS (2)
1,435,562 4,625 1.29 1,510,421 4,900 1.30 1,302,074 5,710 1.75
Investment securities (2)(3)
523,931 808 0.62 500,104 750 0.60 431,493 683 0.63
FHLB stock 73,481 1,231 6.64 72,699 952 5.19 85,187 1,069 4.99
Cash and cash equivalents 37,221 14 0.15 69,501 27 0.15 201,468 51 0.10
Total interest-earning assets 9,181,423 62,466 2.71 9,236,386 63,768 2.75 9,120,570 68,207 2.98
Other non-interest-earning assets 412,115 445,371 453,422
Total assets $ 9,593,538 $ 9,681,757 $ 9,573,992
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Checking $ 1,052,413 179 0.07 $ 1,023,926 183 0.07 $ 900,674 223 0.10
Savings 520,770 70 0.05 514,253 71 0.05 442,906 68 0.06
Money market 1,767,134 825 0.19 1,729,080 907 0.21 1,474,720 1,184 0.32
Retail certificates 2,298,678 7,835 1.35 2,374,089 8,651 1.45 2,591,007 11,794 1.81
Commercial certificates 169,200 272 0.64 204,262 352 0.68 154,829 384 0.99
Wholesale certificates 199,692 86 0.17 246,739 171 0.27 251,634 414 0.66
Total deposits 6,007,887 9,267 0.61 6,092,349 10,335 0.67 5,815,770 14,067 0.96
Borrowings (4)
1,589,258 7,585 1.88 1,582,554 7,889 1.97 1,775,380 10,327 2.30
Total interest-bearing liabilities 7,597,145 16,852 0.88 7,674,903 18,224 0.94 7,591,150 24,394 1.28
Non-interest-bearing deposits 550,492 539,575 460,190
Other non-interest-bearing liabilities 209,890 220,294 240,476
Stockholders' equity 1,236,011 1,246,985 1,282,176
Total liabilities and stockholders' equity $ 9,593,538 $ 9,681,757 $ 9,573,992
Net interest income (5)
$ 45,614 $ 45,544 $ 43,813
Net interest-earning assets $ 1,584,278 $ 1,561,483 $ 1,529,420
Net interest margin (6)
1.99 1.97 1.92
Ratio of interest-earning assets to interest-bearing liabilities 1.21x 1.20x 1.20x
Selected performance ratios:
Return on average assets (annualized) 0.93 % 0.77 % 0.79 %
Return on average equity (annualized) 7.18 5.95 5.90
Average equity to average assets 12.88 12.88 13.39
Operating expense ratio (7)
1.11 1.17 1.13
Efficiency ratio (8)
52.22 55.55 55.37
45
(1) Balances are adjusted for unearned loan fees and deferred costs. Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent.
(2) AFS securities are adjusted for unamortized purchase premiums or discounts.
(3) The average balance of investment securities includes an average balance of nontaxable securities of $4.0 million, $4.9 million, and $9.1 million for the three months ended December 31, 2021, September 30, 2021, and December 31, 2020, respectively.
(4) The FHLB advance amounts and rates included in this line item include the effect of interest rate swaps and are net of deferred prepayment penalties.
(5) Net interest income represents the difference between interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income depends on the average balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them.
(6) Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.
(7) The operating expense ratio represents annualized non-interest expense as a percentage of average assets.
(8) The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income.
Rate/Volume Analysis
The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous period's average rate, and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.
For the Three Months Ended
December 31, 2021 vs. September 30, 2021 December 31, 2021 vs. December 31, 2020
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Total Volume Rate Total
(Dollars in thousands)
Interest-earning assets:
Loans receivable $ 311 $ (1,662) $ (1,351) $ 317 $ (5,223) $ (4,906)
MBS (241) (34) (275) 542 (1,627) (1,085)
Investment securities 36 22 58 143 (18) 125
FHLB stock 11 268 279 (161) 323 162
Cash and cash equivalents (13) — (13) (55) 18 (37)
Total interest-earning assets 104 (1,406) (1,302) 786 (6,527) (5,741)
Interest-bearing liabilities:
Checking 5 (9) (4) 33 (77) (44)
Savings 1 (2) (1) 11 (9) 2
Money market 19 (102) (83) 203 (562) (359)
Certificates of deposit (497) (483) (980) (1,277) (3,122) (4,399)
Borrowings 4 (308) (304) (994) (1,748) (2,742)
Total interest-bearing liabilities (468) (904) (1,372) (2,024) (5,518) (7,542)
Net change in net interest income $ 572 $ (502) $ 70 $ 2,810 $ (1,009) $ 1,801
46
Comparison of Operating Results for the Three Months Ended December 31, 2021 and September 30, 2021
For the quarter ended December 31, 2021, the Company recognized net income of $22.2 million, or $0.16 per share, compared to net income of $18.6 million, or $0.14 per share, for the quarter ended September 30, 2021. The increase in net income was due primarily to a higher negative provision for credit losses compared to the prior quarter and lower non-interest expense. The net interest margin increased two basis points, from 1.97% for the prior quarter to 1.99% for the current quarter, due mainly to a decrease in the cost of retail certificates of deposit.
Interest and Dividend Income
The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent.
For the Three Months Ended
December 31, September 30, Change Expressed in:
2021 2021 Dollars Percent
(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable $ 55,788 $ 57,139 $ (1,351) (2.4) %
MBS 4,625 4,900 (275) (5.6)
FHLB stock 1,231 952 279 29.3
Investment securities 808 750 58 7.7
Cash and cash equivalents 14 27 (13) (48.1)
Total interest and dividend income $ 62,466 $ 63,768 $ (1,302) (2.0)
The decrease in interest income on loans receivable was primarily in the one-to four-family portfolio due to a reduction in the weighted average rate of the portfolio due to originations, purchases, refinances and endorsements to lower market rates and payoffs of higher rate loans, along with a reduction in commercial loan deferred fee amortization related to the PPP. The decrease in interest income on MBS was due primarily to a decrease in the average balance of the portfolio. The increase in dividend income on FHLB stock was due mainly to a special year-end dividend of 1.00% paid by FHLB during the current quarter.
Interest Expense
The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.
For the Three Months Ended
December 31, September 30, Change Expressed in:
2021 2021 Dollars Percent
(Dollars in thousands)
INTEREST EXPENSE:
Deposits $ 9,267 $ 10,335 $ (1,068) (10.3) %
Borrowings 7,585 7,889 (304) (3.9)
Total interest expense $ 16,852 $ 18,224 $ (1,372) (7.5)
The decrease in interest expense on deposits was due primarily to a decrease in the weighted average rate and the average balance of the retail certificate of deposit portfolio. See "Financial Condition" above for additional information on deposits. The decrease in interest expense on borrowings was due to the full impact during the current quarter of certain FHLB advances being replaced at lower rates during the prior quarter.
Provision for Credit Losses
For the quarter ended December 31, 2021, the Bank recorded a negative provision for credit losses of $3.4 million, compared to a negative provision for credit losses of $1.3 million for the prior quarter. The negative provision in the current quarter was comprised of a $2.3 million decrease in the ACL for loans due primarily to a reduction in the balance of special mention commercial loans and a $1.1 million decrease in reserves for off-balance sheet credit exposures due mainly to continued improving economic conditions.
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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 Three Months Ended
December 31, September 30, Change Expressed in:
2021 2021 Dollars Percent
(Dollars in thousands)
NON-INTEREST INCOME:
Deposit service fees $ 3,430 $ 3,294 $ 136 4.1 %
Insurance commissions 711 781 (70) (9.0)
Other non-interest income 1,365 1,228 137 11.2
Total non-interest income $ 5,506 $ 5,303 $ 203 3.8
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 Three Months Ended
December 31, September 30, Change Expressed in:
2021 2021 Dollars Percent
(Dollars in thousands)
NON-INTEREST EXPENSE:
Salaries and employee benefits $ 13,728 $ 14,600 $ (872) (6.0) %
Information technology and related expense 4,432 4,354 78 1.8
Occupancy, net 3,379 3,639 (260) (7.1)
Regulatory and outside services 1,368 1,476 (108) (7.3)
Advertising and promotional 1,064 1,404 (340) (24.2)
Deposit and loan transaction costs 697 638 59 9.2
Federal insurance premium 639 657 (18) (2.7)
Office supplies and related expense 468 426 42 9.9
Other non-interest expense 919 1,053 (134) (12.7)
Total non-interest expense $ 26,694 $ 28,247 $ (1,553) (5.5)
The decrease in salaries and employee benefits was primarily related to incentive compensation, as fiscal year 2021 incentives were finalized during the prior quarter. The decrease in occupancy, net was due mainly to decreases in utilities, which was mainly weather related, and building maintenance expenses due to the timing of certain repairs and maintenance. The decrease in advertising and promotional expense was due primarily to the timing of campaigns.
The Company's efficiency ratio was 52.22% for the current quarter compared to 55.55% for the prior quarter. The improvement in the efficiency ratio was due primarily to lower non-interest expense. 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 lower level of expense, relative to the net interest margin and non-interest income.
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Income Tax Expense
The following table presents pretax income, income tax expense, and net income for the time periods presented, along with the change measured in dollars and percent.
For the Three Months Ended
December 31, September 30, Change Expressed in:
2021 2021 Dollars Percent
(Dollars in thousands)
Income before income tax expense $ 27,865 $ 23,923 $ 3,942 16.5 %
Income tax expense 5,679 5,370 309 5.8
Net income $ 22,186 $ 18,553 $ 3,633 19.6
Effective Tax Rate 20.4 % 22.4 %
The increase in income tax expense was due primarily to higher pretax income, partially offset by a lower effective tax rate in the current quarter. The effective tax rate was higher in the prior quarter due mainly to year-end adjustments of permanent tax differences, specifically the Company's low income housing partnership amounts. Management anticipates the effective income tax rate for fiscal year 2022 will be approximately 21%.
Comparison of Operating Results for the Three Months Ended December 31, 2021 and 2020
The Company recognized net income of $22.2 million, or $0.16 per share, for the current quarter compared to net income of $18.9 million, or $0.14 per share, for the prior year quarter. The increase in net income was due primarily to a higher negative provision for credit losses in the current quarter and an increase in net interest income. The net interest margin increased seven basis points, from 1.92% for the prior year quarter to 1.99% for the current quarter. The increase in net interest income and net interest margin was due mainly to a reduction in the average cost and balance of certificates of deposit and borrowings, which together outpaced the decrease in asset yields.
Interest and Dividend Income
The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent.
For the Three Months Ended
December 31, Change Expressed in:
2021 2020 Dollars Percent
(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable $ 55,788 $ 60,694 $ (4,906) (8.1) %
MBS 4,625 5,710 (1,085) (19.0)
FHLB stock 1,231 1,069 162 15.2
Investment securities 808 683 125 18.3
Cash and cash equivalents 14 51 (37) (72.5)
Total interest and dividend income $ 62,466 $ 68,207 $ (5,741) (8.4)
The decrease in interest income on loans receivable was due mainly to a decrease in the weighted average rate, primarily in the one- to four-family originated loan portfolio. The premium amortization related to the one- to four-family correspondent loan portfolio decreased significantly compared to the prior year quarter due to the slow-down in prepayments and endorsements; however, the decrease in the weighted average loan portfolio rate more than offset the reduction in premium amortization. The decrease in the weighted average rate for the one- to four-family originated and correspondent loan portfolios was due to endorsements and refinances to lower market rates and the origination and purchase of new loans at lower market rates.
The decrease in interest income on the MBS portfolio was due to a decrease in the weighted average yield as a result of higher premium amortization related to prepayment activity, along with purchases at lower market yields, partially offset by an increase in the average balance of the portfolio.
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Interest Expense
The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.
For the Three Months Ended
December 31, Change Expressed in:
2021 2020 Dollars Percent
(Dollars in thousands)
INTEREST EXPENSE:
Deposits $ 9,267 $ 14,067 $ (4,800) (34.1) %
Borrowings 7,585 10,327 (2,742) (26.6)
Total interest expense $ 16,852 $ 24,394 $ (7,542) (30.9)
The decrease in interest expense on deposits was due mainly to a decrease in the weighted average rate paid on retail certificates of deposit, money market accounts, and wholesale certificates of deposit. Retail certificates of deposit continue to reprice downward as they renew or are replaced at lower offered rates, and rates on money market accounts were also lowered between periods.
The decrease in interest expense on borrowings was due primarily to lowering the cost of FHLB advances by terminating or not renewing certain interest rate swap agreements, not replacing certain maturing FHLB advances, and prepaying certain advances during fiscal year 2021. Cash flows from the deposit portfolio were used to pay down certain FHLB advances.
Provision for Credit Losses
The Bank recorded a negative provision for credit losses during the current quarter of $3.4 million, compared to a negative provision for credit losses of $1.5 million during the prior year quarter. See additional information regarding the current quarter negative provision for credit losses in the "Comparison of Operating Results for the Three Months Ended December 31, 2021 and September 30, 2021" section above.
Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.
For the Three Months Ended
December 31, Change Expressed in:
2021 2020 Dollars Percent
(Dollars in thousands)
NON-INTEREST INCOME:
Deposit service fees $ 3,430 $ 2,947 $ 483 16.4 %
Insurance commissions 711 638 73 11.4
Other non-interest income 1,365 1,485 (120) (8.1)
Total non-interest income $ 5,506 $ 5,070 $ 436 8.6
The increase in deposit service fees was due primarily to an increase in debit card income as a result of higher transaction volume, along with an increase in the amount per transaction. The decrease in other non-interest income was primarily related to lower income from BOLI, due to receiving death benefits during the prior year quarter, compared to none during the current quarter
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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 Three Months Ended
December 31, Change Expressed in:
2021 2020 Dollars Percent
(Dollars in thousands)
NON-INTEREST EXPENSE:
Salaries and employee benefits $ 13,728 $ 14,138 $ (410) (2.9) %
Information technology and related expense 4,432 4,233 199 4.7
Occupancy, net 3,379 3,379 — —
Regulatory and outside services 1,368 1,585 (217) (13.7)
Advertising and promotional 1,064 838 226 27.0
Deposit and loan transaction costs 697 766 (69) (9.0)
Federal insurance premium 639 621 18 2.9
Office supplies and related expense 468 424 44 10.4
Other non-interest expense 919 1,083 (164) (15.1)
Total non-interest expense $ 26,694 $ 27,067 $ (373) (1.4)
The decrease in salaries and employee benefits was due primarily to a decrease in loan commissions related to lower loan origination activity in the current quarter. The increase in advertising and promotional expense was due mainly to adjustments to advertising schedules during the prior year related to the COVID-19 pandemic.
The Company's efficiency ratio was 52.22% for the current year period compared to 55.37% for the prior year period. The improvement in the efficiency ratio was due primarily to higher net interest income, as well as lower non-interest expense and higher non-interest income.
Income Tax Expense
The following table presents pretax income, income tax expense, and net income for the time periods presented, along with the change measured in dollars and percent.
For the Three Months Ended
December 31, Change Expressed in:
2021 2020 Dollars Percent
(Dollars in thousands)
Income before income tax expense $ 27,865 $ 23,348 $ 4,517 19.3 %
Income tax expense 5,679 4,450 1,229 27.6
Net income $ 22,186 $ 18,898 $ 3,288 17.4
Effective Tax Rate 20.4 % 19.1 %
The increase in income tax expense was due primarily to higher pretax income in the current year, as well as a higher effective tax rate compared to the prior year. The higher effective tax rate in the current quarter compared to the prior year quarter was due primarily to a lower amount of favorable provision-to-return adjustments compared to the prior year quarter.
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Liquidity and Capital Resources
Liquidity refers to our ability to generate sufficient cash to fund ongoing operations, to repay maturing certificates of deposit and other deposit withdrawals, to repay maturing borrowings, and to fund loan commitments. Liquidity management is both a daily and long-term function of our business management. The Company's most available liquid assets are represented by cash and cash equivalents, AFS securities, and short-term investment securities. The Bank's primary sources of funds are deposits, FHLB borrowings, repayments and maturities of outstanding loans and MBS and other short-term investments, and funds provided by operations. The Bank's long-term borrowings primarily have been used to manage the Bank's interest rate risk with the intention to improve the earnings of the Bank while maintaining capital ratios in excess of regulatory standards for well-capitalized financial institutions. In addition, the Bank's focus on managing risk has provided additional liquidity capacity by maintaining a balance of MBS and investment securities available as collateral for borrowings.
We generally intend to manage cash reserves sufficient to meet short-term liquidity needs, which are routinely forecasted for 10, 30, and 365 days. Additionally, on a monthly basis, we perform a liquidity stress test in accordance with the Interagency Policy Statement on Funding and Liquidity Risk Management. The liquidity stress test incorporates both short-term and long-term liquidity scenarios in order to identify and to quantify liquidity risk. Management also monitors key liquidity statistics related to items such as wholesale funding gaps, borrowings capacity, and available unpledged collateral, as well as various liquidity ratios.
In the event short-term liquidity needs exceed available cash, the Bank has access to a line of credit at FHLB and the FRB of Kansas City's discount window. See "Part I, Item 1. Business - Sources of Funds" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2021 for information regarding limits on the Bank's FHLB borrowings. The amount that can be borrowed from the FRB of Kansas City's discount window is based upon the fair value of securities pledged as collateral and certain other characteristics of those securities. Management tests the Bank's access to the FRB of Kansas City's discount window annually with a nominal, overnight borrowing.
If management observes unusual trends in the amount and frequency of line of credit utilization and/or short-term borrowings, the Bank will likely utilize long-term wholesale borrowing sources such as FHLB advances and/or repurchase agreements to provide long-term, fixed-rate funding. The maturities of these long-term borrowings are generally staggered in order to mitigate the risk of a highly negative cash flow position at maturity. The Bank's internal policy limits total borrowings to 55% of total assets. At December 31, 2021, the Bank had total borrowings, at par, of $1.59 billion, or approximately 16% of total assets, all of which were FHLB advances. Of this amount, $75.0 million were advances scheduled to mature in the next 12 months. All FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB.
At December 31, 2021, the Bank had no repurchase agreements. The Bank may enter into repurchase agreements as management deems appropriate, not to exceed 15% of total assets, and subject to the total borrowings internal policy limit of 55% as discussed above.
The Bank could utilize the repayment and maturity of outstanding loans, MBS, and other investments for liquidity needs rather than reinvesting such funds into the related portfolios. At December 31, 2021, the Bank had $1.61 billion of securities that were eligible but unused as collateral for borrowing or other liquidity needs.
The Bank has access to other sources of funds for liquidity purposes, such as brokered and public unit certificates of deposit. As of December 31, 2021, the Bank's policy allowed for combined brokered and public unit certificates of deposit up to 15% of total deposits. At December 31, 2021, the Bank did not have any brokered certificates of deposit, and public unit certificates of deposit were approximately 3% of total deposits. The Bank had pledged securities with an estimated fair value of $234.9 million as collateral for public unit certificates of deposit at December 31, 2021. The securities pledged as collateral for public unit certificates of deposit are held under joint custody with FHLB and generally will be released upon deposit maturity.
At December 31, 2021, $1.63 billion of the Bank's certificate of deposit portfolio was scheduled to mature within the next 12 months, including $183.6 million of public unit certificates of deposit and $125.8 million of commercial certificates of deposit. Based on our deposit retention experience and our current pricing strategy, we anticipate the majority of the maturing retail certificates of deposit will renew or transfer to other deposit products of the Bank at prevailing rates, although no assurance can be given in this regard. Due to the nature of commercial certificates of deposit, retention rates are not as predictable as for retail certificates of deposit. We also anticipate the majority of the maturing public unit certificates of deposit will be replaced with similar wholesale funding products, depending on availability and pricing.
While scheduled payments from the amortization of loans and MBS and payments on short-term investments are relatively predictable sources of funds, deposit flows, prepayments on loans and MBS, and calls of investment securities are greatly influenced by general interest rates, economic conditions, and competition, and are less predictable sources of funds. To the extent possible, the Bank manages the cash flows of its loan and deposit portfolios by the rates it offers customers. We anticipate we will continue to have
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sufficient funds, through the repayments and maturities of loans and securities, deposits and borrowings, to meet our current commitments.
Limitations on Dividends and Other Capital Distributions
Office of the Comptroller of the Currency ("OCC") regulations impose restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Under FRB and OCC safe harbor regulations, savings institutions generally may make capital distributions during any calendar year equal to earnings of the previous two calendar years and current year-to-date earnings (to the extent not previously distributed). A savings institution that is a subsidiary of a savings and loan holding company, such as the Company, that proposes to make a capital distribution must submit written notice to the OCC and FRB 30 days prior to such distribution. The OCC and FRB may object to the distribution during that 30-day period based on safety and soundness or other concerns. Savings institutions that desire to make a larger capital distribution, are under special restrictions, or are not, or would not be, sufficiently capitalized following a proposed capital distribution must obtain regulatory non-objection prior to making such a distribution.
The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company. So long as the Bank remains well capitalized after each capital distribution (as evidenced by maintaining a Community Bank Leverage Ratio ("CBLR") greater than the required percentage), and operates in a safe and sound manner, it is management's belief that the OCC and FRB will continue to allow the Bank to distribute its earnings to the Company, although no assurance can be given in this regard.
Capital
Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank per the regulatory framework for prompt corrective action ("PCA"). Qualifying institutions that elect to use the CBLR framework, such as the Bank and the Company, that maintain the required minimum leverage ratio will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the capital requirements for the well capitalized category under the agencies' PCA framework. As of December 31, 2021, the Bank's CBLR was 11.6% and the Company's CBLR was 12.8%, which exceeded the minimum requirements.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.