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Section 1: 10-Q (JUNE 30, 2016 FORM 10-Q)

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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 June 30, 2016
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, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller Reporting Company ¨
(Do not check if a smaller reporting company)
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 August 2, 2016, there were 137,344,222 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)
 
 
 
June 30,
 
September 30,
 
2016
 
2015
ASSETS:
 
 
 
Cash and cash equivalents (includes interest-earning deposits of $145,477 and $764,816)
$
152,831

 
$
772,632

Securities:
 
 
 
Available-for-sale ("AFS"), at estimated fair value (amortized cost of $655,349 and $744,708)
666,313

 
758,171

Held-to-maturity ("HTM"), at amortized cost (estimated fair value of $1,214,498 and $1,295,274)
1,188,913

 
1,271,122

Loans receivable, net (allowance for credit losses ("ACL") of $9,312 and $9,443)
6,839,123

 
6,625,027

Federal Home Loan Bank Topeka ("FHLB") stock, at cost
114,425

 
150,543

Premises and equipment, net
81,928

 
75,810

Income taxes receivable, net
123

 
1,071

Other assets
198,119

 
189,785

TOTAL ASSETS
$
9,241,775

 
$
9,844,161

 
 
 
 
LIABILITIES:
 
 
 
Deposits
$
5,085,129

 
$
4,832,520

FHLB borrowings
2,472,026

 
3,270,521

Repurchase agreements
200,000

 
200,000

Advance payments by borrowers for taxes and insurance
37,902

 
61,818

Deferred income tax liabilities, net
25,925

 
26,391

Accounts payable and accrued expenses
39,978

 
36,685

Total liabilities
7,860,960

 
8,427,935

 
 
 
 
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, 137,235,922 and 137,106,822
 
 
 
shares issued and outstanding as of June 30, 2016 and September 30, 2015, respectively
1,372

 
1,371

Additional paid-in capital
1,153,589

 
1,151,041

Unearned compensation, Employee Stock Ownership Plan ("ESOP")
(40,060
)
 
(41,299
)
Retained earnings
259,094

 
296,739

Accumulated other comprehensive income ("AOCI"), net of tax
6,820

 
8,374

Total stockholders' equity
1,380,815

 
1,416,226

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
9,241,775

 
$
9,844,161

 
 
 
 
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 Nine Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
60,840

 
$
58,922

 
$
181,795

 
$
175,739

Mortgage-backed securities ("MBS")
7,401

 
8,849

 
22,934

 
28,387

FHLB stock
3,050

 
3,132

 
9,208

 
9,389

Cash and cash equivalents
2,730

 
1,357

 
7,057

 
4,174

Investment securities
1,506

 
1,914

 
4,524

 
5,262

Total interest and dividend income
75,527

 
74,174

 
225,518

 
222,951

INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB borrowings
16,361

 
17,072

 
48,829

 
51,258

Deposits
9,749

 
8,377

 
27,761

 
24,729

Repurchase agreements
1,487

 
1,712

 
4,478

 
5,136

Total interest expense
27,597

 
27,161

 
81,068

 
81,123

NET INTEREST INCOME
47,930

 
47,013

 
144,450

 
141,828

PROVISION FOR CREDIT LOSSES

 
323

 

 
771

NET INTEREST INCOME AFTER
 
 
 
 
 
 
 
PROVISION FOR CREDIT LOSSES
47,930

 
46,690

 
144,450

 
141,057

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
3,725

 
3,798

 
11,097

 
11,052

Income from bank-owned life insurance ("BOLI")
648

 
251

 
2,810

 
819

Insurance commissions
517

 
537

 
2,093

 
2,059

Loan fees
326

 
340

 
1,004

 
1,071

Other non-interest income
213

 
219

 
617

 
678

Total non-interest income
5,429

 
5,145

 
17,621

 
15,679

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
10,829

 
11,038

 
31,604

 
31,927

Occupancy, net
2,606

 
2,557

 
7,894

 
7,437

Information technology and communications
2,716

 
2,573

 
7,883

 
7,726

Federal insurance premium
1,377

 
1,342

 
4,158

 
4,092

Deposit and loan transaction costs
1,449

 
1,435

 
4,119

 
4,065

Regulatory and outside services
1,370

 
1,365

 
4,000

 
3,867

Advertising and promotional
1,053

 
1,069

 
3,190

 
2,707

Low income housing partnerships
721

 
492

 
2,815

 
3,404

Office supplies and related expense
545

 
499

 
2,016

 
1,560

Other non-interest expense
661

 
736

 
2,664

 
2,322

Total non-interest expense
23,327

 
23,106

 
70,343

 
69,107

INCOME BEFORE INCOME TAX EXPENSE
30,032

 
28,729

 
91,728

 
87,629

INCOME TAX EXPENSE
9,481

 
9,127

 
28,932

 
28,321

NET INCOME
$
20,551

 
$
19,602

 
$
62,796

 
$
59,308

 
 
 
 
 
 
 
 
Basic earnings per share ("EPS")
$
0.15

 
$
0.14

 
$
0.47

 
$
0.43

Diluted EPS
$
0.15

 
$
0.14

 
$
0.47

 
$
0.43

Dividends declared per share
$
0.34

 
$
0.34

 
$
0.76

 
$
0.76


 
 
 
 

 

Basic weighted average common shares
133,101,960

 
135,745,753

 
132,960,917

 
136,013,448

Diluted weighted average common shares
133,250,711

 
135,763,353

 
133,065,828

 
136,040,702

 
 
 
 
 
 
 
 
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 Nine Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
20,551

 
$
19,602

 
$
62,796

 
$
59,308

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Changes in unrealized holding gains (losses) on AFS securities,
 
 
 
 
 
 
 
net of deferred income taxes of $119, $919, $945 and $(754)
(194
)
 
(1,513
)
 
(1,554
)
 
1,241

Comprehensive income
$
20,357

 
$
18,089

 
$
61,242

 
$
60,549

 
 
 
 
 
 
 
 
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, 2015
$
1,371

 
$
1,151,041

 
$
(41,299
)
 
$
296,739

 
$
8,374

 
$
1,416,226

Net income
 
 
 
 
 
 
62,796

 
 
 
62,796

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
(1,554
)
 
(1,554
)
ESOP activity, net
 
 
351

 
1,239

 
 
 
 
 
1,590

Restricted stock activity, net
1

 
40

 
 
 
 
 
 
 
41

Stock-based compensation
 
 
960

 
 
 
 
 
 
 
960

Stock options exercised
 
 
1,197

 
 
 
 
 
 
 
1,197

Cash dividends to stockholders ($0.76 per share)
 
 
 
 
 
(100,441
)
 
 
 
(100,441
)
Balance at June 30, 2016
$
1,372

 
$
1,153,589

 
$
(40,060
)
 
$
259,094

 
$
6,820

 
$
1,380,815

 
 
 
 
 
 
 
 
 
 
 
 
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 Nine Months Ended
 
June 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
62,796

 
$
59,308

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
FHLB stock dividends
(9,208
)
 
(9,389
)
Provision for credit losses

 
771

Amortization and accretion of premiums and discounts on securities
3,988

 
4,217

Depreciation and amortization of premises and equipment
5,288

 
5,054

Amortization of deferred amounts related to FHLB advances, net
1,505

 
3,270

Common stock committed to be released for allocation - ESOP
1,590

 
1,539

Stock-based compensation
960

 
1,566

Changes in:
 
 
 
Other assets, net
488

 
2,869

Income taxes payable/receivable
1,467

 
1,845

Accounts payable and accrued expenses
(6,815
)
 
(8,847
)
Net cash provided by operating activities
62,059

 
62,203

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of AFS securities
(99,927
)
 
(149,937
)
Purchase of HTM securities
(144,392
)
 
(54,133
)
Proceeds from calls, maturities and principal reductions of AFS securities
189,199

 
145,663

Proceeds from calls, maturities and principal reductions of HTM securities
222,700

 
242,958

Proceeds from the redemption of FHLB stock
283,500

 
202,929

Purchase of FHLB stock
(238,174
)
 
(146,743
)
Net increase in loans receivable
(217,498
)
 
(268,769
)
Purchase of premises and equipment
(11,300
)
 
(7,396
)
Proceeds from sale of other real estate owned ("OREO")
3,799

 
4,212

Proceeds from BOLI death benefit
783

 

Net cash used in investing activities
(11,310
)
 
(31,216
)
 
 
 
 
 
 
 
(Continued)


7


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
 
For the Nine Months Ended
 
June 30,
 
2016
 
2015
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Dividends paid
(100,441
)
 
(102,777
)
Deposits, net of withdrawals
252,609

 
157,916

Proceeds from borrowings
5,900,100

 
5,400,000

Repayments on borrowings
(6,700,100
)
 
(6,200,000
)
Change in advance payments by borrowers for taxes and insurance
(23,916
)
 
(20,674
)
Repurchase of common stock

 
(29,842
)
Other, net
1,198

 
218

Net cash used in financing activities
(670,550
)
 
(795,159
)
 
 
 
 
NET DECREASE IN CASH AND CASH EQUIVALENTS
(619,801
)
 
(764,172
)
 
 
 
 
CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of period
772,632

 
810,840

End of period
$
152,831

 
$
46,668

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Income tax payments
$
27,464

 
$
26,476

Interest payments
$
78,957

 
$
77,861

 
 
 
 
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, 2015, filed with the Securities and Exchange Commission ("SEC"). Interim results are not necessarily indicative of results for a full year.

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 is effective for fiscal years beginning after December 15, 2017, including interim reporting periods within that reporting period, which is October 1, 2018 for the Company. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016. The Company has not yet completed its evaluation of ASU 2014-09.

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 is effective for fiscal years beginning after December 15, 2017, including interim periods with those fiscal years, which is October 1, 2018 for the Company. Early adoption is not permitted except in certain circumstances. The Company has not yet completed its evaluation of ASU 2016-01.

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 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, which is October 1, 2019 for the Company. Early adoption is permitted. The Company has not yet completed its evaluation of ASU 2016-02.

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 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods, which is October 1, 2017 for the Company. The Company has not yet completed its evaluation of ASU 2016-09.


9


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 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, which is October 1, 2020 for the Company. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company has not yet completed its evaluation of ASU 2016-13.


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 Nine Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands, except per share amounts)
Net income
$
20,551

 
$
19,602

 
$
62,796

 
$
59,308

Income allocated to participating securities
(11
)
 
(24
)
 
(54
)
 
(93
)
Net income available to common stockholders
$
20,540

 
$
19,578

 
$
62,742

 
$
59,215

 
 
 
 
 
 
 
 
Average common shares outstanding
133,018,908

 
135,662,701

 
132,919,316

 
135,971,846

Average committed ESOP shares outstanding
83,052

 
83,052

 
41,601

 
41,602

Total basic average common shares outstanding
133,101,960

 
135,745,753

 
132,960,917

 
136,013,448

 
 
 
 
 
 
 
 
Effect of dilutive stock options
148,751

 
17,600

 
104,911

 
27,254

 
 
 
 
 
 
 
 
Total diluted average common shares outstanding
133,250,711

 
135,763,353

 
133,065,828

 
136,040,702

 
 
 
 
 
 
 
 
Net EPS:
 
 
 
 
 
 
 
Basic
$
0.15

 
$
0.14

 
$
0.47

 
$
0.43

Diluted
$
0.15

 
$
0.14

 
$
0.47

 
$
0.43

 
 
 
 
 
 
 
 
Antidilutive stock options, excluded from the diluted average
 
 
 
 
 
 
common shares outstanding calculation
875,390

 
1,240,309

 
906,634

 
1,253,057



10


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").
 
June 30, 2016
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
GSE debentures
$
471,143

 
$
1,570

 
$

 
$
472,713

MBS
181,903

 
9,807

 
4

 
191,706

Trust preferred securities
2,163

 

 
410

 
1,753

Municipal bonds
140

 
1

 

 
141

 
655,349

 
11,378

 
414

 
666,313

HTM:
 
 
 
 
 
 
 
MBS
1,152,775

 
25,888

 
815

 
1,177,848

Municipal bonds
36,138

 
516

 
4

 
36,650

 
1,188,913

 
26,404

 
819

 
1,214,498

 
$
1,844,262

 
$
37,782

 
$
1,233

 
$
1,880,811


 
September 30, 2015
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
GSE debentures
$
525,376

 
$
1,304

 
$
60

 
$
526,620

MBS
217,006

 
12,489

 
4

 
229,491

Trust preferred securities
2,186

 

 
270

 
1,916

Municipal bonds
140

 
4

 

 
144

 
744,708

 
13,797

 
334

 
758,171

HTM:
 
 
 
 
 
 
 
MBS
1,233,048

 
27,325

 
3,590

 
1,256,783

Municipal bonds
38,074

 
437

 
20

 
38,491

 
1,271,122

 
27,762

 
3,610

 
1,295,274

 
$
2,015,830

 
$
41,559

 
$
3,944

 
$
2,053,445




11


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.
 
June 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:
 
 
 
 
 
 
 
MBS

 

 
667

 
4

Trust preferred securities

 

 
1,753

 
410

 
$

 
$

 
$
2,420

 
$
414

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HTM:
 
 
 
 
 
 
 
MBS
$
43,035

 
$
46

 
$
89,245

 
$
769

Municipal bonds
1,462

 
3

 
392

 
1

 
$
44,497

 
$
49

 
$
89,637

 
$
770


 
September 30, 2015
 
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
$
39,135

 
$
15

 
$
49,955

 
$
45

MBS

 

 
687

 
4

Trust preferred securities

 

 
1,916

 
270

 
$
39,135

 
$
15

 
$
52,558

 
$
319

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HTM:
 
 
 
 
 
 
 
MBS
$
38,604

 
$
134

 
$
302,158

 
$
3,456

Municipal bonds
3,292

 
12

 
1,128

 
8

 
$
41,896

 
$
146

 
$
303,286

 
$
3,464


The unrealized losses at June 30, 2016 and September 30, 2015 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 June 30, 2016 or September 30, 2015.

12


The amortized cost and estimated fair value of debt securities as of June 30, 2016, 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
$
25,032

 
$
25,075

 
$
6,570

 
$
6,608

One year through five years
446,251

 
447,779

 
23,244

 
23,561

Five years through ten years

 

 
6,324

 
6,481

Ten years and thereafter
2,163

 
1,753

 

 

 
473,446

 
474,607

 
36,138

 
36,650

MBS
181,903

 
191,706

 
1,152,775

 
1,177,848

 
$
655,349

 
$
666,313

 
$
1,188,913

 
$
1,214,498



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 Nine Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Taxable
$
1,342

 
$
1,730

 
$
4,010

 
$
4,696

Non-taxable
164

 
184

 
514

 
566

 
$
1,506

 
$
1,914

 
$
4,524

 
$
5,262



The following table summarizes the carrying value of securities pledged as collateral for the obligations listed below as of the dates presented.
 
June 30, 2016
 
September 30, 2015
 
(Dollars in thousands)
Public unit deposits
$
391,092

 
$
343,385

Repurchase agreements
207,261

 
218,832

Federal Reserve Bank
16,999

 
20,600

FHLB borrowings

 
216,607

 
$
615,352

 
$
799,424


13


4. LOANS RECEIVABLE and ALLOWANCE FOR CREDIT LOSSES
Loans receivable, net at the dates presented is summarized as follows:
 
June 30, 2016
 
September 30, 2015
 
(Dollars in thousands)
Real estate loans:
 
 
 
One- to four-family:
 
 
 
Originated
$
6,093,743

 
$
5,856,730

Purchased
439,954

 
485,682

Construction
78,358

 
75,152

Total
6,612,055

 
6,417,564

Commercial:
 
 
 
Permanent
110,601

 
110,938

Construction
187,705

 
54,768

Total
298,306

 
165,706

Total real estate loans
6,910,361

 
6,583,270

 
 
 
 
Consumer loans:
 
 
 
Home equity
123,673

 
125,844

Other
4,568

 
4,179

Total consumer loans
128,241

 
130,023

 
 
 
 
Total loans receivable
7,038,602

 
6,713,293

 
 
 
 
Less:
 
 
 
Undisbursed loan funds:
 
 
 
One- to four-family
39,595

 
45,696

Commercial
166,237

 
44,869

ACL
9,312

 
9,443

Discounts/unearned loan fees
24,352

 
24,213

Premiums/deferred costs
(40,017
)
 
(35,955
)
 
$
6,839,123

 
$
6,625,027


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. 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. The Bank also originates consumer loans and commercial real estate loans and participates in commercial real estate loans.

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. 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. For the tables within this Note, correspondent loans purchased on a loan-by-loan basis are included with originated loans and loans purchased in loan packages ("bulk loans") are reported as purchased loans.

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

14


speculative purposes are not permitted. All construction loans are manually underwritten using the Bank's internal underwriting standards. Construction draw requests and the supporting documentation are reviewed and approved by 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 real estate loans - The Bank's commercial real estate loans are originated by the Bank or are in participation with a lead bank. These loans are underwritten based on the income producing potential of the property, the collateral value, and the financial strength of the borrower. Additionally, the Bank generally requires personal guarantees. 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 - purchased, consumer - home equity, and consumer - other.

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.


15


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 (net of unadvanced funds related to loans in process), less charge-offs and inclusive of unearned loan fees and deferred costs. At June 30, 2016 and September 30, 2015, all loans 90 or more days delinquent were on nonaccrual status.
 
June 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
$
15,517

 
$
9,156

 
$
24,673

 
$
6,121,791

 
$
6,146,464

One- to four-family - purchased
4,740

 
8,077

 
12,817

 
429,515

 
442,332

Commercial real estate

 

 

 
131,398

 
131,398

Consumer - home equity
548

 
436

 
984

 
122,689

 
123,673

Consumer - other
55

 
17

 
72

 
4,496

 
4,568

 
$
20,860

 
$
17,686

 
$
38,546

 
$
6,809,889

 
$
6,848,435

 
September 30, 2015
 
 
 
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
$
19,285

 
$
7,093

 
$
26,378

 
$
5,869,289

 
$
5,895,667

One- to four-family - purchased
7,305

 
8,956

 
16,261

 
472,114

 
488,375

Commercial real estate

 

 

 
120,405

 
120,405

Consumer - home equity
703

 
497

 
1,200

 
124,644

 
125,844

Consumer - other
17

 
12

 
29

 
4,150

 
4,179

 
$
27,310

 
$
16,558

 
$
43,868

 
$
6,590,602

 
$
6,634,470


The recorded investment of mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of June 30, 2016 was $5.9 million, 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 $3.1 million at June 30, 2016

The following table presents the recorded investment, by class, in loans classified as nonaccrual at the dates presented.
 
June 30, 2016
 
September 30, 2015
 
(Dollars in thousands)
One- to four-family - originated
$
18,957

 
$
16,093

One- to four-family - purchased
8,078

 
9,038

Commercial real estate

 

Consumer - home equity
699

 
792

Consumer - other
24

 
12

 
$
27,758

 
$
25,935



16


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.
 
June 30, 2016
 
September 30, 2015
 
Special Mention
 
Substandard
 
Special Mention
 
Substandard
 
(Dollars in thousands)
One- to four-family - originated
$
11,303

 
$
31,162

 
$
16,149

 
$
29,282

One- to four-family - purchased
1,257

 
11,644

 
1,376

 
13,237

Commercial real estate

 

 

 

Consumer - home equity
57

 
1,259

 
151

 
1,301

Consumer - other

 
26

 

 
17

 
$
12,617

 
$
44,091

 
$
17,676

 
$
43,837


The following table shows the weighted average credit score and weighted average LTV for originated and purchased one- to four-family loans and originated 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 2016, 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.
 
June 30, 2016
 
September 30, 2015
 
Credit Score
 
LTV
 
Credit Score
 
LTV
One- to four-family - originated
765
 
65
%
 
765
 
65
%
One- to four-family - purchased
753
 
64

 
752
 
65

Consumer - home equity
754
 
20

 
753
 
18

 
764
 
64

 
764
 
64






17


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 Nine Months Ended
 
June 30, 2016
 
June 30, 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

 
$
4,488

 
$
4,603

 
90

 
$
11,853

 
$
12,143

One- to four-family - purchased

 

 

 
1

 
123

 
122

Commercial real estate

 

 

 

 

 

Consumer - home equity
8

 
202

 
206

 
13

 
266

 
270

Consumer - other

 

 

 
1

 
8

 
8

 
36

 
$
4,690

 
$
4,809

 
105

 
$
12,250

 
$
12,543

 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30, 2015
 
June 30, 2015
 
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
30

 
$
4,125

 
$
4,190

 
104

 
$
13,862

 
$
14,007

One- to four-family - purchased
2

 
874

 
876

 
4

 
1,140

 
1,144

Commercial real estate

 

 

 

 

 

Consumer - home equity
7

 
171

 
172

 
13

 
255

 
261

Consumer - other

 

 

 
3

 
12

 
12

 
39

 
$
5,170

 
$
5,238

 
124

 
$
15,269

 
$
15,424


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 Nine Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
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
12

 
$
1,581

 
16

 
$
1,356

 
39

 
$
4,183

 
44

 
$
4,234

One- to four-family - purchased

 

 
1

 
551

 

 

 
4

 
890

Commercial real estate

 

 

 

 

 

 

 

Consumer - home equity

 

 
2

 
12

 
4

 
91

 
4

 
33

Consumer - other

 

 

 

 

 

 
1

 
5

 
12

 
$
1,581

 
19

 
$
1,919

 
43

 
$
4,274

 
53

 
$
5,162


18


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.
 
June 30, 2016
 
September 30, 2015
 
 
 
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
$
12,128

 
$
12,729

 
$

 
$
11,169

 
$
11,857

 
$

One- to four-family - purchased
10,895

 
12,645

 

 
11,035

 
13,315

 

Commercial real estate

 

 

 

 

 

Consumer - home equity
597

 
823

 

 
591

 
837

 

Consumer - other
17

 
47

 

 
13

 
40

 

 
23,637

 
26,244

 

 
22,808

 
26,049

 

With an allowance recorded
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
26,825

 
26,889

 
337

 
26,453

 
26,547

 
294

One- to four-family - purchased
2,033

 
2,009

 
63

 
3,764

 
3,731

 
110

Commercial real estate

 

 

 

 

 

Consumer - home equity
768

 
768

 
49

 
869

 
870

 
62

Consumer - other
9

 
9

 
1

 
10

 
10

 
1

 
29,635

 
29,675

 
450

 
31,096

 
31,158

 
467

Total
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
38,953

 
39,618

 
337

 
37,622

 
38,404

 
294

One- to four-family - purchased
12,928

 
14,654

 
63

 
14,799

 
17,046

 
110

Commercial real estate

 

 

 

 

 

Consumer - home equity
1,365

 
1,591

 
49

 
1,460

 
1,707

 
62

Consumer - other
26

 
56

 
1

 
23

 
50

 
1

 
$
53,272

 
$
55,919

 
$
450

 
$
53,904

 
$
57,207

 
$
467



19


The following information pertains to impaired loans, by class, for the periods presented.
 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
Average
 
Interest
 
Average
 
Interest
 
Average
 
Interest
 
Average
 
Interest
 
Recorded
 
Income
 
Recorded
 
Income
 
Recorded
 
Income
 
Recorded
 
Income
 
Investment
 
Recognized
 
Investment
 
Recognized
 
Investment
 
Recognized
 
Investment
 
Recognized
 
(Dollars in thousands)
With no related allowance recorded