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Capitol Federal Financial, Inc. (CFFN) SEC Filing 8-K Material Event for the period ending Thursday, July 29, 2021

Capitol Federal Financial, Inc.

CIK: 1490906 Ticker: CFFN


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NEWS RELEASE
FOR IMMEDIATE RELEASE
July 29, 2021
CAPITOL FEDERAL FINANCIAL, INC.®
REPORTS THIRD QUARTER FISCAL YEAR 2021 RESULTS

Topeka, KS - 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 June 30, 2021. The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 will be filed with the Securities and Exchange Commission ("SEC") on or about August 9, 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 $18.2 million;
basic and diluted earnings per share of $0.13;
net interest margin of 1.84%;
paid dividends of $65.7 million, or $0.485 per share, including a $0.40 per share True Blue® Capitol dividend; and
on July 20, 2021, announced a cash dividend of $0.085 per share, payable on August 20, 2021 to stockholders of record as of the close of business on August 6, 2021.

Comparison of Operating Results for the Three Months Ended June 30, 2021 and March 31, 2021

For the quarter ended June 30, 2021, the Company recognized net income of $18.2 million, or $0.13 per share, compared to net income of $20.4 million, or $0.15 per share, for the quarter ended March 31, 2021. The decrease in net income was due primarily to a decrease in non-interest income due mainly to the prior quarter including a $7.4 million gain on the sale of the Bank's Visa Class B shares, partially offset by a decrease in non-interest expense due mainly to a $4.8 million loss in the prior quarter due to the Bank terminating $200.0 million of its interest rate swaps. The net interest margin decreased four basis points, from 1.88% for the prior quarter to 1.84% for the current quarter. The decrease in the net interest margin was due mainly to a decrease in the loan portfolio average yield, partially offset by a decrease in the average cost of deposits and borrowings. 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.

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Interest and Dividend Income
The weighted average yield on total interest-earning assets decreased 15 basis points, from 2.81% for the prior quarter to 2.66% for the current quarter, while the average balance of interest-earning assets increased $125.8 million between the two periods. The decrease in the weighted average yield was due primarily to a decrease in the one- to four-family loan portfolio yield. The increase in the average balance was due primarily to a $152.1 million increase in the average balance of the mortgage-backed securities ("MBS") and investment securities portfolios and a $38.0 million increase in the average balance of the loans receivable portfolio, partially offset by a $60.7 million decrease in the average balance of cash and cash equivalents. 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
June 30, March 31, Change Expressed in:
20212021DollarsPercent
(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable$54,779 $57,285 $(2,506)(4.4)%
MBS5,360 5,429 (69)(1.3)
Federal Home Loan Bank Topeka ("FHLB") stock944 951 (7)(0.7)
Investment securities763 629 134 21.3 
Cash and cash equivalents26 40 (14)(35.0)
Total interest and dividend income$61,872 $64,334 $(2,462)(3.8)

The decrease in interest income on loans receivable was due to a 16 basis point decrease in the weighted average portfolio yield, partially offset by a $38.0 million increase in the average balance. The weighted average yield on the loans receivable portfolio decreased from 3.27% for the prior quarter to 3.11% for the current quarter, due mainly to an increase in one- to four-family correspondent loan endorsement activity, which increased the amount of premium amortization related to these loans, along with a reduction in one- to four-family originated loan endorsement activity, which decreased the amount of deferred fee recognition related to these loans. Additionally, the yield decreased due to the origination and purchase of one- to four-family loans at rates lower than the overall portfolio. One- to four-family correspondent loan payoff activity in the current quarter was lower than 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. 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.

The decrease in interest income on MBS was due to a 10 basis point decrease in the weighted average portfolio yield, which was largely offset by an $85.1 million increase in the average balance of the portfolio. The increase in interest income on investment securities was due primarily to a $67.0 million increase in the average balance of the portfolio.

Interest Expense
The weighted average rate paid on interest-bearing liabilities decreased 12 basis points, from 1.06% for the prior quarter to 0.94% for the current quarter, while the average balance of interest-bearing liabilities increased $121.1 million between the two periods due to an increase in the average balance of checking, savings and money market accounts, partially offset by a decrease in the average balance of retail/commercial certificates of deposit. 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
June 30, March 31, Change Expressed in:
20212021DollarsPercent
(Dollars in thousands)
INTEREST EXPENSE:
Deposits$11,475 $12,529 $(1,054)(8.4)%
Borrowings7,826 8,732 (906)(10.4)
Total interest expense$19,301 $21,261 $(1,960)(9.2)

The decrease in interest expense on deposits was due primarily to a decrease in the weighted average rate paid on and a decrease in the average balance of the retail/commercial certificate of deposit portfolio. The weighted average rate on the retail/commercial certificate of deposit portfolio decreased 12 basis points, to 1.49% for the current quarter, and the average balance decreased $74.5 million. See the Financial Condition section below for additional information on deposits.
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During the prior quarter, the Bank terminated interest rate swaps designated as cash flow hedges with a notional amount of $200.0 million which were tied to variable-rate FHLB advances totaling $200.0 million. During the current quarter, the Bank prepaid the aforementioned variable-rate FHLB advances and replaced them with $200.0 million of fixed-rate FHLB advances. The decrease in interest expense on borrowings compared to the prior quarter was due primarily to a full quarterly impact of this activity and the related reduction in the effective cost of these borrowings.

Provision for Credit Losses
For the quarter ended June 30, 2021, the Bank recorded a negative provision for credit losses of $2.7 million, compared to a negative provision for credit losses of $3.0 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, partially offset by a $34 thousand increase in reserves for off-balance sheet credit exposures. The $2.7 million negative provision for credit losses in the current quarter was due primarily to more favorable economic conditions at June 30, 2021 compared to March 31, 2021, largely related to commercial loans. See additional discussion regarding the Bank's ACL and reserves for off-balance sheet credit exposures at June 30, 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
June 30, March 31, Change Expressed in:
20212021DollarsPercent
(Dollars in thousands)
NON-INTEREST INCOME:
Deposit service fees$3,227 $2,814 $413 14.7 %
Gain on sale of Visa Class B shares— 7,386 (7,386)(100.0)
Insurance commissions723 888 (165)(18.6)
Other non-interest income1,286 1,389 (103)(7.4)
Total non-interest income$5,236 $12,477 $(7,241)(58.0)

The increase in deposit service fees was due primarily to increases in debit card income and service charge income as a result of higher transaction volume in the current quarter. During the prior quarter, the Bank sold all of its Visa Class B shares, resulting in a $7.4 million gain. The decrease in insurance commissions was due primarily to the receipt of annual contingent insurance commissions during the prior quarter, which were higher than what was anticipated and accrued.

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Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.
For the Three Months Ended
June 30, March 31, Change Expressed in:
20212021DollarsPercent
(Dollars in thousands)
NON-INTEREST EXPENSE:
Salaries and employee benefits$13,867 $13,397 $470 3.5 %
Information technology and related expense4,736 4,599 137 3.0 
Occupancy, net3,504 3,523 (19)(0.5)
Loss on interest rate swap termination— 4,752 (4,752)(100.0)
Regulatory and outside services1,469 1,234 235 19.0 
Advertising and promotional1,407 1,484 (77)(5.2)
Deposit and loan transaction costs693 664 29 4.4 
Federal insurance premium633 634 (1)(0.2)
Office supplies and related expense402 463 (61)(13.2)
Other non-interest expense891 1,903 (1,012)(53.2)
Total non-interest expense$27,602 $32,653 $(5,051)(15.5)

The increase in salaries and employee benefits was due primarily to merit increases during the current quarter. During the prior quarter, the Bank terminated interest rate swaps designated as cash flow hedges with a notional amount of $200.0 million resulting in the reclassification of unrealized losses totaling $4.8 million from accumulated other comprehensive income ("AOCI") into earnings. The increase in regulatory and outside services was due mainly to the timing of external audit expenses. The decrease in other non-interest expense was due primarily to the write-down of a property during the prior quarter that previously served as one of the Bank's branch locations, as management intends to sell the property. During the current quarter there was a partial reversal of the write-down due to receiving updated pricing information for the property.

The Company's efficiency ratio was 57.73% for the current quarter compared to 58.78% for the prior quarter. The improvement in the efficiency ratio was due primarily to lower non-interest expense, partially offset by a decrease 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 lower value indicates that the financial institution is generating revenue with a proportionally lower 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
June 30, March 31, Change Expressed in:
20212021DollarsPercent
(Dollars in thousands)
Income before income tax expense$22,896 $25,861 $(2,965)(11.5)%
Income tax expense4,709 5,417 (708)(13.1)
Net income$18,187 $20,444 $(2,257)(11.0)
Effective Tax Rate20.6 %20.9 %

The decrease in income tax expense was due mainly to a decrease in pretax income. Management anticipates the effective income tax rate for fiscal year 2021 will be approximately 20%.

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Comparison of Operating Results for the Nine Months Ended June 30, 2021 and 2020

The Company recognized net income of $57.5 million, or $0.42 per share, for the nine month period ended June 30, 2021 compared to net income of $46.3 million, or $0.34 per share, for the nine month period ended June 30, 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 $7.2 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 $14.2 million, or 9.9%, from the prior year period to $129.5 million for the current year period. The net interest margin decreased 27 basis points, from 2.15% for the prior year period to 1.88% 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 3.48% for the prior year period to 2.82% for the current year period, while the average balance of interest-earning assets increased $259.3 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 Nine Months Ended
June 30, Change Expressed in:
20212020DollarsPercent
(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable$172,758 $206,179 $(33,421)(16.2)%
MBS16,499 17,584 (1,085)(6.2)
FHLB stock2,964 4,747 (1,783)(37.6)
Investment securities2,075 3,736 (1,661)(44.5)
Cash and cash equivalents117 1,126 (1,009)(89.6)
Total interest and dividend income$194,413 $233,372 $(38,959)(16.7)

The decrease in interest income on loans receivable was due mainly to a 41 basis point decrease in the weighted average yield on the portfolio, from 3.67% for the prior year period to 3.26% 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 endorsements and refinances of one- to four-family originated loans to lower market rates, adjustable-rate loans repricing to lower market rates, and the origination and purchase of new loans at lower market rates. Additionally, the average balance of the portfolio decreased $420.5 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 Coronavirus Disease 2019 ("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 98 basis point decrease in the weighted average yield to 1.54% 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 $495.5 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 135 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 $219.0 million increase in the average balance of the portfolio.

The decrease in interest income on cash and cash equivalents was due primarily to a decrease in the yield earned on cash held at the Federal Reserve Bank of Kansas City.

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Interest Expense
The weighted average rate paid on total interest-bearing liabilities decreased 45 basis points, from 1.52% for the prior year period to 1.07% for the current period, while the average balance of interest-bearing liabilities increased $250.8 million. The increase in the average balance was primarily in money market and checking accounts, partially offset by a decrease in the average balance of 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 Nine Months Ended
June 30, Change Expressed in:
20212020DollarsPercent
(Dollars in thousands)
INTEREST EXPENSE:
Deposits$38,071 $52,299 $(14,228)(27.2)%
Borrowings26,885 37,421 (10,536)(28.2)
Total interest expense$64,956 $89,720 $(24,764)(27.6)

The decrease in interest expense on deposits was due mainly to a decrease in the weighted average rate paid on retail/commercial certificates of deposit, money market accounts, and wholesale certificates of deposit, which decreased by 46 basis points, 31 basis points, and 133 basis points, respectively. Since the onset of the COVID-19 pandemic, retail/commercial certificates of deposit have been 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 $494.1 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 liquidity 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 $7.2 million, compared to a $22.3 million provision for credit losses during the prior year period. See additional discussion regarding the Bank's ACL and reserve for off-balance sheet credit exposures at June 30, 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 Nine Months Ended
June 30, Change Expressed in:
20212020DollarsPercent
(Dollars in thousands)
NON-INTEREST INCOME:
Deposit service fees$8,988 $8,384 $604 7.2 %
Gain on sale of Visa Class B shares7,386 — 7,386 N/A
Insurance commissions2,249 1,762 487 27.6 
Other non-interest income4,160 4,468 (308)(6.9)
Total non-interest income$22,783 $14,614 $8,169 55.9 

The increase in deposit service fees was due primarily to an increase in debit card income as a result of higher transaction volume. 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 higher annual contingent insurance commissions received in the current year period compared to the prior year period. The decrease in other non-interest income was mainly the result of lower income from bank-owned life insurance ("BOLI") compared to the prior year period due to a reduction in the yield due to lower market rates and lower death benefit receipts between the two periods.

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Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.
For the Nine Months Ended
June 30, Change Expressed in:
20212020DollarsPercent
(Dollars in thousands)
NON-INTEREST EXPENSE:
Salaries and employee benefits$41,402 $39,765 $1,637 4.1 %
Information technology and related expense13,568 12,694 874 6.9 
Occupancy, net10,406 10,212 194 1.9 
Loss on interest rate swap termination4,752 — 4,752 N/A
Regulatory and outside services4,288 4,188 100 2.4 
Advertising and promotional3,729 3,773 (44)(1.2)
Deposit and loan transaction costs2,123 2,086 37 1.8 
Federal insurance premium1,888 287 1,601 557.8 
Office supplies and related expense1,289 1,586 (297)(18.7)
Other non-interest expense3,877 4,237 (360)(8.5)
Total non-interest expense$87,322 $78,828 $8,494 10.8 

The increase in salaries and employee benefits was due primarily to an increase in officer bonus accruals, as well as an increase in loan commissions related to higher loan origination activity. The increase in information technology and related expense was due mainly to an increase in software licensing expense and information technology professional services 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 resulting in the reclassification of unrealized losses totaling $4.8 million from AOCI into earnings. 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 57.36% for the current period compared to 49.81% for the prior year period. The change in the efficiency ratio was due to higher non-interest expense and lower net interest income, 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 year period related to higher non-interest expense was due primarily to the loss on the termination of interest rate swaps, which was a unique transaction during the current year 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 Nine Months Ended
June 30, Change Expressed in:
20212020DollarsPercent
(Dollars in thousands)
Income before income tax expense$72,105 $57,138 $14,967 26.2 %
Income tax expense14,576 10,877 3,699 34.0 
Net income$57,529 $46,261 $11,268 24.4 
Effective Tax Rate20.2 %19.0 %

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.
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Financial Condition as of June 30, 2021
Most areas of consumer spending have continued to rebound in recent months, but some segments, such as travel and entertainment, are lagging more than the overall economy. We continue to work with both our retail and commercial customers to help them manage their debt during this uneven economic recovery. There is uncertainty about the long-term 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 $9.65 billion at June 30, 2021, a decrease of $48.4 million, or 0.5%, from March 31, 2021, due primarily to decreases in securities and cash, partially offset by an increase in loans receivable. The Company paid $65.7 million in dividends during the current quarter which reduced excess operating cash. Cash flows from the securities portfolio were generally used to fund loan growth during the current quarter.

Total loans were $7.03 billion at June 30, 2021, an increase of $60.3 million, or 0.9%, from March 31, 2021. The increase was mainly in the one- to four-family correspondent loan portfolio and commercial real estate portfolio. During the current quarter, the Bank originated and refinanced $299.2 million of one- to four-family and consumer loans with a weighted average rate of 2.85% and purchased $235.8 million of one- to four-family loans from correspondent lenders with a weighted average rate of 2.54%. The Bank also originated $51.2 million of commercial loans with a weighted average rate of 3.48% and entered into commercial loan participations of $17.0 million at a weighted average rate of 6.00%.

Total deposits were $6.64 billion at June 30, 2021, a decrease of $12.6 million, or 0.2%, from March 31, 2021. The decrease was due primarily to a $100.0 million decrease in retail certificates of deposit, partially offset by an $85.8 million increase in money market accounts, as 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 assets increased $162.4 million, or 1.7% from September 30, 2020 to June 30, 2021, due mainly to an increase in securities, partially offset by decreases in loans receivable and cash and cash equivalents. 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 $454.7 million, or 29.1%, from September 30, 2020 to June 30, 2021, composed of a $338.2 million increase in MBS and a $116.5 million increase in investment securities.

Total loans decreased $169.0 million from September 30, 2020 to June 30, 2021. The decrease was primarily in the one- to four-family correspondent loan portfolio. During the current year nine month period, the Bank originated and refinanced $948.6 million of one- to four-family and consumer loans with a weighted average rate of 2.75% and purchased $505.0 million of one- to four-family loans from correspondent lenders with a weighted average rate of 2.63%. The Bank also originated $208.5 million of commercial loans with a weighted average rate of 3.30% and entered into commercial loan participations of $115.1 million at a weighted average rate of 4.17%. The commercial loan portfolio totaled $815.0 million at June 30, 2021 and was composed of 84% commercial real estate loans, 9% 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 $267.0 million, was $1.01 billion at June 30, 2021. Total commercial and industrial potential exposure, including undisbursed amounts and outstanding commitments of $23.7 million, was $97.4 million at June 30, 2021, of which $18.3 million related to Paycheck Protection Program ("PPP") loans.

Total deposits increased $446.9 million, or 7.2%, from September 30, 2020 to June 30, 2021. The increase was in non-maturity deposits, which increased $586.6 million, including a $269.2 million increase in money market accounts, a $238.2 million increase in checking accounts, and a $79.2 million increase in savings accounts. Retail certificates of deposit decreased $210.5 million, partially offset by a $71.8 million increase in commercial certificates of deposit during the current year period.

Total borrowings at June 30, 2021 were $1.58 billion, a decrease of $206.9 million, or 11.6%, from September 30, 2020. The decrease was due to not renewing borrowings that matured during the current year period. Cash flows from deposit growth were used to pay off maturing borrowings.

Stockholders' equity at June 30, 2021 was $1.24 billion, a decrease of $47.2 million, or 3.7%, from September 30, 2020. During the current year nine month period, the Company paid cash dividends totaling $106.4 million and repurchased common stock totaling $1.5 million, partially offset by net income of $57.5 million. The cash dividends paid during the current year nine month period totaled $0.785 per share and consisted of a $0.40 per share True Blue Capitol cash dividend, a $0.13 per share cash true-up dividend related to fiscal year 2020 earnings and three regular quarterly cash dividends of $0.085 per share. Given the state of economic uncertainty, the Company elected to defer the annual True Blue dividend in June 2020. In June 2021, the Company paid a True Blue Capitol cash dividend of $0.40 per share. The $0.40 per share True Blue Capitol cash dividend represents a $0.20 per share cash dividend from fiscal year 2020 and a $0.20 per share cash dividend for fiscal year 2021. On July 20, 2021, the Company announced a regular
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quarterly cash dividend of $0.085 per share, or approximately $11.5 million, payable on August 20, 2021 to stockholders of record as of the close of business on August 6, 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 June 30, 2021, this ratio was 11.5%.
At June 30, 2021, Capitol Federal Financial, Inc., at the holding company level, had $84.7 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.
June 30, September 30, June 30,
202120202020
(Dollars in thousands)
Stockholders' equity$1,237,624 $1,284,859 $1,300,520 
Equity to total assets at end of period12.8 %13.5 %13.6 %

The following table presents a reconciliation of total to net shares outstanding as of June 30, 2021.
Total shares outstanding 138,833,184 
Less unallocated Employee Stock Ownership Plan ("ESOP") shares and unvested restricted stock(3,267,063)
Net shares outstanding 135,566,121 

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 8.5% for calendar year 2021 and 9% thereafter. As of June 30, 2021, the Bank's CBLR was 11.5%, 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 June 30, 2021 (dollars in thousands):
Total Bank equity as reported under GAAP$1,112,326 
AOCI13,338 
Goodwill and other intangibles, net of associated deferred taxes(12,651)
Total tier 1 capital$1,113,013 

9


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.

For further information contact:
Kent TownsendInvestor Relations
Executive Vice President,(785) 270-6055
Chief Financial Officer and Treasurerinvestorrelations@capfed.com
(785) 231-6360
ktownsend@capfed.com
10



SUPPLEMENTAL FINANCIAL INFORMATION
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except per share amounts)

June 30, March 31, September 30,
202120212020
ASSETS:
Cash and cash equivalents (includes interest-earning deposits of $74,346, $121,430 and $172,430)$95,305 $139,472 $185,148 
Available-for-sale ("AFS") securities, at estimated fair value (amortized cost of $2,002,957, $2,090,720 and $1,529,605)2,015,705 2,095,924 1,560,950 
Loans receivable, net (ACL of $20,724, $23,397 and $31,527)7,033,827 6,973,536 7,202,851 
FHLB stock, at cost73,630 74,464 93,862 
Premises and equipment, net99,551 99,088 101,875 
Income taxes receivable, net891 — — 
Other assets330,756 315,535 342,532 
TOTAL ASSETS$9,649,665 $9,698,019 $9,487,218 
LIABILITIES:
Deposits$6,638,294 $6,650,865 $6,191,408 
Borrowings1,582,400 1,581,955 1,789,313 
Advance payments by borrowers for taxes and insurance47,330 61,624 65,721 
Income taxes payable, net— 67 795 
Deferred income tax liabilities, net7,922 6,530 8,180 
Other liabilities136,095 118,383 146,942 
Total liabilities8,412,041 8,419,424 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, 138,833,184, 138,809,796 and 138,956,296 shares issued and outstanding as of June 30, 2021, March 31, 2021, and September 30, 2020, respectively1,388 1,388 1,389 
Additional paid-in capital1,189,466 1,188,926 1,189,853 
Unearned compensation, ESOP(31,801)(32,214)(33,040)
Retained earnings91,909 139,448 143,162 
AOCI, net of tax(13,338)(18,953)(16,505)
Total stockholders' equity1,237,624 1,278,595 1,284,859 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$9,649,665 $9,698,019 $9,487,218 
11


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands)

For the Three Months EndedFor the Nine Months Ended
June 30, March 31, June 30,
2021202120212020
INTEREST AND DIVIDEND INCOME:
Loans receivable$54,779 $57,285 $172,758 $206,179 
MBS5,360 5,429 16,499 17,584 
FHLB stock944 951 2,964 4,747 
Investment securities763 629 2,075 3,736 
Cash and cash equivalents26 40 117 1,126 
Total interest and dividend income61,872 64,334 194,413 233,372 
INTEREST EXPENSE:
Deposits11,475 12,529 38,071 52,299 
Borrowings7,826 8,732 26,885 37,421 
Total interest expense19,301 21,261 64,956 89,720 
NET INTEREST INCOME42,571 43,073 129,457 143,652 
PROVISION FOR CREDIT LOSSES(2,691)(2,964)(7,187)22,300 
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES45,262 46,037 136,644 121,352 
NON-INTEREST INCOME:
Deposit service fees3,227 2,814 8,988 8,384 
Gain on sale of Visa Class B shares— 7,386 7,386 — 
Insurance commissions723 888 2,249 1,762 
Other non-interest income1,286 1,389 4,160 4,468 
Total non-interest income5,236 12,477 22,783 14,614 
NON-INTEREST EXPENSE:
Salaries and employee benefits13,867 13,397 41,402 39,765 
Information technology and related expense4,736 4,599 13,568 12,694 
Occupancy, net3,504 3,523 10,406 10,212 
Loss on interest rate swap termination— 4,752 4,752 — 
Regulatory and outside services1,469 1,234 4,288 4,188 
Advertising and promotional1,407 1,484 3,729 3,773 
Deposit and loan transaction costs693 664 2,123 2,086 
Federal insurance premium633 634 1,888 287 
Office supplies and related expense402 463 1,289 1,586 
Other non-interest expense891 1,903 3,877 4,237 
Total non-interest expense27,602 32,653 87,322 78,828 
INCOME BEFORE INCOME TAX EXPENSE22,896 25,861 72,105 57,138 
INCOME TAX EXPENSE4,709 5,417 14,576 10,877 
NET INCOME$18,187 $20,444 $57,529 $46,261 

12


The following is a reconciliation of the basic and diluted earnings per share calculations for the periods indicated.
For the Three Months EndedFor the Nine Months Ended
June 30, March 31, June 30,
2021202120212020
(Dollars in thousands, except per share amounts)
Net income$18,187 $20,444 $57,529 $46,261 
Income allocated to participating securities(12)(14)(39)(38)
Net income available to common stockholders$18,175 $20,430 $57,490 $46,223 
Average common shares outstanding135,421,817 135,409,120 135,409,349 137,919,631 
Average committed ESOP shares outstanding83,052 41,758 41,602 41,600 
Total basic average common shares outstanding135,504,869 135,450,878 135,450,951 137,961,231 
Effect of dilutive stock options 32,283 47,292 26,615 31,747 
Total diluted average common shares outstanding135,537,152 135,498,170 135,477,566 137,992,978 
Net earnings per share:
Basic$0.13 $0.15 $0.42 $0.34 
Diluted$0.13 $0.15 $0.42 $0.34 
Antidilutive stock options, excluded from the diluted
average common shares outstanding calculation 93,565 125,930 210,529 405,522 


13


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.
June 30, 2021March 31, 2021September 30, 2020
% of % of % of
AmountRateTotalAmountRateTotalAmountRateTotal
(Dollars in thousands)
One- to four-family:
Originated$3,977,129 3.23 %56.4 %$3,967,008 3.29 %56.7 %$3,937,310 3.50 %54.5 %
Correspondent purchased1,953,185 3.09 27.7 1,915,027 3.27 27.4 2,101,082 3.49 29.1 
Bulk purchased179,019 1.90 2.5 188,733 2.09 2.7 208,427 2.41 2.9 
Construction30,325 2.96 0.4 28,582 3.11 0.4 34,593 3.30 0.5 
Total6,139,658 3.14 87.0 6,099,350 3.24 87.2 6,281,412 3.46 87.0 
Commercial:
Commercial real estate680,664 3.99 9.7 664,533 4.04 9.5 626,588 4.29 8.7 
Commercial and industrial 73,713 3.24 1.0 77,210 3.08 1.1 97,614 2.79 1.4 
Construction60,614 4.11 0.9 53,271 4.25 0.8 105,458 4.04 1.4 
Total814,991 3.93 11.6 795,014 3.96 11.4 829,660 4.08 11.5 
Consumer loans:
Home equity88,587 4.63 1.3 90,052 4.64 1.3 103,838 4.66 1.4 
Other8,389 4.26 0.1 8,743 4.36 0.1 10,086 4.40 0.1 
Total96,976 4.60 1.4 98,795 4.61 1.4 113,924 4.64 1.5 
Total loans receivable7,051,625 3.26 100.0 %6,993,159 3.34 100.0 %7,224,996 3.55 100.0 %
Less:
ACL20,724 23,397 31,527 
Discounts/unearned loan fees 30,593 30,295 29,190 
Premiums/deferred costs(33,519)(34,069)(38,572)
Total loans receivable, net$7,033,827 $6,973,536 $7,202,851 

14


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 nine-month period, the Bank endorsed $699.2 million of one- to four-family loans, reducing the average rate on those loans by 93 basis points ($285.2 million were endorsed during the December 31, 2020 quarter, reducing the average rate on those loans by 87 basis points, $242.3 million were endorsed during the March 31, 2021 quarter, reducing the average rate on those loans by 96 basis points, and $171.7 million were endorsed during the June 30, 2021 quarter, reducing the average rate on those loans by 98 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
June 30, 2021March 31, 2021December 31, 2020September 30, 2020
AmountRateAmountRateAmountRateAmountRate
(Dollars in thousands)
Beginning balance $6,993,159 3.34 %$7,023,626 3.46 %$7,224,996 3.55 %$7,407,442 3.64 %
Originated and refinanced:
Fixed279,170 2.78 326,570 2.54 318,690 2.75 265,424 2.98 
Adjustable71,216 3.58 112,483 3.43 48,946 3.60 44,625 3.68 
Purchased and participations:
Fixed232,335 2.54 192,262 2.82 100,518 2.86 61,435 3.07 
Adjustable20,499 5.36 9,150 2.42 65,315 3.89 4,396 2.76 
Change in undisbursed loan funds(33,512)(63,925)(70,323)13,898 
Repayments(511,222)(606,937)(664,052)(572,536)
Principal recoveries/(charge-offs), net52 (70)(464)312 
Other(72)— — — 
Ending balance$7,051,625 3.26 $6,993,159 3.34 $7,023,626 3.46 $7,224,996 3.55 

For the Nine Months Ended
June 30, 2021June 30, 2020
AmountRateAmountRate
(Dollars in thousands)
Beginning balance $7,224,996 3.55 %$7,412,473 3.81 %
Originated and refinanced:
Fixed924,430 2.69 684,488 3.22 
Adjustable232,645 3.51 171,698 4.04 
Purchased and participations:
Fixed525,115 2.70 380,469 3.50 
Adjustable94,964 4.07 95,296 3.50 
Change in undisbursed loan funds(167,760)(17,896)
Repayments(1,782,211)(1,318,439)
Principal charge-offs, net(482)(311)
Other(72)(336)
Ending balance$7,051,625 3.26 $7,407,442 3.64 
15


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.
June 30, 2021September 30, 2020
% ofCreditAverage% ofCreditAverage
AmountTotalScoreLTVBalanceAmountTotalScoreLTVBalance
(Dollars in thousands)
Originated$3,977,129 65.1 %772 61 %$150 $3,937,310 63.0 %771 62 %$145 
Correspondent purchased1,953,185 32.0 766 63 396 2,101,082 33.6 765 64 379 
Bulk purchased179,019 2.9 773 59 295 208,427 3.4 767 60 300 
$6,109,333 100.0 %770 62 191 $6,246,819 100.0 %768 63 187 


16


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 $287.8 million of loans that were refinanced from other lenders.
For the Three Months Ended For the Nine Months Ended
June 30, 2021June 30, 2021
Credit Credit
AmountLTVScoreAmountLTVScore
(Dollars in thousands)
Originated$207,706 73 %766 $613,068 71 %768 
Refinanced by Bank customers73,453 67 761 288,408 66 767 
Correspondent purchased235,834 68 773 504,965 69 774 
$516,993 70 769 $1,406,441 69 770 

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 Nine Months Ended
June 30, 2021June 30, 2021
StateAmount% of TotalRateAmount% of TotalRate
(Dollars in thousands)
Kansas$237,868 46.0 %2.74 %$767,443 54.6 %2.67 %
Missouri79,200 15.3 2.72 236,666 16.8 2.67 
Texas54,766 10.6 2.50 105,370 7.5 2.61 
Pennsylvania44,959 8.7 2.50 89,420 6.4 2.54 
Tennessee29,063 5.6 2.53 77,992 5.5 2.65 
Other states71,137 13.8 2.53 129,550 9.2 2.61 
$516,993 100.0 %2.65 $1,406,441 100.0 %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 June 30, 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 yearsMore thanAdjustable-Total
or less15 yearsRateAmountRate
(Dollars in thousands)
Originate/refinance$23,472 $77,739 $4,617 $105,828 2.81 %
Correspondent23,105 117,205 1,604 141,914 2.63 
$46,577 $194,944 $6,221 $247,742 2.71 
Rate2.25 %2.82 %2.52 %

As of June 30, 2021, there were $5.3 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 $195.5 million of one- to four-family loans with COVID-19 loan modifications that were out of their deferral period by June 30, 2021. See "Asset Quality" below for additional information regarding the performance of loans that have exited the deferral period.

17


Commercial Loans: During the current year nine-month period, the Bank originated $208.5 million of commercial loans, including $22.8 million of PPP loans, and entered into commercial loan participations totaling $115.1 million. The Bank also processed commercial loan disbursements, excluding lines of credit, of approximately $208.7 million at a weighted average rate of 3.45%. Additionally, during the current year nine-month period, $48.3 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 June 30, 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.
UnpaidUndisbursedGross LoanOutstanding% of
CountPrincipalAmountAmountCommitmentsTotalTotal
(Dollars in thousands)
Senior housing34 $221,351 $43,271 $264,622 $2,200 $266,822 26.5 %
Hotel10 135,255 59,887 195,142 — 195,142 19.3 
Retail building130 149,313 43,123 192,436 750 193,186 19.2 
Office building95 51,200 60,462 111,662 520 112,182 11.1 
Multi-family42 52,642 13,431 66,073 14,583 80,656 8.0 
One- to four-family property379 58,298 7,587 65,885 618 66,503 6.6 
Single use building23 42,383 4,927 47,310 9,005 56,315 5.6 
Other100 30,836 3,910 34,746 2,677 37,423 3.7 
813 $741,278 $236,598 $977,876 $30,353 $1,008,229 100.0 %
Weighted average rate4.00 %4.03 %4.01 %4.15 %4.01 %

The following table summarizes the Bank's commercial real estate and commercial construction loans and loan commitments by state as of June 30, 2021.
UnpaidUndisbursedGross LoanOutstanding% of
CountPrincipalAmountAmountCommitmentsTotalTotal
(Dollars in thousands)
Kansas637 $323,816 $20,705 $344,521 $14,541 $359,062 35.6 %
Texas11 126,557 131,063 257,620 — 257,620 25.6 
Missouri138 201,517 30,674 232,191 14,312 246,503 24.4 
Colorado14,197 22,000 36,197 — 36,197 3.6 
Arkansas9,309 24,539 33,848 — 33,848 3.4 
Nebraska33,560 33,564 — 33,564 3.3 
Other11 32,322 7,613 39,935 1,500 41,435 4.1 
813 $741,278 $236,598 $977,876 $30,353 $1,008,229 100.0 %

The following table presents the Bank's commercial and industrial loans and loan commitments by business purpose, as of June 30, 2021. Included in the working capital line item are $18.3 million of PPP loans.
UnpaidUndisbursedGross LoanOutstanding% of
CountPrincipalAmountAmountCommitmentsTotalTotal
(Dollars in thousands)
Working capital529 $29,483 $17,140 $46,623 $— $46,623 47.9 %
Purchase/lease autos249 17,153 49 17,202 — 17,202 17.6 
Equipment116 13,161 406 13,567 1,424 14,991 15.4 
Business investment57 7,350 214 7,564 450 8,014 8.2 
Other26 6,566 4,017 10,583 — 10,583 10.9 
977 $73,713 $21,826 $95,539 $1,874 $97,413 100.0 %

18


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 June 30, 2021.
CountAmount
(Dollars in thousands)
Greater than $30 million$150,000 
>$15 to $30 million15 347,216 
>$10 to $15 million69,055 
>$5 to $10 million14 88,662 
$1 to $5 million108 243,940 
Less than $1 million1,644 206,769 
1,790 $1,105,642 

As of June 30, 2021, there were commercial loans with an aggregate gross balance, including undisbursed amounts, of $133.9 million with COVID-19 loan modifications that were still in their deferral period. There were $261.9 million of commercial loans with COVID-19 loan modifications that were out of their deferral period by June 30, 2021. See "Asset Quality" below for additional information regarding the performance of loans that have exited the deferral period.
19


Asset Quality
Of the one- to four-family COVID-19 loan modifications that had completed the deferral period by June 30, 2021, $4.4 million were 30 to 89 days delinquent and $2.1 million were 90 or more days delinquent as of June 30, 2021. None of the commercial COVID-19 loan modifications that had completed the deferral period by June 30, 2021 were delinquent as of June 30, 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 June 30, 2021, approximately 78% 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. In late March 2020, the Bank suspended the initiation of foreclosure proceedings for owner-occupied one- to four-family loans. At June 30, 2021, there were $7.8 million of non-performing one- to four-family loans for which foreclosure proceedings either had been initiated prior to the foreclosure suspension or would have been initiated if the foreclosure suspension was not in place.
Loans Delinquent for 30 to 89 Days at:
June 30, 2021March 31, 2021December 31, 2020September 30, 2020June 30, 2020
NumberAmountNumberAmountNumberAmountNumberAmountNumberAmount
(Dollars in thousands)
One- to four-family:
Originated51 $5,141 45 $4,151 62 $5,844 42 $3,012 57 $5,085 
Correspondent purchased3,650 2,910 13 4,694 3,123 10 2,919 
Bulk purchased958 352 1,750 12 2,532 19 4,536 
Commercial35 806 1,047 45 1,543 
Consumer25 354 17 287 30 515 26 398 21 431 
92 $10,138 81 $8,506 122 $13,850 90 $9,110 116 $14,514 
30 to 89 days delinquent loans
to total loans receivable, net0.14 %0.12 %0.20 %0.13 %0.20 %
20


Non-Performing Loans and OREO at:
June 30, 2021March 31, 2021December 31, 2020September 30, 2020June 30, 2020
NumberAmountNumberAmountNumberAmountNumberAmountNumberAmount
(Dollars in thousands)
Loans 90 or More Days Delinquent or in Foreclosure:
One- to four-family:
Originated53 $3,696 55 $4,433 51 $4,370 51 $4,362 47 $4,026 
Correspondent purchased12 4,230 10 3,749 3,371 2,397 2,740 
Bulk purchased2,596 10 3,172 13 3,724 12 2,903 1,291 
Commercial1,278 1,068 820 1,360 709 
Consumer23 445 26 531 26 473 14 304 23 278 
102 12,245 107 12,953 104 12,758 88 11,326 84 9,044 
Loans 90 or more days delinquent or in foreclosure
 as a percentage of total loans0.17 %0.19 %0.18 %0.16 %0.12 %
Nonaccrual loans less than 90 Days Delinquent:(1)
One- to four-family:
Originated$1,392 $1,646 $968 $691 14 $1,132 
Correspondent purchased— — — — — — — — — — 
Bulk purchased131 — — — — — — — — 
Commercial403 642 411 464 
Consumer— — — — 33 
11 1,926 13 2,288 13 1,388 13 1,164 16 1,171 
Total non-performing loans113 14,171 120 15,241 117 14,146 101 12,490 100 10,215 
Non-performing loans as a percentage of total loans0.20 %0.22 %0.20 %0.17 %0.14 %
OREO:
One- to four-family:
Originated(2)
$177 $105 $129 $183 $183 
Total non-performing assets116 $14,348 122 $15,346 120 $14,275 105 $12,673 104 $10,398 
Non-performing assets as a percentage of total assets0.15 %0.16 %0.15 %0.13 %0.11 %

(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.


21


The following table presents loans classified as special mention or substandard at the dates presented. The increase in commercial special mention loans at June 30, 2021 compared to September 30, 2020 was due mainly to the addition of two commercial loans totaling $50.0 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 considerations that management is monitoring in association with these loans resulting in the special mention classification.
June 30, 2021September 30, 2020June 30, 2020
Special MentionSubstandardSpecial MentionSubstandardSpecial MentionSubstandard
(Dollars in thousands)
One- to four-family$14,885 $24,439 $11,339 $25,630 $12,309 $26,788 
Commercial100,019 4,057 52,006 4,914 52,054 5,128 
Consumer237 670 332 589 320 564 
$115,141 $29,166 $63,677 $31,133 $64,683 $32,480 

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 be funded. 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(s) 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 scenarios selected by management improved at June 30, 2021 compared to March 31, 2021 which resulted in a reduction in the ACL calculated by the model. Management applied qualitative factors at both June 30, 2021 and March 31, 2021 to account for the continued economic uncertainties, along with the balance and trending of large-dollar special mention commercial loans. The total ACL amount assigned to these qualitative factors also decreased at June 30, 2021 compared to March 31, 2021. The economic uncertainties were 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 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, and (3) the unevenness of the recovery in certain industries.


22


The following table presents a summary of changes in ACL and reserve for off-balance sheet credit exposures occurring during the quarter ended June 30, 2021.
ACLReserve for off-balance sheet credit exposuresACL and Reserve for off-balance sheet credit exposures
(Dollars in thousands)
Balance at March 31, 2021$23,397 $6,127 $29,524 
Charge-offs(19)— (19)
Recoveries71 — 71 
Net charge-offs52 — 52 
Provision for credit losses(2,725)34 (2,691)
Balance at June 30, 2021$20,724 $6,161 $26,885 

The negative provision for credit losses in the current quarter was due primarily to a reduction in the commercial loan ACL related to a decrease in the commercial loan economic uncertainty qualitative factor due to improved commercial economic conditions compared to March 31, 2021.

23


The following tables present ACL activity and related ratios at the dates and for the periods indicated.
For the Three Months Ended
June 30, March 31, December 31, September 30, June 30,
20212021202020202020
(Dollars in thousands)
Balance at beginning of period$23,397 $26,125 $31,527 $31,215 $31,196 
Adoption of CECL— — (4,761)— — 
Charge-offs:
One- to four-family(18)(131)(14)— — 
Commercial— — (515)— — 
Consumer(1)(7)(3)(15)(5)
Total charge-offs(19)(138)(532)(15)(5)
Recoveries:
One- to four-family49 57 34 303 — 
Commercial18 12 12 17 
Consumer22 12 
Total recoveries71 68 68 327 24 
Net recoveries (charge-offs)52 (70)(464)312 19 
Provision for credit losses(2,725)(2,658)(177)— — 
Balance at end of period$20,724 $23,397 $26,125 $31,527 $31,215 
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(0.35)0.47 3.44 (2.70)(0.20)
ACL to non-performing loans at end of period146.23 153.51 184.68 252.42 305.58 
ACL to loans receivable at end of period0.29 0.33 0.37 0.44 0.42 
ACL to net charge-offs (annualized)
N/M(1)
83.8x14.1x
N/M(1)
N/M(1)
For the Nine Months Ended
June 30,
20212020
(Dollars in thousands)
Balance at beginning of period$31,527 $9,226 
Adoption of CECL(4,761)— 
Charge-offs:
One- to four-family(163)(64)
Commercial(515)(349)
Consumer(11)(15)
Total charge-offs(689)(428)
Recoveries:
One- to four-family140 
Commercial38 98 
Consumer29 16 
Total recoveries207 117 
Net (charge-offs) recoveries(482)(311)
Provision for credit losses(5,560)22,300 
Balance at end of period$20,724 $31,215 
Ratio of net charge-offs during the period
to average loans outstanding during the period0.01 %— %
Ratio of net charge-offs (recoveries) during the
period to average non-performing assets3.56 3.22 
ACL to net charge-offs (annualized)32.3x75.3x
(1)This ratio is not presented for the time periods noted due to loan recoveries exceeding loan charge-offs during these periods.

24


The distribution of our ACL at the dates indicated is summarized below. The October 1, 2020 column represents the ACL at the time the Company adopted ASU 2016-13.
At
June 30, March 31, December 31, October 1,September 30, June 30,
20212021 2020202020202020
(Dollars in thousands)
One- to four-family:
Originated$1,515 $1,517 $1,516 $1,609 $6,044 $6,298 
Correspondent purchased1,739 1,705 1,758 2,324 2,691 3,189 
Bulk purchased674 747 852 903 467 506 
Construction20 19 22 25 41 48 
Total 3,948 3,988 4,148 4,861 9,243 10,041 
Commercial:
Commercial real estate14,784 17,016 17,813 16,595 16,869 16,353 
Commercial and industrial 345 445 553 559 1,451 1,465 
Construction1,404 1,696 3,341 4,452 3,480 2,886 
Total 16,533 19,157 21,707 21,606 21,800 20,704 
Consumer243 252 270 299 484 470 
Total $20,724 $23,397 $26,125 $26,766 $31,527 $31,215 

The ratio of ACL to loans receivable, by loan type, at the dates indicated is summarized below.