Capitol Federal Financial, Inc. (Form: 10-K, Received: 11/27/2019 12:45:40)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2019

☐ 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:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	CFFN	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ 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 ☒

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, 2019, was $1.82 billion.

As of November 21, 2019, there were issued and outstanding 141,503,865 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, 2019.



			Page No.
PART I	Item 1.	Business	2
	Item 1A.	Risk Factors	31
	Item 1B.	Unresolved Staff Comments	37
	Item 2.	Properties	37
	Item 3.	Legal Proceedings	37
	Item 4.	Mine Safety Disclosures	37


PART II	Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	38
	Item 6.	Selected Financial Data	40
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	42
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	74
	Item 8.	Financial Statements and Supplementary Data	81
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	135
	Item 9A.	Controls and Procedures	135
	Item 9B.	Other Information	135


PART III	Item 10.	Directors, Executive Officers and Corporate Governance	136
	Item 11.	Executive Compensation	136
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	136
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	137
	Item 14.	Principal Accounting Fees and Services	137


PART IV	Item 15.	Exhibits, Financial Statement Schedules	137


INDEX TO EXHIBITS			138


SIGNATURES			140

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;


•	our ability to extend the commercial banking and trust asset management 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 classified and/or non-performing assets, which may require the Bank to increase the ACL, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets;


•	results of examinations of the Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our ACL;


•	changes in accounting principles, policies, or guidelines;


•	the effects of, and changes in, monetary and interest rate policies of the Board of Governors of the Federal Reserve System ("FRB");


•	the effects of, and changes in, trade and fiscal policies and laws of the United States government;


•	the effects of, and changes in, foreign and military policies of the United States government;


•	inflation, interest rate, market, monetary, and currency fluctuations;


•	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;


•	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 or the context indicates otherwise, "the Company," "we," "us," and "our" refer to Capitol Federal Financial, Inc. a Maryland corporation, and its subsidiaries. "Capitol Federal Savings," and "the Bank," refer to Capitol Federal Savings Bank, a federal savings bank and the wholly-owned subsidiary of Capitol Federal Financial, Inc.

Item 1. Business

General

The Company is a Maryland corporation 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.

In August 2018, the Company completed the acquisition of CCB and its wholly-owned subsidiary Capital City Bank, a commercial bank with $450 million in assets that was headquartered in Topeka, Kansas. During April 2019, the Bank completed the integration of the operations of Capital City Bank into the Bank's operations. The acquisition of Capital City Bank has allowed us to advance our commercial banking strategy while staying under $10 billion in assets, and allowed us to offer trust and brokerage services. The Bank competes for commercial banking business through a wide variety of commercial deposit and expanded lending products.

We have been, and intend to continue to be, a community-oriented financial institution offering a variety of financial services to meet the needs of the communities we serve. We attract deposits primarily from the general public and from businesses, and invest those funds primarily in permanent loans secured by first mortgages on owner-occupied, one- to four-family residences. We also originate and participate with other lenders in commercial loans, originate consumer loans primarily secured by mortgages on one- to four-family residences, and invest in certain investment securities and mortgage-backed securities ("MBS") using funding from deposits, 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.

The Company's results of operations are primarily dependent on net interest income, which is the difference between the interest earned on loans, securities, and cash, and the interest paid on deposits and borrowings. On a weekly basis, management reviews deposit flows, loan demand, cash levels, and changes in several market rates to assess all pricing strategies. The Bank's pricing strategy for first mortgage loan products includes setting interest rates based on secondary market prices and competitor pricing for our local lending markets, and secondary market prices and competitor pricing for our correspondent lending markets. Pricing for commercial loans is generally based on competitor pricing and the credit risk of the borrower with consideration given to the overall relationship of the borrower. Generally, deposit pricing is based upon a survey of competitors in the Bank's market areas, and the need to attract funding and retain maturing deposits. The majority of our loans are fixed-rate products with maturities up to 30 years, while the majority of our retail deposits are either non-maturity deposits or have stated maturities of less than two years.

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

Local economic conditions have a significant impact on the ability of borrowers to repay loans and the value of the collateral securing these loans. The industries in the Bank's local market areas, where the properties securing approximately 66% of the Bank's one- to four-family loans are located, are diversified. This is especially true in the Kansas City metropolitan statistical area, which comprises the largest segment of our one- to four-family loan portfolio and deposit base. Management also monitors broad industry and economic indicators and trends in the states and/or metropolitan statistical areas with the highest concentrations of correspondent purchased loans and commercial real estate loans. As of October 2019, the unemployment rate was 3.1% for Kansas and Missouri, and 3.4% for Texas, compared to the national average of 3.6%, based on information from the Bureau of Labor Statistics. The Kansas City market area has an average household income of approximately $91 thousand per annum, based on 2019 estimates from Claritas Pop-Facts Premier. The average household income in our combined local market areas is approximately $87 thousand per annum, with 92% of the population at or above the poverty level, based on 2019 estimates from Claritas Pop-Facts Premier. The average household income in the Texas region where the majority of our correspondent one- to four-family loans are located is approximately $100 thousand per annum, with 90% of the population at or above the poverty level, based on 2019 estimates from Claritas Pop-Facts Premier.

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

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 54 branches (44 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 our 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 first in deposit market share, at 7.41%, in the state of Kansas as reported in the June 30, 2019 FDIC "Summary of Deposits - Market Share Report." Management considers our well-established banking network together with our reputation for financial strength and customer service to be major factors in our success at attracting and retaining customers in our market areas.

The Bank consistently has been one of the top one- to four-family lenders with regard to mortgage loan origination volume in the state of Kansas. 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.

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 and participates in commercial loans, and originates consumer loans and construction loans secured by residential properties.

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 2019 and 2018, the Bank originated and refinanced $581.1 million and $543.5 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, 2019, the Bank had correspondent lending relationships in 28 states and the District of Columbia. During fiscal years 2019 and 2018, the Bank purchased $166.4 million and $391.6 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, 2019, $178.5 million, or 71% 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 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 $73.8 million of bulk purchased loans at September 30, 2019 that do not have the above noted guarantee, the Bank has continued to experience a reduction in loan losses. See "Asset Quality - Allowance for credit losses and Provision for credit losses" below for additional information regarding loan losses for bulk purchased 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.

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 2019.

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 the one-year Constant Maturity Treasury ("CMT") index; however, other indices have been used in the past, including LIBOR. 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 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 if 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 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, 2019, we had $36.8 million in one- to four-family construction loans outstanding, representing 0.5% of our total loan portfolio.

The application process for a construction loan includes submission of complete plans, specifications, and costs of the project to be constructed. 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, 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 customers who, based on our initial underwriting criteria, could likely obtain similar financing elsewhere. During fiscal years 2019 and 2018, the Bank endorsed $121.5 million and $19.4 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. The Bank's Asset and Liability Management Committee ("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 year 2019, the Bank did not sell any loans. During fiscal year 2018, the Bank sold $16.6 million of one- to four-family loans, to test 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. Generally, consumer loans are originated in the Bank's market areas. The majority of our consumer loan portfolio is comprised of home equity lines of credit which have adjustable interest rates. For a majority of the home equity lines of credit, the Bank has the first mortgage or the Bank is in the first lien position. At September 30, 2019, our consumer loan portfolio totaled $131.8 million, or approximately 2% of our total loan portfolio.

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. 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, 2019, the Bank's commercial loans totaled $767.9 million, or approximately 10% of our total loan portfolio. Of this amount, $360.8 million were participation loans. Total undisbursed loan amounts related to commercial loans were $138.8 million, resulting in a total commercial loan concentration of $906.7 million at September 30, 2019.

At September 30, 2019, the Bank's commercial real estate loan portfolio totaled $706.8 million or approximately 92% 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 Kansas, Missouri, and 11 other states. Our largest commercial lending relationship was $98.9 million at September 30, 2019, of which $94.1 million was disbursed, including $90.8 million in commercial real estate loans and $3.3 million in commercial and industrial loans. These loans were current according to their terms at September 30, 2019.

At September 30, 2019, the Bank's commercial and industrial loan portfolio totaled $61.1 million, or approximately 8% of our commercial loan portfolio. The Bank's commercial and industrial loan portfolio consists largely of loans secured by accounts receivable, inventory and equipment.

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 loan, the Bank performs the same underwriting procedures as if the loan was being originated by the Bank.

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.

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 1.15 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 of 1.15 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 85% for commercial real estate loans. In accordance with regulatory guidelines, the Bank requires full independent appraisals for commercial real estate properties. 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.

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 24 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.

Loan Portfolio. The following table presents the composition of our loan portfolio as of the dates indicated.



	September 30,
	2019					2018					2017					2016					2015
	Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent
	(Dollars in thousands)
One- to four-family:
Originated	$	3,873,851		52.2	%	$	3,965,692		52.8	%	$	3,959,232		55.1	%	$	4,005,615		57.6	%	$	4,010,424		60.6	%
Correspondent purchased	2,349,877			31.7		2,505,987			33.4		2,445,311			34.0		2,206,072			31.7		1,846,210			27.9
Bulk purchased	252,347			3.4		293,607			3.9		351,705			4.9		416,653			6.0		485,682			7.3
Construction	36,758			0.5		33,149			0.4		30,647			0.4		39,430			0.6		29,552			0.4
Total	6,512,833			87.8		6,798,435			90.5		6,786,895			94.4		6,667,770			95.9		6,371,868			96.2
Commercial:
Commercial real estate	583,617			7.9		426,243			5.7		183,030			2.6		110,768			1.6		109,314			1.6
Commercial and industrial	61,094			0.8		62,869			0.9		—			—		—			—		—			—
Construction	123,159			1.7		80,498			1.1		86,952			1.2		43,375			0.6		11,523			0.2
Total	767,870			10.4		569,610			7.7		269,982			3.8		154,143			2.2		120,837			1.8
Consumer loans:
Home equity	120,587			1.6		129,588			1.7		122,066			1.7		123,345			1.8		125,844			1.9
Other	11,183			0.2		10,012			0.1		3,808			0.1		4,264			0.1		4,179			0.1
Total	131,770			1.8		139,600			1.8		125,874			1.8		127,609			1.9		130,023			2.0
Total loans receivable	7,412,473			100.0	%	7,507,645			100.0	%	7,182,751			100.0	%	6,949,522			100.0	%	6,622,728			100.0	%

Less:
ACL	9,226					8,463					8,398					8,540					9,443
Discounts/unearned loan fees	31,058					33,933					24,962					24,933					24,213
Premiums/deferred costs	(44,558		)			(49,236		)			(45,680		)			(41,975		)			(35,955		)
Total loans receivable, net	$	7,416,747				$	7,514,485				$	7,195,071				$	6,958,024				$	6,625,027

The following table presents the contractual maturity of our loan portfolio, along with associated weighted average yields, at September 30, 2019. 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 Consumer				Total
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount			Yield
	(Dollars in thousands)
Amounts due:
Within one year⁽¹⁾	$	2,590	5.21	%	$	76,410	5.05	%	$	156,707	4.68	%	$	2,084	6.69	%	$	1,093	4.92	%	$	238,884		4.82	%

After one year:
Over one to two	2,977		4.47		117,508		4.13		3,210		6.81		211		6.26		1,249		5.96		125,155			4.23
Over two to three	6,402		4.06		66,485		4.61		—		—		331		5.85		1,818		5.55		75,036			4.59
Over three to five	50,480		3.98		68,080		5.30		—		—		1,637		5.84		5,491		4.48		125,688			4.74
Over five to ten	498,638		3.34		146,247		4.87		—		—		12,967		6.30		826		6.32		658,678			3.74
Over ten to fifteen	1,052,008		3.38		125,011		4.68		—		—		47,015		6.19		464		6.04		1,224,498			3.63
After fifteen years	4,862,980		3.73		44,970		4.88		—		—		56,342		6.04		242		5.24		4,964,534			3.77
Total due after one year	6,473,485		3.65		568,301		4.70		3,210		6.81		118,503		6.13		10,090		5.10		7,173,589			3.78

Totals loans	$	6,476,075	3.65		$	644,711	4.74		$	159,917	4.72		$	120,587	6.14		$	11,183	5.08		7,412,473			3.81

Less:
ACL																					9,226
Discounts/unearned loan fees																					31,058
Premiums/deferred costs																					(44,558		)
Total loans receivable, net																					$	7,416,747


(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, the maturity date calculated assumes the borrower always makes the required minimum payment. The majority of home equity loans assume a maximum term of 240 months.

The following table presents, as of September 30, 2019, the amount of loans due after September 30, 2020, and whether these loans have fixed or adjustable interest rates.



	Fixed		Adjustable		Total
	(Dollars in thousands)
One- to four-family	$	5,445,463	$	1,028,022	$	6,473,485
Commercial	354,717		213,584		568,301
Construction	2,738		472		3,210
Consumer loans:
Home equity	16,723		101,780		118,503
Other	6,918		3,172		10,090
Total	$	5,826,559	$	1,347,030	$	7,173,589

Asset Quality

The Bank's traditional one- to four-family underwriting guidelines have provided the Bank with generally low delinquencies and low levels of non-performing assets within this loan category 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 31^st day of delinquency, and again at approximately the 50^th 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 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 or collection 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.

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. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs. Of the loans 30 to 89 days delinquent at September 30, 2019, 2018, and 2017, approximately 67%, 74%, and 67%, respectively, were 59 days or less delinquent.



	Loans Delinquent for 30 to 89 Days at September 30,
	2019				2018				2017
	Number	Amount			Number	Amount			Number	Amount
	(Dollars in thousands)
One- to four-family:
Originated	90	$	7,223		129	$	10,647		129	$	13,257
Correspondent purchased	9	2,721			18	3,803			8	1,827
Bulk purchased	16	3,581			15	3,502			22	3,194
Commercial	8	826			6	322			—	—
Consumer	42	525			38	533			35	500
	165	$	14,876		206	$	18,807		194	$	18,778

Loans 30 to 89 days delinquent
to total loans receivable, net		0.20		%		0.25		%		0.26		%

The table below presents the Company's non-performing loans and OREO at the dates indicated. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs. 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 accounting and/or 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, one- to four-family OREO properties acquired in settlement of one- to four-family loans were owned by the Bank, on average, for approximately four months before the properties were sold.



	September 30,
	2019				2018				2017				2016				2015
	Number	Amount			Number	Amount			Number	Amount			Number	Amount			Number	Amount
	(Dollars in thousands)
Loans 90 or More Days Delinquent or in Foreclosure:
One- to four-family:
Originated	44	$	3,268		67	$	5,040		67	$	5,515		73	$	8,190		66	$	6,728
Correspondent purchased	4	1,008			1	449			1	91			3	985			1	394
Bulk purchased	6	1,465			11	3,045			13	3,371			28	7,323			36	8,898
Commercial	4	170			—	—			—	—			—	—			—	—
Consumer	25	362			30	569			22	410			31	529			28	509
	83	6,273			109	9,103			103	9,387			135	17,027			131	16,529

Loans 90 or more days delinquent or in foreclosure
as a percentage of total loans		0.08		%		0.12		%		0.13		%		0.24		%		0.25		%

Nonaccrual loans less than 90 Days Delinquent:⁽¹⁾
One- to four-family:
Originated	16	$	1,183		19	$	1,482		50	$	4,567		70	$	8,956		77	$	9,004
Correspondent purchased	—	—			2	396			8	1,690			9	2,786			1	25
Bulk purchased	1	65			—	—			4	846			1	31			1	82
Commercial	1	7			—	—			—	—			—	—			—	—
Consumer	2	35			2	9			7	113			12	328			12	295
	20	1,290			23	1,887			69	7,216			92	12,101			91	9,406
Total non-performing loans	103	7,563			132	10,990			172	16,603			227	29,128			222	25,935

Non-performing loans as a percentage of total loans		0.10		%		0.15		%		0.23		%		0.42		%		0.39		%



	September 30,
	2019				2018				2017				2016				2015
	Number	Amount			Number	Amount			Number	Amount			Number	Amount			Number	Amount
	(Dollars in thousands)
OREO:
One- to four-family:
Originated⁽²⁾	8	$	745		8	$	843		4	$	58		12	$	692		29	$	1,752
Correspondent purchased	—	—			—	—			—	—			1	499			1	499
Bulk purchased	—	—			1	454			5	1,279			4	1,265			2	796
Commercial	1	600			1	600			—	—			—	—			—	—
Consumer	—	—			—	—			1	67			—	—			1	8
Other	—	—			—	—			—	—			1	1,278			1	1,278
	9	1,345			10	1,897			10	1,404			18	3,734			34	4,333
Total non-performing assets	112	$	8,908		142	$	12,887		182	$	18,007		245	$	32,862		256	$	30,268

Non-performing assets as a percentage of total assets		0.10		%		0.14		%		0.20		%		0.35		%		0.31		%

(1)

Includes loans required to be reported as nonaccrual pursuant to accounting and/or 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.


(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, 2019 included in interest income was $988 thousand for the year ended September 30, 2019. The amount of additional interest income that would have been recorded on nonaccrual loans and TDRs as of September 30, 2019, if they had performed in accordance with their original terms, was $66 thousand for the year ended September 30, 2019.

The following table presents the states where the properties securing five percent or more of the total amount of our one- to four-family loans 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, 2019. 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, 2019, 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	$	3,540,471	54.7	%	$	6,121	45.3	%	$	3,117	54.3	%	59	%
Missouri	1,172,468		18.1		2,286		16.9		786		13.7		53
Texas	712,802		11.0		909		6.7		542		9.4		48
Other states	1,050,334		16.2		4,209		31.1		1,296		22.6		70
	$	6,476,075	100.0	%	$	13,525	100.0	%	$	5,741	100.0	%	60

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, 2019. 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. During the June 30, 2019 quarter, management classified a $50.0 million commercial real estate participation loan as special mention. The loan has been in the portfolio for approximately 3.5 years, with approximately 1.5 years remaining, and relates to a recently opened large hotel and convention center in a high growth area in the central-southern United States. Management identified credit weaknesses associated with this loan, including a debt service coverage ratio below policy, the development surrounding the hotel and convention center has been slower than initially anticipated, and construction delays have occurred. The Bank has personal guarantees from members of a financially strong borrowing group, and the loan was current according to its terms as of September 30, 2019. Management continues to closely monitor the hotel and convention center and surrounding activities. At September 30, 2019, 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	114	$	12,941	198	$	15,628
Correspondent purchased	8	2,349		13	2,785
Bulk purchased	1	102		24	5,294
Commercial	15	54,106		11	5,529
Consumer Loans:
Home equity	16	280		45	696
Other	1	2		6	24
Total loans	155	69,780		297	29,956

OREO:
One- to four-family:
Originated	—	—		8	745
Commercial	—	—		1	600
Total OREO	—	—		9	1,345
Total classified assets	155	$	69,780	306	$	31,301

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 reduced payment amounts are required, reductions in interest rates, and/or 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 on one- to four-family and consumer loans, not to exceed the original loan balance, to these borrowers. For commercial loans, the Bank does not forgive principal or interest or commit to lend additional funds unless the borrower provides additional collateral or other enhancements to improve credit quality. 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,
	2019		2018		2017		2016		2015
	(Dollars in thousands)
Accruing TDRs	$	14,892	$	20,216	$	27,383	$	23,177	$	24,331
Nonaccrual TDRs⁽¹⁾	2,958		4,652		11,742		18,725		15,511
Total TDRs	$	17,850	$	24,868	$	39,125	$	41,902	$	39,842


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

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, 2019, 2018, and 2017 was $23.4 million, $29.9 million, and $44.4 million, respectively. Included in the impaired loan balance at September 30, 2019 were $23.2 million of loans classified as either special mention or substandard.

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.

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 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 lender 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.

Each quarter we prepare a formula analysis model which segregates the loan portfolio into categories based on certain risk characteristics. Historical loss factors and qualitative factors are applied to each loan category in the formula analysis model. The factors are reviewed by management quarterly to assess whether the factors adequately cover probable and estimable losses inherent in the loan portfolio. To the extent the commercial loan portfolio continues to grow and the inherent loss factors remain relatively constant and/or the asset quality declines, the related ACL amounts will likely increase.

The Bank recorded a $750 thousand provision for credit losses during the current fiscal year compared to no provision for credit losses in the prior fiscal year. The provision for credit losses in the current fiscal year was due primarily to commercial loan activities during the current fiscal year, specifically the classification of a large commercial participation loan as special mention, commercial loan growth and funding, certain commercial loans that renewed since being obtained in the CCB acquisition and are now in the Bank's ACL model, and commercial loan charge-offs.

The following table presents ACL activity and related ratios at the dates and for the periods indicated.



	Year Ended September 30,
	2019			2018			2017			2016			2015
	(Dollars in thousands)
Balance at beginning of period	$	8,463		$	8,398		$	8,540		$	9,443		$	9,227
Charge-offs:
One- to four-family:
Originated	(75		)	(136		)	(72		)	(200		)	(424		)
Correspondent	—			(128		)	—			—			(11		)
Bulk purchased	(26		)	—			(216		)	(342		)	(228		)
Total	(101		)	(264		)	(288		)	(542		)	(663		)
Commercial:
Commercial and industrial	(124		)	—			—			—			—
Total	(124		)	—			—			—			—
Consumer:
Home equity	(28		)	(32		)	(51		)	(83		)	(29		)
Other	(9		)	(6		)	(9		)	(5		)	(43		)
Total	(37		)	(38		)	(60		)	(88		)	(72		)
Total charge-offs	(262		)	(302		)	(348		)	(630		)	(735		)
Recoveries:
One- to four-family:
Originated	22			144			4			77			56
Bulk purchased	106			196			165			374			58
Total	128			340			169			451			114
Commercial:
Commercial real estate	22			—			—			—			—
Commercial and industrial	2			—			—			—			—
Construction	25			—			—			—			—
Total	49			—			—			—			—
Consumer:
Home equity	80			22			26			25			64
Other	18			5			11			1			2
Total	98			27			37			26			66
Total recoveries	275			367			206			477			180
Net recoveries (charge-offs)	13			65			(142		)	(153		)	(555		)
Provision for credit losses	750			—			—			(750		)	771
Balance at end of period	$	9,226		$	8,463		$	8,398		$	8,540		$	9,443

Ratio of net charge-offs during the period to
average loans outstanding during the period	—		%	—		%	—		%	—		%	0.01		%

Ratio of net (recoveries) charge-offs during the
period to average non-performing assets	(0.12		)	(0.42		)	0.56			0.48			1.87

ACL to non-performing loans at end of period	121.99			77.01			50.58			29.32			36.41

ACL to loans receivable, net at end of period	0.12			0.11			0.12			0.12			0.14

ACL to net charge-offs	N/M⁽¹⁾			N/M⁽¹⁾			58.9x			55.8x			17.0x


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

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



	September 30,
	2019				2018				2017				2016				2015
			% 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	$	1,982	52.2	%	$	2,933	52.8	%	$	3,149	55.1	%	$	3,892	57.6	%	$	4,833	60.6	%
Correspondent purchased	1,203		31.7		1,861		33.4		1,922		34.0		2,102		31.7		2,115		27.9
Bulk purchased	687		3.4		925		3.9		1,000		4.9		1,065		6.0		1,434		7.3
Construction	18		0.5		20		0.4		24		0.4		36		0.6		32		0.4
Total	3,890		87.8		5,739		90.5		6,095		94.4		7,095		95.9		8,414		96.2
Commercial:
Commercial real estate	3,448		7.9		1,801		5.7		1,242		2.6		774		1.6		604		1.6
Commercial and industrial	472		0.8		21		0.8		—		—		—		—		—		—
Construction	1,251		1.7		734		1.1		870		1.2		434		0.6		138		0.2
Total	5,171		10.4		2,556		7.6		2,112		3.8		1,208		2.2		742		1.8
Consumer loans:
Home equity	97		1.6		129		1.8		159		1.7		187		1.8		222		1.9
Other consumer	68		0.2		39		0.1		32		0.1		50		0.1		65		0.1
Total consumer loans	165		1.8		168		1.9		191		1.8		237		1.9		287		2.0
	$	9,226	100.0	%	$	8,463	100.0	%	$	8,398	100.0	%	$	8,540	100.0	%	$	9,443	100.0	%

The majority of the CCB loans acquired were not deemed purchased credit impaired ("PCI") as of the acquisition date ("non-PCI loans"). The net purchase discounts associated with non-PCI loans were compared to the amount of hypothetical ACL estimated for these loans at September 30, 2019 and September 30, 2018. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Allowance for Credit Losses" for additional information regarding management's estimation of the hypothetical ACL for non-PCI loans. As a result of this analysis, management determined the net purchase discounts were sufficient and no ACL was required on those loans at September 30, 2019 or September 30, 2018.

Investment Activities

Federally chartered savings institutions have the authority to invest in various types of liquid assets, including U.S. Treasury obligations; securities of various federal agencies; government-sponsored enterprises ("GSEs"), including callable agency securities; municipal bonds; certain certificates of deposit of insured banks and savings institutions; certain bankers' acceptances; repurchase agreements; and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in investment grade commercial paper, corporate debt securities, and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. As a member of FHLB, the Bank is required to maintain a specified investment in FHLB stock. See "Regulation and Supervision – Federal Home Loan Bank System" and "Office of the Comptroller of the Currency" for a discussion of additional restrictions on our investment activities.

ALCO considers various factors when making investment decisions, including the liquidity, credit, interest rate risk, and tax consequences of the proposed investment options. The composition of the investment portfolio will be affected by various market conditions, including the slope of the yield curve, the level of interest rates, the impact on the Bank's interest rate risk, the trend of net deposit flows, the volume of loan sales, repayments of borrowings, and loan originations and purchases.

The general objectives of the Bank's investment portfolio are to provide liquidity when loan demand is high, to assist in maintaining earnings when loan demand is low, and to maximize earnings while satisfactorily managing liquidity risk, interest rate risk, reinvestment risk, and credit risk. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Cash flow projections are reviewed regularly and updated to ensure that adequate liquidity is maintained.

We have the ability to classify securities as either trading, available-for-sale ("AFS"), or held-to-maturity ("HTM") at the date of purchase. Securities that are purchased and held principally for resale in the near future are classified as trading securities and are reported at fair value with unrealized gains and losses reported in the consolidated statements of income. AFS securities are reported at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) ("AOCI") within stockholders' equity, net of deferred income taxes. HTM securities are reported at cost, adjusted for amortization of premium and accretion of discount. Effective September 30, 2019, the Company adopted Accounting Standards Update ("ASU") 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities and certain components of ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments that are applicable to ASU 2017-12. As part of the adoption, the Company reclassified its entire portfolio of HTM securities, totaling $444.7 million at amortized cost, to AFS securities.

On a quarterly basis, management reviews securities for the presence of an other-than-temporary impairment. The process involves monitoring market events and other items that could impact issuers. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies" for additional information. Management does not believe any other-than-temporary impairments existed at September 30, 2019.

Investment Securities. Our investment securities portfolio consists primarily of debentures issued by GSEs (primarily Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal Home Loan Banks) and non-taxable municipal bonds. At September 30, 2019, our investment securities portfolio totaled $268.4 million. The portfolio consisted entirely of securities classified as AFS. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 4. Securities" and "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Investment Securities" for additional information.

Mortgage-Backed Securities. At September 30, 2019, our MBS portfolio totaled $936.5 million. The portfolio consisted entirely of securities classified as AFS and were primarily issued by GSEs. The principal and interest payments of MBS issued by GSEs are collateralized by the underlying mortgage assets with principal and interest payments guaranteed by the GSEs. The underlying mortgage assets are conforming mortgages that comply with FNMA and FHLMC underwriting guidelines, as applicable, and are therefore not considered subprime. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 4. Securities" and "Management's Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Mortgage-Backed Securities" for additional information.

MBS generally yield less than the loans that underlie such securities because of the servicing fee retained by the servicer and the cost of payment guarantees or credit enhancements retained by the GSEs that reduce credit risk. However, MBS are generally more liquid than individual mortgage loans and may be used to collateralize certain borrowings and public unit deposits of the Bank. In general, MBS issued or guaranteed by FNMA and FHLMC are weighted at no more than 20% for risk-based capital purposes compared to the 50% risk-weighting assigned to most non-securitized one- to four-family loans.

When securities are purchased for a price other than par value, the difference between the price paid and par is accreted to or amortized against the interest earned over the life of the security, depending on whether a discount or premium to par was paid. Movements in interest rates affect prepayment rates which, in turn, affect the average lives of MBS and the speed at which the discount or premium is accreted to or amortized against earnings.

At September 30, 2019, the MBS portfolio included $108.0 million of collateralized mortgage obligations ("CMOs"). CMOs are special types of MBS in which the stream of principal and interest payments on the underlying mortgages or MBS are used to create investment classes with different maturities and, in some cases, different amortization schedules, as well as a residual interest, with each such class possessing different risk characteristics. We do not purchase residual interest bonds.

While MBS issued by FNMA and FHLMC carry a reduced credit risk compared to whole mortgage loans, these securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of the underlying mortgage loans and consequently affect both the prepayment speed and value of the securities. As noted above, the Bank, on some transactions, pays a premium over par value on MBS purchased. Large premiums could cause significant negative yield adjustments due to accelerated prepayments on the underlying mortgages. The balance of net premiums on our portfolio of MBS at September 30, 2019 was $2.3 million.

The following table sets forth the composition of our investment and MBS portfolios as of the dates indicated. At September 30, 2019, our investment securities portfolio did not contain securities of any issuer with an aggregate book value in excess of 10% of our stockholders' equity, excluding those issued by GSEs.



	September 30,
	2019						2018						2017
	Carrying		% of		Fair		Carrying		% of		Fair		Carrying		% of		Fair
	Value		Total		Value		Value		Total		Value		Value		Total		Value
	(Dollars in thousands)
AFS:
MBS	$	936,487	77.7	%	$	936,487	$	445,090	62.3	%	$	445,090	$	141,516	34.0	%	$	141,516
GSE debentures	249,954		20.8		249,954		265,398		37.1		265,398		270,729		65.1		270,729
Trust Preferred Securities	—		—		—		—		—		—		2,051		0.5		2,051
Municipal bonds	18,422		1.5		18,422		4,126		0.6		4,126		1,535		0.4		1,535
	1,204,863		100.0	%	1,204,863		714,614		100.0	%	714,614		415,831		100.0	%	415,831

HTM:
MBS	—		—	%	—		591,900		96.7	%	580,825		800,931		96.8	%	806,096
Municipal bonds	—		—		—		20,418		3.3		20,246		26,807		3.2		26,913
	—		—	%	—		612,318		100.0	%	601,071		827,738		100.0	%	833,009
	$	1,204,863			$	1,204,863	$	1,326,932			$	1,315,685	$	1,243,569			$	1,248,840

The composition and maturities of the investment and MBS portfolio at September 30, 2019 are indicated in the following table by remaining contractual maturity, without consideration of call features or pre-refunding dates, along with associated weighted average yields. Yields on tax-exempt investments are not calculated on a fully taxable equivalent basis.



	1 year or less				More than 1 to 5 years				More than 5 to 10 years				Over 10 years				Total Securities
	Carrying				Carrying				Carrying				Carrying				Carrying
	Value		Yield		Value		Yield		Value		Yield		Value		Yield		Value		Yield
	(Dollars in thousands)
MBS	$	159	4.10	%	$	85,664	1.90	%	$	359,492	2.38	%	$	491,172	3.01	%	$	936,487	2.67	%
GSE debentures	49,873		1.53		200,081		2.30		—		—		—		—		249,954		2.15
Municipal bonds	7,760		1.55		10,662		1.69		—		—		—		—		18,422		1.63
	$	57,792	1.54		$	296,407	2.16		$	359,492	2.38		$	491,172	3.01		$	1,204,863	2.54

Sources of Funds

General. Our primary sources of funds are deposits, FHLB borrowings, repurchase agreements, repayments and maturities of outstanding loans and MBS and other short-term investments, and funds provided by operations.

Deposits. We offer a variety of retail deposit accounts and commercial deposit accounts and services. Our deposit account offerings have a wide range of interest rates and terms. Our deposits consist of savings accounts, money market deposit accounts, interest-bearing and non-interest-bearing checking accounts, and certificates of deposit. We rely primarily upon competitive pricing policies, marketing, and customer service to attract and retain deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates, and competition. The variety of deposit accounts we offer has allowed us to utilize strategic pricing to obtain funds and to respond with flexibility to changes in consumer demand. We seek to manage the pricing of our deposits in keeping with our asset and liability management, liquidity, and profitability objectives. Based on our experience, we believe that our deposits are stable sources of funds. Despite this stability, our ability to attract and maintain these deposits and the rates paid on them has been, and will continue to be, significantly affected by market conditions.

The Board of Directors has authorized the utilization of brokers to obtain deposits as a source of funds. Depending on market conditions, the Bank may use brokered deposits to fund asset growth and gather deposits that may help to manage interest rate risk. No brokered deposits were acquired during fiscal year 2019 and there were no brokered deposits outstanding at September 30, 2019 or 2018.

The Board of Directors also has authorized the utilization of public unit certificates of deposit as a source of funds. In order to qualify to obtain such deposits, the Bank must have a branch in each county in which it collects public unit certificates of deposit and, by law, must pledge securities as collateral for all such balances in excess of the FDIC insurance limits. At September 30, 2019 and 2018, the balance of public unit certificates of deposit was $294.9 million and $407.7 million, respectively.

As of September 30, 2019, the Bank's policy allows for combined brokered and public unit certificates of deposit up to 15% of total deposits. At September 30, 2019, that amount was approximately 5% of total deposits.

Borrowings. We utilize borrowings when we need additional capacity to fund loan demand or when they help us meet our asset and liability management objectives. Historically, our term borrowings have consisted primarily of FHLB advances. FHLB advances may be made pursuant to several different credit programs, each of which has its own interest rate, maturity, repayment, and embedded options, if any. At September 30, 2019, $1.40 billion of our FHLB advances were fixed-rate advances with no embedded options and $640.0 million of our FHLB advances were variable-rate, also with no embedded options. The variable-rate advances are tied to interest rate swaps, effectively converting the adjustable-rate borrowings into fixed-rate liabilities. The Bank supplements FHLB borrowings with repurchase agreements, wherein the Bank enters into agreements with Board-approved counterparties to sell securities under agreements to repurchase them. These agreements are recorded as financing transactions as the Bank maintains effective control over the transferred securities. Repurchase agreements are made at mutually agreed upon terms between counterparties and the Bank. The use of repurchase agreements allows for the diversification of funding sources and the use of securities that were not being leveraged as collateral. The Bank also regularly uses its FHLB line of credit as a source of funding. The Bank's internal policy limits total borrowings to 55% of total assets.

During fiscal year 2019, the Bank continued, at times, to utilize a leverage strategy (the "leverage strategy") to increase earnings. The leverage strategy during the current fiscal year involved borrowing up to $2.10 billion either on the Bank's FHLB line of credit or by entering into short-term FHLB advances, depending on the rates offered by FHLB. The borrowings were repaid prior to each quarter end, or earlier if the strategy was suspended. The proceeds of the borrowings, net of the required FHLB stock holdings, were deposited at the Federal Reserve Bank of Kansas City ("FRB of Kansas City"). Management suspended the strategy during the majority of fiscal year 2019 due to the large negative interest rate spread making the strategy unprofitable. Management continues to monitor the net interest rate spread and overall profitability of the strategy. It is expected that the strategy will be reimplemented if it reaches a position that is profitable.

At September 30, 2019, we had $2.04 billion of FHLB advances, at par, outstanding and $100.0 million outstanding on the Bank's FHLB line of credit. Total FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB. Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40% of Bank Call Report total assets without the pre-approval of FHLB senior management. In July 2019, the president of the FHLB renewed the approval of the increase in the Bank's borrowing limit to 55% of Bank Call Report total assets through July 2020. This approval was also in place throughout fiscal year 2019. When the full leverage strategy is in place, FHLB borrowings may be in excess of 40% of the Bank's Call Report total assets, and may continue to be in excess of 40% as long as the Bank continues its leverage strategy and FHLB senior management continues to approve the Bank's borrowing limit being in excess of 40% of Call Report total assets.

At September 30, 2019, repurchase agreements totaled $100.0 million, or approximately 1% of total assets. The Bank may enter into additional repurchase agreements as management deems appropriate, not to exceed 15% of total assets and subject to the internal policy limit on total borrowings of 55%. The securities underlying the agreements continue to be reported in the Bank's securities portfolio. At September 30, 2019, we had securities with a fair value of $108.3 million pledged as collateral on repurchase agreements.

The following table sets forth certain information relating to the category of borrowings for which the average short-term balance outstanding during the period was at least 30% of stockholders' equity at the end of each period shown. The maximum balance, average balance, and weighted average contractual interest rate during the fiscal years shown reflect borrowings that were scheduled to mature within one year at any month-end during those years.



	2019			2018			2017
	(Dollars in thousands)
Short-Term FHLB Borrowings:
Balance at end of period	$	1,090,000		$	975,000		$	475,000
Maximum balance outstanding at any month-end during the period	1,090,000			2,975,000			2,675,000
Average balance	1,208,456			2,189,483			2,520,217
Weighted average contractual interest rate during the period	2.34		%	1.65		%	1.27		%
Weighted average contractual interest rate at end of period	2.15			2.00			1.91

Subsidiary Activities

At September 30, 2019, the Company had one wholly-owned subsidiary, the Bank. The Bank provides a full range of retail banking services through 54 banking offices serving primarily the metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia and Salina, Kansas and portions of the metropolitan area of greater Kansas City. At September 30, 2019, the Bank had two wholly-owned subsidiaries, Capitol Funds, Inc. and Capital City Investments, Inc. At September 30, 2019, Capitol Funds, Inc. had one wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company ("CFMRC"), which historically served as a reinsurance company for certain PMI companies the Bank uses in its normal course of operations. CFMRC stopped writing new business for the Bank in January 2010. Capital City Investments, Inc. is a real estate and investment holding company. Each wholly-owned subsidiary is reported with the Company on a consolidated basis.

Regulation and Supervision

Set forth below is a description of certain laws and regulations that are applicable to Capitol Federal Financial, Inc. and the Bank. This description is intended as a brief summary of selected features of such laws and regulations and is qualified in its entirety by references to the laws and regulations applicable to the Company and the Bank.

General. The Bank, as a federally chartered savings bank, is subject to regulation and oversight by the OCC extending to all aspects of its operations. This regulation of the Bank is intended for the protection of depositors and other customers and not for the purpose of protecting the Company's stockholders. The Bank is required to maintain minimum levels of regulatory capital and is subject to some limitations on capital distributions to the Company. The Bank also is subject to regulation and examination by the FDIC, which insures the deposits of the Bank to the maximum extent permitted by law.

The Company is a unitary savings and loan holding company within the meaning of the Home Owners' Loan Act ("HOLA"). As such, the Company is registered with the FRB and subject to the FRB regulations, examinations, supervision, and reporting requirements. In addition, the FRB has enforcement authority over the Company. Among other things, this authority permits the FRB to restrict or prohibit activities that are determined to be a serious risk to the Bank.

The OCC and FRB enforcement authority includes, among other things, the ability to assess civil monetary penalties, to issue cease-and-desist or removal orders, and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed. Except under certain circumstances, public disclosure of final enforcement actions by the OCC or the FRB is required by law.

Office of the Comptroller of the Currency. The investment and lending authority of the Bank is prescribed by federal laws and regulations and the Bank is prohibited from engaging in any activities not permitted by such laws and regulations.

As a federally chartered savings bank, the Bank is required to meet a Qualified Thrift Lender ("QTL") test. This test requires the Bank to have at least 65% of its portfolio assets, as defined by statute, in qualified thrift investments at month-end for 9 out of every 12 months on a rolling basis. Under an alternative test, the Bank's business must consist primarily of acquiring the savings of the public and investing in loans, while maintaining 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under either test, the Bank is required to maintain a significant portion of its assets in residential housing related loans and investments. An institution that fails to qualify as a QTL based upon one of these tests is immediately subject to certain restrictions on its operations, including a prohibition against capital distributions, except with the prior approval of both the OCC and the FRB, as necessary to meet the obligations of a company controlling the institution. If the Bank fails the QTL test and does not regain QTL status within one year, or fails the test for a second time, the Company must immediately register as, and become subject to, the restrictions applicable to a bank holding company. The activities authorized for a bank holding company are more limited than are the activities authorized for a savings and loan holding company. Three years after failing the test, an institution must divest all investments and cease all activities not permissible for both a national bank and a savings association. Failure to meet the QTL test is a statutory violation subject to enforcement action. As of September 30, 2019, the Bank met the QTL test.

The Bank is subject to a 35% of total assets limit on non-real estate consumer loans, commercial paper and corporate debt securities, and a 20% limit on commercial non-mortgage loans. At September 30, 2019, the Bank was in compliance with these limits.

The Bank's relationship with its depositors and borrowers is regulated to a great extent by federal laws and regulations, especially in such matters as the ownership of savings accounts and the form and content of mortgage requirements. In addition, the branching authority of the Bank is regulated by the OCC. The Bank is generally authorized to branch nationwide.

The Bank is subject to a statutory lending limit on aggregate loans to one person or a group of persons combined because of certain common interests. The general limit is equal to 15% of our unimpaired capital and surplus, plus an additional 10% for loans fully secured by readily marketable collateral. At September 30, 2019, the Bank's lending limit under this restriction was $176.7 million. The Bank has no loans or loan relationships in excess of its lending limit. Total loan commitments and loans outstanding to the Bank's largest borrowing relationship totaled $98.9 million at September 30, 2019, all of which was current according to its terms.

The Bank is subject to periodic examinations by the OCC. During these examinations, the examiners may require the Bank to increase its ACL, change the classification of loans, and/or recognize additional charge-offs based on their judgments, which can impact our capital and earnings. As a federally chartered savings bank, the Bank is subject to a semi-annual assessment, based upon its total assets, to fund the operations of the OCC.

The OCC has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure, and compensation and other employee benefits. Any institution regulated by the OCC that fails to comply with these standards must submit a compliance plan.

Insurance of Accounts and Regulation by the FDIC. The DIF of the FDIC insures deposit accounts in the Bank up to applicable limits. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") permanently increased the maximum amount of deposit insurance for banks, savings institutions, and credit unions to $250 thousand per separately insured deposit ownership right or category.

Under the FDIC's system for assessing insurance premiums, insured institutions that have not reported assets of $10 billion or more at the end of the quarter for at least four consecutive quarters on their Call Reports are assessed based on CAMELS component ratings and certain financial ratios. For these institutions, total base assessment rates currently range from 1.5 to 16 basis points for institutions with CAMELS composite ratings of 1 or 2, 3 to 30 basis points for those with a CAMELS composite score of 3, and 11 to 30 basis points for those with CAMELS composite scores of 4 or 5, all subject to adjustments. For the fiscal year ended September 30, 2019, the Bank paid $1.1 million in FDIC premiums. Assessment rates are applied to an institution's assessment base, which is its average consolidated total assets minus its average tangible equity during the assessment period.

An institution that has reported total assets at the end of the quarter of $10 billion or more for at least four consecutive quarters is assessed under a complex scorecard method employing many factors, including weighted average CAMELS ratings; a performance score; leverage ratio; ability to withstand asset-related stress; certain measures of concentration, core earnings, core deposits, credit quality, and liquidity; and a loss severity score and loss severity measure. Total base assessment rates for these institutions currently range from 1.5 to 40 basis points, subject to certain adjustments. For all institutions, the base assessment rates are expected to decrease when the reserve ratio increases to specified thresholds of 2% and 2.5%.

The FDIC has authority to increase insurance assessments, and any significant increases would have an adverse effect on the operating expenses and results of operations of the Company. Management cannot predict what assessment rates will be in the future. In a banking industry emergency, the FDIC may also impose a special assessment.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition, or violation that may lead to termination of our deposit insurance.

The Dodd-Frank Act required large institutions to bear the burden of raising the reserve ratio from 1.15% to 1.35%. To implement this mandate, large and highly complex institutions paid an annual surcharge of 4.5 basis points on their assessment base through December 28, 2018 as a result of the DIF ratio reaching 1.36%.

Since established small institutions contributed to the DIF while the reserve ratio was between 1.15% and 1.35%, the FDIC has provided assessment credits to the established small institutions for the portion of their assessments that contributed to the increase. The Bank received $2.8 million in credits to apply to future FDIC assessments. Pursuant to regulatory guidance, once the reserve ratio exceeds 1.38%, credits are allocated to banks with less than $10 billion in assets. These credits will continue to offset the Bank's premium assessments as long as the reserve ratio remains above 1.38% and the Bank still has a remaining credit balance. During fiscal year 2019, the Bank utilized $1.2 million of the credit. As of September 30, 2019, the Bank had a remaining credit of $1.6 million.

FDIC-insured institutions were required to pay additional quarterly assessments known as "FICO assessments" in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. The rate for these assessments was adjusted quarterly and was applied to the same base used for the deposit insurance assessment. These assessments were discontinued during fiscal year 2019 when the bonds matured. For the fiscal year ended September 30, 2019, the Bank paid $55 thousand in FICO assessments.

Transactions with Affiliates. Transactions between the Bank and its affiliates are required to be on terms as favorable to the institution as transactions with non-affiliates, and certain of these transactions are restricted to a percentage of the Bank's capital, and, in the case of loans, require eligible collateral in specified amounts. In addition, the Bank may not lend to any affiliate engaged in activities not permissible for a bank holding company or purchase or invest in the securities of affiliates.

Regulatory Capital Requirements. The Bank and Company are required to maintain specified levels of regulatory capital under regulations of the OCC and FRB, respectively. The current regulatory capital rules, sometimes referred to as the Basel III rules, became effective for the Company and Bank in January 2016, with some rules being transitioned into full effectiveness over two-to-four years and some adjustments being made to selected features of the rules since January 2016.

Under the Basel III rules, the minimum capital ratios are as follows:


•	4.5% common equity Tier 1 ("CET1") to risk-weighted assets.


•	6.0% Tier 1 capital to risk-weighted assets.


•	8.0% total capital to risk-weighted assets.


•	4.0% Tier 1 capital to average consolidated assets as reported on Call Reports, minus certain items deducted from Tier 1 capital (known as the "leverage ratio").

CET1 capital and Tier 1 capital for the Company and the Bank generally consists of common stock plus related surplus and retained earnings, adjusted for goodwill and other intangible assets and AOCI-related amounts. Tier 2 capital for the Company and the Bank includes the balance of ACL; however, the amount of includable ACL in Tier 2 capital may be limited if the amount exceeds 1.25% of risk-weighted assets. At September 30, 2019, the Bank had $9.2 million of ACL, which was less than the 1.25% risk-weighted assets limit; therefore, the entire amount of ACL was includable in Tier 2 and total risk-based capital. Total capital for the Company and the Bank consists of Tier 1 capital plus the amount of includable ACL (Tier 2 capital).

The Basel III rules require the Company and the Bank to maintain a capital conservation buffer above certain minimum capital ratios in order to avoid certain restrictions on capital distributions and other payments including dividends, share repurchases, and certain compensation. The Bank and Company must maintain a balance of capital that exceeds by more than 2.5% each of the minimum risk-based capital ratios in order to satisfy the requirement, so that the required ratios will bear: (1) a CET1 capital ratio of more than 7.0%, (2) a Tier 1 capital ratio of more than 8.5%, and (3) a total capital (Tier 1 plus Tier 2) ratio of more than 10.5%. At September 30, 2019 and 2018, the Bank and Company held capital in excess of the capital conservation buffer requirement.

The capital rules assign a risk weight to every asset and to certain off-balance sheet items, such as binding loan commitments, which are multiplied by credit conversion factors to convert them into asset equivalents. The risk weights for the Bank's and Company's assets and off-balance sheet items generally range from 0% to 150%. At September 30, 2019, the Bank and the Company each had total risk-weighted assets of $4.85 billion.

For the quarter ended September 30, 2019, the Bank reported in its Call Report quarterly average assets of $9.69 billion and the Company reported to the FRB quarterly average assets of $9.70 billion.

A depository institution is considered to be well capitalized if it has (i) a total risk-based capital ratio of 10.0% or more, (ii) a CET1 risk-based capital ratio of 6.5% or more, (iii) a Tier 1 risk-based capital ratio of 8.0% or more, and (iv) a leverage ratio of 5.0% or more, and is not subject to any of certain specified requirements to meet and maintain a specific capital level for any capital measure. An institution that is not well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the rates it can offer on its deposits generally. At September 30, 2019, the Bank was considered well capitalized under OCC regulations. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 14. Regulatory Capital Requirements" and "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources" for additional regulatory capital information.

In September 2019, the regulatory agencies, including the OCC and FRB, adopted a final rule, effective January 1, 2020, creating a community bank leverage ratio ("CBLR") for institutions with total consolidated assets of less than $10 billion and that meet other qualifying criteria. The CBLR provides for a simple measure of capital adequacy for qualifying institutions. Qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules and to have met the well-capitalized ratio requirements. Management is still reviewing the CBLR framework, but expects the Bank and Company will elect to use the CBLR framework.

The OCC has the ability to establish individual minimum capital requirements for a particular institution which vary from the capital levels that would otherwise be required under the capital regulations, based on such factors as concentrations of credit risk, levels of interest rate risk, the risks of non-traditional activities, and other circumstances. The OCC has not imposed any such requirement on the Bank.

The OCC is authorized and, under certain circumstances, required to take certain actions against federal savings banks that are considered not to be adequately capitalized because they fail to meet the minimum ratios under the Basel III rules. Any such institution must submit a capital restoration plan for OCC approval and may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and may not make capital distributions. The OCC may impose further restrictions. The plan must include a guaranty by the institution's holding company limited to the lesser of 5% of the institution's assets when it became undercapitalized, or the amount necessary to restore the institution to adequately capitalized status.

Federal regulations state that any institution that fails to comply with its capital plan or has a CET1 risk-based capital ratio of less than 3.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a total risk-based capital ratio of less than 6.0%, or a leverage ratio of less than 3.0% is considered significantly undercapitalized and must be made subject to one or more additional specified actions and restrictions that may cover all aspects of its operations and may include a forced merger or acquisition of the institution. An institution with tangible equity to total assets of less than 2.0% is critically undercapitalized and becomes subject to further mandatory restrictions on its operations. The OCC generally is authorized to reclassify an institution into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition. The imposition by the OCC of any of these measures on the Bank may have a substantial adverse effect on its operations and profitability. In general, the FDIC must be appointed receiver for a critically undercapitalized institution whose capital is not restored within the time provided.

When the FDIC as receiver liquidates an institution, the claims of depositors and the FDIC as their successor (for deposits covered by FDIC insurance) have priority over other unsecured claims against the institution.

Community Reinvestment and Consumer Protection Laws. In connection with its lending activities, the Bank is subject to a number of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. These include the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 ("SAFE Act"), and the Community Reinvestment Act ("CRA"). In addition, federal banking regulators, pursuant to the Gramm-Leach-Bliley Act, have enacted regulations limiting the ability of banks and other financial institutions to disclose nonpublic consumer information to non-affiliated third parties. The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated parties. With respect to federal consumer protection laws, regulations are generally promulgated by the CFPB, but the OCC examines the Bank for compliance with such laws.

The CRA requires the appropriate federal banking agency, in connection with its examination of an FDIC-insured institution, to assess its record in meeting the credit needs of the communities served by the bank, including low and moderate income neighborhoods. The federal banking regulators take into account the institution's record of performance under the CRA when considering applications for mergers, acquisitions, and branches. Under the CRA, institutions are assigned a rating of outstanding, satisfactory, needs to improve, or substantial non-compliance. The Bank received a satisfactory rating in its most recently completed CRA evaluation.

Bank Secrecy Act /Anti-Money Laundering Laws. The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws, including the USA PATRIOT Act of 2001 and regulations thereunder. These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity and source of deposits and wealth of its customers. Violations of these laws and regulations can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers and acquisitions.

Federal Securities Law. The common stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended. The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Securities Exchange Act of 1934.

The Company stock held by persons who are affiliates of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. For this purpose, affiliates are generally considered to be executive officers, directors and principal stockholders. If the Company meets specified current public information requirements, each affiliate of the Company will be able to sell in the public market, without registration, a limited number of shares in any three-month period.

Federal Reserve System. The FRB requires all depository institutions to maintain reserves at specified levels against their transaction accounts, primarily checking accounts. At September 30, 2019, the Bank was in compliance with these reserve requirements. The Bank is authorized to borrow from the Federal Reserve Bank "discount window." An eligible institution need not exhaust other sources of funds before going to the discount window, nor are there restrictions on the purposes for which the borrower can use primary credit. At September 30, 2019, the Bank had no outstanding borrowings from the discount window.

Federal Home Loan Bank System. The Bank is a member of one of 11 regional Federal Home Loan Banks, each of which serves as a reserve, or central bank, for its members within its assigned region and is funded primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans, called advances, to members and provides access to a line of credit in accordance with policies and procedures established by the Board of Directors of FHLB, which are subject to the oversight of the Federal Housing Finance Agency.

As a member, the Bank is required to purchase and maintain capital stock in FHLB. The minimum required FHLB stock amount is generally 4.5% of the Bank's FHLB advances and outstanding balance against the FHLB line of credit, and 2% of the outstanding principal of loans sold into the Mortgage Partnership Finance program. At September 30, 2019, the Bank had a balance of $98.5 million in FHLB stock, which was in compliance with this requirement. In past years, the Bank has received dividends on its FHLB stock, although no assurance can be given that these dividends will continue. On a quarterly basis, management conducts a review of FHLB to determine whether an other-than-temporary impairment of the FHLB stock is present. At September 30, 2019, management concluded there was no such impairment.

Federal Savings and Loan Holding Company Regulation. The purpose and powers of the Company are to pursue any or all of the lawful objectives of a savings and loan holding company and to exercise any of the powers accorded to a savings and loan holding company.

The HOLA prohibits a savings and loan holding company (directly or indirectly, or through one or more subsidiaries) from acquiring another savings association, or holding company thereof, without prior written approval from the FRB; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings association, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of a depository institution that is not federally insured. In evaluating applications by savings and loan holding companies to acquire savings associations, the FRB must consider the financial and managerial resources and future prospects of the

company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community, competitive factors, and other factors.

The FRB has long set forth in its regulations its "source of strength" policy, which requires holding companies to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress. The Dodd-Frank Act extended to savings and loan holding companies and codified the FRB's "source of strength" doctrine, which had applied to bank holding companies before the FRB regulated savings and loan holding companies in addition to bank holding companies.

2018 Regulatory Reform. In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the "Regulatory Relief Act"), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Regulatory Relief Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory changes for community banks such as the Bank, and their holding companies.

The Regulatory Relief Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single CBLR, as described above. In addition, the Regulatory Relief Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.

Regulations have been adopted which allow a federal savings association with total consolidated assets of $20 billion or less as of December 31, 2017 to operate as a covered savings association, having generally the same rights, privileges, duties, restrictions, limitations and conditions as a national bank.

Amendments to the Volcker Rule exclude from the definition of "banking entity" certain firms that have total consolidated assets equal to $10 billion or less and total trading assets and liabilities equal to five percent or less of total consolidated assets.

Effective November 24, 2019, the minimum asset threshold for federal savings associations covered by the company-run stress testing requirement was raised from $10 billion to $250 billion in total consolidated assets.

Taxation

Federal Taxation

General

The Company and the Bank are subject to federal income taxation in the same general manner as other corporations. The Company files a consolidated federal income tax return. The Company is no longer subject to federal income tax examination for fiscal years prior to 2016.

Method of Accounting

For federal income tax purposes, the Bank currently reports its income and expenses on the accrual method of accounting and uses a fiscal year ending on September 30 for filing its federal income tax return.

State Taxation

The earnings/losses of Capitol Federal Financial, Inc., Capitol Funds, Inc. and Capital City Investments, Inc. are combined for purposes of filing a consolidated Kansas corporate tax return. The Kansas corporate tax rate is 4.0%, plus a surcharge of 3.0% on earnings greater than $50 thousand.

The Bank files a Kansas privilege tax return. For Kansas privilege tax purposes, the minimum tax rate is 4.5% of earnings, which is calculated based on federal taxable income, subject to certain adjustments. The Bank has not received notification from the state of any potential tax liability for any years still subject to audit.

Additionally, the Bank files state tax returns in various other states where it has significant purchased loans and/or foreclosure activities. In these states, the Bank has either established nexus under an economic nexus theory or has exceeded enumerated nexus thresholds based on the amount of interest derived from sources within the state.

Employees

At September 30, 2019, we had a total of 773 employees, including 128 part-time employees. The full-time equivalent of our total employees at September 30, 2019 was 738. Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good.

Information about our Executive Officers

John B. Dicus. Age 58 years. Mr. Dicus is Chairman of the Board of Directors, Chief Executive Officer, and President of the Bank and the Company. He has served as Chairman since January 2009 and Chief Executive Officer since January 2003. He has served as President of the Bank since 1996 and of the Company since its inception in March 1999. Prior to accepting the responsibilities of Chief Executive Officer, he served as Chief Operating Officer of the Bank and the Company. Prior to that, he served as the Executive Vice President of Corporate Services for the Bank for four years. He has been with the Bank in various other positions since 1985.

Kent G. Townsend. Age 58 years. Mr. Townsend serves as Executive Vice President and Chief Financial Officer of the Bank, its subsidiary, and the Company. Mr. Townsend also serves as Treasurer for the Company, Capitol Funds, Inc. and CFMRC. Mr. Townsend was promoted to Executive Vice President, Chief Financial Officer and Treasurer on September 1, 2005. Prior to that, he served as Senior Vice President, a position he held since April 1999, and Controller of the Company, a position he held since March 1999. He has served in similar positions with the Bank since September 1995. He served as the Financial Planning and Analysis Officer with the Bank for three years and has held other financial-related positions since joining the Bank in 1984.

Rick C. Jackson. Age 54 years. Mr. Jackson serves as Executive Vice President, Chief Lending Officer and Community Development Director of the Bank and the Company. He also serves as the President of Capitol Funds, Inc., a subsidiary of the Bank, and President of CFMRC. He has been with the Bank since 1993 and has held the position of Community Development Director since that time. He has held the position of Chief Lending Officer since February 2010.

Natalie G. Haag. Age 60 years. Ms. Haag serves as Executive Vice President and General Counsel of the Bank and the Company. Prior to joining the Bank and the Company in August 2012, Ms. Haag was 2nd Vice President, Director of Governmental Affairs and Assistant General Counsel for Security Benefit Corporation and Security Benefit Life Insurance Company in Topeka, Kansas. Security Benefit provides retirement products and services, including annuities and mutual funds. Ms. Haag was employed by Security Benefit since 2003. The Security Benefit companies are not parents, subsidiaries or affiliates of the Bank or the Company.

Anthony S. Barry. Age 55 years. Mr. Barry serves as Executive Vice President, Chief Corporate Services Officer of the Bank and the Company. Mr. Barry has served in the banking industry as a board member of a bank holding company in Arizona from 1998 to 2008. Prior to joining the Bank and the Company in October 2018, Mr. Barry was in the private practice of law for 29 years practicing in real estate and general litigation with an emphasis in construction law.

Daniel L. Lehman. Age 54 years. Mr. Lehman serves as Executive Vice President, Chief Retail Operations Officer of the Bank and Company. Prior to accepting those responsibilities in October 2016, he served as First Vice President and Accounting Director, a position held since May 2003 and Controller, a position held since 2005.

Robert D. Kobbeman. Age 64 years. Mr. Kobbeman joined the Bank and the Company at the time of the acquisition of CCB and serves as Executive Vice President, Chief Commercial Lending Officer. Prior to joining the Bank and the Company, Mr. Kobbeman was the President and Chief Executive Officer and a director of Capital City Bank since 2002. From 1998 to 2002, Mr. Kobbeman served as Executive Vice President, Chief Lending Officer of Capital City Bank.

Item 1A. Risk Factors

There are risks inherent in the Bank's and Company's business. The following is a summary of material risks and uncertainties relating to the operations of the Bank and the Company. Adverse experiences with these could have a material impact on the Company's financial condition and results of operations. Some of these risks and uncertainties are interrelated, and the occurrence of one or more of them may exacerbate the effect of others. These material risks and uncertainties are not necessarily presented in order of significance. In addition to the risks set forth below and the other risks described in this Annual Report, there may be risks and uncertainties that are not currently known to us or that we currently deem to be immaterial that could materially and adversely affect our business, financial condition or operating results.

Changes in interest rates could have an adverse impact on our results of operations and financial condition.

Our results of operations are primarily dependent on net interest income, which is the difference between the interest earned on loans, securities, cash at the Federal Reserve Bank and dividends received on FHLB stock, and the interest paid on deposits and borrowings. Changes in interest rates could have an adverse impact on our results of operations and financial condition because the majority of our interest-earning assets are long-term, fixed-rate loans, while the majority of our interest-bearing liabilities are shorter term, and therefore subject to a greater degree of interest rate fluctuations. This type of risk is known as interest rate risk and is affected by prevailing economic and competitive conditions, including monetary policies of the FRB and fiscal policies of the United States federal government.

The impact of changes in interest rates is generally observed on the income statement. The magnitude of the impact will be determined by the difference between the amount of interest-earning assets and interest-bearing liabilities, both of which either reprice or mature within a given period of time. This difference provides an indication of the extent to which our net interest rate spread will be impacted by changes in interest rates. In addition, changes in interest rates will impact the expected level of repricing of the Bank's mortgage-related assets and callable debt securities. Generally, as interest rates decline, the amount of interest-earning assets expected to reprice will increase as borrowers have an economic incentive to reduce the cost of their mortgage or debt, which would negatively impact the Bank's interest income. Conversely, as interest rates rise, the amount of interest-earning assets expected to reprice will decline as the economic incentive to refinance the mortgage or debt is diminished. As this occurs, the amount of interest-earning assets repricing could diminish to the point where interest-bearing liabilities reprice to a higher interest rate at a faster pace than interest-earning assets, thus negatively impacting the Bank's net interest income.

Changes in interest rates can also have an adverse effect on our financial condition as AFS securities are reported at estimated fair value. We increase or decrease our stockholders' equity, specifically AOCI (loss), by the amount of change in the estimated fair value of our AFS securities, net of deferred taxes. Increases in interest rates generally decrease the fair value of AFS securities. Decreases in the fair value of AFS securities would, therefore, adversely impact stockholders' equity.

Changes in interest rates, as they relate to customers, can also have an adverse impact on our financial condition and results of operations. In times of rising interest rates, default risk may increase among borrowers with adjustable-rate loans as the rates on their loans adjust upward and their payments increase. Fluctuations in interest rates also affect customer demand for deposit products. Local competition could affect our ability to attract deposits, or could result in us paying more than competitors for deposits.

In addition to general changes in interest rates, changes that affect the shape of the yield curve could negatively impact the Bank. The Bank's interest-bearing liabilities are generally priced based on short-term interest rates while the majority of the Bank's interest-earning assets are priced based on long-term interest rates. Income for the Bank is primarily driven by the spread between these rates. As a result, a steeper yield curve, meaning long-term interest rates are significantly higher than short-term interest rates, would provide the Bank with a better opportunity to increase net interest income. When the yield curve is flat, meaning long-term interest rates and short-term interest rates are essentially the same, or when the yield curve is inverted, meaning long-term interest rates are lower than short-term interest rates, the yield between interest-earning assets and interest-bearing liabilities that reprice is compressed or diminished and would likely negatively impact the Bank's net interest income. See "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for additional information about the Bank's interest rate risk management.

The expected discontinuation of LIBOR, and the identification and use of alternative replacement reference rates, may adversely affect our results of operations and subject the Company to litigation risk.

LIBOR is used extensively in the United States as a reference rate for various financial contracts, including adjustable-rate loans, asset-backed securities, and interest rate swaps. In July 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. The announcement means the continuation of LIBOR cannot be guaranteed after 2021.

In the United States, the Alternative Reference Rate Committee ("ARRC"), a group of diverse private-market participants assembled by the Federal Reserve Board and the Federal Reserve Bank of New York, was tasked with identifying alternative reference interest rates to replace LIBOR. The Secured Overnight Finance Rate ("SOFR") has emerged as the ARRC's preferred alternative rate for LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities in the repurchase agreement market. At this time, it is not possible to predict how markets will respond to SOFR or other alternative reference rates as the transition away from LIBOR is anticipated to be gradual over the coming years.

The Company has formed a LIBOR steering committee composed of individuals from lending, compliance/risk, treasury and legal. The LIBOR steering committee has been charged with overseeing the coordination of the Company's enterprise-wide LIBOR transition program and evaluating and mitigating the risks associated with the transition from LIBOR. The LIBOR transition program includes a comprehensive review by management of the financial products, agreements, contracts and business processes that may use LIBOR as a reference rate. As financial products, agreements, contracts and business processes that use LIBOR are identified, the LIBOR steering committee works with management to develop a strategy to transition away from LIBOR. During the strategy development process, management and the LIBOR steering committee considers the financial, customer/counterparty, regulatory and legal impacts of all proposed strategies.

As of September 30, 2019, the Company has identified $780.7 million of adjustable-rate one- to four-family loans for which the repricing index was tied to LIBOR and the loan maturity date is after December 31, 2021. Our one- to four-family loan agreements generally allow the Bank to choose a new alternative reference rate based upon comparable information if the current index is no longer available. During the June 30, 2019 quarter, the Bank discontinued the use of LIBOR for the origination of adjustable-rate one- to four-family loans and no longer purchases correspondent one- to four-family loans that use LIBOR. The Bank began using the one-year CMT index for newly originated and correspondent purchased one- to four-family adjustable-rate loans. At September 30, 2019, none of the Bank's consumer or commercial loans use a repricing index tied to LIBOR. The Bank has interest rate swaps maturing after December 31, 2021 with a notional amount of $465.0 million at September 30, 2019 that are tied to LIBOR. The Bank's swap agreements are governed by the International Swap Dealers Association ("ISDA"). ISDA is in the process of developing fallback language for swap agreements and is expected to establish a protocol to allow counterparties to modify legacy trades to include the new fallback language.

The market transition away from LIBOR to an alternative reference rate is complex. If LIBOR rates are no longer available, and we are required to implement replacement reference rates for the calculation of interest rates under our loan agreements with borrowers, we may incur significant expense in effecting the transition and we may be subject to disputes or litigation with our borrowers over the appropriateness or comparability to LIBOR of the replacement reference rates. The replacement reference rates could also result in a reduction in our interest income. We may also receive inquiries and other actions from regulators in respect to the Company's preparation and readiness for the replacement of LIBOR with alternative reference rates.

The occurrence of any information system failure or interruption, breach of security or cyber-attack, at the Company, at its third-party service providers or counterparties may have an adverse effect on our business, reputation, financial condition or results of operations.

Information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger, our deposits and our loans. In the normal course of our business, we collect, process, retain and transmit (by email and other electronic means) sensitive and confidential information regarding our customers, employees and others. We also outsource certain aspects of our data processing, data processing operations, remote network monitoring, engineering and managed security services to third-party service providers. In addition to confidential information regarding our customers, employees and others, we, and in some cases a third party, compile, process, transmit and store proprietary, non-public information concerning our business, operations, plans and strategies.

Information security risks for financial institutions continue to increase in part because of evolving technologies, the use of the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. Cyber criminals use a variety of tactics, such as ransomware, denial of service, and theft of sensitive business and customer information to extort payment or other concessions from victims. In some cases, these attacks have caused significant impacts on other businesses' access to data and ability to provide services. We are not able to anticipate or implement effective preventive measures against all incidents of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources.

We use a variety of physical, procedural and technological safeguards to prevent or limit the impact of system failures, interruptions and security breaches and to protect confidential information from mishandling, misuse or loss, including detection and response mechanisms designed to contain and mitigate security incidents. However, there can be no assurance that such events will not occur or that they will be promptly detected and adequately addressed if they do, and early detection of security breaches may be thwarted by sophisticated attacks and malware designed to avoid detection. If there is a failure in or breach of our information systems, or those of a third-party service provider, the confidential and other information processed and stored in, and transmitted through, such information systems could be jeopardized, or could otherwise cause interruptions or malfunctions in our operations or the operations of our customers, employees, or others.

Our business and operations depend on the secure processing, storage and transmission of confidential and other information in our information systems and those of our third-party service providers. Although we devote significant resources and management focus to ensuring the integrity of our information systems through information security measures, risk management practices, relationships with threat intelligence providers and business continuity planning, our facilities, computer systems, software and networks, and those of our third-party service providers, may be vulnerable to external or internal security breaches, acts of vandalism, unauthorized access, misuse, computer viruses or other malicious code and cyber attacks that could have a security impact. In addition, breaches of security may occur through intentional or unintentional acts by those having authorized or unauthorized access to our confidential or other information or the confidential or other information of our customers, employees or others. While we regularly conduct security and risk assessments on our systems and those of our third-party service providers, there can be no assurance that their information security protocols are sufficient to withstand a cyber-attack or other security breach. The Company has not experienced any material breaches.

The occurrence of any of the foregoing could subject us to litigation or regulatory scrutiny, cause us significant reputational damage or erode confidence in the security of our information systems, products and services, cause us to lose customers or have greater difficulty in attracting new customers, have an adverse effect on the value of our common stock or subject us to financial losses that may not be covered by insurance, any of which could have a material adverse effect on our business, financial condition or results of operations. As information security risks and cyber threats continue to evolve, we may be required to expend significant additional resources to further enhance or modify our information security measures and/or to investigate and remediate any information security vulnerabilities or other exposures arising from operational and security risks.

Furthermore, there continues to be heightened legislative and regulatory focus on privacy, data protection and information security. New or revised laws and regulations may significantly impact our current and planned privacy, data protection and information security-related practices, the collection, use, sharing, retention and safeguarding of consumer and employee information, and current or planned business activities. Compliance with current or future privacy, data protection and information security laws could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our business, financial condition or results of operations.

Our customers are also the target of cyber-attacks and identity theft. There continues to be instances involving financial services and consumer-based companies reporting the unauthorized disclosure of client or customer information or the destruction or theft of corporate data. Large scale identity theft could result in customers' accounts being compromised and fraudulent activities being performed in their name. We have implemented certain safeguards against these types of activities but they may not fully protect us from fraudulent financial losses. The occurrence of a breach of security involving our customers' information, regardless of its origin, could damage our reputation and result in a loss of customers and business

and subject us to additional regulatory scrutiny, and could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

An economic downturn, especially one affecting our geographic market area and certain regions of the country where we have correspondent one- to four-family loans, could adversely impact our business and financial results.

Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans on residential properties; therefore, we are particularly exposed to downturns in regional housing markets and, to a lesser extent, the U.S. housing market, along with changes in the levels of unemployment or underemployment. We monitor the current status and trends of local and national employment levels and trends and current conditions in the real estate and housing markets in our local market areas and certain areas where we have correspondent one- to four-family loans. Adverse conditions in our local economies and in certain areas where we have correspondent one- to four-family loans, such as inflation, unemployment, recession, natural disasters, or other factors beyond our control, could impact the ability of our borrowers to repay their loans. Any one or a combination of these events may have an adverse impact on borrowers' ability to repay their loans, which could result in increased delinquencies, non-performing assets, loan losses, and future loan loss provisions. Decreases in local real estate values could adversely affect the value of the property used as collateral for our loans, which could cause us to realize a loss in the event of a foreclosure.

The increase in commercial loans in our loan portfolio exposes us to increased lending and credit risks, which could adversely impact our financial condition and results of operations.

A growing portion of our loan portfolio consists of commercial loans. In addition, as a result of the acquisition of CCB in August 2018, it is anticipated that commercial lending will continue to be a growing portion of our business. These loan types tend to be larger than and in different geographic regions from most of our existing loan portfolio and are generally considered to have different and greater risks than one- to four-family residential real estate loans and may involve multiple loans to groups of related borrowers. A growing commercial loan portfolio also subjects us to greater regulatory scrutiny. Furthermore, these loan types can expose us to a greater risk of delinquencies, non-performing assets, loan losses, and future loan loss provisions than one- to four-family residential real estate loans because repayment of such loans often depends on the successful operation of a business or of the underlying property. Repayment of such loans may be affected by factors outside the borrower's control, such as adverse conditions in the real estate market, the economy, environmental factors, natural disasters, and/or changes in government regulation. Also, there are risks inherent in commercial real estate construction lending as the value of the project is uncertain prior to the completion of construction and subsequent lease-up. A sudden downturn in the economy or other unforeseen events could result in stalled projects or collateral shortfalls, thus exposing us to increased credit risk.

Commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. The borrowers' cash flow may prove to be unpredictable, and collateral securing these loans may fluctuate in value. Most often, this collateral consists of accounts receivable, inventory and equipment. Significant adverse changes in a borrower's industries and businesses could cause rapid declines in values of, and collectability associated with, those business assets, which could result in inadequate collateral coverage for our commercial and industrial loans and expose us to future losses. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its clients. Inventory and equipment may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. If the cash flow from business operations is reduced, the borrower's ability to repay the loan may be impaired. An increase in valuation allowances and charge-offs related to our commercial and industrial loan portfolio could have an adverse effect on our business, financial condition, results of operations and future prospects.

If our ACL is not sufficient to cover actual loan losses, it could adversely impact our financial results.

We make several assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the ACL, management analyzes and considers several internal and external data elements, such as trend and composition of delinquent and non-performing loans, trends in foreclosed property transactions, charge-off activity, current status and trends of local and national employment levels, trends and current conditions of the housing markets, loan growth and concentration and industry and peer charge-off and ACL information. If actual results differ significantly from our assumptions, our ACL may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our ACL. Bank regulators also periodically review our loan portfolio, the ACL, and our assumptions underlying the

determinations we have made regarding the ACL, and as a result may require us to increase our ACL and/or recognize additional loan charge-offs, both resulting in an increase in the provision for credit losses.

The Financial Accounting Standards Board ("FASB") adopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which will be effective for the Company on October 1, 2020. This ASU replaces the incurred loss impairment methodology in current accounting principles generally accepted in the United States of America ("GAAP") with a new impairment model commonly referred to as the Current Expected Credit Loss ("CECL") methodology. CECL methodology will require the Bank to measure, at each reporting date, the expected credit losses of financial instruments not measured at fair value, such as loans and loan commitments, over their contractual lives. The change in loss impairment methodology could increase our ACL and provision for credit losses. Additionally, the change is likely to increase the types and amount of data the Bank will be required to collect and consider in determining an appropriate level for its ACL. We are currently evaluating the impact this ASU will have on our financial position and results of operations.

We are heavily reliant on technology, and a failure to effectively implement technology initiatives or anticipate future technology needs or demands could adversely affect our business or performance.

Like most financial institutions, the Bank significantly depends on technology to deliver its products and other services and to otherwise conduct business. To remain technologically competitive and operationally efficient, the Bank invests in system upgrades, new technological solutions, and other technology initiatives. Many of these solutions and initiatives have a significant duration, are tied to critical information systems, and require substantial resources. Although the Bank takes steps to mitigate the risks and uncertainties associated with these solutions and initiatives, there is no guarantee that they will be implemented on time, within budget, or without negative operational or customer impact. The Bank also may not succeed in anticipating its future technology needs, the technology demands of its customers, or the competitive landscape for technology. If the Bank were to falter in any of these areas, it could have an adverse effect on our business, financial condition or results of operations.

We may be required to provide remedial consideration to borrowers whose loans we purchase from correspondent and nationwide lenders if it is discovered that the originating company did not properly comply with lending regulations during the origination process.

We purchase whole one- to four-family loans from correspondent and nationwide lenders. While loans purchased on a loan-by-loan basis from correspondent lenders are underwritten by the Bank's underwriters and loans purchased in bulk packages from correspondent and nationwide lenders are evaluated on a certain set of criteria before being purchased, we are still subject to some risks associated with the loan origination process itself. By law, loan originators are required to comply with lending regulations at all times during the origination process. Even though the Bank can contractually pursue the originating company, certain compliance-related risks associated with the origination process itself may shift from the originating company to the Bank once the Bank purchases the loan. Should it be discovered, at any point, that an instance of noncompliance occurred by the originating company during the origination process, the Bank may still be held responsible and required to remedy the issue for the loans it purchased from the originator. Remedial actions can include refunding interest paid by the borrower and adjusting the contractual interest rate on the loan to the current market rate if advantageous to the borrower. The Bank no longer purchases loans in bulk from nationwide lenders due primarily to these risks.

Strong competition may limit growth and profitability.

While we are one of the largest mortgage loan originators in the state of Kansas, we compete in the same market areas as local, regional, and national banks, credit unions, mortgage brokerage firms, investment banking firms, investment brokerage firms, and savings institutions. We also compete with online investment and mortgage brokerages and online banks that are not confined to any specific market area. Many of these competitors operate on a national or regional level, are a conglomerate of various financial services providers housed under one corporation, or otherwise have substantially greater financial or technological resources than the Bank. We compete primarily on the basis of the interest rates offered to depositors, the terms of loans offered to borrowers, and the benefits afforded to customers as a local institution and portfolio lender. Our pricing strategy for loan and deposit products includes setting interest rates based on secondary market prices and local competitor pricing for our local markets, and secondary market prices and national competitor pricing for our correspondent lending markets. Should we face competitive pressure to increase deposit rates or decrease loan rates, our net interest income could be adversely affected. Additionally, our competitors may offer products and services that we do not or cannot provide, as certain deposit and loan products fall outside of our accepted level of risk. Our profitability depends upon our ability to compete in our local market areas.

We operate in a highly regulated environment which limits the manner and scope of our business activities and we may be adversely affected by new and/or changes in laws and regulations or interpretation of existing laws and regulations.

We are subject to extensive regulation, supervision, and examination by the OCC, FRB, and the FDIC. These regulatory authorities exercise broad discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank's operations, reclassify assets, determine the adequacy of a bank's ACL, and determine the level of deposit insurance premiums assessed. The Dodd-Frank Act created the CFPB with broad powers to supervise and enforce consumer protection laws, including a wide range of consumer protection laws that apply to all banks and savings institutions, like the authority to prohibit "unfair, deceptive or abusive" acts and practices. The CFPB also has examination and enforcement authority over all banks with regulatory assets exceeding $10 billion at four consecutive quarter-ends. The Bank has not exceeded $10 billion in regulatory assets at four consecutive quarter-ends, but it may at some point in the future. Smaller banks, like the Bank, will continue to be examined for compliance with the consumer laws and regulations of the CFPB by their primary bank regulators (the OCC, in the case of the Bank). The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.

Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation, interpretation or application, could have a material adverse impact on our operations. Moreover, bank regulatory agencies have been active in responding to concerns and trends identified in examinations, and have issued formal enforcement orders requiring capital ratios in excess of regulatory requirements and/or assessing monetary penalties. Bank regulatory agencies, such as the OCC and the FDIC, govern the activities in which we may engage, primarily for the protection of depositors, and not for the protection or benefit of investors. The CFPB enforces consumer protection laws and regulations for the benefit of the consumer and not the protection or benefit of investors. In addition, new laws and regulations may continue to increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and securities, the products we offer, the fees we can charge and our ongoing operations, costs, and profitability.

The Company is also directly subject to the requirements of entities that set and interpret the accounting standards such as the FASB, and indirectly subject to the actions and interpretations of the Public Company Accounting Oversight Board, which establishes auditing and related professional practice standards for registered public accounting firms and inspects registered firms to assess their compliance with certain laws, rules, and professional standards in public company audits. These regulations, along with the currently existing tax, accounting, securities, and monetary laws, regulations, rules, standards, policies and interpretations, control the methods by which financial institutions and their holding companies conduct business, engage in strategic and tax planning, implement strategic initiatives, and govern financial reporting.

The Company's failure to comply with laws, regulations or policies could result in civil or criminal sanctions and money penalties by state and federal agencies, and/or reputation damage, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Part I, Item 1. Business - Regulation and Supervision" for more information about the regulations to which the Company is subject.

The Company's ability to pay dividends is subject to the ability of the Bank to make capital distributions to the Company.

The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company, and also on the availability of cash at the holding company level in the event earnings are not sufficient to pay dividends. Under certain circumstances, capital distributions from the Bank to the Company may be subject to regulatory approvals. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Limitations on Dividends and Other Capital Distributions" for additional information.

Our risk-management and compliance programs and functions may not be effective in mitigating risk and loss.

We maintain an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the risks that we face. These risks include: interest-rate, credit, liquidity, operations, reputation, compliance and litigation. We also maintain a compliance program to identify, measure, assess, and report on our adherence to applicable laws, policies and procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk management or compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in our business. If conditions or circumstances arise that expose flaws or gaps in our risk management or compliance programs, or if our controls do not function as designed, the performance and value of our business could be adversely affected.

The Company may not attract and retain skilled employees.

The Company's success depends, in large part, on its ability to attract and retain key people. Competition for the best people can be intense, and the Company spends considerable time and resources attracting and hiring qualified people for its operations. The unexpected loss of the services of one or more of the Company's key personnel could have a material adverse impact on the Company's business because of their skills, knowledge of the Company's market, and years of industry experience, as well as the difficulty of promptly finding qualified replacement personnel.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

At September 30, 2019, we had 44 traditional branch offices and 10 in-store branch offices. The Bank owns the office building and related land in which its home office and executive offices are located, and 33 of its other branch offices. The remaining 20 branches are either leased or partially owned.

For additional information regarding our lease obligations, see "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 6. Premises and Equipment, net."

Management believes that our current facilities are adequate to meet our present and immediately foreseeable needs. However, we will continue to monitor customer growth and expand our branching network, if necessary, to serve our customers' needs.

Item 3. Legal Proceedings

The Company and the Bank are involved as plaintiff or defendant in various legal actions arising in the normal course of business. In our opinion, after consultation with legal counsel, we believe it unlikely that such pending legal actions will have a material adverse effect on our financial condition, results of operations or liquidity.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Stock Listing

Capitol Federal Financial, Inc. common stock is traded on the Global Select tier of the NASDAQ Stock Market under the symbol "CFFN". At November 21, 2019, there were approximately 8,812 Capitol Federal Financial, Inc. stockholders of record.

Share Repurchases

On October 28, 2015, the Company announced a stock repurchase plan for up to $70.0 million of common stock. The plan does not have an expiration date. Since the Company completed its second-step conversion in December 2010, $368.0 million worth of shares have been repurchased.

The following table summarizes our share repurchase activity during the three months ended September 30, 2019 and additional information regarding our share repurchase program.



				Total Number of	Approximate Dollar
	Total			Shares Purchased as	Value of Shares
	Number of	Average		Part of Publicly	that May Yet Be
	Shares	Price Paid		Announced Plans	Purchased Under the
	Purchased	per Share		or Programs	Plans or Programs
July 1, 2019 through
July 31, 2019	—	$	—	—	$	70,000,000
August 1, 2019 through
August 31, 2019	—	—		—	70,000,000
September 1, 2019 through
September 30, 2019	—	—		—	70,000,000
Total	—	—		—	70,000,000

Stockholders and General Inquiries

Copies of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 are available to stockholders at no charge in the Investor Relations section of our website, www.capfed.com.

Stockholder Return Performance Presentation

The information presented below assumes $100 invested on September 30, 2014 in the Company's common stock and in each of the indices, and assumes the reinvestment of all dividends. Historical stock price performance is not necessarily indicative of future stock price performance.



	Period Ending
Index	9/30/2014	9/30/2015	9/30/2016	9/30/2017	9/30/2018	9/30/2019
Capitol Federal Financial, Inc.	100.00	109.75	135.82	150.42	139.26	162.21
NASDAQ Composite Index	100.00	104.00	121.08	149.75	187.44	188.43
SNL U.S. Bank & Thrift Index	100.00	102.09	105.56	148.46	159.59	157.62

Source: S&P Global Market Intelligence

Restrictions on the Payments of Dividends

The Company's ability to pay dividends is dependent, in part, upon its ability to obtain capital distributions from the Bank. The dividend policy of the Company is subject to the discretion of the Board of Directors and will depend upon a number of factors, including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company level. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Limitations on Dividends and Other Capital Distributions" for additional information regarding the Company's ability to pay dividends.

Item 6. Selected Financial Data

The summary information presented below under "Selected Balance Sheet Data" and "Selected Operations Data" for, and as of the end of, each of the years ended September 30 is derived from our audited consolidated financial statements. The following information is only a summary and should be read in conjunction with our consolidated financial statements.



	September 30,
	2019		2018		2017		2016		2015
	(Dollars in thousands)
Selected Balance Sheet Data:
Total assets	$	9,340,018	$	9,449,547	$	9,192,916	$	9,267,247	$	9,844,161
Loans receivable, net	7,416,747		7,514,485		7,195,071		6,958,024		6,625,027
Securities:
AFS	1,204,863		714,614		415,831		527,301		758,171
HTM	—		612,318		827,738		1,100,874		1,271,122
FHLB stock	98,456		99,726		100,954		109,970		150,543
Deposits	5,581,867		5,603,354		5,309,868		5,164,018		4,832,520
Borrowings	2,239,989		2,285,033		2,373,808		2,572,389		3,470,521
Stockholders' equity	1,336,326		1,391,622		1,368,313		1,392,964		1,416,226



	For the Year Ended September 30,
	2019		2018		2017		2016			2015
	(Dollars and counts in thousands, except per share amounts)
Selected Operations Data:
Total interest and dividend income	$	329,954	$	321,892	$	313,186	$	301,113		$	297,362
Total interest expense	123,564		123,119		117,804		108,931			107,594
Net interest and dividend income	206,390		198,773		195,382		192,182			189,768
Provision for credit losses	750		—		—		(750		)	771
Net interest and dividend income after
provision for credit losses	205,640		198,773		195,382		192,932			188,997
Deposit service fees	12,740		15,636		15,053		14,835			14,897
Other non-interest income	9,218		6,399		7,143		8,477			6,243
Total non-interest income	21,958		22,035		22,196		23,312			21,140
Salaries and employee benefits	53,145		46,563		43,437		42,378			43,309
Other non-interest expense	53,799		50,339		46,221		51,927			51,060
Total non-interest expense	106,944		96,902		89,658		94,305			94,369
Income before income tax expense	120,654		123,906		127,920		121,939			115,768
Income tax expense	26,411		24,979		43,783		38,445			37,675
Net income	$	94,243	$	98,927	$	84,137	$	83,494		$	78,093

Basic earnings per share	$	0.68	$	0.73	$	0.63	$	0.63		$	0.58
Average basic shares outstanding	137,677		134,698		134,082		133,045			135,384
Diluted earnings per share	$	0.68	$	0.73	$	0.63	$	0.63		$	0.58
Average diluted shares outstanding	137,735		134,759		134,244		133,176			135,409



	2019			2018			2017			2016			2015
Performance Ratios:
Return on average assets⁽¹⁾	0.99		%	0.94		%	0.75		%	0.74		%	0.70		%
Return on average equity⁽¹⁾	6.94			7.25			6.09			5.95			5.32
Dividends paid per share	$	0.98		$	0.88		$	0.88		$	0.84		$	0.84
Dividend payout ratio	143.17		%	119.60		%	140.20		%	133.86		%	146.19		%
Operating expense ratio	1.12			0.92			0.80			0.84			0.84
Efficiency ratio⁽¹⁾	46.83			43.89			41.21			43.76			44.74
Ratio of average interest-earning assets
to average interest-bearing liabilities	1.14x			1.13x			1.12x			1.13x			1.14x
Net interest margin⁽¹⁾	2.26		%	1.95		%	1.79		%	1.75		%	1.73		%

Interest rate spread information:
Average during period⁽¹⁾	2.07			1.80			1.66			1.63			1.59
End of period	2.04			2.18			2.04			1.92			1.85

Asset Quality Ratios:
Non-performing assets to total assets	0.10			0.14			0.20			0.35			0.31
Non-performing loans to total loans	0.10			0.15			0.23			0.42			0.39
ACL to non-performing loans	121.99			77.01			50.58			29.32			36.41
ACL to loans receivable, net	0.12			0.11			0.12			0.12			0.14

Capital Ratios:
Equity to total assets at end of period	14.3			14.7			14.9			15.0			14.4
Average equity to average assets	14.3			13.0			12.4			12.4			13.1
Company Tier 1 leverage ratio	13.8			14.9			12.3			12.3			12.6
Bank Tier 1 leverage ratio	12.1			13.0			10.8			10.9			11.3

Other Data:
Number of traditional offices	44			48			37			37			37
Number of in-store offices	10			10			10			10			10

(1)

The table below provides a reconciliation between certain performance ratios presented in accordance with GAAP and those same performance ratios excluding the effects of the leverage strategy, which are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide the performance ratios without the leverage strategy because of its unique nature. The leverage strategy reduces some of our performance ratios, even though it increases our net income, due to the amount of earnings associated with the transaction in comparison to the size of the transaction. The leverage strategy was in place for a shorter period of time during the current fiscal year than in prior fiscal years, so the leverage strategy impact for fiscal year 2019 shown in the table below is minimal. Management can discontinue the leverage strategy at any point in time.



	For the Year Ended September 30,
	2019						2018						2017
	Actual		Leverage		Non-		Actual		Leverage		Non-		Actual		Leverage		Non-
	(GAAP)		Strategy		GAAP		(GAAP)		Strategy		GAAP		(GAAP)		Strategy		GAAP
Return on average assets	0.99	%	(0.02	)%	1.01	%	0.94	%	(0.13	)%	1.07	%	0.75	%	(0.14	)%	0.89	%
Return on average equity	6.94		—		6.94		7.25		0.13		7.12		6.09		0.21		5.88
Efficiency ratio	46.83		—		46.83		43.89		(0.30	)	44.19		41.21		(0.63	)	41.84
Net interest margin	2.26		(0.04	)	2.30		1.95		(0.29	)	2.24		1.79		(0.36	)	2.15
Average interest rate spread	2.07		(0.03	)	2.10		1.80		(0.26	)	2.06		1.66		(0.32	)	1.98



	For the Year Ended September 30,
	2016						2015
	Actual		Leverage		Non-		Actual		Leverage		Non-
	(GAAP)		Strategy		GAAP		(GAAP)		Strategy		GAAP
Return on average assets	0.74	%	(0.14	)%	0.88	%	0.70	%	(0.13	)%	0.83	%
Return on average equity	5.95		0.17		5.78		5.32		0.19		5.13
Efficiency ratio	43.76		(0.42	)	44.18		44.74		(0.61	)	45.35
Net interest margin	1.75		(0.35	)	2.10		1.73		(0.34	)	2.07
Average interest rate spread	1.63		(0.30	)	1.93		1.59		(0.28	)	1.87

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended to assist in understanding the financial condition, results of operations, liquidity, and capital resources of the Company. The Bank comprises almost all of the consolidated assets and liabilities of the Company and the Company is dependent primarily upon the performance of the Bank for the results of its operations. Because of this relationship, references to management actions, strategies and results of actions apply to both the Bank and the Company.

Executive Summary

The following summary should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section in its entirety.

The Company provides a full range of banking services through the Bank, which is a wholly-owned subsidiary of the Company, headquartered in Topeka Kansas. The Bank has 44 traditional and 10 in-store banking offices serving primarily the metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia and Salina, Kansas and portions of the Kansas City metropolitan area. 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. The Company's results of operations are primarily dependent on net interest income, which is the difference between the interest earned on loans, securities, and cash, and the interest paid on deposits and borrowings.

During April 2019, the Bank completed the integration of the operations of Capital City Bank into the Bank's operations. The Company completed its acquisition of Capital City Bank and its parent company, CCB, on August 31, 2018. The acquisition of Capital City Bank, a commercial bank with $450 million in assets, allows us to advance our commercial banking strategy through enhanced commercial deposit and lending products while managing to stay under $10 billion in assets. The acquisition also allows the Bank to compete for commercial banking business through a wide variety of commercial deposit services and expanded commercial lending products, as well as trust and brokerage services.

The Company recognized net income of $94.2 million, or $0.68 per share, for fiscal year 2019 compared to net income of $98.9 million, or $0.73 per share, for fiscal year 2018. The decrease in net income was due primarily to a $10.0 million increase in non-interest expense during the current year due mainly to an increase in salaries and employee benefits and information technology and related expenses, partially offset by a $7.6 million increase in net interest income due primarily to higher yielding loans added in the acquisition of CCB. Additionally, income tax expense was $1.4 million higher in the current fiscal year due primarily to income tax adjustments required in the prior fiscal year with the enactment of The Tax Cuts and Jobs Act (the "Tax Act") in December 2017.

At times, the Bank has utilized a leverage strategy to increase earnings. The leverage strategy has involved borrowing up to $2.10 billion either on the Bank's FHLB line of credit or by entering into short-term FHLB advances, depending on the rates offered by FHLB. The borrowings were repaid prior to quarter end, or earlier if the strategy was suspended. The proceeds from the borrowings, net of the required FHLB stock holdings which yielded 7.4% from dividends during the current fiscal year, were deposited at the FRB of Kansas City. Net income attributable to the leverage strategy is largely derived from the dividends received on FHLB stock holdings, plus the net interest rate spread between the yield on the cash at the FRB of Kansas City and the rate paid on the related FHLB borrowings, less applicable federal insurance premiums and estimated taxes. Net income attributable to the leverage strategy was $36 thousand during the current fiscal year compared to $1.7 million during the prior fiscal year. The decrease was due mainly to the strategy being suspended for the majority of the current fiscal year due to the large negative interest rate spread, making the strategy unprofitable. Management continues to monitor the net interest rate spread and overall profitability of the strategy. It is expected that the strategy will be reimplemented if it reaches a position that is profitable.

The net interest margin increased 31 basis points, from 1.95% for the prior fiscal year to 2.26% for the current fiscal year. When the leverage strategy is in place, it reduces the net interest margin due to the limited amount of earnings from the transaction in comparison to the size of the transaction. Excluding the effects of the leverage strategy, the net interest margin would have increased six basis points, from 2.24% for the prior fiscal year to 2.30% for the current fiscal year. The increase in the net interest margin excluding the effects of the leverage strategy was due mainly to the addition of higher yielding commercial loans in the CCB acquisition, partially offset by an increase in the cost of deposits.

To the extent market rates of interest remain at current levels or go lower during fiscal year 2020, the Company expects a decrease in our net interest margin, compared to fiscal year 2019, due primarily to lower yields on our loans and securities. If realized, the decrease in the yields on our loans and securities is expected to be from loans originated at lower rates, adjustable-rate loans repricing lower and increased prepayment speeds on our correspondent loans and MBS portfolios, which would accelerate the amortization of the premiums we have paid to acquire these assets. The rates on our certificate of deposit portfolio and borrowings may also decrease if market rates decrease, but will likely do so at a slower pace than interest-earning assets because the majority of those liabilities have stated maturities.

Management continues to manage the size and mix of the loan portfolio, over the long-term, by utilizing cash flows from the one- to four-family loan portfolio to fund commercial loan growth. Given the current level of total assets and the interest rate environment, it is unlikely that the loan portfolio will increase in the next year, but it is expected that cash flows from the one- to four-family loan portfolio will continue to be used to fund commercial loan growth. Over the past few years, cash flows from the securities portfolio have been used primarily to purchase loans and in part to pay down FHLB advances. By moving cash from lower yielding assets to higher yielding assets and repaying higher costing liabilities, we have been able to maintain our net interest margin. Additionally, the Bank began reducing its balance of public unit certificates of deposit late in the third quarter of the current fiscal year in order to reduce its use of expensive wholesale funds and release securities pledged as collateral, which assists with liquidity levels. The balance of public unit certificates of deposit was $294.9 million at September 30, 2019. Management intends to maintain the balance of public unit certificates of deposit at approximately the same level for the time being. Management continues to evaluate liquidity levels, as measured by the ratio of securities and cash to total assets, and may consider reducing its target ratio below the current target level of 15%.

Total assets were $9.34 billion at September 30, 2019 compared to $9.45 billion at September 30, 2018. The $109.5 million, or 1.2% decrease was largely in the securities portfolio and the loan portfolio, partially offset by an increase in operating cash. The one- to four-family loan portfolio decreased $285.6 million, partially offset by a $198.3 million increase in the commercial loan portfolio as cash flows from the one- to four-family loan portfolio were used to fund commercial loan growth. During the current fiscal year, the Bank originated and refinanced $660.8 million of one- to four-family and consumer loans with a weighted average rate of 4.18% and purchased $166.4 million of one- to four-family loans from correspondent lenders with a weighted average rate of 4.17%. The Bank also originated $164.1 million of commercial loans with a weighted average rate of 5.10% and entered into commercial real estate loan participations totaling $96.0 million at a weighted average rate of 5.27%. The commercial loan portfolio was $767.9 million at September 30, 2019, compared to $569.6 million at September 30, 2018, an increase of $198.3, or 35%. At September 30, 2019, the commercial loan portfolio was composed of 76% commercial real estate, 16% commercial construction, and 8% commercial and industrial. Total commercial real estate and commercial construction potential exposure, including undisbursed amounts and outstanding commitments totaling $214.3 million, was $921.1 million at September 30, 2019. Total commercial and industrial potential exposure, including undisbursed amounts and outstanding commitments of $16.8 million, was $77.9 million at September 30, 2019.

Total deposits were $5.58 billion at September 30, 2019 compared to $5.60 billion at September 30, 2018. The retail/business certificate of deposit portfolio increased $163.4 million, or 6.5%, during the current fiscal year, funded primarily by cash flows from new certificate of deposit accounts, money market accounts, and checking accounts. The public unit certificate of deposit portfolio decreased $112.8 million during the current fiscal year, which was intentional, as discussed above. Excluding the impact of the decrease in the balance of public unit certificates of deposit, total deposits would have increased $91.3 million, or 1.8%, during the current fiscal year.

Stockholders' equity was $1.34 billion at September 30, 2019 compared to $1.39 billion at September 30, 2018. The $55.3 million decrease was due primarily to the payment of $134.9 million in cash dividends, partially offset by net income of $94.2 million during the current fiscal year.

Critical Accounting Policies

Our most critical accounting policies are the methodologies used to determine the ACL and fair value measurements. These policies are important to the presentation of our financial condition and results of operations, involve a high degree of complexity, and require management to make difficult and subjective judgments that may require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could affect reported results materially. These critical accounting policies and their application are reviewed at least annually by our audit committee. The following is a description of our critical accounting policies and an explanation of the methods and assumptions underlying their application.

Allowance for Credit Losses. The Company maintains an ACL to absorb inherent losses in the loan portfolio based upon ongoing quarterly assessments of the loan portfolio. The ACL is maintained through provisions for credit losses which are either charged or credited to income. The methodology for determining the ACL is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in economic conditions that could result in changes to the amount of the recorded ACL. Additionally, bank regulators review the ACL and could have a differing view from management regarding the ACL balance, which could result in an increase in the ACL and/or the recognition of additional charge-offs. Although management believes that the Bank has established and maintained the ACL at appropriate levels, additions may be necessary if economic and other conditions worsen substantially from the current operating environment, and/or if bank regulators have a differing view from management regarding the ACL balance.

Our lending emphasis on the origination and purchase of one- to four-family loans and, to a lesser extent, consumer loans secured by one- to four-family residential properties, has resulted in a loan concentration in one- to four-family residential mortgage loans. We believe the primary risks inherent in our one- to four-family and consumer loan portfolios are a decline in economic conditions, elevated levels of unemployment or underemployment, and declines in residential real estate values. Adverse changes in any one or a combination of these events may negatively affect borrowers' ability to repay their loans, resulting in increased delinquencies, non-performing assets, loan losses, and future loan loss provisions. Although the commercial loan portfolio is subject to the same risk of declines in economic conditions, the primary risk characteristics inherent in this portfolio include the ability of the borrower to sustain sufficient cash flows from leases and business operations, the ability to control operational or business expenses to satisfy their contractual debt payments, and the ability to utilize personal or business resources to pay their contractual debt payments if the cash flows are not sufficient. Additionally, if the Bank were to repossess the secured collateral of a commercial real estate loan, the pool of potential buyers is more limited than that for a residential property. Therefore, the Bank could hold the property for an extended period of time, or potentially be forced to sell at a discounted price, resulting in additional losses. Our commercial and industrial loans are primarily secured by accounts receivable, inventory and equipment, which may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business.

Each quarter, we prepare a formula analysis model which segregates our loan portfolio into categories based on certain risk characteristics such as loan type (one- to four-family, commercial, etc.), interest payments (fixed-rate and adjustable-rate), loan source (originated, correspondent purchased, or bulk purchased), LTV ratios, borrower's credit score and payment status (i.e. current or number of days delinquent). Consumer loans, such as second mortgages and home equity lines of credit, with the same underlying collateral as a one- to four-family loan are combined with the one- to four-family loan in the formula analysis model to calculate a combined LTV ratio.

Historical loss factors are applied to each loan category in the formula analysis model. Additionally, qualitative loss factors that management believes impact the collectability of the loan portfolio as of the evaluation date are applied to each loan category. Qualitative loss factors increase as loans are classified or become delinquent. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies" for additional information related to the loss factors utilized in the formula analysis model.

The loss factors applied in the formula analysis model are reviewed quarterly by management to assess whether the factors adequately cover probable and estimable losses inherent in the loan portfolio. Our ACL methodology permits modifications to the formula analysis model in the event that, in management's judgment, significant factors which affect the collectability of the portfolio or any category of the loan portfolio, as of the evaluation date, have changed from the current formula analysis model. Management's evaluation of the qualitative factors with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with a specific problem loan or portfolio segment.

Non-PCI loans that have not become impaired subsequent to the acquisition date are included in the formula analysis model. For these loans, the Company estimates a hypothetical amount of ACL. The Company uses the acquired bank's past loss history adjusted for qualitative factors to establish the hypothetical amount of ACL. This amount is compared with the remaining net purchase discount for the non-PCI loans to test for credit quality deterioration and the possible need for an additional loan loss provision. To the extent the remaining net purchase discount of the pool is greater than the hypothetical ACL, no additional ACL is necessary. If the remaining net purchase discount of the pool is less than the hypothetical ACL, the difference results in an increase to the ACL recorded through a provision for credit losses.

Management utilizes the formula analysis model, along with analyzing and considering several other relevant internal and external data elements, when evaluating the adequacy of the ACL. Such data elements include the trend and composition of delinquent and non-performing loans, trends in foreclosed property transactions and charge-off activity, the current status and trends of local and national employment levels, trends and current conditions in the housing markets, loan growth and concentrations, industry and peer charge-off and ACL information, and certain ACL ratios such as ACL to loans receivable, net and annualized historical losses. Since our loan portfolio is primarily concentrated in one- to four-family real estate, management monitors residential real estate market value trends in the Bank's local market areas and geographic sections of the U.S. by reference to various industry and market reports, economic releases and surveys, and management's general and specific knowledge of the real estate markets in which we lend, in order to determine what impact, if any, such trends may have on the level of ACL. Reviewing these data elements assists management in evaluating the overall credit quality of the loan portfolio and the reasonableness of the ACL on an ongoing basis, and whether changes need to be made to our ACL methodology. In addition, the adequacy of the Company's ACL is reviewed during bank regulatory examinations. We consider any comments from our regulators when assessing the appropriateness of our ACL. We seek to apply ACL methodology in a consistent manner; however, the methodology can be modified in response to changing conditions.

Fair Value Measurements. The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with Accounting Standards Codification ("ASC") 820 and ASC 825. The Company groups its financial instruments at fair value in three levels based on the markets in which the instruments are traded and the reliability of the assumptions used to determine fair value, with Level 1 (quoted prices for identical assets in an active market) being considered the most reliable, and Level 3 having the most unobservable inputs and therefore being considered the least reliable. The Company bases its fair values on the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

The Company's AFS securities are measured at fair value on a recurring basis. Changes in the fair value of AFS securities are recorded, net of tax, as AOCI in stockholders' equity. The Company primarily uses prices obtained from third-party pricing services to determine the fair value of its AFS securities. Various modeling techniques are used to determine pricing for the Company's securities, including option pricing, discounted cash flow models, and similar techniques. The inputs to these models may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. All AFS securities are classified as Level 2.

The Company's interest rate swaps are measured at fair value on a recurring basis. The Company uses a discounted cash flow analysis using observable market-based inputs to determine the fair value of its interest rate swaps. Changes in the fair value of the interest rate swaps are recorded, net of tax, as AOCI in stockholders' equity. The Company did not have any other financial instruments that were measured at fair value on a recurring basis at September 30, 2019.

Recent Accounting Pronouncements

For a discussion of Recent Accounting Pronouncements, see "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Financial Statements – Note 1. Summary of Significant Accounting Policies."

Management Strategy

We are a community-oriented financial institution dedicated to serving the needs of customers in our market areas. Our commitment is to provide qualified borrowers the broadest possible access to home ownership through our mortgage lending programs and to offer a complete set of personal and commercial banking products and services to our customers. We strive to enhance stockholder value while maintaining a strong capital position. To achieve these goals, we focus on the following strategies:

•

Lending. We are one of the leading originators of one- to four-family loans in the state of Kansas. We originate these loans primarily for our own portfolio, and we service the loans we originate. We also purchase one- to four-family loans from correspondent lenders. We offer both fixed- and adjustable-rate products with various terms to maturity and pricing options. We maintain strong relationships with local real estate agents to attract mortgage loan business. With the acquisition of CCB in August 2018, we began offering more commercial lending options to our customers. We rely on our marketing efforts and customer service reputation to attract mortgage business from walk-in customers, customers that apply online, and existing customers.

•

Deposit Services. We offer a wide array of deposit products and services. These products include checking, savings, money market, certificates of deposit, and retirement accounts. With the acquisition of CCB, we began offering commercial deposit services. Our deposit services are provided through a branch network of 54 locations, including traditional branches and retail in-store locations, our call center which operates on extended hours, mobile banking, telephone banking, and online banking and bill payment services.

•

Cost Control. We generally are very effective at controlling our costs of operations. By using technology, we are able to centralize our loan servicing and deposit support functions for efficient processing. We serve a broad range of customers through relatively few branch locations. Our average deposit base per traditional branch at September 30, 2019 was approximately $112.7 million. This large average deposit base per branch helps to control costs. Our one- to four-family lending strategy and our effective management of credit risk allows us to service a large portfolio of loans at efficient levels because it costs less to service a portfolio of performing loans. We recognize it is more expensive to offer a full suite of commercial products and services, but we will continue our efforts to control those costs.


•	Asset Quality. We utilize underwriting standards for our lending products that are designed to limit our exposure to credit risk. We require complete documentation for both originated and purchased loans, and make credit decisions based on our assessment of the borrower's ability to repay the loan in accordance with its terms.

•

Capital Position. Our policy has always been to protect the safety and soundness of the Bank through credit and operational risk management, balance sheet strength, and sound operations. The end result of these activities has been a capital ratio in excess of the well-capitalized standards set by the OCC. We believe that maintaining a strong capital position safeguards the long-term interests of the Bank, the Company, and our stockholders.

•

Stockholder Value. We strive to provide stockholder value while maintaining a strong capital position. One way that we continue to provide returns to stockholders is through our dividend payments. Total dividends declared and paid during fiscal year 2019 were $134.9 million, including a $0.25 per share, or $34.4 million, True Blue® Capitol Dividend paid in June 2019. The Company's cash dividend payout policy is reviewed quarterly by management and the Board of Directors, and the ability to pay dividends under the policy depends upon a number of factors, including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company level. For fiscal year 2020, it is the intent of the Board of Directors and management to continue with the payout of 100% of the Company's earnings to its stockholders through regular quarterly dividends and a true-up dividend.

•

Interest Rate Risk Management. Changes in interest rates are our primary market risk as our balance sheet is almost entirely comprised of interest-earning assets and interest-bearing liabilities. As such, fluctuations in interest rates have a significant impact not only upon our net income but also upon the cash flows related to those assets and liabilities and the market value of our assets and liabilities. In order to maintain what we believe to be acceptable levels of net interest income in varying interest rate environments, we actively manage our interest rate risk and assume a moderate amount of interest rate risk consistent with board policies.

Financial Condition

Assets. Total assets were $9.34 billion at September 30, 2019 compared to $9.45 billion at September 30, 2018. The $109.5 million decrease was largely in the securities portfolio and the loan portfolio, partially offset by an increase in operating cash. The one- to four-family loan portfolio decreased $285.6 million, partially offset by a $198.3 million increase in the commercial loan portfolio as cash flows from the one- to four-family loan portfolio were used to fund commercial loan growth. The increase in operating cash primarily occurred later in the current fiscal year due to the interest rate environment as the interest rate earned on excess reserves was comparable to the available yield on securities, along with an increase in projected funding of commercial loan commitments.

Loans Receivable. The following table presents the balance and weighted average rate of our loan portfolio as of the dates indicated. Approximately 64% of the one- to four-family loan portfolio at September 30, 2019 had a balance of $484 thousand or less at the time of origination. The weighted average rate of the loan portfolio increased seven basis points due primarily to the origination and purchase of loans at higher market rates during the current fiscal year, as well as adjustable-rate loans repricing to higher market rates.



	September 30, 2019					September 30, 2018
	Amount			Rate		Amount			Rate
	(Dollars in thousands)
One- to four-family:
Originated	$	3,873,851		3.74	%	$	3,965,692		3.74	%
Correspondent purchased	2,349,877			3.64		2,505,987			3.59
Bulk purchased	252,347			2.94		293,607			2.60
Construction	36,758			4.00		33,149			4.03
Total	6,512,833			3.68		6,798,435			3.64
Commercial:
Commercial real estate	583,617			4.48		426,243			4.33
Commercial and industrial	61,094			5.14		62,869			5.00
Construction	123,159			4.81		80,498			4.59
Total	767,870			4.58		569,610			4.44
Consumer loans:
Home equity	120,587			6.15		129,588			5.97
Other	11,183			4.57		10,012			4.59
Total	131,770			6.02		139,600			5.87
Total loans receivable	7,412,473			3.81		7,507,645			3.74

Less:
ACL	9,226					8,463
Discounts/unearned loan fees	31,058					33,933
Premiums/deferred costs	(44,558		)			(49,236		)
Total loans receivable, net	$	7,416,747				$	7,514,485

Loan Activity - The following table summarizes activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, discounts/unearned loan fees, and premiums/deferred costs. Loans that were paid-off as a result of refinances and loans that were sold are included in repayments. Loan endorsements are not included in the activity in the following table because a new loan is not generated at the time of the endorsement. The endorsed balance and rate are included in the ending loan portfolio balance and rate. During fiscal year 2019, the Bank endorsed $121.5 million of one- to four-family loans, reducing the average rate on those loans by 69 basis points. Commercial loan renewals are not included in the activity in the following table unless new funds are disbursed at the time of renewal.



	For the Three Months Ended
	September 30, 2019					June 30, 2019					March 31, 2019					December 31, 2018
	Amount			Rate		Amount			Rate		Amount			Rate		Amount			Rate
	(Dollars in thousands)
Beginning balance	$	7,501,741		3.83	%	$	7,564,076		3.82	%	$	7,518,887		3.78	%	$	7,507,645		3.74	%
Originated and refinanced:
Fixed	188,753			3.60		121,871			4.09		78,678			4.58		116,032			4.59
Adjustable	59,550			4.37		63,341			4.87		123,006			4.80		73,711			4.98
Purchased and participations:
Fixed	49,161			4.12		29,447			4.65		35,387			5.46		72,140			4.60
Adjustable	12,305			3.55		10,018			3.85		11,331			4.01		42,651			4.88
Change in undisbursed loan funds	12,293					34,742					30,500					(25,315		)
Repayments	(410,624		)			(321,439		)			(233,625		)			(267,469		)
Principal (charge-offs) recoveries, net	(110		)			(33		)			61					95
Other	(596		)			(282		)			(149		)			(603		)
Ending balance	$	7,412,473		3.81		$	7,501,741		3.83		$	7,564,076		3.82		$	7,518,887		3.78



	For the Year Ended September 30,
	2019					2018
	Amount			Rate		Amount			Rate
	(Dollars in thousands)
Beginning balance	$	7,507,645		3.74	%	$	7,182,751		3.61	%
Originations and refinances:
Fixed	505,334			4.10		447,890			4.07
Adjustable	319,608			4.77		185,495			4.40
Purchases and participations:
Fixed	186,135			4.64		364,508			3.98
Adjustable	76,305			4.40		162,873			3.73
Loans added in CCB acquisition, net	—			—		299,659			4.77
Change in undisbursed loan funds	52,220					(31,004		)
Repayments	(1,233,157		)			(1,102,624		)
Principal recoveries, net	13					65
Other	(1,630		)			(1,968		)
Ending balance	$	7,412,473		3.81		$	7,507,645		3.74

The following table presents loan origination, refinance, and purchase activity for the periods indicated, excluding endorsement activity and $299.7 million of loans at a rate of 4.77% purchased in connection with the acquisition of CCB during fiscal year 2018, along with associated weighted average rates and percent of total. Commercial loan renewals are not included in the activity in the following table except to the extent new funds are disbursed at the time of renewal. Loan originations, purchases, and refinances are reported together. Starting in the June 30, 2019 quarter, the Bank discontinued the use of LIBOR for adjustable-rate one- to four-family loan originations and no longer purchases correspondent one- to four-family loans that use LIBOR, since LIBOR is expected to be discontinued in 2021. Currently, new adjustable-rate one- to four-family loan originations and purchases are tied to the one-year CMT index, which, to date, does not appear to have had any impact on our ability and opportunities to originate and purchase adjustable-rate one- to four-family loans.



	For the Year Ended
	September 30, 2019						September 30, 2018
	Amount		Rate		% of Total		Amount		Rate		% of Total
	(Dollars in thousands)
Fixed-rate:
One- to four-family:⁽¹⁾
<= 15 years	$	106,966	3.56	%	9.8	%	$	160,099	3.51	%	13.8	%
> 15 years	420,243		4.14		38.6		530,606		4.12		45.7
One- to four-family construction	51,663		4.13		4.8		43,604		4.11		3.8
Commercial:
Commercial real estate	27,886		6.21		2.6		10,644		4.48		0.9
Commercial and industrial	15,291		5.24		1.4		1,579		5.24		0.1
Commercial construction	59,108		4.85		5.4		60,417		4.30		5.2
Home equity	5,411		6.20		0.5		4,758		6.18		0.4
Other	4,901		5.29		0.5		691		7.54		0.1
Total fixed-rate	691,469		4.24		63.6		812,398		4.03		70.0

Adjustable-rate:
One- to four-family:⁽²⁾
<= 36 months	9,786		3.57		0.9		8,233		3.39		0.7
> 36 months	139,511		3.70		12.8		173,775		3.49		15.0
One- to four-family construction	19,364		3.86		1.8		18,791		3.58		1.6
Commercial:
Commercial real estate	100,142		4.84		9.2		570		5.03		—
Commercial and industrial	27,496		5.63		2.5		325		5.81		—
Commercial construction	30,251		5.39		2.8		69,543		4.16		6.0
Home equity	66,893		6.33		6.2		74,042		5.66		6.4
Other	2,470		3.51		0.2		3,089		3.24		0.3
Total adjustable-rate	395,913		4.70		36.4		348,368		4.09		30.0

Total originated, refinanced and purchased	$	1,087,382	4.41		100.0	%	$	1,160,766	4.05		100.0	%

Purchased and participation loans included above:
Fixed-rate:
Correspondent - one- to four-family	$	118,758	4.31				$	298,299	3.92
Participations - commercial	67,377		5.24				66,209		4.28
Total fixed-rate purchased/participations	186,135		4.64				364,508		3.98

Adjustable-rate:
Correspondent - one- to four-family	47,655		3.83				93,330		3.41
Participations - commercial	28,650		5.35				69,543		4.16
Total adjustable-rate purchased/participations	76,305		4.40				162,873		3.73
Total purchased/participation loans	$	262,440	4.57				$	527,381	3.91


(1)	The fixed-rate one- to four-family loans less than or equal to 15 years have an original maturity at origination of less than or equal to 15 years, while fixed-rate one- to four-family loans greater than 15 years have an original maturity at origination of greater than 15 years.


(2)	The adjustable-rate one- to four-family loans less than or equal to 36 months have a term to first reset of less than or equal to 36 months at origination and adjustable-rate one- to four-family loans greater than 36 months have a term to first reset of greater than 36 months at origination.

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 LTV ratio, and average balance per loan as of the dates presented. Credit scores are updated at least semiannually, with the latest update in September 2019, from a nationally recognized consumer rating agency. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. In most cases, the most recent appraisal was obtained at the time of origination.



	September 30, 2019
			% of		Credit			Average
	Amount		Total		Score	LTV		Balance
	(Dollars in thousands)
Originated	$	3,873,851	59.8	%	768	62	%	$	140
Correspondent purchased	2,349,877		36.3		765	65		371
Bulk purchased	252,347		3.9		762	61		304
	$	6,476,075	100.0	%	767	63		186

	September 30, 2018
			% of		Credit			Average
	Amount		Total		Score	LTV		Balance
	(Dollars in thousands)
Originated	$	3,965,692	58.6	%	767	62	%	$	138
Correspondent purchased	2,505,987		37.1		764	67		378
Bulk purchased	293,607		4.3		758	62		304
	$	6,765,286	100.0	%	765	64		186

The following table presents originated, refinanced, and correspondent purchased activity in our one- to four-family loan portfolio, excluding endorsement activity, along with associated weighted average LTVs and weighted average credit scores for the periods indicated. Of the loans originated during the current year, $85.1 million were refinanced from other lenders. Of the loans originated and refinanced during the current year, 78% had loan values of $484 thousand or less. Of the correspondent loans purchased during the current year, 33% had loan values of $484 thousand or less.



	For the Year Ended
	September 30, 2019					September 30, 2018
					Credit					Credit
	Amount		LTV		Score	Amount		LTV		Score
	(Dollars in thousands)
Originated	$	494,739	78	%	760	$	473,140	77	%	762
Refinanced by Bank customers	86,381		68		752	70,339		67		750
Correspondent purchased	166,413		73		762	391,629		74		766
	$	747,533	76		760	$	935,108	75		763

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 year ended September 30, 2019.



State	Amount		% of Total		Rate
	(Dollars in thousands)
Kansas	$	507,341	67.9	%	3.92	%
Missouri	128,751		17.2		3.95
Texas	64,098		8.6		4.12
Other states	47,343		6.3		4.23
	$	747,533	100.0	%	3.96

One- to Four-Family Loan Commitments - The following table summarizes our one- to four-family loan origination and refinance commitments and one- to four-family correspondent loan purchase commitments as of September 30, 2019, along with associated weighted average rates. Loan commitments generally have fixed expiration dates or other termination clauses and may require the payment of a rate lock fee. It is expected that some of the loan commitments will expire unfunded, so the amounts reflected in the table below are not necessarily indicative of future cash needs.



	Fixed-Rate
	15 years			More than			Adjustable-			Total
	or less			15 years			Rate			Amount		Rate
	(Dollars in thousands)
Originate/refinance	$	16,826		$	44,828		$	14,679		$	76,333	3.40	%
Correspondent	5,862			60,136			9,621			75,619		3.65
	$	22,688		$	104,964		$	24,300		$	151,952	3.53

Rate	2.95		%	3.73		%	3.18		%

Commercial Loans - The commercial loan portfolio totaled $767.9 million at September 30, 2019, compared to $569.6 million at September 30, 2018. At September 30, 2019, the commercial loan portfolio was composed of 76% commercial real estate, 16% commercial construction, and 8% commercial and industrial. During the current fiscal year, the Bank originated $164.1 million of commercial loans and entered into commercial real estate loan participations totaling $96.0 million, which included $82.0 million of commercial real estate construction loans.

The following table presents the Bank's commercial real estate and commercial construction loans and loan commitments by industry classification, as defined by the North American Industry Classification System, as of September 30, 2019. Included in the gross loan amounts in the table, which does not include outstanding commitments, are fixed-rate loans totaling $487.0 million at a weighted average rate of 4.33% and adjustable-rate loans totaling $342.8 million at a weighted average rate of 4.99%. The weighted average rate of fixed-rate loans is lower than that of adjustable-rate loans due primarily to the majority of the fixed-rate loans in the portfolio at September 30, 2019 having shorter terms to maturity.



	Unpaid			Undisbursed			Gross Loan			Outstanding						% of
	Principal			Amount			Amount			Commitments			Total			Total
	(Dollars in thousands)
Real estate rental and leasing	$	262,652		$	44,558		$	307,210		$	3,123		$	310,333		33.7	%
Health care and social assistance	219,715			38,981			258,696			28,426			287,122			31.2
Accommodation and food services	116,313			29,984			146,297			48,100			194,397			21.1
Arts, entertainment, and recreation	35,009			—			35,009			—			35,009			3.8
Retail trade	27,628			2,794			30,422			—			30,422			3.3
Construction	14,446			1,962			16,408			404			16,812			1.8
Other	31,013			4,774			35,787			11,225			47,012			5.1
	$	706,776		$	123,053		$	829,829		$	91,278		$	921,107		100.0	%

Weighted average rate	4.53		%	4.99		%	4.60		%	5.28		%	4.67		%

The following table summarizes the Bank's commercial real estate and commercial construction loans and loan commitments by state as of September 30, 2019.



	Unpaid		Undisbursed		Gross Loan		Outstanding				% of
	Principal		Amount		Amount		Commitments		Total		Total
	(Dollars in thousands)
Kansas	$	284,113	$	14,211	$	298,324	$	14,547	$	312,871	34.0	%
Missouri	208,888		53,337		262,225		30,931		293,156		31.8
Texas	118,911		46,721		165,632		40,000		205,632		22.3
Nebraska	29,752		4,010		33,762		—		33,762		3.7
Kentucky	22,285		3,274		25,559		—		25,559		2.8
California	6,107		—		6,107		5,800		11,907		1.3
Other	36,720		1,500		38,220		—		38,220		4.1
	$	706,776	$	123,053	$	829,829	$	91,278	$	921,107	100.0	%

The following table presents the Bank's commercial loan portfolio and outstanding loan commitments, categorized by gross loan amount (unpaid principal plus undisbursed amounts) or outstanding loan commitment amount, as of September 30, 2019.



	Count		Amount
	(Dollars in thousands)
Greater than $30 million	$	5	$	190,672
>$15 to $30 million	11		271,702
>$10 to $15 million	5		60,614
>$5 to $10 million	15		94,058
$1 to $5 million	88		194,876
Less than $1 million	1,181		187,054
	$	1,305	$	998,976

Securities. Securities decreased $139.4 million from $1.33 billion at September 30, 2018 to $1.19 billion at September 30, 2019. The decrease primarily occurred later in the current fiscal year and was due mainly to not reinvesting some of the cash flows from the securities portfolio due to the interest rate environment. The following table presents the distribution of our securities portfolio, at amortized cost, at the dates indicated. Overall, fixed-rate securities comprised 75% of our securities portfolio at September 30, 2019. The weighted average life ("WAL") is the estimated remaining maturity (in years) after three-month historical prepayment speeds and projected call option assumptions have been applied. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.



	September 30, 2019					September 30, 2018
	Amount		Yield		WAL	Amount		Yield		WAL
	(Dollars in thousands)
Fixed-rate securities:
MBS	$	625,840	2.46	%	2.9	$	732,095	2.43	%	3.0
GSE debentures	249,828		2.15		0.7	268,525		2.09		2.3
Municipal bonds	18,371		1.63		1.0	24,574		1.56		1.8
Total fixed-rate securities	894,039		2.35		2.3	1,025,194		2.32		2.8

Adjustable-rate securities:
MBS	297,416		3.10		4.7	305,688		2.89		4.5
Total securities portfolio	$	1,191,455	2.54		2.9	$	1,330,882	2.45		3.2

The following table presents the carrying value of MBS in our portfolio by issuer at the dates presented.



	At September 30,
	2019		2018
	(Dollars in thousands)
FNMA	$	656,799	$	680,717
FHLMC	208,745		265,441
Government National Mortgage Association	70,943		90,832
	$	936,487	$	1,036,990

Mortgage-Backed Securities - The balance of MBS, which primarily consists of securities of U.S. GSEs, decreased $100.5 million to $936.5 million at September 30, 2019 from $1.04 billion at September 30, 2018. The following table summarizes the activity in our portfolio of MBS for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yields for the ending balances are as of the last day of the period presented and are generally derived from recent prepayment activity on the securities in the portfolio as of the dates presented. The beginning and ending WAL is the estimated remaining principal repayment term (in years) after three-month historical prepayment speeds have been applied.



	For the Three Months Ended
	September 30, 2019						June 30, 2019						March 31, 2019						December 31, 2018
	Amount			Yield		WAL	Amount			Yield		WAL	Amount			Yield		WAL	Amount			Yield		WAL
	(Dollars in thousands)
Beginning balance - carrying value	$	979,256		2.68	%	3.4	$	985,294		2.67	%	3.7	$	972,543		2.62	%	3.6	$	1,036,990		2.57	%	3.4
Maturities and repayments	(70,865		)				(74,335		)				(62,702		)				(67,214		)
Net amortization of (premiums)/discounts	(270		)				(375		)				(310		)				(349		)
Purchases:
Fixed	25,214			1.93		3.2	23,620			2.74		3.8	28,921			2.89		5.1	—			—		—
Adjustable	—			—		—	40,362			2.79		4.5	43,776			2.69		4.3	—			—		—
Valuation transferred from HTM to AFS	3,039						—						—						—
Change in valuation on AFS securities	113						4,690						3,066						3,116
Ending balance - carrying value	$	936,487		2.67		3.5	$	979,256		2.68		3.4	$	985,294		2.67		3.7	$	972,543		2.62		3.6



	For the Year Ended September 30,
	2019						2018
	Amount			Yield		WAL	Amount			Yield		WAL
	(Dollars in thousands)
Beginning balance - carrying value	$	1,036,990		2.57	%	3.4	$	942,447		2.28	%	3.5
Maturities and repayments	(275,116		)				(277,464		)
Net amortization of (premiums)/discounts	(1,304		)				(2,968		)
Purchases:
Fixed	77,755			2.53		4.1	201,871			2.93		4.1
Adjustable	84,138			2.74		4.4	94,028			2.42		4.2
Securities added in CCB acquisition, net	—			—		—	85,741			3.13		2.5
Valuation transferred from HTM to AFS	3,039						—
Change in valuation on AFS securities	10,985						(6,665		)
Ending balance - carrying value	$	936,487		2.67		3.5	$	1,036,990		2.57		3.4

Investment Securities - Investment securities, which consist of U.S. GSE debentures (primarily issued by FNMA, FHLMC, or Federal Home Loan Banks) and municipal investments, decreased $21.5 million to $268.4 million at September 30, 2019 from $289.9 million at September 30, 2018. The following table summarizes the activity of investment securities for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yields for the ending balances are as of the last day of the period presented. The beginning and ending WALs represent the estimated remaining principal repayment terms (in years) of the securities after projected call dates have been considered, based upon market rates at each date presented.



	For the Three Months Ended
	September 30, 2019						June 30, 2019						March 31, 2019						December 31, 2018
	Amount			Yield		WAL	Amount			Yield		WAL	Amount			Yield		WAL	Amount			Yield		WAL
	(Dollars in thousands)
Beginning balance - carrying value	$	273,995		2.30	%	1.0	$	288,894		2.38	%	1.0	$	264,782		2.14	%	1.8	$	289,942		2.05	%	2.2
Maturities, calls and sales	(80,690		)				(65,781		)				(76,635		)				(26,665		)
Net amortization of (premiums)/discounts	(13		)				153						(39		)				(39		)
Purchases:
Fixed	75,000			2.02		1.1	50,000			2.60		1.0	99,809			2.67		0.7	—			—		—
Valuation transferred from HTM to AFS	47						—						—						—
Change in valuation on AFS securities	37						729						977						1,544
Ending balance - carrying value	$	268,376		2.11		0.8	$	273,995		2.30		1.0	$	288,894		2.38		1.0	$	264,782		2.14		1.8



	For the Year Ended September 30,
	2019						2018
	Amount			Yield		WAL	Amount			Yield		WAL
	(Dollars in thousands)
Beginning balance - carrying value	$	289,942		2.05	%	2.2	$	301,122		1.33	%	1.5
Maturities, calls and sales	(249,771		)				(129,838		)
Net amortization of (premiums)/discounts	62						(182		)
Purchases:
Fixed	224,809			2.44		0.9	115,560			2.85		1.8
Securities added in CCB acquisition, net	—			—		—	5,855			2.12		1.0
Valuation transferred from HTM to AFS	47						—
Change in valuation on AFS securities	3,287						(2,575		)
Ending balance - carrying value	$	268,376		2.11		0.8	$	289,942		2.05		2.2

Liabilities.

Deposits - The following table presents the amount, weighted average rate and percent of total for the components of our deposit portfolio at the dates presented. Cash flows from new certificate of deposit accounts, money market accounts, and checking accounts resulted in an increase of $163.4 million, or 6.5%, in retail/business certificates of deposit during the current fiscal year. The public unit certificate of deposit portfolio decreased $112.8 million, which was intentional as the Bank reduced its usage of public unit certificates of deposit, as previously discussed. Excluding the impact of the decrease in the balance of public unit certificates of deposit, total deposits would have increased $91.3 million, or 1.8%, during the current fiscal year.



	At September 30,
	2019						2018
					% of						% of
	Amount		Rate		Total		Amount		Rate		Total
	(Dollars in thousands)
Non-interest-bearing checking	$	357,284	—	%	6.4	%	$	336,454	—	%	6.0	%
Interest-bearing checking	717,121		0.09		12.8		724,066		0.08		12.9
Savings	321,494		0.05		5.8		352,896		0.07		6.3
Money market	1,198,343		0.70		21.5		1,252,881		0.47		22.4
Retail/business certificates of deposit	2,692,770		2.08		48.2		2,529,368		1.79		45.1
Public unit certificates of deposit	294,855		2.29		5.3		407,689		1.89		7.3
	$	5,581,867	1.29		100.0	%	$	5,603,354	1.06		100.0	%

The composition of the retail/business certificate of deposit portfolio changed during the current fiscal year. Short-term and intermediate-term certificates of deposit increased $362.5 million while longer-term and variable rate certificates of deposit decreased $199.1 million. The change in the deposit portfolio mix was intentional. The Bank increased offered rates on short-term and certain intermediate-term certificates of deposit late in the third quarter of fiscal year 2019 and ran a special certificate of deposit campaign ("unTraditional campaign") during the last quarter of fiscal year 2019. The intention of the unTraditional campaign was to attract deposits with generally shorter term to maturity to allow the Bank to more quickly reprice certificate of deposit funds lower if market rates decrease.

The following tables set forth scheduled maturity information for our certificates of deposit, including public unit certificates of deposit, along with associated weighted average rates, at September 30, 2019.



	Amount Due
				More than			More than
	1 year			1 year to			2 years to 3			More than			Total
Rate range	or less			2 years			years			3 years			Amount		Rate
	(Dollars in thousands)
0.00 – 0.99%	$	17,483		$	2,537		$	29		$	—		$	20,049	0.67	%
1.00 – 1.99%	873,887			326,852			203,765			7,482			1,411,986		1.78
2.00 – 2.99%	614,467			296,601			294,558			349,721			1,555,347		2.40
3.00 – 3.99%	—			—			—			243			243		3.00
	$	1,505,837		$	625,990		$	498,352		$	357,446		$	2,987,625	2.10

Percent of total	50.4		%	20.9		%	16.7		%	12.0		%
Weighted average rate	1.98			2.09			2.22			2.46
Weighted average maturity (in years)	0.5			1.4			2.6			3.6			1.4
Weighted average maturity for the retail/business certificate of deposit portfolio (in years)													1.5



	Amount Due
			Over		Over
	3 months		3 to 6		6 to 12		Over
	or less		months		months		12 months		Total
	(Dollars in thousands)
Retail/business certificates of deposit less than $100,000	$	188,883	$	153,187	$	358,223	$	845,734	$	1,546,027
Retail/business certificates of deposit of $100,000 or more	147,727		96,538		301,318		601,160		1,146,743
Public unit certificates of deposit of $100,000 or more	112,275		56,767		90,919		34,894		294,855
	$	448,885	$	306,492	$	750,460	$	1,481,788	$	2,987,625

Borrowings - The following tables present borrowing activity for the periods shown. The borrowings presented in the table have original contractual terms of one year or longer. FHLB advances are presented at par. The effective rate is shown as a weighted average and includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. The weighted average maturity ("WAM") is the remaining weighted average contractual term in years. The beginning and ending WAMs represent the remaining maturity at each date presented. For new borrowings, the WAMs presented are as of the date of issue.



	For the Three Months Ended
	September 30, 2019						June 30, 2019						March 31, 2019						December 31, 2018
				Effective						Effective						Effective						Effective
	Amount			Rate		WAM	Amount			Rate		WAM	Amount			Rate		WAM	Amount			Rate		WAM
	(Dollars in thousands)
Beginning balance	$	2,140,000		2.35	%	2.6	$	2,240,000		2.29	%	2.8	$	2,181,186		2.31	%	3.0	$	2,185,052		2.17	%	2.9
Maturities:
FHLB advances	(375,000		)	2.38			(200,000		)	2.11			—			—			(300,000		)	1.73
CCB acquisition - junior subordinated debentures assumed (redeemed)	—			—		—	—			—		—	(6,186		)	10.60		11.5	(3,866		)	5.82		13.5
New FHLB borrowings:
Fixed-rate	100,000			2.14		4.0	—			—		—	—			—		—	100,000			3.39		5.0
Interest rate swaps⁽¹⁾	275,000			2.70		4.5	100,000			3.09		9.0	65,000			2.57		5.0	200,000			2.46		3.5
Ending balance	$	2,140,000		2.38		2.6	$	2,140,000		2.35		2.6	$	2,240,000		2.29		2.8	$	2,181,186		2.31		3.0



	For the Year Ended September 30,
	2019						2018
				Effective						Effective
	Amount			Rate		WAM	Amount			Rate		WAM
	(Dollars in thousands)
Beginning balance	$	2,185,052		2.17	%	2.9	$	2,375,000		2.16	%	2.7
Maturities:
FHLB advances	(875,000		)	2.10			(475,000		)	2.38
Repurchase agreements	—			—			(100,000		)	3.35
CCB acquisition - junior subordinated debentures assumed (redeemed)	(10,052		)	8.76		12.3	10,052			8.75		12.7
New FHLB borrowings:
Fixed-rate	200,000			2.77		4.5	—			—		—
Interest rate swaps⁽¹⁾	640,000			2.67		5.0	375,000			2.64		6.8
Ending balance	$	2,140,000		2.38		2.6	$	2,185,052		2.17		2.9


(1)	Represents adjustable-rate FHLB advances for which the Bank has entered into interest rate swaps to hedge the variability in cash flows associated with the advances. The effective rate and WAM presented include the effect of the interest rate swaps.

Maturities - The following table presents the maturity of term borrowings (including FHLB advances, at par, and repurchase agreements), along with associated weighted average contractual and effective rates as of September 30, 2019.



	FHLB Advances Amount				Repurchase
Maturity by			Interest rate		Agreements		Total		Contractual	Effective
Fiscal Year	Fixed-rate		swaps⁽¹⁾		Amount		Amount		Rate	Rate⁽²⁾
	(Dollars in thousands)
2020	350,000		640,000		100,000		1,090,000		2.18	2.44
2021	550,000		—		—		550,000		2.27	2.27
2022	200,000		—		—		200,000		2.23	2.23
2023	200,000		—		—		200,000		1.98	1.98
2024	100,000		—		—		100,000		3.39	3.39
	$	1,400,000	$	640,000	$	100,000	$	2,140,000	2.25	2.38

(1)

Represents 12-month adjustable-rate FHLB advances for which the Bank has entered into interest rate swaps with a notional amount of $640.0 million to hedge the variability in cash flows associated with the advances. These advances are presented based on their contractual maturity dates and will be renewed each year until the maturity or termination of the interest rate swaps. The expected WAL of the interest rate swaps was 4.5 years at September 30, 2019.


(2)	The effective rate includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid.

As of September 30, 2019, the Bank had $100.0 million outstanding, at a rate of 2.20%, on its FHLB line of credit which was not related to the leverage strategy. The average outstanding balance of FHLB line of credit borrowings during the current year was $115.6 million at an average rate of 2.54%.

The following table presents the maturity and weighted average repricing rate, which is also the weighted average effective rate, of certificates of deposit, split between retail/business and public unit amounts, and term borrowings for the next four quarters as of September 30, 2019.



	Retail/Business				Public Unit				Term
Maturity by	Certificate		Repricing		Certificate		Repricing		Borrowings		Repricing				Repricing
Quarter End	Amount		Rate		Amount		Rate		Amount		Rate		Total		Rate
	(Dollars in thousands)
December 31, 2019	$	336,610	1.65	%	$	112,275	2.18	%	$	350,000	2.40	%	$	798,885	2.05	%
March 31, 2020	249,725		1.78		56,767		2.37		65,000		2.57		371,492		2.01
June 30, 2020	403,455		2.11		54,246		2.40		200,000		2.35		657,701		2.21
September 30, 2020	256,086		2.09		36,673		2.24		475,000		2.48		767,759		2.34
	$	1,245,876	1.91		$	259,961	2.27		$	1,090,000	2.44		$	2,595,837	2.17

Stockholders' Equity. Stockholders' equity was $1.34 billion at September 30, 2019 compared to $1.39 billion at September 30, 2018. The $55.3 million decrease was due primarily to the payment of $134.9 million in cash dividends, partially offset by net income of $94.2 million. In the long run, management considers a ratio of stockholders' equity to total assets at the Bank of at least 10% an appropriate level of capital. At September 30, 2019, this ratio was 12.5%. The cash dividends paid during the current fiscal year totaled $0.98 per share and consisted of a $0.39 per share cash true-up dividend related to fiscal year 2018 earnings per the Company's dividend policy, a $0.25 per share True Blue Capitol dividend, and four regular quarterly cash dividends totaling $0.34 per share.

On October 16, 2019, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.7 million, payable on November 15, 2019 to stockholders of record as of the close of business on November 1, 2019. On October 30, 2019, the Company announced a fiscal year 2019 cash true-up dividend of $0.34 per share, or approximately $46.9 million, related to fiscal year 2019 earnings. The $0.34 per share cash true-up dividend was determined by taking the difference between total earnings for fiscal year 2019 and total regular quarterly cash dividends paid during fiscal year 2019, divided by the number of shares outstanding as of October 18, 2019. The cash true-up dividend is payable on December 6, 2019 to stockholders of record as of the close of business on November 22, 2019, and is the result of the Board of Directors' commitment to distribute to stockholders 100% of the annual earnings of the Company for fiscal year 2019.

At September 30, 2019, Capitol Federal Financial, Inc., at the holding company level, had $126.3 million on deposit at the Bank. For fiscal year 2020, it is the intent of the Board of Directors and management to continue with the payout of 100% of the Company's earnings to its stockholders. The payout is expected to be in the form of regular quarterly cash dividends of $0.085 per share, totaling $0.34 for the year, and a cash true-up dividend equal to fiscal year 2020 earnings in excess of the amount paid as regular quarterly cash dividends during fiscal year 2020. It is anticipated that the fiscal year 2020 cash true-up dividend will be paid in December 2020. Dividend payments depend upon a number of factors including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company.

The Company works to find multiple ways to provide stockholder value. Recently, this has primarily been through the payment of cash dividends and historically, the Company has also utilized stock buybacks. The Company has maintained a dividend policy of paying out 100% of its earnings to stockholders in the form of quarterly cash dividends and an annual cash true-up dividend in December of each year. In order to provide additional stockholder value, the Company has paid a True Blue Capitol cash dividend of $0.25 per share in June of each of the past six years, including June 2019, and in December prior to that. The Company has paid the True Blue Capitol dividend primarily due to excess capital levels at the Company and Bank. The Company considers various business strategies and their impact on capital and asset measures on both a current and future basis, as well as regulatory capital levels and requirements, in determining the amount, if any, and timing of the True Blue dividend.

The following table presents regular quarterly cash dividends and special cash dividends paid in calendar years 2019, 2018, and 2017. The amounts represent cash dividends paid during each period. The 2019 true-up dividend amount presented represents the dividend payable on December 6, 2019 to stockholders of record as of November 22, 2019.



	Calendar Year
	2019				2018				2017
	Amount		Per Share		Amount		Per Share		Amount		Per Share
	(Dollars in thousands, except per share amounts)
Regular quarterly dividends paid
Quarter ended March 31	$	11,700	$	0.085	$	11,427	$	0.085	$	11,386	$	0.085
Quarter ended June 30	11,708		0.085		11,429		0.085		11,409		0.085
Quarter ended September 30	11,713		0.085		11,430		0.085		11,411		0.085
Quarter ended December 31	11,731		0.085		11,696		0.085		11,427		0.085
True-up dividends paid	46,932		0.340		53,666		0.390		38,985		0.290
True Blue dividends paid	34,446		0.250		33,614		0.250		33,559		0.250
Calendar year-to-date dividends paid	$	128,230	$	0.930	$	133,262	$	0.980	$	118,177	$	0.880

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

Weighted Average Yields and Rates. The following table presents the weighted average yields on interest-earning assets, the weighted average rates paid on interest-bearing liabilities, and the resultant interest rate spreads at the dates indicated. As previously discussed, the leverage strategy was not in place at September 30, 2019, 2018, and 2017, so the end of period yields/rates presented in the table below do not reflect the effects of this strategy. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. The weighted average rate on FHLB borrowings includes the impact of interest rate swaps. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.



	At September 30,
	2019		2018		2017
Yield on:
Loans receivable	3.81	%	3.74	%	3.59	%
MBS	2.67		2.57		2.28
Investment securities	2.11		2.05		1.33
FHLB stock	7.47		7.22		6.47
Cash and cash equivalents	1.80		2.19		1.25
Combined yield on interest-earning assets	3.64		3.57		3.32

Rate paid on:
Checking	0.06		0.05		0.04
Savings	0.05		0.07		0.24
Money market	0.70		0.47		0.24
Retail/business certificates	2.08		1.79		1.52
Wholesale certificates	2.29		1.89		1.28
Total deposits	1.29		1.06		0.89
FHLB borrowings	2.36		2.13		2.09
Other borrowings	2.53		3.10		2.94
Total borrowings	2.37		2.18		2.16
Combined rate paid on interest-bearing liabilities	1.60		1.39		1.28

Net interest rate spread	2.04		2.18		2.04

Average Balance Sheets. The following table presents the average balances of our assets, liabilities, and stockholders' equity, and the related weighted average yields and rates on our interest-earning assets and interest-bearing liabilities for the periods indicated. For fiscal year 2017 information, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2018. Weighted average yields are derived by dividing annual income by the average balance of the related assets, and weighted average rates are derived by dividing annual expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.



	For the Year Ended September 30,
	2019						2018
	Average		Interest				Average		Interest
	Outstanding		Earned/		Yield/		Outstanding		Earned/		Yield/
	Amount		Paid		Rate		Amount		Paid		Rate
Assets:	(Dollars in thousands)
Interest-earning assets:
One- to four-family loans	$	6,681,441	$	240,919	3.61	%	$	6,792,670	$	239,274	3.52	%
Commercial loans	701,771		34,810		4.90		318,915		13,852		4.29
Consumer loans	135,683		8,500		6.26		125,330		7,072		5.64
Total loans receivable⁽¹⁾	7,518,895		284,229		3.77		7,236,915		260,198		3.60
MBS⁽²⁾	977,925		25,730		2.63		961,251		22,619		2.35
Investment securities⁽²⁾⁽³⁾	281,490		6,366		2.26		291,726		4,670		1.60
FHLB stock	106,057		7,823		7.38		163,307		10,962		6.71
Cash and cash equivalents⁽⁴⁾	251,015		5,806		2.28		1,514,625		23,443		1.53
Total interest-earning assets⁽¹⁾⁽²⁾	9,135,382		329,954		3.61		10,167,824		321,892		3.16
Other non-interest-earning assets	385,803						313,902
Total assets	$	9,521,185					$	10,481,726

Liabilities and stockholders' equity:
Interest-bearing liabilities:
Checking	$	1,073,825	615		0.06		$	888,076	334		0.04
Savings	342,617		197		0.06		369,833		1,465		0.40
Money market	1,255,001		8,861		0.71		1,192,027		4,532		0.38
Retail/business certificates	2,531,923		48,496		1.92		2,441,982		39,779		1.63
Wholesale certificates	369,282		8,032		2.18		414,107		6,515		1.57
Total deposits	5,572,648		66,201		1.19		5,306,025		52,625		0.99
FHLB borrowings⁽⁵⁾	2,337,468		54,391		2.31		3,558,032		67,120		1.88
Other borrowings	103,534		2,972		2.83		122,886		3,374		2.71
Total borrowings	2,441,002		57,363		2.34		3,680,918		70,494		1.90
Total interest-bearing liabilities	8,013,650		123,564		1.54		8,986,943		123,119		1.36
Other non-interest-bearing liabilities	149,156						129,749
Stockholders' equity	1,358,379						1,365,034
Total liabilities and stockholders' equity	$	9,521,185					$	10,481,726

Net interest income⁽⁶⁾			$	206,390					$	198,773
Net interest rate spread⁽⁷⁾⁽⁸⁾					2.07						1.80
Net interest-earning assets	$	1,121,732					$	1,180,881
Net interest margin⁽⁸⁾⁽⁹⁾					2.26						1.95
Ratio of interest-earning assets to interest-bearing liabilities					1.14x						1.13x


(1)	Balances are adjusted for unearned loan fees and deferred costs. Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent. Balances include loans receivable held-for-sale.


(2)	MBS and investment securities classified as AFS are stated at amortized cost, adjusted for unamortized purchase premiums or discounts.


(3)	The average balance of investment securities includes an average balance of nontaxable securities of $21.6 million, and $24.9 million, for the years ended September 30, 2019 and 2018, respectively.


(4)	The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $150.7 million and $1.33 billion for the years ended September 30, 2019 and 2018, respectively.

(5)

Included in this line, for the years ended September 30, 2019 and 2018, respectively, are FHLB borrowings related to the leverage strategy with an average outstanding balance of $157.8 million and $1.39 billion, respectively, and interest paid of $3.9 million and $22.1 million, respectively, at a weighted average rate of 2.46% and 1.57%, respectively, and FHLB borrowings not related to the leverage strategy with an average outstanding balance of $2.18 billion and $2.17 billion, respectively, and interest paid of $50.5 million and $45.0 million, respectively, at a weighted average rate of 2.30% and 2.07%, respectively. The FHLB advance amounts and rates included in this line include the effect of interest rate swaps and are net of deferred prepayment penalties.


(6)	Net interest income represents the difference between interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income depends on the average balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them.


(7)	Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(8)

The table below provides a reconciliation between certain performance ratios presented in accordance with GAAP and the performance ratios excluding the effects of the leverage strategy, which are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide the performance ratios without the leverage strategy because of the unique nature of the leverage strategy. The leverage strategy reduces some of our performance ratios due to the amount of earnings associated with the transaction in comparison to the size of the transaction, while increasing our net income. The pre-tax yield on the leverage strategy was 0.03% and 0.15% for the years ended September 30, 2019 and 2018, respectively.



	For the Year Ended September 30,
	2019						2018
	Actual		Leverage		Adjusted		Actual		Leverage		Adjusted
	(GAAP)		Strategy		(Non-GAAP)		(GAAP)		Strategy		(Non-GAAP)
Net interest margin	2.26	%	(0.04	)%	2.30	%	1.95	%	(0.29	)%	2.24	%
Net interest rate spread	2.07		(0.03	)	2.10		1.80		(0.26	)	2.06


(9)	Net interest margin represents net interest income as a percentage of average interest-earning assets.

Rate/Volume Analysis. The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing fiscal years 2019 to 2018. For the comparison of fiscal years 2018 to 2017, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2018. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate, and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.



	For the Year Ended September 30,
	2019 vs. 2018
	Increase (Decrease) Due to
	Volume			Rate			Total
	(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	14,735		$	9,296		$	24,031
MBS	398			2,713			3,111
Investment securities	(169		)	1,865			1,696
FHLB stock	(4,139		)	1,000			(3,139		)
Cash and cash equivalents	(25,628		)	7,991			(17,637		)
Total interest-earning assets	(14,803		)	22,865			8,062

Interest-bearing liabilities:
Checking	81			200			281
Savings	(100		)	(1,168		)	(1,268		)
Money market	251			4,078			4,329
Certificates of deposit	742			9,492			10,234
FHLB borrowings	(26,065		)	13,336			(12,729		)
Other borrowings	(294		)	(108		)	(402		)
Total interest-bearing liabilities	(25,385		)	25,830			445

Net change in net interest income	$	10,582		$	(2,965	)	$	7,617

Comparison of Operating Results for the Years Ended September 30, 2019 and 2018

The Company recognized net income of $94.2 million, or $0.68 per share, for the current fiscal year compared to net income of $98.9 million, or $0.73 per share, for the prior fiscal year. The decrease in net income was due primarily to a $10.0 million increase in non-interest expense during the current year, partially offset by a $7.6 million increase in net interest income due primarily to higher yielding loans added in the acquisition of CCB. Additionally, income tax expense was $1.4 million higher in the current fiscal year due primarily to income tax adjustments required in the prior fiscal year with the enactment of the Tax Act in December 2017.

The net interest margin increased 31 basis points, from 1.95% for the prior fiscal year to 2.26% for the current fiscal year. When the leverage strategy is in place, it reduces the net interest margin due to the amount of earnings from the transaction in comparison to the size of the transaction. Excluding the effects of the leverage strategy, the net interest margin would have increased six basis points, from 2.24% for the prior fiscal year to 2.30% for the current fiscal year. The increase in the net interest margin excluding the effects of the leverage strategy was due mainly to the addition of higher yielding commercial loans in the CCB acquisition, partially offset by an increase in the cost of deposits.

Interest and Dividend Income

The weighted average yield on total interest-earning assets increased 45 basis points, from 3.16% for the prior fiscal year to 3.61% for the current fiscal year, while the average balance of interest-earning assets decreased $1.03 billion from the prior fiscal year. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have increased 23 basis points, from 3.39% for the prior fiscal year to 3.62% for the current fiscal year, and the average balance of interest-earning assets would have increased $202.1 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 Year Ended
	September 30,				Change Expressed in:
	2019		2018		Dollars			Percent
	(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable	$	284,229	$	260,198	$	24,031		9.2	%
MBS	25,730		22,619		3,111			13.8
FHLB stock	7,823		10,962		(3,139		)	(28.6	)
Investment securities	6,366		4,670		1,696			36.3
Cash and cash equivalents	5,806		23,443		(17,637		)	(75.2	)
Total interest and dividend income	$	329,954	$	321,892	$	8,062		2.5

The increase in interest income on loans receivable was due to a $282.0 million increase in the average balance of the portfolio, as well as a 17 basis point increase in the weighted average yield on the portfolio to 3.77% for the current fiscal year. The increase in the average balance was due mainly to the acquisition of CCB. The increase in the weighted average yield was also due mainly to the addition of higher yielding loans associated with the CCB acquisition, legacy adjustable-rate loans repricing to higher market rates, and the origination and purchase of new loans at higher market rates.

The increase in interest income on the MBS portfolio was due to a 28 basis point increase in the weighted average yield on the portfolio to 2.63% for the current fiscal year, along with a $16.7 million increase in the average balance of the portfolio. The increase in the weighted average yield was due primarily to a decrease in the impact of net premium amortization, as well as adjustable-rate MBS repricing to higher market rates. Net premium amortization of $1.3 million during the current fiscal year decreased the weighted average yield on the portfolio by 13 basis points. During the prior fiscal year, $3.0 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 31 basis points. As of September 30, 2019, the remaining net balance of premiums on our portfolio of MBS was $2.3 million.

The decrease in dividend income on FHLB stock was due to a decrease in the average balance of FHLB stock as a result of the leverage strategy being in place for a shorter period of time during the current fiscal year as compared to the prior fiscal year. This was partially offset by a higher dividend rate on FHLB stock during the current fiscal year.

The increase in interest income on the investment securities portfolio was due to a 66 basis point increase in the weighted average yield on the portfolio to 2.26%. The increase in the weighted average yield was primarily a result of replacing maturing securities at higher market rates.

The cash and cash equivalents line item in the table above includes interest income associated and not associated with the leverage strategy. Interest income on cash and cash equivalents not related to the leverage strategy decreased $705 thousand from the prior fiscal year due to an $86.8 million decrease in the average balance, partially offset by a 68 basis point increase in the weighted average yield. Interest income on cash associated with the leverage strategy decreased $16.9 million from the prior fiscal year due to a $1.18 billion decrease in the average balance, as the leverage strategy was in place for a shorter period of time during the current fiscal year.

Interest Expense

The weighted average rate paid on total interest-bearing liabilities increased 18 basis points, from 1.36% for the prior fiscal year to 1.54% for the current fiscal year, while the average balance of interest-bearing liabilities decreased $973.3 million from the prior fiscal year. Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased 19 basis points, from 1.33% for the prior fiscal year to 1.52% for the current fiscal year, and the average balance of interest-bearing liabilities would have increased $263.2 million. The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.



	For the Year Ended
	September 30,				Change Expressed in:
	2019		2018		Dollars			Percent
	(Dollars in thousands)
INTEREST EXPENSE:
Deposits	$	66,201	$	52,625	$	13,576		25.8	%
FHLB borrowings	54,391		67,120		(12,729		)	(19.0	)
Other borrowings	2,972		3,374		(402		)	(11.9	)
Total interest expense	$	123,564	$	123,119	$	445		0.4

The increase in interest expense on deposits was due primarily to a 20 basis point increase in the weighted average rate, to 1.19% for the current fiscal year. The deposit accounts assumed in the CCB acquisition were at a lower average rate than our legacy deposit portfolio rate and our overall deposit portfolio rate, which partially offset the increase in the deposit portfolio rate in the current fiscal year. The increase in the weighted average rate was due primarily to increases in the average retail/business certificate of deposit portfolio rate and money market portfolio rate, which increased 29 basis points and 33 basis points, respectively, as market interest rates increased throughout both years. Additionally, late in the third quarter of the current fiscal year, the Bank increased offered rates on short-term and certain intermediate-term certificates of deposit in an effort to encourage customers to move funds to those terms and during the fourth quarter of the current fiscal year the Bank ran an unTraditional campaign resulting in growth in the short-term and certain intermediate-term certificates of deposit.

The FHLB borrowings line item in the table above includes interest expense associated and not associated with the leverage strategy. Interest expense on FHLB borrowings not related to the leverage strategy increased $5.5 million from the prior fiscal year due to a 23 basis point increase in the weighted average rate paid, to 2.30% for the current fiscal year, and a $14.0 million increase in the average balance of the portfolio. The increase in the weighted average rate paid was due primarily to certain maturing advances being replaced at higher effective market interest rates. Interest expense on FHLB borrowings associated with the leverage strategy decreased $18.2 million from the prior fiscal year due to the leverage strategy being in place for a shorter period of time during the current fiscal year.

The decrease in interest expense on other borrowings was due mainly to the maturity of a $100.0 million repurchase agreement during the prior fiscal year, which was not replaced with a new repurchase agreement.

Provision for Credit Losses

The Bank recorded a provision for credit losses during the current fiscal year of $750 thousand, compared to no provision for credit losses during the prior fiscal year. The $750 thousand provision for credit losses in the current fiscal year is due primarily to commercial loan activities during the current fiscal year, specifically the classification of a large commercial loan as special mention, commercial loan growth and funding, certain commercial loans that renewed since being obtained in the CCB acquisition and are now in the Bank's ACL model, and commercial loan charge-offs.

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 Year Ended
	September 30,				Change Expressed in:
	2019		2018		Dollars			Percent
	(Dollars in thousands)
NON-INTEREST INCOME:
Deposit service fees	$	12,740	$	15,636	$	(2,896	)	(18.5	)%
Income from bank-owned life insurance ("BOLI")	2,432		1,875		557			29.7
Other non-interest income	6,786		4,524		2,262			50.0
Total non-interest income	$	21,958	$	22,035	$	(77	)	(0.3	)

The decrease in deposit service fees was due mainly to a change in the presentation of interchange network charges related to the adoption of a new revenue recognition accounting standard during the current fiscal year. Previously, interchange network charges were reported in deposit and loan expense. As a result of the adoption of the new revenue recognition accounting standard on October 1, 2018, interchange transaction fee income is now reported net of interchange network charges, which totaled $3.4 million during the current fiscal year and $3.0 million during the prior fiscal year.

The increase in income from BOLI was due primarily to a one-time adjustment during the prior fiscal year to the benchmark rate associated with one of the policies which reduced income from BOLI during that period, as well as to an increase in income related to policies acquired in the CCB acquisition.

The increase in other non-interest income was due mainly to revenues from the trust asset management operations obtained in the CCB acquisition, commercial loan fee related income, insurance commission income, and income related to the collateral pledged by the Bank on its interest rate swap agreements.

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 Year Ended
	September 30,				Change Expressed in:
	2019		2018		Dollars			Percent
	(Dollars in thousands)
NON-INTEREST EXPENSE:
Salaries and employee benefits	$	53,145	$	46,563	$	6,582		14.1	%
Information technology and related expense	17,615		13,999		3,616			25.8
Occupancy, net	13,032		11,455		1,577			13.8
Regulatory and outside services	5,813		5,709		104			1.8
Advertising and promotional	5,244		5,034		210			4.2
Deposit and loan transaction costs	2,478		5,621		(3,143		)	(55.9	)
Office supplies and related expense	2,439		1,888		551			29.2
Federal insurance premium	1,172		3,277		(2,105		)	(64.2	)
Other non-interest expense	6,006		3,356		2,650			79.0
Total non-interest expense	$	106,944	$	96,902	$	10,042		10.4

The increase in salaries and employee benefits was due primarily to expense related to retained CCB employees. Management anticipates salaries and employee benefits will be approximately $4.0 million higher in fiscal year 2020 due primarily to an increase in staffing for commercial banking activities and related back office functions, along with an increase in information technology staff. The $4.0 million increase is expected to be approximately $1.2 million in each of the second and third quarters and $1.6 million in the fourth quarter. The increase in information technology and related expense was due mainly to an increase in software licensing fees and costs related to the integration of CCB operations. The increase in occupancy, net was due primarily to expenses related to properties acquired in the CCB acquisition. The decrease in deposit and loan transaction costs was due mainly to the adoption of the new revenue recognition standard discussed above. The increase in office supplies and related expense was due primarily to costs related to the integration of CCB customers and operations. The decrease in the federal insurance premium was due mainly to the Bank receiving a credit from the FDIC as a result of the FDIC deposit insurance fund ratio reaching 1.40%. Pursuant to regulatory guidance, once the insurance fund exceeds 1.38% of insured deposits, deposit insurance assessment credits are allocated to banks with less than $10 billion in assets, to compensate for premiums previously paid that contributed to growth of the fund past 1.15%. These credits will continue to offset the Bank's premium assessments as long as the insurance fund ratio remains above 1.38% of insured deposits and the Bank still has a remaining credit balance. As of September 30, 2019, the Bank had a remaining credit of $1.6 million. The increase in other non-interest expense was due primarily to amortization of deposit intangibles associated with the acquisition of CCB. Management anticipates other non-interest expense may increase in the first quarter of fiscal year 2020 due primarily to a potential $400 thousand write-down of an OREO property that was added in the CCB acquisition, related to an offer received on this property subsequent to September 30, 2019.

The Company's efficiency ratio was 46.83% for the current fiscal year compared to 43.89% for the prior fiscal year. The change in the efficiency ratio was due to higher non-interest expense in the current fiscal year compared to the prior fiscal year. The efficiency ratio is a measure of a financial institution's total non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income. A lower value indicates that the financial institution is generating revenue with a proportionally lower level of expense.

Income Tax Expense

Income tax expense was $26.4 million for the current fiscal year compared to $25.0 million for the prior fiscal year. The effective tax rate was 21.9% for the current fiscal year compared to 20.2% for the prior fiscal year. The increase in the effective tax rate compared to the prior year was due mainly to the enactment of the Tax Act in the prior fiscal year. In accordance with GAAP, the Company revalued its deferred tax assets and liabilities in December 2017 to account for the lower corporate tax rate which reduced income tax expense by $7.5 million. This benefit was partially offset, when comparing the two fiscal years, as the Company was required to apply a blended statutory federal tax rate, because we have a fiscal year end of September 30, of 24.5% in the prior fiscal year compared to 21% in the current fiscal year. Additionally, the tax credit benefits associated with the Company's low income housing partnership investments were higher in the current fiscal year compared to the prior fiscal year, which contributed to a reduction in the current year effective income tax compared to the prior fiscal year. Management anticipates the effective income tax rate for fiscal year 2020 will be approximately 21% to 22%.

Comparison of Operating Results for the Years Ended September 30, 2018 and 2017

For this discussion, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Operating Results for the Years Ended September 30, 2018 and 2017" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2018.

Liquidity and Capital Resources

Liquidity refers to our ability to generate sufficient cash to fund ongoing operations, to repay maturing certificates of deposit and other deposit withdrawals, to repay maturing borrowings, and to fund loan commitments. Liquidity management is both a daily and long-term function of our business management. The Company's most available liquid assets are represented by cash and cash equivalents, AFS securities, and short-term investment securities. The Bank's primary sources of funds are deposits, FHLB borrowings, repurchase agreements, repayments and maturities of outstanding loans and MBS and other short-term investments, and funds provided by operations. The Bank's long-term borrowings primarily have been used to manage the Bank's interest rate risk with the intent to improve the earnings of the Bank while maintaining capital ratios in excess of regulatory standards for well-capitalized financial institutions. In addition, the Bank's focus on managing risk has provided additional liquidity capacity by maintaining a balance of MBS and investment securities available as collateral for borrowings.

We generally intend to manage cash reserves sufficient to meet short-term liquidity needs, which are routinely forecasted for 10, 30, and 365 days. Additionally, on a monthly basis, we perform a liquidity stress test in accordance with the Interagency Policy Statement on Funding and Liquidity Risk Management. The liquidity stress test incorporates both short-term and long-term liquidity scenarios in order to identify and to quantify liquidity risk. Management also monitors key liquidity statistics related to items such as wholesale funding gaps, borrowings capacity, and available unpledged collateral, as well as various liquidity ratios.

In the event short-term liquidity needs exceed available cash, the Bank has access to a line of credit at FHLB and the FRB of Kansas City's discount window. Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40% of regulatory total assets without the pre-approval of FHLB senior management. The president of FHLB has approved an increase, through July 2020, in the Bank's borrowing limit to 55% of Bank Call Report total assets. When the leverage strategy is in place, the Bank maintains the resulting excess cash reserves from the FHLB borrowings at the FRB of Kansas City, which can be used to meet any short-term liquidity needs. The amount that can be borrowed from the FRB of Kansas City's discount window is based upon the fair value of securities pledged as collateral and certain other characteristics of those securities, and is used only when other sources of short-term liquidity are unavailable. Management tests the Bank's access to the FRB of Kansas City's discount window annually with a nominal, overnight borrowing.

If management observes a trend in the amount and frequency of line of credit utilization and/or short-term borrowings that is not in conjunction with a planned strategy, such as the leverage strategy, the Bank will likely utilize long-term wholesale borrowing sources such as FHLB advances and/or repurchase agreements to provide long-term, fixed-rate funding. The maturities of these long-term borrowings are generally staggered in order to mitigate the risk of a highly negative cash flow position at maturity. The Bank's internal policy limits total borrowings to 55% of total assets. At September 30, 2019, the Bank had total borrowings, at par, of $2.24 billion, or approximately 24% of total assets.

The amount of FHLB borrowings outstanding at September 30, 2019 was $2.14 billion, of which $990.0 million were advances scheduled to mature in the next 12 months, including $640.0 million of one-year floating-rate FHLB advances tied to interest rate swaps. All FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB. At September 30, 2019, the ratio of the par value of the Bank's FHLB borrowings to Call Report total assets was 23%. When the full leverage strategy is in place, FHLB borrowings may be in excess of 40% of the Bank's Call Report total assets, and may be in excess of 40% as long as the Bank continues its leverage strategy and FHLB senior management continues to approve the Bank's borrowing limit being in excess of 40% of Call Report total assets. All or a portion of the FHLB borrowings in conjunction with the leverage strategy can be repaid at any point in time while the strategy is in effect, if necessary or desired.

At September 30, 2019, the Bank had repurchase agreements of $100.0 million, or approximately 1% of total assets, all of which were scheduled to mature in the next 12 months. The Bank may enter into additional repurchase agreements as management deems appropriate, not to exceed 15% of total assets, and subject to the total borrowings limit of 55% as discussed above. The Bank has pledged securities with an estimated fair value of $108.3 million as collateral for repurchase agreements as of September 30, 2019. The securities pledged for the repurchase agreements will be delivered back to the Bank when the repurchase agreements mature.

The Bank could utilize the repayment and maturity of outstanding loans, MBS, and other investments for liquidity needs rather than reinvesting such funds into the related portfolios. At September 30, 2019, the Bank had $708.8 million of securities that were eligible but unused as collateral for borrowing or other liquidity needs.

The Bank has access to other sources of funds for liquidity purposes, such as brokered and public unit certificates of deposit. As of September 30, 2019, the Bank's policy allowed for combined brokered and public unit certificates of deposit up to 15% of total deposits. At September 30, 2019, the Bank did not have any brokered certificates of deposit and public unit certificates of deposit were approximately 5% of total deposits. The Bank had pledged securities with an estimated fair value of $381.1 million as collateral for public unit certificates of deposit at September 30, 2019. The securities pledged as collateral for public unit certificates of deposit are held under joint custody with FHLB and generally will be released upon deposit maturity.

At September 30, 2019, $1.51 billion of the Bank's certificate of deposit portfolio was scheduled to mature within the next 12 months, including $260.0 million of public unit certificates of deposit. Based on our deposit retention experience and our current pricing strategy, we anticipate the majority of the maturing retail certificates of deposit will renew or transfer to other deposit products at the prevailing rate, although no assurance can be given in this regard. We also anticipate the majority of the maturing public unit certificates of deposit will be replaced with similar wholesale funding products.

While scheduled payments from the amortization of loans and MBS and payments on short-term investments are relatively predictable sources of funds, deposit flows, prepayments on loans and MBS, and calls of investment securities are greatly influenced by general interest rates, economic conditions, and competition, and are less predictable sources of funds. To the extent possible, the Bank manages the cash flows of its loan and deposit portfolios by the rates it offers customers.

The following table presents the contractual maturities of our loan, MBS, and investment securities portfolios at September 30, 2019, along with associated weighted average yields. Loans and securities 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. As of September 30, 2019, the amortized cost of investment securities in our portfolio which are callable or have pre-refunding dates within one year was $230.8 million.



	Loans⁽¹⁾				MBS				Investment Securities				Total
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
	(Dollars in thousands)
Amounts due:
Within one year	$	238,884	4.82	%	$	159	4.10	%	$	57,633	1.53	%	$	296,676	4.18	%

After one year:
Over one to two years	125,155		4.23		13,886		2.68		79,376		2.13		218,417		3.37
Over two to three years	75,036		4.59		3,983		3.33		55,987		2.29		135,006		3.60
Over three to five years	125,688		4.74		67,795		1.66		75,380		2.40		268,863		3.31
Over five to ten years	658,678		3.74		359,492		2.38		—		—		1,018,170		3.26
Over ten to fifteen years	1,224,498		3.63		193,524		3.14		—		—		1,418,022		3.56
After fifteen years	4,964,534		3.77		297,648		2.93		—		—		5,262,182		3.72
Total due after one year	7,173,589		3.78		936,328		2.67		210,743		2.27		8,320,660		3.61

	$	7,412,473	3.81		$	936,487	2.67		$	268,376	2.11		$	8,617,336	3.63


(1)	Demand loans, loans having no stated maturity, and overdraft loans are included in the amounts due within one year. Construction loans are presented based on the estimated term to complete construction. The maturity date for home equity loans assumes the customer always makes the required minimum payment.

Limitations on Dividends and Other Capital Distributions

OCC regulations impose restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Under FRB and OCC safe harbor regulations, savings institutions generally may make capital distributions during any calendar year equal to earnings of the previous two calendar years and current year-to-date earnings. Savings institutions must also maintain an applicable capital conservation buffer above minimum risk-based capital requirements in order to avoid restrictions on capital distributions, including dividends. A savings institution that is a subsidiary of a savings and loan holding company, such as the Company, that proposes to make a capital distribution must submit written notice to the OCC and FRB 30 days prior to such distribution. The OCC and FRB may object to the distribution during that 30-day period based on safety and soundness or other concerns. Savings institutions that desire to make a larger capital distribution, are under special restrictions, or are not, or would not be, sufficiently capitalized following a proposed capital distribution must obtain regulatory non-objection prior to making such a distribution.

The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company. So long as the Bank remains well capitalized after each capital distribution, operates in a safe and sound manner, and maintains an applicable capital conservation buffer above its minimum risk-based capital requirements, it is management's belief that the OCC and FRB will continue to allow the Bank to distribute its earnings to the Company, although no assurance can be given in this regard.

Capital

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank per the regulatory framework for prompt corrective action. As of September 30, 2019, the Bank and Company exceeded all regulatory capital requirements. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 14. Regulatory Capital Requirements" for additional information related to regulatory capital.

The following table presents a reconciliation of equity under GAAP to regulatory capital amounts, as of September 30, 2019, for the Bank and the Company (dollars in thousands):



	Bank			Company
Total equity as reported under GAAP	$	1,168,986		$	1,336,326
AOCI	14,899			14,899
Goodwill and other intangibles, net of deferred tax liabilities	(14,848		)	(14,848		)
Total tier 1 capital	1,169,037			1,336,377
ACL	9,226			9,226
Total capital	$	1,178,263		$	1,345,603

Off-Balance Sheet Arrangements, Commitments and Contractual Obligations

The following table summarizes our contractual obligations, along with associated weighted average contractual rates as of September 30, 2019.



				Maturity Range
				Less than			1 to 3			3 to 5			More than
	Total			1 year			years			years			5 years
	(Dollars in thousands)
Operating leases	$	6,236		$	1,298		$	2,256		$	1,567		$	1,115

Certificates of deposit	$	2,987,625		$	1,505,837		$	1,124,342		$	356,839		$	607
Rate	2.10		%	1.98		%	2.14		%	2.46		%	2.15		%

FHLB advances	$	2,040,000		$	990,000		$	750,000		$	300,000		$	—
Rate	2.23		%	2.15		%	2.26		%	2.45		%	—		%

Repurchase agreements	$	100,000		$	100,000		$	—		$	—		$	—
Rate	2.53		%	2.53		%	—		%	—		%	—		%

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments consist primarily of commitments to originate, purchase, or participate in loans or fund lines of credit, along with standby letters of credit. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of an underlying contract with a third party. The credit risks associated with these off-balance-sheet commitments are essentially the same as those involved with extending loans to customers and these commitments are subject to normal credit policies. The contractual amounts of these off-balance sheet financial instruments as of September 30, 2019 were as follows (dollars in thousands):



Commitments to originate and purchase/participate in loans	$	230,996
Commitments to fund unused lines of credit	265,226
Standby letters of credit	1,248
Total	$	497,470

It is expected that some of the commitments will expire unfunded; therefore, the amounts reflected in the table above are not necessarily indicative of future liquidity requirements. Additionally, the Bank is not obligated to honor commitments to fund unused lines of credit if a customer is delinquent or otherwise in violation of the loan agreement.

The Company has investments in several low income housing partnerships. These partnerships supply funds for the construction and operation of apartment complexes that provide affordable housing to that segment of the population with lower family income. If these developments successfully attract a specified percentage of residents falling in that lower income range, federal income tax credits are made available to the partners. The tax credits are normally recognized over ten years, and they play an important part in the anticipated yield from these investments. In order to continue receiving the tax credits each year over the life of the partnership, the low-income residency targets must be maintained. Under the terms of the partnership agreements, the Company has a commitment to fund a specified amount that will be due in installments over the life of the agreements. The majority of the commitments at September 30, 2019 are projected to be funded through the end of calendar year 2021. At September 30, 2019, the investments totaled $82.6 million and are included in other assets in the consolidated balance sheet. Unfunded commitments, which are recorded as liabilities, totaled $40.0 million at September 30, 2019.

We anticipate we will continue to have sufficient funds, through repayments and maturities of loans and securities, deposits and borrowings, to meet our current commitments.

Contingencies

In the normal course of business, the Company and its subsidiary are named defendants in various lawsuits and counter claims. In the opinion of management, after consultation with legal counsel, none of the currently pending suits are expected to have a materially adverse effect on the Company's consolidated financial statements for the year ended September 30, 2019, or future periods.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Asset and Liability Management and Market Risk

The rates of interest the Bank earns on its assets and pays on its liabilities are generally established contractually for a period of time. Fluctuations in interest rates have a significant impact not only upon our net income, but also upon the cash flows and market values of our assets and liabilities. Our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our interest-earning assets and interest-bearing liabilities. Risk associated with changes in interest rates on the earnings of the Bank and the market value of its financial assets and liabilities is known as interest rate risk. Interest rate risk is our most significant market risk, and our ability to adapt to changes in interest rates is known as interest rate risk management.

On a weekly basis, management reviews deposit flows, loan demand, cash levels, and changes in several market rates to assess all pricing strategies. The Bank's pricing strategy for first mortgage loan products includes setting interest rates based on secondary market prices and competitor pricing for our local and correspondent lending markets. Pricing for commercial loans is generally based on competitor pricing and the credit risk of the borrower with consideration given to the overall relationship of the borrower. Generally, deposit pricing is based upon a survey of competitors in the Bank's market areas, and the need to attract funding and retain maturing deposits. The majority of our loans are fixed-rate products with maturities up to 30 years, while the majority of our retail deposits have stated maturities or repricing dates of less than two years.

The general objective of our interest rate risk management program is to determine and manage an appropriate level of interest rate risk while maximizing net interest income in a manner consistent with our policy to manage, to the extent practicable, the exposure of net interest income to changes in market interest rates. The Board of Directors and ALCO regularly review the Bank's interest rate risk exposure by forecasting the impact of hypothetical, alternative interest rate environments on net interest income and the market value of portfolio equity ("MVPE") at various dates. The MVPE is defined as the net of the present value of cash flows from existing assets, liabilities, and off-balance sheet instruments. The present values are determined based upon market conditions as of the date of the analysis, as well as in alternative interest rate environments, providing potential changes in the MVPE under those alternative interest rate environments. Net interest income is projected in the same alternative interest rate environments with both a static balance sheet and management strategies considered. The MVPE and net interest income analyses are also conducted to estimate our sensitivity to rates for future time horizons based upon market conditions as of the date of the analysis. In addition to the interest rate environments presented below, management also reviews the impact of non-parallel rate shock scenarios on a quarterly basis. These scenarios consist of flattening and steepening the yield curve by changing short-term and long-term interest rates independent of each other, and simulating cash flows and determining valuations as a result of these hypothetical changes in interest rates to identify rate environments that pose the greatest risk to the Bank. This analysis helps management quantify the Bank's exposure to changes in the shape of the yield curve.

The ability to maximize net interest income is dependent largely upon the achievement of a positive interest rate spread that can be sustained despite fluctuations in prevailing interest rates. The asset and liability repricing gap is a measure of the difference between the amount of interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of time. The difference provides an indication of the extent to which an institution's interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest-earning assets exceeds the amount of interest-bearing liabilities maturing or repricing during the same period. A gap is considered negative when the amount of interest-bearing liabilities exceeds the amount of interest-earning assets maturing or repricing during the same period. Generally, during a period of rising interest rates, a negative gap within shorter repricing periods adversely affects net interest income, while a positive gap within shorter repricing periods positively affects net interest income. During a period of falling interest rates, the opposite would generally be true.

The shape of the yield curve also has an impact on our net interest income and, therefore, the Bank's net interest margin. Historically, the Bank has benefited from a steeper yield curve as the Bank's mortgage loans are generally priced off of long-term rates while deposits are priced off of short-term rates. A steeper yield curve (one with a greater difference between short-term rates and long-term rates) allows the Bank to receive a higher rate of interest on its new mortgage-related assets relative to the rate paid for the funding of those assets, which generally results in a higher net interest margin. As the yield curve flattens or becomes inverted, the spread between rates received on assets and paid on liabilities becomes compressed, which generally leads to a decrease in net interest margin.

General assumptions used by management to evaluate the sensitivity of our financial performance to changes in interest rates presented in the tables below are utilized in, and set forth under, the gap table and related notes. Although management finds these assumptions reasonable, the interest rate sensitivity of our assets and liabilities and the estimated effects of changes in interest rates on our net interest income and MVPE indicated in the below tables could vary substantially if different assumptions were used or actual experience differs from these assumptions. To illustrate this point, the projected cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities within the next 12 months as a percent of total assets ("one-year gap") is also provided for an up 200 basis point scenario, as of September 30, 2019.

Qualitative Disclosure about Market Risk

At September 30, 2019, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $487.4 million, or 5.22% of total assets, compared to $(14.9) million, or (0.16)% of total assets, at September 30, 2018. The increase in the one-year gap amount was due primarily to lower interest rates as of September 30, 2019 compared to September 30, 2018, as well as an increase in the amount of cash held at September 30, 2019 compared to September 30, 2018. As interest rates fall, borrowers have more economic incentive to refinance their mortgages and agency debt issuers have more economic incentive or opportunity to exercise their call options in order to issue new debt at lower interest rates, resulting in higher projected cash flows on these assets.

The majority of interest-earning assets anticipated to reprice in the coming year are repayments and prepayments on one- to four-family loans and MBS, both of which include the option to prepay without a fee being paid by the contract holder. The amount of interest-bearing liabilities expected to reprice in a given period is not typically impacted significantly by changes in interest rates because the Bank's borrowings and certificate of deposit portfolios have contractual maturities and generally cannot be terminated early without a prepayment penalty. If interest rates were to increase 200 basis points, as of September 30, 2019, the Bank's one-year gap is projected to be $(361.8) million, or (3.87)% of total assets. The decrease in the gap compared to when there is no change in rates is due to lower anticipated cash flows in the higher rate environment. This compares to a one-year gap of $(394.8) million, or (4.18)% of total assets, if interest rates were to have increased 200 basis points as of September 30, 2018.

During the current fiscal year, loan repayments totaled $1.23 billion and cash flows from the securities portfolio totaled $524.9 million. The majority of these cash flows were reinvested into new loans and securities at current market interest rates. Total cash flows from term liabilities that matured and repriced into current market interest rates during the current fiscal year were $2.28 billion, including $875.0 million in FHLB borrowings. These offsetting cash flows allow the Bank to manage its interest rate risk and gap position more precisely than if the Bank did not have offsetting cash flows due to its mix of assets or maturity structure of liabilities.

The Bank primarily uses long-term fixed-rate borrowings with no embedded options to lengthen the average life of the Bank's liabilities. The fixed-rate characteristics of these borrowings lock-in the cost until maturity and thus decrease the amount of liabilities repricing as interest rates move higher compared to funding with lower-cost short-term borrowings. These borrowings are laddered in order to prevent large amounts of liabilities repricing in any one period. The WAL of the Bank's term borrowings as of September 30, 2019 was 1.4 years. However, including the impact of interest rate swaps related to $640.0 million of adjustable-rate FHLB advances, the WAL of the Bank's term borrowings as of September 30, 2019 was 2.6 years. The interest rate swaps effectively convert the adjustable-rate borrowings into long-term, fixed-rate liabilities.

The Bank uses the securities portfolio to shorten the average life of the Bank's assets. Security purchases over the past few years have primarily been focused on callable agency debentures with maturities no longer than five years, shorter duration MBS, and adjustable-rate MBS. These securities have a shorter average life and provide a steady source of cash flow that can be reinvested as interest rates rise into higher-yielding assets.

In addition to these wholesale strategies, the Bank has sought to increase non-maturity deposits. Non-maturity deposits are expected to reduce the risk of higher interest rates because their interest rates are not expected to increase significantly as market interest rates rise. Specifically, checking accounts and savings accounts have had minimal interest rate fluctuations throughout historical interest rate cycles, though no assurance can be given that this will be the case in future interest rate cycles. The balances and rates of these accounts have historically tended to remain very stable over time, giving them the characteristic of long-term liabilities. The Bank uses historical data pertaining to these accounts to estimate their future balances.

Over the last few years, the Bank has priced long-term certificates of deposit more aggressively than short-term certificates of deposit with the goal of giving customers incentive to move funds into longer-term certificates of deposit when interest rates were lower. Like non-maturity deposits, longer-term certificates of deposit are expected to reduce the risk of higher interest rates when market interest rates rise. More recently, the Bank began pricing short-term certificates of deposit more aggressively as the Bank reduces its usage of public unit certificates of deposit, which are generally large dollar, short-term funds. This strategy is intended to allow the Bank to more quickly reprice certificate of deposit funds lower, as it has been management's expectation that short-term interest rates would decrease. Additionally, as we expand the commercial banking business, we expect to have the ability to obtain lower-costing commercial deposits, which could be used to reduce the cost of funds by replacing FHLB borrowings and wholesale deposits.

Gap Table. The following gap table summarizes the anticipated maturities or repricing periods of the Bank's interest-earning assets and interest-bearing liabilities based on the information and assumptions set forth in the notes below. Cash flow projections for mortgage-related assets are calculated based in part on prepayment assumptions at current and projected interest rates. Prepayment projections are subjective in nature, involve uncertainties and assumptions and, therefore, cannot be determined with a high degree of accuracy. Although certain assets and liabilities may have similar maturities or periods to repricing, they may react differently to changes in market interest rates. Assumptions may not reflect how actual yields and costs respond to market interest rate changes. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the gap table below. A positive gap indicates more cash flows from assets are expected to reprice than cash flows from liabilities and would indicate, in a rising rate environment, that earnings should increase. A negative gap indicates more cash flows from liabilities are expected to reprice than cash flows from assets and would indicate, in a rising rate environment, that earnings should decrease. For additional information regarding the impact of changes in interest rates, see the following Change in Net Interest Income and Change in MVPE discussions and tables.



				More Than			More Than
	Within			One Year to			Three Years			Over
	One Year			Three Years			to Five Years			Five Years			Total
Interest-earning assets:	(Dollars in thousands)
Loans receivable⁽¹⁾	$	1,944,038		$	2,204,973		$	1,292,009		$	1,965,180		$	7,406,200
Securities⁽²⁾	628,960			319,021			135,423			108,051			1,191,455
Other interest-earning assets	198,688			—			—			—			198,688
Total interest-earning assets	2,771,686			2,523,994			1,427,432			2,073,231			8,796,343

Interest-bearing liabilities:
Non-maturity deposits⁽³⁾	227,765			327,370			257,021			1,908,406			2,720,562
Certificates of deposit	1,507,319			1,123,151			356,684			471			2,987,625
Borrowings⁽⁴⁾	550,000			925,000			565,000			239,971			2,279,971
Total interest-bearing liabilities	2,285,084			2,375,521			1,178,705			2,148,848			7,988,158

Excess (deficiency) of interest-earning assets over
interest-bearing liabilities	$	486,602		$	148,473		$	248,727		$	(75,617	)	$	808,185

Cumulative excess of interest-earning assets over
interest-bearing liabilities	$	486,602		$	635,075		$	883,802		$	808,185

Cumulative (deficiency) excess of interest-earning assets over interest-bearing
liabilities as a percent of total Bank assets at:
September 30, 2019	5.21		%	6.80		%	9.46		%	8.65		%
September 30, 2018	(0.16		)

Cumulative one-year gap - interest rates +200 bps at:
September 30, 2019	(3.88		)
September 30, 2018	(4.18		)

(1)

Adjustable-rate loans are included in the period in which the rate is next scheduled to adjust or in the period in which repayments are expected to occur, or prepayments are expected to be received, prior to their next rate adjustment, rather than in the period in which the loans are due. Fixed-rate loans are included in the periods in which they are scheduled to be repaid, based on scheduled amortization and prepayment assumptions. Balances are net of undisbursed amounts and deferred fees and exclude loans 90 or more days delinquent or in foreclosure.


(2)	MBS reflect projected prepayments at amortized cost. Investment securities are presented based on contractual maturities, term to call dates or pre-refunding dates as of September 30, 2019, at amortized cost.

(3)

Although the Bank's checking, savings, and money market accounts are subject to immediate withdrawal, management considers a substantial amount of these accounts to be core deposits having significantly longer effective maturities. The decay rates (the assumed rates at which the balances of existing accounts decline) used on these accounts is based on assumptions developed from our actual experiences with these accounts. If all of the Bank's checking, savings, and money market accounts had been assumed to be subject to repricing within one year, interest-bearing liabilities which were estimated to mature or reprice within one year would have exceeded interest-earning assets with comparable characteristics by $2.01 billion, for a cumulative one-year gap of (21.5)% of total assets.


(4)	Borrowings exclude deferred prepayment penalty costs. Included in this line are $640.0 million of FHLB adjustable-rate advances with interest rate swaps. The repricing for these liabilities is projected to occur at the maturity date of each interest rate swap.

Change in Net Interest Income. The Bank's net interest income projections are a reflection of the response to interest rates of the assets and liabilities that are expected to mature or reprice over the next year. Repricing occurs as a result of cash flows that are received or paid on assets or due on liabilities which would be replaced at then current market interest rates or on adjustable-rate products that reset during the next year. The Bank's borrowings and certificate of deposit portfolios have stated maturities and the cash flows related to the Bank's liabilities do not generally fluctuate as a result of changes in interest rates. Cash flows from mortgage-related assets and callable agency debentures can vary significantly as a result of changes in interest rates. As interest rates decrease, borrowers have an economic incentive to lower their cost of debt by refinancing or endorsing their mortgage to a lower interest rate. Similarly, agency debt issuers are more likely to exercise embedded call options for agency securities and issue new securities at a lower interest rate.

For each date presented in the following table, the estimated change in the Bank's net interest income is based on the indicated instantaneous, parallel and permanent change in interest rates is presented. The change in each interest rate environment represents the difference between estimated net interest income in the 0 basis point interest rate environment ("base case," assumes the forward market and product interest rates implied by the yield curve are realized) and the estimated net interest income in each alternative interest rate environment (assumes market and product interest rates have a parallel shift in rates across all maturities by the indicated change in rates). Projected cash flows for each scenario are based upon varying prepayment assumptions to model likely customer behavior changes as market rates change. Estimations of net interest income used in preparing the table below were based upon the assumptions that the total composition of interest-earning assets and interest-bearing liabilities does not change materially and that any repricing of assets or liabilities occurs at anticipated product and market rates for the alternative rate environments as of the dates presented. The estimation of net interest income does not include any projected gains or losses related to the sale of loans or securities, or income derived from non-interest income sources, but does include the use of different prepayment assumptions in the alternative interest rate environments. It is important to consider that estimated changes in net interest income are for a cumulative four-quarter period. These do not reflect the earnings expectations of management.



Change	Net Interest Income At September 30,
(in Basis Points)	2019							2018
in Interest Rates⁽¹⁾	Amount ($)		Change ($)			Change (%)		Amount ($)		Change ($)			Change (%)
	(Dollars in thousands)
-100 bp	$	186,080	$	(7,249	)	(3.75	)%	$	201,434	$	1,221		0.61	%
000 bp	193,329		—			—		200,213		—			—
+100 bp	194,093		764			0.40		196,272		(3,941		)	(1.97	)
+200 bp	192,111		(1,218		)	(0.63	)	190,872		(9,341		)	(4.67	)
+300 bp	188,752		(4,577		)	(2.37	)	184,603		(15,610		)	(7.80	)


(1)	Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities.

The net interest income projection was lower in the base case scenario at September 30, 2019 compared to September 30, 2018 due mainly to lower market interest rates at September 30, 2019 as assets are expected to reprice lower at a faster pace than liabilities over the one-year horizon. The Bank's one-year gap amount was positive at September 30, 2019. Therefore, as market interest rates rise in the +100 basis point scenario, the Bank's assets are projected to reprice higher at a faster pace than liabilities, resulting in a higher net interest income projection in this scenario. However, as interest rates rise, the one-year gap will eventually become negative due to a reduction in cash flows from the Bank's mortgage-related assets and callable agency debentures. Therefore, as interest rates move higher in the +200 and +300 basis point scenarios, liabilities are projected to reprice to higher interest rates at a faster pace than assets and have a negative impact to the Bank's net interest income projection.

Change in MVPE. Changes in the estimated market values of our financial assets and liabilities drive changes in estimates of MVPE. The market value of an asset or liability reflects the present value of all the projected cash flows over its remaining life, discounted at market interest rates. As interest rates rise, generally the market value for both financial assets and liabilities decrease. The opposite is generally true as interest rates fall. The MVPE represents the theoretical market value of capital that is calculated by netting the market value of assets, liabilities, and off-balance sheet instruments. If the market values of financial assets increase at a faster pace than the market values of financial liabilities, or if the market values of financial liabilities decrease at a faster pace than the market values of financial assets, the MVPE will increase. The market value of shorter term-to-maturity financial instruments is less sensitive to changes in interest rates than are longer term-to-maturity financial instruments. Because of this, the market values of our certificates of deposit (which generally have relatively shorter average lives) tend to display less sensitivity to changes in interest rates than do our mortgage-related assets (which generally have relatively longer average lives). The average life expected on our mortgage-related assets varies under different interest rate environments because borrowers have the ability to prepay their mortgage loans. Therefore, as interest rates decrease, the WAL of mortgage-related assets decrease as well. As interest rates increase, the WAL would be expected to increase, as well as increasing the sensitivity of these assets in higher rate environments.

The following table sets forth the estimated change in the MVPE for each date presented based on the indicated instantaneous, parallel, and permanent change in interest rates. The change in each interest rate environment represents the difference between the MVPE in the base case (assumes the forward market interest rates implied by the yield curve are realized) and the MVPE in each alternative interest rate environment (assumes market interest rates have a parallel shift in rates). Projected cash flows for each scenario are based upon varying prepayment assumptions to model likely customer behavior as market rates change. The estimations of the MVPE used in preparing the table below were based upon the assumptions that the total composition of interest-earning assets and interest-bearing liabilities does not change, that any repricing of assets or liabilities occurs at current product or market rates for the alternative rate environments as of the dates presented, and that different prepayment rates were used in each alternative interest rate environment. The estimated MVPE results from the valuation of cash flows from financial assets and liabilities over the anticipated lives of each for each interest rate environment. The table below presents the effects of the changes in interest rates on our assets and liabilities as they mature, repay, or reprice, as shown by the change in the MVPE for alternative interest rates.



Change	Market Value of Portfolio Equity At September 30,
(in Basis Points)	2019							2018
in Interest Rates⁽¹⁾	Amount ($)		Change ($)			Change (%)		Amount ($)		Change ($)			Change (%)
	(Dollars in thousands)
-100 bp	$	1,203,351	$	(80,078	)	(6.24	)%	$	1,498,631	$	53,683		3.72	%
000 bp	1,283,429		—			—		1,444,948		—			—
+100 bp	1,286,446		3,017			0.24		1,281,910		(163,038		)	(11.28	)
+200 bp	1,162,151		(121,278		)	(9.45	)	1,087,644		(357,304		)	(24.73	)
+300 bp	992,060		(291,369		)	(22.70	)	888,611		(556,337		)	(38.50	)


(1)	Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities.

At September 30, 2019, the average life of the Bank's mortgage-related assets was shorter than that of the Bank's long-term borrowings and core deposits due to the low level of interest rates. Because of the low level of interest rates at September 30, 2019, prepayment projections for mortgage-related assets and call projections for callable agency debentures were high, thereby significantly reducing the average life of these assets by increasing near-term cash flows. As interest rates rise, the market values of the Bank's financial liabilities decrease at a faster pace than those of its assets. As a result, the Bank's MVPE increases in the +100 basis point interest rate environment. As interest rates move higher in the +200 and +300 basis point interest rate environments, prepayment projections for mortgage-related assets, in general, are expected to decrease significantly and reduce near-term cash flows. As interest rates rise to these levels, projected prepayments would likely only be realized through changes in borrowers' lives such as divorce, death, job-related relocations, or other life-changing events, resulting in an increase in the average life of these assets. Call projections for the Bank's callable agency debentures would also decrease significantly as interest rates rise to these levels, which would cause the cash flows from these assets to move toward their contractual maturity dates. The longer expected average lives of these assets, relative to the assumptions in the base case environment, increase their sensitivity to changes in interest rates. As a result, the Bank's sensitivity to rising interest rates increases to such a point that that expected decrease in the market value of the Bank's financial assets more than

offsets the decrease in the market value of its financial liabilities, resulting in a decrease in the MVPE in these interest rate environments.

The following table presents the weighted average yields/rates and WALs (in years), after applying prepayment, call assumptions, and decay rates for our interest-earning assets and interest-bearing liabilities as of September 30, 2019. Yields presented for interest-earning assets include the amortization of fees, costs, premiums and discounts, which are considered adjustments to the yield. The interest rate presented for term borrowings is the effective rate, which includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. The WAL presented for term borrowings includes the effect of interest rate swaps. The maturity and repricing terms presented for one- to four-family loans represent the contractual terms of the loan.



	Amount		Yield/Rate		WAL	% of Category		% of Total
	(Dollars in thousands)
Investment securities	$	268,376	2.11	%	0.7	22.3	%	3.0	%
MBS - fixed	632,787		2.46		3.0	52.5		7.1
MBS - adjustable	303,700		3.10		2.4	25.2		3.4
Total securities	1,204,863		2.54		2.3	100.0	%	13.5
Loans receivable:
Fixed-rate one- to four-family:
<= 15 years	1,024,314		3.13		3.6	13.8	%	11.5
> 15 years	4,423,504		3.88		5.2	59.7		49.5
Fixed-rate commercial	450,577		4.52		3.1	6.1		5.0
All other fixed-rate loans	53,241		5.08		3.3	0.7		0.6
Total fixed-rate loans	5,951,636		3.81		4.8	80.3		66.6
Adjustable-rate one- to four-family:
<= 36 months	215,764		2.49		2.7	2.9		2.4
> 36 months	812,493		3.36		2.2	11.0		9.1
Adjustable-rate commercial	317,293		5.13		6.9	4.3		3.5
All other adjustable-rate loans	115,287		5.84		1.6	1.5		1.3
Total adjustable-rate loans	1,460,837		3.81		3.2	19.7		16.3
Total loans receivable	7,412,473		3.81		4.4	100.0	%	82.9
FHLB stock	98,456		7.47		1.4			1.1
Cash and cash equivalents	220,370		1.80		—			2.5
Total interest-earning assets	$	8,936,162	3.64		4.0			100.0	%

Non-maturity deposits	$	2,594,242	0.35		14.2	46.5	%	33.2	%
Retail/business certificates of deposit	2,692,770		2.08		1.5	48.2		34.4
Public unit certificates of deposit	294,855		2.29		0.5	5.3		3.8
Total deposits	5,581,867		1.29		7.3	100.0	%	71.4
Term borrowings	2,140,000		2.38		2.6	95.5	%	27.3
FHLB line of credit	100,000		2.20		—	4.5		1.3
Total borrowings	2,240,000		2.37		2.5	100.0	%	28.6
Total interest-bearing liabilities	$	7,821,867	1.60		5.9			100.0	%

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of Capitol Federal Financial, Inc. and subsidiary

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Capitol Federal Financial, Inc. and subsidiary (the "Company") as of September 30, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended September 30, 2019, of the Company and our report dated November 27, 2019, expressed an unqualified opinion on those financial statements.

Basis for Opinion

The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Kansas City, Missouri

November 27, 2019

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of Capitol Federal Financial, Inc. and subsidiary

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Capitol Federal Financial, Inc. and subsidiary (the "Company") as of September 30, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended September 30, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 27, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses - Refer to Notes 1 and 5 to the financial statements

Critical Audit Matter Description

Management's methodology for assessing the appropriateness of the allowance for credit losses (ACL) consists of a formula analysis model, along with analyzing and considering several other relevant internal and external factors. In the formula analysis model, historical loss factors, as adjusted, are applied to each loan category and qualitative loss factors are applied to reflect risks inherent in each loan category that are not captured by the historical loss factors. Management reviews the loss factors quarterly to assess whether the factors adequately cover probable and estimable losses inherent in the loan portfolio. Management also analyzes and considers several other relevant internal and external factors, including the trend and composition of delinquent loans and nonperforming loans, trends in foreclosed property transactions and charge-off activity, the current status and trends of local and national employment levels, trends and current conditions in the housing markets, loan growth and concentrations, and industry and peer charge-off and ACL information, among other considerations. Based

on management's review of these data elements, they evaluate the reasonableness of the ACL on an ongoing basis and whether any changes need to be made to the Bank's ACL methodology.

Given the significant amount of judgment required by management when considering the relevant data elements, performing audit procedures to evaluate the reasonableness of the estimated ACL required a high degree of auditor judgment.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the ACL formula analysis model included the following, among others:


•	We tested the effectiveness of controls over the Company's ACL formula analysis model inclusive of the controls over loan charge-off activity and management's review of the adequacy of the ACL.


•	We tested the classification and appropriate segregation of loan categories based on certain risk characteristics in order to evaluate the application of the relevant data elements.


•	We evaluated the appropriateness and relevance of the data elements by comparing to relevant internal and external sources.


•	We tested the mathematical accuracy of (i) the historical charge-off activity, (ii) the quantitative measures of the qualitative loss factors, and (iii) the formula analysis model calculations.


•	We evaluated analytics, trends, and peer analyses of the overall ACL formula analysis model to assess for reasonableness.

Kansas City, Missouri

November 27, 2019

We have served as the Company's auditor since 1974.



CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2019 and 2018 (Dollars in thousands, except per share amounts)

	2019			2018
ASSETS:
Cash and cash equivalents (includes interest-earning deposits of $198,809 and $122,733)	$	220,370		$	139,055
Securities:
Available-for-sale ("AFS"), at estimated fair value (amortized cost of $1,191,455 and $718,564)	1,204,863			714,614
Held-to-maturity ("HTM"), at amortized cost (estimated fair value of $0 and $601,071)	—			612,318
Loans receivable, net (allowance for credit losses ("ACL") of $9,226 and $8,463)	7,416,747			7,514,485
Federal Home Loan Bank Topeka ("FHLB") stock, at cost	98,456			99,726
Premises and equipment, net	96,784			96,005
Income taxes receivable, net	2			2,177
Other assets	302,796			271,167
TOTAL ASSETS	$	9,340,018		$	9,449,547

LIABILITIES:
Deposits	$	5,581,867		$	5,603,354
FHLB borrowings	2,139,989			2,174,981
Other borrowings	100,000			110,052
Advance payments by borrowers for taxes and insurance	65,686			65,264
Deferred income tax liabilities, net	14,282			21,253
Accounts payable and accrued expenses	101,868			83,021
Total liabilities	8,003,692			8,057,925

STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 100,000,000 shares authorized, no shares issued or outstanding	—			—
Common stock, $.01 par value; 1,400,000,000 shares authorized, 141,440,030 and 141,225,516
shares issued and outstanding as of September 30, 2019 and 2018, respectively	1,414			1,412
Additional paid-in capital	1,210,226			1,207,644
Unearned compensation, Employee Stock Ownership Plan ("ESOP")	(34,692		)	(36,343		)
Retained earnings	174,277			214,569
Accumulated other comprehensive (loss) income ("AOCI"), net of tax	(14,899		)	4,340
Total stockholders' equity	1,336,326			1,391,622
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	9,340,018		$	9,449,547


See accompanying notes to consolidated financial statements.



CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2019, 2018, and 2017 (Dollars in thousands, except per share amounts)

	2019		2018		2017
INTEREST AND DIVIDEND INCOME:
Loans receivable	$	284,229	$	260,198	$	253,393
Mortgage-backed securities ("MBS")	25,730		22,619		23,809
FHLB stock	7,823		10,962		12,233
Investment securities	6,366		4,670		4,362
Cash and cash equivalents	5,806		23,443		19,389
Total interest and dividend income	329,954		321,892		313,186
INTEREST EXPENSE:
Deposits	66,201		52,625		42,968
FHLB borrowings	54,391		67,120		68,871
Other borrowings	2,972		3,374		5,965
Total interest expense	123,564		123,119		117,804
NET INTEREST INCOME	206,390		198,773		195,382
PROVISION FOR CREDIT LOSSES	750		—		—
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	205,640		198,773		195,382
NON-INTEREST INCOME:
Deposit service fees	12,740		15,636		15,053
Income from bank-owned life insurance ("BOLI")	2,432		1,875		2,233
Other non-interest income	6,786		4,524		4,910
Total non-interest income	21,958		22,035		22,196
NON-INTEREST EXPENSE:
Salaries and employee benefits	53,145		46,563		43,437
Information technology and related expense	17,615		13,999		11,282
Occupancy, net	13,032		11,455		10,814
Regulatory and outside services	5,813		5,709		5,821
Advertising and promotional	5,244		5,034		4,673
Deposit and loan transaction costs	2,478		5,621		5,284
Office supplies and related expense	2,439		1,888		1,981
Federal insurance premium	1,172		3,277		3,539
Other non-interest expense	6,006		3,356		2,827
Total non-interest expense	106,944		96,902		89,658
INCOME BEFORE INCOME TAX EXPENSE	120,654		123,906		127,920
INCOME TAX EXPENSE	26,411		24,979		43,783
NET INCOME	$	94,243	$	98,927	$	84,137

Basic earnings per share ("EPS")	$	0.68	$	0.73	$	0.63
Diluted EPS	$	0.68	$	0.73	$	0.63

See accompanying notes to consolidated financial statements.



CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2019, 2018, and 2017 (Dollars in thousands)

	2019			2018			2017
Net income	$	94,243		$	98,927		$	84,137
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on AFS securities arising during the period,
net of taxes of $(3,468), $2,499, and $1,595	10,804			(6,741		)	(2,625		)
Unrealized gains on securities reclassified from HTM to AFS
during the period, net of taxes of $(750), $0, and $0	2,336			—			—
Changes in unrealized gains (losses) on cash flow hedges,
net of taxes of $10,394, $(2,785), and $226	(32,379		)	7,496			(372		)
Comprehensive income	$	75,004		$	99,682		$	81,140

See accompanying notes to consolidated financial statements.



CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2019, 2018, and 2017 (Dollars in thousands, except per share amounts)

			Additional			Unearned									Total
	Common		Paid-In			Compensation			Retained						Stockholders'
	Stock		Capital			ESOP			Earnings			AOCI			Equity
Balance at September 30, 2016	$	1,375	$	1,156,855		$	(39,647	)	$	268,466		$	5,915		$	1,392,964
Net income, fiscal year 2017									84,137						84,137
Other comprehensive loss, net of tax												(2,997		)	(2,997		)
ESOP activity			784			1,652									2,436
Restricted stock activity, net			57												57
Stock-based compensation			506												506
Stock options exercised	7		9,166												9,173
Cash dividends to stockholders ($0.88 per share)									(117,963		)				(117,963		)
Balance at September 30, 2017	1,382		1,167,368			(37,995		)	234,640			2,918			1,368,313

Net income, fiscal year 2018									98,927						98,927
Other comprehensive income, net of tax												755			755
Reclassification of certain tax effects related to adopting Accounting Standards Update ("ASU") 2018-02									(667		)	667			—
Cumulative effect of adopting ASU 2016-09			19						(19		)				—
Capital City Bancshares, Inc. ("CCB") acquisition	30		39,083												39,113
ESOP activity			541			1,652									2,193
Stock-based compensation			372												372
Stock options exercised			261												261
Cash dividends to stockholders ($0.88 per share)									(118,312		)				(118,312		)
Balance at September 30, 2018	1,412		1,207,644			(36,343		)	214,569			4,340			1,391,622

Net income, fiscal year 2019									94,243						94,243
Other comprehensive loss, net of tax												(19,239		)	(19,239		)
Cumulative effect of adopting ASU 2014-09									394						394
ESOP activity			549			1,651									2,200
Restricted stock activity, net	1		(3		)										(2		)
Stock-based compensation			552												552
Stock options exercised	1		1,484												1,485
Cash dividends to stockholders ($0.98 per share)									(134,929		)				(134,929		)
Balance at September 30, 2019	$	1,414	$	1,210,226		$	(34,692	)	$	174,277		$	(14,899	)	$	1,336,326


See accompanying notes to consolidated financial statements.



CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2019, 2018, and 2017 (Dollars in thousands)

	2019			2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	94,243		$	98,927		$	84,137
Adjustments to reconcile net income to net cash provided by operating activities:
FHLB stock dividends	(7,823		)	(10,962		)	(12,233		)
Provision for credit losses	750			—			—
Originations of loans receivable held-for-sale ("LHFS")	—			(777		)	—
Proceeds from sales of LHFS	—			16,423			6,816
Amortization and accretion of premiums and discounts on securities	1,242			3,150			4,479
Depreciation and amortization of premises and equipment	9,143			8,458			7,796
Amortization of intangible assets	2,316			234			—
Amortization of deferred amounts related to FHLB advances, net	8			1,173			1,419
Common stock committed to be released for allocation - ESOP	2,200			2,193			2,436
Stock-based compensation	552			372			506
Provision for deferred income taxes	(361		)	(4,540		)	922
Changes in:
Unrestricted cash collateral (provided to)/received from derivative counterparties, net	(9,970		)	10,701			(731		)
Other assets, net	6,220			1,712			51
Income taxes payable/receivable, net	2,173			(2,262		)	590
Accounts payable and accrued expenses	(19,746		)	(639		)	(10,743		)
Net cash provided by operating activities	80,947			124,163			85,445

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of AFS securities	(386,702		)	(411,459		)	(37,425		)
Proceeds from calls, maturities and principal reductions of AFS securities	359,551			192,966			144,643
Proceeds from calls, maturities and principal reductions of HTM securities	165,336			212,267			268,689
Proceeds from sale of AFS securities	—			2,078			—
Proceeds from the redemption of FHLB stock	197,054			291,506			386,900
Purchase of FHLB stock	(187,961		)	(277,552		)	(365,651		)
Net change in loans receivable	95,358			(37,537		)	(246,882		)
Purchase of premises and equipment	(11,732		)	(11,761		)	(9,128		)
Proceeds from sale of other real estate owned ("OREO")	2,053			2,240			5,138
Cash acquired from acquisition	—			15,685			—
Proceeds from the redemption of common equity securities related to the redemption of junior subordinated debentures	302			—			—
Net cash provided by (used in) investing activities	233,259			(21,567		)	146,284


							(Continued)



CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2019, 2018, and 2017 (Dollars in thousands)

	2019			2018			2017
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid	(134,929		)	(118,312		)	(117,963		)
Net change in deposits	(21,487		)	(58,988		)	145,850
Proceeds from borrowings	5,518,700			17,275,100			2,700,100
Repayments on borrowings	(5,563,752		)	(17,414,200		)	(2,900,100		)
Change in advance payments by borrowers for taxes and insurance	422			939			1,106
Stock options exercised	1,485			261			8,843
Excess tax benefits from stock options	—			—			330
Net cash used in financing activities	(199,561		)	(315,200		)	(161,834		)

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS	114,645			(212,604		)	69,895

CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS:
Beginning of year	139,055			351,659			281,764
End of year	$	253,700		$	139,055		$	351,659

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income tax payments	$	17,779		$	24,785		$	37,875
Interest payments	$	123,508		$	119,699		$	117,308

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Loans transferred to LHFS	$	—		$	15,814		$	6,714
Acquisition:
Common stock issued	$	—		$	39,113		$	—
Fair value of assets acquired, excluding acquired cash and intangibles	$	—		$	418,062		$	—
Fair value of liabilities assumed	$	—		$	412,675		$	—
Transfer of HTM securities, at amortized cost, to AFS securities	$	444,732		$	—		$	—

See accompanying notes to consolidated financial statements.							(Concluded)

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2019, 2018, and 2017

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business - Capitol Federal Financial, Inc. (the "Company") provides a full range of retail banking services through its wholly-owned subsidiary, Capitol Federal Savings Bank (the "Bank"), a federal savings bank, which has 44 traditional and 10 in-store banking offices serving primarily the metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia and Salina, Kansas and portions of the Kansas City metropolitan area. The Bank emphasizes mortgage lending, primarily originating and purchasing one- to four-family loans, and providing personal retail financial services, along with offering commercial banking and lending products. The Bank is subject to competition from other financial institutions and other companies that provide financial services.

Basis of Presentation - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank. The Bank has two wholly owned subsidiaries, Capitol Funds, Inc. and Capital City Investments, Inc. Capitol Funds, Inc. has a wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company. Capital City Investments, Inc. is a real estate and investment holding company. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates and assumptions.

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Cash, cash equivalents, restricted cash and restricted cash equivalents reported in the statement of cash flows include cash and cash equivalents of $220.4 million and $139.1 million at September 30, 2019 and 2018 and restricted cash and cash equivalents of $33.3 million at September 30, 2019, which was included in other assets on the consolidated balance sheet. There was no restricted cash and cash equivalents at September 30, 2018. The restricted cash and cash equivalents relate to the collateral postings to/from the Bank's derivative counterparties associated with the Bank's interest rate swaps. See additional discussion regarding the interest rate swaps in Note 9. Deposits and Borrowed Funds.

Regulations of the Board of Governors of the Federal Reserve System ("FRB") require federally chartered savings banks to maintain cash reserves against their transaction accounts. Required reserves must be maintained in the form of vault cash, an account at a Federal Reserve Bank, or a pass-through account as defined by the FRB. The amount of interest-earning deposits held at the Federal Reserve Bank of Kansas City ("FRB of Kansas City") as of September 30, 2019 and 2018 was $198.6 million and $120.8 million, respectively. The Bank is in compliance with the FRB requirements. For the years ended September 30, 2019 and 2018, the average daily balance of required reserves at the FRB of Kansas City was $21.5 million and $11.0 million, respectively.

Net Presentation of Cash Flows Related to Borrowings - At times, the Bank enters into certain FHLB advances with contractual maturities of 90 days or less. Cash flows related to these advances are reported on a net basis in the consolidated statements of cash flows.

Securities - Securities include MBS and agency debentures issued primarily by United States Government-Sponsored Enterprises ("GSE"), including Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and the Federal Home Loan Banks, United States Government agencies, including Government National Mortgage Association, and municipal bonds. Securities are classified as HTM, AFS, or trading based on management's intention for holding the securities on the date of purchase. Generally, classifications are made in response to liquidity needs, asset/liability management strategies, and the market interest rate environment at the time of purchase.

Securities that management has the intent and ability to hold to maturity are classified as HTM and reported at amortized cost. Such securities are adjusted for the amortization of premiums and discounts which are recognized as adjustments to interest income over the life of the securities using the level-yield method.

Securities that management may sell if necessary for liquidity or asset management purposes are classified as AFS and reported at fair value, with unrealized gains and losses reported as a component of AOCI within stockholders' equity, net of deferred income taxes. The amortization of premiums and discounts are recognized as adjustments to interest income over the life of the securities using the level-yield method. Gains or losses on the disposition of AFS securities are recognized using the specific identification method. The Company primarily uses prices obtained from third-party pricing services to determine the fair value of securities. See additional discussion of fair value of AFS securities in "Note 15. Fair Value of Financial Instruments."

Securities that are purchased and held principally for resale in the near future are classified as trading securities and are reported at fair value, with unrealized gains and losses included in non-interest income in the consolidated statements of income. During the fiscal years ended September 30, 2019 and 2018, neither the Company nor the Bank maintained a trading securities portfolio.

Management monitors securities in the investment portfolio for impairment on an ongoing basis and performs a formal review quarterly. The process involves monitoring market events and other items that could impact issuers. The evaluation includes, but is not limited to, such factors as: the nature of the investment, the length of time the security has had a fair value less than the amortized cost basis, the cause(s) and severity of the loss, expectation of an anticipated recovery period, recent events specific to the issuer or industry including the issuer's financial condition and current ability to make future payments in a timely manner, external credit ratings and recent downgrades in such ratings, management's intent to sell and whether it is more likely than not management would be required to sell prior to recovery for debt securities. Management determines whether other-than-temporary losses should be recognized for impaired securities by assessing all known facts and circumstances surrounding the securities. If management intends to sell an impaired security or if it is more likely than not that management will be required to sell an impaired security before recovery of its amortized cost basis, an other-than-temporary impairment has occurred and the difference between amortized cost and fair value will be recognized as a loss in earnings and the security will be written down to fair value.

Loans Receivable - Loans receivable that management has the intent and ability to hold for the foreseeable future are carried at the amount of unpaid principal, net of ACL, undisbursed loan funds, unamortized premiums and discounts, and deferred loan origination fees and costs. Net loan origination fees and costs, and premiums and discounts are amortized as yield adjustments to interest income using the level-yield method. Interest on loans is credited to income as earned and accrued only if deemed collectible.

Loan endorsements - Certain 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 by the Bank. The fee received for each endorsement is deferred and amortized as an adjustment to interest income over the life of the loan. If the change in loan terms resulting from the endorsement is deemed to be more than minor, the loan is treated as a new loan and all existing unamortized deferred loan origination fees and costs are recognized at the time of endorsement. If the change in loan terms is deemed to be minor, the fee received for the endorsement is added to the net remaining unamortized deferred fee or deferred cost balance.

Troubled debt restructurings ("TDRs") - For borrowers experiencing financial difficulties, the Bank may grant a concession to the borrower. Such concessions generally involve extensions of loan maturity dates, the granting of periods during which reduced payment amounts are required, and/or reductions in interest rates. The Bank does not forgive principal or interest, nor does it commit to lend additional funds to these borrowers, except for situations generally involving the capitalization of delinquent interest and/or escrow on one- to four-family loans and consumer loans, not to exceed the original loan amount. In the case of commercial loans, the Bank does not forgive principal or interest or commit to lend additional funds unless the borrower provides additional collateral or other enhancements to improve the credit quality.

Delinquent loans - A loan is considered delinquent when payment has not been received within 30 days of its contractual due date. The number of days delinquent is determined by the number of scheduled payments that remain unpaid, assuming a period of 30 days between each scheduled payment.

Nonaccrual loans - The accrual of income on loans is generally discontinued when interest or principal payments are 90 days in arrears. We also report certain TDR loans as nonaccrual loans that are required to be reported as such pursuant to regulatory reporting requirements. Loans on which the accrual of income has been discontinued are designated as nonaccrual

and outstanding interest previously credited beyond 90 days delinquent is reversed, except in the case of commercial loans in which all delinquent accrued interest is reversed. A nonaccrual one- to four-family or consumer loan is returned to accrual status once the contractual payments have been made to bring the loan less than 90 days past due or, in the case of a TDR loan, the borrower has made the required consecutive loan payments. A nonaccrual commercial loan is returned to accrual status once the loan has been current for a minimum of six months, all fees and interest are paid current, the loan has a sufficient debt service coverage ratio, and the loan is well secured and within policy.

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, in which case interest income is no longer recognized.

Acquired Loans - Acquired loans are initially recorded at fair value based on a discounted cash flow valuation methodology that considers, among other things, interest rates, projected prepayments, projected default rates, loss given default and recovery rates, with no carryover of any existing ACL. Acquired loans with evidence of credit quality deterioration at acquisition are reviewed to determine if it is probable that the Company will not be able to collect all contractual amounts due, including both principal and interest. When both conditions exist, such loans are categorized and accounted for as purchased credit impaired ("PCI") loans. When these conditions do not exist, the loans are categorized as non-PCI loans.

For PCI loans with cash flows that the Company has determined can be reasonably estimated, which is the majority of the PCI loans, interest income is recognized on a level-yield basis over the life of the loan based upon the excess of expected cash flows over the original investment in the loan.

Allowance for Credit Losses - The ACL represents management's best estimate of the amount of inherent losses in the loan portfolio as of the balance sheet date. It involves a high degree of complexity and requires management to make difficult and subjective judgments and assumptions about highly uncertain matters. Management's methodology for assessing the appropriateness of the ACL consists of a formula analysis model, along with analyzing and considering several other relevant internal and external factors. The use of different judgments and assumptions could cause reported results to differ significantly. Management maintains the ACL through provisions for credit losses that are either charged or credited to income.

One- to four-family loans, including home equity loans, are individually evaluated for loss when the loan is generally 180 days delinquent and any losses are charged-off. Losses are based on new collateral values obtained through appraisals, less estimated costs to sell. Anticipated private mortgage insurance proceeds are taken into consideration when calculating the loss amount. An updated appraisal is requested, at a minimum, every 12 months thereafter if the loan is 180 days or more delinquent or in foreclosure. If the Bank holds the first and second mortgage, both loans are combined when evaluating whether there is a potential loss on the loan. When a non-real estate secured consumer loan is 120 days delinquent, any identified losses are charged-off. For commercial loans, generally losses are charged-off prior to a loan becoming 120 days delinquent when it is determined, through the analysis of any available current financial information with regards to the borrower, that the borrower is not able to service the debt and there is little or no prospect for near term improvement, or, in the case of secured loans, it is determined, through the analysis of current information with regards to the Bank's collateral position, that the amounts due from the borrower are in excess of the calculated current fair value of the collateral after consideration of estimated costs to sell. Charge-offs for any loan type may also occur at any time if the Bank has knowledge of the existence of a probable loss.

The primary risk characteristics inherent in the one- to four-family and consumer loan portfolios are a decline in economic conditions, elevated levels of unemployment or underemployment, and declines in residential real estate values. Any one or a combination of these events may adversely affect the ability of borrowers to repay their loans, resulting in increased delinquencies, non-performing assets, loan losses, and future loan loss provisions. Although the commercial loan portfolio is subject to the same risk of declines in economic conditions, the primary risk characteristics inherent in this portfolio include the ability of the borrower to sustain sufficient cash flows from leases and business operations, the ability to control operational or business expenses to satisfy their contractual debt payments, and the ability to utilize personal or business resources to pay their contractual debt payments if the cash flows are not sufficient. Additionally, if the Bank were to repossess the secured collateral of a commercial real estate loan, the pool of potential buyers is more limited than that for a residential property. Therefore, the Bank could hold the property for an extended period of time, or potentially be forced to sell at a discounted price, resulting in additional losses. Our commercial and industrial loans are primarily secured by

accounts receivable, inventory and equipment, which may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business.

Each quarter end, a formula analysis is prepared which segregates the loan portfolio into categories based on certain risk characteristics. The categories include the following: one- to four-family loans; commercial loans; consumer home equity loans; and other consumer loans. Home equity loans with the same underlying collateral as a one- to four-family loan are combined with the one- to four-family loan in the formula analysis model to calculate a combined loan-to-value ("LTV") ratio. The one- to four-family loan portfolio and related home equity loans are segregated into additional categories based on the following risk characteristics: loan source (originated, correspondent purchased, or bulk purchased), interest payments (fixed-rate and adjustable-rate), LTV ratios, borrower's credit scores, and geographic location. The categories were derived by management based on reviewing the historical performance of the one- to four-family loan portfolio and taking into consideration current economic conditions, such as trends in residential real estate values in certain areas of the U.S. and unemployment rates. The commercial loan portfolio is segregated into additional categories based on the type of loan (real estate loan, construction loan or commercial and industrial). Impaired loans are not included in the formula analysis as they are individually evaluated for loss.

Historical loss factors are applied to each loan category in the formula analysis model. Each quarter end, management reviews historical losses over a look-back time period and utilizes the historical loss time periods believed to be the most appropriate considering the current economic conditions. The historical loss time period is then adjusted for a loss emergence time period, which represents the estimated time period from the date of a loss event to the date we recognize a charge-off/loss. Qualitative loss factors are utilized in the formula analysis model to reflect risks inherent in each loan category that are not captured by the historical loss factors. The qualitative loss factors for one- to four-family and consumer loan portfolios take into consideration such items as: unemployment rate trends, residential real estate value trends, credit score trends, and delinquent loan trends. The qualitative loss factors for the commercial loan portfolio take into consideration the composition of the portfolio along with industry and peer charge-off information and certain ACL ratios. As loans are classified or become delinquent, the qualitative loss factors increase for each respective loan category. The qualitative loss factors were derived by management based on a review of the historical performance of the respective loan portfolios and industry and peer information for those loan portfolios with no or limited historical loss experience, along with consideration of current economic conditions and the likely impact such conditions might have on the performance of the loan portfolio.

For non-PCI loans, the Company estimates a hypothetical amount of ACL. The Company uses the acquired bank's past loss history adjusted for qualitative factors to establish the hypothetical amount of ACL. This amount is compared with the remaining net purchase discount for the non-PCI loans to test for credit quality deterioration and the possible need for an additional loan loss provision. To the extent the remaining net purchase discount of the pool is greater than the hypothetical ACL, no additional ACL is necessary. If the remaining net purchase discount of the pool is less than the hypothetical ACL, the difference results in an increase to the ACL recorded through a provision for credit losses.

Management utilizes the formula analysis model, along with analyzing and considering several other relevant internal and external factors when evaluating the adequacy of the ACL. Such factors include the trend and composition of delinquent loans and non-performing loans, trends in foreclosed property transactions and charge-off activity, the current status and trends of local and national employment levels, trends and current conditions in the housing markets, loan growth and concentrations, industry and peer charge-off and ACL information, and certain ACL ratios such as ACL to loans receivable, net and annualized historical losses. Since the Bank's loan portfolio is primarily concentrated in one- to four-family real estate, management monitors residential real estate market value trends in the Bank's local market areas and geographic sections of the U.S. by reference to various industry and market reports, economic releases and surveys, and management's general and specific knowledge of the real estate markets in which the Bank lends, in order to determine what impact, if any, such trends may have on the level of ACL. Reviewing these data elements assists management in evaluating the overall credit quality of the loan portfolio and the reasonableness of the ACL on an ongoing basis, and whether changes need to be made to the Bank's ACL methodology. Management seeks to apply the ACL methodology in a consistent manner; however, the methodology may be modified in response to changing conditions. Although management believes the ACL was at a level adequate to absorb inherent losses in the loan portfolio at September 30, 2019, the level of the ACL remains an estimate that is subject to significant judgment and short-term changes.

Federal Home Loan Bank Stock - As a member of FHLB, the Bank is required to acquire and hold shares of FHLB stock. The Bank's holding requirement varies based on the Bank's activities, primarily the Bank's outstanding borrowings, with FHLB. FHLB stock is carried at cost and is considered a restricted asset because it cannot be pledged as collateral or bought or sold on the open market and it also has certain redemption restrictions. Management conducts a quarterly evaluation to determine if any FHLB stock impairment exists. The quarterly impairment evaluation focuses primarily on the capital adequacy and liquidity of FHLB, while also considering the impact that legislative and regulatory developments may have on FHLB. Stock and cash dividends received on FHLB stock are reflected as dividend income in the consolidated statements of income.

Premises and Equipment - Land is carried at cost. Buildings, leasehold improvements, and furniture, fixtures and equipment are carried at cost less accumulated depreciation and leasehold amortization. Buildings, furniture, fixtures and equipment are depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the respective leases. The costs for major improvements and renovations are capitalized, while maintenance, repairs and minor improvements are charged to operating expenses as incurred. Gains and losses on dispositions are recorded as non-interest income or non-interest expense as incurred.

Other Assets - Included in other assets on the consolidated balance sheet are the Company's intangible assets, recognized as a result of the acquisition of CCB, which consist of goodwill, deposit intangibles and other intangibles.

Goodwill is assessed for impairment on an annual basis, or more frequently in certain circumstances. The test for impairment is performed by comparing the fair value of the reporting unit with its carrying amount. If the fair value is determined to be less than the carrying amount, an impairment is recorded.

The Company's intangible assets primarily relate to core deposits. These intangible assets are amortized based upon the expected economic benefit over an estimated life of approximately 8 years and are tested for impairment whenever events or circumstances change.

Income Taxes - The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Deferred income tax expense (benefit) represents the change in deferred income tax assets and liabilities excluding the tax effects of the change in net unrealized gain (loss) on AFS securities and interest rate swaps and changes in the market value of restricted stock awards between the grant date and vesting date. Income tax related penalties and interest, if any, are included in income tax expense in the consolidated statements of income.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. To the extent that management considers it more likely than not that a deferred tax asset will not be recovered, a valuation allowance is recorded. All positive and negative evidence is reviewed in determining how much of a valuation allowance is recognized on a quarterly basis.

Certain accounting literature prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an uncertain tax position taken, or expected to be taken, in a tax return. Interest and penalties related to unrecognized tax benefits are recognized in income tax expense in the consolidated statements of income. Accrued interest and penalties related to unrecognized tax benefits are included within the related tax liabilities line in the consolidated balance sheet.

Employee Stock Ownership Plan - The funds borrowed by the ESOP from the Company to purchase the Company's common stock are being repaid from dividends paid on unallocated ESOP shares and, if necessary, contributions by the Bank. The ESOP shares pledged as collateral are reported as a reduction of stockholders' equity at cost. As ESOP shares are committed to be released from collateral each quarter, the Company records compensation expense based on the average market price of the Company's stock during the quarter. Additionally, the ESOP shares become outstanding for EPS computations once they are committed to be released.

Stock-based Compensation - The Company has share-based plans under which stock options and restricted stock awards have been granted. Compensation expense is recognized over the service period of the share-based payment award. The Company utilizes a fair-value-based measurement method in accounting for the share-based payment transactions. The Company applies the modified prospective method in which compensation cost is recognized over the service period for all awards granted.

Borrowed Funds - The Bank has entered into repurchase agreements, which are sales of securities under agreements to repurchase, with approved counterparties. These agreements are recorded as financing transactions, and thereby reported as liabilities on the consolidated balance sheet, with the related expense reported as interest expense on the consolidated statements of income, as the Bank maintains effective control over the transferred securities and the securities continue to be carried in the Bank's securities portfolio.

The Bank has obtained borrowings from FHLB in the form of advances and a line of credit. Total FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB and certain securities, as necessary. Additionally, the Bank is authorized to borrow from the Federal Reserve Bank's "discount window."

The Company uses interest rate swaps as part of its interest rate risk management strategy to hedge the variable cash outflows associated with certain borrowings. Interest rate swaps are carried at fair value in the Company's consolidated financial statements. For interest rate swaps that are designated and qualify as cash flow hedges, the effective portion of changes in the fair value of such agreements are recorded in AOCI and are subsequently reclassified into interest expense in the period that interest on the borrowings affects earnings. The ineffective portion of the change in fair value of the interest rate swap is recognized directly in earnings. Effectiveness is assessed using regression analysis. At the inception of a hedge, the Company documents certain items, including the relationship between the hedging instrument and the hedged item, the risk management objective and the nature of the risk being hedged, a description of how effectiveness will be measured and an evaluation of hedged transaction effectiveness.

Segment Information - As a community-oriented financial institution, substantially all of the Bank's operations involve the delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an ongoing review of these community banking operations, which constitute the Company's only operating segment for financial reporting purposes.

Low Income Housing Partnerships - As part of the Bank's community reinvestment initiatives, the Bank invests in affordable housing limited partnerships ("low income housing partnerships") that make equity investments in affordable housing properties. The Bank is a limited partner in each partnership in which it invests. A separate, unrelated third party is the general partner. The Bank receives affordable housing tax credits and other tax benefits for these investments. See "Note 7. Low Income Housing Partnerships" for additional information.

Earnings Per Share - Basic EPS is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options) were exercised or resulted in the issuance of common stock. These potentially dilutive shares would then be included in the weighted average number of shares outstanding for the period using the treasury stock method. Shares issued and shares reacquired during any period are weighted for the portion of the period that they were outstanding.

In computing both basic and diluted EPS, the weighted average number of common shares outstanding includes the ESOP shares previously allocated to participants and shares committed to be released for allocation to participants and restricted stock shares which have vested or have been allocated to participants. ESOP shares that have not been committed to be released are excluded from the computation of basic and diluted EPS. Unvested restricted stock awards contain nonforfeitable rights to dividends and are treated as participating securities in the computation of EPS pursuant to the two-class method.

Trust Asset Management - Assets (other than cash deposits with the Bank) held in fiduciary or agency capacities for customers are not included in the accompanying consolidated balance sheets, since such items are not assets of the Company or its subsidiaries.

Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers. The ASU, as amended, implements a common revenue standard that clarifies the principles for recognizing revenue included in Accounting Standards Codification ("ASC") Topic 606. The core principle of the amended guidance is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The majority of the Company's revenue is composed of interest income from loans and securities which are explicitly excluded from the amended ASU. The Company elected to implement the amended ASU using the modified retrospective application with a cumulative adjustment to opening retained earnings at October 1, 2018. Upon adoption of the amended ASU, the Company recorded a cumulative adjustment, which increased opening retained earnings by $394 thousand related to contracts that were not complete upon adoption. The amount was related to the change in the recognition of revenue related to certain insurance commissions. Additionally, effective October 1, 2018, interchange network charges are reported as a reduction in deposit service fees. Previously, these charges were reported as expense in deposit and loan transaction costs in the consolidated statements of income. The Company concluded the ASU did not significantly change the Company's revenue recognition methods. This ASU did not have a material impact on the Company's consolidated financial condition or results of operations at the time of adoption. The new disclosure requirements of the ASU are included in Note 17. Revenue Recognition.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU supersedes certain accounting guidance related to equity securities with readily determinable fair values and the related impairment assessment. An entity's equity investments that are accounted for under the equity method of accounting or result in consolidation of an investee are not included within the scope of this ASU. The ASU requires public business entities to utilize the exit price notion when determining fair value for financial instruments measured at amortized cost on the balance sheet. The ASU also requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the notes to the financial statements. ASU 2016-01 became effective for the Company on October 1, 2018. The adoption of this ASU did not have a material impact on the Company's consolidated financial condition or results of operations. The new disclosure requirements of the ASU are included in Note 15. Fair Value of Financial Instruments.

In February 2016, the FASB issued ASU 2016-02, Leases. The ASU, as amended, revises lease accounting guidance by requiring that lessees recognize the assets and liabilities arising from leases on the balance sheet. Additionally, the ASU requires entities to disclose both quantitative and qualitative information regarding their leasing activities. The accounting applied by a lessor is largely unchanged from that applied under the previous guidance. In July 2018, the FASB issued ASU 2018-11, Leases, which provides entities with relief from the costs of implementation by allowing the option to not restate comparative periods as part of the transition. The ASU, as amended, will be effective for the Company on October 1, 2019. Upon adoption, the Company intends to elect the modified retrospective approach and the optional transition method under which the Company can use the effective date as the date of initial application of the amendments. The cumulative-effect adjustment at the time of adoption is not anticipated to be material. The optional practical expedients the Company intends to elect include: (1) not reassessing whether any expired or existing contracts are or contain leases, (2) not reassessing the classification of any expired or existing contracts, (3) not reassessing initial direct costs for existing leases, and (4) using hindsight for leases existing at adoption date. For leases with an initial term of 12 months or less, the Company intends to elect the short-term lease option, which entails not recognizing right-of-use assets and lease liabilities for these leases. Additionally, the Company intends to elect, for facility-related leases, the practical expedient that allows an entity to elect, by lease class, the ability to not separate lease and non-lease components. The Company developed a lease inventory and an internal lease data collection, organization, and computing platform for compliance with this ASU and implemented processes to ensure adequate internal controls were in place to assess contracts and enable proper accounting and reporting upon adoption and going forward. Upon adoption, the Company will recognize a right-of-use asset and a lease liability of approximately $15 million, related to the Company's non-cancellable operating lease commitments based on the present value of the expected remaining lease payments as of October 1, 2019. These ASUs are not expected to have a material impact on the Company's results of operations and cash flows at the time of adoption. The disclosures required by the ASU will be provided beginning with the Company's Form 10-Q for the first quarter of fiscal year 2020.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU, as amended, replaces the incurred loss impairment methodology in current GAAP, which requires credit losses to be recognized when it is probable that a loss has been incurred, with a new impairment methodology. The new impairment methodology requires an entity to measure, at each reporting date, the expected credit losses of financial

assets not measured at fair value, such as loans, HTM debt securities, and loan commitments, over their contractual lives. Under the new impairment methodology, expected credit losses will be measured at each reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU amends the current credit loss measurements for AFS debt securities. Credit losses related to AFS debt securities will be recorded through the ACL rather than as a direct write-down as per current GAAP. The ASU also requires enhanced disclosures related to credit quality and significant estimates and judgments used by management when estimating credit losses. The ASU will become effective for the Company on October 1, 2020. The Company continues to work with a software provider on the application and implementation of the new accounting guidance. The integration of the Company's data with the software provider is substantially complete. Management anticipates model development, with the assistance of the software provider, will begin in late calendar year 2019 and will take several months to complete. While we are currently unable to reasonably estimate the impact of adopting this ASU, we expect the impact of adoption will be influenced by the composition of our loan and securities portfolios as well as the economic conditions and forecasts at the time of adoption.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash (a consensus of the FASB Emerging Issues Task Force). The ASU addresses diversity in the classification and presentation of changes in restricted cash and cash equivalents on the statement of cash flows. The ASU requires that amounts described as restricted cash and cash equivalents be included with cash and cash equivalents when reconciling the beginning and ending amounts presented on the statement of cash flows, requires disclosures on the nature of restrictions on cash and cash equivalents, and the amount and financial statement line presentation of restricted cash and cash equivalents. The Company adopted this ASU on October 1, 2018 and it did not have a material impact on the Company's consolidated financial condition or results of operations at the time of adoption.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The ASU amends the hedge accounting recognition and presentation requirements in current GAAP. The purpose of the ASU was to improve transparency of hedging relationships in the financial statements and to reduce the complexity of applying hedge accounting for preparers. The Company elected to early-adopt this ASU, along with the components of ASU 2019-04 that are applicable to ASU 2017-12, on September 30, 2019. See below for more information regarding ASU 2019-04. As part of the adoption, the Company reclassified $444.7 million of HTM securities, at amortized cost, which were eligible to be hedged under the last-of-layer method, to AFS securities. The adoption of this ASU did not have a material impact on the Company's consolidated financial condition or results of operations at the time of adoption.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosures Requirements for Fair Value Measurement. This ASU eliminates, modifies and adds certain disclosure requirements for fair value measurements. The ASU adds disclosure requirements for the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The effective date of this ASU for the Company is October 1, 2020, with early adoption permitted. Entities are allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. Since this ASU only requires disclosure changes, it will not have a significant impact on the Company's consolidated financial condition and results of operations.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include internal-use software license). The effective date of this ASU for the Company is October 1, 2020, with early adoption permitted. The Company is currently evaluating the effect of the ASU on the Company's consolidated financial condition, results of operations and disclosures.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This ASU makes clarifications and corrections to the application of the guidance contained in each of the amended topics. According to the provisions of the ASU, entities that have not adopted ASU 2017-12 prior to the issuance of ASU 2019-04 shall adopt the provisions of both ASUs at the same time. The effective date of the non-hedging amendments contained in ASU 2019-04 for the Company is

October 1, 2020. The Company is currently evaluating the effect of the non-hedging amendments contained in this ASU on the Company's consolidated financial condition, results of operations and disclosures.

2. ACQUISITION

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. The acquisition was not considered material to the Company's financial statements; therefore, pro-forma financial data and related disclosures are not included.

The Company acquired loans and deposits with fair values of $299.7 million and $352.5 million, respectively, at the date of acquisition. Included in the loans acquired from CCB at August 31, 2018 were PCI loans with contractually required cash flows totaling $2.6 million. Of that amount, the Company expected to collect $1.9 million, which was also the fair value at the date of acquisition. Under the terms of the acquisition agreement, the Company issued 3.0 million shares of 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. See "Note 8. Intangible Assets" for additional information regarding the acquisition of CCB.

During fiscal years 2019 and 2018, the Company incurred $30 thousand and $872 thousand, respectively, of pre-tax merger-related expenses attributable to the CCB acquisition. The merger-related expenses were reflected on the Company's consolidated statement of income and were reported primarily in regulatory and outside services.

3. EARNINGS PER SHARE

Shares acquired by the ESOP are not included in basic average shares outstanding until the shares are committed for allocation or vested to an employee's individual account. Unvested shares awarded pursuant to the Company's restricted stock benefit plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security.



	For the Year Ended September 30,
	2019			2018			2017
	(Dollars in thousands, except per share amounts)
Net income	$	94,243		$	98,927		$	84,137
Income allocated to participating securities	(55		)	(40		)	(44		)
Net income available to common stockholders	$	94,188		$	98,887		$	84,093

Average common shares outstanding	137,614,465			134,635,886			134,019,962
Average committed ESOP shares outstanding	62,458			62,458			62,458
Total basic average common shares outstanding	137,676,923			134,698,344			134,082,420

Effect of dilutive stock options	58,478			60,647			161,442

Total diluted average common shares outstanding	137,735,401			134,758,991			134,243,862

Net EPS:
Basic	$	0.68		$	0.73		$	0.63
Diluted	$	0.68		$	0.73		$	0.63

Antidilutive stock options, excluded from the diluted average
common shares outstanding calculation	470,938			541,418			200,800

4. SECURITIES

The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of AFS and HTM securities at the dates presented. The majority of the MBS and investment securities portfolios are composed of securities issued by GSEs. Upon the adoption of ASU 2017-12 and certain components of ASU 2019-04 on September 30, 2019, the Company reclassified $444.7 million of HTM securities, at amortized cost, to AFS securities.



	September 30, 2019
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(Dollars in thousands)
AFS:
MBS	$	923,256	$	15,571	$	2,340	$	936,487
GSE debentures	249,828		304		178		249,954
Municipal bonds	18,371		52		1		18,422
	$	1,191,455	$	15,927	$	2,519	$	1,204,863



	September 30, 2018
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(Dollars in thousands)
AFS:
MBS	$	445,883	$	3,270	$	4,063	$	445,090
GSE debentures	268,525		30		3,157		265,398
Municipal bonds	4,156		—		30		4,126
	$	718,564	$	3,300	$	7,250	$	714,614
HTM:
MBS	$	591,900	$	4,514	$	15,589	$	580,825
Municipal bonds	20,418		—		172		20,246
	$	612,318	$	4,514	$	15,761	$	601,071

The following tables summarize the estimated fair value and gross unrealized losses of those securities on which an unrealized loss at the dates presented was reported and the continuous unrealized loss position for less than 12 months and equal to or greater than 12 months as of the dates presented.



	September 30, 2019
	Less Than 12 Months				Equal to or Greater Than 12 Months
	Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses
	(Dollars in thousands)
AFS:
MBS	$	111,368	$	126	$	199,442	$	2,214
GSE debentures	—		—		74,812		178
Municipal bonds	1,755		1		—		—
	$	113,123	$	127	$	274,254	$	2,392



	September 30, 2018
	Less Than 12 Months				Equal to or Greater Than 12 Months
	Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses
	(Dollars in thousands)
AFS:
MBS	$	324,563	$	3,797	$	8,129	$	266
GSE debentures	101,735		1,231		148,049		1,926
Municipal bonds	4,126		30		—		—
	$	430,424	$	5,058	$	156,178	$	2,192


HTM:
MBS	$	58,233	$	904	$	362,806	$	14,685
Municipal bonds	18,345		171		685		1
	$	76,578	$	1,075	$	363,491	$	14,686

The unrealized losses at September 30, 2019 and 2018 were primarily a result of an increase in market yields from the time the securities were purchased. In general, as market yields rise, the fair value of securities will decrease; as market yields fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in interest rates as temporary. Therefore, these securities have not been classified as other-than-temporarily impaired. The impairment is also considered temporary because scheduled coupon payments have been made, it is anticipated that the entire principal balance will be collected as scheduled, and management neither intends to sell the securities, nor is it more likely than not that the Company will be required to sell the securities before the recovery of the remaining amortized cost amount, which could be at maturity. As a result of the analysis, management has concluded that no other-than-temporary impairments existed at September 30, 2019 or 2018. See "Note 1. Summary of Significant Accounting Policies - Securities" for additional information regarding our impairment review and classification process for securities.

100

The amortized cost and estimated fair value of debt securities as of September 30, 2019, by contractual maturity, are shown below. Actual principal repayments may differ from contractual maturities due to prepayment or early call privileges by the issuer. In the case of MBS, borrowers on the underlying loans generally have the right to prepay their loans without prepayment penalty. For this reason, MBS are not included in the maturity categories.



	Amortized		Estimated
	Cost		Fair Value
	(Dollars in thousands)
One year or less	$	57,744	$	57,633
One year through five years	210,455		210,743
	268,199		268,376
MBS	923,256		936,487
	$	1,191,455	$	1,204,863

The following table presents the taxable and non-taxable components of interest income on investment securities for the periods presented.



	For the Year Ended September 30,
	2019		2018		2017
	(Dollars in thousands)
Taxable	$	6,020	$	4,275	$	3,847
Non-taxable	346		395		515
	$	6,366	$	4,670	$	4,362

The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of the dates presented.



	September 30,
	2019		2018
	(Dollars in thousands)
Public unit deposits	$	381,143	$	515,553
Repurchase agreements	108,271		108,360
FRB of Kansas City	6,636		9,529
	$	496,050	$	633,442

During fiscal year 2018, the Company sold trust preferred securities and received proceeds of $2.1 million. The Company recognized a gain of $9 thousand on the sale. All other dispositions of securities during fiscal years 2019, 2018, and 2017 were the result of principal repayments, calls, or maturities.

101

5. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES

Loans receivable, net at September 30, 2019 and 2018 is summarized as follows:



	2019			2018
	(Dollars in thousands)
One- to four-family:
Originated	$	3,873,851		$	3,965,692
Correspondent purchased	2,349,877			2,505,987
Bulk purchased	252,347			293,607
Construction	36,758			33,149
Total	6,512,833			6,798,435
Commercial:
Commercial real estate	583,617			426,243
Commercial and industrial	61,094			62,869
Construction	123,159			80,498
Total	767,870			569,610
Consumer:
Home equity	120,587			129,588
Other	11,183			10,012
Total	131,770			139,600

Total loans receivable	7,412,473			7,507,645

Less:
ACL	9,226			8,463
Discounts/unearned loan fees	31,058			33,933
Premiums/deferred costs	(44,558		)	(49,236		)
	$	7,416,747		$	7,514,485

Included in the loan portfolio at September 30, 2019 were $199.6 million of non-PCI loans and $2.1 million of PCI loans associated with the acquisition of CCB during fiscal year 2018. At September 30, 2019, the Company had $3.6 million of net purchase discounts related to non-PCI loans and $474 thousand related to PCI loans.

As of September 30, 2019 and 2018, the Bank serviced loans for others aggregating $117.3 million and $134.2 million, respectively. Such loans are not included in the accompanying consolidated balance sheets. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. Loan servicing income includes servicing fees withheld from investors and certain charges collected from borrowers, such as late payment fees. The Bank held borrowers' escrow balances on loans serviced for others of $2.2 million and $2.4 million as of September 30, 2019 and 2018, respectively.

Lending Practices and Underwriting Standards - Originating and purchasing one- to four-family loans is the Bank's primary lending business. The Bank also originates consumer loans primarily secured by one- to four-family residential properties and originates and participates in commercial loans. The Bank has a loan concentration in one- to four-family loans and a geographic concentration of these loans in Kansas and Missouri.

One- to four-family loans - 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. Properties securing one- to four-family loans are appraised by either staff appraisers or fee appraisers, both of which are independent of the loan origination function.

102

The underwriting standards for loans purchased from correspondent lenders are generally similar to the Bank's internal underwriting standards. The underwriting of loans purchased from correspondent lenders on a loan-by-loan basis is performed by the Bank's underwriters.

The Bank also originates owner-occupied construction-to-permanent loans secured by one- to four-family residential real estate. Construction draw requests and the supporting documentation are reviewed and approved by designated personnel. The Bank also performs regular documented inspections of the construction project to ensure the funds are being used for the intended purpose and the project is being completed according to the plans and specifications provided.

Commercial loans - The Bank's commercial real estate and commercial construction loans are originated by the Bank or are in participation with a lead bank. When underwriting a commercial real estate or commercial construction loan, several factors are considered, such as the income producing potential of the property, cash equity provided by the borrower, the financial strength of the borrower, managerial expertise of the borrower or tenant, feasibility studies, lending experience with the borrower and the marketability of the property. For commercial real estate and commercial construction participation loans, the Bank performs the same underwriting procedures as if the loan was being originated by the Bank. At the time of origination, LTV ratios on commercial real estate loans generally do not exceed 85% of the appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.15. For commercial construction loans, LTV ratios generally do not exceed 80% of the projected appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.15, but it 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. Appraisals on properties securing these loans are performed by independent state certified fee appraisers.

The Bank's commercial and industrial loans are generally made in the Bank's market areas and are underwritten on the basis of the borrower's ability to service the debt from income. 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 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. As a result of these additional complexities, variables and risks, these loans require more thorough underwriting and servicing than other types of loans.

Consumer loans - 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 deposits. The Bank also originates a very limited amount of unsecured loans. The majority of the consumer loan portfolio is comprised of home equity lines of credit for which the Bank also has the first mortgage or the home equity line of credit is in the first lien position.

The underwriting standards for consumer loans include a determination of an applicant's payment history on other debts and an assessment of an applicant's ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of an 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.

Credit Quality Indicators - Based on the Bank's lending emphasis and underwriting standards, management has segmented the loan portfolio into three segments: (1) one- to four-family; (2) consumer; and (3) commercial. These segments are further divided into classes for purposes of providing disaggregated information about the credit quality of the loan portfolio. The classes are: one- to four-family - originated, one- to four-family - correspondent purchased, one- to four-family - bulk purchased, consumer - home equity, consumer - other, commercial - commercial real estate, and commercial - commercial and industrial. One- to four-family construction loans are included in either the originated class or correspondent purchased class, and commercial construction loans are included in the commercial real estate class.

The Bank's primary credit quality indicators for the one- to four-family and consumer - home equity loan portfolios are delinquency status, asset classifications, LTV ratios, and borrower credit scores. The Bank's primary credit quality indicators for the commercial and consumer - other loan portfolios are delinquency status and asset classifications.

103

The following tables present the recorded investment, by class, in loans 30 to 89 days delinquent, loans 90 or more days delinquent or in foreclosure, total delinquent loans, current loans, and total recorded investment at the dates presented. The recorded investment in loans is defined as the unpaid principal balance of a loan, less charge-offs and inclusive of unearned loan fees and deferred costs. At September 30, 2019 and 2018, all loans 90 or more days delinquent were on nonaccrual status.



	September 30, 2019
			90 or More Days		Total				Total
	30 to 89 Days		Delinquent or		Delinquent		Current		Recorded
	Delinquent		in Foreclosure		Loans		Loans		Investment
	(Dollars in thousands)
One- to four-family:
Originated	$	7,187	$	3,261	$	10,448	$	3,885,335	$	3,895,783
Correspondent purchased	2,762		1,023		3,785		2,377,629		2,381,414
Bulk purchased	3,624		1,484		5,108		248,376		253,484
Commercial:
Commercial real estate	762		—		762		702,377		703,139
Commercial and industrial	70		173		243		60,340		60,583
Consumer:
Home equity	446		302		748		119,688		120,436
Other	78		21		99		11,035		11,134
	$	14,929	$	6,264	$	21,193	$	7,404,780	$	7,425,973



	September 30, 2018
			90 or More Days		Total				Total
	30 to 89 Days		Delinquent or		Delinquent		Current		Recorded
	Delinquent		in Foreclosure		Loans		Loans		Investment
	(Dollars in thousands)
One- to four-family:
Originated	$	10,613	$	5,025	$	15,638	$	3,968,362	$	3,984,000
Correspondent purchased	3,846		458		4,304		2,536,913		2,541,217
Bulk purchased	3,521		3,063		6,584		288,386		294,970
Commercial:
Commercial real estate	76		—		76		501,932		502,008
Commercial and industrial	250		—		250		61,255		61,505
Consumer:
Home equity	472		521		993		128,351		129,344
Other	61		10		71		9,833		9,904
	$	18,839	$	9,077	$	27,916	$	7,495,032	$	7,522,948

The recorded investment in mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of September 30, 2019 and 2018 was $1.5 million and $2.9 million, respectively, which is included in loans 90 or more days delinquent or in foreclosure in the table above. The carrying value of residential OREO held as a result of obtaining physical possession upon completion of a foreclosure or through completion of a deed in lieu of foreclosure was $745 thousand at September 30, 2019 and $1.3 million at September 30, 2018.

104

The following table presents the recorded investment, by class, in loans classified as nonaccrual at the dates presented.



	September 30,
	2019		2018
	(Dollars in thousands)
One- to four-family:
Originated	$	4,436	$	6,503
Correspondent purchased	1,023		863
Bulk purchased	1,551		3,063
Commercial:
Commercial real estate	—		—
Commercial and industrial	173		—
Consumer:
Home equity	337		530
Other	21		10
	$	7,541	$	10,969

In accordance with the Bank's asset classification policy, management regularly reviews the problem loans in the Bank's portfolio to determine whether any loans require classification. Loan classifications are defined as follows:


•	Special mention - These loans are performing loans on which known information about the collateral pledged or the possible credit problems of the borrower(s) have caused management to have doubts as to the ability of the borrower(s) to comply with present loan repayment terms and which may result in the future inclusion of such loans in the non-performing loan categories.


•	Substandard - A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those characterized by the distinct possibility the Bank will sustain some loss if the deficiencies are not corrected.


•	Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses present make collection or liquidation in full on the basis of currently existing facts and conditions and values highly questionable and improbable.


•	Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as assets on the books is not warranted.

105

The following table sets forth the recorded investment in loans classified as special mention or substandard, by class, at the dates presented. Special mention and substandard loans are included in the ACL formula analysis model if the loans are not individually evaluated for loss. Loans classified as doubtful or loss are individually evaluated for loss. At the dates presented, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off. The increase in special mention loans at September 30, 2019 compared to September 30, 2018 was due primarily to one commercial real estate participation loan that relates to a recently opened large hotel and convention center. Due to the identified credit weaknesses, management made the decision to classify the loan as special mention during the June 30, 2019 quarter. Management continues to closely monitor the hotel and convention center and surrounding activities.



	September 30,
	2019				2018
	Special Mention		Substandard		Special Mention		Substandard
	(Dollars in thousands)
One- to four-family:
Originated	$	12,941	$	15,628	$	8,660	$	22,409
Correspondent purchased	2,349		2,785		997		3,126
Bulk purchased	102		5,294		—		7,195
Commercial:
Commercial real estate	52,891		2,472		1,251		1,368
Commercial and industrial	1,215		3,057		1,126		—
Consumer:
Home equity	280		696		298		894
Other	2		24		—		10
	$	69,780	$	29,956	$	12,332	$	35,002

The following table shows the weighted average credit score and weighted average LTV for one- to four-family loans and consumer home equity loans at the dates presented. Borrower credit scores are intended to provide an indication as to the likelihood that a borrower will repay their debts. Credit scores are updated at least semiannually, with the last update in September 2019, from a nationally recognized consumer rating agency. The LTV ratios provide an estimate of the extent to which the Bank may incur a loss on any given loan that may go into foreclosure. The consumer - home equity LTV does not take into account the first lien position, if applicable. 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.



	September 30,
	2019			2018
	Credit Score	LTV		Credit Score	LTV
One- to four-family - originated	768	62	%	767	63	%
One- to four-family - correspondent	765	65		764	67
One- to four-family - bulk purchased	762	61		758	62
Consumer - home equity	754	19		750	22
	766	62		765	63

106

TDRs - The following tables present the recorded investment prior to restructuring and immediately after restructuring in all loans restructured during the periods presented. These tables do not reflect the recorded investment at the end of the periods indicated. Any increase in the recorded investment at the time of the restructuring was generally due to the capitalization of delinquent interest and/or escrow balances. During the fourth quarter of fiscal year 2017, management refined its methodology for assessing whether a loan modification qualifies as a TDR which, though not material, resulted in fewer loans being classified as TDRs in the current fiscal year and prior fiscal year.



	For the Year Ended September 30, 2019
	Number	Pre-		Post-
	of	Restructured		Restructured
	Contracts	Outstanding		Outstanding
	(Dollars in thousands)
One- to four-family:
Originated	3	$	385	$	386
Correspondent purchased	—	—		—
Bulk purchased	2	377		377
Commercial:
Commercial real estate	—	—		—
Commercial and industrial	—	—		—
Consumer:
Home equity	—	—		—
Other	—	—		—
	5	$	762	$	763



	For the Year Ended September 30, 2018
	Number	Pre-		Post-
	of	Restructured		Restructured
	Contracts	Outstanding		Outstanding
	(Dollars in thousands)
One- to four-family:
Originated	5	$	264	$	281
Correspondent purchased	2	406		406
Bulk purchased	—	—		—
Commercial:
Commercial real estate	—	—		—
Commercial and industrial	—	—		—
Consumer:
Home equity	—	—		—
Other	—	—		—
	7	$	670	$	687

107



	For the Year Ended September 30, 2017
	Number	Pre-		Post-
	of	Restructured		Restructured
	Contracts	Outstanding		Outstanding
	(Dollars in thousands)
One- to four-family:
Originated	112	$	11,940	$	12,402
Correspondent purchased	12	2,443		2,459
Bulk purchased	3	1,031		1,048
Commercial:
Commercial real estate	—	—		—
Commercial and industrial	—	—		—
Consumer:
Home equity	17	368		380
Other	—	—		—
	144	$	15,782	$	16,289

The following table provides information on TDRs that became delinquent during the periods presented within 12 months after being restructured.



	For the Years Ended
	September 30, 2019			September 30, 2018			September 30, 2017
	Number of	Recorded		Number of	Recorded		Number of	Recorded
	Contracts	Investment		Contracts	Investment		Contracts	Investment
	(Dollars in thousands)
One- to four-family:
Originated	1	$	45	22	$	1,416	46	$	4,561
Correspondent purchased	—	—		1	124		2	148
Bulk purchased	—	—		3	1,040		2	698
Commercial:
Commercial real estate	—	—		—	—		—	—
Commercial and industrial	—	—		—	—		—	—
Consumer:
Home equity	—	—		4	133		16	440
Other	—	—		—	—		—	—
	1	$	45	30	$	2,713	66	$	5,847

108

Impaired loans - The following information pertains to impaired loans, by class, as of the dates presented. All impaired loans were individually evaluated for loss and all losses were charged-off, resulting in no related ACL for these loans.



	September 30, 2019				September 30, 2018
			Unpaid				Unpaid
	Recorded		Principal		Recorded		Principal
	Investment		Balance		Investment		Balance
	(Dollars in thousands)
One- to four-family:
Originated	$	14,683	$	15,241	$	18,857	$	19,388
Correspondent purchased	1,763		1,868		2,668		2,768
Bulk purchased	4,943		5,661		6,011		6,976
Commercial:
Commercial real estate	—		—		—		—
Commercial and industrial	60		184		—		—
Consumer:
Home equity	345		462		504		720
Other	—		29		—		25
	$	21,794	$	23,445	$	28,040	$	29,877

109

The following information pertains to impaired loans, by class, for the periods presented. During the fourth quarter of fiscal year 2017, management refined its methodology for classifying loans as impaired. The change resulting from this refinement was immaterial.



	For the Years Ended
	September 30, 2019				September 30, 2018				September 30, 2017
	Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized
	(Dollars in thousands)
With no related allowance recorded
One- to four-family:
Originated	$	16,030	$	671	$	23,847	$	990	$	24,122	$	917
Correspondent purchased	2,071		82		3,204		112		3,346		118
Bulk purchased	5,257		180		6,438		191		9,852		194
Commercial:
Commercial real estate	—		—		—		—		—		—
Commercial and industrial	5		—		—		—		—		—
Consumer:
Home equity	417		28		588		39		988		86
Other	—		—		—		—		7		—
	23,780		961		34,077		1,332		38,315		1,315
With an allowance recorded
One- to four-family:
Originated	—		—		—		—		11,469		434
Correspondent purchased	—		—		—		—		2,018		65
Bulk purchased	—		—		—		—		1,160		20
Commercial:
Commercial real estate	—		—		—		—		—		—
Commercial and industrial	—		—		—		—		—		—
Consumer:
Home equity	—		—		—		—		457		36
Other	—		—		—		—		10		1
	—		—		—		—		15,114		556
Total
One- to four-family:
Originated	16,030		671		23,847		990		35,591		1,351
Correspondent purchased	2,071		82		3,204		112		5,364		183
Bulk purchased	5,257		180		6,438		191		11,012		214
Commercial:
Commercial real estate	—		—		—		—		—		—
Commercial and industrial	5		—		—		—		—		—
Consumer:
Home equity	417		28		588		39		1,445		122
Other	—		—		—		—		17		1
	$	23,780	$	961	$	34,077	$	1,332	$	53,429	$	1,871

110

Allowance for Credit Losses - The following is a summary of ACL activity, by loan portfolio segment, for the periods presented, and the ending balance of ACL based on the Company's impairment methodology.



	For the Year Ended September 30, 2019
	One- to Four-Family
				Correspondent			Bulk
	Originated			Purchased			Purchased			Total			Commercial			Consumer			Total
	(Dollars in thousands)
Beginning balance	$	2,953		$	1,861		$	925		$	5,739		$	2,556		$	168		$	8,463
Charge-offs	(75		)	—			(26		)	(101		)	(124		)	(37		)	(262		)
Recoveries	22			—			106			128			49			98			275
Provision for credit losses	(900		)	(658		)	(318		)	(1,876		)	2,690			(64		)	750
Ending balance	$	2,000		$	1,203		$	687		$	3,890		$	5,171		$	165		$	9,226



	For the Year Ended September 30, 2018
	One- to Four-Family
				Correspondent			Bulk
	Originated			Purchased			Purchased			Total			Commercial		Consumer			Total
	(Dollars in thousands)
Beginning balance	$	3,173		$	1,922		$	1,000		$	6,095		$	2,112	$	191		$	8,398
Charge-offs	(136		)	(128		)	—			(264		)	—		(38		)	(302		)
Recoveries	144			—			196			340			—		27			367
Provision for credit losses	(228		)	67			(271		)	(432		)	444		(12		)	—
Ending balance	$	2,953		$	1,861		$	925		$	5,739		$	2,556	$	168		$	8,463



	For the Year Ended September 30, 2017
	One- to Four-Family
				Correspondent			Bulk
	Originated			Purchased			Purchased			Total			Commercial		Consumer			Total
	(Dollars in thousands)
Beginning balance	$	3,928		$	2,102		$	1,065		$	7,095		$	1,208	$	237		$	8,540
Charge-offs	(72		)	—			(216		)	(288		)	—		(60		)	(348		)
Recoveries	4			—			165			169			—		37			206
Provision for credit losses	(687		)	(180		)	(14		)	(881		)	904		(23		)	—
Ending balance	$	3,173		$	1,922		$	1,000		$	6,095		$	2,112	$	191		$	8,398

111

The following is a summary of the loan portfolio and related ACL balances, at the dates presented, by loan portfolio segment disaggregated by the Company's impairment method. There was no ACL for loans individually evaluated for impairment at either date as all losses were charged-off.



	September 30, 2019
	One- to Four-Family
			Correspondent		Bulk
	Originated		Purchased		Purchased		Total		Commercial		Consumer		Total
	(Dollars in thousands)
Recorded investment in loans
collectively evaluated for impairment	$	3,881,100	$	2,379,651	$	248,541	$	6,509,292	$	763,662	$	131,225	$	7,404,179

Recorded investment in loans
individually evaluated for impairment	14,683		1,763		4,943		21,389		60		345		21,794
	$	3,895,783	$	2,381,414	$	253,484	$	6,530,681	$	763,722	$	131,570	$	7,425,973

ACL for loans collectively
evaluated for impairment	$	2,000	$	1,203	$	687	$	3,890	$	5,171	$	165	$	9,226



	September 30, 2018
	One- to Four-Family
			Correspondent		Bulk
	Originated		Purchased		Purchased		Total		Commercial		Consumer		Total
	(Dollars in thousands)
Recorded investment in loans
collectively evaluated for impairment	$	3,965,143	$	2,538,549	$	288,959	$	6,792,651	$	563,513	$	138,744	$	7,494,908

Recorded investment in loans
individually evaluated for impairment	18,857		2,668		6,011		27,536		—		504		28,040
	$	3,984,000	$	2,541,217	$	294,970	$	6,820,187	$	563,513	$	139,248	$	7,522,948

ACL for loans collectively
evaluated for impairment	$	2,953	$	1,861	$	925	$	5,739	$	2,556	$	168	$	8,463

112

6. PREMISES AND EQUIPMENT

A summary of the net carrying value of premises and equipment at September 30, 2019 and 2018 was as follows:



	2019		2018
	(Dollars in thousands)
Land	$	14,313	$	13,536
Building and improvements	110,262		107,580
Furniture, fixtures and equipment	52,270		48,852
	176,845		169,968
Less accumulated depreciation	80,061		73,963
	$	96,784	$	96,005

The Bank has entered into non-cancelable operating lease agreements with respect to banking premises and equipment. It is expected that many agreements will be renewed at expiration in the normal course of business. Rental expense was $1.5 million, $1.2 million, and $1.1 million for the years ended September 30, 2019, 2018, and 2017, respectively.

As of September 30, 2019, future minimum rental commitments, rounded to the nearest thousand, required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year were as follows:



2020	$	1,298
2021	1,187
2022	1,069
2023	930
2024	637
Thereafter	1,115
	$	6,236

7. LOW INCOME HOUSING PARTNERSHIPS

The Bank's investment in low income housing partnerships, which is included in other assets in the consolidated balance sheets, was $82.6 million and $74.5 million at September 30, 2019 and 2018, respectively. The Bank's obligations related to unfunded commitments, which are included in accounts payable and accrued expenses in the consolidated balance sheets, were $40.0 million and $34.0 million at September 30, 2019 and 2018, respectively. The majority of the commitments at September 30, 2019 are projected to be funded through the end of calendar year 2021.

For fiscal year 2019, the net income tax benefit associated with these investments, which consists of proportional amortization expense and affordable housing tax credits and other related tax benefits, was reported in income tax expense in the consolidated statements of income. The amount of proportional amortization expense recognized during fiscal years 2019, 2018 and 2017 was $6.8 million, $7.0 million and $4.4 million, respectively, and the amount of affordable housing tax credits and other related tax benefits was $8.6 million, $7.5 million and $6.9 million, respectively, resulting in a net income tax benefit of $1.8 million, $500 thousand and $2.5 million, respectively. The increase in proportional amortization expense in fiscal years 2019 and 2018 compared to fiscal year 2017 was due primarily to a change in the tax rate resulting from The Tax Cuts and Jobs Act (the "Tax Act"), as well as to changes in the life cycle stage of the investments. There were no impairment losses during fiscal years 2019, 2018, or 2017 resulting from the forfeiture or ineligibility of tax credits or other circumstances.

113

8. INTANGIBLE ASSETS

With the acquisition of CCB, the Company recognized goodwill of $8.0 million, which is calculated as the consideration exchanged in excess of the fair value of assets, net of the fair value of liabilities assumed. Certain purchase accounting adjustments were applied during the measurement period in the current fiscal year, resulting in a $1.3 million increase in goodwill associated with the acquisition of CCB. The Company also recognized $10.1 million of other intangible assets in conjunction with the acquisition which is largely composed of core deposit intangibles. These other intangible assets are being amortized over their estimated lives, which management determined to be 8 years at the time of acquisition.

Changes in the carrying amount of the Company's intangible assets, which are included in other assets on the consolidated balance sheet, are presented in the following table.



			Core Deposit and
	Goodwill		Other Intangibles
	(Dollars in thousands)
Balance at September 30, 2017	$	—	$	—
Acquisition of CCB	7,989		10,052
Less: Amortization	—		(234		)
Balance at September 30, 2018	7,989		9,819
Purchase accounting adjustments	1,335		—
Less: Amortization	—		(2,316		)
Balance at September 30, 2019	$	9,324	$	7,503

As of September 30, 2019, there was no impairment recorded on goodwill or other intangible assets.

The estimated amortization expense for the next five years related to the core deposit and other intangible assets as of September 30, 2019 is presented in the following table (dollars in thousands):



2020	$	1,964
2021	1,659
2022	1,358
2023	1,056
2024	761

114

9. DEPOSITS AND BORROWED FUNDS

Deposits - Non-interest-bearing deposits totaled $357.3 million and $336.5 million as of September 30, 2019 and 2018, respectively. Certificates of deposit with a minimum denomination of $250 thousand were $610.0 million and $668.8 million as of September 30, 2019 and 2018, respectively. Deposits in excess of $250 thousand may not be fully insured by the Federal Deposit Insurance Corporation.

FHLB Borrowings - FHLB borrowings at September 30, 2019 consisted of $2.04 billion in FHLB advances, of which $1.40 billion were fixed-rate advances and $640.0 million were variable-rate advances, and $100.0 million against the variable-rate FHLB line of credit. FHLB borrowings at September 30, 2018 consisted of $2.07 billion in FHLB advances, of which $1.60 billion were fixed-rate advances and $475.0 million were variable-rate advances. and $100.0 million against the variable-rate FHLB line of credit. The line of credit is set to expire on November 13, 2020, at which time it is expected to be renewed by FHLB for a one-year period.

FHLB advances at September 30, 2019 and 2018 were comprised of the following:



	2019			2018
	(Dollars in thousands)
FHLB advances	$	2,040,000		$	2,075,000
Deferred prepayment penalty	(11		)	(19		)
	$	2,039,989		$	2,074,981

Weighted average contractual interest rate on FHLB advances	2.23		%	2.07		%
Weighted average effective interest rate on FHLB advances⁽¹⁾	2.37			2.12


(1)	The effective interest rate includes the net impact of deferred amounts and interest rate swaps related to the adjustable-rate FHLB advances.

During fiscal years 2019, 2018 and 2017, the Bank utilized a leverage strategy (the "leverage strategy") to increase earnings. The leverage strategy involves borrowing up to $2.10 billion either on the Bank's FHLB line of credit or by entering into short-term FHLB advances, depending on the rates offered by FHLB, with all of the balance being paid down at each quarter end, or earlier if the strategy it is not profitable. The proceeds of the borrowings, net of the required FHLB stock holdings, are deposited at the FRB of Kansas City. Management can discontinue the use of the leverage strategy at any point in time.

At September 30, 2019 and 2018, the Bank had entered into interest rate swap agreements with a total notional amount of $640.0 million and $475.0 million, respectively, in order to hedge the variable cash flows associated with $640.0 million and $475.0 million, respectively, of adjustable-rate FHLB advances. At September 30, 2019 and 2018, the interest rate swap agreements had an average remaining term to maturity of 4.5 years and 5.8 years, respectively. The interest rate swaps were designated as cash flow hedges and involve the receipt of variable amounts from a counterparty in exchange for the Bank making fixed-rate payments over the life of the interest rate swap agreements. At September 30, 2019, the interest rate swaps were in a loss position with a total fair value of $33.1 million, which was reported in accounts payable and accrued expenses on the consolidated balance sheet. At September 30, 2018, the interest rate swaps were in a gain position with a total fair value of $9.7 million, which was reported in other assets on the consolidated balance sheet. During fiscal years 2019 and 2018, $438 thousand and $515 thousand, respectively, were reclassified from AOCI as an increase to interest expense and no hedge ineffectiveness was recognized in the consolidated statements of income during either period. At September 30, 2019, the Company estimates that $5.4 million will be reclassified as an increase to interest expense during the next 12 months. The Bank has minimum collateral posting thresholds with its derivative counterparty and posts collateral on a daily basis. The Bank posted cash collateral of $33.3 million at September 30, 2019 and held cash collateral of $10.0 million at September 30, 2018.

FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB and certain securities, when necessary. Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40% of a borrowing institution's regulatory total assets without the pre-approval of FHLB senior management. In July 2019, the president of FHLB approved an increase, through July 2020, in the Bank's borrowing limit to 55% of Bank Call Report total assets. At September 30, 2019, the ratio of the par value of the Bank's FHLB borrowings to the Bank's Call Report total assets was

115

23%. At times, the Bank's FHLB borrowings to the Bank's Call Report total assets may be in excess of 40% due to the leverage strategy.

Repurchase Agreements - At September 30, 2019 and 2018, the Company had repurchase agreements outstanding in the amount of $100.0 million, with a weighted average contractual rate of 2.53%. The repurchase agreements are included in other borrowings on the consolidated balance sheet. All of the Company's repurchase agreements at September 30, 2019 and 2018 were fixed-rate. See Note 4 for information regarding the amount of securities pledged as collateral in conjunction with repurchase agreements. Securities are delivered to the party with whom each transaction is executed and the party agrees to resell the same securities to the Bank at the maturity of the agreement. The Bank retains the right to substitute similar or like securities throughout the terms of the agreements. The repurchase agreements and collateral are subject to valuation at current market levels and the Bank may ask for the return of excess collateral or be required to post additional collateral due to changes in the market values of these items. The Bank may also be required to post additional collateral as a result of principal payments received on the securities pledged.

Maturity of Borrowed Funds and Certificates of Deposit - The following table presents the scheduled maturity of FHLB advances, at par, repurchase agreements, and certificates of deposit as of September 30, 2019:



	FHLB		Repurchase		Certificates
	Advances		Agreements		of Deposit
	Amount		Amount		Amount
	(Dollars in thousands)
2020	$	990,000	$	100,000	$	1,505,837
2021	550,000		—		625,990
2022	200,000		—		498,352
2023	200,000		—		303,817
2024	100,000		—		53,022
Thereafter	—		—		607
	$	2,040,000	$	100,000	$	2,987,625

Junior Subordinated Debentures and Trust-Preferred Securities - In conjunction with the CCB acquisition, the Company assumed $10.1 million of junior subordinated debentures relating to mandatorily redeemable capital trust preferred securities that were previously issued by CCB-sponsored trusts to third-party investors. The proceeds from the sale of the trust preferred securities to investors were invested by the trusts in the related junior subordinated debentures issued by CCB. The junior subordinated debentures were redeemed by the Company during fiscal year 2019, which resulted in the concurrent redemption by the trusts of the related trust-preferred securities.

116

10. INCOME TAXES

Income tax expense for the years ended September 30, 2019, 2018, and 2017 consisted of the following:



	2019			2018			2017
	(Dollars in thousands)
Current:
Federal	$	22,030		$	26,007		$	38,127
State	4,742			3,512			4,734
	26,772			29,519			42,861
Deferred:
Federal	(456		)	(5,956		)	712
State	95			1,416			210
	(361		)	(4,540		)	922
	$	26,411		$	24,979		$	43,783

The Tax Act made significant changes to the U.S. corporate income tax laws, such as a permanent reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018, bonus depreciation that will allow full expensing of qualified property, and other changes to and/or limitations on certain corporate income tax deductions. As required by Section 15 of the Internal Revenue Code, the Company had a blended statutory federal income tax rate of 24.5% for the year ended September 30, 2018, which is based on the applicable income tax rates prior to and subsequent to January 1, 2018 and the number of days in the fiscal year. In accordance with GAAP, the Company revalued its deferred tax assets and liabilities as of December 22, 2017 to account for the future impact of a lower federal income tax rate. The revaluation of the Company's deferred tax assets and liabilities resulted in a $7.5 million reduction in income tax expense during the December 31, 2017 quarter and a corresponding reduction in the Company's net deferred tax liability.

The Company's effective tax rates were 21.9%, 20.2%, and 34.2% for the years ended September 30, 2019, 2018, and 2017, respectively. The differences between such effective rates and the statutory Federal income tax rate computed on income before income tax expense resulted from the following:



	2019					2018					2017
	Amount			%		Amount			%		Amount			%
	(Dollars in thousands)
Federal income tax expense
computed at statutory Federal rate	$	25,337		21.0	%	$	30,392		24.5	%	$	44,772		35.0	%
Increases (decreases) in taxes resulting from:
State taxes, net of Federal tax effect	4,024			3.3		3,986			3.2		3,452			2.7
Deferred tax liability remeasurement, net	—			—		(7,498		)	(6.0	)	—			—
Low income housing tax credits, net	(1,745		)	(1.4	)	(500		)	(0.4	)	(2,468		)	(2.0	)
ESOP related expenses, net	(757		)	(0.6	)	(790		)	(0.6	)	(1,052		)	(0.8	)
Other	(448		)	(0.4	)	(611		)	(0.5	)	(921		)	(0.7	)
	$	26,411		21.9	%	$	24,979		20.2	%	$	43,783		34.2	%

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Deferred income tax expense represents the change in deferred income tax assets and liabilities excluding the tax effects of the change in net unrealized gain (loss) on AFS securities and interest rate swaps and changes in the market value of restricted stock awards between the grant date and vesting date. The sources of these differences and the tax effect of each as of September 30, 2019, 2018, and 2017 were as follows:



	2019			2018			2017
	(Dollars in thousands)
Net purchase discounts related to acquired loans	$	465		$	—		$	—
FHLB stock dividends	459			(7,692		)	4
Salaries, deferred compensation and employee benefits	107			897			437
Low income housing partnerships	82			604			285
Premises and equipment	(2,007		)	(122		)	14
Deposit intangible	(589		)	—			—
ACL	(36		)	1,827			185
Other, net	1,158			(54		)	(3		)
	$	(361	)	$	(4,540	)	$	922

The components of the net deferred income tax liabilities as of September 30, 2019 and 2018 were as follows:



	2019			2018
	(Dollars in thousands)
Deferred income tax assets:
Unrealized loss on interest rate swaps	$	8,041		$	—
Salaries, deferred compensation and employee benefits	1,579			1,686
ESOP compensation	1,288			1,206
Net purchase discounts related to acquired loans	991			1,456
Low income housing partnerships	792			874
Unrealized loss on AFS securities	—			960
Other	2,918			3,154
Gross deferred income tax assets	15,609			9,336

Valuation allowance	(1,823		)	(1,822		)
Gross deferred income tax asset, net of valuation allowance	13,786			7,514

Deferred income tax liabilities:
FHLB stock dividends	16,009			15,550
Premises and equipment	3,546			5,983
Unrealized gain on AFS securities	3,258			—
Deposit intangible	1,978			2,567
ACL	1,080			1,116
Unrealized gain on interest rate swaps	—			2,353
Other	2,197			1,198
Gross deferred income tax liabilities	28,068			28,767

Net deferred tax liabilities	$	14,282		$	21,253

118

The State of Kansas allows for a bad debt deduction on savings and loan institutions' privilege tax returns of up to 5% of Kansas taxable income. Due to the low level of net loan charge-offs experienced by the Bank historically, the Bank's bad debt deduction on the Kansas privilege tax return has been in excess of actual net charge-offs for several years resulting in a state deferred tax liability. At September 30, 2019 and 2018, the state deferred tax liability associated with ACL was in excess of the federal deferred tax asset.

The Company assesses the available positive and negative evidence surrounding the recoverability of its deferred tax assets and applies its judgment in estimating the amount of valuation allowance necessary under the circumstances. At both September 30, 2019 and 2018, the Company had a valuation allowance of $1.8 million related to the net operating losses generated by the Company's consolidated Kansas corporate income tax return. The companies included in the consolidated Kansas corporate income tax return are the holding company, Capitol Funds, Inc. and Capital City Investments, Inc., as the Bank files a Kansas privilege tax return. Based on the nature of the operations of the holding company, Capitol Funds, Inc. and Capital City Investments, Inc., management believes there will not be sufficient taxable income to fully utilize the deferred tax assets noted above; therefore, a valuation allowance has been recorded for the related amounts at September 30, 2019 and 2018.

ASC 740 Income Taxes prescribes a process by which a tax position taken, or expected to be taken, on an income tax return is determined based upon the technical merits of the position, along with whether the tax position meets a more-likely-than-not-recognition threshold, to determine the amount, if any, of unrecognized tax benefits to recognize in the financial statements. Estimated penalties and interest related to unrecognized tax benefits are included in income tax expense in the consolidated statements of income. For the year ended September 30, 2019, 2018, and 2017 the Company had no unrecognized tax benefits.

The Company files income tax returns in the U.S. federal jurisdiction and the state of Kansas, as well as other states where it has either established nexus under an economic nexus theory or has exceeded enumerated nexus thresholds based on the amount of interest income derived from sources within a given state. With few exceptions, the Company is no longer subject to U.S. federal and state examinations by tax authorities for fiscal years before 2016.

119

11. EMPLOYEE STOCK OWNERSHIP PLAN

The ESOP trust acquired 3,024,574 shares (6,846,728 shares post-corporate reorganization) of common stock in the Company's initial public offering and 4,726,000 shares of common stock in the Company's corporate reorganization in December of 2010. Both acquisitions of common stock were made with proceeds from loans from the Company, secured by shares of the Company's stock purchased in each offering. The Bank has agreed to make cash contributions to the ESOP trust on an annual basis sufficient to enable the ESOP trust to make the required annual loan payments to the Company on September 30 of each year. The loan for the shares acquired in the initial public offering matured on September 30, 2013. The loan for the shares acquired in the corporate reorganization matures on September 30, 2040.

As annual loan payments are made on September 30, shares are released from collateral and allocated to qualified employees based on the proportion of their qualifying compensation to total qualifying compensation. On September 30, 2019, 165,198 shares were released from collateral. On September 30, 2020, 165,198 shares will be released from collateral. As ESOP shares are committed to be released from collateral, the Company records compensation expense. Dividends on unallocated ESOP shares are applied to the debt service payments of the loan secured by the unallocated shares. Dividends on unallocated ESOP shares in excess of the debt service payment are recorded as compensation expense and distributed to participants or participants' ESOP accounts. Compensation expense related to the ESOP was $3.1 million for the year ended September 30, 2019, $2.9 million for the year ended September 30, 2018, and $3.3 million for the year ended September 30, 2017. Of these amounts, $549 thousand, $541 thousand, and $784 thousand related to the difference between the market price of the Company's stock when the shares were acquired by the ESOP trust and the average market price of the Company's stock during the years ended September 30, 2019, 2018, and 2017, respectively. The amount included in compensation expense for dividends on unallocated ESOP shares in excess of the debt service payments was $906 thousand, $688 thousand, and $833 thousand for the years ended September 30, 2019, 2018, and 2017, respectively.

Shares may be withdrawn from the ESOP trust due to diversification (a participant may begin to diversify at least 25% of their ESOP shares at age 50), retirement, termination, or death of the participant. The following is a summary of shares held in the ESOP trust as of September 30, 2019 and 2018:



	2019		2018
	(Dollars in thousands)
Allocated ESOP shares	4,207,520		4,339,002
Unreleased ESOP shares	3,469,158		3,634,356
Total ESOP shares	7,676,678		7,973,358

Fair value of unreleased ESOP shares	$	47,805	$	46,302

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12. STOCK-BASED COMPENSATION

The Company has a Stock Option Plan, a Restricted Stock Plan, and an Equity Incentive Plan, all of which are considered share-based plans. The Stock Option Plan and Restricted Stock Plan expired in April 2015. No additional grants can be made from these two plans; however, awards granted under these two plans remain outstanding until they are individually vested, forfeited or expire. The objectives of the Equity Incentive Plan are to provide additional compensation to certain officers, directors and key employees by facilitating their acquisition of stock interest in the Company and enable the Company to retain personnel of experience and ability in key positions of responsibility.

Stock Option Plans – There are currently 445,930 stock options outstanding as a result of grants awarded from the Stock Option Plan. The Equity Incentive Plan had 5,907,500 stock options originally eligible to be granted and, as of September 30, 2019, the Company had 4,199,316 stock options still available for future grants under this plan. This plan will expire in January 2027 and no additional grants may be made after expiration, but awards granted under this plan remain outstanding until they are individually vested, forfeited, or expire.

The Company may issue incentive and nonqualified stock options under the Equity Incentive Plan. The Company may also award stock appreciation rights, although no stock appreciation rights have been awarded to date. The incentive stock options expire no later than 10 years from the date of grant, and the nonqualified stock options expire no later than 15 years from the date of grant. The vesting period of the stock options under the Equity Incentive Plan generally has ranged from 3 years to 5 years. The stock option exercise price cannot be less than the market value at the date of the grant as defined by each plan. The fair value of stock option grants is estimated on the date of the grant using the Black-Scholes option pricing model.

At September 30, 2019, the Company had 1,013,295 stock options outstanding with a weighted average exercise price of $13.21 per option and a weighted average contractual life of 3.5 years, and 999,295 options exercisable with a weighted average exercise price of $13.22 per option and a weighted average contractual life of 3.5 years. The exercise price may be paid in cash, shares of common stock, or a combination of both. New shares are issued by the Company upon the exercise of stock options.

Compensation expense attributable to stock option awards during the years ended September 30, 2019, 2018, and 2017 totaled $49 thousand, $71 thousand, and $118 thousand, respectively. The fair value of stock options vested during the years ended September 30, 2019, 2018, and 2017 was $64 thousand, $77 thousand, and $174 thousand, respectively. As of September 30, 2019, the total future compensation cost related to non-vested stock options not yet recognized in the consolidated statements of income was $12 thousand, and the weighted average period over which these awards are expected to be recognized was 0.7 years.

Restricted Stock Plans – The Equity Incentive Plan had 2,363,000 shares originally eligible to be granted as restricted stock and, as of September 30, 2019, the Company had 1,648,050 shares available for future grants of restricted stock under this plan. This plan will expire in January 2027 and no additional grants may be made after expiration, but awards granted under this plan remain outstanding until they are individually vested or forfeited. The vesting period of the restricted stock awards under the Equity Incentive Plan has generally ranged from 3 years to 5 years. At September 30, 2019, the Company had 121,800 unvested restricted stock shares with a weighted average grant date fair value of $13.72 per share.

Compensation expense is calculated based on the fair market value of the common stock at the date of the grant, as defined by the plan, and is recognized over the vesting time period. Compensation expense attributable to restricted stock awards during the years ended September 30, 2019, 2018, and 2017 totaled $501 thousand, $301 thousand, and $388 thousand, respectively. The fair value of restricted stock that vested during the years ended September 30, 2019, 2018, and 2017 totaled $294 thousand, $294 thousand, and $563 thousand, respectively. As of September 30, 2019, there was $1.3 million of unrecognized compensation cost related to unvested restricted stock to be recognized over a weighted average period of 3.2 years.

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13. COMMITMENTS AND CONTINGENCIES

The following table summarizes the Bank's loan commitments as of September 30, 2019 and 2018:



	2019		2018
	(Dollars in thousands)
Originate fixed-rate	$	55,249	$	46,645
Originate adjustable-rate	32,206		25,228
Purchase/participate fixed-rate	94,400		122,418
Purchase/participate adjustable-rate	49,141		10,085
	$	230,996	$	204,376

Commitments to originate loans are commitments to lend to a customer. Commitments to purchase/participate in loans represent commitments to purchase loans from correspondent lenders on a loan-by-loan basis or participate in commercial loans with a lead bank. The Bank evaluates each borrower's creditworthiness on a case-by-case basis. Commitments generally have expiration dates or other termination clauses and one- to four-family loan commitments may require the payment of a rate lock fee. Some of the commitments are expected to expire without being fully drawn upon; therefore, the amount of total commitments disclosed in the table above does not necessarily represent future cash requirements. As of September 30, 2019 and 2018, there were no significant loan-related commitments that met the definition of derivatives or commitments to sell mortgage loans. As of September 30, 2019 and 2018, the Bank had approved but unadvanced lines of credit of $265.2 million and $246.1 million, respectively.

The Company also has standby letters of credit, which are conditional commitments to guarantee the performance of a customer to a third party. Most guarantees have one-year terms. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At September 30, 2019 and 2018, the Company had $1.2 million in outstanding standby letters of credit, and no amounts had been recorded as liabilities for the Company's potential obligations under these agreements at either date.

In the normal course of business, the Company and its subsidiary are named defendants in various lawsuits and counterclaims. In the opinion of management, after consultation with legal counsel, none of the currently pending suits are expected to have a materially adverse effect on the Company's consolidated financial statements for the year ended September 30, 2019, or future periods.

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14. REGULATORY CAPITAL REQUIREMENTS

The Bank and the Company are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly additional discretionary, actions by regulators that, if undertaken, could have a material adverse effect on the Company's financial statements. Under regulatory capital adequacy guidelines, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Additionally, the Bank must meet specific capital guidelines to be considered well capitalized per the regulatory framework for prompt corrective action. The Company's and Bank's capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.

Generally, savings institutions, such as the Bank, may make capital distributions during any calendar year equal to the earnings of the previous two calendar years and current year-to-date earnings. It is generally required that the Bank remain well capitalized before and after the proposed distribution. The Company's ability to pay dividends is dependent, in part, upon its ability to obtain capital distributions from the Bank. So long as the Bank continues to remain well capitalized after each capital distribution and operates in a safe and sound manner, it is management's belief that the regulators will continue to allow the Bank to distribute its net income to the Company, although no assurance can be given in this regard.

In conjunction with the Company's corporate reorganization in December 2010, a "liquidation account" was established for the benefit of certain depositors of the Bank in an amount equal to Capitol Federal Savings Bank MHC's ownership interest in the retained earnings of Capitol Federal Financial as of June 30, 2010. As of September 30, 2019, the balance of this liquidation account was $127.6 million. Under applicable federal banking regulations, neither the Company nor the Bank is permitted to pay dividends on its capital stock to its stockholders if stockholders' equity would be reduced below the amount of the liquidation account at that time.

The Bank and the Company must maintain certain minimum capital ratios as set forth in the table below for capital adequacy purposes. Effective January 1, 2016, the Company and Bank were required to maintain a capital conservation buffer above certain minimum risk-based capital ratios for capital adequacy purposes in order to avoid certain restrictions on capital distributions and other payments including dividends, share repurchases, and certain compensation. The required capital conservation buffer was phased in over a four-year period by increasing the required buffer amount by 0.625% each year to a total of 2.50%. The capital conservation buffer was fully phased in on January 1, 2019. The capital conservation buffer was 2.500% at September 30, 2019 and 1.875% at September 30, 2018. At September 30, 2019 and 2018, the Bank and Company exceeded the capital conservation buffer requirement. Management believes, as of September 30, 2019, that the Bank and Company meet all capital adequacy requirements to which they are subject and there were no conditions or events subsequent to September 30, 2019 that would change the Bank's or Company's category.

In September 2019, the regulatory agencies, including the Office of the Comptroller of the Currency and FRB, adopted a final rule, effective January 1, 2020, creating a community bank leverage ratio ("CBLR") for institutions with total consolidated assets of less than $10 billion and that meet other qualifying criteria. Qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules and to have met the well-capitalized ratio requirements. Management is still reviewing the CBLR framework, but expects the Bank and Company will elect to use the CBLR framework.

123



									To Be Well
									Capitalized
									Under Prompt
					For Capital				Corrective Action
	Actual				Adequacy Purposes				Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Bank
As of September 30, 2019
Tier 1 leverage	$	1,169,037	12.1	%	$	387,427	4.0	%	$	484,284	5.0	%
Common Equity Tier 1 ("CET1") capital	1,169,037		24.1		218,042		4.5		314,949		6.5
Tier 1 capital	1,169,037		24.1		290,722		6.0		387,630		8.0
Total capital	1,178,263		24.3		387,630		8.0		484,537		10.0

As of September 30, 2018
Tier 1 leverage	1,202,125		13.0		370,559		4.0		463,199		5.0
CET1 capital	1,202,125		25.1		215,764		4.5		311,659		6.5
Tier 1 capital	1,202,125		25.1		287,685		6.0		383,580		8.0
Total capital	1,210,589		25.2		383,580		8.0		479,475		10.0

Company
As of September 30, 2019
Tier 1 leverage	1,336,377		13.8		387,346		4.0		N/A		N/A
CET1 capital	1,336,377		27.6		218,070		4.5		N/A		N/A
Tier 1 capital	1,336,377		27.6		290,759		6.0		N/A		N/A
Total capital	1,345,603		27.8		387,679		8.0		N/A		N/A

As of September 30, 2018
Tier 1 leverage	1,381,791		14.9		370,475		4.0		N/A		N/A
CET1 capital	1,381,791		28.6		215,793		4.5		N/A		N/A
Tier 1 capital	1,381,791		28.8		287,724		6.0		N/A		N/A
Total capital	1,390,255		29.0		383,632		8.0		N/A		N/A

124

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value Measurements – The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with ASC 820 and ASC 825. The Company's AFS securities and interest rate swaps are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other financial instruments on a non-recurring basis, such as OREO and loans individually evaluated for impairment. These non-recurring fair value adjustments involve the application of lower of cost or fair value accounting or write-downs of individual financial instruments.

The Company groups its financial instruments at fair value in three levels based on the markets in which the financial instruments are traded and the reliability of the assumptions used to determine fair value. These levels are:


•	Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.


•	Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

•

Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company's own estimates of assumptions that market participants would use in pricing the financial instrument. Valuation techniques include the use of option pricing models, discounted cash flow models, and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the financial instrument.

The Company bases its fair values on the price that would be received from the sale of a financial instrument in an orderly transaction between market participants at the measurement date under current market conditions. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

The following is a description of valuation methodologies used for financial instruments measured at fair value on a recurring basis.

AFS Securities - The Company's AFS securities portfolio is carried at estimated fair value. The majority of the securities within the AFS portfolio were issued by GSEs. The Company primarily uses prices obtained from third-party pricing services to determine the fair value of its securities. On a quarterly basis, management corroborates a sample of prices obtained from the third-party pricing service for Level 2 securities by comparing them to an independent source. If the price provided by the independent source varies by more than a predetermined percentage from the price received from the third-party pricing service, then the variance is researched by management. The Company did not have to adjust prices obtained from the third-party pricing service when determining the fair value of its securities during the years ended September 30, 2019 and 2018. The Company's major security types, based on the nature and risks of the securities, are:


•	GSE Debentures - Estimated fair values are based on a discounted cash flow method. Cash flows are determined by taking any embedded options into consideration and are discounted using current market yields for similar securities. (Level 2)


•	MBS - Estimated fair values are based on a discounted cash flow method. Cash flows are determined based on prepayment projections of the underlying mortgages and are discounted using current market yields for benchmark securities. (Level 2)


•	Municipal Bonds - Estimated fair values are based on a discounted cash flow method. Cash flows are determined by taking any embedded options into consideration and are discounted using current market yields for securities with similar credit profiles. (Level 2)

Interest Rate Swaps - The Company's interest rate swaps are designated as cash flow hedges and are reported at fair value in other assets on the consolidated balance sheet if in a gain position, and in accounts payable and accrued expenses if in a loss position, with any unrealized gains and losses, net of taxes, reported as AOCI in stockholders' equity. See "Note 9. Deposits and Borrowed Funds" for additional information. The estimated fair values of the interest rates swaps are obtained from the counterparty and are determined by a discounted cash flow analysis using observable market-based inputs. On a quarterly basis, management corroborates the estimated fair values by internally calculating the estimated fair value using a discounted

125

cash flow analysis with independent observable market-based inputs from a third party. The Company did not make any adjustments to the estimated fair values during the years ended September 30, 2019 and 2018. (Level 2)

The following tables provide the level of valuation assumption used to determine the carrying value of the Company's financial instruments measured at fair value on a recurring basis at the dates presented. The Company did not have any Level 3 financial instruments measured at fair value on a recurring basis at September 30, 2019 or 2018. The Company did not have any liabilities that were measured at fair value at September 30, 2018.



	September 30, 2019
			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable
	Carrying		for Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
AFS Securities:
MBS	$	936,487	$	—	$	936,487	$	—
GSE debentures	249,954		—		249,954		—
Municipal bonds	18,422		—		18,422		—
	$	1,204,863	$	—	$	1,204,863	$	—

Liabilities:
Interest rate swaps	$	33,090	$	—	$	33,090	$	—



	September 30, 2018
			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable
	Carrying		for Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
AFS Securities:
MBS	$	445,090	$	—	$	445,090	$	—
GSE debentures	265,398		—		265,398		—
Municipal bonds	4,126		—		4,126		—
	714,614		—		714,614		—
Interest rate swaps	9,685		—		9,685		—
	$	724,299	$	—	$	724,299	$	—

126

The following is a description of valuation methodologies used for significant financial instruments measured at fair value on a non-recurring basis.

Loans Receivable – The amount of loans individually evaluated for impairment on a non-recurring basis during fiscal years 2019 and 2018 that were still held in the portfolio as of September 30, 2019 and 2018 was $6.8 million and $6.7 million, respectively. The majority of these loans were secured by residential real estate and were individually evaluated to determine if the carrying value of the loan was in excess of the fair value of the collateral, less estimated selling costs of 10%. Fair values were estimated through current appraisals. Management does not adjust or apply a discount to the appraised value, except for the estimated sales cost noted above. The primary significant unobservable input for loans individually evaluated for impairment was the appraisal. Fair values of loans individually evaluated for impairment cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the loan and, as such, are classified as Level 3. Based on this evaluation, the Bank charged-off all loss amounts as of September 30, 2019 and 2018; therefore, the fair value was equal to the carrying value and there was no ACL related to these loans.

OREO – OREO primarily represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at lower of cost or fair value. The fair value for OREO is estimated through current appraisals or listing prices, less estimated selling costs of 10%. Management does not adjust or apply a discount to the appraised value or listing price, except for the estimated sales costs noted above. The primary significant unobservable input for OREO was the appraisal or listing price. Fair values of foreclosed property cannot be determined with precision and may not be realized in an actual sale of the property and, as such, are classified as Level 3. The fair value of OREO measured on a non-recurring basis during fiscal years 2019 and 2018 that was still held in the portfolio as of September 30, 2019 and 2018 was $678 thousand and $1.9 million, respectively. The carrying value of the properties equaled the fair value of the properties at September 30, 2019 and 2018.

Fair Value Disclosures – The Company determined estimated fair value amounts using available market information and a variety of valuation methodologies as of the dates presented. Considerable judgment is required to interpret market data to develop the estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company would realize from a current market exchange at subsequent dates.

127

The carrying amounts and estimated fair values of the Company's financial instruments by fair value hierarchy, at the dates presented, were as follows:



	2019
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	220,370	$	220,370	$	220,370	$	—	$	—
AFS securities	1,204,863		1,204,863		—		1,204,863		—
Loans receivable	7,416,747		7,654,586		—		—		7,654,586
FHLB stock	98,456		98,456		98,456		—		—
Liabilities:
Deposits	5,581,867		5,614,895		2,594,242		3,020,653		—
FHLB borrowings	2,139,989		2,153,041		100,001		2,053,040		—
Other borrowings	100,000		100,312		—		100,312		—
Interest rate swaps	33,090		33,090		—		33,090		—



	2018
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	139,055	$	139,055	$	139,055	$	—	$	—
AFS securities	714,614		714,614		—		714,614		—
HTM securities	612,318		601,071		—		601,071		—
Loans receivable	7,514,485		7,418,026		—		—		7,418,026
FHLB stock	99,726		99,726		99,726		—		—
Interest rate swaps	9,685		9,685		—		9,685		—
Liabilities:
Deposits	5,603,354		5,569,591		2,666,297		2,903,294		—
FHLB borrowings	2,174,981		2,145,477		100,000		2,045,477		—
Other borrowings	110,052		109,465		10,503		98,962		—

128

16. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following tables present the changes in the components of AOCI, net of tax, for the years presented.



	For the Year Ended September 30, 2019
	Unrealized			Unrealized
	Gains (Losses)			Gains (Losses)
	on AFS			on Cash Flow			Total
	Securities			Hedges			AOCI
	(Dollars in thousands)
Beginning balance	$	(2,990	)	$	7,330		$	4,340
Transfer of HTM securities to AFS securities	2,336			—			2,336
Other comprehensive income (loss), before reclassifications	10,804			(32,817		)	(22,013		)
Amount reclassified from AOCI	—			438			438
Other comprehensive income (loss)	13,140			(32,379		)	(19,239		)
Ending balance	$	10,150		$	(25,049	)	$	(14,899	)



	For the Year Ended September 30, 2018
	Unrealized			Unrealized
	Gains (Losses)			Gains (Losses)
	on AFS			on Cash Flow			Total
	Securities			Hedges			AOCI
	(Dollars in thousands)
Beginning balance	$	3,290		$	(372	)	$	2,918
Other comprehensive income (loss), before reclassifications	(6,741		)	6,981			240
Amount reclassified from AOCI	—			515			515
Other comprehensive income (loss)	(6,741		)	7,496			755
Reclassification of certain income tax effects related to adoption of ASU 2018-02	461			206			667
Ending balance	$	(2,990	)	$	7,330		$	4,340



	For the Year Ended September 30, 2017
	Unrealized			Unrealized
	Gains (Losses)			Gains (Losses)
	on AFS			on Cash Flow			Total
	Securities			Hedges			AOCI
	(Dollars in thousands)
Beginning balance	$	5,915		$	—		$	5,915
Other comprehensive income (loss), before reclassifications	(2,625		)	(506		)	(3,131		)
Amount reclassified from AOCI	—			134			134
Other comprehensive income (loss)	(2,625		)	(372		)	(2,997		)
Ending balance	$	3,290		$	(372	)	$	2,918

129

17. REVENUE RECOGNITION

On October 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, and all subsequent ASUs that modified the principles for recognizing revenue. The Company's primary sources of revenue consist of net interest income on financial assets and liabilities, which are not within the scope of the amended ASU. In addition, certain non-interest income revenue streams, such as loan servicing fees, derivatives, and BOLI, are not in-scope of the amended ASU. Based on an assessment of non-interest income revenue streams and a review of the related contracts with customers, the Company concluded the amended ASU did not significantly change the Company's revenue recognition methods. The Company elected to implement the amended ASU using the modified retrospective application with a cumulative adjustment, which increased opening retained earnings at October 1, 2018 by $394 thousand related to contracts that were not complete upon adoption. The amount was related to the change in the recognition of revenue related to certain insurance commissions.

Details of the Company's primary types of non-interest income revenue streams by financial statement line reported in the consolidated statements of income that are within the scope of the amended ASU and ASC Topic 606 are below. During the current fiscal year, revenue from contracts with customers totaled $16.6 million.

Deposit Service Fees

Interchange Transaction Fees - Interchange transaction fee income primarily consists of interchange fees earned on a transactional basis through card payment networks. The performance obligation for these types of transactions is satisfied as services are rendered for each transaction and revenue is recognized daily concurrently with the transaction processing services provided to the cardholder.

In order to participate in the card payment networks, the Company must pay various transaction related costs established by the networks ("interchange network charges"), including membership fees and a per unit charge for each transaction. The Company determined it is acting as an agent for its debit card customers when they are utilizing the card payment networks; therefore, upon adoption of the amended ASU, interchange transaction fee income is reported net of interchange network charges. Previously, interchange network charges were reported in deposit and loan expense. Interchange network charges totaled $3.4 million and $3.0 million for fiscal years 2019 and 2018, respectively.

Service Charges on Deposit Accounts - Service charges on deposit accounts consist of account maintenance and transaction-based fees such as overdrafts, insufficient funds, wire transfers and the use of out-of-network ATMs. The Company's performance obligation is satisfied over a period of time, generally a month, for account maintenance and at the time of service for transaction-based fees. Revenue is recognized after the performance obligation is satisfied. Payments are typically collected from the customer's deposit account at the time the transaction is processed and/or at the end of the customer's statement cycle (typically monthly).

Other Non-Interest Income

Trust Asset Management Income - The Company provides trust asset management services to customers. The Company primarily earns fees for these services over time as the monthly services are provided and the Company assesses revenue at each month end. Fees are charged based on a tiered scale of the market value of the individual trust asset accounts at the end of the month.

Insurance Commissions - Commissions are received on insurance product sales. The Company acts in the capacity of an agent between the Company's customer and the insurance carrier. The Company's performance obligation is satisfied when the terms of the policy have been agreed upon and the insurance policy becomes effective. Additionally, the Company earns performance-based incentives ("contingent insurance commissions") based on certain criteria established by the insurance carriers. Upon adoption of the amended ASU, contingent insurance commissions are accrued based upon management's expectations. Previously, contingent insurance commissions were recognized when the funds were received.

130

18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table presents summarized quarterly data for each of the years indicated for the Company.



	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter		Total
	(Dollars and counts in thousands, except per share amounts)
2019
Total interest and dividend income	$	82,421	$	82,037	$	82,211	$	83,285	$	329,954
Net interest and dividend income	52,301		52,597		51,681		49,811		206,390
Provision for credit losses	—		—		450		300		750
Net income	24,383		24,554		22,897		22,409		94,243
Basic EPS	0.18		0.18		0.17		0.16		0.68
Diluted EPS	0.18		0.18		0.17		0.16		0.68
Dividends declared per share	0.475		0.085		0.335		0.085		0.98
Average number of basic shares outstanding	137,551		137,635		137,720		137,801		137,677
Average number of diluted shares outstanding	137,592		137,691		137,788		137,867		137,735



2018
Total interest and dividend income	$	80,644	$	81,774	$	82,161	$	77,313	$	321,892
Net interest and dividend income	49,374		49,889		49,433		50,077		198,773
Provision for credit losses	—		—		—		—		—
Net income	31,836		23,330		22,372		21,389		98,927
Basic EPS	0.24		0.17		0.17		0.16		0.73
Diluted EPS	0.24		0.17		0.17		0.16		0.73
Dividends declared per share	0.375		0.085		0.335		0.085		0.88
Average number of basic shares outstanding	134,373		134,428		134,484		135,500		134,698
Average number of diluted shares outstanding	134,467		134,475		134,530		135,556		134,759

131

19. PARENT COMPANY FINANCIAL INFORMATION (PARENT COMPANY ONLY)

The Company serves as the holding company for the Bank (see "Note 1. Summary of Significant Accounting Policies"). The Company's (parent company only) balance sheets at the dates presented, and the related statements of income and cash flows for each of the years presented are as follows:



BALANCE SHEETS
SEPTEMBER 30, 2019 and 2018
(Dollars in thousands, except per share amounts)

	2019			2018
ASSETS:
Cash and cash equivalents	$	126,320		$	137,684
Investment in the Bank	1,168,986			1,221,706
Note receivable - ESOP	39,971			41,285
Other assets	711			690
Income taxes receivable, net	429			486
TOTAL ASSETS	$	1,336,417		$	1,401,851

LIABILITIES:
Junior subordinated debentures	$	—		$	10,052
Accounts payable and accrued expenses	91			177
Total liabilities	91			10,229

STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 100,000,000 shares authorized, no shares issued or outstanding	—			—
Common stock, $.01 par value; 1,400,000,000 shares authorized, 141,440,030 and 141,225,516
shares issued and outstanding as of September 30, 2019 and 2018, respectively	1,414			1,412
Additional paid-in capital	1,210,226			1,207,644
Unearned compensation - ESOP	(34,692		)	(36,343		)
Retained earnings	174,277			214,569
AOCI, net of tax	(14,899		)	4,340
Total stockholders' equity	1,336,326			1,391,622
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,336,417		$	1,401,851

132



STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2019, 2018, and 2017
(Dollars in thousands)

	2019			2018			2017
INTEREST AND DIVIDEND INCOME:
Dividend income from the Bank	$	129,409		$	134,540		$	120,215
Interest income from other investments	2,428			1,951			1,715
Total interest and dividend income	131,837			136,491			121,930
INTEREST EXPENSE	403			62			—
NET INTEREST INCOME	131,434			136,429			121,930
NON-INTEREST INCOME	14			—			—
NON-INTEREST EXPENSE:
Salaries and employee benefits	829			1,031			896
Regulatory and outside services	286			1,129			247
Other non-interest expense	652			581			561
Total non-interest expense	1,767			2,741			1,704
INCOME BEFORE INCOME TAX EXPENSE AND EQUITY IN
EXCESS OF DISTRIBUTION OVER EARNINGS OF SUBSIDIARY	129,681			133,688			120,226
INCOME TAX EXPENSE (BENEFIT)	57			(179		)	4
INCOME BEFORE EQUITY IN EXCESS OF
DISTRIBUTION OVER EARNINGS OF SUBSIDIARY	129,624			133,867			120,222
EQUITY IN EXCESS OF DISTRIBUTION OVER EARNINGS OF SUBSIDIARY	(35,381		)	(34,940		)	(36,085		)
NET INCOME	$	94,243		$	98,927		$	84,137

133



STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2019, 2018, and 2017
(Dollars in thousands)

	2019			2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	94,243		$	98,927		$	84,137
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in excess of distribution over earnings of subsidiary	35,381			34,940			36,085
Depreciation of equipment	37			30			29
Loss on disposal of premises and equipment	8			—			—
Provision for deferred income taxes	—			(35		)	(2		)
Changes in:
Other assets	54			(53		)	(5		)
Income taxes receivable/payable	57			(145		)	(40		)
Accounts payable and accrued expenses	(86		)	(257		)	(22		)
Net cash provided by operating activities	129,694			133,407			120,182

CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on note receivable from ESOP	1,314			1,272			1,233
Cash acquired from acquisition	—			18			—
Purchase of equipment	(423		)	—			—
Proceeds from the redemption of common equity securities related to the redemption of junior subordinated debentures	302			—			—
Net cash provided by investing activities	1,193			1,290			1,233

CASH FLOWS FROM FINANCING ACTIVITIES:
Net payment from subsidiary related to restricted stock awards	1,245			253			293
Cash dividends paid	(134,929		)	(118,312		)	(117,963		)
Repayment of other borrowings	(10,052		)	—			—
Stock options exercised	1,485			261			8,843
Net cash used in financing activities	(142,251		)	(117,798		)	(108,827		)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(11,364		)	16,899			12,588

CASH AND CASH EQUIVALENTS:
Beginning of year	137,684			120,785			108,197
End of year	$	126,320		$	137,684		$	120,785

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for acquisition	$	—		$	39,113		$	—
Capital contribution to subsidiary in conjunction with acquisition of CCB	$	—		$	48,798		$	—

134

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, the "Act") as of September 30, 2019. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of September 30, 2019, such disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Act is accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms.

Management's Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Act). The Company's internal control system is a process designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair presentation of published financial statements.

The Company's internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or untimely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the Company's financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial reporting. Further, because of changes in conditions, the effectiveness of any system of internal control may vary over time. The design of any internal control system also factors in resource constraints and consideration for the benefit of the control relative to the cost of implementing the control. Because of these inherent limitations in any system of internal control, management cannot provide absolute assurance that all control issues and instances of fraud within the Company have been detected.

Management assessed the effectiveness of the Company's internal control over financial reporting as of September 30, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Management has concluded that the Company maintained an effective system of internal control over financial reporting based on these criteria as of September 30, 2019.

The Company's independent registered public accounting firm, Deloitte & Touche LLP, who audited the consolidated financial statements included in the Company's annual report, has issued an audit report on the Company's internal control over financial reporting as of September 30, 2019 and it is included in Item 8.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Act) that occurred during the Company's quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. As of September 30, 2019, the Company has integrated CCB's operations into the Company's internal control over financial reporting.

Item 9B. Other Information

None.

135

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information required by this item concerning the Company's directors and any delinquent reports under Section 16(a) of the Act is incorporated herein by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held in January 2020, a copy of which will be filed not later than 120 days after the close of the fiscal year. Pursuant to General Instruction G(3), information concerning executive officers of the Company is included in Part I, under the caption "Executive Officers of the Registrant" of this Form 10-K.

Information required by this item regarding the audit committee of the Company's Board of Directors, including information regarding the audit committee financial experts serving on the committee, is incorporated herein by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held in January 2020, a copy of which will be filed not later than 120 days after the close of the fiscal year.

Code of Ethics

We have adopted a written code of ethics within the meaning of Item 406 of SEC Regulation S-K that applies to our principal executive officer and senior financial officers, and to all of our other employees and our directors, a copy of which is available free of charge in the Investor Relations section of our website, www.capfed.com.

Item 11. Executive Compensation

Information required by this item concerning compensation is incorporated herein by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held in January 2020, a copy of which will be filed not later than 120 days after the close of the fiscal year.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this item concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held in January 2020, a copy of which will be filed not later than 120 days after the close of the fiscal year.

The following table sets forth information as of September 30, 2019 with respect to compensation plans under which shares of our common stock may be issued.



Equity Compensation Plan Information
				Number of Shares
				Remaining Available
				for Future Issuance
	Number of Shares			Under Equity
	to be issued upon	Weighted Average		Compensation Plans
	Exercise of	Exercise Price of		(Excluding Shares
	Outstanding Options,	Outstanding Options,		Reflected in the
Plan Category	Warrants and Rights	Warrants and Rights		First Column)
Equity compensation plans
approved by stockholders	1,013,295	$	13.21	5,847,366	⁽¹⁾
Equity compensation plans not
approved by stockholders	N/A	N/A		N/A
	1,013,295	$	13.21	5,847,366


(1)	This amount includes 1,648,050 shares available for future grants of restricted stock under the Equity Incentive Plan.

136

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information required by this item concerning certain relationships, related transactions and director independence is incorporated herein by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held in January 2020, a copy of which will be filed not later than 120 days after the close of the fiscal year.

Item 14. Principal Accounting Fees and Services

Information required by this item concerning principal accounting fees and services is incorporated herein by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held in January 2020, a copy of which will be filed not later than 120 days after the close of the fiscal year.

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a) The following is a list of documents filed as part of this report:

(1) Financial Statements:

The following financial statements are included under Part II, Item 8 of this Form 10-K:


1.	Reports of Independent Registered Public Accounting Firm.


2.	Consolidated Balance Sheets as of September 30, 2019 and 2018.


3.	Consolidated Statements of Income for the Years Ended September 30, 2019, 2018, and 2017.


4.	Consolidated Statements of Comprehensive Income for the Years Ended September 30, 2019, 2018, and 2017.


5.	Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 2019, 2018, and 2017.


6.	Consolidated Statements of Cash Flows for the Years Ended September 30, 2019, 2018, and 2017.


7.	Notes to Consolidated Financial Statements for the Years Ended September 30, 2019, 2018, and 2017.

(2) Financial Statement Schedules:

All financial statement schedules have been omitted as the information is not required under the related instructions or is not applicable.

(3) Exhibits:

See "Index to Exhibits."

137

INDEX TO EXHIBITS



Exhibit Number		Document
3(i)		Charter of Capitol Federal Financial, Inc., as filed on May 6, 2010, as Exhibit 3(i) to Capitol Federal Financial, Inc.'s Registration Statement on Form S-1 (File No. 333-166578) and incorporated herein by reference
3(ii)		Bylaws of Capitol Federal Financial, Inc., as amended, filed on September 30, 2016, as Exhibit 3.2 to Form 8-K for Capitol Federal Financial Inc. and incorporated herein by reference
4		Description of the Registrant's Securities
10.1(i)		Form of Change of Control Agreement with each of John B. Dicus, Kent G. Townsend, and Rick C. Jackson filed on January 20, 2011 as Exhibit 10.1 to the Registrant's Current Report on Form 8-K and incorporated herein by reference
10.1(ii)		Form of Change of Control Agreement with each of Natalie G. Haag and Carlton A. Ricketts filed on November 29, 2012 as Exhibit 10.1(iv) to the Registrant's Annual Report on Form 10-K and incorporated herein by reference
10.1(iii)		Form of Change of Control Agreement with Daniel L. Lehman filed on November 29, 2016 as Exhibit 10.1(v) to the Registrant's Annual Report on Form 10-K and incorporated herein by reference
10.1(iv)		Form of Change of Control Agreement with Robert D. Kobbeman filed on November 29, 2018 as Exhibit 10.1(iv) to the Registrant's Annual Report on Form 10-K and incorporated herein by reference
10.1(v)		Employment Agreement with Robert D. Kobbeman, as amended, filed on November 29, 2018 as Exhibit 10.1(v) to the Registrant's Annual Report on Form 10-K and incorporated herein by reference
10.1(vi)		Form of Change of Control Agreement with Anthony S. Barry filed on May 10, 2019 as Exhibit 10.1(vi) to the Registrant's March 31, 2019 Form 10-Q and incorporated herein by reference
10.2		Capitol Federal Financial's 2000 Stock Option and Incentive Plan (the "Stock Option Plan") filed on April 13, 2000 as Appendix A to Capitol Federal Financial's Revised Proxy Statement (File No. 000-25391) and incorporated herein by reference
10.3		Capitol Federal Financial Deferred Incentive Bonus Plan, as amended, filed on November 29, 2018 as Exhibit 10.3 to the Registrant's September 30, 2018 Form 10-K and incorporated herein by reference
10.4		Form of Incentive Stock Option Agreement under the Stock Option Plan filed on February 4, 2005 as Exhibit 10.5 to the December 31, 2004 Form 10-Q for Capitol Federal Financial and incorporated herein by reference
10.5		Form of Non-Qualified Stock Option Agreement under the Stock Option Plan filed on February 4, 2005 as Exhibit 10.6 to the December 31, 2004 Form 10-Q for Capitol Federal Financial and incorporated herein by reference
10.6		Description of Director Fee Arrangements filed on November 29, 2018 as Exhibit 10.6 to the Registrant's September 30, 2018 Form 10-K and incorporated herein by reference
10.7		Short-term Performance Plan filed on August 4, 2015 as Exhibit 10.10 to the Registrant's June 30, 2015 Form 10-Q and incorporated herein by reference
10.8		Capitol Federal Financial, Inc. 2012 Equity Incentive Plan (the "Equity Incentive Plan") filed on December 22, 2011 as Appendix A to Capitol Federal Financial, Inc.'s Proxy Statement (File No. 001-34814) and incorporated herein by reference
10.9		Form of Incentive Stock Option Agreement under the Equity Incentive Plan filed on February 6, 2012 as Exhibit 10.12 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
10.10		Form of Non-Qualified Stock Option Agreement under the Equity Incentive Plan filed on February 6, 2012 as Exhibit 10.13 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
10.11		Form of Stock Appreciation Right Agreement under the Equity Incentive Plan filed on February 6, 2012 as Exhibit 10.14 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
10.12		Form of Restricted Stock Agreement under the Equity Incentive Plan filed on February 6, 2012 as Exhibit 10.15 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
14		Code of Ethics*
21		Subsidiaries of the Registrant
23		Consent of Independent Registered Public Accounting Firm



31.1		Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by John B. Dicus, Chairman, President and Chief Executive Officer
31.2		Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Kent G. Townsend, Executive Vice President, Chief Financial Officer and Treasurer
32		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 made by John B. Dicus, Chairman, President and Chief Executive Officer, and Kent G. Townsend, Executive Vice President, Chief Financial Officer and Treasurer
101		The following information from the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019, filed with the SEC on November 27, 2019, has been formatted in Inline eXtensible Business Reporting Language ("XBRL"): (i) Consolidated Balance Sheets at September 30, 2019 and 2018, (ii) Consolidated Statements of Income for the fiscal years ended September 30, 2019, 2018, and 2017, (iii) Consolidated Statements of Comprehensive Income for the fiscal years ended September 30, 2019, 2018, and 2017, (iv) Consolidated Statement of Stockholders' Equity for the fiscal years ended September 30, 2019, 2018, and 2017, (v) Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2019, 2018, and 2017, and (vi) Notes to the Consolidated Financial Statements
104		Cover Page Interactive Data File, formatted in Inline XBRL and included in Exhibit 101

*May be obtained free of charge in the Investor Relations section of our website, www.capfed.com.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	CAPITOL FEDERAL FINANCIAL, INC.



Date: November 27, 2019	By:	/s/ John B. Dicus
		John B. Dicus, Chairman, President and
		Chief Executive Officer
		(Principal Executive Officer)



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

By:	/s/ John B. Dicus	By:	/s/ Reginald L. Robinson
	John B. Dicus, Chairman, President		Reginald L. Robinson, Director
	and Chief Executive Officer		Date: November 27, 2019
	(Principal Executive Officer)
	Date: November 27, 2019	By:	/s/ Michael T. McCoy, M.D.
			Michael T. McCoy, M.D., Director
By:	/s/ Kent G. Townsend		Date: November 27, 2019
	Kent G. Townsend, Executive Vice President,
	Chief Financial Officer and Treasurer	By:	/s/ James G. Morris
	(Principal Financial Officer)		James G. Morris, Director
	Date: November 27, 2019		Date: November 27, 2019

By:	/s/ Jeffrey R. Thompson	By:	/s/ Michel' P. Cole
	Jeffrey R. Thompson, Director		Michel' P. Cole, Director
	Date: November 27, 2019		Date: November 27, 2019

By:	/s/ Jeffrey M. Johnson	By:	/s/ Tara D. Van Houweling
	Jeffrey M. Johnson, Director		Tara D. Van Houweling, First Vice President
	Date: November 27, 2019		and Reporting Director
			(Principal Accounting Officer)
By:	/s/ Morris J. Huey II		Date: November 27, 2019
	Morris J. Huey II, Director
	Date: November 27, 2019


•	1,400,000,000 shares of common stock, $0.01 par value per share; and


•	100,000,000 shares of preferred stock, $0.01 value per share.



			State of
		Percentage	Incorporation
		of	or
Parent	Subsidiary	Ownership	Organization

Capitol Federal	Capitol Federal	100%	Federal
Financial, Inc.	Savings Bank

Capitol Federal	Capitol Funds, Inc.	100%	Kansas
Savings Bank

Capitol Federal	Capital City	100%	Kansas
Savings Bank	Investments, Inc.

Capitol Funds,	Capitol Federal	100%	Vermont
Inc.	Mortgage Reinsurance
	Company


1.	I have reviewed this Annual Report on Form 10-K of Capitol Federal Financial, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c.	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d.	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and


a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



Date: November 27, 2019	By:	/s/ John B. Dicus
	John B. Dicus
	Chairman, President and Chief Executive Officer



Date: November 27, 2019	By:	/s/ Kent G. Townsend
	Kent G. Townsend
	Executive Vice President, Chief Financial Officer and Treasurer


1.	the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


2.	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in such Report.