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Section 1: 10-Q (MARCH 31, 2017 FORM 10-Q)

Document


UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
Form 10-Q
_________________
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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)
 
 
 
(785) 235-1341
Registrant's telephone number, including area code

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 requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files.) Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
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 Exchange Act). Yes ¨ No þ

As of May 4, 2017, there were 138,201,735 shares of Capitol Federal Financial, Inc. common stock outstanding.





PART I - FINANCIAL INFORMATION
Page Number
Item 1.
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
Item 3.
Item 4.
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 




PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 
(Unaudited)
 
 
 
March 31,
 
September 30,
 
2017
 
2016
ASSETS:
 
 
 
Cash and cash equivalents (includes interest-earning deposits of $226,160 and $267,829)
$
240,587

 
$
281,764

Securities:
 
 
 
Available-for-sale ("AFS"), at estimated fair value (amortized cost of $458,295 and $517,791)
465,083

 
527,301

Held-to-maturity ("HTM"), at amortized cost (estimated fair value of $959,541 and $1,122,867)
954,110

 
1,100,874

Loans receivable, net (allowance for credit losses ("ACL") of $8,447 and $8,540)
7,193,721

 
6,958,024

Federal Home Loan Bank Topeka ("FHLB") stock, at cost
105,475

 
109,970

Premises and equipment, net
83,248

 
83,221

Other assets
204,166

 
206,093

TOTAL ASSETS
$
9,246,390

 
$
9,267,247

 
 
 
 
LIABILITIES:
 
 
 
Deposits
$
5,269,234

 
$
5,164,018

FHLB borrowings
2,273,113

 
2,372,389

Repurchase agreements
200,000

 
200,000

Advance payments by borrowers for taxes and insurance
54,790

 
62,643

Income taxes payable, net
728

 
310

Deferred income tax liabilities, net
24,860

 
25,374

Accounts payable and accrued expenses
41,376

 
49,549

Total liabilities
7,864,101

 
7,874,283

 
 
 
 
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, 138,187,735 and 137,486,172
 
 
 
shares issued and outstanding as of March 31, 2017 and September 30, 2016, respectively
1,382

 
1,375

Additional paid-in capital
1,166,459

 
1,156,855

Unearned compensation, Employee Stock Ownership Plan ("ESOP")
(38,821
)
 
(39,647
)
Retained earnings
249,047

 
268,466

Accumulated other comprehensive income ("AOCI"), net of tax
4,222

 
5,915

Total stockholders' equity
1,382,289

 
1,392,964

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
9,246,390

 
$
9,267,247

 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 


3


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)
 
 
 
 
 
 
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
March 31,
 
2017
 
2016
 
2017
 
2016
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
63,106

 
$
60,732

 
$
125,051

 
$
120,955

Mortgage-backed securities ("MBS")
6,191

 
7,702

 
12,553

 
15,533

Cash and cash equivalents
4,132

 
2,707

 
7,101

 
4,327

FHLB stock
3,100

 
3,006

 
6,039

 
6,158

Investment securities
1,131

 
1,485

 
2,238

 
3,018

Total interest and dividend income
77,660

 
75,632

 
152,982

 
149,991

INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB borrowings
16,771

 
16,394

 
32,888

 
32,468

Deposits
10,364

 
9,213

 
20,760

 
18,012

Repurchase agreements
1,471

 
1,487

 
2,974

 
2,991

Total interest expense
28,606

 
27,094

 
56,622

 
53,471

NET INTEREST INCOME
49,054

 
48,538

 
96,360

 
96,520

PROVISION FOR CREDIT LOSSES

 

 

 

NET INTEREST INCOME AFTER
 
 
 
 
 
 
 
PROVISION FOR CREDIT LOSSES
49,054

 
48,538

 
96,360

 
96,520

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
3,582

 
3,558

 
7,291

 
7,372

Income from bank-owned life insurance ("BOLI")
573

 
1,459

 
1,096

 
2,162

Other non-interest income
1,418

 
1,609

 
2,454

 
2,658

Total non-interest income
5,573

 
6,626

 
10,841

 
12,192

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
10,544

 
10,288

 
21,178

 
20,775

Information technology and communications
2,768

 
2,609

 
5,602

 
5,167

Occupancy, net
2,764

 
2,616

 
5,439

 
5,288

Deposit and loan transaction costs
1,228

 
1,396

 
2,614

 
2,670

Regulatory and outside services
1,265

 
1,144

 
2,611

 
2,630

Advertising and promotional
1,263

 
983

 
1,953

 
2,137

Federal insurance premium
878

 
1,399

 
1,772

 
2,781

Office supplies and related expense
541

 
584

 
978

 
1,471

Low income housing partnerships

 
1,321

 

 
2,094

Other non-interest expense
686

 
1,086

 
1,387

 
2,003

Total non-interest expense
21,937

 
23,426

 
43,534

 
47,016

INCOME BEFORE INCOME TAX EXPENSE
32,690

 
31,738

 
63,667

 
61,696

INCOME TAX EXPENSE
11,103

 
10,211

 
21,502

 
19,451

NET INCOME
$
21,587

 
$
21,527

 
$
42,165

 
$
42,245

 
 
 
 
 
 
 
 
Basic earnings per share ("EPS")
$
0.16

 
$
0.16

 
$
0.31

 
$
0.32

Diluted EPS
$
0.16

 
$
0.16

 
$
0.31

 
$
0.32

Dividends declared per share
$
0.09

 
$
0.09

 
$
0.46

 
$
0.42


 
 
 
 
 
 
 
Basic weighted average common shares
134,066,189

 
132,960,030

 
133,879,350

 
132,890,781

Diluted weighted average common shares
134,258,822

 
133,031,042

 
134,102,447

 
132,971,254

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 

4


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
 
 
 
 
 
 
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
March 31,
 
2017
 
2016
 
2017
 
2016
Net income
$
21,587

 
$
21,527

 
$
42,165

 
$
42,245

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Changes in unrealized holding gains (losses) on AFS securities,
 
 
 
 
 
 
 
net of taxes of $230, $(874), $1,029 and $826
(379
)
 
1,438

 
(1,693
)
 
(1,360
)
Comprehensive income
$
21,208

 
$
22,965

 
$
40,472

 
$
40,885

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 


5


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
Unearned
 
 
 
 
 
Total
 
Common
 
Paid-In
 
Compensation
 
Retained
 
 
 
Stockholders'
 
Stock
 
Capital
 
ESOP
 
Earnings
 
AOCI
 
Equity
Balance at October 1, 2016
$
1,375

 
$
1,156,855

 
$
(39,647
)
 
$
268,466

 
$
5,915

 
$
1,392,964

Net income
 
 
 
 
 
 
42,165

 
 
 
42,165

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
(1,693
)
 
(1,693
)
ESOP activity, net
 
 
443

 
826

 
 
 
 
 
1,269

Restricted stock activity, net
 
 
40

 
 
 
 
 
 
 
40

Stock-based compensation
 
 
330

 
 
 
 
 
 
 
330

Stock options exercised
7

 
8,791

 
 
 
 
 
 
 
8,798

Cash dividends to stockholders ($0.46 per share)
 
 
 
 
 
(61,584
)
 
 
 
(61,584
)
Balance at March 31, 2017
$
1,382

 
$
1,166,459

 
$
(38,821
)
 
$
249,047

 
$
4,222

 
$
1,382,289

 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 
 


6


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
 
For the Six Months Ended
 
March 31,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
42,165

 
$
42,245

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
FHLB stock dividends
(6,039
)
 
(6,158
)
Amortization and accretion of premiums and discounts on securities
2,438

 
2,486

Depreciation and amortization of premises and equipment
3,831

 
3,475

Amortization of deferred amounts related to FHLB advances, net
724

 
1,135

Common stock committed to be released for allocation - ESOP
1,269

 
1,039

Stock-based compensation
330

 
783

Changes in:
 
 
 
Other assets, net
1,178

 
353

Income taxes payable/receivable
651

 
3,240

Accounts payable and accrued expenses
(8,086
)
 
(4,901
)
Net cash provided by operating activities
38,461

 
43,697

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of AFS securities
(37,425
)
 
(74,987
)
Purchase of HTM securities

 
(144,392
)
Proceeds from calls, maturities and principal reductions of AFS securities
96,902

 
153,512

Proceeds from calls, maturities and principal reductions of HTM securities
144,345

 
142,223

Proceeds from the redemption of FHLB stock
193,450

 
189,000

Purchase of FHLB stock
(182,916
)
 
(146,680
)
Net increase in loans receivable
(237,470
)
 
(146,790
)
Purchase of premises and equipment
(3,966
)
 
(8,446
)
Proceeds from sale of other real estate owned ("OREO")
2,865

 
1,096

Proceeds from BOLI death benefit

 
783

Net cash used in investing activities
(24,215
)
 
(34,681
)
 
 
 
 
 
 
 
(Continued)


7


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
 
For the Six Months Ended
 
March 31,
 
2017
 
2016
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Cash dividends paid
(61,584
)
 
(55,856
)
Net change in deposits
105,216

 
287,309

Proceeds from borrowings
2,100,000

 
3,600,000

Repayments on borrowings
(2,200,000
)
 
(4,400,000
)
Change in advance payments by borrowers for taxes and insurance
(7,853
)
 
(9,589
)
Stock options exercised
8,476

 
299

Excess tax benefits from stock options
322

 

Net cash used in financing activities
(55,423
)
 
(577,837
)
 
 
 
 
NET DECREASE IN CASH AND CASH EQUIVALENTS
(41,177
)
 
(568,821
)
 
 
 
 
CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of period
281,764

 
772,632

End of period
$
240,587

 
$
203,811

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Income tax payments
$
17,996

 
$
16,212

Interest payments
$
57,140

 
$
51,766

 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
(Concluded)


8


Notes to Consolidated Financial Statements (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements include the accounts of Capitol Federal® Financial, Inc. (the "Company") and its wholly-owned subsidiary, Capitol Federal Savings Bank (the "Bank"). The Bank has a wholly-owned subsidiary, Capitol Funds, Inc. Capitol Funds, Inc. has a wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance 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") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2016, filed with the Securities and Exchange Commission ("SEC"). Interim results are not necessarily indicative of results for a full year.

Net Presentation of Cash Flows Related to Borrowings - Beginning in fiscal year 2014, the Bank implemented a leverage strategy ("leverage strategy") to increase earnings. This 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 the FHLB at the time of the borrowings, with some or all of the balance being repaid prior to the end of each quarter for regulatory purposes. Proceeds from the borrowings, net of required FHLB stock holdings, are deposited at the Federal Reserve Bank of Kansas City (the "FRB of Kansas City"). The contractual maturities of the FHLB advances utilized in conjunction with the leverage strategy beginning in the current fiscal year are seven days or less; therefore, cash flows related to these advances are reported on a net basis within the consolidated statements of cash flows.

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. Prior to October 1, 2016, the Bank accounted for its low income housing partnership investments using the equity method of accounting, as two of the Bank's officers were involved in the operational management of the low income housing partnership investment group. On October 1, 2016, due to both officers' resignation from operational management, the Bank began using the proportional method of accounting for its low income housing partnership investments.

Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers. The ASU, as amended, clarifies principles for recognizing revenue and provides a common revenue standard for GAAP and International Financial Reporting Standards. Additionally, the ASU provides implementation guidance on several topics and requires entities to disclose both quantitative and qualitative information regarding contracts with customers. ASU 2014-09 will become effective for the Company on October 1, 2018. The scope of the amended ASU explicitly excludes interest income from loans and securities; therefore, the Company anticipates that the majority of its revenue will not be within the scope of the amended ASU. The Company is continuing to evaluate the amended ASU and its impact on the Company's consolidated financial condition, results of operations, and disclosures.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments, Recognition and Measurement of Financial Assets and 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 notation in determining fair value for financial instruments measured at amortized cost on the balance sheet. The ASU requires additional reporting in other comprehensive income for financial liabilities measured at fair value in accordance with the fair value option. The ASU also requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balances or in the notes to the financial statements. ASU 2016-01 will become effective for the Company on October 1, 2018. Early adoption is not permitted except in certain circumstances. The Company is currently evaluating the impact that this ASU may have on the Company's consolidated financial condition, results of operations and disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases. The ASU amends 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. ASU 2016-02 will become effective for the Company on October 1, 2019. Early adoption is permitted. The Company is currently in the process of accumulating lease data and developing an inventory of leases. The Company expects to recognize right-of-use assets and lease liabilities for substantially all of its operating

9


lease commitments based on the present value of unpaid lease payments as of the date of adoption. The Company is continuing to evaluate the impact this ASU may have on the Company's consolidated financial condition, results of operations and disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, along with simplifying the classification in the statement of cash flows. The ASU will become effective for the Company on October 1, 2017. Upon adoption, the Company intends to elect to account for forfeitures of stock-based compensation awards when they occur. The Company plans to recognize excess tax benefits and tax deficiencies in income tax expense on the consolidated statements of income and present them within operating activities on the consolidated statements of cash flows. While the adoption of the ASU is not expected to have a material impact on the Company's consolidated financial condition or results of operations, the impact of tax benefits and the timing of their recognition within income tax expense is unpredictable, as these benefits are recognized primarily as a result of stock options being exercised.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU replaces the incurred loss impairment methodology in current GAAP, which requires credit losses to be recognized when it is probable that a loss has 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. Early adoption is permitted for fiscal years beginning after December 15, 2018. The Company is currently evaluating the ASU and is in the process of reviewing its systems and processes to support the data required to implement the ASU.

In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. Under current GAAP, premiums on callable debt securities generally are amortized to the maturity date. The ASU will become effective for the Company on October 1, 2019. Early adoption is permitted, including adoption in an interim period. The Company is evaluating the ASU, but the ASU is not expected to have a material impact on the Company's consolidated financial condition or results of operations.


10


2. EARNINGS PER SHARE
Shares acquired by the ESOP are not considered in the 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 Three Months Ended
 
For the Six Months Ended
 
March 31,
 
March 31,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands, except per share amounts)
Net income
$
21,587

 
$
21,527

 
$
42,165

 
$
42,245

Income allocated to participating securities
(12
)
 
(16
)
 
(25
)
 
(43
)
Net income available to common stockholders
$
21,575

 
$
21,511

 
$
42,140

 
$
42,202

 
 
 
 
 
 
 
 
Average common shares outstanding
134,024,890

 
132,918,277

 
133,858,701

 
132,869,793

Average committed ESOP shares outstanding
41,299

 
41,753

 
20,649

 
20,988

Total basic average common shares outstanding
134,066,189

 
132,960,030

 
133,879,350

 
132,890,781

 
 
 
 
 
 
 
 
Effect of dilutive stock options
192,633

 
71,012

 
223,097

 
80,473

 
 
 
 
 
 
 
 
Total diluted average common shares outstanding
134,258,822

 
133,031,042

 
134,102,447

 
132,971,254

 
 
 
 
 
 
 
 
Net EPS:
 
 
 
 
 
 
 
Basic
$
0.16

 
$
0.16

 
$
0.31

 
$
0.32

Diluted
$
0.16

 
$
0.16

 
$
0.31

 
$
0.32

 
 
 
 
 
 
 
 
Antidilutive stock options, excluded from the diluted average
 
 
 
 
 
 
common shares outstanding calculation
187,327

 
921,199

 
212,133

 
898,386



11


3. 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 United States government-sponsored enterprises ("GSEs").
 
March 31, 2017
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
GSE debentures
$
296,266

 
$
63

 
$
741

 
$
295,588

MBS
158,414

 
7,676

 
39

 
166,051

Trust preferred securities
2,080

 

 
166

 
1,914

Municipal bonds
1,535

 

 
5

 
1,530

 
$
458,295

 
$
7,739

 
$
951

 
$
465,083

HTM:
 
 
 
 
 
 
 
MBS
$
924,819

 
$
11,845

 
$
6,456

 
$
930,208

Municipal bonds
29,291

 
101

 
59

 
29,333

 
$
954,110

 
$
11,946

 
$
6,515

 
$
959,541


 
September 30, 2016
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
GSE debentures
$
346,226

 
$
815

 
$
3

 
$
347,038

MBS
169,442

 
9,069

 
4

 
178,507

Trust preferred securities
2,123

 

 
367

 
1,756

 
$
517,791

 
$
9,884

 
$
374

 
$
527,301

HTM:
 
 
 
 
 
 
 
MBS
$
1,067,571

 
$
22,862

 
$
1,219

 
$
1,089,214

Municipal bonds
33,303

 
357

 
7

 
33,653

 
$
1,100,874

 
$
23,219

 
$
1,226

 
$
1,122,867




12


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.
 
March 31, 2017
 
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:
 
 
 
 
 
 
 
GSE debentures
$
199,231

 
$
741

 
$

 
$

MBS
10,628

 
34

 
629

 
5

Trust preferred securities

 

 
1,914

 
166

Municipal bonds
1,530

 
5

 

 

 
$
211,389

 
$
780

 
$
2,543

 
$
171

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HTM:
 
 
 
 
 
 
 
MBS
$
448,666

 
$
4,533

 
$
85,249

 
$
1,923

Municipal bonds
9,062

 
57

 
447

 
2

 
$
457,728

 
$
4,590

 
$
85,696

 
$
1,925


 
September 30, 2016
 
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:
 
 
 
 
 
 
 
GSE debentures
$
24,997

 
$
3

 
$

 
$

MBS

 

 
654

 
4

Trust preferred securities

 

 
1,756

 
367

 
$
24,997

 
$
3

 
$
2,410

 
$
371

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HTM:
 
 
 
 
 
 
 
MBS
$
147,930

 
$
538

 
$
66,646

 
$
681

Municipal bonds
4,771

 
6

 
391

 
1

 
$
152,701

 
$
544

 
$
67,037

 
$
682


The unrealized losses at March 31, 2017 and September 30, 2016 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 March 31, 2017 or September 30, 2016.

13


The amortized cost and estimated fair value of debt securities as of March 31, 2017, 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.
 
AFS
 
HTM
 
Amortized
 
Estimated
 
Amortized
 
Estimated
 
Cost
 
Fair Value
 
Cost
 
Fair Value
 
(Dollars in thousands)
One year or less
$
75,020

 
$
75,020

 
$
6,105

 
$
6,142

One year through five years
222,781

 
222,098

 
20,997

 
20,986

Five years through ten years

 

 
2,189

 
2,205

Ten years and thereafter
2,080

 
1,914

 

 

 
299,881

 
299,032

 
29,291

 
29,333

MBS
158,414

 
166,051

 
924,819

 
930,208

 
$
458,295

 
$
465,083

 
$
954,110

 
$
959,541



The following table presents the taxable and non-taxable components of interest income on investment securities for the periods presented.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
March 31,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Taxable
$
1,000

 
$
1,314

 
$
1,964

 
$
2,668

Non-taxable
131

 
171

 
274

 
350

 
$
1,131

 
$
1,485

 
$
2,238

 
$
3,018



The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of the dates presented.
 
March 31, 2017
 
September 30, 2016
 
(Dollars in thousands)
Public unit deposits
$
394,335

 
$
419,282

Repurchase agreements
214,773

 
217,374

FRB of Kansas City
13,686

 
15,938

 
$
622,794

 
$
652,594


14


4. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES
Loans receivable, net at the dates presented is summarized as follows:
 
March 31, 2017
 
September 30, 2016
 
(Dollars in thousands)
Real estate loans:
 
 
 
One- to four-family:
 
 
 
Originated
$
4,025,985

 
$
4,005,615

Correspondent purchased
2,396,663

 
2,206,072

Bulk purchased
385,700

 
416,653

Construction
30,818

 
39,430

Total
6,839,166

 
6,667,770

Commercial:
 
 
 
Permanent
102,806

 
110,768

Construction
116,471

 
43,375

Total
219,277

 
154,143

Total real estate loans
7,058,443

 
6,821,913

 
 
 
 
Consumer loans:
 
 
 
Home equity
119,434

 
123,345

Other
4,469

 
4,264

Total consumer loans
123,903

 
127,609

 
 
 
 
Total loans receivable
7,182,346

 
6,949,522

 
 
 
 
Less:
 
 
 
ACL
8,447

 
8,540

Discounts/unearned loan fees
25,318

 
24,933

Premiums/deferred costs
(45,140
)
 
(41,975
)
 
$
7,193,721

 
$
6,958,024


Lending Practices and Underwriting Standards - Originating and purchasing one- to four-family loans is the Bank's primary lending business, resulting in a loan concentration in residential first mortgage loans. The Bank purchases one- to four-family loans, on a loan-by-loan basis, from a select group of correspondent lenders. The Bank also originates consumer loans primarily secured by one- to four-family residential properties and originates and participates in commercial real estate loans. As a result of our one- to four-family lending activities, the Bank has a concentration of loans secured by real property located 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 ("CFPB"). 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 and approved by our Board of Directors.

The underwriting standards for loans purchased from correspondent and nationwide 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 construction-to-permanent loans secured by one- to four-family residential real estate. Construction loans are obtained by homeowners who will occupy the property when construction is complete. Construction loans to builders for speculative purposes are not permitted by the Bank's lending policies. 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.

15



Commercial real estate loans - The Bank's commercial real estate loans are originated by the Bank or are in participation with a lead bank. When underwriting a commercial real estate 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 participation loans, the Bank performs the same underwriting procedures as if the loan was being originated by the Bank.
At the time of origination, loan-to-value ("LTV") ratios on commercial real estate loans generally do not exceed 80% of the appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.25. Appraisals on properties securing these loans are performed by independent state certified fee appraisers.

Consumer loans - The Bank offers a variety of secured consumer loans, including home equity loans and lines of credit, home improvement loans, auto loans, and loans secured by savings deposits. The Bank also originates a very limited amount of unsecured loans. The Bank does not originate any consumer loans on an indirect basis, such as contracts purchased from retailers of goods or services which have extended credit to their customers. 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 real estate. The one- to four-family and consumer loan portfolios are further segmented 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, and consumer - other. The one- to four-family - correspondent purchased class was segregated from the one- to four-family originated class in the current fiscal year due to the size of the portfolio along with the loan product composition, geographic locations and inherent credit risks within the portfolio. The prior period information presented within this note has been conformed to the new loan class presentation.

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 real estate and consumer - other loan portfolios are delinquency status and asset classifications.


16


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 March 31, 2017 and September 30, 2016, all loans 90 or more days delinquent were on nonaccrual status.
 
March 31, 2017
 
 
 
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
$
10,853

 
$
5,333

 
$
16,186

 
$
4,025,590

 
$
4,041,776

One- to four-family - correspondent
749

 
908

 
1,657

 
2,428,961

 
2,430,618

One- to four-family - bulk purchased
3,556

 
7,178

 
10,734

 
376,937

 
387,671

Commercial real estate

 

 

 
218,200

 
218,200

Consumer - home equity
761

 
423

 
1,184

 
118,250

 
119,434

Consumer - other
34

 
7

 
41

 
4,428

 
4,469

 
$
15,953

 
$
13,849

 
$
29,802

 
$
7,172,366

 
$
7,202,168

 
September 30, 2016
 
 
 
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
$
13,545

 
$
8,153

 
$
21,698

 
$
4,007,012

 
$
4,028,710

One- to four-family - correspondent
3,389

 
992

 
4,381

 
2,233,941

 
2,238,322

One- to four-family - bulk purchased
5,082

 
7,380

 
12,462

 
406,379

 
418,841

Commercial real estate

 

 

 
153,082

 
153,082

Consumer - home equity
635

 
520

 
1,155

 
122,190

 
123,345

Consumer - other
62

 
9

 
71

 
4,193

 
4,264

 
$
22,713

 
$
17,054

 
$
39,767

 
$
6,926,797

 
$
6,966,564


The recorded investment of mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of March 31, 2017 and September 30, 2016 was $7.2 million and $5.7 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 $2.7 million at March 31, 2017 and $2.5 million at September 30, 2016.

The following table presents the recorded investment, by class, in loans classified as nonaccrual at the dates presented.
 
March 31, 2017
 
September 30, 2016
 
(Dollars in thousands)
One- to four-family - originated
$
15,974

 
$
17,086

One- to four-family - correspondent
1,497

 
3,788

One- to four-family - bulk purchased
7,991

 
7,411

Commercial real estate

 

Consumer - home equity
770

 
848

Consumer - other
7

 
10

 
$
26,239

 
$
29,143



17


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.

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.
 
March 31, 2017
 
September 30, 2016
 
Special Mention
 
Substandard
 
Special Mention
 
Substandard
 
(Dollars in thousands)
One- to four-family - originated
$
9,081

 
$
29,167

 
$
10,242

 
$
27,818

One- to four-family - correspondent
365

 
5,269

 
2,496

 
5,168

One- to four-family - bulk purchased
867

 
11,069

 
1,156

 
11,480

Commercial real estate

 

 

 

Consumer - home equity
41

 
1,463

 
54

 
1,431

Consumer - other

 
17

 
8

 
16

 
$
10,354

 
$
46,985

 
$
13,956

 
$
45,913


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 March 2017, 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.
 
March 31, 2017
 
September 30, 2016
 
Credit Score
 
LTV
 
Credit Score
 
LTV
One- to four-family - originated
767
 
63
%
 
766
 
63
%
One- to four-family - correspondent
764
 
68

 
764
 
68

One- to four-family - bulk purchased
754
 
63

 
753
 
64

Consumer - home equity
756
 
19

 
755
 
20

 
765
 
64

 
764
 
64






18


Troubled Debt Restructurings ("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.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31, 2017
 
March 31, 2017
 
Number
 
Pre-
 
Post-
 
Number
 
Pre-
 
Post-
 
of
 
Restructured
 
Restructured
 
of
 
Restructured
 
Restructured
 
Contracts
 
Outstanding
 
Outstanding
 
Contracts
 
Outstanding
 
Outstanding
 
(Dollars in thousands)
One- to four-family - originated
43

 
$
5,360

 
$
5,492

 
81

 
$
9,288

 
$
9,677

One- to four-family - correspondent
3

 
260

 
261

 
3

 
260

 
261

One- to four-family - purchased
2

 
687

 
700

 
2

 
687

 
700

Commercial real estate

 

 

 

 

 

Consumer - home equity
6

 
111

 
115

 
14

 
317

 
327

Consumer - other

 

 

 

 

 

 
54

 
$
6,418

 
$
6,568

 
100

 
$
10,552

 
$
10,965

 
For the Three Months Ended
 
For the Six Months Ended
 
March 31, 2016
 
March 31, 2016
 
Number
 
Pre-
 
Post-
 
Number
 
Pre-
 
Post-
 
of
 
Restructured
 
Restructured
 
of
 
Restructured
 
Restructured
 
Contracts
 
Outstanding
 
Outstanding
 
Contracts
 
Outstanding
 
Outstanding
 
(Dollars in thousands)
One- to four-family - originated
28

 
$
3,433

 
$
3,542

 
58

 
$
6,539

 
$
6,707

One- to four-family - correspondent
4

 
826

 
833

 
4
 
826

 
833

One- to four-family - bulk purchased

 

 

 
1

 
123

 
122

Commercial real estate

 

 

 

 

 

Consumer - home equity
1

 
3

 
3

 
5

 
64

 
64

Consumer - other
1

 
8

 
8

 
1

 
8

 
8

 
34

 
$
4,270

 
$
4,386

 
69

 
$
7,560

 
$
7,734


The following table provides information on TDRs that became delinquent during the periods presented within 12 months after being restructured.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31, 2017
 
March 31, 2016
 
March 31, 2017
 
March 31, 2016
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
Contracts
 
Investment
 
Contracts
 
Investment
 
(Dollars in thousands)
One- to four-family - originated
11

 
$
1,069

 
16

 
$
1,802

 
22

 
$
2,047

 
27

 
$
2,602

One- to four-family - correspondent

 

 

 

 

 

 

 

One- to four-family - bulk purchased

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

Consumer - home equity
5

 
224

 
2

 
13

 
9

 
339

 
4

 
91

Consumer - other

 

 

 

 

 

 

 

 
16

 
$
1,293

 
18

 
$
1,815

 
31

 
$
2,386

 
31

 
$
2,693


19


Impaired loans - The following information pertains to impaired loans, by class, as of the dates presented. 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 contractual terms of the loan agreement.
 
March 31, 2017
 
September 30, 2016
 
 
 
Unpaid
 
 
 
 
 
Unpaid
 
 
 
Recorded
 
Principal
 
Related
 
Recorded
 
Principal
 
Related
 
Investment
 
Balance
 
ACL
 
Investment
 
Balance
 
ACL
 
(Dollars in thousands)
With no related allowance recorded
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
$
24,560

 
$
25,243

 
$

 
$
22,982

 
$
23,640

 
$

One- to four-family - correspondent
3,841

 
3,828

 

 
2,963

 
2,950

 

One- to four-family - bulk purchased
10,821

 
12,388

 

 
10,985

 
12,684

 

Commercial real estate

 

 

 

 

 

Consumer - home equity
1,164

 
1,372

 

 
1,014

 
1,230

 

Consumer - other
5

 
26

 

 
10

 
42

 

 
40,391

 
42,857

 

 
37,954

 
40,546

 

With an allowance recorded
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
12,381

 
12,415

 
72

 
13,430

 
13,476

 
125

One- to four-family - correspondent
1,993

 
1,991

 
7

 
2,662

 
2,664

 
4

One- to four-family - bulk purchased
1,279

 
1,249

 
19

 
1,650

 
1,627

 
49

Commercial real estate

 

 

 

 

 

Consumer - home equity
394

 
394

 
17

 
548

 
548

 
38

Consumer - other
13

 
13

 
2

 
6

 
6

 
1

 
16,060

 
16,062

 
117

 
18,296

 
18,321

 
217

Total
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
36,941

 
37,658

 
72

 
36,412

 
37,116

 
125

One- to four-family - correspondent
5,834

 
5,819

 
7

 
5,625

 
5,614

 
4

One- to four-family - bulk purchased
12,100

 
13,637

 
19

 
12,635

 
14,311

 
49

Commercial real estate