Capitol Federal Financial, Inc.® Reports First Quarter Fiscal Year 2020 Results

·35 min read

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 December 31, 2019. Detailed results will be available in the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2019, which will be filed with the Securities and Exchange Commission ("SEC") on or about February 7, 2020 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 $22.5 million;

  • basic and diluted earnings per share of $0.16;

  • net interest margin of 2.18%;

  • paid dividends of $58.7 million, or $0.425 per share; and

  • on January 28, 2020, announced a cash dividend of $0.085 per share, payable on February 21, 2020 to stockholders of record as of the close of business on February 7, 2020.

Comparison of Operating Results for the Three Months Ended December 31, 2019 and September 30, 2019

For the quarter ended December 31, 2019, the Company recognized net income of $22.5 million, or $0.16 per share, compared to net income of $22.4 million, or $0.16 per share, for the quarter ended September 30, 2019. Income tax expense decreased $1.6 million from the prior quarter largely offset by a $1.1 million, or 2.2%, decrease in net interest income. The net interest margin increased three basis points from 2.15% for the prior quarter to 2.18% for the current quarter. Excluding the effects of the leverage strategy, the net interest margin would have decreased six basis points, from 2.24% for the prior quarter to 2.18% for the current quarter. The leverage strategy was in place during a portion of the prior quarter, and was not in place during the current quarter. The leverage strategy was suspended at certain times during the prior quarter and during all of the current quarter due to the negative interest rate spreads between the related Federal Home Loan Bank Topeka ("FHLB") borrowings and cash held at the Federal Reserve Bank of Kansas City (the "FRB of Kansas City"), making the transaction unprofitable. See additional discussion regarding the leverage strategy in the Financial Condition section below. 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. The decrease in the net interest margin, excluding the effects of the leverage strategy, was due mainly to an increase in the cost of retail/business certificates of deposit and a decrease in the yield on interest-earning assets.

To the extent market rates of interest remain at current levels or go lower during the remainder of fiscal year 2020, the Company expects a continued decrease in our net interest margin, due to our loans and securities repricing to lower market yields at a faster pace than our deposits and borrowings, as the majority of those liabilities have stated maturities. Given current levels of yields on new loans and the amount of one- to four-family refinances and endorsements of terms to lower current market rates, the yield on the total loan portfolio is likely to continue to decrease. Additionally, yields on new securities are lower than the portfolio yield. On the liability side, we are constrained in reducing offered rates on new deposit accounts by our efforts to remain competitive with the rates offered by other financial institutions.

Interest and Dividend Income

The weighted average yield on total interest-earning assets was 3.58% for the current quarter, unchanged from the prior quarter, while the average balance of interest-earning assets decreased $354.4 million between the two periods. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have decreased four basis points, from 3.62% for the prior quarter to 3.58% for the current quarter, while the average balance of interest-earning assets would have increased $43.4 million. The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent.

For the Three Months Ended

December 31,

September 30,

Change Expressed in:

2019

2019

Dollars

Percent

(Dollars in thousands)

INTEREST AND DIVIDEND INCOME:

Loans receivable

$

69,914

$

70,366

$

(452

)

(0.6

)%

Mortgage-backed securities ("MBS")

6,102

6,293

(191

)

(3.0

)

FHLB stock

1,826

2,156

(330

)

(15.3

)

Investment securities

1,507

1,585

(78

)

(4.9

)

Cash and cash equivalents

687

2,885

(2,198

)

(76.2

)

Total interest and dividend income

$

80,036

$

83,285

$

(3,249

)

(3.9

)

The weighted average yield on the loans receivable portfolio decreased two basis points, from 3.77% for the prior quarter to 3.75% for the current quarter, due mainly to loans repricing to lower market rates as a result of endorsements, refinances, and adjustable-rate loan resets, as well as the origination of new loans at market rates lower than the existing portfolio. The decrease in interest income on the MBS portfolio was due primarily to a six basis point decrease in the weighted average yield on the portfolio to 2.61% for the current quarter. The decrease in the weighted average yield was due primarily to the purchase of MBS at market rates lower than the existing portfolio. The decrease in interest income on FHLB stock and cash and cash equivalents was due mainly to the leverage strategy being in place during a portion of prior quarter, and not being in place during the current quarter.

Interest Expense

The weighted average rate paid on total interest-bearing liabilities for the current quarter decreased three basis points, from 1.62% for the prior quarter to 1.59% for the current quarter, and the average balance of interest-bearing liabilities decreased $370.4 million between the two periods. Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased two basis points, from 1.57% for the prior quarter to 1.59% for the current quarter, and the average balance of interest-bearing liabilities would have increased $27.5 million. The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.

For the Three Months Ended

December 31,

September 30,

Change Expressed in:

2019

2019

Dollars

Percent

(Dollars in thousands)

INTEREST EXPENSE:

Deposits

$

17,962

$

17,471

$

491

2.8

%

Borrowings

13,377

16,003

(2,626

)

(16.4

)

Total interest expense

$

31,339

$

33,474

$

(2,135

)

(6.4

)

The increase in interest expense on deposits was due primarily to an increase in the cost of the retail/business certificate of deposit portfolio during the current quarter, partially offset by a decrease in the cost of the money market portfolio due to a decrease in the weighted average balance and rate of that portfolio. The weighted average rate of the retail/business certificate of deposit portfolio increased seven basis points, to 2.09% for the current quarter, and the average balance increased $76.8 million, or approximately 3%. Late in the third quarter of fiscal year 2019, the Bank increased offered rates on short-term and certain intermediate-term certificates, and during the fourth quarter of fiscal year 2019, the Bank ran a special certificate of deposit campaign (the "unTraditional campaign"). These actions resulted in growth in the short-term and certain intermediate-term certificates of deposit throughout the fourth quarter of fiscal year 2019, and the current quarter included a full quarter impact of this growth. See the Financial Condition section below for more information.

The borrowings line item in the table above includes interest expense associated and not associated with the leverage strategy. Interest expense on borrowings not related to the leverage strategy decreased $64 thousand from the prior quarter due to a decrease in the average rate paid on the FHLB line of credit during the current quarter. Interest expense on FHLB borrowings associated with the leverage strategy decreased $2.6 million from the prior quarter due to the leverage strategy being in place during a portion of the prior quarter and not being in place during the current quarter.

Provision for Credit Losses

The Bank recorded a provision for credit losses during the current quarter of $225 thousand, compared to a provision for credit losses during the prior quarter of $300 thousand. The $225 thousand provision for credit losses in the current quarter related to certain commercial loans that were acquired in the Capital City Bancshares, Inc. ("CCB") acquisition and were renewed after the acquisition.

Non-Interest Income

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

For the Three Months Ended

December 31,

September 30,

Change Expressed in:

2019

2019

Dollars

Percent

(Dollars in thousands)

NON-INTEREST INCOME:

Deposit service fees

$

3,062

$

3,159

$

(97

)

(3.1

)%

Insurance commissions

691

749

(58

)

(7.7

)

Other non-interest income

1,751

1,951

(200

)

(10.3

)

Total non-interest income

$

5,504

$

5,859

$

(355

)

(6.1

)

The decrease in other non-interest income was due mainly to a decrease in commercial loan fee-related income, partially offset by the receipt of a bank-owned life insurance ("BOLI") death benefit during the current quarter.

Non-Interest Expense

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

For the Three Months Ended

December 31,

September 30,

Change Expressed in:

2019

2019

Dollars

Percent

(Dollars in thousands)

NON-INTEREST EXPENSE:

Salaries and employee benefits

$

13,471

$

13,940

$

(469

)

(3.4

)%

Information technology and related expense

4,141

4,080

61

1.5

Occupancy, net

3,207

3,264

(57

)

(1.7

)

Advertising and promotional

1,410

1,647

(237

)

(14.4

)

Regulatory and outside services

1,343

1,566

(223

)

(14.2

)

Deposit and loan transaction costs

711

596

115

19.3

Office supplies and related expense

519

555

(36

)

(6.5

)

Federal insurance premium

(615

)

615

(100.0

)

Other non-interest expense

1,698

1,297

401

30.9

Total non-interest expense

$

26,500

$

26,330

$

170

0.6

The decrease in salaries and employee benefits expense was due mainly to the prior quarter including compensation expense on unallocated Employee Stock Ownership Plan ("ESOP") shares, which was related to the True Blue Capitol dividend paid in June 2019. The decrease in advertising and promotional expense was due primarily to the timing of campaigns and sponsorships. The decrease in regulatory and outside services expense was due mainly to the timing of external audit expenses. During the prior fiscal year, the Bank began utilizing a credit from the Federal Deposit Insurance Corporation ("FDIC") as a result of the FDIC deposit insurance fund ratio exceeding 1.38%. Pursuant to regulatory guidance, once the insurance fund exceeds 1.38% of insured deposits, deposit insurance assessment credits are allocated to banks with less than $10 billion in assets, to compensate for premiums previously paid that contributed to growth of the fund past 1.15%. The $615 thousand credit in the prior quarter represented the reversal of the accrual related to the June 2019 federal insurance premium payment that was to be paid in September 2019, but was not paid due to utilizing the assessment credit. These credits fully offset the Bank's premium assessments during the current quarter and will continue to offset the Bank's premium assessments as long as the insurance fund ratio remains above 1.38% of insured deposits and the Bank still has a remaining assessment credit balance. As of December 31, 2019, the Bank had a remaining assessment credit of approximately $900 thousand. The increase in other non-interest expense was due primarily to a write-down of an other real estate owned ("OREO") property that was added in the CCB acquisition. This property was sold during the current quarter.

The Company's efficiency ratio was 48.89% for the current quarter compared to 47.30% for the prior quarter. The change in the efficiency ratio was due primarily to lower net interest income in the current quarter compared to the prior quarter. The efficiency ratio is a measure of a financial institution's total non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income. A lower value indicates that the financial institution is generating revenue with a proportionally lower level of expense.

Income Tax Expense

Income tax expense was $5.0 million for the current quarter, compared to $6.6 million for the prior quarter. The effective tax rate was 18.1% for the current quarter compared to 22.8% for the prior quarter. The effective tax rate was lower in the current quarter due primarily to a discrete benefit recognized as a result of favorable federal tax guidance that was issued during the current quarter related to certain BOLI policies added in the CCB acquisition. Management anticipates the effective income tax rate for the remainder of fiscal year 2020 will be approximately 22% each quarter, resulting in an effective tax rate of approximately 21% for fiscal year 2020.

Comparison of Operating Results for the Three Months Ended December 31, 2019 and 2018

The Company recognized net income of $22.5 million, or $0.16 per share, for the quarter ended December 31, 2019 compared to net income of $24.4 million, or $0.18 per share, for the quarter ended December 31, 2018. The decrease in net income was due primarily to a decrease in net interest income, partially offset by a decrease in income tax expense.

Net interest income decreased $3.6 million, or 6.9%, from the prior year quarter to $48.7 million for the current quarter. The net interest margin decreased nine basis points, from 2.27% for the prior year quarter to 2.18% for the current quarter. The leverage strategy was in place during a portion of the prior year quarter, and was not in place during the current quarter. 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. Excluding the effects of the leverage strategy, the net interest margin would have decreased 14 basis points, from 2.32% for the prior year quarter to 2.18% for the current quarter. The decrease in the net interest margin, excluding the effects of the leverage strategy, was due mainly to an increase in the cost of retail/business certificates of deposit.

Interest and Dividend Income

The weighted average yield on total interest-earning assets increased two basis points, from 3.56% for the prior year quarter to 3.58% for the current quarter, while the average balance of interest-earning assets decreased $306.6 million from the prior year quarter. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have decreased one basis point, from 3.59% for the prior year quarter to 3.58% for the current quarter, and the average balance of interest-earning assets would have decreased $78.4 million. The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent.

For the Three Months Ended

December 31,

Change Expressed in:

2019

2018

Dollars

Percent

(Dollars in thousands)

INTEREST AND DIVIDEND INCOME:

Loans receivable

$

69,914

$

70,772

$

(858

)

(1.2

)%

MBS

6,102

6,523

(421

)

(6.5

)

FHLB stock

1,826

1,971

(145

)

(7.4

)

Investment securities

1,507

1,441

66

4.6

Cash and cash equivalents

687

1,714

(1,027

)

(59.9

)

Total interest and dividend income

$

80,036

$

82,421

$

(2,385

)

(2.9

)

The decrease in interest income on loans receivable was due mainly to a decrease in yield resulting from an increase in the amortization of premiums related to correspondent loan payoff activity. This was partially offset by a shift in the mix of the portfolio, as the average balance of lower-yielding one- to four-family loans decreased $249.9 million, partially offset by a $176.9 million increase in the average balance of higher-yielding commercial loans. The decrease in interest income on the MBS portfolio was due to a $74.2 million decrease in the average balance of the portfolio. The decrease in dividend income on FHLB stock and the decrease in interest income on cash and cash equivalents were due primarily to the leverage strategy being in place for a portion of the prior year quarter and not being in place during the current quarter. See additional discussion regarding the leverage strategy in the Financial Condition section below.

Interest Expense

The weighted average rate paid on total interest-bearing liabilities increased 11 basis points, from 1.48% for the prior year quarter to 1.59% for the current quarter, while the average balance of interest-bearing liabilities decreased $235.5 million from the prior year quarter. Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased 13 basis points, from 1.46% for the prior year quarter to 1.59% for the current quarter, while the average balance of interest-bearing liabilities would have decreased $7.2 million. The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.

For the Three Months Ended

December 31,

Change Expressed in:

2019

2018

Dollars

Percent

(Dollars in thousands)

INTEREST EXPENSE:

Deposits

$

17,962

$

15,725

$

2,237

14.2

%

Borrowings

13,377

14,395

(1,018

)

(7.1

)

Total interest expense

$

31,339

$

30,120

$

1,219

4.0

The increase in interest expense on deposits was due primarily to an increase in the cost of the retail/business certificate of deposit portfolio. The weighted average rate of the retail/business certificate of deposit portfolio increased 27 basis points, to 2.09% for the current quarter, and the average balance increased $182.0 million, or approximately 7%. Late in the third quarter of fiscal year 2019, the Bank increased offered rates on short-term and certain intermediate-term certificates of deposit in an effort to encourage customers to move funds to those terms and during the fourth quarter of fiscal year 2019, the Bank held the unTraditional campaign, resulting in growth in the short-term and certain intermediate-term certificates of deposit. See the Financial Condition section below for more information.

The borrowings line item in the table above includes interest expense associated and not associated with the leverage strategy. Interest expense on borrowings not related to the leverage strategy increased $359 thousand from the prior year quarter due to an 11 basis point increase in the weighted average rate paid, to 2.36% for the current quarter. The increase in the weighted average rate paid was due primarily to certain maturing FHLB advances being replaced at higher effective market interest rates. Interest expense on FHLB borrowings associated with the leverage strategy decreased $1.4 million from the prior year quarter due to the leverage strategy being in place for a portion of the prior year quarter and not being in place during the current quarter.

Provision for Credit Losses

The Bank recorded a provision for credit losses during the current quarter of $225 thousand, compared to no provision for credit losses during the prior year quarter. The $225 thousand provision for credit losses in the current quarter related to certain commercial loans that were acquired in the CCB acquisition and were renewed after the acquisition.

Non-Interest Income

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

For the Three Months Ended

December 31,

Change Expressed in:

2019

2018

Dollars

Percent

(Dollars in thousands)

NON-INTEREST INCOME:

Deposit service fees

$

3,062

$

3,352

$

(290

)

(8.7

)%

Insurance commissions

691

626

65

10.4

Other non-interest income

1,751

1,446

305

21.1

Total non-interest income

$

5,504

$

5,424

$

80

1.5

The decrease in deposit service fees was due mainly to the discontinuation of point-of-sale service charges, which the Bank ceased charging in April 2019. The increase in other non-interest income was due mainly to the receipt of a BOLI death benefit during the current quarter.

Non-Interest Expense

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

For the Three Months Ended

December 31,

Change Expressed in:

2019

2018

Dollars

Percent

(Dollars in thousands)

NON-INTEREST EXPENSE:

Salaries and employee benefits

$

13,471

$

12,962

$

509

3.9

%

Information technology and related expense

4,141

4,599

(458

)

(10.0

)

Occupancy, net

3,207

3,252

(45

)

(1.4

)

Advertising and promotional

1,410

760

650

85.5

Regulatory and outside services

1,343

1,766

(423

)

(24.0

)

Deposit and loan transaction costs

711

736

(25

)

(3.4

)

Office supplies and related expense

519

459

60

13.1

Federal insurance premium

528

(528

)

(100.0

)

Other non-interest expense

1,698

1,720

(22

)

(1.3

)

Total non-interest expense

$

26,500

$

26,782

$

(282

)

(1.1

)

The increase in salaries and employee benefits expense was due primarily to an increase in commissions and merit increases. The decrease in information technology and related expense was due mainly to the prior year quarter including costs related to the integration of CCB operations. The increase in advertising and promotional expense was due to the timing of campaigns and sponsorships. The decrease in regulatory and outside services expense was due primarily to a decrease in consulting and external audit fees in the current quarter. The decrease in the federal insurance premium was due mainly to the Bank receiving an assessment credit from the FDIC as discussed above.

The Company's efficiency ratio was 48.89% for the current quarter compared to 46.40% for the prior year quarter. The change in the efficiency ratio was due to lower net interest income in the current quarter compared to the prior year quarter.

Income Tax Expense

Income tax expense was $5.0 million for the current quarter compared to $6.6 million for the prior quarter. The effective tax rate was 18.1% for the current quarter compared to 21.2% for the prior year quarter. The lower effective tax rate in the current quarter compared to the prior year quarter was due mainly to the enactment of favorable tax guidance in the current quarter related to certain BOLI policies added in the CCB acquisition, as discussed above.

Financial Condition as of December 31, 2019

Management continues to manage the size and mix of the loan portfolio, over the long-term, by utilizing cash flows from the one- to four-family loan portfolio to fund commercial loan growth. Given the current level of total assets and the interest rate environment, it is unlikely that the total loan portfolio will increase materially during fiscal year 2020. Over the past few years, we have worked to maintain our net interest margin by reinvesting cash flows from lower yielding assets into higher yielding assets and repaying higher costing liabilities. Following the Federal Reserve rate increase in December 2018, the Bank increased its offered rates on certificates of deposit in order to remain competitive with other financial institutions. As the Federal Reserve has reduced overnight rates, the Bank has reduced its offered rates on certificates of deposit. The benefit of the lower rates will be realized over time as existing certificates of deposit mature. The Bank is constrained in reducing offered rates on certificates of deposit by its efforts to remain competitive with the rates offered by other financial institutions. Additionally, the Bank began reducing its balance of public unit certificates of deposit late in the third quarter of fiscal year 2019 in order to reduce its use of wholesale funds and release securities pledged as collateral, which assists with liquidity levels.

Total assets were $9.24 billion at December 31, 2019, a decrease of $103.4 million, or 1.1%, from September 30, 2019, due to a $149.7 million decrease in cash and cash equivalents. During the current quarter, cash flows were used to pay $58.7 million of cash dividends to stockholders, pay down $50.0 million in FHLB borrowings, and pay borrowers' real estate taxes.

Total loans were $7.43 billion at December 31, 2019, an increase of $12.5 million, from September 30, 2019. The increase was primarily in the originated one- to four-family loan portfolio, partially offset by a decrease in commercial loans due mainly to the payoff of a $36.7 million participation loan. During the current quarter, the Bank originated and refinanced $256.4 million of one- to four-family and consumer loans with a weighted average rate of 3.51% and purchased $108.5 million of one- to four-family loans from correspondent lenders with a weighted average rate of 3.45%. The Bank also originated $32.4 million of commercial loans with a weighted average rate of 4.89% and entered into commercial real estate loan participations of $28.4 million at a weighted average rate of 4.65%. The commercial loan portfolio totaled $748.2 million at December 31, 2019 and was composed of 78% commercial real estate, 14% commercial construction, and 8% commercial and industrial. Total commercial real estate and commercial construction potential exposure, including undisbursed amounts and outstanding commitments totaling $181.6 million, was $872.8 million at December 31, 2019. Total commercial and industrial potential exposure, including undisbursed amounts and outstanding commitments of $18.9 million, was $75.9 million at December 31, 2019.

On October 1, 2019, the Company adopted Accounting Standards Update ("ASU") 2016-02, Leases and all subsequent ASUs that modified Topic 842. As a result of the adoption, the Company recorded a right-of-use asset of $15.7 million and a lease liability of $15.5 million, based on the present value of the expected remaining lease payments as of October 1, 2019. The right-of-use asset was included in other assets and the lease liability was included in accounts payable and accrued expenses in the Company's December 31, 2019 consolidated balance sheet.

Total deposits were $5.59 billion at December 31, 2019, an increase of $4.0 million from September 30, 2019. There were some compositional changes within the deposit portfolio during the current quarter. Non-maturity deposits increased $71.3 million, partially offset by a $36.4 million decrease in retail/business certificates of deposit and a $30.9 million decrease in public unit certificates of deposit. Within the retail/business certificate of deposit portfolio, short-term and intermediate-term certificates of deposit increased $66.2 million during the current quarter while longer-term and variable rate certificates of deposit decreased $102.6 million. The change in the composition of the retail/business certificate of deposit portfolio was intentional as the Bank increased offered rates on short-term and certain intermediate-term certificates of deposit late in the third quarter of fiscal year 2019 and ran the unTraditional campaign during the fourth quarter of fiscal year 2019. The intention of the unTraditional campaign was to attract deposits with generally shorter terms to maturity, to allow the Bank to more quickly reprice certificate of deposit funds lower if market interest rates decrease.

Beginning in late November 2019 and continuing into December 2019, the Bank reduced offered rates on several certificate of deposit terms. These reductions did not negatively impact the Bank's overall retention rate for fixed-rate certificates of deposit that subsequently matured. Since the reductions occurred later in the quarter, the impact on current quarter interest expense was negligible.

Total borrowings at December 31, 2019 were $2.19 billion, a decrease of $50.0 million, or 2.2%, from September 30, 2019. The decrease was due to not renewing a portion of the FHLB advances that matured during the current quarter.

Stockholders' equity was $1.31 billion at December 31, 2019 compared to $1.34 billion at September 30, 2019. The $29.7 million decrease was due primarily to the payment of $58.7 million in cash dividends, partially offset by net income of $22.5 million during the current quarter. In the long run, management considers a ratio of stockholders' equity to total assets at the Bank of at least 10% an appropriate level of capital. At December 31, 2019, this ratio was 12.7%. The cash dividends paid during the current quarter totaled $0.425 per share and consisted of a $0.34 per share cash true-up dividend related to fiscal year 2019 earnings per the Company's dividend policy, and a regular quarterly cash dividend of $0.085 per share. On January 28, 2020, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.7 million, payable on February 21, 2020 to stockholders of record as of the close of business on February 7, 2020.

At times, the Bank has utilized a leverage strategy to increase earnings. The leverage strategy involves borrowing up to $2.10 billion either on the Bank's FHLB line of credit or by entering into short-term FHLB advances, depending on the rates offered by FHLB. The borrowings are repaid at quarter end, or earlier if the strategy is suspended. The proceeds from the borrowings, net of the required FHLB stock holdings which yield approximately 7.5% from dividends, are deposited at the FRB of Kansas City. Net income attributable to the leverage strategy is largely derived from the dividends received on FHLB stock holdings, plus the net interest rate spread between the yield on the cash at the FRB of Kansas City and the rate paid on the related FHLB borrowings, less applicable federal insurance premiums and estimated taxes. Net income attributable to the leverage strategy was $22 thousand during the quarter ended September 30, 2019 and $14 thousand during the quarter ended December 31, 2018. The leverage strategy was not in place during the current quarter, due to the large negative interest rate spread making the strategy unprofitable. Management continues to monitor the net interest rate spread and overall profitability of the strategy. It is expected that the strategy will be reimplemented if it reaches a position that is profitable.

At December 31, 2019, Capitol Federal Financial, Inc., at the holding company level, had $90.6 million on deposit at the Bank. For fiscal year 2020, it is the intent 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.

The Company has authorized the repurchase of up to $70.0 million of its common stock under its stock repurchase plan. Shares may be repurchased from time to time based upon market conditions and available liquidity. There is no expiration for this repurchase plan and no shares have been repurchased under this repurchase plan.

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

December 31,

September 30,

December 31,

2019

2019

2018

(Dollars in thousands)

Stockholders' equity

$

1,306,594

$

1,336,326

$

1,345,913

Equity to total assets at end of period

14.1

%

14.3

%

14.5

%

The following table presents a reconciliation of total to net shares outstanding as of December 31, 2019.

Total shares outstanding

141,502,665

Less unallocated ESOP shares and unvested restricted stock

(3,539,709

)

Net shares outstanding

137,962,956

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. As of December 31, 2019, the Bank and Company exceeded all regulatory capital requirements. The following table presents the Bank's regulatory capital ratios at December 31, 2019.

Regulatory

Requirement For

Bank

Well-Capitalized

Ratios

Status

Tier 1 leverage ratio

12.5

%

5.0

%

Common equity tier 1 capital ratio

24.1

6.5

Tier 1 capital ratio

24.1

8.0

Total capital ratio

24.3

10.0

In September 2019, the regulatory agencies, including the Office of the Comptroller of the Currency and Board of Governors of the Federal Reserve System, adopted a final rule, effective January 1, 2020, creating a community bank leverage ratio ("CBLR") for institutions with total consolidated assets of less than $10 billion and that meet other qualifying criteria. The CBLR provides for a simple measure of capital adequacy for qualifying institutions. Qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules and to have met the well-capitalized ratio requirements. Management intends to elect the CBLR framework for the Bank and Company which will be reflected in the Bank's and Company's March 31, 2020 regulatory reports.

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 capital amounts as of December 31, 2019 (dollars in thousands):

Total Bank equity as reported under GAAP

$

1,174,713

Accumulated Other Comprehensive Income ("AOCI")

9,927

Goodwill and other intangibles, net of associated deferred taxes

(14,975

)

Total tier 1 capital

1,169,665

Allowance for credit losses ("ACL")

9,435

Total capital

$

1,179,100

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 the possibility that expected cost savings, synergies and other benefits from the acquisition of CCB might not be realized within the anticipated time frames or at all, changes in economic conditions in the Company's market area, 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,

2019

2019

ASSETS:

Cash and cash equivalents (includes interest-earning deposits of $46,427 and $198,809)

$

70,703

$

220,370

Available-for-sale ("AFS") securities, at estimated fair value

1,229,587

1,204,863

Loans receivable, net (ACL of $9,435 and $9,226)

7,429,207

7,416,747

FHLB stock, at cost

99,861

98,456

Premises and equipment, net

98,188

96,784

Income taxes receivable, net

2

Other assets

309,026

302,796

TOTAL ASSETS

$

9,236,572

$

9,340,018

LIABILITIES:

Deposits

$

5,585,851

$

5,581,867

Borrowings

2,189,991

2,239,989

Advance payments by borrowers for taxes and insurance

27,284

65,686

Income taxes payable, net

3,802

Deferred income tax liabilities, net

15,308

14,282

Accounts payable and accrued expenses

107,742

101,868

Total liabilities

7,929,978

8,003,692

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, 141,502,665 and 141,440,030

shares issued and outstanding as of December 31, 2019 and September 30, 2019, respectively

1,415

1,414

Additional paid-in capital

1,211,172

1,210,226

Unearned compensation, ESOP

(34,279

)

(34,692

)

Retained earnings

138,213

174,277

AOCI, net of tax

(9,927

)

(14,899

)

Total stockholders' equity

1,306,594

1,336,326

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

9,236,572

$

9,340,018

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands)

For the Three Months Ended

December 31,

September 30,

December 31,

2019

2019

2018

INTEREST AND DIVIDEND INCOME:

Loans receivable

$

69,914

$

70,366

$

70,772

MBS

6,102

6,293

6,523

FHLB stock

1,826

2,156

1,971

Investment securities

1,507

1,585

1,441

Cash and cash equivalents

687

2,885

1,714

Total interest and dividend income

80,036

83,285

82,421

INTEREST EXPENSE:

Deposits

17,962

17,471

15,725

Borrowings

13,377

16,003

14,395

Total interest expense

31,339

33,474

30,120

NET INTEREST INCOME

48,697

49,811

52,301

PROVISION FOR CREDIT LOSSES

225

300

NET INTEREST INCOME AFTER

PROVISION FOR CREDIT LOSSES

48,472

49,511

52,301

NON-INTEREST INCOME:

Deposit service fees

3,062

3,159

3,352

Insurance commissions

691

749

626

Other non-interest income

1,751

1,951

1,446

Total non-interest income

5,504

5,859

5,424

NON-INTEREST EXPENSE:

Salaries and employee benefits

13,471

13,940

12,962

Information technology and related expense

4,141

4,080

4,599

Occupancy, net

3,207

3,264

3,252

Advertising and promotional

1,410

1,647

760

Regulatory and outside services

1,343

1,566

1,766

Deposit and loan transaction costs

711

596

736

Office supplies and related expense

519

555

459

Federal insurance premium

(615

)

528

Other non-interest expense

1,698

1,297

1,720

Total non-interest expense

26,500

26,330

26,782

INCOME BEFORE INCOME TAX EXPENSE

27,476

29,040

30,943

INCOME TAX EXPENSE

4,965

6,631

6,560

NET INCOME

$

22,511

$

22,409

$

24,383

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

For the Three Months Ended

December 31,

September 30,

December 31,

2019

2019

2018

(Dollars in thousands, except per share amounts)

Net income

$

22,511

$

22,409

$

24,383

Income allocated to participating securities

(19

)

(20

)

(9

)

Net income available to common stockholders

$

22,492

$

22,389

$

24,374

Average common shares outstanding

137,897,561

137,676,683

137,550,471

Average committed ESOP shares outstanding

449

124,346

449

Total basic average common shares outstanding

137,898,010

137,801,029

137,550,920

Effect of dilutive stock options

78,112

65,960

41,459

Total diluted average common shares outstanding

137,976,122

137,866,989

137,592,379

Net earnings per share:

Basic

$

0.16

$

0.16

$

0.18

Diluted

$

0.16

$

0.16

$

0.18

Antidilutive stock options, excluded from the diluted

average common shares outstanding calculation

435,750

439,750

550,021

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.

December 31, 2019

September 30, 2019

December 31, 2018

% of

% of

% of

Amount

Rate

Total

Amount

Rate

Total

Amount

Rate

Total

(Dollars in thousands)

One- to four-family:

Originated

$

3,927,015

3.71

%

52.9

%

$

3,873,851

3.74

%

52.2

%

$

3,955,975

3.77

%

52.6

%

Correspondent purchased

2,343,750

3.62

31.6

2,349,877

3.64

31.7

2,491,692

3.61

33.2

Bulk purchased

237,691

2.93

3.2

252,347

2.94

3.4

279,719

2.67

3.7

Construction

38,771

3.82

0.5

36,758

4.00

0.5

33,443

4.08

0.4

Total

6,547,227

3.65

88.2

6,512,833

3.68

87.8

6,760,829

3.67

89.9

Commercial:

Commercial real estate

583,848

4.48

7.9

583,617

4.48

7.9

463,317

4.36

6.2

Commercial and industrial

57,019

4.97

0.8

61,094

5.14

0.8

61,221

5.19

0.8

Construction

107,372

4.68

1.4

123,159

4.81

1.7

93,244

4.74

1.2

Total

748,239

4.54

10.1

767,870

4.58

10.4

617,782

4.50

8.2

Consumer loans:

Home equity

118,491

5.73

1.6

120,587

6.15

1.6

129,795

6.20

1.8

Other

10,877

4.58

0.1

11,183

4.57

0.2

10,481

4.51

0.1

Total

129,368

5.63

1.7

131,770

6.02

1.8

140,276

6.07

1.9

Total loans receivable

7,424,834

3.77

100.0

%

7,412,473

3.81

100.0

%

7,518,887

3.78

100.0

%

Less:

ACL

9,435

9,226

8,558

Discounts/unearned loan fees

30,323

31,058

33,139

Premiums/deferred costs

(44,131

)

(44,558

)

(48,590

)

Total loans receivable, net

$

7,429,207

$

7,416,747

$

7,525,780

Loan Activity: The following table summarizes activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, discounts/unearned loan fees, and premiums/deferred costs. Loans that were paid-off as a result of refinances and loans that were sold 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 quarter ended December 31, 2019, the Bank endorsed $53.0 million of one- to four-family loans, reducing the average rate on those loans by 79 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.

For the Three Months Ended

December 31, 2019

September 30, 2019

June 30, 2019

March 31, 2019

Amount

Rate

Amount

Rate

Amount

Rate

Amount

Rate

(Dollars in thousands)

Beginning balance

$

7,412,473

3.81

%

$

7,501,741

3.83

%

$

7,564,076

3.82

%

$

7,518,887

3.78

%

Originated and refinanced:

Fixed

233,693

3.52

188,753

3.60

121,871

4.09

78,678

4.58

Adjustable

55,126

4.30

59,550

4.37

63,341

4.87

123,006

4.80

Purchased and participations:

Fixed

123,118

3.77

49,161

4.12

29,447

4.65

35,387

5.46

Adjustable

13,801

3.06

12,305

3.55

10,018

3.85

11,331

4.01

Change in undisbursed loan funds

(9,743

)

12,293

34,742

30,500

Repayments

(403,361

)

(410,624

)

(321,439

)

(233,625

)

Principal (charge-offs)/recoveries, net

(16

)

(110

)

(33

)

61

Other

(257

)

(596

)

(282

)

(149

)

Ending balance

$

7,424,834

3.77

$

7,412,473

3.81

$

7,501,741

3.83

$

7,564,076

3.82

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 are updated at least semiannually, with the latest update in September 2019, 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.

December 31, 2019

December 31, 2018

% of

Credit

Average

% of

Credit

Average

Amount

Total

Score

LTV

Balance

Amount

Total

Score

LTV

Balance

(Dollars in thousands)

Originated

$

3,927,015

60.3

%

768

62

%

$

142

$

3,955,975

58.8

%

767

62

%

$

139

Correspondent purchased

2,343,750

36.0

764

65

372

2,491,692

37.0

764

66

377

Bulk purchased

237,691

3.7

763

61

302

279,719

4.2

758

62

304

$

6,508,456

100.0

%

766

63

187

$

6,727,386

100.0

%

765

64

186

The following table presents originated, refinanced, and correspondent purchased activity in our one- to four-family loan portfolio, excluding endorsement activity, along with associated weighted average LTVs and weighted average credit scores for the periods indicated. Of the loans originated during the current quarter, $75.7 million were refinanced from other lenders.

For the Three Months Ended

December 31, 2019

December 31, 2018

Credit

Credit

Amount

LTV

Score

Amount

LTV

Score

(Dollars in thousands)

Originated

$

172,386

74

%

768

$

126,325

77

%

754

Refinanced by Bank customers

64,523

68

761

12,954

67

743

Correspondent purchased

108,493

72

767

52,940

74

763

$

345,402

72

766

$

192,219

75

756

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 quarter ended December 31, 2019.

For the Three Months Ended

December 31, 2019

State

Amount

% of Total

Rate

(Dollars in thousands)

Kansas

$

207,637

60.1

%

3.35

%

Missouri

60,081

17.4

3.38

Texas

44,068

12.8

3.37

Other states

33,616

9.7

3.51

$

345,402

100.0

%

3.37

The following table summarizes our one- to four-family loan origination and refinance commitments and one- to four-family correspondent loan purchase commitments as of December 31, 2019, 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

$

14,849

$

41,355

$

12,311

$

68,515

3.39

%

Correspondent

21,919

98,243

19,845

140,007

3.43

$

36,768

$

139,598

$

32,156

$

208,522

3.42

Rate

2.99

%

3.62

%

3.02

%

Commercial Loans: During the current quarter, the Bank originated $32.4 million of commercial loans, entered into commercial real estate loan participations totaling $28.4 million, and processed commercial loan disbursements, excluding lines of credit, of approximately $40 million at a weighted average rate of 4.91%. Additionally, a single $36.7 million commercial real estate participation loan was repaid in full during the current quarter.

The following table presents the Bank's commercial real estate loans and loan commitments by type of primary collateral, as of December 31, 2019. Included in the gross loan amounts in the table, which does not include outstanding commitments, are fixed-rate loans totaling $494.6 million at a weighted average rate of 4.36% and adjustable-rate loans totaling $331.5 million at a weighted average rate of 4.88%. The weighted average rate of fixed-rate loans is lower than that of adjustable-rate loans due primarily to the majority of the fixed-rate loans in the portfolio at December 31, 2019 having shorter terms to maturity.

Unpaid

Undisbursed

Gross Loan

Outstanding

% of

Principal

Amount

Amount

Commitments

Total

Total

(Dollars in thousands)

Senior housing

$

218,686

$

54,851

$

273,537

$

$

273,537

31.3

%

Hotel

113,238

23,823

137,061

40,000

177,061

20.3

Retail building

119,383

27,331

146,714

6,390

153,104

17.5

Multi-family

56,473

18,238

74,711

74,711

8.6

One- to four-family property

55,174

3,740

58,914

163

59,077

6.8

Office building

48,634

1,583

50,217

50,217

5.8

Single use building

45,224

4,598

49,822

49,822

5.7

Other

34,408

670

35,078

181

35,259

4.0

$

691,220

$

134,834

$

826,054

$

46,734

$

872,788

100.0

%

Weighted average rate

4.51

%

4.89

%

4.57

%

5.56

%

4.62

%

The following table summarizes the Bank's commercial real estate loans and loan commitments by state as of December 31, 2019.

Unpaid

Undisbursed

Gross Loan

Outstanding

% of

Principal

Amount

Amount

Commitments

Total

Total

(Dollars in thousands)

Kansas

$

284,738

$

17,122

$

301,860

$

4,675

$

306,535

35.1

%

Missouri

218,080

71,120

289,200

2,059

291,259

33.4

Texas

91,438

36,000

127,438

40,000

167,438

19.2

Nebraska

30,864

2,822

33,686

33,686

3.9

Kentucky

23,589

1,970

25,559

25,559

2.9

California

5,990

4,300

10,290

10,290

1.2

Other

36,521

1,500

38,021

38,021

4.3

$

691,220

$

134,834

$

826,054

$

46,734

$

872,788

100.0

%

The following table presents the Bank's commercial loan portfolio and outstanding loan commitments, categorized by gross loan amount (unpaid principal plus undisbursed amounts) or outstanding loan commitment amount, as of December 31, 2019.

Count

Amount

(Dollars in thousands)

Greater than $30 million

4

$

152,031

>$15 to $30 million

11

266,835

>$10 to $15 million

4

50,350

>$5 to $10 million

13

84,543

$1 to $5 million

91

206,017

Less than $1 million

1,186

188,950

1,309

$

948,726

Asset Quality

The following tables present loans 30 to 89 days delinquent, non-performing loans, and OREO as of the dates indicated. Of the loans 30 to 89 days delinquent at December 31, 2019, approximately 72% were 59 days or less delinquent. Non-performing loans are loans that are 90 or more days delinquent or in foreclosure, and nonaccrual 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. Over the past 12 months, OREO properties acquired in settlement of one- to four-family loans were owned by the Bank, on average, for approximately three months before they were sold.

Loans Delinquent for 30 to 89 Days at:

December 31, 2019

September 30, 2019

June 30, 2019

March 31, 2019

December 31, 2018

Number

Amount

Number

Amount

Number

Amount

Number

Amount

Number

Amount

(Dollars in thousands)

One- to four-family:

Originated

96

$

9,004

90

$

7,223

94

$

7,749

79

$

8,694

118

$

9,765

Correspondent purchased

13

4,117

9

2,721

14

3,727

13

4,133

10

1,969

Bulk purchased

14

3,307

16

3,581

13

2,249

13

2,722

15

2,780

Commercial

7

1,192

8

826

12

1,699

13

1,361

2

64

Consumer

40

488

42

525

43

630

37

481

42

744

170

$

18,108

165

$

14,876

176

$

16,054

155

$

17,391

187

$

15,322

30 to 89 days delinquent loans

to total loans receivable, net

0.24

%

0.20

%

0.21

%

0.23

%

0.20

%

Non-Performing Loans and OREO at:

December 31, 2019

September 30, 2019

June 30, 2019

March 31, 2019

December 31, 2018

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

44

$

3,552

44

$

3,268

58

$

5,069

67

$

5,172

69

$

5,301

Correspondent purchased

4

1,376

4

1,008

2

871

3

918

5

1,093

Bulk purchased

2

689

6

1,465

7

2,194

10

2,782

10

3,137

Commercial

4

170

Consumer

20

340

25

362

25

437

27

567

28

513

70

5,957

83

6,273

92

8,571

107

9,439

112

10,044

Loans 90 or more days delinquent or in foreclosure

as a percentage of total loans

0.08

%

0.08

%

0.11

%

0.12

%

0.13

%

Nonaccrual loans less than 90 Days Delinquent:(1)

One- to four-family:

Originated

11

$

634

16

$

1,183

15

$

1,057

18

$

1,761

17

$

1,584

Correspondent purchased

1

298

Bulk purchased

1

134

1

65

2

374

Commercial

6

363

1

7

1

7

2

1,712

2

1,776

Consumer

2

35

2

4

3

14

3

13

18

1,131

20

1,290

20

1,442

23

3,487

23

3,671

Total non-performing loans

88

7,088

103

7,563

112

10,013

130

12,926

135

13,715

Non-performing loans as a percentage of total loans

0.10

%

0.10

%

0.13

%

0.17

%

0.18

%

OREO:

One- to four-family:

Originated(2)

8

$

414

8

$

745

8

$

546

5

$

549

4

$

588

Bulk purchased

1

322

1

322

Commercial

1

600

1

600

1

600

1

600

Consumer

1

98

9

512

9

1,345

9

1,146

7

1,471

6

1,510

Total non-performing assets

97

$

7,600

112

$

8,908

121

$

11,159

137

$

14,397

141

$

15,225

Non-performing assets as a percentage of total assets

0.08

%

0.10

%

0.12

%

0.15

%

0.16

%

(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 special mention loans compared to December 31, 2018 was due primarily to one $50.0 million commercial participation real estate loan being classified as special mention during the quarter ended June 30, 2019. The loan relates to a recently opened large hotel and convention center in a high growth area in the central-southern United States. Management has identified credit weaknesses associated with this loan, including a debt service coverage ratio below policy, the development surrounding the hotel and convention center has been slower than initially anticipated, and construction delays have occurred. The Bank has personal guarantees from members of a financially strong borrowing group. Due to the identified credit weaknesses, management made the decision to classify the loan as special mention. Management continues to closely monitor the hotel and convention center and surrounding activities. Included in substandard commercial loans at December 31, 2019 and September 30, 2019 were $3.8 million and $1.3 million, respectively, of loans added in the CCB acquisition which have since been renewed and on which the related purchase acquisition adjustments have been accreted; as such, these loans are now included in the Bank's ACL formula analysis model or are individually evaluated for impairment. There were no such loans at December 31, 2018.

December 31, 2019

September 30, 2019

December 31, 2018

Special Mention

Substandard

Special Mention

Substandard

Special Mention

Substandard

(Dollars in thousands)

One- to four-family

$

15,778

$

25,376

$

15,428

$

23,783

$

10,540

$

30,758

Commercial

52,809

5,356

54,134

5,543

5,657

1,776

Consumer

375

683

283

758

211

859

$

68,962

$

31,415

$

69,845

$

30,084

$

16,408

$

33,393

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

For the Three Months Ended

December 31,

September 30,

June 30,

March 31,

December 31,

2019

2019

2019

2019

2018

(Dollars in thousands)

Balance at beginning of period

$

9,226

$

9,036

$

8,619

$

8,558

$

8,463

Charge-offs:

One- to four-family

(18

)

(45

)

(10

)

(46

)

Commercial

(24

)

(124

)

Consumer

(6

)

(9

)

(16

)

(2

)

(10

)

Total charge-offs

(48

)

(133

)

(61

)

(12

)

(56

)

Recoveries:

One- to four-family

14

3

19

92

Commercial

27

5

17

25

2

Consumer

5

4

8

29

57

Total recoveries

32

23

28

73

151

Net (charge-offs) recoveries

(16

)

(110

)

(33

)

61

95

Provision for credit losses

225

300

450

Balance at end of period

$

9,435

$

9,226

$

9,036

$

8,619

$

8,558

Ratio of net charge-offs during the period

to average loans outstanding during the period

%

%

%

%

%

Ratio of net (recoveries) charge-offs during the

period to average non-performing assets

0.19

1.09

0.26

(0.41

)

(0.68

)

ACL to non-performing loans at end of period

133.11

121.99

90.24

66.68

62.40

ACL to loans receivable, net at end of period

0.13

0.12

0.12

0.11

0.11

ACL to net charge-offs (annualized)

144.5x

21.1x

68.1x

N/M(1)

N/M(1)

(1)

This ratio is not presented for the time periods noted due to loan recoveries exceeding loan charge-offs during these periods.

The distribution of our ACL at the dates indicated is summarized below. Each quarter, we prepare a formula analysis model which segregates the loan portfolio into categories based on certain risk characteristics. Historical loss factors and qualitative factors are applied to each loan category in the formula analysis model. The factors are reviewed by management quarterly to assess whether the factors adequately cover probable and estimable losses inherent in the loan portfolio. The historical loss factors and qualitative factors continue to improve for our one- to four-family portfolio. To the extent the commercial loan portfolio continues to grow and the inherent loss factors remain relatively constant and/or the asset quality declines, the related ACL amounts will likely increase. In addition to the formula analysis model, management considers several other internal and external data elements when evaluating the overall adequacy of the ACL. Management considers the overall ACL to be adequate for the loan portfolio at December 31, 2019.

At

December 31,

September 30,

June 30,

March 31,

December 31,

2019

2019

2019

2019

2018

(Dollars in thousands)

One- to four-family:

Originated

$

2,027

$

1,982

$

2,019

$

2,157

$

2,740

Correspondent purchased

1,200

1,203

1,275

1,392

1,748

Bulk purchased

612

687

742

802

836

Construction

20

18

17

16

21

Total

3,859

3,890

4,053

4,367

5,345

Commercial:

Commercial real estate

3,608

3,448

3,394

2,783

2,056

Commercial and industrial

710

472

256

224

55

Construction

1,100

1,251

1,182

1,081

923

Total

5,418

5,171

4,832

4,088

3,034

Consumer

158

165

151

164

179

Total

$

9,435

$

9,226

$

9,036

$

8,619

$

8,558

ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, replaces the current incurred loss impairment methodology in GAAP. The new impairment methodology requires an entity to measure, at each reporting date, the expected credit losses of financial assets not measured at fair value, such as loans and loan commitments, over their contractual lives. This ASU is effective for the Company on October 1, 2020. The Company is working with a third-party vendor solution to implement the new impairment methodology. While we are currently unable to reasonably estimate the impact of adopting this ASU, we expect the impact of adoption will be influenced by the composition of our loan and securities portfolios as well as the economic conditions and forecasts at the time of adoption.

Securities Portfolio

The following table presents the distribution of our securities portfolio, at amortized cost, at the dates indicated. Overall, fixed-rate securities comprised 77% of our securities portfolio at December 31, 2019. The weighted average life ("WAL") is the estimated remaining maturity (in years) after three-month historical prepayment speeds and projected call option assumptions have been applied. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.

December 31, 2019

September 30, 2019

December 31, 2018

Amount

Yield

WAL

Amount

Yield

WAL

Amount

Yield

WAL

(Dollars in thousands)

Fixed-rate securities:

MBS

$

648,663

2.40

%

2.8

$

625,840

2.46

%

2.9

$

685,636

2.44

%

3.1

U.S. government-sponsored enterprise debentures

274,994

2.03

0.8

249,828

2.15

0.7

243,550

2.20

1.8

Municipal bonds

17,050

1.60

0.9

18,371

1.63

1.0

22,845

1.57

1.6

Total fixed-rate securities

940,707

2.28

2.2

894,039

2.35

2.3

952,031

2.35

2.8

Adjustable-rate securities:

MBS

276,069

3.09

4.3

297,416

3.10

4.7

284,584

3.07

4.9

Total securities portfolio

$

1,216,776

2.46

2.7

$

1,191,455

2.54

2.9

$

1,236,615

2.52

3.3

MBS: The following table summarizes the activity in our portfolio of MBS for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yields for the ending balances are as of the last day of the period presented and are generally derived from recent prepayment activity on the securities in the portfolio as of the dates presented. The beginning and ending WAL is the estimated remaining principal repayment term (in years) after three-month historical prepayment speeds have been applied.

For the Three Months Ended

December 31, 2019

September 30, 2019

June 30, 2019

March 31, 2019

Amount

Yield

WAL

Amount

Yield

WAL

Amount

Yield

WAL

Amount

Yield

WAL

(Dollars in thousands)

Beginning balance - carrying value

$

936,487

2.67

%

3.5

$

979,256

2.68

%

3.4

$

985,294

2.67

%

3.7

$

972,543

2.62

%

3.6

Maturities and repayments

(72,635

)

(70,865

)

(74,335

)

(62,702

)

Net amortization of (premiums)/discounts

(248

)

(270

)

(375

)

(310

)

Purchases:

Fixed

74,359

2.05

3.8

25,214

1.93

3.2

23,620

2.74

3.8

28,921

2.89

5.1

Adjustable

40,362

2.79

4.5

43,776

2.69

4.3

Valuation transferred from HTM to AFS

3,039

Change in valuation on AFS securities

(646

)

113

4,690

3,066

Ending balance - carrying value

$

937,317

2.61

3.3

$

936,487

2.67

3.5

$

979,256

2.68

3.4

$

985,294

2.67

3.7

Investment Securities: The following table summarizes the activity of investment securities for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yields for the ending balances are as of the last day of the period presented. The beginning and ending WALs represent the estimated remaining principal repayment terms (in years) of the securities after projected call dates have been considered, based upon market rates at each date presented.

For the Three Months Ended

December 31, 2019

September 30, 2019

June 30, 2019

March 31, 2019

Amount

Yield

WAL

Amount

Yield

WAL

Amount

Yield

WAL

Amount

Yield

WAL

(Dollars in thousands)

Beginning balance - carrying value

$

268,376

2.11

%

0.8

$

273,995

2.30

%

1.0

$

288,894

2.38

%

1.0

$

264,782

2.14

%

1.8

Maturities, calls and sales

(51,175

)

(80,690

)

(65,781

)

(76,635

)

Net amortization of (premiums)/discounts

20

(13

)

153

(39

)

Purchases:

Fixed

75,000

1.90

1.7

75,000

2.02

1.1

50,000

2.60

1.0

99,809

2.67

0.7

Valuation transferred from HTM to AFS

47

Change in valuation on AFS securities

49

37

729

977

Ending balance - carrying value

$

292,270

2.00

0.8

$

268,376

2.11

0.8

$

273,995

2.30

1.0

$

288,894

2.38

1.0

Deposit Portfolio

The following table presents the amount, weighted average rate, and percent of total for the components of our deposit portfolio at the dates presented.

December 31, 2019

September 30, 2019

December 31, 2018

% of

% of

% of

Amount

Rate

Total

Amount

Rate

Total

Amount

Rate

Total

(Dollars in thousands)

Non-interest-bearing checking

$

368,311

%

6.6

%

$

357,284

%

6.4

%

$

348,867

%

6.3

%

Interest-bearing checking

745,436

0.08

13.3

717,121

0.09

12.8

729,712

0.07

13.1

Savings

358,817

0.09

6.4

321,494

0.05

5.8

350,089

0.06

6.3

Money market

1,192,972

0.69

21.4

1,198,343

0.70

21.5

1,256,302

0.72

22.6

Retail/business certificates of deposit

2,656,379

2.11

47.6

2,692,770

2.08

48.2

2,479,614

1.86

44.6

Public unit certificates of deposit

263,936

2.14

4.7

294,855

2.29

5.3

393,280

2.07

7.1

$

5,585,851

1.27

100.0

%

$

5,581,867

1.29

100.0

%

$

5,557,864

1.15

100.0

%

The following table presents scheduled maturity information for our certificates of deposit, including public unit certificates of deposit, along with associated weighted average rates, as of December 31, 2019.

Amount Due

More than

More than

1 year

1 year to

2 years to 3

More than

Total

Rate range

or less

2 years

years

3 years

Amount

Rate

(Dollars in thousands)

0.00 – 0.99%

$

7,449

$

2,286

$

25

$

$

9,760

0.69

%

1.00 – 1.99%

828,131

374,561

165,628

13,365

1,381,685

1.81

2.00 – 2.99%

600,437

271,542

375,583

281,063

1,528,625

2.40

3.00 – 3.99%

245

245

3.00

$

1,436,017

$

648,389

$

541,236

$

294,673

$

2,920,315

2.11

Percent of total

49.2

%

22.2

%

18.5

%

10.1

%

Weighted average rate

2.01

2.08

2.24

2.47

Weighted average maturity (in years)

0.5

1.5

2.6

3.7

1.4

Weighted average maturity for the retail/business certificate of deposit portfolio (in years)

1.5

Borrowings

The following table presents the maturity of term borrowings which includes FHLB advances, at par, and repurchase agreements, along with associated weighted average contractual and effective rates as of December 31, 2019.

Term Borrowings Amount

Maturity by

Interest rate

Contractual

Effective

Fiscal Year

Fixed-rate

swaps(1)

Rate

Rate(2)

(Dollars in thousands)

2020

$

300,000

$

440,000

2.01

2.46

2021

550,000

200,000

2.22

2.35

2022

200,000

2.23

2.23

2023

200,000

1.98

1.98

2024

100,000

3.39

3.39

2025

100,000

1.96

1.96

$

1,450,000