UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30 , 2023
or
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __ to __
Commission file number: 001-34814
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
Registrant's telephone number, including area code:
(785 ) 235-1341
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | 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 ☒ No ☐
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 ☐ No ☒
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 ☒ No ☐
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 ☒ No ☐
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.
Smaller reporting company ☐ Emerging growth 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. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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, 2023, was $897.3 million.
As of November 22, 2023, there were issued and outstanding 135,243,275 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, 2023.
| Page No. | |||||||||||
| PART I | Item 1. | ||||||||||
| Item 1A. | |||||||||||
| Item 1B. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| PART II | Item 5. | ||||||||||
| Item 6. | |||||||||||
| Item 7. | |||||||||||
| Item 7A. | |||||||||||
| Item 8. | |||||||||||
| Item 9. | |||||||||||
| Item 9A. | |||||||||||
| Item 9B. | |||||||||||
| Item 9C. | |||||||||||
| PART III | Item 10. | ||||||||||
| Item 11. | |||||||||||
| Item 12. | |||||||||||
| Item 13. | |||||||||||
| Item 14. | |||||||||||
| PART IV | Item 15. | ||||||||||
| Item 16. | |||||||||||
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 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 and maintain sufficient liquidity;
•the expected synergies and other benefits from our acquisition activities might not be realized to the extent anticipated, within the anticipated time frames, or at all;
•our ability to extend our commercial banking and trust asset management expertise across our market areas;
•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 and/or the availability of labor in the local economies in which we conduct operations, including areas where we have purchased large amounts of correspondent loans, originated commercial loans, and entered into commercial loan participations;
•changes in real estate values, unemployment levels, general economic trends, 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 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 and the effects of a potential economic recession or slower economic growth;
•the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor or depositor sentiment;
•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;
•the ability to attract and retain skilled employees;
1
•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 cyberattacks;
•changes in consumer spending, borrowing and saving habits; and
•our success at managing the risks involved in our business.
This list of 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 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.
Item 1. Business
General
The Company is a Maryland corporation with its common stock traded on the Global Select tier of the NASDAQ Stock Market. The Bank is a wholly-owned subsidiary of the Company and is a federally chartered and insured savings bank headquartered in Topeka, Kansas. We have been, and intend to continue to be, a community-oriented financial institution offering a variety of financial services to meet the needs of the communities we serve. We attract deposits primarily from the general public and from businesses, and invest those funds primarily in permanent loans secured by first mortgages on owner-occupied, one- to four-family residences and in commercial loans, either secured by real estate or for commercial and industrial purposes. We also participate with other lenders in commercial loans, originate consumer loans primarily secured by mortgages on one- to four-family residences, and invest in certain investment securities and mortgage-backed securities ("MBS") using funding from deposits and Federal Home Loan Bank Topeka ("FHLB") borrowings. We offer a variety of deposit accounts having a wide range of interest rates and terms, which generally include savings accounts, money market accounts, interest-bearing and non-interest-bearing checking accounts, and certificates of deposit with terms ranging from 91 days to 120 months.
The Company's results of operations are primarily dependent on net interest income, which is the difference between the interest earned on loans, securities, and cash, and the interest paid on deposits and borrowings. On a weekly basis, management reviews deposit flows, loan demand, cash levels, and changes in several market interest rates to assess all pricing strategies. The Bank's pricing strategy for first mortgage loan products includes setting interest rates based on secondary market prices and competitor pricing for our local lending markets, and secondary market prices and competitor pricing for our correspondent lending markets. Pricing for commercial loans is generally based on competitor pricing and the credit risk of the borrower with consideration given to the overall relationship of the borrower. Generally, deposit pricing is based upon a survey of competitors in the Bank's market areas, and the need to attract funding and retain maturing deposits.
The Company is significantly affected by prevailing economic conditions, including federal monetary and fiscal policies and federal regulation of financial institutions. Deposit balances are influenced by a number of factors, including interest rates paid on competing investment products, the level of personal income, and the personal rate of savings within our market areas. Lending activities are influenced by the demand for housing and business activity levels, our loan underwriting guidelines compared to those of our competitors, as well as the interest rate environment and interest rate pricing competition from other lending institutions.
2
Management Strategy
We seek to provide qualified borrowers the broadest possible access to home ownership through our mortgage lending programs and to offer a complete set of personal and commercial banking products and services to our customers. We strive to enhance stockholder value while maintaining a strong capital position. To achieve these goals, we focus on the following strategies:
•Lending. We are one of the leading originators of one- to four-family loans in the state of Kansas. We originate these loans primarily for our own portfolio, and we service the loans we originate. Historically, we have purchased one- to four-family loans from correspondent lenders but recently have reduced that activity for balance sheet management purposes. We offer several commercial lending options and participate in commercial loans with other lenders, both locally and outside our market areas. We offer both fixed- and adjustable-rate products with various terms to maturity and pricing options. We maintain strong relationships with local real estate agents to attract loan business. We rely on our marketing efforts and customer service reputation to attract business from walk-in customers, customers that apply online, and existing customers. Our business development efforts help to bring new business relationships to the Bank.
•Deposit Services. We offer a wide array of retail and business deposit products and services. These products include checking, savings, money market, certificates of deposit, and retirement accounts. Our deposit services are provided through our network of traditional branches and retail in-store locations, our call center which operates on extended hours, mobile banking, telephone banking, and online banking and bill payment services.
•Cost Control. We generally are very effective at controlling our costs of operations. We centralize our loan servicing and deposit support functions for efficient processing. We serve a broad range of customers through relatively few branch locations. Our average deposit base per traditional branch at September 30, 2023 was approximately $123.0 million. This large average deposit base per branch helps to control costs. Our one- to four-family lending strategy and our effective management of credit risk allows us to service a large portfolio of loans at efficient levels because it costs less to service a portfolio of performing loans. We recognize it is more expensive to offer a full suite of commercial products and services, but we will continue our efforts to control those costs. The Bank continues to invest in its infrastructure, which can increase costs.
•Asset Quality. We utilize underwriting standards for all of our lending products, including the loans we purchase and participate in, that are designed to limit our exposure to credit risk. We require complete documentation for both originated and purchased loans, and make credit decisions based on our assessment of the borrower's ability to repay the loan in accordance with its terms. Additionally, we monitor the asset quality of existing loans and strive to work proactively with customers who face challenging financial conditions.
•Capital Position. Our policy has always been to protect the safety and soundness of the Bank through credit and operational risk management, balance sheet strength, and sound operations. The end result of these activities has been capital ratios that meet or exceed the well-capitalized standards set by the Office of the Comptroller of the Currency (the "OCC"). We believe that maintaining a strong capital position safeguards the long-term interests of the Bank, the Company, and our stockholders.
•Stockholder Value. We strive to provide stockholder value while maintaining a strong capital position. We continue to generate returns to stockholders through dividend payments. Total dividends declared and paid during fiscal year 2023 were $83.2 million. 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 2024, it is the current intention of the Board of Directors to pay out the regular quarterly cash dividend of $0.085 per share.
•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.
3
Market Area and Competition
Our corporate office is located in Topeka, Kansas. We currently have a network of 51 branches (46 traditional branches and five in-store branches) located in nine counties throughout Kansas and three counties in Missouri. We primarily serve the metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia, and Salina, Kansas and a portion of the metropolitan area of greater Kansas City.
The Bank ranked second in deposit market share, at 6.2%, in the state of Kansas as reported in the June 30, 2023 Federal Deposit Insurance Corporation ("FDIC") "Summary of Deposits - Market Share Report." Management considers our well-established banking network together with our reputation for financial strength and customer service to be major factors in our success at attracting and retaining customers in our market areas.
The Bank consistently has been one of the top one- to four-family lenders with regard to mortgage loan origination volume in the state of Kansas. This has been achieved through strong relationships with real estate agents and our other marketing efforts, which are based on our reputation and competitive pricing. Competition in originating one- to four-family loans primarily comes from other savings institutions, commercial banks, credit unions, mortgage brokers, and mortgage bankers.
Available Information
Our website address is www.capfed.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports can be obtained free of charge from our website. These reports are available on our website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. These reports are also available on the SEC's website at http://www.sec.gov.
Regulation and Supervision
The Bank is examined and regulated by the OCC, its primary regulator, and its deposits are insured up to applicable limits by the Deposit Insurance Fund ("DIF"), which is administered by the FDIC. The Company, as a savings and loan holding company, is examined and regulated by the FRB.
Set forth below is a description of certain laws and regulations that are applicable to Capitol Federal Financial, Inc. and the Bank. This description is intended as a brief summary of selected features of such laws and regulations and is qualified in its entirety by references to the laws and regulations applicable to the Company and the Bank.
General. The Bank, as a federally chartered savings bank, is subject to regulation and oversight by the OCC extending to all aspects of its operations. This regulation of the Bank is intended for the protection of depositors and other customers and not for the purpose of protecting the Company's stockholders. The investment and lending authority of the Bank is prescribed by federal laws and regulations and the Bank is prohibited from engaging in any activities not permitted by such laws and regulations. The Bank and Company are required to maintain minimum levels of regulatory capital and the Bank is subject to limitations on making capital distributions to the Company.
The Company is a unitary savings and loan holding company within the meaning of the Home Owners' Loan Act ("HOLA"). As such, the Company is registered with the FRB and subject to the FRB regulations, examinations, supervision, and reporting requirements. In addition, the FRB has enforcement authority over the Company. Among other things, this authority permits the FRB to restrict or prohibit activities that are determined to be a serious risk to the Bank.
The OCC and FRB enforcement authority includes, among other things, the ability to assess civil monetary penalties, to issue cease-and-desist or removal orders, and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely filed reports. Except under certain circumstances, public disclosure of final enforcement actions by the OCC or the FRB is required by law.
As a federally chartered savings bank, the Bank is required to maintain a significant portion of its assets in residential housing-related loans and investments. An institution that fails to do so is immediately subject to restrictions on its operations, including a prohibition against capital distributions, except with the prior approval of both the OCC and the FRB.
4
Failure to meet this qualification is a statutory violation subject to enforcement action. As of September 30, 2023, the Bank met the qualification.
The Bank's relationship with its depositors and borrowers is regulated to a great extent by federal laws and regulations, especially in such matters as the ownership of savings accounts and the form and content of mortgage requirements. In addition, the branching authority of the Bank is regulated by the OCC. The Bank is generally authorized to branch nationwide.
The Bank is subject to a statutory lending limit on aggregate loans to one person or a group of related persons. The general limit is 15% of our unimpaired capital and surplus, plus an additional 10% for loans fully secured by readily marketable collateral. At September 30, 2023, the Bank's lending limit under this restriction was $139.8 million. The Bank has no loans or loan relationships in excess of its lending limit. Total loan commitments and loans outstanding to the Bank's largest borrowing relationship was $76.2 million at September 30, 2023, all of which was current according to its terms.
The OCC has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure, and compensation and other employee benefits. The Bank is subject to periodic examinations by the OCC regarding these and related matters. During these examinations, the examiners may require the Bank to increase its ACL, change the classification of loans, and/or recognize additional charge-offs based on their judgments, which can impact our capital and earnings.
Regulatory Capital Requirements. The Bank and the Company are required to maintain specified levels of regulatory capital under regulations of the OCC and FRB, respectively. See "Part II, Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 13. Regulatory Capital Requirements" for additional regulatory capital information. At September 30, 2023, the Bank was considered well capitalized under OCC regulations.
The OCC has the ability to establish individual minimum capital requirements for a particular institution which vary from the capital levels that would otherwise be required under the applicable capital regulations based on such factors as concentrations of credit risk, levels of interest rate risk, the risks of non-traditional activities, and other circumstances. The OCC has not imposed any such requirements on the Bank.
The OCC is authorized and, under certain circumstances, required to take certain actions against federal savings banks that are not adequately capitalized because they fail to meet the minimum requirements associated with their elected capital framework. Any such institution must submit a capital restoration plan for OCC approval and may be restricted in, among other things, increasing its assets, acquiring another institution, establishing a branch or engaging in any new activities, and may not make capital distributions. As of September 30, 2023, the Bank and the Company met all capital adequacy requirements to which they are subject.
Limitations on Dividends and Other Capital Distributions. OCC regulations impose restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Under FRB and OCC safe harbor regulations, savings institutions generally may make capital distributions during any calendar year equal to earnings of the previous two calendar years and current year-to-date earnings (to the extent not previously distributed). A savings institution that is a subsidiary of a savings and loan holding company, such as the Company, that proposes to make a capital distribution must submit written notice to the OCC and FRB 30 days prior to such distribution. The OCC and FRB may object to the distribution during that 30-day period based on safety and soundness or other concerns. Savings institutions that desire to make a larger capital distribution, are under special restrictions, or are not, or would not be, sufficiently capitalized following a proposed capital distribution must obtain regulatory non-objection prior to making such a distribution.
The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company. So long as the Bank remains well capitalized after each capital distribution, and operates in a safe and sound manner, it is management's belief that the OCC and FRB will continue to allow the Bank to distribute its earnings to the Company, although no assurance can be given in this regard.
5
Insurance of Accounts and Regulation by the FDIC. The Bank also is subject to regulation and examination by the FDIC, which insures the deposits of the Bank to the maximum extent permitted by law. The DIF of the FDIC insures deposit accounts in the Bank up to applicable limits, with a maximum amount of deposit insurance for banks, savings institutions, and credit unions of $250 thousand per separately insured deposit ownership right or category.
The FDIC assesses deposit insurance premiums on all FDIC-insured institutions quarterly based on annualized rates. Under these rules, assessment rates for an institution with total assets of less than $10 billion are determined by weighted average capital adequacy, asset quality, management, earnings, liquidity, and sensitivity (CAMELS) composite ratings and certain financial ratios, and range from 1.5 to 30.0 basis points, subject to certain adjustments. Assessment rates for an institution with $10 billion or more in total assets are assigned an individual rate based on a scorecard that measures the institution's composite rating, ability to withstand asset-related and funding-related stress and the magnitude of potential losses to the FDIC in the event of failure. In October 2022, the FDIC adopted a final rule that increased the initial base deposit assessment rate schedule uniformly by two basis points, beginning with the first quarterly assessment period of 2023. While the Bank exceeded $10 billion in total assets at September 30, 2023, an institution is not considered a large institution under the FDIC assessment regulations until the institution exceeds $10 billion in total assets for four consecutive quarters. The Bank's total assets were in excess of $10 billion at March 31, 2023, June 30, 2023 and September 30, 2023, but total assets are anticipated to be below $10 billion at December 31, 2023. For the fiscal year ended September 30, 2023, the Bank paid $4.5 million in FDIC premiums. Assessment rates are applied to an institution's assessment base, which is its average consolidated total assets minus its average tangible equity during the assessment period.
The FDIC has authority to further increase insurance assessments in the future, and any significant increases would have an adverse effect on the operating expenses and results of operations of the Company. Management cannot predict what assessment rates will be in the future. In a banking industry emergency, the FDIC may also impose a special assessment.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition, or violation that may lead to termination of our deposit insurance.
Community Reinvestment and Consumer Protection Laws. In connection with its lending activities, the Bank is subject to a number of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. These include the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 ("SAFE Act"), and the Community Reinvestment Act ("CRA"). In addition, federal banking regulators have enacted regulations limiting the ability of banks and other financial institutions to disclose nonpublic consumer information to non-affiliated third parties. The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated third parties. With respect to federal consumer protection laws, regulations are generally promulgated by the Consumer Financial Protection Bureau ("CFPB"), but the OCC examines the Bank for compliance with such laws.
The CRA requires the appropriate federal banking agency, in connection with its examination of an FDIC-insured institution, to assess its record in meeting the credit needs of the communities served by the institution, including low and moderate income neighborhoods. The federal banking regulators take into account the institution's record of performance under the CRA when considering applications for mergers, acquisitions, and branches. Under the CRA, institutions are assigned a rating of outstanding, satisfactory, needs to improve, or substantial non-compliance. The Bank received a satisfactory rating in its most recently completed CRA evaluation.
On October 24, 2023, the federal banking agencies, including the OCC, issued a final rule designed to strengthen and modernize the regulations implementing the CRA. The changes are designed to encourage banks to expand access to credit, investment and banking services in low- and moderate-income communities, adapt to changes in the banking industry, including mobile and internet banking, provide greater clarity and consistency in the application of the CRA regulations and tailor CRA evaluations and data collection to bank size and type.
Bank Secrecy Act /Anti-Money Laundering Laws. The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws, including the USA PATRIOT Act of 2001 and regulations thereunder. These laws and regulations require
6
the Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity and source of deposits and wealth of its customers. Violations of these laws and regulations can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers and acquisitions.
Federal Reserve System. The FRB requires all depository institutions to maintain reserves at specified levels against their transaction accounts, primarily checking accounts. In response to the Coronavirus Disease 2019 ("COVID-19") pandemic, the FRB reduced reserve requirement ratios to zero percent effective on March 26, 2020, to support lending to households and businesses. At September 30, 2023, the reserve requirement of zero percent was still in place.
The Bank is authorized to borrow from the Federal Reserve Bank "discount window." An eligible institution need not exhaust other sources of funds before going to the discount window, nor are there restrictions on the purposes for which the institution can use primary credit. At September 30, 2023, the Bank had no outstanding borrowings from the discount window.
In March 2023, the FRB created a Bank Term Funding Program ("BTFP") to make additional funding available to eligible depository institutions. The BTFP offers loans up to one year in length that can be prepaid without penalty. The amount that can be borrowed under the BTFP is based upon the par value of the securities pledged as collateral to the FRB. Advances can be requested under the BTFP until at least March 11, 2024. At September 30, 2023, the Bank had $500.0 million of BTFP borrowings. In October 2023, the Bank paid off the $500.0 million of BTFP borrowings.
Federal Home Loan Bank System. The Bank is a member of one of 11 regional Federal Home Loan Banks, each of which serves as a reserve, or central bank, for its members within its assigned region and is funded primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System. The Federal Home Loan Banks make loans, called advances, to members and provide access to a line of credit in accordance with policies and procedures established by the Board of Directors of FHLB, which are subject to the oversight of the Federal Housing Finance Agency. At September 30, 2023, the Bank had $2.38 billion of FHLB advances, at par. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Financial Statements – Note 8. Deposits and Borrowed Funds" for additional information regarding FHLB advances.
As a member, the Bank is required to purchase and maintain capital stock in FHLB. The minimum required FHLB stock amount is generally 4.5% of the Bank's FHLB advances and outstanding balance against the FHLB line of credit, and 2% of the outstanding principal balance of loans sold into the Mortgage Partnership Finance Program. At September 30, 2023, the Bank had a balance of $110.7 million in FHLB stock, which was in compliance with the FHLB's stock requirement. In past years, the Bank has received dividends on its FHLB stock, although no assurance can be given that these dividends will continue. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Financial Statements – Note 1. Summary of Significant Accounting Policies" for additional information regarding FHLB stock.
Federal Savings and Loan Holding Company Regulation. The HOLA prohibits a savings and loan holding company (directly or indirectly, or through one or more subsidiaries) from acquiring another savings association, or holding company thereof, without prior written approval from the FRB; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings association, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of a depository institution that is not federally insured. In evaluating applications by savings and loan holding companies to acquire savings associations, the FRB must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community, competitive factors, and other factors.
The FRB has long set forth in its regulations its "source of strength" policy, which requires bank holding companies to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress. This policy now also applies to savings and loan holding companies.
Transactions with Affiliates. Transactions between the Bank and its affiliates are required to be on terms as favorable to the institution as transactions with non-affiliates, and certain of these transactions are restricted to a percentage of the Bank's
7
capital, and, in the case of loans, require eligible collateral in specified amounts. In addition, the Bank may not lend to any affiliate engaged in activities not permissible for a bank holding company or purchase or invest in the securities of affiliates.
Taxation
Federal Taxation. The Company and the Bank are subject to federal income taxation in the same general manner as other corporations. The Company files a consolidated federal income tax return. The Company has not received notification from the IRS of any potential tax liability for any years still subject to audit. For federal income tax purposes, the Bank currently reports its income and expenses on the accrual method of accounting and uses a fiscal year ending on September 30 for filing its federal income tax return. Changes to the corporate federal income tax rate would result in changes to the Company's effective income tax rate and would require the Company to remeasure its deferred tax assets and liabilities based on the tax rate in the years in which those temporary differences are expected to be recovered or settled.
State Taxation. The earnings/losses of Capitol Federal Financial, Inc., Capitol Funds, Inc. and Capital City Investments, Inc. are combined for purposes of filing a consolidated Kansas corporate tax return. The Kansas corporate tax rate is 4.0%, plus a surcharge of 3.0% on earnings greater than $50 thousand.
The Bank files a Kansas privilege tax return. For Kansas privilege tax purposes, the minimum tax rate is 4.5% of earnings, which is calculated based on federal taxable income, subject to certain adjustments. The Bank has not received notification from the state of any potential tax liability for any years still subject to audit.
Additionally, the Bank files state tax returns in various other states where it has significant purchased loans and/or foreclosure activities. In these states, the Bank has either established nexus under an economic nexus theory or has exceeded enumerated nexus thresholds based on the amount of interest derived from sources within the state.
Employees and Human Capital Resources
At September 30, 2023, we had a total of 649 employees, including 57 part-time employees. The full-time equivalent of our total employees at September 30, 2023 was 632, a decrease from 707 at September 30, 2022. The decrease was largely attributable to the Bank's improved ability to provide a comprehensive digital experience as a result of its implementation of a new core processing system ("the digital transformation"). A large majority of our customers became comfortable carrying out daily transactions through the adoption of our technology efforts, resulting in decreased walk-in traffic and management's ability to more efficiently staff our branches. Our new staffing model includes officer-level decision makers at each of our locations, as well as narrowly focused efforts to hire and develop a more universal employee who can not only execute basic teller transactions, but also participate in consumer loan activity. The overall decrease in headcount was not achieved through layoffs, but rather management's decision to not backfill non-essential employees through natural attrition. We believe the new staffing model comprised of decision makers and well-rounded employees will add an elevated customer experience for those who still choose to bank with us in-person.
Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good. We believe our ability to attract and retain employees is a key to our success. Accordingly, we strive to offer competitive salaries and employee benefits to all employees and monitor salaries in our market areas. Physical well-being is supported by the Company's health, dental, vision, life and various other insurances, and a wellness program that incentivizes employees to live a healthy and balanced lifestyle. Volunteer opportunities are provided and encouraged for all employees. Capitol Federal employees recorded over 3,628 hours in volunteer time for local organizations and charities during fiscal year 2023.
Our Company respects, values and encourages diversity in our employees and customers. We seek to recognize and develop the unique contributions each individual brings to our Company, and we are fully committed to maintaining a culture of diversity as a pillar of our values and our success. These efforts are supported by our Board of Directors. Since 1977, at least one woman has served as a director of the Bank and, since its inception in 1999, at least one woman has served on the Board of Directors of the Company. In addition, since 2012, at least one underrepresented minority has served as a director of the Company and the Bank. The Board of Directors annually reviews the Company's diversity recruitment efforts and employment statistics.
8
To assist in expanding diversity, the Company recruits employees through sources and organizations targeted at diverse communities. The Company also provides multiple opportunities for professional development and growth, including continuing education when applicable and specialty education within banking. Leadership development is supported through our Leadership Forum services, on a biannual basis, for mid-level leaders within the organization. Education for this program is currently provided by Banktastic. Annual employee educational requirements include targeted diversity, equity and inclusion training for all managers. All employees receive annual training on providing fair service, which is targeted at addressing implicit bias in providing customer service.
The Company actively participates in initiatives to promote diversity and inclusion, both internally and externally. Our employees, together with the Capitol Federal Foundation, contribute to programs that promote educational opportunities in all communities as well as housing in low-and-moderate income communities, including scholarships specifically for diverse candidates.
Item 1A. Risk Factors
There are risks inherent in the Bank's and Company's business. The following is a summary of material risks and uncertainties relating to the operations of the Bank and the Company. Adverse experiences with these could have a material impact on the Company's financial condition and results of operations. Some of these risks and uncertainties are interrelated, and the occurrence of one or more of them may exacerbate the effect of others. These material risks and uncertainties are not necessarily presented in order of significance. In addition to the risks set forth below and the other risks described in this Annual Report, there may be risks and uncertainties that are not currently known to us or that we currently deem to be immaterial that could materially and adversely affect our business, financial condition or operating results.
Risks Related to Macroeconomic Conditions
Changes in interest rates could have an adverse impact on our results of operations and financial condition.
Our results of operations are primarily dependent on net interest income, which is the difference between the interest earned on loans, securities, cash at the Federal Reserve Bank and dividends received on FHLB stock, and the interest paid on deposits and borrowings. Changes in interest rates could have an adverse impact on our results of operations and financial condition because the majority of our interest-earning assets are long-term, fixed-rate loans, while the majority of our interest-bearing liabilities are shorter term, and therefore subject to a greater degree of interest rate fluctuations. This type of risk is known as interest rate risk and is affected by prevailing economic and competitive conditions that are beyond the Company's control, including general economic conditions, inflationary trends and/or monetary policies of the FRB and fiscal policies of the United States federal government.
The impact of changes in interest rates is generally observed on the income statement. The magnitude of the impact will be determined by the difference between the amount of interest-earning assets and interest-bearing liabilities, both of which either reprice or mature within a given period of time. This difference provides an indication of the extent to which our net interest rate spread will be impacted by changes in interest rates. In addition, changes in interest rates will impact the expected level of repricing of the Bank's mortgage-related assets and callable debt securities. Generally, as interest rates decline, the amount of interest-earning assets expected to reprice will increase as borrowers have an economic incentive to reduce the cost of their mortgage or debt, which would negatively impact the Bank's interest income. Conversely, as interest rates rise, the amount of interest-earning assets expected to reprice will decline as the economic incentive to refinance the mortgage or debt is diminished. As this occurs, the amount of interest-earning assets repricing could diminish to the point where interest-bearing liabilities reprice to a higher interest rate at a faster pace than interest-earning assets, thus negatively impacting the Bank's net interest income. For additional information about the interest-rate risk we face, see "Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk."
Changes in interest rates can also have an adverse effect on our financial condition as available-for-sale ("AFS") securities are reported at estimated fair value. Stockholders' equity, specifically accumulated other comprehensive income (loss) ("AOCI"), is increased or decreased by the amount of change in the estimated fair value of our AFS securities, net of deferred income taxes. Increases in interest rates generally decrease the fair value of AFS securities, which adversely impacts stockholders' equity. For additional information, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Strategic Securities Transaction," "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Stockholders' Equity" and "Part II, Item 8. Financial Statements
9
and Supplementary Data – Notes to Consolidated Financial Statements – Note 15. Accumulated Other Comprehensive Income."
Changes in interest rates, as they relate to customers, can also have an adverse impact on our financial condition and results of operations. In times of rising interest rates, default risk may increase among borrowers with adjustable-rate loans as the rates on their loans adjust upward and their payments increase. Fluctuations in interest rates also affect customer demand for loan and deposit products. Competition from other financial institutions and/or brokerage firms could affect our ability to attract and retain deposits and could result in us paying more for deposits.
In addition to general changes in interest rates, changes that affect the shape of the yield curve could negatively impact the Bank. The Bank's interest-bearing liabilities are generally priced based on short-term interest rates while the majority of the Bank's interest-earning assets are priced based on long-term interest rates. Income for the Bank is primarily driven by the spread between these rates. As a result, a steeper yield curve, meaning long-term interest rates are significantly higher than short-term interest rates, would provide the Bank with a better opportunity to increase net interest income. When the yield curve is flat, meaning long-term interest rates and short-term interest rates are essentially the same, or when the yield curve is inverted, meaning long-term interest rates are lower than short-term interest rates, the yield between interest-earning assets and interest-bearing liabilities that reprice is compressed or diminished and would likely negatively impact the Bank's net interest income. See "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for additional information about the Bank's interest rate risk management.
An economic downturn, especially one affecting our geographic market areas and certain regions of the country where we have correspondent loans secured by one- to four-family properties or commercial real estate participation loans, could have an adverse impact on our business and financial results.
Our primary lending emphasis is the origination of one- to four-family first mortgage loans secured by residential properties. We have also purchased one- to four-family first mortgage loans, secured by properties that are typically outside our local market areas, from correspondent lenders. As we have grown our commercial real estate lending portfolio, we have continued to maintain relationships not only in our local markets but in geographically diverse markets. As a result, we are particularly exposed to downturns in regional housing and commercial real estate markets and, to a lesser extent, the U.S. housing and commercial real estate markets, along with changes in the levels of unemployment or underemployment. We monitor the current status and trends of local and national employment levels and trends and current conditions in the real estate and housing markets, as well as commercial real estate markets, in our local market areas and certain areas where we have correspondent loans and commercial real estate participation loans. Decreases in local real estate values could adversely affect the value of the property used as collateral for our loans, which could cause us to realize a loss in the event of a foreclosure. Adverse conditions in our local economies and in certain areas where we have correspondent loans and commercial real estate participation loans, such as inflation, unemployment, supply chain disruptions, recession, natural disasters or pandemics, or other factors beyond our control, could impact the ability of our borrowers to repay their loans. Any one or a combination of these events may have an adverse impact on borrowers' ability to repay their loans, which could result in increased delinquencies, non-performing assets, loan losses, and future loan loss provisions.
Risks Related to Lending Activities
The increase in commercial loans in our loan portfolio exposes us to increased lending and credit risks, which could adversely impact our financial condition and results of operations.
A growing portion of our loan portfolio consists of commercial loans. These loan types tend to be larger than and in different geographic regions from most of our existing loan portfolio and are generally considered to have different and greater risks than one- to four-family residential real estate loans and may involve multiple loans to groups of related borrowers. A growing commercial loan portfolio also subjects us to greater regulatory scrutiny. Furthermore, these loan types can expose us to a greater risk of delinquencies, non-performing assets, loan losses, and future loan loss provisions than one- to four-family residential real estate loans because repayment of such loans often depends on the successful operation of a business or of the underlying property. Repayment of such loans may be affected by factors outside the borrower's control, such as adverse conditions in the real estate market, the economy, environmental factors, natural disasters or pandemics, and/or changes in government regulation. Also, there are risks inherent in commercial real estate construction lending as the value of the project is uncertain prior to the completion of construction and subsequent lease-up. A sudden downturn in the economy, labor and/or supply chain issues, or other unforeseen events could result in stalled projects or collateral shortfalls, thus exposing us to increased credit risk.
10
Commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. The borrowers' cash flow may prove to be unpredictable, and collateral securing these loans may fluctuate in value. Most often, this collateral consists of accounts receivable, inventory and equipment. Significant adverse changes in a borrower's industries and businesses could cause rapid declines in values of, and collectability associated with, those business assets, which could result in inadequate collateral coverage for our commercial and industrial loans and expose us to future losses. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its clients. Inventory and equipment may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. If the cash flow from business operations is reduced, the borrower's ability to repay the loan may be impaired. An increase in valuation allowances and charge-offs related to our commercial and industrial loan portfolio could have an adverse effect on our business, financial condition, results of operations and future prospects.
Risks Related to Cybersecurity, Third Parties, and Technology.
The occurrence of any information system failure or interruption, breach of security or cyberattack, at the Company, at its third-party service providers or counterparties may have an adverse effect on our business, reputation, financial condition and results of operations.
Information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger, our deposits and our loans. In the normal course of our business, we collect, process, retain and transmit (by email and other electronic means) sensitive and confidential information regarding our customers, employees and others. We also outsource certain aspects of our data processing, data processing operations, remote network monitoring, engineering and managed security services to third-party service providers. In addition to confidential information regarding our customers, employees and others, we, and in some cases a third party, compile, process, transmit and store proprietary, non-public information concerning our business, operations, plans and strategies.
Information security risks for financial institutions continue to increase in part because of evolving technologies, the use of the internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. Cyber criminals use a variety of tactics, such as ransomware, denial of service, and theft of sensitive business and customer information to extort payment or other concessions from victims. In some cases, these attacks have caused significant impacts on other businesses' access to data and ability to provide services. We are not able to anticipate or implement effective preventive measures against all incidents of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources, including attacks on third-party vendors and their applications and products used by the Bank.
We use a variety of physical, procedural and technological safeguards to prevent or limit the impact of system failures, interruptions and security breaches and to protect confidential information from mishandling, misuse or loss, including detection and response mechanisms designed to contain and mitigate security incidents. However, there can be no assurance that such events will not occur or that they will be promptly detected and adequately addressed if they do, and early detection of security breaches may be thwarted by sophisticated attacks and malware designed to avoid detection. If there is a failure in or breach of our information systems, or those of a third-party service provider, the confidential and other information processed and stored in, and transmitted through, such information systems could be jeopardized, or could otherwise cause interruptions or malfunctions in our operations or the operations of our customers, employees, or others.
Our business and operations depend on the secure processing, storage and transmission of confidential and other information in our information systems and those of our third-party service providers. Although we devote significant resources and management focus to ensuring the integrity of our information systems through information security measures, risk management practices, relationships with threat intelligence providers and business continuity planning, our facilities, computer systems, software and networks, and those of our third-party service providers, may be vulnerable to external or internal security breaches, acts of vandalism, unauthorized access, misuse, computer viruses or other malicious code and cyberattacks 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
11
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 cyberattack or other security breach. Across our industry, the cost of minimizing these risks and investigating incidents has continued to increase with the frequency and sophistication of these threats.
During June 2023, a third-party service provider (the "Service Provider") to the Bank advised the Bank that files with personally identifiable information related to Bank customers had been compromised during a security incident experienced by the Service Provider (the "Incident"). The Bank used the Service Provider to process transactions. The Incident resulted from a zero-day vulnerability in a managed file sharing software called MOVEit. MOVEit is used by thousands of organizations around the world for securely transferring sensitive and confidential information and other data. The vulnerability was exploited in a large-scale, cyber campaign that impacted government agencies, universities, and corporations around the world. As a result of the Incident, an unauthorized party was able to obtain access to certain Bank customers' data in the Service Provider's possession that contained social security numbers, account numbers, and other personally identifiable information. The Bank confirmed the Service Provider has fixed the vulnerability noted above and the Bank has implemented additional security procedures when sharing files with the Service Provider. When the Bank received notice of the Incident from the Service Provider, the Bank promptly enacted response protocols. The Service Provider has provided appropriate notifications to potentially affected customers. The Bank worked with the Service Provider to identify any others potentially impacted by the Incident. The Bank is not aware of any other third-party incidents related to the MOVEit vulnerability that has affected personally identifiable information associated with Bank customers.
The occurrence of any of the foregoing could subject us to litigation or regulatory scrutiny, cause us significant reputational damage or erode confidence in the security of our information systems, products and services, cause us to lose customers or have greater difficulty in attracting new customers, have an adverse effect on the value of our common stock or subject us to financial losses that may not be covered by insurance, any of which could have an adverse effect on our business, financial condition and results of operations. As information security risks and cyber threats continue to evolve, we may be required to expend significant additional resources to further enhance or modify our information security measures and/or to investigate and remediate any information security vulnerabilities or other exposures arising from operational and security risks.
Furthermore, there continues to be heightened legislative and regulatory focus on privacy, data protection and information security. New or revised laws and regulations may significantly impact our current and planned privacy, data protection and information security-related practices, the collection, use, sharing, retention and safeguarding of consumer and employee information, and current or planned business activities. Compliance with current or future privacy, data protection and information security laws could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have an adverse effect on our business, financial condition and results of operations.
Our customers are also targets of cyberattacks and identity theft. There continues to be instances involving financial services and consumer-based companies reporting the unauthorized disclosure of client or customer information or the destruction or theft of corporate data. Large scale identity theft could result in customers' accounts being compromised and fraudulent activities being performed in their names. We have implemented certain safeguards against these types of activities, but they may not fully protect us from financial losses. The occurrence of a security breach involving our customers' information, regardless of its origin, could damage our reputation and result in a loss of customers and business, subject us to additional regulatory scrutiny, and expose us to litigation and possible financial liability. Any of these events could have an adverse effect on our business, financial condition and results of operations.
Third-party vendors subject the Company to potential business, reputation and financial risks.
Third-party vendors are sources of operational and information security risk to the Company, including risks associated with operations errors, information system interruptions or breaches, and unauthorized disclosures of sensitive or confidential customer information. The Company requires third-party vendors to maintain certain levels of information security; however, vendors may remain vulnerable to breaches, unauthorized access, misuse, computer viruses, and/or other malicious attacks that could ultimately compromise sensitive information. We have developed procedures and processes for selecting and monitoring third-party vendors, but ultimately are dependent on these third-party vendors to secure their information. If these vendors encounter any of these types of issues, or if we have difficulty communicating with them, we could be exposed to disruption of operations, loss of service or connectivity to customers, reputational damage, and litigation risk that could have an adverse effect on our business, financial condition and results of operations.
12
The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements, because of changes in the vendor's organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which could have an adverse effect on our business and, in turn, our financial condition and results of operations. Additionally, replacing certain third-party vendors could also entail significant delay and expense.
We are heavily reliant on technology, and a failure to effectively implement technology initiatives or anticipate future technology needs or demands could adversely affect our business or performance.
Like most financial institutions, the Bank significantly depends on technology to deliver its products and services and to otherwise conduct business. To remain technologically competitive and operationally efficient, the Bank invests in system upgrades, new technological solutions, and other technology initiatives. Many of these solutions and initiatives have a significant duration, are tied to critical information systems, and require substantial resources. Although the Bank takes steps to mitigate the risks and uncertainties associated with these solutions and initiatives, there is no guarantee that they will be implemented on time, within budget, or without negative operational or customer impact. The Bank also may not succeed in anticipating its future technology needs, the technology demands of its customers, or the competitive landscape for technology. If the Bank were to falter in any of these areas, it could have an adverse effect on our business, financial condition and results of operations.
In August 2023, the Company implemented a new core processing system ("digital transformation"). While the digital transformation was completed successfully, the Company may face operational risks, such as disruptions in technology systems, which may impact customers. The Company will work to remediate any such disruptions, if they occur, but no assurance can be given that a potential adverse development will be quickly or completely remediated. If an adverse development arising from the digital transformation is not sufficiently remediated or is not remediated in a timely fashion, the Company's reputation could be significantly impacted, which could result in loss of customer business, subject the Company to regulatory scrutiny, or expose the Company to litigation, any of which could have a material impact on the Company's financial condition and results of operations.
Risks Related to Competition
Strong competition may limit growth and profitability.
While we are one of the largest mortgage loan originators in the state of Kansas, we compete in the same market areas as local, regional, and national banks, credit unions, mortgage brokerage firms, investment banking firms, investment brokerage firms, mortgage bankers, and savings institutions. We also compete with online investment and mortgage brokerages and online banks that are not confined to any specific market area. Many of these competitors operate on a national or regional level, are a conglomerate of various financial services providers housed under one corporation, or otherwise have substantially greater financial or technological resources than the Bank. We compete primarily on the basis of the interest rates offered to depositors, the terms of loans offered to borrowers, and the benefits afforded to customers as a local institution and portfolio lender. Should we face competitive pressure to increase deposit rates or decrease loan rates, our net interest income could be adversely affected. Additionally, our competitors may offer products and services that we do not or cannot provide, as certain deposit and loan products fall outside of our accepted level of risk. Our profitability depends upon our ability to compete in our local market areas.
Risks Related to Regulation
We operate in a highly regulated environment which limits the manner and scope of our business activities, and we may be adversely affected by new and/or changes in laws and regulations or interpretation of existing laws and regulations.
We are subject to extensive regulation, supervision, and examination by the OCC, the FRB, and the FDIC. These regulatory authorities exercise broad discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank's operations, reclassify assets, determine the adequacy of a bank's ACL, and determine the level of deposit insurance premiums assessed. The CFPB has broad powers to supervise and enforce consumer protection laws, including a wide range of consumer protection laws that apply to all banks and savings institutions, like the authority to prohibit unfair, deceptive or abusive acts and practices. The CFPB also has examination and enforcement authority over all banks with regulatory assets exceeding $10 billion at four consecutive quarter-ends. The Bank exceeded $10 billion in
13
regulatory assets at March 31, 2023, June 30, 2023 and September 30, 2023. The Bank intends to be below $10 billion in regulatory assets at December 31, 2023 so it will not exceed $10 billion in regulatory assets at four consecutive quarter-ends. There are increased direct costs, additional regulatory burdens with indirect costs, and lost revenue, mainly related to interchange fees, associated with the Bank being over $10 billion in regulatory assets at certain points in time and for four consecutive quarter-ends. As long as the Bank does not exceed $10 billion in regulatory assets for four consecutive quarter ends, it will continue to be examined for compliance with consumer protection laws and the regulations of the CFPB by the Bank's primary bank regulator, the OCC. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations and gives state attorneys general the ability to enforce federal consumer protection laws.
Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation, interpretation or application, could have an adverse impact on our operations. Moreover, bank regulatory agencies have been active in responding to concerns and trends identified in examinations and have issued formal enforcement orders requiring capital ratios in excess of regulatory requirements and/or assessing monetary penalties. Bank regulatory agencies, such as the OCC, the FRB and the FDIC, govern the activities in which we may engage, primarily for the protection of depositors' funds, the DIF and the safety and soundness of the banking system as a whole, and not for the protection or benefit of investors. The CFPB enforces consumer protection laws and regulations for the benefit of the consumer and not the protection or benefit of investors. In addition, new laws and regulations, including those related to environmental, social, and governance initiatives, may continue to increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and securities, the products we offer, the fees we can charge and our ongoing operations, costs, and profitability.
The Company is also directly subject to the requirements of entities that set and interpret accounting standards such as the Financial Accounting Standards Board, and indirectly subject to the actions and interpretations of the Public Company Accounting Oversight Board, which establishes auditing and related professional practice standards for registered public accounting firms and inspects registered firms to assess their compliance with certain laws, rules, and professional standards in public company audits. These regulations, along with 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 reputational damage, which could have an adverse effect on the Company's business, financial condition and results of operations. See "Part I, Item 1. Business - Regulation and Supervision" for more information about the regulations to which the Company is subject.
Other Risks
The Company's ability to pay dividends is subject to the ability of the Bank to make capital distributions to the Company.
The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to generate earnings and to, therefore, make capital distributions to the Company, and on the availability of cash at the holding company level in the event earnings are not sufficient to pay dividends. Under certain circumstances, capital distributions from the Bank to the Company may be subject to regulatory approvals. See "Item 1. Business – Regulation and Supervision" for additional information.
Our risk management and compliance programs and functions may not be effective in mitigating risk and loss.
We maintain an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the risks that we face. These risks include: interest-rate, credit, liquidity, operations, reputation, compliance and litigation. We also maintain a compliance program to identify, measure, assess, and report on our adherence to applicable laws, policies and procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk management or compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in our business. If conditions or circumstances arise that expose flaws or gaps in our risk management or compliance programs, or if our controls do not function as designed, the performance and value of our business could be adversely affected.
14
The Company may not be able to attract and retain skilled employees.
The Company's success depends, in large part, on its ability to attract and retain key people. Competition for the best people can be intense, and the Company spends considerable time and resources attracting and hiring qualified people for its operations. The unexpected loss of the services of one or more of the Company's key personnel could have an adverse impact on the Company's business because of their skills, knowledge of the Company's market, and years of industry experience, as well as the difficulty of promptly finding qualified replacement personnel.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
At September 30, 2023, we had 46 traditional branch offices and five in-store branch offices. The Bank owns the office building and related land in which its home office and executive offices are located, and 35 of its other branch offices. The remaining 15 branches are either leased or partially owned.
For additional information regarding our lease obligations, see "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 5. Premises, Equipment and Leases."
Management believes that our number of current facilities meet the present and immediately foreseeable needs of our customers. Management will continue to evaluate the performance of these locations through a number of metrics, including but not limited to, customer traffic, and determine on at least an annual basis whether or not we are branched in a way that most effectively serves our existing and prospective customer bases.
Item 3. Legal Proceedings
In the normal course of business, the Company and the Bank are involved as parties to various legal actions. In our opinion, after consultation with legal counsel, we believe it is unlikely that any such pending legal actions will have a material adverse effect on our financial condition, results of operations or liquidity.
On November 2, 2022, the Bank was served a putative class action lawsuit, captioned Jennifer Harding, et al. vs. Capitol Federal Savings Bank (Case No. 2022-CV-00598), filed in the Third Judicial District Court, Shawnee County, Kansas against the Bank, alleging the Bank improperly charged overdraft fees on (1) debit card transactions that were authorized for payment on sufficient funds but later settled against a negative account balance (commonly known as "authorize positive purportedly settle negative" or "APPSN" transactions) and (2) merchant re-presentments of previously rejected payment requests. The complaint asserts a breach of contract claim (including breach of an implied covenant of good faith and fair dealing) for each practice and seeks restitution for alleged improper fees, alleged actual damages, costs and disbursements, and injunction relief. On April 5, 2023, the court granted the Bank's motion to dismiss the complaint, with prejudice. The plaintiffs have appealed this decision.
The Company assesses the liabilities and loss contingencies in connection with pending or threatened legal and regulatory proceedings on at least a quarterly basis and establishes accruals when it is believed to be probable that a loss may be incurred and that the amount of such loss can be reasonably estimated.
Item 4. Mine Safety Disclosures
Not applicable.
15
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 22, 2023, there were approximately 7,495 holders of record of Capitol Federal Financial, Inc. common stock.
Share Repurchases
The following table summarizes our share repurchase activity during the three months ended September 30, 2023 and additional information regarding our share repurchase program. As of September 30, 2023, the Company had $21.2 million of common stock that could be repurchased under its existing stock repurchase plan. This plan has no expiration date; however, the Federal Reserve Bank's approval for the Company to repurchase shares extends through August 2024. Shares may be repurchased from time to time in the open market or in privately negotiated transactions based upon market conditions and available liquidity. From December 2010 through September 30, 2023, $417.0 million worth of common stock was repurchased.
| Total Number of | Approximate Dollar | ||||||||||||||||||||||
| Total | Shares Purchased as | Value of Shares | |||||||||||||||||||||
| Number of | Average | Part of Publicly | that May Yet Be | ||||||||||||||||||||
| Shares | Price Paid | Announced Plans | Purchased Under the | ||||||||||||||||||||
| Purchased | per Share | or Programs | Plans or Programs | ||||||||||||||||||||
| July 1, 2023 through | |||||||||||||||||||||||
| July 31, 2023 | — | $ | — | — | $ | 22,469,207 | |||||||||||||||||
| August 1, 2023 through | |||||||||||||||||||||||
| August 31, 2023 | — | — | — | 22,469,207 | |||||||||||||||||||
| September 1, 2023 through | |||||||||||||||||||||||
| September 30, 2023 | 250,594 | 4.97 | 250,594 | 21,222,929 | |||||||||||||||||||
| Total | 250,594 | 4.97 | 250,594 | 21,222,929 | |||||||||||||||||||
Stockholders and General Inquiries
Copies of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 are available to stockholders at no charge in the Investor Relations section of our website, www.capfed.com.
16
Stockholder Return Performance Presentation
The information presented below assumes $100 invested on September 30, 2018 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 | 9/30/2018 | 9/30/2019 | 9/30/2020 | 9/30/2021 | 9/30/2022 | 9/30/2023 | ||||||||||||||
| Capitol Federal Financial, Inc. | 100.00 | 116.58 | 82.57 | 109.88 | 85.20 | 53.25 | ||||||||||||||
| NASDAQ Composite Index | 100.00 | 100.52 | 141.70 | 184.58 | 136.12 | 171.65 | ||||||||||||||
| S&P U.S. BMI Banks Index | 100.00 | 100.32 | 73.65 | 134.01 | 102.95 | 99.73 | ||||||||||||||
Source: S&P Global Market Intelligence
Restrictions on the Payment of Dividends
The Company's ability to pay dividends is dependent, in part, upon its ability to obtain capital distributions from the Bank. The dividend policy of the Company is subject to the discretion of the Board of Directors and will depend upon a number of factors, including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company level.
Item 6. [Reserved]
17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to assist in understanding the financial condition, results of operations, liquidity, and capital resources of the Company. The Bank comprises almost all of the consolidated assets and liabilities of the Company and the Company is dependent primarily upon the performance of the Bank for the results of its operations. Because of this relationship, references to management actions, strategies and results of actions apply to both the Bank and the Company except where the context indicates otherwise.
Strategic Securities Transaction
In October 2023, the Company initiated a strategic securities transaction ("securities strategy") by selling $1.30 billion of securities, representing 94% of its securities portfolio. Since the Company did not have the intent to hold the $1.30 billion of securities to maturity at September 30, 2023, the Company recognized an impairment loss on those securities, $192.6 million of which is reflected in our financial statements for the fiscal year ended September 30, 2023 and $13.3 million of which will be recorded in the first quarter of fiscal year 2024. The securities strategy is designed to allow the Company to improve its earnings stream, beginning in fiscal year 2024, and to provide liquidity to deleverage the balance sheet, which should enable the Company to reduce the size of its balance sheet to under $10 billion in total assets by December 31, 2023, while keeping the Bank and Company well capitalized and with tangible common equity for the Company of more than 10.0%. The securities strategy, on a static basis, is expected to increase our earnings per share by approximately $0.30 and our net interest margin by approximately 60 basis points in fiscal year 2024 subsequent to the sales of securities through securities reinvestment and debt repayment. The $13.3 million loss discussed above, which was attributable to the change in valuation after September 30, 2023, is expected to reduce our earnings for the first quarter of fiscal year 2024 and for fiscal year 2024 by $0.08 per share.
The proceeds from the sale of the securities in October 2023 were used to purchase $632.0 million of securities, yielding 5.75%, and pay down $500.0 million of borrowings with a cost of 4.70%. The Company plans to hold the remaining cash at the FRB earning the interest on reserve balances rate, until such time it can be used to fund commercial loan commitments or other Bank operations. The Company expects these actions will help reduce total assets to approximately $9.70 billion by December 31, 2023. The weighted average yield on the securities sold was 1.22% and the average duration was 3.6 years. The Company expects the earn-back period to be 3.9 years, aligning closely with the average duration of the securities sold. Following the execution of the securities strategy, the Company maintains exceptional asset quality along with strong liquidity measures, including an unused $2.11 billion line of credit with the FHLB, enabling the Company to meet current and expected future commitments.
The Company's balance sheet is primarily composed of one- to four-family loans, most of which were refinanced in fiscal years 2020, 2021 and 2022 at then-current market interest rates. Securities were purchased during the same time period, also at low market interest rates, as a result of significant cash inflows from pandemic-related governmental stimulus support. Beginning in March 2022, the Federal Reserve started to raise interest rates at a record pace which resulted in the Bank increasing rates on deposit products to retain funds. Some of the Bank's borrowings also repriced to higher market interest rates during the same time period. Due to the composition of our loan and securities portfolios, our assets were not able to reprice as quickly as our liabilities, resulting in net interest margin compression. The securities strategy addresses the Company's recent decline in earnings associated with net interest margin compression driven by these factors by recognizing a net loss in fiscal year 2023. Because the securities sold in the securities strategy were held on our balance sheet as AFS, the net loss in fiscal year 2023 had minimal impact to the Company's tangible book value per share ("TBVPS"), as most of this loss was already included in the calculation of our TBVPS.
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 loss of $101.7 million, or $(0.76) per share, for fiscal year 2023 compared to net income of $84.5 million, or $0.62 per share, for fiscal year 2022. The net loss for the current year resulted from the securities strategy, specifically, the $192.6 million impairment loss on the securities that management did not have the intent to hold at September 30, 2023. The securities were sold in October 2023. Excluding the effects of the securities strategy, earnings per share would have been $0.33 for the current year. The decrease in earnings per share, excluding the effects of the securities
18
strategy, from the prior year was due primarily to lower net interest income, along with recording a provision for credit losses of $6.8 million for the current year compared to a release of provision of $4.6 million for the prior year. The net interest margin decreased 36 basis points, from 1.79% for the prior year to 1.43% for the current year. Excluding the effects of the leverage strategy described below, the net interest margin decreased 49 basis points, from 2.04% for the prior year to 1.55% for the current year. The decrease in the net interest margin excluding the effects of the leverage strategy was due mainly to an increase in the cost of borrowings and deposits, which exceeded the increase in loan yields.
At times, the Bank has utilized a leverage strategy to increase earnings which entails entering into short-term FHLB advances and depositing the proceeds from the borrowings, net of the required FHLB stock holdings, at the Federal Reserve Bank of Kansas City ("FRB of Kansas City"). The borrowings are repaid prior to each quarter end. The average balance of leverage strategy borrowings was $924.4 million for the year ended September 30, 2023. At times during the current year, the leverage strategy was not profitable and therefore was not utilized, resulting in a decrease in the average outstanding balance of leverage strategy borrowings compared to the prior year. Net income attributable to the leverage strategy was $997 thousand and $3.1 million for the years ended September 30, 2023 and 2022, respectively. When the leverage strategy is in place, it reduces the net interest margin due to the amount of earnings from the transaction in comparison to the size of the transaction. Management continues to monitor the net interest rate spread and overall profitability of the leverage strategy.
Total assets were $10.18 billion at September 30, 2023, an increase of $552.6 million from September 30, 2022. The increase was mainly composed of a $506.7 million increase in the loan portfolio, or 6.8% growth, and a $196.4 million increase in operating cash, partially offset by a $178.8 million decrease in securities. The growth in the loan portfolio was primarily funded with proceeds from borrowings.
Total liabilities were $9.13 billion at September 30, 2023, an increase of $605.0 million from September 30, 2022 due primarily to a $747.0 million increase in borrowings, partially offset by a $143.6 million decrease in deposits. The increase in borrowings was composed of $500.0 million in BTFP borrowings at a rate of 4.70% and the remaining amounts were FHLB advances. The decrease in deposits during the current year was mainly in non-maturity deposits which decreased $670.1 million, largely retail money market accounts, partially offset by a $460.4 million increase in retail certificates of deposit and a $53.6 million increase in public unit certificates of deposit. The decrease in non-maturity deposit balances was likely due to depositors moving funds to a higher rate certificate of deposit product offered by the Bank, higher yielding investment products outside the Bank, and/or withdrawing funds for customer spending. The majority of the growth in the retail certificate of deposit portfolio in the current year were in terms less than 17 months. Management continues to competitively price certain short-term retail certificate of deposit products to encourage customers to move to shorter-term options. If rates were to decrease in the near future, the Bank would be able to more quickly reprice those balances to lower market rates at maturity.
Stockholder's equity was $1.04 billion at September 30, 2023, a decrease of $52.4 million from September 30, 2022. The decrease was due primarily to the payment of cash dividends during the current year.
The Bank's asset quality remained strong, reflected in low loan delinquency and charge-off ratios. At September 30, 2023, loans 30 to 89 days delinquent were 0.21% of total loans receivable, net, and loans 90 or more days delinquent or in foreclosure were 0.11% of total loans receivable, net. The ratio of net charge-offs (recoveries) ("NCOs") during the current year to average loans outstanding during the current year was 0.00%.
At September 30, 2023, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $(1.19) billion, or (11.7)% of total assets, meaning the amount of interest-bearing liabilities exceeded the amount of interest-earning assets maturing or repricing during the same period. See additional discussion in "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk."
In August 2023, management successfully implemented a new core processing and digital banking systems to enhance customer experiences and better position the Bank for the future. The new platform will allow us to introduce new products and services quickly, drive better efficiencies, and provide a more personalized experience for our customers.
19
Critical Accounting Estimates
Our most critical accounting estimates are the methodologies used to determine the ACL and reserve for off-balance sheet credit exposures and fair value measurements. These estimates are important to the presentation of our financial condition and results of operations, involve a high degree of complexity, and require management to make difficult and subjective judgments that may require assumptions about highly uncertain matters. The use of different judgments, assumptions, and estimates could affect reported results materially. These critical accounting estimates and their application are reviewed at least annually by our audit committee. The following is a description of our critical accounting estimates and an explanation of the methods and assumptions underlying their application.
Allowance for Credit Losses and Reserve for Off-Balance Sheet Credit Exposures. The ACL is a valuation amount that is deducted from the amortized cost basis of loans and represents management's estimate of lifetime credit losses expected on the Company's loan portfolio as of the balance sheet date. The reserve for off-balance sheet credit exposures represents expected credit losses on unfunded portions of existing loans and commitments to originate or purchase loans that are not unconditionally cancellable by the Company.
Management estimates the ACL by projecting future loss rates which are dependent upon forecasted economic indices and applying qualitative factors when deemed appropriate by management. The key assumptions used in projecting future loss rates include the economic forecast, the forecast and reversion to mean time periods, and prepayment and curtailment assumptions. The assumptions are used to calculate and aggregate estimated cash flows for the time period that remains in each loan's contractual life. The cash flows are discounted back to the balance sheet date using each loan's effective yield, to arrive at a present value of future cash flows, which is compared to the amortized cost basis of the loan pool to determine the amount of ACL required by the calculation. Management then considers qualitative factors when assessing the overall level of ACL. See "Allowance for Credit Losses on Loans Receivable" and "Reserve for Off-Balance Sheet Credit Exposures" within "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies" for additional information.
One of the most significant judgments used in projecting loss rates when estimating the ACL and reserves for off-balance sheet credit exposures is the macroeconomic forecast provided by a third party. The economic indices sourced from the macroeconomic forecast and used in projecting loss rates are the national unemployment rate, changes in commercial real estate prices, changes in home values, and changes in the United States gross domestic product. The economic index used in the calculation to which the calculation is most sensitive is the national unemployment rate. Each reporting period, several macroeconomic forecast scenarios are considered by management. Management selects the macroeconomic forecast(s) that is/are most reflective of expectations at that point in time. Changes in the macroeconomic forecast, especially for the national unemployment rate, could significantly impact the calculated estimated credit losses between reporting periods.
Other key assumptions in the calculation of the ACL and reserve for off-balance sheet credit exposures estimates include the forecast and reversion to mean time periods and prepayment and curtailment assumptions. The calculation is less sensitive to these assumptions than the macroeconomic forecasts. The macroeconomic forecast is applied for a reasonable and supportable time period before reverting to long-term historical averages for each economic index. The forecast and reversion to mean time period used for each economic index at September 30, 2023 was four quarters. Prepayment and curtailment assumptions are generally based on the Company's historical experience and are adjusted by management as deemed necessary. The prepayment and curtailment assumptions vary based on loan product type.
The ACL and reserve for off-balance sheet credit exposures may be materially affected by qualitative factors, especially during periods of economic uncertainty, for items not reflected in the economic forecast and/or discounted cash flow model, but which are deemed appropriate by management's current assessment of the risks related to the loan portfolio and/or external factors. Such qualitative factors may include changes in the Bank's loan portfolio composition and credit concentrations, changes in the balances and/or trends in asset quality and/or loan credit performance, changes in lending underwriting standards, the effect of other external factors such as significant unique events or conditions, and actual and/or expected changes in economic conditions, real estate values, and/or other economic developments. The qualitative factors applied by management at September 30, 2023 were (1) economic uncertainty that may not be adequately captured in the third-party economic forecast scenarios and (2) other management considerations related to commercial loans to account for credit risks not fully reflected in the discounted cash flow model. The qualitative factors applied at September 30, 2023, and the importance and levels of the qualitative factors applied, may change in future periods depending on the level of changes
20
to items such as the uncertainty of economic conditions and management's assessment of the level of credit risk within the loan portfolio as a result of such changes, compared to the amount of ACL calculated by the model. The evaluation of qualitative factors is inherently imprecise and requires significant management judgment. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 4. Loans Receivable and Allowance for Credit Losses - Allowance for Credit Losses" for additional information regarding the qualitative factors applied at September 30, 2023.
The ACL and the reserve for off-balance sheet credit exposures were $23.8 million and $4.1 million, respectively at September 30, 2023, compared to $16.4 million and $4.8 million, respectively, at September 30, 2022. The $7.4 million increase in the ACL was due primarily to the outlook for worsening economic forecast conditions in the current year compared to the prior year, along with a reduction in the projected prepayment speeds used in the model for all loan categories. The $656 thousand decrease in the reserve for off-balance sheet credit exposures was due primarily to refining our methodology to account for the estimated credit losses on unfunded commercial construction-to-permanent loans and commitments for the time period after construction is expected to be completed. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 4. Loans Receivable and Allowance for Credit Losses - Allowance for Credit Losses" for additional information regarding the assumptions used in the Company's September 30, 2023 estimate of ACL.
While management utilizes its best judgment and information available, the adequacy of the ACL and reserve for off-balance sheet credit exposures is determined by certain factors outside of the Company's control, such as the performance of our portfolios, changes in the economic environment including economic uncertainty, changes in interest rates, and the view of the regulatory authorities toward classification of assets and the level of ACL and reserve for off-balance sheet credit exposures. Additionally, the level of ACL and reserve for off-balance sheet credit exposures may fluctuate based on the balance and mix of the loan portfolio and off-balance sheet credit exposures. If actual results differ significantly from our assumptions, our ACL and reserve for off-balance sheet credit exposures may not be sufficient to cover inherent losses in our loan portfolio, resulting in additions to our ACL and an increase in the provision for credit losses.
Fair Value Measurements. The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with Accounting Standards Codification ("ASC") 820 and ASC 825. The Company groups its financial instruments at fair value in three levels based on the markets in which the instruments are traded and the reliability of the assumptions used to determine fair value, with Level 1 (quoted prices for identical assets in an active market) being considered the most reliable, and Level 3 having the most unobservable inputs and therefore being considered the least reliable. The Company bases its fair values on the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
The Company's AFS securities are measured at fair value on a recurring basis. Changes in the fair value of AFS securities, not related to credit loss, are recorded, net of tax, as AOCI in stockholders' equity. The Company primarily uses prices obtained from third-party pricing services to determine the fair value of its AFS securities. Various modeling techniques are used to determine pricing for the Company's securities, including option pricing, discounted cash flow models, and similar techniques. The inputs to these models may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. All AFS securities are classified as Level 2.
The Company's interest rate swaps are measured at fair value on a recurring basis. The estimated fair values of the interest rate swaps are obtained from the counterparty and are determined by a discounted cash flow analysis using observable market-based inputs. Changes in the fair value of the interest rate swaps are recorded, net of tax, as AOCI in stockholders' equity. The Company did not have any other financial instruments that were measured at fair value on a recurring basis at September 30, 2023.
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."
21
Financial Condition
The following table summarizes the Company's financial condition at the dates indicated.
| September 30, | Change expressed in: | ||||||||||||||||||||||
| 2023 | 2022 | Dollars | Percent | ||||||||||||||||||||
| (Dollars and shares in thousands) | |||||||||||||||||||||||
| Total assets | $ | 10,177,461 | $ | 9,624,897 | $ | 552,564 | 5.7 | % | |||||||||||||||
| AFS securities | 1,384,482 | 1,563,307 | (178,825) | (11.4) | |||||||||||||||||||
| Loans receivable, net | 7,970,949 | 7,464,208 | 506,741 | 6.8 | |||||||||||||||||||
| Deposits | 6,051,220 | 6,194,866 | (143,646) | (2.3) | |||||||||||||||||||
| Borrowings | 2,879,125 | 2,132,154 | 746,971 | 35.0 | |||||||||||||||||||
| Stockholders' equity | 1,044,054 | 1,096,499 | (52,445) | (4.8) | |||||||||||||||||||
| Equity to total assets at end of period | 10.3 | % | 11.4 | % | |||||||||||||||||||
| Average number of basic shares outstanding | 133,557 | 135,700 | (2,143) | (1.6) | |||||||||||||||||||
| Average number of diluted shares outstanding | 133,557 | 135,700 | (2,143) | (1.6) | |||||||||||||||||||
Loans Receivable. Total loans, net at September 30, 2023 were $7.97 billion, an increase of $506.7 million from September 30, 2022. The increase was due primarily to growth in the commercial real estate loan portfolio and one- to four-family correspondent loan portfolio.
Originating and purchasing loans secured by one- to four-family residential properties is the Bank's primary lending business, resulting in a concentration in residential first mortgage loans secured by properties located in Kansas and Missouri. The Bank also originates and participates in commercial loans, and originates consumer loans and construction loans.
The Bank purchases one- to four-family loans, on a loan-by-loan basis, from a select group of correspondent lenders ("correspondent purchased"). Loan purchases enable the Bank to attain geographic diversification in the one- to four-family loan portfolio. We generally pay a premium of 0.50% to 1.00% of the loan balance to purchase these loans, and 1.00% of the loan balance to purchase the servicing of these loans. The premium paid is amortized against the interest earned over the life of the loan, which reduces the loan yield. If a loan pays off before the scheduled maturity date, the remaining premium is recognized as reduction in interest income. For balance sheet management purposes, we reduced purchases of correspondent loans during the current year, with the intention of correspondent purchases eventually being near zero.
In the past, the Bank has also purchased one- to four-family loans from correspondent and nationwide lenders in bulk loan packages ("bulk purchased"). The majority of the Bank's bulk purchased loans were guaranteed by one seller. The Bank has not experienced any losses with this group of loans since the loan package was purchased in August 2012.
The Bank originates owner-occupied construction-to-permanent loans secured by one- to four-family residential real estate. The majority of these loans are secured by property located within the Bank's Kansas City market area. The Bank's owner-occupied construction-to-permanent loan program combines the construction loan and the permanent loan into one loan, allowing the borrower to secure the same interest rate structure throughout the construction period and the permanent loan term.
The Bank offers a variety of secured consumer loans, including home equity loans and lines of credit, home improvement loans, vehicle loans, and loans secured by savings deposits. The Bank also originates a very limited amount of unsecured loans. Generally, consumer loans are originated in the Bank's market areas. The majority of our consumer loan portfolio is comprised of home equity lines of credit, which have adjustable interest rates. For a majority of the home equity lines of credit, the Bank has the first mortgage or the Bank is in the first lien position.
The Bank's commercial loan portfolio is composed of commercial real estate loans, commercial construction loans and commercial and industrial loans. Our commercial real estate loans include a variety of property types, including retail buildings, senior housing facilities, multi-family dwellings, hotels, and office buildings located in Kansas, Texas, and
22
Missouri, and 13 other states. The Bank's commercial and industrial loan portfolio consists largely of loans secured by accounts receivable, inventory and equipment.
Commercial borrowers are generally required to provide financial information annually, including borrower financial statements, subject property rental rates and income, maintenance costs, updated real estate property tax and insurance payments, and personal financial information for the guarantor(s). This allows the Bank to monitor compliance with loan covenants and review the borrower's performance, including cash flows from operations, debt service coverage, and comparison of performance to projections and year-over-year performance trending. Additionally, the Bank monitors and performs site visits, or in the case of participation loans, obtains updates from the lead bank as needed to determine the condition of the collateral securing the loan. Depending on the financial strength of the project and/or the complexity of the borrower's financials, the Bank may also perform a global analysis of cash flows to account for all other properties owned by the borrower or guarantor. If signs of weakness are identified, the Bank may begin performing more frequent financial and/or collateral reviews or will initiate contact with the borrower, or the lead bank will contact the borrower if the loan is a participation loan, to ensure cash flows from operations are maintained at a satisfactory level to meet the debt requirements. The Bank mitigates the risk of commercial real estate construction lending during the construction period by monitoring inspection reports from an independent third-party, project budget, percentage of completion, on-site inspections and percentage of advanced funds. Commercial and industrial loans are monitored through a review of borrower performance as indicated by borrower financial statements, borrowing base reports, accounts receivable aging reports, and inventory aging reports. These reports are required to be provided by the borrowers monthly, quarterly, or annually depending on the nature of the borrowing relationship. The Bank regularly monitors the level of risk in the entire commercial loan portfolio, including concentrations in such factors as geographic locations, collateral types, tenant brand name, borrowing relationships, and lending relationships in the case of participation loans, among other factors.
23
The following table presents the balance and weighted average rate of our loan portfolio as of the dates indicated. The rate on the portfolio increased 43 basis points during the current year due primarily to one- to four-family correspondent and commercial loan growth at interest rates higher than the existing portfolios, disbursements on higher rate commercial construction loans, and repricing of existing commercial loans to higher market interest rates.
| September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||
| Amount | Rate | Amount | Rate | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| One- to four-family: | |||||||||||||||||||||||
| Originated | $ | 3,978,837 | 3.39 | % | $ | 3,988,469 | 3.20 | % | |||||||||||||||
| Correspondent purchased | 2,405,911 | 3.44 | 2,201,886 | 3.10 | |||||||||||||||||||
| Bulk purchased | 137,193 | 1.85 | 147,939 | 1.24 | |||||||||||||||||||
| Construction | 69,974 | 3.68 | 66,164 | 2.90 | |||||||||||||||||||
| Total | 6,591,915 | 3.38 | 6,404,458 | 3.12 | |||||||||||||||||||
| Commercial: | |||||||||||||||||||||||
| Commercial real estate | 995,788 | 5.29 | 745,301 | 4.30 | |||||||||||||||||||
| Commercial and industrial | 112,953 | 6.36 | 79,981 | 4.30 | |||||||||||||||||||
| Construction | 178,746 | 5.01 | 141,062 | 5.34 | |||||||||||||||||||
| Total | 1,287,487 | 5.35 | 966,344 | 4.45 | |||||||||||||||||||
| Consumer loans: | |||||||||||||||||||||||
| Home equity | 95,723 | 8.83 | 92,203 | 6.28 | |||||||||||||||||||
| Other | 9,256 | 5.20 | 8,665 | 4.21 | |||||||||||||||||||
| Total | 104,979 | 8.51 | 100,868 | 6.10 | |||||||||||||||||||
| Total loans receivable | 7,984,381 | 3.76 | 7,471,670 | 3.33 | |||||||||||||||||||
| Less: | |||||||||||||||||||||||
| ACL | 23,759 | 16,371 | |||||||||||||||||||||
| Deferred loan fees/discounts | 31,335 | 29,736 | |||||||||||||||||||||
| Premiums/deferred costs | (41,662) | (38,645) | |||||||||||||||||||||
| Total loans receivable, net | $ | 7,970,949 | $ | 7,464,208 | |||||||||||||||||||
24
The following table presents the contractual maturity of our loan portfolio, along with associated weighted average yields, at September 30, 2023. Loans that have adjustable interest rates are shown as maturing in the period during which the contract is due. The table does not reflect the effects of possible prepayments or enforcement of due on sale clauses.
One year or less(1) | Over one year to five years | Over five years to 15 years | Over 15 years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| One- to four-family: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Originated | $ | 1,659 | 4.03 | % | $ | 75,168 | 3.37 | % | $ | 1,184,927 | 2.92 | % | $ | 2,717,083 | 3.64 | % | $ | 3,978,837 | 3.42 | % | |||||||||||||||||||||||||||||||||||||||
| Correspondent purchased | 117 | 3.77 | 18,064 | 2.58 | 436,634 | 2.46 | 1,951,096 | 3.54 | 2,405,911 | 3.34 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Bulk purchased | 1 | 4.63 | 80 | 4.90 | 27,877 | 3.83 | 109,235 | 1.24 | 137,193 | 1.77 | |||||||||||||||||||||||||||||||||||||||||||||||||
Construction(2) | — | — | — | — | 16,020 | 2.71 | 53,954 | 4.03 | 69,974 | 3.72 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 1,777 | 4.02 | 93,312 | 3.22 | 1,665,458 | 2.81 | 4,831,368 | 3.55 | 6,591,915 | 3.36 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | 77,723 | 6.00 | 193,066 | 5.63 | 506,809 | 4.53 | 218,190 | 6.75 | 995,788 | 5.34 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 23,319 | 7.59 | 48,726 | 6.88 | 36,233 | 4.96 | 4,675 | 4.07 | 112,953 | 6.29 | |||||||||||||||||||||||||||||||||||||||||||||||||
Construction(2) | 38,549 | 7.15 | 94,371 | 4.33 | 44,489 | 4.88 | 1,337 | 7.43 | 178,746 | 5.10 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 139,591 | 6.58 | 336,163 | 5.45 | 587,531 | 4.58 | 224,202 | 6.70 | 1,287,487 | 5.39 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Home equity(3) | 1,290 | 10.91 | 1,710 | 6.65 | 41,736 | 8.84 | 50,987 | 8.77 | 95,723 | 8.79 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other | 643 | 2.16 | 7,707 | 5.17 | 847 | 6.83 | 59 | 18.00 | 9,256 | 5.20 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 1,933 | 8.00 | 9,417 | 5.44 | 42,583 | 8.80 | 51,046 | 8.78 | 104,979 | 8.47 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total loans receivable | $ | 143,301 | 6.57 | $ | 438,892 | 4.97 | $ | 2,295,572 | 3.37 | $ | 5,106,616 | 3.74 | 7,984,381 | 3.75 | |||||||||||||||||||||||||||||||||||||||||||||
| Less: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ACL | 23,759 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred loan fees/discounts | 31,335 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Premiums/deferred costs | (41,662) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total loans receivable, net | $ | 7,970,949 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1)Includes demand loans, loans having no stated maturity, and overdraft loans.
(2)Construction loans are presented based upon the contractual maturity date, which includes the permanent financing period for construction-to-permanent loans.
(3)For home equity loans, including those that do not have a stated maturity date, the maturity date calculated assumes the borrower always makes the required minimum payment. The majority of home equity loans assume a maximum term of 240 months.
25
The following table presents, as of September 30, 2023, the amount of loans due after September 30, 2024, and whether these loans have fixed or adjustable interest rates.
| Fixed | Adjustable | Total | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| One- to four-family: | |||||||||||||||||
| Originated | $ | 3,605,008 | $ | 372,170 | $ | 3,977,178 | |||||||||||
| Correspondent purchased | 1,994,557 | 411,237 | 2,405,794 | ||||||||||||||
| Bulk purchased | 3,954 | 133,238 | 137,192 | ||||||||||||||
| Construction | 53,985 | 15,989 | 69,974 | ||||||||||||||
| Total | 5,657,504 | 932,634 | 6,590,138 | ||||||||||||||
| Commercial: | |||||||||||||||||
| Commercial real estate | 270,700 | 647,365 | 918,065 | ||||||||||||||
| Commercial and industrial | 39,513 | 50,121 | 89,634 | ||||||||||||||
| Construction | 77,846 | 62,351 | 140,197 | ||||||||||||||
| Total | 388,059 | 759,837 | 1,147,896 | ||||||||||||||
| Consumer: | |||||||||||||||||
| Home equity | 17,148 | 77,285 | 94,433 | ||||||||||||||
| Other | 6,352 | 2,261 | 8,613 | ||||||||||||||
| Total | 23,500 | 79,546 | 103,046 | ||||||||||||||
| Total loans receivable | $ | 6,069,063 | $ | 1,772,017 | $ | 7,841,080 | |||||||||||
Loan Activity - The following table summarizes activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, deferred loan fees/discounts, and premiums/deferred costs. Loans that were paid off as a result of refinances are included in repayments. Loan endorsements are not included in the activity in the following table because a new loan is not generated at the time of the endorsement. The endorsed balance and rate are included in the ending loan portfolio balance and rate. Commercial loan renewals are not included in the activity presented in the following table unless new funds are disbursed at the time of renewal. The renewal balance and rate are included in the ending loan portfolio balance and rate.
| For the Year Ended | |||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||
| Amount | Rate | Amount | Rate | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Beginning balance | $ | 7,471,670 | 3.33 | % | $ | 7,096,073 | 3.21 | % | |||||||||||||||
| Originated and refinanced | 930,362 | 5.96 | 1,065,373 | 3.74 | |||||||||||||||||||
| Purchased and participations | 644,072 | 5.59 | 701,674 | 3.46 | |||||||||||||||||||
| Change in undisbursed loan funds | (99,179) | (53,811) | |||||||||||||||||||||
| Repayments | (956,562) | (1,337,034) | |||||||||||||||||||||
| Principal (charge-offs)/recoveries, net | (106) | 186 | |||||||||||||||||||||
| Other | (5,876) | (791) | |||||||||||||||||||||
| Ending balance | $ | 7,984,381 | 3.76 | $ | 7,471,670 | 3.33 | |||||||||||||||||
26
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 Year Ended | |||||||||||||||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||||||||||||||
| Amount | Rate | % of Total | Amount | Rate | % of Total | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Fixed-rate: | |||||||||||||||||||||||||||||||||||
| One- to four-family | $ | 404,598 | 5.47 | % | 25.7 | % | $ | 926,274 | 3.41 | % | 52.5 | % | |||||||||||||||||||||||
| One- to four-family construction | 39,599 | 5.72 | 2.5 | 120,615 | 3.19 | 6.8 | |||||||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||||||||
| Real estate | 43,408 | 7.48 | 2.7 | 50,620 | 4.08 | 2.9 | |||||||||||||||||||||||||||||
| Commercial and industrial | 40,238 | 7.81 | 2.6 | 23,846 | 4.14 | 1.3 | |||||||||||||||||||||||||||||
| Construction | 149,046 | 5.89 | 9.5 | 86,023 | 3.47 | 4.9 | |||||||||||||||||||||||||||||
| Home equity | 6,080 | 8.20 | 0.4 | 6,771 | 5.76 | 0.4 | |||||||||||||||||||||||||||||
| Other | 4,620 | 6.93 | 0.3 | 3,923 | 5.66 | 0.2 | |||||||||||||||||||||||||||||
| Total fixed-rate | 687,589 | 5.87 | 43.7 | 1,218,072 | 3.45 | 69.0 | |||||||||||||||||||||||||||||
| Adjustable-rate: | |||||||||||||||||||||||||||||||||||
| One- to four-family | 342,093 | 4.97 | 21.7 | 230,640 | 3.51 | 13.0 | |||||||||||||||||||||||||||||
| One- to four-family construction | 28,545 | 5.22 | 1.8 | 26,080 | 3.31 | 1.5 | |||||||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||||||||
| Real estate | 223,910 | 5.60 | 14.2 | 137,150 | 4.21 | 7.8 | |||||||||||||||||||||||||||||
| Commercial and industrial | 57,295 | 7.28 | 3.6 | 32,430 | 3.87 | 1.8 | |||||||||||||||||||||||||||||
| Construction | 177,471 | 6.22 | 11.3 | 58,080 | 4.94 | 3.3 | |||||||||||||||||||||||||||||
| Home equity | 55,896 | 8.43 | 3.6 | 62,832 | 4.97 | 3.5 | |||||||||||||||||||||||||||||
| Other | 1,635 | 4.25 | 0.1 | 1,763 | 3.03 | 0.1 | |||||||||||||||||||||||||||||
| Total adjustable-rate | 886,845 | 5.75 | 56.3 | 548,975 | 4.01 | 31.0 | |||||||||||||||||||||||||||||
| Total originated, refinanced and purchased | $ | 1,574,434 | 5.81 | 100.0 | % | $ | 1,767,047 | 3.63 | 100.0 | % | |||||||||||||||||||||||||
| Purchased and participation loans included above: | |||||||||||||||||||||||||||||||||||
| Fixed-rate: | |||||||||||||||||||||||||||||||||||
| Correspondent purchased - one- to four-family | $ | 199,858 | 5.20 | $ | 452,093 | 3.35 | |||||||||||||||||||||||||||||
| Participations and purchases - commercial | 19,016 | 9.43 | 87,365 | 3.47 | |||||||||||||||||||||||||||||||
| Total fixed-rate purchased/participations | 218,874 | 5.57 | 539,458 | 3.37 | |||||||||||||||||||||||||||||||
| Adjustable-rate: | |||||||||||||||||||||||||||||||||||
| Correspondent purchased - one- to four-family | 215,939 | 4.86 | 129,216 | 3.49 | |||||||||||||||||||||||||||||||
| Participations and purchases - commercial | 209,259 | 6.36 | 33,000 | 4.87 | |||||||||||||||||||||||||||||||
| Total adjustable-rate purchased/participations | 425,198 | 5.60 | 162,216 | 3.77 | |||||||||||||||||||||||||||||||
| Total purchased/participation loans | $ | 644,072 | 5.59 | $ | 701,674 | 3.46 | |||||||||||||||||||||||||||||
27
One- to Four-Family Loans - The following table presents, for our portfolio of one- to four-family loans, the amount, percent of total, weighted average rate, weighted average credit score, weighted average loan-to-value ("LTV") ratio, and average balance per loan as of September 30, 2023. Credit scores are updated at least annually, with the latest update in September 2023, 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 | $ | 3,978,837 | 61.0 | % | 3.39 | % | 772 | 60 | % | $ | 164 | ||||||||||||||||||||||||
| Correspondent purchased | 2,405,911 | 36.9 | 3.44 | 767 | 64 | 416 | |||||||||||||||||||||||||||||
| Bulk purchased | 137,193 | 2.1 | 1.85 | 772 | 55 | 288 | |||||||||||||||||||||||||||||
| $ | 6,521,941 | 100.0 | % | 3.37 | 770 | 61 | 213 | ||||||||||||||||||||||||||||
The following table presents originated and correspondent purchased activity in our one- to four-family loan portfolio, excluding endorsement activity, along with associated weighted average rates, weighted average LTVs and weighted average credit scores for the current year.
| Credit | |||||||||||||||||||||||
| Amount | Rate | LTV | Score | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Originated | $ | 399,038 | 5.51 | % | 75 | % | 764 | ||||||||||||||||
| Correspondent purchased | 415,797 | 5.02 | 76 | 769 | |||||||||||||||||||
| $ | 814,835 | 5.26 | 76 | 767 | |||||||||||||||||||
The following table summarizes our one- to four-family loan origination and refinance commitments and one- to four-family correspondent loan purchase commitments as of September 30, 2023, along with associated weighted average rates. It is expected that some of the loan commitments will expire unfunded, so the amounts reflected in the table below are not necessarily indicative of our future cash needs.
| Amount | Rate | ||||||||||
| (Dollars in thousands) | |||||||||||
| Originate/refinance | $ | 53,497 | 6.62 | % | |||||||
| Correspondent | 1,765 | 5.81 | |||||||||
| $ | 55,262 | 6.60 | |||||||||
Commercial Loans - During fiscal year 2023, the Bank originated $463.1 million of commercial loans and entered into commercial loan participations totaling $228.3 million. The Bank processed commercial loan disbursements, excluding lines of credit, of approximately $474.6 million at a weighted average rate of 6.09%.
As of September 30, 2023 and September 30, 2022, the Bank's commercial and industrial gross loan amounts (unpaid principal plus undisbursed amounts) totaled $158.5 million and $100.4 million, respectively, and commitments totaled $2.6 million and $458 thousand, respectively.
28
The following table presents the Bank's commercial real estate and commercial construction loans by type of primary collateral as of the dates indicated. As of September 30, 2023, the Bank had three commercial real estate and commercial construction loan commitments totaling $14.0 million, at a weighted average rate of 7.57%, which are not included in the table below. Because the commitments to pay out undisbursed funds are not cancellable by the Bank, unless the loan is in default, we generally anticipate fully funding the related projects. Of the total commercial undisbursed amounts and commitments outstanding as of September 30, 2023, management anticipates funding approximately $86 million during the December 2023 quarter, $75 million during the March 2024 quarter, $52 million during the June 2024 quarter, and $172 million during the September 2024 quarter or later.
| September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||||||||
| Unpaid | Undisbursed | Gross Loan | Gross Loan | ||||||||||||||||||||||||||
| Count | Principal | Amount | Amount | Amount | |||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||
| Retail building | 141 | $ | 265,336 | $ | 87,163 | $ | 352,499 | $ | 230,153 | ||||||||||||||||||||
| Senior housing | 36 | 308,765 | 22,442 | 331,207 | 328,259 | ||||||||||||||||||||||||
| Multi-family | 42 | 83,614 | 225,232 | 308,846 | 122,735 | ||||||||||||||||||||||||
| Hotel | 13 | 214,019 | 18,993 | 233,012 | 181,546 | ||||||||||||||||||||||||
| Office building | 81 | 122,132 | 8,789 | 130,921 | 109,653 | ||||||||||||||||||||||||
| One- to four-family property | 365 | 62,733 | 7,532 | 70,265 | 68,907 | ||||||||||||||||||||||||
| Single use building | 30 | 33,990 | 13,203 | 47,193 | 41,908 | ||||||||||||||||||||||||
| Other | 112 | 83,945 | 5,050 | 88,995 | 53,054 | ||||||||||||||||||||||||
| 820 | $ | 1,174,534 | $ | 388,404 | $ | 1,562,938 | $ | 1,136,215 | |||||||||||||||||||||
| Weighted average rate | 5.25 | % | 6.12 | % | 5.47 | % | 4.56 | % | |||||||||||||||||||||
The following table summarizes the Bank's commercial real estate and commercial construction loans by state as of the dates indicated.
| September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||||||||
| Unpaid | Undisbursed | Gross Loan | Gross Loan | ||||||||||||||||||||||||||
| Count | Principal | Amount | Amount | Amount | |||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||
| Kansas | 607 | $ | 471,114 | $ | 199,384 | $ | 670,498 | $ | 423,797 | ||||||||||||||||||||
| Texas | 17 | 269,718 | 78,989 | 348,707 | 280,840 | ||||||||||||||||||||||||
| Missouri | 163 | 261,761 | 70,849 | 332,610 | 296,443 | ||||||||||||||||||||||||
| Colorado | 8 | 42,766 | 6,619 | 49,385 | 34,377 | ||||||||||||||||||||||||
| Tennessee | 2 | 26,391 | 15,745 | 42,136 | — | ||||||||||||||||||||||||
| Nebraska | 8 | 35,571 | 2,038 | 37,609 | 32,992 | ||||||||||||||||||||||||
| Other | 15 | 67,213 | 14,780 | 81,993 | 67,766 | ||||||||||||||||||||||||
| 820 | $ | 1,174,534 | $ | 388,404 | $ | 1,562,938 | $ | 1,136,215 | |||||||||||||||||||||
29
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, 2023.
| Count | Amount | ||||||||||
| (Dollars in thousands) | |||||||||||
| Greater than $30 million | 9 | $ | 436,940 | ||||||||
| >$15 to $30 million | 20 | 418,355 | |||||||||
| >$10 to $15 million | 10 | 122,580 | |||||||||
| >$5 to $10 million | 32 | 234,433 | |||||||||
| $1 to $5 million | 143 | 339,856 | |||||||||
| Less than $1 million | 1,217 | 185,888 | |||||||||
| 1,431 | $ | 1,738,052 | |||||||||
Asset Quality
Delinquent and nonaccrual loans and other real estate owned ("OREO"). The following table presents the Company's 30 to 89 day delinquent loans at the dates indicated. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. Of the loans 30 to 89 days delinquent at September 30, 2023 and 2022, approximately 72% and 73%, respectively, were 59 days or less delinquent. The increase in loans 30 to 89 days delinquent during the current year was due mainly to delinquencies returning to more historical levels as government payment assistance programs expired.
| 2023 | 2022 | ||||||||||||||||||||||
| Number | Amount | Number | Amount | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| One- to four-family: | |||||||||||||||||||||||
| Originated | 88 | $ | 9,078 | 48 | $ | 4,134 | |||||||||||||||||
| Correspondent purchased | 17 | 5,192 | 7 | 1,104 | |||||||||||||||||||
| Bulk purchased | 1 | 149 | 3 | 913 | |||||||||||||||||||
| Construction | 4 | 1,123 | — | — | |||||||||||||||||||
| Commercial | 5 | 94 | — | — | |||||||||||||||||||
| Consumer | 30 | 730 | 24 | 345 | |||||||||||||||||||
| 145 | $ | 16,366 | 82 | $ | 6,496 | ||||||||||||||||||
| Loans 30 to 89 days delinquent | |||||||||||||||||||||||
| to total loans receivable, net | 0.21 | % | 0.09 | % | |||||||||||||||||||
30
The following table presents the Company's nonaccrual loans and OREO at the dates indicated. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. Nonaccrual loans are loans that are 90 or more days delinquent or in foreclosure and other loans required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements and/or internal policies, even if the loans are current. At all dates presented, there were no loans 90 or more days delinquent that were still accruing interest. Non-performing assets include nonaccrual loans and OREO.
| September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Number | Amount | Number | Amount | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Loans 90 or More Days Delinquent or in Foreclosure: | |||||||||||||||||||||||
| One- to four-family: | |||||||||||||||||||||||
| Originated | 24 | $ | 2,246 | 29 | $ | 2,919 | |||||||||||||||||
| Correspondent purchased | 9 | 3,410 | 12 | 3,737 | |||||||||||||||||||
| Bulk purchased | 2 | 942 | 3 | 1,148 | |||||||||||||||||||
| Commercial | 12 | 2,183 | 8 | 1,167 | |||||||||||||||||||
| Consumer | 9 | 113 | 9 | 154 | |||||||||||||||||||
| 56 | 8,894 | 61 | 9,125 | ||||||||||||||||||||
| Loans 90 or more days delinquent or in foreclosure | |||||||||||||||||||||||
| as a percentage of total loans | 0.11 | % | 0.12 | % | |||||||||||||||||||
Nonaccrual loans less than 90 Days Delinquent:(1) | |||||||||||||||||||||||
| One- to four-family: | |||||||||||||||||||||||
| Originated | 2 | $ | 215 | 3 | $ | 222 | |||||||||||||||||
| Correspondent purchased | 1 | 282 | — | — | |||||||||||||||||||
| Bulk purchased | — | — | — | — | |||||||||||||||||||
| Commercial | 1 | 18 | 1 | 77 | |||||||||||||||||||
| Consumer | — | — | 1 | 19 | |||||||||||||||||||
| 4 | 515 | 5 | 318 | ||||||||||||||||||||
| Total nonaccrual loans | 60 | 9,409 | 66 | 9,443 | |||||||||||||||||||
| Nonaccrual loans as a percentage of total loans | 0.12 | % | 0.13 | % | |||||||||||||||||||
| OREO: | |||||||||||||||||||||||
| One- to four-family: | |||||||||||||||||||||||
Originated(2) | — | $ | — | 4 | $ | 307 | |||||||||||||||||
| Correspondent purchased | 1 | 219 | — | — | |||||||||||||||||||
| Consumer | — | — | 1 | 21 | |||||||||||||||||||
| 1 | 219 | 5 | 328 | ||||||||||||||||||||
| Total non-performing assets | 61 | $ | 9,628 | 71 | $ | 9,771 | |||||||||||||||||
| Non-performing assets as a percentage of total assets | 0.09 | % | 0.10 | % | |||||||||||||||||||
(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.
31
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, excluding construction 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, 2023. 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, 2023, 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 | $ | 3,537,368 | 54.2 | % | $ | 8,331 | 57.8 | % | $ | 1,863 | 28.2 | % | 53 | % | ||||||||||||||||||||||||||||||
| Missouri | 1,120,470 | 17.2 | 3,608 | 25.0 | 1,582 | 24.0 | 57 | |||||||||||||||||||||||||||||||||||||
| Other states | 1,864,103 | 28.6 | 2,480 | 17.2 | 3,153 | 47.8 | 49 | |||||||||||||||||||||||||||||||||||||
| $ | 6,521,941 | 100.0 | % | $ | 14,419 | 100.0 | % | $ | 6,598 | 100.0 | % | 52 | ||||||||||||||||||||||||||||||||
Classified Assets. In accordance with the Bank's asset classification policy, management regularly reviews the problem assets in the Bank's portfolio to determine whether any assets require classification. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 4. Loans Receivable and Allowance for Credit Losses" for asset classification definitions.
The following table presents loans classified as special mention or substandard at the dates presented. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs, if any. The increase in commercial special mention loans at September 30, 2023 compared to September 30, 2022 was due mainly to three loans in a single commercial relationship where the borrower has experienced some performance issues. Since being classified as special mention, these loans have been trending in a positive direction. Management continues to closely monitor the borrower's performance.
| September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||
| Special Mention | Substandard | Special Mention | Substandard | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| One- to four-family | $ | 18,603 | $ | 19,314 | $ | 12,950 | $ | 19,953 | |||||||||||||||
| Commercial | 16,407 | 1,293 | 565 | 2,733 | |||||||||||||||||||
| Consumer | 327 | 190 | 306 | 354 | |||||||||||||||||||
| $ | 35,337 | $ | 20,797 | $ | 13,821 | $ | 23,040 | ||||||||||||||||
32
Allowance for Credit Losses. The following table presents the distribution of our ACL and the ratio of ACL to loans receivable, by loan type, at the dates indicated. The increase in the ratio of ACL to loans receivable for commercial loans from September 30, 2022 to September 30, 2023 was due mainly to the outlook for worsening economic forecast conditions in the current year compared to the prior year, along with a reduction in projected prepayment speeds.
| September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| % of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||||||||||
| ACL to | ACL to | Loans to | ACL to | ACL to | Loans to | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Loans | Total | Total | Amount | Loans | Total | Total | ||||||||||||||||||||||||||||||||||||||||
| of ACL | Ratio | ACL | Loans | of ACL | Ratio | ACL | Loans | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| One- to four-family: | |||||||||||||||||||||||||||||||||||||||||||||||
| Originated | $ | 2,084 | 0.05 | % | 8.8 | % | 49.9 | % | $ | 2,012 | 0.05 | % | 12.3 | % | 53.4 | % | |||||||||||||||||||||||||||||||
| Correspondent purchased | 2,972 | 0.12 | 12.4 | 30.1 | 2,734 | 0.12 | 16.7 | 29.5 | |||||||||||||||||||||||||||||||||||||||
| Bulk purchased | 207 | 0.15 | 0.9 | 1.7 | 206 | 0.14 | 1.3 | 2.0 | |||||||||||||||||||||||||||||||||||||||
| Construction | 65 | 0.09 | 0.3 | 0.9 | 54 | 0.08 | 0.3 | 0.9 | |||||||||||||||||||||||||||||||||||||||
| Total | 5,328 | 0.08 | 22.4 | 82.6 | 5,006 | 0.08 | 30.6 | 85.8 | |||||||||||||||||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||||||||||||||||||||
| Real estate | 15,589 | 1.57 | 65.6 | 12.5 | 8,729 | 1.17 | 53.3 | 10.0 | |||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 1,104 | 0.98 | 4.6 | 1.4 | 490 | 0.61 | 3.0 | 1.0 | |||||||||||||||||||||||||||||||||||||||
| Construction | 1,487 | 0.83 | 6.3 | 2.2 | 1,901 | 1.35 | 11.6 | 1.9 | |||||||||||||||||||||||||||||||||||||||
| Total | 18,180 | 1.41 | 76.5 | 16.1 | 11,120 | 1.15 | 67.9 | 12.9 | |||||||||||||||||||||||||||||||||||||||
| Consumer loans: | |||||||||||||||||||||||||||||||||||||||||||||||
| Home equity | 142 | 0.15 | 0.6 | 1.2 | 136 | 0.15 | 0.8 | 1.2 | |||||||||||||||||||||||||||||||||||||||
| Other consumer | 109 | 1.18 | 0.5 | 0.1 | 109 | 1.26 | 0.7 | 0.1 | |||||||||||||||||||||||||||||||||||||||
| Total consumer loans | 251 | 0.24 | 1.1 | 1.3 | 245 | 0.24 | 1.5 | 1.3 | |||||||||||||||||||||||||||||||||||||||
| $ | 23,759 | 0.30 | % | ||||||||||||||||||||||||||||||||||||||||||||