Capitol Federal Financial, Inc.® Reports Second Quarter Fiscal Year 2021 Results

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Capitol Federal Financial, Inc.® (NASDAQ: CFFN) (the "Company"), the parent company of Capitol Federal Savings Bank (the "Bank"), announced results today for the quarter ended March 31, 2021. Detailed results will be available in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, which will be filed with the Securities and Exchange Commission ("SEC") on or about May 10, 2021 and posted on our website, http://ir.capfed.com. For best viewing results, please view this release in Portable Document Format (PDF) on our website.

Highlights for the quarter include:

  • net income of $20.4 million;

  • basic and diluted earnings per share of $0.15;

  • net interest margin of 1.88%;

  • annualized deposit growth of approximately 15%;

  • paid dividends of $11.5 million, or $0.085 per share; and

  • on April 20, 2021, announced a cash dividend of $0.085 per share, payable on May 21, 2021 to stockholders of record as of the close of business on May 7, 2021.

During the current quarter, the Bank completed three unique transactions that impacted operating results:

  • Sold Visa Class B shares for a gain of $7.4 million.

  • Terminated $200.0 million of fixed-pay swaps with an average cost at the time of termination of 2.62% and realized a loss of $4.8 million. The estimated earn-back period of the loss is approximately 15 months.

  • Wrote down the value of a branch we intend to sell by $1.2 million.

For the quarter ended March 31, 2021, the Bank also recorded a negative provision for credit losses of $3.0 million.

Since the onset of the Coronavirus Disease 2019 ("COVID-19") pandemic, the Bank has lowered its rates offered on all deposit products except retail checking and savings accounts. The impact of reducing rates offered on our certificate of deposit products has been to lower the cost of deposits as certificates of deposit reprice to a lower rate when they mature and as new accounts are opened. Additionally, certain borrowings were repaid or restructured over the past year using funds obtained through deposit growth, which reduced interest expense on borrowings. Over this time, we lowered rates for our loan products. In late February 2021, as market interest rates began to increase, we began to increase our offered loan rates in our market areas. Despite this recent increase, the yield on the loan portfolio will likely continue to decrease in the near term due to the high levels of prepayments, refinances and endorsements, but not at the same magnitude as the past year. With significant cash inflows realized due to investment securities being called and prepayments on loans and mortgage-backed securities ("MBS") over the past year and the current yields on reinvested funds into new securities being lower than existing portfolio yields, the yield on our investments has been reduced significantly.

Comparison of Operating Results for the Three Months Ended March 31, 2021 and December 31, 2020

For the quarter ended March 31, 2021, the Company recognized net income of $20.4 million, or $0.15 per share, compared to net income of $18.9 million, or $0.14 per share, for the quarter ended December 31, 2020. The increase was due primarily to an increase in non-interest income resulting mainly from the sale of VISA Class B shares, partially offset by an increase in non-interest expense due to the termination of $200.0 million of interest rate swaps. The net interest margin decreased four basis points, from 1.92% for the prior quarter to 1.88% for the current quarter. The decrease in the net interest margin was due mainly to a decrease in the loan portfolio and securities portfolio average yields, along with a change in asset mix as cash flows from the loan portfolio have been invested into lower yielding securities, partially offset by a decrease in the average cost of borrowings and deposits. Our net interest margin could continue to decrease if our interest-earning assets continue to reprice to lower market rates at a faster pace than our deposits and borrowings, and if we continue investing in lower yielding securities rather than reinvesting cash flows into the loan portfolio.

Interest and Dividend Income

The weighted average yield on total interest-earning assets decreased 17 basis points, from 2.98% for the prior quarter to 2.81% for the current quarter, while the average balance of interest-earning assets increased $30.1 million between the two periods. The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent.

For the Three Months Ended

March 31,

December 31,

Change Expressed in:

2021

2020

Dollars

Percent

(Dollars in thousands)

INTEREST AND DIVIDEND INCOME:

Loans receivable

$

57,285

$

60,694

$

(3,409

)

(5.6

)

%

MBS

5,429

5,710

(281

)

(4.9

)

Federal Home Loan Bank Topeka ("FHLB") stock

951

1,069

(118

)

(11.0

)

Investment securities

629

683

(54

)

(7.9

)

Cash and cash equivalents

40

51

(11

)

(21.6

)

Total interest and dividend income

$

64,334

$

68,207

$

(3,873

)

(5.7

)

The decrease in interest income on loans receivable was due to a 14 basis point decrease in the weighted average portfolio yield and a $96.2 million decrease in the average balance. The weighted average yield on the loans receivable portfolio decreased from 3.41% for the prior quarter to 3.27% for the current quarter, due mainly to loans repricing to lower current market rates as a result of endorsements, refinances and adjustable-rate loan rate changes, along with a decrease in commercial loan deferred fee and discount recognition related to Paycheck Protection Program ("PPP") loans and other commercial loan activity. One- to four-family correspondent loan payoff activity decreased during the current quarter compared to the prior quarter; thereby reducing the amount of premium amortization and reduction in the loan portfolio yield. Correspondent loan payoff activity remains at elevated levels compared to historical norms which was the primary reason for the decrease in the average balance of the loan portfolio during the current quarter.

The decrease in interest income on the MBS portfolio was due to a 25 basis point decrease in the weighted average yield, to 1.50% for the current quarter, due primarily to an increase in the impact of net premium amortization, along with purchases at lower market yields. This was partially offset by a $142.5 million increase in the average balance as a result of purchases, primarily utilizing excess cash flows from the loan portfolio and operating cash, along with funds from growth in the deposit portfolio that were not used to pay down borrowings.

Interest Expense

The weighted average rate paid on interest-bearing liabilities decreased 14 basis points, from 1.20% for the prior quarter to 1.06% for the current quarter, while the average balance of interest-bearing liabilities increased $48.1 million between the two periods. The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.

For the Three Months Ended

March 31,

December 31,

Change Expressed in:

2021

2020

Dollars

Percent

(Dollars in thousands)

INTEREST EXPENSE:

Deposits

$

12,529

$

14,067

$

(1,538

)

(10.9

)

%

Borrowings

8,732

10,327

(1,595

)

(15.4

)

Total interest expense

$

21,261

$

24,394

$

(3,133

)

(12.8

)

The decrease in interest expense on deposits was due primarily to a decrease in the weighted average rate paid on the retail/business certificate of deposit portfolio. The weighted average rate on the retail/business certificate of deposit portfolio decreased 15 basis points, to 1.61% for the current quarter. Management has generally reduced deposit offer rates as discussed above. See the Financial Condition section below for additional information on deposits.

The decrease in interest expense on borrowings was due primarily to not replacing term borrowings that matured during the current quarter and prior quarter, along with prepaying certain advances and replacing them at lower rates. Cash flows from the deposit portfolio were generally utilized to repay maturing term borrowings during the current and prior quarters. The average balance of borrowings decreased $171.9 million compared to the prior quarter.

Provision for Credit Losses

For the quarter ended March 31, 2021, the Bank recorded a negative provision for credit losses of $3.0 million, compared to a negative provision for credit losses of $1.5 million for the prior quarter. The negative provision in the current quarter was composed of a $2.7 million decrease in the allowance for credit losses ("ACL") for loans and a $305 thousand decrease in reserves for off-balance sheet credit exposures. The $3.0 million negative provision for credit losses was due primarily to continued improvements in the economic forecast used in the model. See additional discussion regarding management's evaluation of the adequacy of the Bank's ACL and reserves for off-balance sheet credit exposures at March 31, 2021 in the Asset Quality section below.

Non-Interest Income

The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.

For the Three Months Ended

March 31,

December 31,

Change Expressed in:

2021

2020

Dollars

Percent

(Dollars in thousands)

NON-INTEREST INCOME:

Gain on sale of Visa Class B shares

$

7,386

$

$

7,386

N/A

Deposit service fees

2,814

2,947

(133

)

(4.5

)

%

Insurance commissions

888

638

250

39.2

Other non-interest income

1,389

1,485

(96

)

(6.5

)

Total non-interest income

$

12,477

$

5,070

$

7,407

146.1

During the current quarter, the Bank sold all of its Visa Class B shares, resulting in a $7.4 million gain. The increase in insurance commissions was due primarily to the receipt of annual contingent insurance commissions which were higher than what was anticipated and accrued.

Non-Interest Expense

The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.

For the Three Months Ended

March 31,

December 31,

Change Expressed in:

2021

2020

Dollars

Percent

(Dollars in thousands)

NON-INTEREST EXPENSE:

Salaries and employee benefits

$

13,397

$

14,138

$

(741

)

(5.2

)

%

Information technology and related expense

4,599

4,233

366

8.6

Occupancy, net

3,523

3,379

144

4.3

Loss on interest rate swap termination

4,752

4,752

N/A

Regulatory and outside services

1,234

1,585

(351

)

(22.1

)

Advertising and promotional

1,484

838

646

77.1

Deposit and loan transaction costs

664

766

(102

)

(13.3

)

Federal insurance premium

634

621

13

2.1

Office supplies and related expense

463

424

39

9.2

Other non-interest expense

1,903

1,083

820

75.7

Total non-interest expense

$

32,653

$

27,067

$

5,586

20.6

The decrease in salaries and employee benefits was due primarily to non-officer employee bonuses of $313 thousand paid during the prior quarter in appreciation of the hard work and dedication by our non-officer employees during these challenging times, along with a decrease in the number of working days compared to the prior quarter. The increase in information technology and related expense was due primarily to an increase in information technology professional services expense. During the current quarter, the Bank terminated interest rate swaps designated as cash flow hedges with a notional amount of $200.0 million which were tied to FHLB advances totaling $200.0 million. Since it was management's intention to prepay the related FHLB advances, the previously-forecasted transactions subject to the cash flow hedges are no longer expected to occur. Therefore, the termination of the interest rate swaps resulted in the reclassification of unrealized losses totaling $4.8 million from accumulated other comprehensive income ("AOCI") into earnings. The decrease in regulatory and outside services was due mainly to the timing of external audit expenses. The increase in advertising and promotional expenses was due to the timing of campaigns. The increase in other non-interest expense was due primarily to the write-down of a property that previously served as one of the Bank's branch locations, as management intends to sell the property.

The Company's efficiency ratio was 58.78% for the current quarter compared to 55.37% for the prior quarter. The change in the efficiency ratio was due primarily to higher non-interest expense, partially offset by an increase in non-interest income. The efficiency ratio is a measure of a financial institution's total non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income. A higher value indicates that the financial institution is generating revenue with a proportionally higher level of expense, relative to the net interest margin.

Income Tax Expense

The following table presents pretax income, income tax expense, and net income for the time periods presented, along with the change measured in dollars and percent.

For the Three Months Ended

March 31,

December 31,

Change Expressed in:

2021

2020

Dollars

Percent

(Dollars in thousands)

Income before income tax expense

$

25,861

$

23,348

$

2,513

10.8

%

Income tax expense

5,417

4,450

967

21.7

Net income

$

20,444

$

18,898

$

1,546

8.2

Effective Tax Rate

20.9

%

19.1

%

The increase in income tax expense was due mainly to a higher effective tax rate compared to the prior quarter, as well as an increase in pretax income. The lower effective tax rate in the prior quarter was due primarily to true-ups related to the preparation of the September 30, 2020 federal and state tax returns. Management anticipates the effective income tax rate for fiscal year 2021 will be approximately 21%.

Comparison of Operating Results for the Six Months Ended March 31, 2021 and 2020

The Company recognized net income of $39.3 million, or $0.29 per share, for the six month period ended March 31, 2021 compared to net income of $26.8 million, or $0.19 per share, for the six month period ended March 31, 2020. The increase in net income was due primarily to recording a $22.3 million provision for credit losses during the prior year period compared to recording a negative provision for credit losses of $4.5 million in the current year period, partially offset by a decrease in net interest income and an increase in income tax expense. Net interest income decreased $10.5 million, or 10.8%, from the prior year period to $86.9 million for the current year period. The net interest margin decreased 29 basis points, from 2.19% for the prior year period to 1.90% for the current year period. The decrease in net interest income and net interest margin was due mainly to a decrease in asset yields, along with a change in asset mix as cash flows from the loan portfolio have been used to purchase lower yielding securities, partially offset by a decrease in the cost of deposits and borrowings.

Interest and Dividend Income

The weighted average yield on total interest-earning assets decreased 66 basis points, from 3.56% for the prior year period to 2.90% for the current year period, while the average balance of interest-earning assets increased $232.9 million. The decrease in the weighted average yield between periods was due primarily to a decrease in the loan portfolio yield and partially the securities portfolio yield, along with a change in asset mix as cash flows from the loan portfolio have been used to purchase lower yielding securities. The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent.

For the Six Months Ended

March 31,

Change Expressed in:

2021

2020

Dollars

Percent

(Dollars in thousands)

INTEREST AND DIVIDEND INCOME:

Loans receivable

$

117,979

$

139,527

$

(21,548

)

(15.4

)

%

MBS

11,139

11,968

(829

)

(6.9

)

FHLB stock

2,020

3,540

(1,520

)

(42.9

)

Investment securities

1,312

2,889

(1,577

)

(54.6

)

Cash and cash equivalents

91

1,067

(976

)

(91.5

)

Total interest and dividend income

$

132,541

$

158,991

$

(26,450

)

(16.6

)

The decrease in interest income on loans receivable was due mainly to a 39 basis point decrease in the weighted average yield on the portfolio, from 3.73% for the prior year period to 3.34% for the current year period, primarily on correspondent one- to four-family loans related to higher premium amortization due to increases in payoff and endorsement activity, as well as adjustable-rate loans repricing to lower market rates, endorsements and refinances of one- to four-family originated loans to lower market rates, and the origination of new loans at lower market rates. Additionally, the average balance of the portfolio decreased $407.1 million compared to the prior year period. The majority of the decrease in the average balance of the loan portfolio between periods was due to a reduction in the correspondent one-to four-family loan portfolio. We suspended accepting new applications for these loans from mid-March 2020 to mid-June 2020, in part, to manage the influx of refinance requests from existing customers in our local market areas during that time period while also managing underwriting concerns on correspondent loans early in the COVID-19 pandemic. Additionally, after lifting the suspension, there were, and continues to be, historically high levels of prepayments due to refinance activity.

The decrease in interest income on the MBS portfolio was due to a 96 basis point decrease in the weighted average yield to 1.62% for the current year period as a result of new purchases at lower market yields and the repricing of existing adjustable-rate MBS to lower market yields, partially offset by a $445.6 million increase in the average balance of the portfolio.

The decrease in dividend income on FHLB stock was due mainly to a decrease in the dividend rate paid by FHLB, along with a decrease in the average balance of FHLB stock. The average balance decreased as the Bank did not replace certain maturing FHLB advances between periods, which reduced the amount of FHLB stock owned by the Bank per FHLB requirements.

The decrease in interest income on investment securities was due to a 146 basis point decrease in the weighted average yield to 0.58% for the current year period as a result of new purchases at lower market yields, partially offset by a $165.8 million increase in the average balance of the portfolio.

The decrease in interest income on cash and cash equivalents was due to a decrease in the yield earned on cash held at the Federal Reserve Bank of Kansas City, partially offset by a $46.3 million increase in the average balance.

Interest Expense

The weighted average rate paid on total interest-bearing liabilities decreased 44 basis points, from 1.57% for the prior year period to 1.13% for the current period, while the average balance of interest-bearing liabilities increased $248.9 million. The increase in the average balance was primarily in money market and checking accounts, partially offset by a decrease in borrowings. The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.

For the Six Months Ended

March 31,

Change Expressed in:

2021

2020

Dollars

Percent

(Dollars in thousands)

INTEREST EXPENSE:

Deposits

$

26,596

$

35,766

$

(9,170

)

(25.6

)

%

Borrowings

19,059

25,860

(6,801

)

(26.3

)

Total interest expense

$

45,655

$

61,626

$

(15,971

)

(25.9

)

The decrease in interest expense on deposits was due mainly to a decrease in the weighted average rate paid on retail/business certificates of deposit, money market accounts, and wholesale certificates of deposit, which decreased by 42 basis points, 38 basis points, and 152 basis points, respectively. Since the onset of the COVID-19 pandemic, retail/business certificates of deposit have been gradually repricing downward as they renew or are replaced at lower offered rates and rates on money market accounts have been lowered.

The decrease in interest expense on borrowings was due primarily to a $514.5 million decrease in the average balance, as certain maturing FHLB advances and repurchase agreements were not replaced and the Bank paid down its FHLB line of credit with funds generated from the deposit portfolio. Additionally, the decrease in interest expense on borrowings was due to the impact of prepaying certain FHLB advances during the current and prior periods.

Provision for Credit Losses

The Bank recorded a negative provision for credit losses during the current year period of $4.5 million, compared to a $22.3 million provision for credit losses during the prior year period. See additional discussion regarding management's evaluation of the adequacy of the Bank's ACL and reserve for off-balance sheet credit exposures at March 31, 2021 in the Asset Quality section below.

Non-Interest Income

The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.

For the Six Months Ended

March 31,

Change Expressed in:

2021

2020

Dollars

Percent

(Dollars in thousands)

NON-INTEREST INCOME:

Gain on sale of Visa Class B shares

$

7,386

$

$

7,386

N/A

Deposit service fees

5,761

5,845

(84

)

(1.4

)

%

Insurance commissions

1,526

1,091

435

39.9

Other non-interest income

2,874

3,239

(365

)

(11.3

)

Total non-interest income

$

17,547

$

10,175

$

7,372

72.5

During the current year period, the Bank sold its Visa Class B Shares, resulting in a $7.4 million gain. The increase in insurance commissions was due primarily to an increase in annual contingent insurance commissions received compared to the prior year period. The decrease in other non-interest income was mainly the result of a decrease in income from bank-owned life insurance ("BOLI") compared to the prior year period due to a reduction in the yield and lower death benefit receipts between the two periods.

Non-Interest Expense

The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.

For the Six Months Ended

March 31,

Change Expressed in:

2021

2020

Dollars

Percent

(Dollars in thousands)

NON-INTEREST EXPENSE:

Salaries and employee benefits

$

27,535

$

26,706

$

829

3.1

%

Information technology and related expense

8,832

8,409

423

5.0

Occupancy, net

6,902

6,656

246

3.7

Loss on interest rate swap termination

4,752

4,752

N/A

Regulatory and outside services

2,819

2,640

179

6.8

Advertising and promotional

2,322

2,769

(447

)

(16.1

)

Deposit and loan transaction costs

1,430

1,389

41

3.0

Federal insurance premium

1,255

1,255

N/A

Office supplies and related expense

887

1,111

(224

)

(20.2

)

Other non-interest expense

2,986

2,984

2

0.1

Total non-interest expense

$

59,720

$

52,664

$

7,056

13.4

The increase in salaries and employee benefits was due primarily to an increase in loan commissions, an increase in full-time equivalent employees, and higher non-officer related bonuses paid in the current year period. The increase in information technology and related expense was due mainly to an increase in information technology professional services expense and software licensing expense. As discussed previously, during the current year period, the Bank terminated interest rate swaps designated as cash flow hedges with a notional amount of $200.0 million which were tied to FHLB advances totaling $200.0 million. The termination of the interest rate swaps resulted in the reclassification of unrealized losses totaling $4.8 million from AOCI into earnings. The decrease in advertising and promotional expenses was due mainly to the timing of campaigns. The increase in the federal insurance premium was due mainly to the Bank utilizing an assessment credit from the Federal Deposit Insurance Corporation ("FDIC") during the prior year period.

The Company's efficiency ratio was 57.19% for the current period compared to 48.97% for the prior year period. The change in the efficiency ratio was due to higher non-interest expense, partially offset by an increase in non-interest income in the current year period compared to the prior year period. Management continues to strive to control operating costs. The increase in the efficiency ratio in the current period was due primarily to the loss on the termination of interest rate swaps, which was a unique transaction during the current period, along with higher federal insurance premium expense as the Bank utilized an assessment credit from the FDIC during the prior year period.

Income Tax Expense

The following table presents pretax income, income tax expense, and net income for the time periods presented, along with the change measured in dollars and percent.

For the Six Months Ended

March 31,

Change Expressed in:

2021

2020

Dollars

Percent

(Dollars in thousands)

Income before income tax expense

$

49,209

$

32,576

$

16,633

51.1

%

Income tax expense

9,867

5,789

4,078

70.4

Net income

$

39,342

$

26,787

$

12,555

46.9

Effective Tax Rate

20.1

%

17.8

%

The increase in income tax expense was due primarily to higher pretax income in the current year period, as well as a higher effective tax rate compared to the prior year period. The effective tax rate was lower in the prior year period due primarily to a discrete benefit recognized in the prior year period related to certain BOLI policies that were acquired in fiscal year 2018.

Financial Condition as of March 31, 2021

Many areas of consumer spending have rebounded in recent months, but some segments, such as travel and entertainment, are lagging. We continue to work with both our retail and commercial customers to help them manage their debt during this period of economic uncertainty. There is uncertainty about the longer lasting impact on local business as well as travel and entertainment resulting from the COVID-19 pandemic. This could cause a longer recovery time for some sectors of the economy and could make it challenging for sectors that have had better recoveries to maintain that recovery in the long run.

Total assets were $9.70 billion at March 31, 2021, an increase of $91.1 million, or 0.9%, from December 31, 2020, due to an increase in securities, partially offset by a decrease in loans receivable and cash and cash equivalents. Excess operating cash and cash flows from the loan portfolio and funds from deposit growth were generally used to purchase securities during the current quarter. Total loans were $6.97 billion at March 31, 2021, a decrease of $30.6 million, or 0.4%, from December 31, 2020. The decrease was mainly in the one- to four-family correspondent loan portfolio as payoffs exceeded purchases during the current quarter. During the current quarter, the Bank originated and refinanced $319.8 million of one- to four-family and consumer loans with a weighted average rate of 2.66% and purchased $163.3 million of one- to four-family loans from correspondent lenders with a weighted average rate of 2.61%. The Bank also originated $119.2 million of commercial loans with a weighted average rate of 3.07% and entered into commercial loan participations of $38.1 million at a weighted rate of 3.62%.

Total deposits were $6.65 billion at March 31, 2021, an increase of $240.0 million, or 3.7%, from December 31, 2020. The increase was primarily in non-maturity deposits, including a $113.8 million increase in money market accounts and a $110.0 million increase in checking accounts. Between mid-March 2021 and March 31, 2021, the Bank processed approximately $113 million of Economic Impact Payments, the majority of which were retained by the Bank as of March 31, 2021. Retail/business certificates of deposit decreased $47.6 million from December 31, 2020. Customers are moving some of the funds from maturing certificates to more liquid investment options such as the Bank's retail money market accounts.

Total borrowings decreased $152.3 million, or 8.8%, from December 31, 2020 to March 31, 2021. The decrease was due to not renewing borrowings that matured during the current quarter. Cash flows from the increase in the deposit portfolio were used to pay off maturing borrowings.

Total assets increased $210.8 million, or 2.2% from September 30, 2020 to March 31, 2021, due mainly to an increase in securities, partially offset by a decrease in loans receivable. Securities were purchased with cash flows from the loan portfolio and growth in the deposit portfolio that was not used to pay down maturing borrowings. Total securities increased $535.0 million, or 34.3%, from September 30, 2020 to March 31, 2021, including a $369.1 million increase in MBS and a $165.9 million increase in investment securities.

Total loans decreased $229.3 million from September 30, 2020 to March 31, 2021. The decrease was primarily in the one- to four-family correspondent loan portfolio. During the current year six month period, the Bank originated and refinanced $649.4 million of one- to four-family and consumer loans with a weighted average rate of 2.71% and purchased $269.1 million of one- to four-family loans from correspondent lenders with a weighted average rate of 2.70%. The Bank also originated $157.3 million of commercial loans with a weighted average rate of 3.24% and entered into commercial loan participations of $98.1 million at a weighted average rate of 3.85%. The commercial loan portfolio totaled $795.0 million at March 31, 2021 and was composed of 83% commercial real estate loans, 10% commercial and industrial loans, and 7% commercial construction loans. Total commercial real estate and commercial construction potential exposure, including undisbursed amounts and outstanding commitments totaling $258.2 million, was $976.0 million at March 31, 2021. Total commercial and industrial potential exposure, including undisbursed amounts and outstanding commitments of $23.1 million, was $100.3 million at March 31, 2021, of which $25.3 million related to PPP loans.

Total deposits increased $459.5 million, or 7.4%, from September 30, 2020 to March 31, 2021. The increase was in non-maturity deposits, which increased $501.7 million, including a $241.1 million increase in checking accounts, a $183.4 million increase in money market accounts, and a $77.2 million increase in savings accounts. Retail/business certificates of deposit and public unit certificates of deposit decreased $36.1 million and $6.1 million, respectively, during the current year period.

Total borrowings at March 31, 2021 were $1.58 billion, a decrease of $207.4 million, or 11.6%, from September 30, 2020. The decrease was due to not renewing borrowings that matured during the current year period. Subsequent to March 31, 2021, the Bank prepaid $100.0 million of adjustable-rate FHLB advances and replaced them with $100.0 million of fixed-rate FHLB advances with a weighted average rate of 0.69% and a weighted average term of 3.5 years. Management may prepay the remaining $100.0 million of adjustable-rate FHLB advances during the June 30, 2021 quarter. Cash flows from the increase in the deposit portfolio were used to pay off maturing borrowings.

Stockholders' equity was $1.28 billion at both March 31, 2021 and September 30, 2020. During the current year six month period, the Company paid cash dividends totaling $40.6 million and repurchased common stock totaling $1.5 million, partially offset by net income of $39.3 million. The cash dividends paid during the current year six month period totaled $0.30 per share and consisted of a $0.13 per share cash true-up dividend related to fiscal year 2020 earnings and two regular quarterly cash dividends of $0.085 per share. On April 20, 2021, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.5 million, payable on May 21, 2021 to stockholders of record as of the close of business on May 7, 2021. In the long run, management considers the Bank's equity to total assets ratio of at least 9% an appropriate level of capital. At March 31, 2021, this ratio was 12.0%.

At March 31, 2021, Capitol Federal Financial, Inc., at the holding company level, had $73.9 million in cash on deposit at the Bank. For fiscal year 2021, it is the intention of the Board of Directors to continue the payout of 100% of the Company's earnings to the Company's stockholders. Dividend payments depend upon a number of factors including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company level.

There remains $44.7 million authorized under the existing stock repurchase plan for additional purchases of the Company's common stock. Shares may be repurchased from time to time based upon market conditions, available liquidity and other factors. This plan has no expiration date; however, the Federal Reserve Bank's existing approval for the Company to repurchase shares expires in August 2021.

The following table presents the balance of stockholders' equity and related information as of the dates presented.

March 31,

September 30,

March 31,

2021

2020

2020

(Dollars in thousands)

Stockholders' equity

$

1,278,595

$

1,284,859

$

1,287,793

Equity to total assets at end of period

13.2

%

13.5

%

13.7

%

The following table presents a reconciliation of total to net shares outstanding as of March 31, 2021.

Total shares outstanding

138,809,796

Less unallocated Employee Stock Ownership Plan ("ESOP") shares and unvested restricted stock

(3,315,312

)

Net shares outstanding

135,494,484

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank in accordance with regulatory standards. In April 2020, the federal bank regulatory agencies announced the issuance of two interim final rules, effective immediately, to provide temporary relief to community banking organizations. Under the interim final rules, the community bank leverage ratio ("CBLR") requirement is a minimum of 8% at December 31, 2020, 8.5% for calendar year 2021, and 9% thereafter. As of March 31, 2021, the Bank's CBLR was 12.2%, which exceeded the minimum requirement.

The following table presents a reconciliation of the Bank's equity under accounting principles generally accepted in the United States of America ("GAAP") to regulatory tier 1 capital as of March 31, 2021 (dollars in thousands):

Total Bank equity as reported under GAAP

$

1,164,295

AOCI

18,953

Goodwill and other intangibles, net of associated deferred taxes

(13,072

)

Total tier 1 capital

$

1,170,176

Capitol Federal Financial, Inc. is the holding company for the Bank. The Bank has 54 branch locations in Kansas and Missouri, and is one of the largest residential lenders in the State of Kansas. News and other information about the Company can be found at the Bank's website, http://www.capfed.com.

Except for the historical information contained in this press release, the matters discussed herein may be deemed to be "forward-looking statements" within the meaning 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. The words "may," "could," "should," "would," "will," "believe," "anticipate," "estimate," "expect," "intend," "plan," and similar expressions are intended to identify forward-looking statements. Forward-looking statements involve risks and uncertainties, including: potential adverse impacts of the ongoing COVID-19 pandemic and any governmental or societal responses thereto on economic conditions in the Company's local market areas and other market areas where the Bank has lending relationships, on other aspects of the Company's business operations and on financial markets; changes in policies or the application or interpretation of laws and regulations by regulatory agencies and tax authorities; other governmental initiatives affecting the financial services industry; changes in accounting principles, policies or guidelines; fluctuations in interest rates; demand for loans in the Company's market area; the future earnings and capital levels of the Bank, which would affect the ability of the Company to pay dividends in accordance with its dividend policies; competition; and other risks detailed from time to time in documents filed or furnished by the Company with the SEC. Actual results may differ materially from those currently expected. These forward-looking statements represent the Company's judgment as of the date of this release. The Company disclaims, however, any intent or obligation to update these forward-looking statements.

SUPPLEMENTAL FINANCIAL INFORMATION

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands, except per share amounts)

December 31,

September 30,

2021

2020

2020

ASSETS:

Cash and cash equivalents (includes interest-earning deposits of $121,430, $139,031 and $172,430)

$

139,472

$

168,032

$

185,148

Available-for-sale ("AFS") securities, at estimated fair value (amortized cost of $2,090,720, $1,880,972 and $1,529,605)

2,095,924

...

1,913,866

1,560,950

Loans receivable, net (ACL of $23,397, $26,125 and $31,527)

6,973,536

7,004,094

7,202,851

FHLB stock, at cost

74,464

84,693

93,862

Premises and equipment, net

99,088

101,238

101,875

Other assets

315,535

335,041

342,532

TOTAL ASSETS

$

9,698,019

$

9,606,964

$

9,487,218

LIABILITIES:

Deposits

$

6,650,865

$

6,410,842

$

6,191,408

Borrowings

1,581,955

1,734,275

1,789,313

Advance payments by borrowers for taxes and insurance

61,624

33,216

65,721

Income taxes payable, net

67

3,180

795

Deferred income tax liabilities, net

6,530

9,318

8,180

Other liabilities

118,383

139,585

146,942

Total liabilities

8,419,424

8,330,416

8,202,359

STOCKHOLDERS' EQUITY:

Preferred stock, $0.01 par value; 100,000,000 shares authorized, no shares issued or outstanding

Common stock, $0.01 par value; 1,400,000,000 shares authorized, 138,809,796, 138,792,496 and 138,956,296 shares issued and outstanding as of March 31, 2021, December 31, 2020, and September 30, 2020, respectively

1,388

1,388

1,389

Additional paid-in capital

1,188,926

1,188,636

1,189,853

Unearned compensation, ESOP

(32,214

)

(32,627

)

(33,040

)

Retained earnings

139,448

130,522

143,162

AOCI, net of tax

(18,953

)

(11,371

)

(16,505

)

Total stockholders' equity

1,278,595

1,276,548

1,284,859

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

9,698,019

$

9,606,964

$

9,487,218

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands)

For the Three Months Ended

For the Six Months Ended

March 31,

December 31,

March 31,

2021

2020

2021

2020

INTEREST AND DIVIDEND INCOME:

Loans receivable

$

57,285

$

60,694

$

117,979

$

139,527

MBS

5,429

5,710

11,139

11,968

FHLB stock

951

1,069

2,020

3,540

Investment securities

629

683

1,312

2,889

Cash and cash equivalents

40

51

91

1,067

Total interest and dividend income

64,334

68,207

132,541

158,991

INTEREST EXPENSE:

Deposits

12,529

14,067

26,596

35,766

Borrowings

8,732

10,327

19,059

25,860

Total interest expense

21,261

24,394

45,655

61,626

NET INTEREST INCOME

43,073

43,813

86,886

97,365

PROVISION FOR CREDIT LOSSES

(2,964

)

(1,532

)

(4,496

)

22,300

NET INTEREST INCOME AFTER

PROVISION FOR CREDIT LOSSES

46,037

45,345

91,382

75,065

NON-INTEREST INCOME:

Gain on sale of Visa Class B shares

7,386

7,386

Deposit service fees

2,814

2,947

5,761

5,845

Insurance commissions

888

638

1,526

1,091

Other non-interest income

1,389

1,485

2,874

3,239

Total non-interest income

12,477

5,070

17,547

10,175

NON-INTEREST EXPENSE:

Salaries and employee benefits

13,397

14,138

27,535

26,706

Information technology and related expense

4,599

4,233

8,832

8,409

Occupancy, net

3,523

3,379

6,902

6,656

Loss on interest rate swap termination

4,752

4,752

Regulatory and outside services

1,234

1,585

2,819

2,640

Advertising and promotional

1,484

838

2,322

2,769

Deposit and loan transaction costs

664

766

1,430

1,389

Federal insurance premium

634

621

1,255

Office supplies and related expense

463

424

887

1,111

Other non-interest expense

1,903

1,083

2,986

2,984

Total non-interest expense

32,653

27,067

59,720

52,664

INCOME BEFORE INCOME TAX EXPENSE

25,861

23,348

49,209

32,576

INCOME TAX EXPENSE

5,417

4,450

9,867

5,789

NET INCOME

$

20,444

$

18,898

$

39,342

$

26,787

The following is a reconciliation of the basic and diluted earnings per share calculations for the periods indicated.

For the Three Months Ended

For the Six Months Ended

March 31,

December 31,

March 31,

2021

2020

2021

2020

(Dollars in thousands, except per share amounts)

Net income

$

20,444

$

18,898

$

39,342

$

26,787

Income allocated to participating securities

(14

)

(13

)

(27

)

(22

)

Net income available to common stockholders

$

20,430

$

18,885

$

39,315

$

26,765

Average common shares outstanding

135,409,120

135,397,242

135,403,116

137,911,988

Average committed ESOP shares outstanding

41,758

449

20,876

20,988

Total basic average common shares outstanding

135,450,878

135,397,691

135,423,992

137,932,976

Effect of dilutive stock options

47,292

1,193

23,709

55,673

Total diluted average common shares outstanding

135,498,170

135,398,884

135,447,701

137,988,649

Net earnings per share:

Basic

$

0.15

$

0.14

$

0.29

$

0.19

Diluted

$

0.15

$

0.14

$

0.29

$

0.19

Antidilutive stock options, excluded from the diluted

average common shares outstanding calculation

125,930

431,212

268,622

387,979

Loan Portfolio

The following table presents information related to the composition of our loan portfolio in terms of dollar amounts, weighted average rates, and percentages as of the dates indicated.

March 31, 2021

December 31, 2020

September 30, 2020

% of

% of

% of

Amount

Rate

Total

Amount

Rate

Total

Amount

Rate

Total

(Dollars in thousands)

One- to four-family:

Originated

$

3,967,008

3.29

%

56.7

%

$

3,946,073

3.39

%

56.2

%

$

3,937,310

3.50

%

54.5

%

Correspondent purchased

1,915,027

3.27

27.4

1,974,086

3.40

28.1

2,101,082

3.49

29.1

Bulk purchased

188,733

2.09

2.7

199,673

2.24

2.8

208,427

2.41

2.9

Construction

28,582

3.11

0.4

32,871

3.22

0.5

34,593

3.30

0.5

Total

6,099,350

3.24

87.2

6,152,703

3.36

87.6

6,281,412

3.46

87.0

Commercial:

Commercial real estate

664,533

4.04

9.5

609,936

4.23

8.7

626,588

4.29

8.7

Commercial and industrial

77,210

3.08

1.1

69,378

3.41

1.0

97,614

2.79

1.4

Construction

53,271

4.25

0.8

84,564

3.89

1.2

105,458

4.04

1.4

Total

795,014

3.96

11.4

763,878

4.12

10.9

829,660

4.08

11.5

Consumer loans:

Home equity

90,052

4.64

1.3

97,717

4.64

1.4

103,838

4.66

1.4

Other

8,743

4.36

0.1

9,328

4.40

0.1

10,086

4.40

0.1

Total

98,795

4.61

1.4

107,045

4.62

1.5

113,924

4.64

1.5

Total loans receivable

6,993,159

3.34

100.0

%

7,023,626

3.46

100.0

%

7,224,996

3.55

100.0

%

Less:

ACL

23,397

26,125

31,527

Discounts/unearned loan fees

30,295

28,825

29,190

Premiums/deferred costs

(34,069

)

(35,418

)

(38,572

)

Total loans receivable, net

$

6,973,536

$

7,004,094

$

7,202,851

Loan Activity: The following tables summarize activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, discounts/unearned loan fees, and premiums/deferred costs. Loans that were paid off as a result of refinances are included in repayments. Loan endorsements are not included in the activity in the following table because a new loan is not generated at the time of the endorsement. The endorsed balance and rate are included in the ending loan portfolio balance and rate. During the current year six-month period, the Bank endorsed $527.5 million of one- to four-family loans, reducing the average rate on those loans by 91 basis points ($285.2 million were endorsed during the December 31, 2020 quarter, reducing the average rate on those loans by 87 basis points, and $242.3 million were endorsed during the March 31, 2021 quarter, reducing the average rate on those loans by 96 basis points). Commercial loan renewals are not included in the activity in the following table unless new funds are disbursed at the time of renewal. The renewal balance and rate are included in the ending loan portfolio balance and rate.

For the Three Months Ended

March 31, 2021

December 31, 2020

September 30, 2020

June 30, 2020

Amount

Rate

Amount

Rate

Amount

Rate

Amount

Rate

(Dollars in thousands)

Beginning balance

$

7,023,626

3.46

%

$

7,224,996

3.55

%

$

7,407,442

3.64

%

$

7,493,280

3.74

%

Originated and refinanced:

Fixed

326,570

2.54

318,690

2.75

265,424

2.98

277,904

2.83

Adjustable

112,483

3.43

48,946

3.60

44,625

3.68

60,626

3.75

Purchased and participations:

Fixed

192,262

2.82

100,518

2.86

61,435

3.07

131,739

3.28

Adjustable

9,150

2.42

65,315

3.89

4,396

2.76

62,510

3.76

Change in undisbursed loan funds

(63,925

)

(70,323

)

13,898

(32,202

)

Repayments

(606,937

)

(664,052

)

(572,536

)

(586,434

)

Principal (charge-offs)/recoveries, net

(70

)

(464

)

312

19

Ending balance

$

6,993,159

3.34

$

7,023,626

3.46

$

7,224,996

3.55

$

7,407,442

3.64

For the Six Months Ended

March 31, 2021

March 31, 2020

Amount

Rate

Amount

Rate

(Dollars in thousands)

Beginning balance

$

7,224,996

3.55

%

$

7,412,473

3.81

%

Originated and refinanced:

Fixed

645,260

2.64

406,584

3.48

Adjustable

161,429

3.48

111,072

4.20

Purchased and participations:

Fixed

292,780

2.83

248,730

3.61

Adjustable

74,465

3.71

32,786

3.00

Change in undisbursed loan funds

(134,248

)

14,306

Repayments

(1,270,989

)

(732,005

)

Principal charge-offs, net

(534

)

(330

)

Other

(336

)

Ending balance

$

6,993,159

3.34

$

7,493,280

3.74

One- to Four-Family Loans: The following table presents, for our portfolio of one- to four-family loans, the amount, percent of total, weighted average credit score, weighted average loan-to-value ("LTV") ratio, and average balance per loan as of the dates presented. Credit scores were updated in March 2021 from a nationally recognized consumer rating agency. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. In most cases, the most recent appraisal was obtained at the time of origination.

March 31, 2021

September 30, 2020

% of

Credit

Average

% of

Credit

Average

Amount

Total

Score

LTV

Balance

Amount

Total

Score

LTV

Balance

(Dollars in thousands)

Originated

$

3,967,008

65.4

%

772

61

%

$

148

$

3,937,310

63.0

%

771

62

%

$

145

Correspondent purchased

1,915,027

31.5

765

63

386

2,101,082

33.6

765

64

379

Bulk purchased

188,733

3.1

772

59

297

208,427

3.4

767

60

300

$

6,070,768

100.0

%

770

62

188

$

6,246,819

100.0

%

768

63

187

The following table presents originated, refinanced, and correspondent purchased activity in our one- to four-family loan portfolio, excluding endorsement activity, along with associated weighted average LTVs and weighted average credit scores for the periods indicated. Included in the originated line item for the current year period are $209.3 million of loans that were refinanced from other lenders.

For the Three Months Ended

For the Six Months Ended

March 31, 2021

March 31, 2021

Credit

Credit

Amount

LTV

Score

Amount

LTV

Score

(Dollars in thousands)

Originated

$

184,166

69

%

770

$

405,362

70

%

769

Refinanced by Bank customers

122,105

66

769

214,955

65

769

Correspondent purchased

163,298

69

774

269,131

69

775

$

469,569

69

771

$

889,448

69

771

The following table presents the amount, percent of total, and weighted average rate, by state, of one- to four-family loan originations and correspondent purchases where originations and purchases in the state exceeded five percent of the total amount originated and purchased during the current year period.

For the Three Months Ended

For the Six Months Ended

March 31, 2021

March 31, 2021

State

Amount

% of Total

Rate

Amount

% of Total

Rate

(Dollars in thousands)

Kansas

$

264,895

56.4

%

2.58

%

$

529,575

59.5

%

2.64

%

Missouri

79,316

16.9

2.62

157,466

17.7

2.65

Texas

26,302

5.6

2.59

50,604

5.7

2.72

Tennessee

32,066

6.8

2.64

48,929

5.5

2.73

Pennsylvania

33,989

7.3

2.55

44,461

5.0

2.59

Other states

33,001

7.0

2.61

58,413

6.6

2.72

$

469,569

100.0

%

2.59

$

889,448

100.0

%

2.65

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 March 31, 2021, along with associated weighted average rates. Loan commitments generally have fixed expiration dates or other termination clauses and may require the payment of a rate lock fee. It is expected that some of the loan commitments will expire unfunded, so the amounts reflected in the table below are not necessarily indicative of our future cash needs.

Fixed-Rate

15 years

More than

Adjustable-

Total

or less

15 years

Rate

Amount

Rate

(Dollars in thousands)

Originate/refinance

$

27,948

$

80,156

$

8,107

$

116,211

2.76

%

Correspondent

38,456

134,881

4,189

177,526

2.48

$

66,404

$

215,037

$

12,296

$

293,737

2.59

Rate

2.16

%

2.73

%

2.47

%

As of March 31, 2021, there were $7.8 million of one- to-four family loans with modifications under the Bank's program to support and provide relief to borrowers during the COVID-19 pandemic ("COVID-19 loan modifications") that were still in their deferral period. There were $208.9 million of one- to four-family loans with COVID-19 loan modifications that were out of their deferral period by March 31, 2021. See "Asset Quality" below for additional information regarding the performance of loans that have exited the deferral period.

Commercial Loans: During the current year period, the Bank originated $157.3 million of commercial loans, including $19.5 million of PPP loans, and entered into commercial loan participations totaling $98.1 million. The Bank also processed commercial loan disbursements, excluding lines of credit, of approximately $152.3 million at a weighted average rate of 3.42%. Additionally, during the current year, $39.0 million of PPP loans were paid off, primarily by the U.S. Small Business Administration ("SBA") following completion of the loan forgiveness process.

The following table presents the Bank's commercial real estate and commercial construction loans and loan commitments by type of primary collateral, as of March 31, 2021. Because the commitments to pay out undisbursed funds are not cancellable by the Bank, unless the loan is in default, we generally anticipate fully funding the related projects.

Unpaid

Undisbursed

Gross Loan

Outstanding

% of

Count

Principal

Amount

Amount

Commitments

Total

Total

(Dollars in thousands)

Senior housing

33

$

215,364

$

50,255

$

265,619

$

$

265,619

27.2

%

Retail building

133

133,738

44,808

178,546

18,868

197,414

20.2

Hotel

9

133,818

44,705

178,523

178,523

18.3

Office building

98

55,029

61,874

116,903

116,903

12.0

One- to four-family property

367

58,613

5,170

63,783

250

64,033

6.6

Multi-family

39

48,184

14,524

62,708

272

62,980

6.4

Single use building

20

42,612

4,644

47,256

7,000

54,256

5.6

Other

97

30,446

3,193

33,639

2,597

36,236

3.7

796

$

717,804

$

229,173

$

946,977

$

28,987

$

975,964

100.0

%

Weighted average rate

4.05

%

3.88

%

4.01

%

3.63

%

4.00

%

The following table summarizes the Bank's commercial real estate and commercial construction loans and loan commitments by state as of March 31, 2021.

Unpaid

Undisbursed

Gross Loan

Outstanding

% of

Count

Principal

Amount

Amount

Commitments

Total

Total

(Dollars in thousands)

Kansas

628

$

325,789

$

19,017

$

344,806

$

9,487

$

354,293

36.3

%

Texas

10

124,498

116,576

241,074

241,074

24.7

Missouri

132

180,446

36,701

217,147

18,000

235,147

24.1

Colorado

6

13,451

22,755

36,206

36,206

3.7

Arkansas

3

7,461

26,395

33,856

33,856

3.5

Nebraska

6

33,655

4

33,659

33,659

3.4

Other

11

32,504

7,725

40,229

1,500

41,729

4.3

796

$

717,804

$

229,173

$

946,977

$

28,987

$

975,964

100.0

%

The following table presents the Bank's commercial and industrial loans and loan commitments by business purpose, as of March 31, 2021. Included in the working capital line item are $25.3 million of PPP loans.

Unpaid

Undisbursed

Gross Loan

Outstanding

% of

Count

Principal

Amount

Amount

Commitments

Total

Total

(Dollars in thousands)

Working capital

636

$

36,046

$

16,809

$

52,855

$

1,115

$

53,970

53.8

%

Equipment

118

13,815

245

14,060

1,882

15,942

15.9

Purchase/lease autos

228

15,113

57

15,170

55

15,225

15.2

Business investment

59

7,701

223

7,924

7,924

7.9

Other

22

4,535

2,713

7,248

7,248

7.2

1,063

$

77,210

$

20,047

$

97,257

$

3,052

$

100,309

100.0

%

The following table presents the Bank's commercial loan portfolio and outstanding loan commitments, categorized by gross loan amount (unpaid principal plus undisbursed amounts) or outstanding loan commitment amount, as of March 31, 2021.

Count

Amount

(Dollars in thousands)

Greater than $30 million

3

$

150,000

>$15 to $30 million

14

331,514

>$10 to $15 million

5

57,267

>$5 to $10 million

15

93,842

$1 to $5 million

109

240,461

Less than $1 million

1,713

203,189

1,859

$

1,076,273

The Bank's commercial lending team continues to proactively work with our commercial customers as the COVID-19 pandemic continues to present challenging operating conditions. As of March 31, 2021, there were commercial loans with a gross balance, including undisbursed amounts, totaling $134.0 million with COVID-19 loan modifications that were still in their deferral period. There were $270.7 million of commercial loans with COVID-19 loan modifications that were out of their deferral period by March 31, 2021. See "Asset Quality" below for additional information regarding the performance of loans that have exited the deferral period.

Asset Quality

Of the one- to four-family COVID-19 loan modifications that had completed the deferral period by March 31, 2021, $2.3 million were 30 to 89 days delinquent and $1.8 million were 90 or more days delinquent as of March 31, 2021. Of the commercial COVID-19 loan modifications that had completed the deferral period by March 31, 2021, one loan for $150 thousand was 30 to 89 days delinquent and none were 90 or more days delinquent as of March 31, 2021.

The following tables present loans 30 to 89 days delinquent, non-performing loans, and other real estate owned ("OREO") as of the dates indicated. Loans subject to payment forbearance under the Bank's COVID-19 loan modification program are not reported as delinquent during the forbearance time period. Of the loans 30 to 89 days delinquent at March 31, 2021, approximately 74% were 59 days or less delinquent. Non-performing loans are loans that are 90 or more days delinquent or in foreclosure, and other loans that are less than 90 days delinquent but are required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements and/or internal policies even if the loans are current. Non-performing assets include non-performing loans and OREO.

Loans Delinquent for 30 to 89 Days at:

March 31, 2021

December 31, 2020

September 30, 2020

June 30, 2020

March 31, 2020

Number

Amount

Number

Amount

Number

Amount

Number

Amount

Number

Amount

(Dollars in thousands)

One- to four-family:

Originated

45

$

4,151

62

$

5,844

42

$

3,012

57

$

5,085

92

$

8,360

Correspondent purchased

9

2,910

13

4,694

8

3,123

10

2,919

13

4,531

Bulk purchased

5

352

9

1,750

12

2,532

19

4,536

12

2,914

Commercial

5

806

8

1,047

2

45

9

1,543

7

1,555

Consumer

17

287

30

515

26

398

21

431

43

628

81

$

8,506

122

$

13,850

90

$

9,110

116

$

14,514

167

$

17,988

30 to 89 days delinquent loans

to total loans receivable, net

0.12

%

0.20

%

0.13

%

0.20

%

0.24

%

Non-Performing Loans and OREO at:

March 31, 2021

December 31, 2020

September 30, 2020

June 30, 2020

March 31, 2020

Number

Amount

Number

Amount

Number

Amount

Number

Amount

Number

Amount

(Dollars in thousands)

Loans 90 or More Days Delinquent or in Foreclosure:

One- to four-family:

Originated

55

$

4,433

51

$

4,370

51

$

4,362

47

$

4,026

53

$

4,517

Correspondent purchased

10

3,749

9

3,371

6

2,397

7

2,740

4

1,342

Bulk purchased

10

3,172

13

3,724

12

2,903

3

1,291

1

630

Commercial

6

1,068

5

820

5

1,360

4

709

4

716

Consumer

26

531

26

473

14

304

23

278

17

326

107

12,953

104

12,758

88

11,326

84

9,044

79

7,531

Loans 90 or more days delinquent or in foreclosure

as a percentage of total loans

0.19

%

0.18

%

0.16

%

0.12

%

0.10

%

Nonaccrual loans less than 90 Days Delinquent:(1)

One- to four-family:

Originated

9

$

1,646

9

$

968

9

$

691

14

$

1,132

13

$

811

Correspondent purchased

1

189

Bulk purchased

1

134

Commercial

4

642

3

411

3

464

1

6

2

129

Consumer

1

9

1

9

1

33

2

43

13

2,288

13

1,388

13

1,164

16

1,171

19

1,306

Total non-performing loans

120

15,241

117

14,146

101

12,490

100

10,215

98

8,837

Non-performing loans as a percentage of total loans

0.22

%

0.20

%

0.17

%

0.14

%

0.12

%

OREO:

One- to four-family:

Originated(2)

2

$

105

3

$

129

4

$

183

4

$

183

5

$

187

Total non-performing assets

122

$

15,346

120

$

14,275

105

$

12,673

104

$

10,398

103

$

9,024

Non-performing assets as a percentage of total assets

0.16

%

0.15

%

0.13

%

0.11

%

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.

The following table presents loans classified as special mention or substandard at the dates presented. The increase in commercial special mention loans at March 31, 2021 compared to September 30, 2020 was due mainly to the addition of two commercial loans totaling $50.7 million for which the borrowers have been impacted by the COVID-19 pandemic. Both of these loans were subject to COVID-19 loan modifications during fiscal year 2020 and have since resumed full payments. There are underlying economic conditions that management is monitoring in association with these loans resulting in the special mention classification.

March 31, 2021

September 30, 2020

March 31, 2020

Special Mention

Substandard

Special Mention

Substandard

Special Mention

Substandard

(Dollars in thousands)

One- to four-family

$

14,299

$

26,562

$

11,339

$

25,630

$

13,678

$

26,077

Commercial

100,655

4,497

52,006

4,914

52,515

4,538

Consumer

250

764

332

589

479

659

$

115,204

$

31,823

$

63,677

$

31,133

$

66,672

$

31,274

Allowance for Credit Losses: Accounting Standard Update ("ASU") 2016-13 became effective for the Company on October 1, 2020. This ASU replaced the incurred loss impairment methodology for calculating ACL under GAAP with a new impairment methodology, commonly known as the current expected credit loss ("CECL") methodology. The new methodology requires the Company to measure, at each reporting date, the expected credit losses for loans and loan commitments over their contractual lives based on historical experience, current conditions, and reasonable and supportable forecasts. Upon adoption of the ASU, the Company recorded a cumulative-effect adjustment to retained earnings of $2.3 million (net of tax of $739 thousand), which reduced the ACL by $4.8 million, to $26.8 million, and established a reserve for off-balance sheet credit exposures of $7.8 million, which is recorded in other liabilities in the consolidated balance sheet. The Bank's off-balance sheet credit exposures are comprised of unfunded portions of existing loans and commitments to originate or purchase new loans that are not unconditionally cancellable by the Bank.

The Bank is utilizing a discounted cash flow approach for estimating expected credit losses for pooled loans and loan commitments. The credit loss estimate for off-balance sheet credit exposures also takes into consideration the likelihood that the commitment will fund. The economic indices used for the reasonable and supportable forecasted time period are the national unemployment rate, changes in commercial real estate price index, changes in home values, and changes in the United States gross domestic product. Management considers several economic forecast scenarios provided by a third party and selects the scenario believed to be the most appropriate considering the facts and circumstances at quarter end. Management also considers several qualitative factors. The qualitative factors account for items not included in historical loss rates, the macroeconomic forecast, and/or other model inputs/assumptions. Any changes to the ACL and reserves on off-balance sheet credit exposures are recorded through increases/decreases in the provision for credit losses on the consolidated statements of income.

The economic forecast scenario selected by management improved at March 31, 2021 compared to December 31, 2020 which resulted in a reduction in the ACL calculated by the model. Management applied qualitative factors to account for the continued economic uncertainties, along with the balance and trending of large-dollar special mention commercial loans. These qualitative factors partially offset the reduction in the ACL related to the improvement in the economic forecast. The economic uncertainties related to (1) the job market, specifically the unemployment rate, labor participation rate and the effectiveness of the latest federal stimulus package to the unemployed and the economic stimulus payments to qualifying households, (2) the unevenness of the recovery in certain industries, and (3) the impact to the housing market as a result of the foreclosure moratorium and how the housing market may react when the foreclosure moratorium is eventually lifted. Management will continue to closely monitor economic conditions and will work with borrowers as necessary to assist them through this challenging economic climate.

The following table presents a summary of changes in ACL and reserve for off-balance sheet credit exposures occurring during the quarter ended March 31, 2021.

ACL

Reserve for off-
balance sheet
credit exposures

ACL and
Reserve for off-
balance sheet
credit exposures

(Dollars in thousands)

Balance at December 31, 2020

$

26,125

$

6,433

$

32,558

For the quarter ended March 31, 2021

Charge-offs

(138

)

(138

)

Recoveries

68

68

Net charge-offs

(70

)

(70

)

Provision for credit losses

(2,658

)

(306

)

(2,964

)

Balance at March 31, 2021

$

23,397

$

6,127

$

29,524

The negative provision for credit losses was due primarily to a reduction in commercial loan ACL and reserves for off-balance sheet credit exposures as a result of improvements in the economic forecast used in the model, partially offset by an increase in qualitative factors, primarily the economic uncertainty qualitative factor, as discussed above.

The following tables present ACL activity and related ratios at the dates and for the periods indicated.

For the Three Months Ended

March 31,

December 31,

September 30,

June 30,

March 31,

2021

2020

2020

2020

2020

(Dollars in thousands)

Balance at beginning of period

$

26,125

$

31,527

$

31,215

$

31,196

$

9,435

Adoption of CECL

(4,761

)

Charge-offs:

One- to four-family

(131

)

(14

)

(46

)

Commercial

(515

)

(325

)

Consumer

(7

)

(3

)

(15

)

(5

)

(4

)

Total charge-offs

(138

)

(532

)

(15

)

(5

)

(375

)

Recoveries:

One- to four-family

57

34

303

3

Commercial

8

12

12

17

54

Consumer

3

22

12

7

4

Total recoveries

68

68

327

24

61

Net (charge-offs) recoveries

(70

)

(464

)

312

19

(314

)

Provision for credit losses

(2,658

)

(177

)

22,075

Balance at end of period

$

23,397

$

26,125

$

31,527

$

31,215

$

31,196

Ratio of net charge-offs during the period

to average loans outstanding during the period

%

0.01

%

%

%

%

Ratio of net charge-offs (recoveries) during the

period to average non-performing assets

0.47

3.44

(2.70

)

(0.20

)

3.78

ACL to non-performing loans at end of period

153.51

184.68

252.42

305.58

353.02

ACL to loans receivable at end of period

0.33

0.37

0.44

0.42

0.42

ACL to net charge-offs (annualized)

83.8x

14.1x

N/M(1)

N/M(1)

24.9x

For the Six Months Ended

March 31,

2021

2020

(Dollars in thousands)

Balance at beginning of period

$

31,527

$

9,226

Adoption of CECL

(4,761

)

Charge-offs:

One- to four-family

(145

)

(64

)

Commercial

(515

)

(349

)

Consumer

(10

)

(10

)

Total charge-offs

(670

)

(423

)

Recoveries:

One- to four-family

91

3

Commercial

20

81

Consumer

25

9