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EX-32 - CFFN EXHIBIT 32 CERTIFICATION SECTION 1350 - Capitol Federal Financial, Inc.cffn-093018xex32.htm
EX-31.2 - CFFN EXHIBIT 31.2 CERTIFICATION - Capitol Federal Financial, Inc.cffn-093018xex312.htm
EX-31.1 - CFFN EXHIBIT 31.1 CERTIFICATION - Capitol Federal Financial, Inc.cffn-093018xex311.htm
EX-23 - CFFN EXHIBIT 23 CONSENT OF AUDITORS - Capitol Federal Financial, Inc.cffn-093018xex23.htm
EX-21 - CFFN EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT - Capitol Federal Financial, Inc.cffn-093018xex21.htm
EX-10.6 - CFFN EXHIBIT 10.6 DESCRIPTION OF DIRECTOR FEE ARRANGEMENTS - Capitol Federal Financial, Inc.cffn-093018xex106.htm
EX-10.3 - CFFN EXHIBIT 10.3 DEFERRED INCENTIVE BONUS PLAN - Capitol Federal Financial, Inc.cffn-093018xex103.htm
EX-10.1(V) - CFFN EXHIBIT 10.1(V) EMPLOYMENT AGREEMENT - Capitol Federal Financial, Inc.cffn-093018xex101v.htm
EX-10.1(IV) - CFFN EXHIBIT 10.1(IV) CHANGE OF CONTROL AGREEMENT - Capitol Federal Financial, Inc.cffn-093018xex101iv.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
þ        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2018
                                                                                 or
¨        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __ to __ 
Commission file number: 001-34814
________________________________
Capitol Federal Financial, Inc.
(Exact name of registrant as specified in its charter)

Maryland
27-2631712
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
700 South Kansas Avenue, Topeka, Kansas
66603
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code:
(785) 235-1341

Securities registered pursuant to Section 12(b) of the Act:
 
Common Stock, par value $0.01 per share
The NASDAQ Stock Market LLC
(Title of Class)

(Name of Each Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ      No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨      No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ     No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller Reporting Company ¨
Emerging Growth Company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the average of the closing bid and asked price of such stock on the NASDAQ Stock Market as of March 31, 2018, was $1.68 billion.
As of November 21, 2018, there were issued and outstanding 141,238,239 shares of the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Portions of the proxy statement for the Annual Meeting of Stockholders for the year ended September 30, 2018.



 
 
 
Page No.
PART I
Item 1.
 
Item 1A.
 
Item 1B.
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
 
 
PART II
Item 5.
 
Item 6.
 
Item 7.
 
Item 7A.
 
Item 8.
 
Item 9.
 
Item 9A.
 
Item 9B.
 
 
 
 
 
 
 
 
PART III
Item 10.
 
Item 11.
 
Item 12.
 
Item 13.
 
Item 14.
 
 
 
 
 
 
 
 
PART IV
Item 15.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Private Securities Litigation Reform Act-Safe Harbor Statement

Capitol Federal Financial, Inc. (the "Company"), and Capitol Federal Savings Bank ("Capitol Federal Savings" or the "Bank"), may from time to time make written or oral "forward-looking statements," including statements contained in documents filed or furnished by the Company with the Securities and Exchange Commission ("SEC"). These forward-looking statements may be included in this Annual Report on Form 10-K and the exhibits attached to it, in the Company's reports to stockholders, in the Company's press releases, and in other communications by the Company, which are made in good faith by us pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause our future results to differ materially from the beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in the forward-looking statements:

our ability to maintain overhead costs at reasonable levels;
our ability to originate and purchase a sufficient volume of one- to four-family loans in order to maintain the balance of that portfolio at a level desired by management;
our ability to invest funds in wholesale or secondary markets at favorable yields compared to the related funding source;
our ability to access cost-effective funding;
the expected cost savings, synergies and other benefits from the acquisition of Capital City Bancshares, Inc. ("CCB") might not be realized within the anticipated time frames or at all, and costs or difficulties relating to integration matters might be greater than expected;
our ability to extend the commercial banking expertise acquired from CCB through our existing branch footprint;
fluctuations in deposit flows;
the future earnings and capital levels of the Bank and the continued non-objection by our primary federal banking regulators, to the extent required, to distribute capital from the Bank to the Company, which could affect the ability of the Company to pay dividends in accordance with its dividend policy;
the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations, including areas where we have purchased large amounts of correspondent loans;
changes in real estate values, unemployment levels, and the level and direction of loan delinquencies and charge-offs may require changes in the estimates of the adequacy of the allowance for credit losses ("ACL"), which may adversely affect our business;
increases in non-performing assets, which may require the Bank to increase the ACL, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets;
results of examinations of the Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our ACL;
changes in accounting principles, policies, or guidelines;
the effects of, and changes in, monetary and interest rate policies of the Board of Governors of the Federal Reserve System ("FRB");
the effects of, and changes in, trade and fiscal policies and laws of the United States government;
the effects of, and changes in, foreign and military policies of the United States government;
inflation, interest rate, market, monetary, and currency fluctuations;
the timely development and acceptance of new products and services and the perceived overall value of these products and services by users, including the features, pricing, and quality compared to competitors' products and services;
the willingness of users to substitute competitors' products and services for our products and services;
our success in gaining regulatory approval of our products and services and branching locations, when required;
the impact of interpretations of, and changes in, financial services laws and regulations, including laws concerning taxes, banking, securities, consumer protection, trust and insurance and the impact of other governmental initiatives affecting the financial services industry;
implementing business initiatives may be more difficult or expensive than anticipated;
significant litigation;
technological changes;

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our ability to maintain the security of our financial, accounting, technology, and other operating systems and facilities, including the ability to withstand cyber-attacks;
acquisitions and dispositions;
changes in consumer spending, borrowing and saving habits; and
our success at managing the risks involved in our business.

This list of important factors is not all inclusive. See "Part I, Item 1A. Risk Factors" for a discussion of risks and uncertainties related to our business that could adversely impact our operations and/or financial results. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank.

PART I
As used in this Form 10-K, unless we specify otherwise, "the Company," "we," "us," and "our" refer to Capitol Federal Financial, Inc. a Maryland corporation. "Capitol Federal Savings," and "the Bank," refer to Capitol Federal Savings Bank, a federal savings bank and the wholly-owned subsidiary of Capitol Federal Financial, Inc.

Item 1. Business
General
The Company is a Maryland corporation that was incorporated in April 2010. The Company's common stock is traded on the Global Select tier of the NASDAQ Stock Market under the symbol "CFFN."

The Bank is a wholly-owned subsidiary of the Company and is a federally chartered and insured savings bank headquartered in Topeka, Kansas. The Bank is examined and regulated by the Office of the Comptroller of the Currency (the "OCC"), its primary regulator, and its deposits are insured up to applicable limits by the Deposit Insurance Fund ("DIF"), which is administered by the Federal Deposit Insurance Corporation ("FDIC"). The Company, as a savings and loan holding company, is examined and regulated by the FRB.

On August 31, 2018, the Company completed the acquisition of CCB and its wholly-owned subsidiary Capital City Bank, headquartered in Topeka, Kansas. Capital City Bank owned and leased banking locations in Topeka, Lawrence, and Overland Park, Kansas. As a result of the merger, the Bank is entering the commercial banking business through the origination of commercial lending products and offering of commercial deposit services, and began offering trust and brokerage services. The Company acquired loans and deposits with fair values of $299.7 million and $352.5 million, respectively, at the date of acquisition. Under the terms of the acquisition agreement, the Company issued 3.0 million shares of Company common stock for all outstanding shares of CCB capital stock, for a total merger consideration of $39.1 million, based on the Company's closing stock price of $13.21 on August 31, 2018.

We have been, and intend to continue to be, a community-oriented financial institution offering a variety of financial services to meet the needs of the communities we serve. We attract deposits primarily from the general public and also from businesses and invest those funds primarily in permanent loans secured by first mortgages on owner-occupied, one- to four-family residences. We also originate and participate in commercial loans with other lenders, originate consumer loans primarily secured by mortgages on one- to four-family residences, and invest in certain investment securities and mortgage-backed securities ("MBS") using funding from deposits, repurchase agreements, and Federal Home Loan Bank Topeka ("FHLB") borrowings. We offer a variety of deposit accounts having a wide range of interest rates and terms, which generally include savings accounts, money market accounts, interest-bearing and non-interest-bearing checking accounts, and certificates of deposit with terms ranging from 91 days to 96 months. Our primary revenues are derived from interest on loans, MBS, investment securities, and dividends on FHLB stock.

The Company is significantly affected by prevailing economic conditions, including federal monetary and fiscal policies and federal regulation of financial institutions. Deposit balances are influenced by a number of factors, including interest rates paid on competing investment products, the level of personal income, and the personal rate of savings within our market areas. Lending activities are influenced by the demand for housing and other loans, our loan underwriting guidelines compared to those of our competitors, as well as interest rate pricing competition from other lending institutions.

Our executive offices are located at 700 South Kansas Avenue, Topeka, Kansas 66603, and our telephone number at that address is (785) 235-1341.

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Available Information
Our Internet website address is www.capfed.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports can be obtained free of charge from our website. These reports are available on our website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. These reports are also available on the SEC's website at http://www.sec.gov.

Market Area and Competition
Our corporate office is located in Topeka, Kansas. We currently have a network of 58 branches (48 traditional branches and 10 in-store branches) located in nine counties throughout Kansas and three counties in Missouri. We primarily serve the metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia, and Salina, Kansas and a portion of the metropolitan area of greater Kansas City. In addition to providing full service banking offices, we provide services through our call center which operates on extended hours, mobile banking, telephone banking, and online banking and bill payment services.

The Bank ranked second in deposit market share, at 7.26%, in the state of Kansas as reported in the June 30, 2018 FDIC "Summary of Deposits - Market Share Report." Deposit market share is measured by total deposits, without consideration for type of deposit. Prior to the acquisition of CCB, we did not offer commercial deposit accounts, while many of our competitors have both commercial and retail deposits in their total deposit base. Some of our competitors also offer products and services that we do not, which may add to their total deposits. Consumers also have the ability to utilize online financial institutions and investment brokerages that are not confined to any specific market area.  Management considers our well-established retail banking network together with our reputation for financial strength and customer service to be major factors in our success at attracting and retaining customers in our market areas.

The Bank consistently has been one of the top one- to four-family lenders with regard to mortgage loan origination volume in the state of Kansas. Through our strong relationships with real estate agents and marketing efforts, which reflect our reputation, and pricing, we attract mortgage loan business from walk-in customers, customers that apply online, and existing customers. Competition in originating one- to four-family loans primarily comes from other savings institutions, commercial banks, credit unions, and mortgage bankers. Other savings institutions, commercial banks, credit unions, and finance companies provide vigorous competition in consumer lending.

 
Lending Practices and Underwriting Standards
General. Originating and purchasing loans secured by one- to four-family residential properties is the Bank's primary lending business, resulting in a loan concentration in residential first mortgage loans secured by properties located in Kansas and Missouri. The Bank also originates consumer loans and construction loans secured by residential properties, and originates and participates in commercial loans.

On August 31, 2018, the Bank acquired loans from CCB with fair values of $299.7 million as of that date. The acquired loans are included in the September 30, 2018 loan discussions and tables, where applicable, throughout this Annual Report on Form 10-K.

One- to Four-Family Residential Real Estate Lending. The Bank originates and services one- to four-family loans that are not guaranteed or insured by the federal government, and purchases one- to four-family loans, on a loan-by-loan basis, from a select group of correspondent lenders.

Originated Loans
While the Bank originates both fixed- and adjustable-rate loans, our origination volume is dependent upon customer demand for loans in our market areas. Demand is affected by the local housing market, competition, and the interest rate environment. During fiscal years 2018 and 2017, the Bank originated and refinanced $543.5 million and $619.0 million of one- to four-family loans, respectively.

Correspondent Purchased Loans
The Bank purchases one- to four-family loans, on a loan-by-loan basis, from a select group of correspondent lenders. Loan purchases enable the Bank to attain geographic diversification in the loan portfolio. At September 30, 2018, the Bank had correspondent lending relationships in 28 states and the District of Columbia. During fiscal years 2018 and 2017, the Bank

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purchased $391.6 million and $563.2 million, respectively, of one- to four-family loans from correspondent lenders. We generally pay a premium of 0.50% to 1.0% of the loan balance to purchase these loans, and we pay 1.0% of the loan balance to purchase the servicing of these loans.

The Bank has an agreement with a third-party mortgage sub-servicer to service loans originated by the Bank's correspondent lenders in certain states. The sub-servicer has experience servicing loans in the market areas in which the Bank purchases loans and services the loans according to the Bank's servicing standards, which is intended to allow the Bank greater control over servicing and reporting and help maintain a standard of loan performance. 

Bulk Purchased Loans
In the past, the Bank has also purchased one- to four-family loans from correspondent and nationwide lenders in bulk loan packages. The last bulk loan package purchase by the Bank was in August 2012. The Bank no longer purchases bulk loan packages. See "Part I, Item 1A. Risk Factors" for additional information regarding why the Bank no longer purchases bulk loan packages.

The servicing rights associated with bulk purchased loans were generally retained by the lender/seller for the loans purchased from nationwide lenders. The servicing by nationwide lenders is governed by a servicing agreement, which outlines collection policies and procedures, as well as oversight requirements, such as servicer certifications attesting to and providing proof of compliance with the servicing agreement.

At September 30, 2018, $194.1 million, or 66% of the Bank's bulk purchased loan portfolio, are loans guaranteed by one seller. Based on the historical performance of these loans and the seller, the Bank believes the seller has the financial ability to repurchase or replace loans if any loans were to become delinquent. The Bank has not experienced any losses with this group of loans since the loan package was purchased in August 2012. For the $99.5 million of bulk purchased loans at September 30, 2018 that do not have the above noted guarantee, the Bank has continued to experience a reduction in loan losses due to an improvement in collateral values. A large portion of these loans were originally interest-only loans with interest-only terms up to 10 years. All of the bulk purchased interest-only loans are now fully amortizing loans.

Underwriting
Full documentation to support an applicant's credit and income, and sufficient funds to cover all applicable fees and reserves at closing, are required on all loans. Generally, loans are underwritten according to the "ability to repay" and "qualified mortgage" standards, as issued by the Consumer Financial Protection Bureau ("CFPB"). Information pertaining to the creditworthiness of the borrower generally consists of a summary of the borrower's credit history, employment stability, sources of income, assets, net worth, and debt ratios. The value of the subject property must be supported by an appraisal report prepared in accordance with our appraisal policy by either a staff appraiser or a fee appraiser, both of which are independent of the loan origination function and who are approved by our Board of Directors.

Loans over $550 thousand, up to and including $800 thousand, must be underwritten by two senior underwriters. Loans over $800 thousand, up to and including $3.0 million, must be approved by our Asset and Liability Management Committee ("ALCO"), while loans over $3.0 million must be approved by our Board of Directors. For loans requiring ALCO and/or Board of Directors' approval, lending management is responsible for presenting to ALCO and/or the Board of Directors information about the creditworthiness of the borrower and the market value of the subject property.

The underwriting standards for loans purchased from correspondent and nationwide lenders are generally similar to the Bank's internal underwriting standards. The underwriting of correspondent loans is performed by the Bank's underwriters. Our standard contractual agreement with the lender/seller includes recourse options for any breach of representation or warranty with respect to the loans purchased. The Bank did not request any lenders/sellers to repurchase loans for breach of representation during fiscal year 2018.

Adjustable-rate Mortgage ("ARM") Loans
ARM loans are offered with a three-year, five-year, or seven-year term to the initial repricing date. After the initial period, the interest rate for each ARM loan adjusts annually for the remainder of the term of the loan. Currently, the repricing index for loan originations and correspondent purchases is tied to London Interbank Offered Rates ("LIBOR"); however, other indices have been used in the past. Current adjustable-rate one- to four-family loans originated by the Bank generally provide for a specified rate limit or cap on the periodic adjustment to the interest rate, as well as a specified maximum

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lifetime cap and minimum rate, or floor. As a consequence of using caps, the interest rates on these loans may not be as rate sensitive as our cost of funds. Negative amortization of principal is not allowed. For three- and five-year ARM loans, borrowers are qualified based on the principal, interest, tax, and insurance payments at the initial interest rate plus the life of loan cap and the initial interest rate plus the first period cap, respectively. For seven-year ARM loans, borrowers are qualified based on the principal, interest, tax, and insurance payments at the initial rate. After the initial three-, five-, or seven-year period, the interest rate resets annually and the new principal and interest payment is based on the new interest rate, remaining unpaid principal balance, and remaining term of the ARM loan. Our ARM loans are not automatically convertible into fixed-rate loans; however, we do allow borrowers to pay an endorsement fee to convert an ARM loan into a fixed-rate loan. ARM loans can pose greater credit risks than fixed-rate loans, primarily because as interest rates rise, the borrower's payment also rises, increasing the potential for default. This specific type of risk is known as repricing risk.

Pricing
Our pricing strategy for one- to four-family loan products includes setting interest rates based on secondary market prices and local competitor pricing for our local lending markets, and secondary market prices and national competitor pricing for our correspondent markets.

Mortgage Insurance
For a one- to four-family loan with a loan-to-value ("LTV") ratio in excess of 80% at the time of origination, private mortgage insurance ("PMI") is required in order to reduce the Bank's loss exposure. The Bank will lend up to 97% of the lesser of the appraised value or purchase price for one- to four-family loans, provided PMI is obtained. Management continuously monitors the claim-paying ability of our PMI counterparties. We believe our PMI counterparties have the ability to meet potential claim obligations we may file in the foreseeable future.

Repayment
The Bank's one- to four-family loans are primarily fully amortizing fixed-rate or ARM loans. The contractual maturities for fixed-rate loans and ARM loans can be up to 30 years; however, there are certain bulk purchased ARM loans that had original contractual maturities of 40 years. Our one- to four-family loans are generally not assumable and do not contain prepayment penalties. A "due on sale" clause, allowing the Bank to declare the unpaid principal balance due and payable upon the sale of the secured property, is generally included in the security instrument.

Construction Lending
The Bank originates construction and owner-occupied construction-to-permanent loans secured by one- to four-family residential real estate. The majority of these loans are secured by property located within the Bank's Kansas City market area. At September 30, 2018, we had $33.1 million in one- to four-family construction loans outstanding, representing 0.4% of our total loan portfolio, of which $27.1 million were owner occupied construction-to-permanent loans.

The application process for a construction loan includes submission of complete plans, specifications, and costs of the project to be constructed. All construction loans are manually underwritten using the Bank's internal underwriting standards. Construction draw requests and the supporting documentation are reviewed and approved by authorized management or experienced construction loan personnel. The Bank also performs regular documented inspections of the construction project to ensure the funds are being used for the intended purpose. Interest is not capitalized during the construction period; it is billed and collected monthly based on the amount of funds disbursed.

The Bank's owner occupied construction-to-permanent loan program combines the construction loan and the permanent loan into one loan, allowing the borrower to secure the same interest rate structure throughout the construction period and the permanent loan term. Once the construction period is complete on an owner-occupied construction-to-permanent loan, the payment method is changed from interest-only to an amortized principal and interest payment for the remaining term of the loan.

Loan Endorsement Program
In an effort to offset the impact of repayments and to retain our customers, existing loan customers, including customers whose loans were purchased from a correspondent lender, have the opportunity, for a cash fee, to endorse their original loan terms to current loan terms being offered. Customers whose loans have been sold to third parties, or have been delinquent on their contractual loan payments during the previous 12 months, or are currently in bankruptcy, are not eligible to participate in this program. The Bank does not solicit customers for this program, but considers it a valuable opportunity to retain

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customers who, based on our initial underwriting criteria, could likely obtain similar financing elsewhere. During fiscal years 2018 and 2017, the Bank endorsed $19.4 million and $53.1 million of one- to four-family loans, respectively.

Loan Sales
One- to four-family loans may be sold on a bulk basis or on a flow basis as loans are originated. Loans originated by the Bank and purchased from correspondent lenders are generally eligible for sale in the secondary market. Loans are generally sold for portfolio restructuring purposes, to reduce interest rate risk and/or to maintain a certain liquidity position. The Bank generally retains the servicing on these loans. ALCO determines the criteria upon which one- to four-family loans are to be classified as held-for-sale or held-for-investment. One- to four-family loans classified as held-for-sale are to be sold in accordance with policies set forth by ALCO. During fiscal years 2018 and 2017, the Bank sold $16.6 million and $6.7 million of one- to four-family loans, respectively. The loans sold during fiscal years 2018 and 2017 were completed in order to test the Bank's loan sale processes for liquidity purposes.

Consumer Lending. The Bank offers a variety of secured consumer loans, including home equity loans and lines of credit, home improvement loans, vehicle loans, and loans secured by savings deposits. The Bank also originates a very limited amount of unsecured loans. The Bank does not originate any consumer loans on an indirect basis, such as contracts purchased from retailers of goods or services which have extended credit to their customers. Generally, consumer loans are originated in the Bank's market areas. At September 30, 2018, our consumer loan portfolio totaled $139.6 million, or approximately 2% of our total loan portfolio.

The majority of our consumer loan portfolio is comprised of home equity lines of credit which have adjustable interest rates. For a majority of the home equity lines of credit, the Bank has the first mortgage or the Bank is in the first lien position. Home equity lines of credit may be originated up to 90% of the value of the property securing the loan if no first mortgage exists, or up to 90% of the value of the property securing the loans if taking into consideration an existing first mortgage. Repaid principal may be re-advanced at any time during the draw period, not to exceed the original credit limit of the loan.

Closed-end home equity loans may be originated up to 95% of the value of the property securing the loans if taking into consideration an existing first mortgage, or the lesser of up to $40 thousand or 25% of the value of the property securing the loan if no first mortgage exists. Generally, loan terms are more limiting and rates are higher for a loan in the second lien position. Home equity loans, including lines of credit and closed-end loans, comprised approximately 93% of our consumer loan portfolio, or $129.6 million, at September 30, 2018; of that amount, 86% were adjustable-rate.

The underwriting standards for consumer loans include a determination of the applicant's payment history on other debts and an assessment of the applicant's ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security in relation to the proposed loan amount.

Consumer loans generally have shorter terms-to-maturity or reprice more frequently, usually without periodic caps, which reduces our exposure to credit risk and changes in interest rates, and usually carry higher rates of interest than do one- to four-family loans. However, consumer loans may entail greater credit risk than do one- to four-family loans, particularly in the case of consumer loans that are secured by rapidly depreciable assets, such as vehicles. Management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.

Commercial Lending. At September 30, 2018, the Bank's commercial loans totaled $569.6 million, or approximately 8% of our total loan portfolio. Of this amount, $296.4 million were participation loans. Total undisbursed loan amounts related to commercial loans were $187.3 million, resulting in a total commercial loan concentration of $756.9 million at September 30, 2018. During fiscal year 2018 and 2017, the Bank entered into commercial real estate loan participations of $135.8 million and $67.7 million, respectively. With the acquisition of CCB, the Bank began offering more commercial lending products.
At September 30, 2018, the Bank's commercial real estate loan portfolio totaled $506.7 million or approximately 89% of our commercial loan portfolio. Our commercial real estate loans include a variety of property types, including hotels, office and retail buildings, senior housing facilities, and multi-family dwellings located in Texas, Missouri, Kansas, Kentucky, Nebraska, Colorado, Arkansas, California, Montana, and Arizona. Our largest commercial real estate loan was $50.0 million at September 30, 2018. This loan was current according to its terms at September 30, 2018.


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At September 30, 2018, the Bank's commercial and industrial loan portfolio totaled $62.9 million, or approximately 11% of our commercial loan portfolio. The Bank's commercial and industrial loan portfolio consists largely of loans secured by accounts receivable, inventory and equipment. The majority of the Bank's commercial and industrial loan portfolio was purchased as part of the CCB acquisition.

Underwriting
The Bank performs more extensive due diligence in underwriting commercial loans than loans secured by one- to four-family residential properties due to the larger loan amounts, the more complex sources of repayment and the riskier nature of such loans. When participating in a commercial real estate loan, the Bank performs the same underwriting procedures as if the loan was being originated by the Bank. The primary source of repayment is funds from the operation of the subject property. For secondary sources of repayment, the Bank generally requires personal guarantees and also evaluates the real estate collateral.

When underwriting a commercial real estate loan, several factors are considered, such as the income producing potential of the property to support the debt service, cash equity provided by the borrower, the financial strength of the borrower, tenant and/or guarantor(s), managerial expertise of the borrower or tenant, feasibility studies from the borrower or an independent third party, the marketability of the property and our lending experience with the borrower. For non-owner occupied properties, the Bank has a pre-lease requirement, depending on the property type, and overall strength of the credit.

The loan approval method uses a hierarchy of individual credit authorities. Loan relationships over $750 thousand, up to and including $10.0 million, are submitted to the Loan Committee for approval and also require the approval of both the Chief Lending Officer and the Chief Commercial Banking Officer. Loan relationships over $10.0 million, up to and including $40.0 million, are submitted to ALCO for approval and loan relationships over $40.0 million are submitted to the Board of Directors for approval.

For non-construction properties, the historical net operating income, which is the income derived from the operation of the property less all operating expenses, generally must be at least 1.20 times the required payments related to the outstanding debt (debt service coverage ratio) at the time of origination. For construction projects, the minimum debt service coverage ratio requirement of 1.20 applies to the projected cash flows, and the borrower must have successful experience with the construction and operation of properties similar to the subject property. As part of the underwriting process, the historical or projected cash flows are stressed under various scenarios to measure the viability of the project given adverse conditions.

Generally, our maximum LTV ratios conform to supervisory limits, including 65% for raw land, 75% for land development and 80% for commercial real estate loans. Full appraisals on properties securing these loans are performed by independent state certified fee appraisers. Additionally, the Bank has an independent third-party perform a review of each appraisal. The Bank generally requires at least 15% cash equity from the borrower for land acquisition, land development, and commercial real estate construction loans. For non-acquisition, development or construction loans, the equity may be from a combination of cash and the appraised value of the secured property.

Our commercial and industrial loans are primarily made in the Bank's market areas and are underwritten on the basis of the borrower's ability to service the debt from income. Other sources of repayment include the collateral underlying the loans and guarantees from business owners. Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets. In general, commercial and industrial loans involve more credit risk than commercial real estate loans. The increased risk in commercial and industrial loans is due to the type of collateral securing these loans as well as the expectation that commercial and industrial loans generally will be serviced principally from the operations of the business, and those operations may not be successful. Significant adverse changes in borrowers' industries and businesses could cause a rapid decline in the values of, and collectability associated with, business assets securing the loans, which could result in inadequate collateral coverage of our commercial and industrial loans. Additionally, commercial and industrial loans secured by accounts receivable may be substantially dependent on the ability of the borrower to collect amounts due from clients and loans secured by inventory and equipment are subject to depreciation over time and may be difficult to appraise. As a result of these additional complexities, variables and risks, commercial and industrial loans require more thorough underwriting and servicing than other types of commercial loans.


7


Loan Terms
Commercial loans generally have amortization terms of 15 to 30 years and maturities ranging from 90 days to 20 years, which generally requires balloon payments of the remaining principal balance.

Commercial loans have either fixed or adjustable interest rates based on prevailing market rates. The interest rate on adjustable-rate loans is based on a variety of indices, but is generally determined through negotiation with the borrower or determined by the lead bank in the case of a loan participation.

For a construction loan, generally, the Bank allows interest-only payments during the construction phase of a project and for a stabilization period of 6 to 12 months after occupancy. The Bank requires amortizing payments at the conclusion of the stabilization period.

Additionally, the Bank may include covenants in the loan agreement that allow the Bank to take action when deterioration in the financial strength of the project is detected to potentially prevent the credit from becoming impaired. The covenants are specific to each loan agreement, based on factors such as the purpose of funds, the collateral type, and the financial strength of the project, the borrower and the guarantor, among other factors.

Monitoring of Risk
For the Bank's commercial real estate loan portfolio, borrowers with a loan principal balance of $1.5 million or more are required to provide financial information annually, including borrower financial statements, subject property rental rates and income, maintenance costs, an update of real estate property tax and insurance payments, and personal financial information for the guarantor(s). The annual review process for loans with a principal balance of $1.5 million or more allows the Bank to monitor compliance with loan covenants and review the borrower's performance, including cash flows from operations, debt service coverage, and comparison of performance to projections and year-over-year performance trending. Additionally, the Bank performs a site visit, schedules a drive-by site visit or obtains an update from the lead bank to obtain information regarding the maintenance of the property and surrounding area. Depending on the financial strength of the project and/or the complexity of the borrower's financials, the Bank may also perform a global analysis of cash flows to account for all other properties owned by the borrower or guarantor. If signs of weakness are identified, the Bank may begin performing more frequent financial and/or collateral reviews or will initiate contact with the borrower, or the lead bank will contact the borrower if the loan is a participation loan, to ensure cash flows from operations are maintained at a satisfactory level to meet the debt requirements. Both macro-level and loan-level stress-test scenarios based on existing and forecasted market conditions are part of the on-going portfolio management process for the commercial real estate portfolio.

Commercial real estate construction lending generally involves a greater degree of risk than commercial real estate lending. Repayment of a construction loan is, to a great degree, dependent upon the successful and timely completion of the construction of the subject property. Construction delays, slower than anticipated stabilization or the financial impairment of the builder may negatively affect the borrower's ability to repay the loan. The Bank takes these risks into consideration during the underwriting process including the requirement of personal guarantees. The Bank mitigates the risk of commercial real estate construction lending during the construction period by monitoring inspection reports from an independent third-party, project budget, percentage of completion, on-site inspections and percentage of advanced funds.

Commercial and industrial loans are monitored through a review of borrower performance as indicated by borrower financial statements, borrowing base reports, accounts receivable aging reports, and inventory aging reports. These reports are required to be provided by the borrowers monthly, quarterly, or annually depending on the nature of the borrowing relationship.

Our commercial loans are generally large dollar loans and involve a greater degree of credit risk than one- to four-family loans. Because payments on these loans are often dependent on the successful operation or management of the properties and/or businesses, repayment of such loans may be subject to adverse conditions in the economy, the borrower's line of business, and/or the real estate market. If the cash flows from the project or business operation is reduced, or if leases are not obtained or renewed, the borrower's ability to repay the loan may become impaired. The Bank regularly monitors the level of risk in the portfolio, including concentrations in such factors as geographic locations, collateral types, tenant brand name, borrowing relationships, and lending relationships in the case of participation loans, among other factors.

8


Loan Portfolio. The following table presents the composition of our loan portfolio as of the dates indicated.
 
September 30,
 
2018
 
2017
 
2016
 
2015
 
2014
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
$
3,965,692

 
52.8
%
 
$
3,959,232

 
55.1
%
 
$
4,005,615

 
57.6
%
 
$
4,010,424

 
60.6
%
 
$
3,978,342

 
63.8
%
Correspondent purchased
2,505,987

 
33.4

 
2,445,311

 
34.0

 
2,206,072

 
31.7

 
1,846,210

 
27.9

 
1,431,745

 
23.0

Bulk purchased
293,607

 
3.9

 
351,705

 
4.9

 
416,653

 
6.0

 
485,682

 
7.3

 
561,890

 
9.0

Construction
33,149

 
0.4

 
30,647

 
0.4

 
39,430

 
0.6

 
29,552

 
0.4

 
33,378

 
0.5

Total
6,798,435

 
90.5

 
6,786,895

 
94.4

 
6,667,770

 
95.9

 
6,371,868

 
96.2

 
6,005,355

 
96.3

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
426,243

 
5.7

 
183,030

 
2.6

 
110,768

 
1.6

 
109,314

 
1.6

 
75,677

 
1.2

Commercial and industrial
62,869

 
0.9

 

 

 

 

 

 

 

 

Construction
80,498

 
1.1

 
86,952

 
1.2

 
43,375

 
0.6

 
11,523

 
0.2

 
21,465

 
0.3

Total
569,610

 
7.7

 
269,982

 
3.8

 
154,143

 
2.2

 
120,837

 
1.8

 
97,142

 
1.5

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
129,588

 
1.7

 
122,066

 
1.7

 
123,345

 
1.8

 
125,844

 
1.9

 
130,484

 
2.1

Other
10,012

 
0.1

 
3,808

 
0.1

 
4,264

 
0.1

 
4,179

 
0.1

 
4,537

 
0.1

Total
139,600

 
1.8

 
125,874

 
1.8

 
127,609

 
1.9

 
130,023

 
2.0

 
135,021

 
2.2

Total loans receivable
7,507,645

 
100.0
%
 
7,182,751

 
100.0
%
 
6,949,522

 
100.0
%
 
6,622,728

 
100.0
%
 
6,237,518

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ACL
8,463

 
 
 
8,398

 
 
 
8,540

 
 
 
9,443

 
 
 
9,227

 
 
Discounts/unearned loan fees
33,933

 
 
 
24,962

 
 
 
24,933

 
 
 
24,213

 
 
 
23,687

 
 
Premiums/deferred costs
(49,236
)
 
 
 
(45,680
)
 
 
 
(41,975
)
 
 
 
(35,955
)
 
 
 
(28,566
)
 
 
Total loans receivable, net
$
7,514,485

 
 
 
$
7,195,071

 
 
 
$
6,958,024

 
 
 
$
6,625,027

 
 
 
$
6,233,170

 
 


9


The following table presents the contractual maturity of our loan portfolio, along with associated weighted average yields, at September 30, 2018. Loans which have adjustable interest rates are shown as maturing in the period during which the contract is due. The table does not reflect the effects of possible prepayments or enforcement of due on sale clauses.
 
One- to Four-Family
 
Commercial
 
Construction(2)
 
Home Equity(3)
 
Other
 
Total
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
(Dollars in thousands)
Amounts due:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Within one year(1)
$
12,237

 
4.75
%
 
$
52,595

 
6.06
%
 
$
113,175

 
4.62
%
 
$
6,350

 
5.83
%
 
$
1,643

 
7.23
%
 
$
186,000

 
5.10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
After one year:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over one to two
6,125

 
4.44

 
18,842

 
4.32

 
472

 
14.15

 
1,290

 
6.73

 
1,539

 
6.12

 
28,268

 
4.72

Over two to three
8,542

 
4.71

 
121,615

 
4.06

 

 

 
841

 
5.87

 
1,595

 
5.21

 
132,593

 
4.13

Over three to five
40,201

 
3.95

 
40,517

 
5.31

 

 

 
2,571

 
5.78

 
4,654

 
4.80

 
87,943

 
4.68

Over five to ten
577,293

 
3.40

 
135,320

 
4.74

 

 

 
15,230

 
6.12

 
581

 
6.45

 
728,424

 
3.71

Over ten to fifteen
1,148,918

 
3.32

 
56,917

 
4.74

 

 

 
43,945

 
6.00

 

 

 
1,249,780

 
3.48

After fifteen years
4,971,970

 
3.69

 
63,306

 
4.47

 

 

 
59,361

 
5.86

 

 

 
5,094,637

 
3.72

Total due after one year
6,753,049

 
3.60

 
436,517

 
4.55

 
472

 
14.15

 
123,238

 
5.95

 
8,369

 
5.23

 
7,321,645

 
3.70

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Totals loans
$
6,765,286

 
3.61

 
$
489,112

 
4.71

 
$
113,647

 
4.66

 
$
129,588

 
5.94

 
$
10,012

 
5.56

 
7,507,645

 
3.74

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ACL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8,463

 
 
Discounts/unearned loan fees
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
33,933

 
 
Premiums/deferred costs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(49,236
)
 
 
Total loans receivable, net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
7,514,485

 
 


(1)
Includes demand loans, loans having no stated maturity, and overdraft loans.
(2)
Construction loans are presented based upon the estimated term to complete construction. See "One- to Four-Family Residential Real Estate Lending - Construction Lending" above for more information regarding our construction-to-permanent loan program.
(3)
For home equity loans that were not acquired from CCB, which represent the majority of the home equity loan portfolio, the maturity date calculated assumes the borrower always makes the required minimum payment. The majority of interest-only home equity lines of credit assume a balloon payment of unpaid principal at 120 months, while other home equity lines of credit generally assume a term of 240 months. For home equity loans acquired from CCB, which totaled $7.4 million at September 30, 2018, the maturity date reflected is the contractual maturity date.


10


The following table presents, as of September 30, 2018, the amount of loans due after September 30, 2019, and whether these loans have fixed or adjustable interest rates.

 
Fixed
 
Adjustable
 
Total
 
(Dollars in thousands)
One- to four-family
$
5,641,129

 
$
1,111,920

 
$
6,753,049

Commercial
280,735

 
155,782

 
436,517

Construction

 
472

 
472

Consumer loans:
 
 
 
 
 
Home equity
13,527

 
109,711

 
123,238

Other
5,408

 
2,961

 
8,369

Total
$
5,940,799

 
$
1,380,846

 
$
7,321,645



Asset Quality
The Bank's traditional underwriting guidelines have provided the Bank with generally low delinquencies and low levels of non-performing assets compared to national levels. Of particular importance is the complete and full documentation required for each loan the Bank originates, participates in or purchases. Generally, one- to four-family owner occupied loans are underwritten according to the "ability to repay" and "qualified mortgage" standards, as issued by the CFPB. This allows the Bank to make an informed credit decision based upon a thorough assessment of the borrower's ability to repay the loan.

For one- to four-family loans and consumer loans, when a borrower fails to make a loan payment within 10 to 15 days after the due date, a late charge is assessed and a notice is mailed. Collection personnel review all delinquent loan accounts more than 16 days past due. Attempts to contact the borrower occur by personal letter and, if no response is received, by telephone, with the purpose of establishing repayment arrangements for the borrower to bring the loan current. Repayment arrangements must be approved by a designated bank employee. For residential mortgage loans serviced by the Bank, beginning at approximately the 31st day of delinquency, and again at approximately the 50th day of delinquency, information notices are mailed to borrowers to inform them of the availability of payment assistance programs. Borrowers are encouraged to contact the Bank to initiate the process of reviewing such opportunities. Once a loan becomes 90 days delinquent, assuming a loss mitigation solution is not actively in process, a demand letter is issued requiring the loan be brought current or foreclosure procedures will be implemented. Generally, when a loan becomes 120 days delinquent, and an acceptable repayment plan or loss mitigation solution has neither been established nor is in the process of being negotiated, the loan is forwarded to legal counsel to initiate foreclosure. We also monitor whether borrowers who have filed for bankruptcy are meeting their obligation to pay the mortgage debt in accordance with the terms of the bankruptcy petition.

For purchased loans serviced by a third party, we monitor delinquencies using reports received from the servicers. The reports generally provide total principal and interest due and length of delinquency, and are used to prepare monthly management reports and perform delinquent loan trend analysis. The information from the sub-servicer of our correspondent loans is generally received during the first week of the month while the information from the servicers of our bulk loans is received later in the month. Management also utilizes information from the servicers to monitor property valuations and identify the need to charge-off loan balances.

For commercial loans originated by the Bank, when a borrower fails to make a loan payment within 10 to 15 days after the due date, a late notice is mailed. If the loan becomes 30 days or more past due, the Bank begins collection efforts including sending legal notices for payment collection and contacting the borrower by telephone. The primary purpose of such contact is to notify the borrower of the past due payment in case the loan payment was misplaced or lost and to identify any changes in the borrower's income flow that may affect future loan performance. If it is determined that future loan performance may be adversely affected, the Bank initiates discussions with the borrower regarding plans to ensure cash flow from operations is sufficient to satisfy the debt requirements and meet the loan covenants. Generally, once a loan becomes 90 days delinquent, foreclosure procedures are initiated. For participation loans, the lead bank is responsible for all collection efforts and contact with the borrower. However, if the Bank does not receive an expected payment on a participation loan, the Bank contacts the lead bank to determine the cause of the late payment and to initiate discussions with the lead bank of collection efforts, as necessary. See "Lending Practices and Underwriting Standards – Commercial Lending – Monitoring of Risk" for additional information.

11


Delinquent and non-performing loans and other real estate owned ("OREO")
The following table presents the Company's 30 to 89 day delinquent loans at the dates indicated. Of the loans 30 to 89 days delinquent at September 30, 2018, 2017, and 2016, approximately 74%, 67%, and 75%, respectively, were 59 days or less delinquent.
 
Loans Delinquent for 30 to 89 Days at September 30,
 
2018
 
2017
 
2016
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
Originated
129

 
$
10,647

 
129

 
$
13,257

 
143

 
$
13,593

Correspondent purchased
18

 
3,803

 
8

 
1,827

 
9

 
3,329

Bulk purchased
15

 
3,502

 
22

 
3,194

 
21

 
5,008

Commercial
6

 
322

 

 

 

 

Consumer
38

 
533

 
35

 
500

 
41

 
697

 
206

 
$
18,807

 
194

 
$
18,778

 
214

 
$
22,627

 
 
 
 
 
 
 
 
 
 
 
 
Loans 30 to 89 days delinquent
 
 
 
 
 
 
 
 
 
 
 
to total loans receivable, net
 
 
0.25
%
 
 
 
0.26
%
 
 
 
0.33
%


12


The table below presents the Company's non-performing loans and OREO at the dates indicated. Non-performing loans are loans that are 90 or more days delinquent or in foreclosure and other loans required to be reported as nonaccrual pursuant to regulatory reporting requirements, even if the loans are current. At all dates presented, there were no loans 90 or more days delinquent that were still accruing interest. Non-performing assets include non-performing loans and OREO. OREO primarily includes assets acquired in settlement of loans. Over the past 12 months, OREO one-to four-family properties acquired in settlement of loans were owned by the Bank, on average, for approximately four months before the properties were sold.
 
September 30,
 
2018
 
2017
 
2016
 
2015
 
2014
 
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
67

 
$
5,040

 
67

 
$
5,515

 
73

 
$
8,190

 
66

 
$
6,728

 
82

 
$
7,880

Correspondent purchased
1

 
449

 
1

 
91

 
3

 
985

 
1

 
394

 
2

 
709

Bulk purchased
11

 
3,045

 
13

 
3,371

 
28

 
7,323

 
36

 
8,898

 
28

 
7,120

Commercial

 

 

 

 

 

 

 

 

 

Consumer
30

 
569

 
22

 
410

 
31

 
529

 
28

 
509

 
29

 
410

 
109

 
9,103

 
103

 
9,387

 
135

 
17,027

 
131

 
16,529

 
141

 
16,119

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans 90 or more days delinquent or in foreclosure
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 as a percentage of total loans
 
 
0.12
%
 
 
 
0.13
%
 
 
 
0.24
%
 
 
 
0.25
%
 
 
 
0.26
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonaccrual loans less than 90 Days Delinquent:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
19

 
$
1,482

 
50

 
$
4,567

 
70

 
$
8,956

 
77

 
$
9,004

 
67

 
$
7,473

Correspondent purchased
2

 
396

 
8

 
1,690

 
9

 
2,786

 
1

 
25

 
4

 
553

Bulk purchased

 

 
4

 
846

 
1

 
31

 
1

 
82

 
5

 
724

Consumer
2

 
9

 
7

 
113

 
12

 
328

 
12

 
295

 
2

 
45

 
23

 
1,887

 
69

 
7,216

 
92

 
12,101

 
91

 
9,406

 
78

 
8,795

Total non-performing loans
132

 
10,990

 
172

 
16,603

 
227

 
29,128

 
222

 
25,935

 
219

 
24,914

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-performing loans as a percentage of total loans
 
0.15
%
 
 
 
0.23
%
 
 
 
0.42
%
 
 
 
0.39
%
 
 
 
0.40
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

13


 
September 30,
 
2018
 
2017
 
2016
 
2015
 
2014
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
OREO:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated(2)
8

 
$
843

 
4

 
$
58

 
12

 
$
692

 
29

 
$
1,752

 
25

 
$
2,040

Correspondent purchased

 

 

 

 
1

 
499

 
1

 
499

 
1

 
179

Bulk purchased
1

 
454

 
5

 
1,279

 
4

 
1,265

 
2

 
796

 
2

 
575

Commercial
1

 
600

 

 

 

 

 

 

 

 

Consumer

 

 
1

 
67

 

 

 
1

 
8

 

 

Other

 

 

 

 
1

 
1,278

 
1

 
1,278

 
1

 
1,300

 
10

 
1,897

 
10

 
1,404

 
18

 
3,734

 
34

 
4,333

 
29

 
4,094

Total non-performing assets
142

 
$
12,887

 
182

 
$
18,007

 
245

 
$
32,862

 
256

 
$
30,268

 
248

 
$
29,008

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-performing assets as a percentage of total assets
0.14
%
 
 
 
0.20
%
 
 
 
0.35
%
 
 
 
0.31
%
 
 
 
0.29
%

(1)
Represents loans required to be reported as nonaccrual pursuant to regulatory reporting requirements, even if the loans are current. The decrease in the balance of these loans at September 30, 2017 compared to September 30, 2016 was due to fewer loans being classified as troubled debt restructurings ("TDRs") as a result of management refining its methodology for assessing whether a loan modification qualifies as a TDR. At September 30, 2018, 2017, 2016, 2015, and 2014, this amount was comprised of $1.1 million, $1.8 million, $2.3 million, $2.2 million, and $1.1 million, respectively, of loans that were 30 to 89 days delinquent and were reported as such, and $800 thousand, $5.4 million, $9.8 million, $7.2 million, and $7.7 million, respectively, of loans that were 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 amount of interest income on nonaccrual loans and TDRs as of September 30, 2018 included in interest income was $1.1 million for the year ended September 30, 2018.  The amount of additional interest income that would have been recorded on nonaccrual loans and TDRs as of September 30, 2018, if they had performed in accordance with their original terms, was $90 thousand for the year ended September 30, 2018.


14


The following table presents the states where the properties securing one percent or more of the total amount of our one- to four-family loans are located and the corresponding balance of loans 30 to 89 days delinquent, 90 or more days delinquent or in foreclosure, and weighted average LTV ratios for loans 90 or more days delinquent or in foreclosure at September 30, 2018. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. At September 30, 2018, potential losses, after taking into consideration anticipated PMI proceeds and estimated selling costs, have been charged-off.
 
 
 
 
 
 
Loans 30 to 89
 
Loans 90 or More Days Delinquent
 
 
One- to Four-Family
 
Days Delinquent
 
or in Foreclosure
State
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Amount
 
% of Total
 
LTV
 
 
(Dollars in thousands)
Kansas
 
$
3,640,185

 
53.8
%
 
$
9,186

 
51.2
%
 
$
4,765

 
55.8
%
 
62
%
Missouri
 
1,236,483

 
18.3

 
3,320

 
18.5

 
1,060

 
12.4

 
62

Texas
 
743,013

 
11.0

 
1,848

 
10.3

 
450

 
5.3

 
45

Tennessee
 
226,820

 
3.3

 

 

 

 

 
n/a

California
 
195,710

 
2.9

 

 

 

 

 
n/a

Pennsylvania
 
108,818

 
1.6

 
299

 
1.6

 

 

 
n/a

Georgia
 
94,604

 
1.4

 

 

 
391

 
4.6

 
50

Alabama
 
91,526

 
1.3

 

 

 

 

 
n/a

North Carolina
 
64,596

 
1.0

 

 

 
122

 
1.4

 
79

Other states
 
363,531

 
5.4

 
3,299

 
18.4

 
1,746

 
20.5

 
67

 
 
$
6,765,286

 
100.0
%
 
$
17,952

 
100.0
%
 
$
8,534

 
100.0
%
 
61


Troubled Debt Restructurings. For borrowers experiencing financial difficulties, the Bank may grant a concession to the borrower, resulting in a TDR. Such concessions generally involve extensions of loan maturity dates, the granting of periods during which the payment of only interest and escrow is required, reductions in interest rates, and loans that have been discharged under Chapter 7 bankruptcy proceedings where the borrower has not reaffirmed the debt. The Bank does not forgive principal or interest, nor does it commit to lend additional funds, except for situations generally involving the capitalization of delinquent interest and/or escrow not to exceed the original loan balance, to these borrowers. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies and Note 5. Loans Receivable and Allowance for Credit Losses" for additional information related to TDRs.

The following table presents the Company's TDRs, based on accrual status, at the dates indicated.
 
September 30,
 
2018

 
2017

 
2016

 
2015

 
2014

 
(Dollars in thousands)
Accruing TDRs
$
20,216

 
$
27,383

 
$
23,177

 
$
24,331

 
$
24,636

Nonaccrual TDRs(1)
4,652

 
11,742

 
18,725

 
15,511

 
13,370

Total TDRs
$
24,868

 
$
39,125

 
$
41,902

 
$
39,842

 
$
38,006


(1)
Nonaccrual TDRs are included in the non-performing loan table above.

Impaired Loans. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due, including principal and interest, according to the original contractual terms of the loan agreement. Interest income on impaired loans is recognized in the period collected unless the ultimate collection of principal is considered doubtful. The unpaid principal balance of loans reported as impaired at September 30, 2018, 2017, and 2016 was $29.9 million, $44.4 million, and $58.9 million, respectively. During the fourth quarter of fiscal year 2017, management refined its methodology for classifying loans as impaired which, though not material, resulted in fewer loans being classified as impaired in the current fiscal year.

15


See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies and Note 5. Loans Receivable and Allowance for Credit Losses" for additional information related to impaired loans.

Classified Assets. In accordance with the Bank's asset classification policy, management regularly reviews the problem assets in the Bank's portfolio to determine whether any assets require classification. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 5. Loans Receivable and Allowance for Credit Losses" for asset classification definitions.

The following table sets forth the recorded investment in assets, classified as either special mention or substandard, as of September 30, 2018. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 5. Loans Receivable and Allowance for Credit Losses" for information regarding asset classification definitions. At September 30, 2018, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.

 
Special Mention
 
Substandard
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
Originated
76

 
$
8,660

 
255

 
$
22,409

Correspondent purchased
4

 
997

 
13

 
3,126

Bulk purchased

 

 
29

 
7,195

Commercial
3

 
2,377

 
1

 
1,368

Consumer Loans:
 
 
 
 
 
 
 
Home equity
14

 
298

 
57

 
894

Other

 

 
4

 
10

Total loans
97

 
12,332

 
359

 
35,002

 
 
 
 
 
 
 
 
OREO:
 
 
 
 
 
 
 
Originated

 

 
8

 
843

Bulk purchased

 

 
1

 
454

Commercial

 

 
1

 
600

Total OREO

 

 
10

 
1,897

Total classified assets
97

 
$
12,332

 
369

 
$
36,899


Allowance for credit losses and Provision for credit losses. Management maintains an ACL to absorb inherent losses in the loan portfolio based on quarterly assessments of the loan portfolio. The ACL is maintained through provisions for credit losses which are either charged to or credited to income. Our ACL methodology considers a number of factors including the trend and composition of delinquent loans, trends in foreclosed property and short sale transactions and charge-off activity, the current status and trends of local and national employment levels, trends and current conditions in the real estate and housing markets, loan portfolio growth and concentrations, industry and peer charge-off activity and ACL ratios, and the Bank's ACL ratios. For our commercial loan portfolio, we also consider qualitative factors such as geographic locations, collateral types, tenant brand name, borrowing relationships, and lending relationships in the case of participation loans, among other factors. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Allowance for Credit Losses" and "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies" for a full discussion of our ACL methodology. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 5. Loans Receivable and Allowance for Credit Losses" for additional information on the ACL.


16


The Bank did not record a provision for credit losses during the current fiscal year or during the prior fiscal year. Based on management's assessment of the ACL formula analysis model and several other factors, management determined that no provision for credit losses was necessary. Net recoveries were $65 thousand during the current fiscal year and net charge-offs were $142 thousand during the prior fiscal year. At September 30, 2018 and 2017, respectively, loans 30 to 89 days delinquent were 0.25% and 0.26% of total loans and loans 90 or more days delinquent or in foreclosure were 0.12% and 0.13% of total loans.

The following table presents ACL activity and related ratios at the dates and for the periods indicated. Using the Bank's annualized net historical loan losses from the Bank's ACL formula analysis model over the past five years, the Bank would have approximately 22 years of net loan loss coverage based on the ACL balance at September 30, 2018.
 
Year Ended September 30,
 
2018

 
2017

 
2016

 
2015

 
2014

 
(Dollars in thousands)
Balance at beginning of period
$
8,398

 
$
8,540

 
$
9,443

 
$
9,227

 
$
8,822

Charge-offs:
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
Originated
(136
)
 
(72
)
 
(200
)
 
(424
)
 
(284
)
Correspondent
(128
)
 

 

 
(11
)
 
(96
)
Bulk purchased

 
(216
)
 
(342
)
 
(228
)
 
(653
)
Total
(264
)
 
(288
)
 
(542
)
 
(663
)
 
(1,033
)
Consumer:
 
 
 
 
 
 
 
 
 
Home equity
(32
)
 
(51
)
 
(83
)
 
(29
)
 
(103
)
Other
(6
)
 
(9
)
 
(5
)
 
(43
)
 
(6
)
Total
(38
)
 
(60
)
 
(88
)
 
(72
)
 
(109
)
Total charge-offs
(302
)
 
(348
)
 
(630
)
 
(735
)
 
(1,142
)
Recoveries:
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
Originated
144

 
4

 
77

 
56

 
1

Bulk purchased
196

 
165

 
374

 
58

 
64

Total
340

 
169

 
451

 
114

 
65

Consumer:
 
 
 
 
 
 
 
 
 
Home equity
22

 
26

 
25

 
64

 
72

Other
5

 
11

 
1

 
2

 
1

Total
27

 
37

 
26

 
66

 
73

Total recoveries
367

 
206

 
477

 
180

 
138

Net recoveries (charge-offs)
65

 
(142
)
 
(153
)
 
(555
)
 
(1,004
)
Provision for credit losses

 

 
(750
)
 
771

 
1,409

Balance at end of period
$
8,463

 
$
8,398

 
$
8,540

 
$
9,443

 
$
9,227

 
 
 
 
 
 
 
 
 
 
Ratio of net charge-offs during the period to
 
 
 
 
 
 
 
 
 
average loans outstanding during the period
 %
 
%
 
%
 
0.01
%
 
0.02
%
 
 
 
 
 
 
 
 
 
 
Ratio of net (recoveries) charge-offs during the
 
 
 
 
 
 
 
 
 
period to average non-performing assets
(0.42
)
 
0.56

 
0.48

 
1.87

 
3.38

 
 
 
 
 
 
 
 
 
 
ACL to non-performing loans at end of period
77.01

 
50.58

 
29.32

 
36.41

 
37.04

 
 
 
 
 
 
 
 
 
 
ACL to loans receivable, net at end of period
0.11

 
0.12

 
0.12

 
0.14

 
0.15

 
 
 
 
 
 
 
 
 
 
ACL to net charge-offs
N/M(1)

 
58.9x

 
55.8x

 
17.0x

 
9.2x

(1)
This ratio is not presented for the time period noted due to loan recoveries exceeding loan charge-offs during the period.

17


The distribution of our ACL at the dates indicated is summarized below.

 
September 30,
 
2018
 
2017
 
2016
 
2015
 
2014
 
 
 
% of
 
 
 
% of
 
 
 
% of
 
 
 
% of
 
 
 
% of
 
Amount
 
Loans to
 
Amount
 
Loans to
 
Amount
 
Loans to
 
Amount
 
Loans to
 
Amount
 
Loans to
 
of ACL
 
Total Loans
 
of ACL
 
Total Loans
 
of ACL
 
Total Loans
 
of ACL
 
Total Loans
 
of ACL
 
Total Loans
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
$
2,933

 
52.8
%
 
$
3,149

 
55.1
%