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Section 1: 10-Q (DECEMBER 31, 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 December 31, 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 February 3, 2017, there were 137,975,531 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)
 
 
 
December 31,
 
September 30,
 
2016
 
2016
ASSETS:
 
 
 
Cash and cash equivalents (includes interest-earning deposits of $128,460 and $267,829)
$
150,560

 
$
281,764

Securities:
 
 
 
Available-for-sale ("AFS"), at estimated fair value (amortized cost of $492,395 and $517,791)
499,792

 
527,301

Held-to-maturity ("HTM"), at amortized cost (estimated fair value of $1,027,292 and $1,122,867)
1,022,215

 
1,100,874

Loans receivable, net (allowance for credit losses ("ACL") of $8,521 and $8,540)
7,071,410

 
6,958,024

Federal Home Loan Bank Topeka ("FHLB") stock, at cost
105,364

 
109,970

Premises and equipment, net
83,838

 
83,221

Other assets
206,331

 
206,093

TOTAL ASSETS
$
9,139,510

 
$
9,267,247

 
 
 
 
LIABILITIES:
 
 
 
Deposits
$
5,192,674

 
$
5,164,018

FHLB borrowings
2,272,754

 
2,372,389

Repurchase agreements
200,000

 
200,000

Advance payments by borrowers for taxes and insurance
25,403

 
62,643

Income taxes payable, net
9,369

 
310

Deferred income tax liabilities, net
24,594

 
25,374

Accounts payable and accrued expenses
46,541

 
49,549

Total liabilities
7,771,335

 
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, 137,915,672 and 137,486,172
 
 
 
shares issued and outstanding as of December 31, 2016 and September 30, 2016, respectively
1,379

 
1,375

Additional paid-in capital
1,162,584

 
1,156,855

Unearned compensation, Employee Stock Ownership Plan ("ESOP")
(39,235
)
 
(39,647
)
Retained earnings
238,846

 
268,466

Accumulated other comprehensive income ("AOCI"), net of tax
4,601

 
5,915

Total stockholders' equity
1,368,175

 
1,392,964

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
9,139,510

 
$
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
 
December 31,
 
2016
 
2015
INTEREST AND DIVIDEND INCOME:
 
 
 
Loans receivable
$
61,945

 
$
60,223

Mortgage-backed securities ("MBS")
6,362

 
7,831

Cash and cash equivalents
2,969

 
1,620

FHLB stock
2,939

 
3,152

Investment securities
1,107

 
1,533

Total interest and dividend income
75,322

 
74,359

INTEREST EXPENSE:
 
 
 
FHLB borrowings
16,117

 
16,074

Deposits
10,396

 
8,799

Repurchase agreements
1,503

 
1,504

Total interest expense
28,016

 
26,377

NET INTEREST INCOME
47,306

 
47,982

PROVISION FOR CREDIT LOSSES

 

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
47,306

 
47,982

NON-INTEREST INCOME:
 
 
 
Retail fees and charges
3,709

 
3,814

Income from bank-owned life insurance ("BOLI")
523

 
703

Other non-interest income
1,036

 
1,049

Total non-interest income
5,268

 
5,566

NON-INTEREST EXPENSE:
 
 
 
Salaries and employee benefits
10,634

 
10,487

Information technology and communications
2,834

 
2,558

Occupancy, net
2,675

 
2,672

Deposit and loan transaction costs
1,386

 
1,274

Regulatory and outside services
1,346

 
1,486

Federal insurance premium
894

 
1,382

Advertising and promotional
690

 
1,154

Office supplies and related expense
437

 
887

Low income housing partnerships

 
773

Other non-interest expense
701

 
917

Total non-interest expense
21,597

 
23,590

INCOME BEFORE INCOME TAX EXPENSE
30,977

 
29,958

INCOME TAX EXPENSE
10,399

 
9,240

NET INCOME
$
20,578

 
$
20,718

 
 
 
 
Basic earnings per share ("EPS")
$
0.15

 
$
0.16

Diluted EPS
$
0.15

 
$
0.16

Dividends declared per share
$
0.38

 
$
0.34


 
 
 
Basic weighted average common shares
133,696,574

 
132,822,283

Diluted weighted average common shares
133,949,796

 
132,911,156

 
 
 
 
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
 
December 31,
 
2016
 
2015
Net income
$
20,578

 
$
20,718

Other comprehensive income (loss), net of tax:
 
 
 
Changes in unrealized holding gains (losses) on AFS securities,
 
 
 
net of taxes of $799 and $1,700
(1,314
)
 
(2,798
)
Comprehensive income
$
19,264

 
$
17,920

 
 
 
 
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
 
 
 
 
 
 
20,578

 
 
 
20,578

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
(1,314
)
 
(1,314
)
ESOP activity, net
 
 
222

 
412

 
 
 
 
 
634

Restricted stock activity, net
 
 
14

 
 
 
 
 
 
 
14

Stock-based compensation
 
 
157

 
 
 
 
 
 
 
157

Stock options exercised
4

 
5,336

 
 
 
 
 
 
 
5,340

Cash dividends to stockholders ($0.38 per share)
 
 
 
 
 
(50,198
)
 
 
 
(50,198
)
Balance at December 31, 2016
$
1,379

 
$
1,162,584

 
$
(39,235
)
 
$
238,846

 
$
4,601

 
$
1,368,175

 
 
 
 
 
 
 
 
 
 
 
 
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 Three Months Ended
 
December 31,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
20,578

 
$
20,718

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
FHLB stock dividends
(2,939
)
 
(3,152
)
Amortization and accretion of premiums and discounts on securities
1,362

 
1,289

Depreciation and amortization of premises and equipment
1,891

 
1,706

Amortization of deferred amounts related to FHLB advances, net
365

 
751

Common stock committed to be released for allocation - ESOP
634

 
525

Stock-based compensation
157

 
533

Changes in:
 
 
 
Other assets, net
(437
)
 
83

Income taxes payable/receivable
8,899

 
9,226

Accounts payable and accrued expenses
(3,556
)
 
(5,514
)
Net cash provided by operating activities
26,954

 
26,165

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of AFS securities
(35,890
)
 

Purchase of HTM securities

 
(1,432
)
Proceeds from calls, maturities and principal reductions of AFS securities
61,274

 
116,678

Proceeds from calls, maturities and principal reductions of HTM securities
77,309

 
71,312

Proceeds from the redemption of FHLB stock
98,950

 
94,500

Purchase of FHLB stock
(91,405
)
 
(59,832
)
Net increase in loans receivable
(114,245
)
 
(41,994
)
Purchase of premises and equipment
(1,981
)
 
(4,555
)
Proceeds from sale of other real estate owned ("OREO")
1,272

 
815

Net cash (used in) provided by investing activities
(4,716
)
 
175,492

 
 
 
 
 
 
 
(Continued)


7


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
 
For the Three Months Ended
 
December 31,
 
2016
 
2015
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Dividends paid
(50,198
)
 
(44,551
)
Net change in deposits
28,656

 
139,960

Proceeds from borrowings
2,100,000

 
1,500,000

Repayments on borrowings
(2,200,000
)
 
(2,300,000
)
Change in advance payments by borrowers for taxes and insurance
(37,240
)
 
(37,502
)
Stock options exercised
5,147

 
158

Excess tax benefits from stock options
193

 

Net cash used in financing activities
(153,442
)
 
(741,935
)
 
 
 
 
NET DECREASE IN CASH AND CASH EQUIVALENTS
(131,204
)
 
(540,278
)
 
 
 
 
CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of period
281,764

 
772,632

End of period
$
150,560

 
$
232,354

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Income tax payments
$
5

 
$
13

Interest payments
$
29,016

 
$
25,686

 
 
 
 
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 contractual maturities of the FHLB advances utilized in conjunction with the leverage strategy beginning in the current quarter 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 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 expects that the majority of its revenue will not be within the scope 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.


9


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.

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 is currently evaluating the ASU and the impact it may have to our formula analysis model.


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
 
December 31,
 
2016
 
2015
 
(Dollars in thousands, except per share amounts)
Net income
$
20,578

 
$
20,718

Income allocated to participating securities
(13
)
 
(27
)
Net income available to common stockholders
$
20,565

 
$
20,691

 
 
 
 
Average common shares outstanding
133,696,125

 
132,821,834

Average committed ESOP shares outstanding
449

 
449

Total basic average common shares outstanding
133,696,574

 
132,822,283

 
 
 
 
Effect of dilutive stock options
253,222

 
88,873

 
 
 
 
Total diluted average common shares outstanding
133,949,796

 
132,911,156

 
 
 
 
Net EPS:
 
 
 
Basic
$
0.15

 
$
0.16

Diluted
$
0.15

 
$
0.16

 
 
 
 
Antidilutive stock options, excluded from the diluted average
 
 
common shares outstanding calculation
236,400

 
872,039



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").
 
December 31, 2016
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
GSE debentures
$
321,246

 
$
156

 
$
798

 
$
320,604

MBS
169,037

 
8,284

 
7

 
177,314

Trust preferred securities
2,112

 

 
238

 
1,874

 
$
492,395

 
$
8,440

 
$
1,043

 
$
499,792

HTM:
 
 
 
 
 
 
 
MBS
$
989,012

 
$
13,084

 
$
7,858

 
$
994,238

Municipal bonds
33,203

 
68

 
217

 
33,054

 
$
1,022,215

 
$
13,152

 
$
8,075

 
$
1,027,292


 
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




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.
 
December 31, 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
$
199,151

 
$
798

 
$

 
$

MBS
10,936

 
2

 
641

 
5

Trust preferred securities

 

 
1,874

 
238

 
$
210,087

 
$
800

 
$
2,515

 
$
243

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HTM:
 
 
 
 
 
 
 
MBS
$
505,924

 
$
6,170

 
$
61,781

 
$
1,688

Municipal bonds
22,649

 
212

 
836

 
5

 
$
528,573

 
$
6,382

 
$
62,617

 
$
1,693


 
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 December 31, 2016 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 December 31, 2016 or September 30, 2016.

12


The amortized cost and estimated fair value of debt securities as of December 31, 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
$
25,030

 
$
25,032

 
$
7,576

 
$
7,610

One year through five years
296,216

 
295,572

 
20,699

 
20,565

Five years through ten years

 

 
4,928

 
4,879

Ten years and thereafter
2,112

 
1,874

 

 

 
323,358

 
322,478

 
33,203

 
33,054

MBS
169,037

 
177,314

 
989,012

 
994,238

 
$
492,395

 
$
499,792

 
$
1,022,215

 
$
1,027,292



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
 
December 31,
 
2016
 
2015
 
(Dollars in thousands)
Taxable
$
964

 
$
1,354

Non-taxable
143

 
179

 
$
1,107

 
$
1,533



The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of the dates presented.
 
December 31, 2016
 
September 30, 2016
 
(Dollars in thousands)
Public unit deposits
$
427,077

 
$
419,282

Repurchase agreements
217,193

 
217,374

Federal Reserve Bank
14,765

 
15,938

 
$
659,035

 
$
652,594


13


4. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES
Loans receivable, net at the dates presented is summarized as follows:
 
December 31, 2016
 
September 30, 2016
 
(Dollars in thousands)
Real estate loans:
 
 
 
One- to four-family:
 
 
 
Originated
$
4,027,991

 
$
4,005,615

Correspondent purchased
2,288,368

 
2,206,072

Bulk purchased
400,506

 
416,653

Construction
37,524

 
39,430

Total
6,754,389

 
6,667,770

Commercial:
 
 
 
Permanent
104,323

 
110,768

Construction
76,254

 
43,375

Total
180,577

 
154,143

Total real estate loans
6,934,966

 
6,821,913

 
 
 
 
Consumer loans:
 
 
 
Home equity
122,378

 
123,345

Other
4,213

 
4,264

Total consumer loans
126,591

 
127,609

 
 
 
 
Total loans receivable
7,061,557

 
6,949,522

 
 
 
 
Less:
 
 
 
ACL
8,521

 
8,540

Discounts/unearned loan fees
25,028

 
24,933

Premiums/deferred costs
(43,402
)
 
(41,975
)
 
$
7,071,410

 
$
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 commercial real estate loans and also 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

14


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. 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 quarter 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.


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, less charge-offs and inclusive of unearned loan fees and deferred costs. At December 31, 2016 and September 30, 2016, all loans 90 or more days delinquent were on nonaccrual status.
 
December 31, 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
$
11,199

 
$
6,625

 
$
17,824

 
$
4,032,155

 
$
4,049,979

One- to four-family - correspondent
7,928

 
555

 
8,483

 
2,312,776

 
2,321,259

One- to four-family - bulk purchased
4,895

 
8,053

 
12,948

 
389,661

 
402,609

Commercial real estate

 

 

 
179,493

 
179,493

Consumer - home equity
665

 
456

 
1,121

 
121,257

 
122,378

Consumer - other
17

 
18

 
35

 
4,178

 
4,213

 
$
24,704

 
$
15,707

 
$
40,411

 
$
7,039,520

 
$
7,079,931

 
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 December 31, 2016 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 $2.1 million at December 31, 2016 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.
 
December 31, 2016
 
September 30, 2016
 
(Dollars in thousands)
One- to four-family - originated
$
17,985

 
$
17,086

One- to four-family - correspondent
1,794

 
3,788

One- to four-family - bulk purchased
8,200

 
7,411

Commercial real estate

 

Consumer - home equity
827

 
848

Consumer - other
18

 
10

 
$
28,824

 
$
29,143



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.
 
December 31, 2016
 
September 30, 2016
 
Special Mention
 
Substandard
 
Special Mention
 
Substandard
 
(Dollars in thousands)
One- to four-family - originated
$
8,764

 
$
28,564

 
$
10,242

 
$
27,818

One- to four-family - correspondent
6,838

 
4,850

 
2,496

 
5,168

One- to four-family - bulk purchased
880

 
11,616

 
1,156

 
11,480

Commercial real estate

 

 

 

Consumer - home equity
58

 
1,469

 
54

 
1,431

Consumer - other

 
30

 
8

 
16

 
$
16,540

 
$
46,529

 
$
13,956

 
$
45,913


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

 
764
 
68

One- to four-family - bulk purchased
753
 
64

 
753
 
64

Consumer - home equity
755
 
20

 
755
 
20

 
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
 
December 31, 2016
 
Number
 
Pre-
 
Post-
 
of
 
Restructured
 
Restructured
 
Contracts
 
Outstanding
 
Outstanding
 
(Dollars in thousands)
One- to four-family - originated
38

 
$
3,928

 
$
4,185

One- to four-family - correspondent

 

 

One- to four-family - purchased

 

 

Commercial real estate

 

 

Consumer - home equity
8

 
206

 
212

Consumer - other

 

 

 
46

 
$
4,134

 
$
4,397

 
For the Three Months Ended
 
December 31, 2015
 
Number
 
Pre-
 
Post-
 
of
 
Restructured
 
Restructured
 
Contracts
 
Outstanding
 
Outstanding
 
(Dollars in thousands)
One- to four-family - originated
30

 
$
3,106

 
$
3,165

One- to four-family - correspondent

 

 

One- to four-family - bulk purchased
1

 
123

 
122

Commercial real estate

 

 

Consumer - home equity
4

 
61

 
61

Consumer - other

 

 

 
35

 
$
3,290

 
$
3,348


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
 
December 31, 2016
 
December 31, 2015
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
(Dollars in thousands)
One- to four-family - originated
11

 
$
978

 
11

 
$
800

One- to four-family - correspondent

 

 

 

One- to four-family - bulk purchased

 

 

 

Commercial real estate

 

 

 

Consumer - home equity
4

 
115

 
2

 
78

Consumer - other

 

 

 

 
15

 
$
1,093

 
13

 
$
878


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.
 
December 31, 2016
 
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
$
24,077

 
$
24,759

 
$

 
$
22,982

 
$
23,640

 
$

One- to four-family - correspondent
4,244

 
4,233

 

 
2,963

 
2,950

 

One- to four-family - bulk purchased
11,175

 
12,870

 

 
10,985

 
12,684

 

Commercial real estate

 

 

 

 

 

Consumer - home equity
1,070

 
1,269

 

 
1,014

 
1,230

 

Consumer - other
16

 
39

 

 
10

 
42

 

 
40,582

 
43,170

 

 
37,954

 
40,546

 

With an allowance recorded
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
11,723

 
11,760

 
89

 
13,430

 
13,476

 
125

One- to four-family - correspondent
1,056

 
1,059

 
2

 
2,662

 
2,664

 
4

One- to four-family - bulk purchased
1,320

 
1,313

 
15

 
1,650

 
1,627

 
49

Commercial real estate

 

 

 

 

 

Consumer - home equity
499

 
499

 
31

 
548

 
548

 
38

Consumer - other
14

 
14

 
1

 
6

 
6

 
1

 
14,612

 
14,645

 
138

 
18,296

 
18,321

 
217

Total
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
35,800

 
36,519

 
89

 
36,412

 
37,116

 
125

One- to four-family - correspondent
5,300

 
5,292

 
2

 
5,625

 
5,614

 
4

One- to four-family - bulk purchased
12,495

 
14,183

 
15

 
12,635

 
14,311

 
49

Commercial real estate

 

 

 

 

 

Consumer - home equity
1,569

 
1,768

 
31

 
1,562

 
1,778

 
38

Consumer - other
30

 
53

 
1

 
16

 
48

 
1

 
$
55,194

 
$
57,815

 
$
138

 
$
56,250

 
$
58,867

 
$
217



19


The following information pertains to impaired loans, by class, for the periods presented.
 
For the Three Months Ended
 
December 31, 2016
 
December 31, 2015
 
Average
 
Interest
 
Average
 
Interest
 
Recorded
 
Income
 
Recorded
 
Income
 
Investment
 
Recognized
 
Investment
 
Recognized
 
(Dollars in thousands)
With no related allowance recorded
 
 
 
 
 
 
 
One- to four-family - originated
$
22,687

 
$
205

 
$
10,843

 
$
110

One- to four-family - correspondent
3,138

 
24

 
129

 
3

One- to four-family - bulk purchased
10,898

 
46

 
11,090

 
51

Commercial real estate

 

 

 

Consumer - home equity
991

 
30

 
574

 
8

Consumer - other
11

 

 
9

 

 
37,725

 
305

 
22,645

 
172

With an allowance recorded
 
 
 
 
 
 
 
One- to four-family - originated
13,289

 
125

 
26,779

 
252

One- to four-family - correspondent
2,254

 
20

 
1,335

 
13

One- to four-family - bulk purchased
1,428

 
6

 
3,246

 
7

Commercial real estate

 

 

 

Consumer - home equity
587

 
15

 
954

 
11

Consumer - other
13

 

 
13

 

 
17,571

 
166

 
32,327

 
283

Total
 
 
 
 
 
 
 
One- to four-family - originated
35,976

 
330

 
37,622

 
362

One- to four-family - correspondent
5,392

 
44

 
1,464

 
16

One- to four-family - bulk purchased
12,326

 
52

 
14,336

 
58

Commercial real estate

 

 

 

Consumer - home equity
1,578

 
45

 
1,528

 
19

Consumer - other
24

 

 
22

 

 
$
55,296

 
$
471

 
$
54,972

 
$
455



20


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 Three Months Ended December 31, 2016
 
One- to Four-Family
 

 
 
 
 
 

 
Correspondent
 
Bulk
 

 
Commercial
 
 
 
 
 
Originated
 
Purchased
 
Purchased
 
Total
 
Real Estate
 
Consumer
 
Total
 
(Dollars in thousands)
Beginning balance
$
3,928

 
$
2,102

 
$
1,065

 
$
7,095

 
$
1,208

 
$
237

 
$
8,540

Charge-offs
(24
)
 

 

 
(24
)
 

 
(8
)
 
(32
)
Recoveries

 

 

 

 

 
13

 
13

Provision for credit losses
(161
)
 
(38
)
 
(53
)
 
(252
)
 
287

 
(35
)
 

Ending balance
$
3,743

 
$
2,064

 
$
1,012

 
$
6,819

 
$
1,495

 
$
207

 
$
8,521

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended December 31, 2015
 
One- to Four-Family
 

 
 
 
 
 

 
Correspondent
 
Bulk
 

 
Commercial
 
 
 
 
 
Originated
 
Purchased
 
Purchased
 
Total
 
Real Estate
 
Consumer
 
Total
 
(Dollars in thousands)
Beginning balance
$
4,865

 
$
2,115

 
$
1,434

 
$
8,414

 
$
742

 
$
287

 
$
9,443

Charge-offs
(57
)
 

 
(175
)
 
(232
)
 

 
(18
)
 
(250
)
Recoveries
3

 

 

 
3

 

 
5

 
8

Provision for credit losses
1

 
(95
)
 
31

 
(63
)
 
59

 
4

 

Ending balance
$
4,812

 
$
2,020

 
$
1,290

 
$
8,122

 
$
801

 
$
278

 
$
9,201

 
 
 
 
 
 
 
 
 
 
 
 
 
 


21


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.

 
December 31, 2016
 
One- to Four-Family
 

 
 
 
 
 

 
Correspondent
 
Bulk
 

 
Commercial
 
 
 
 
 
Originated
 
Purchased
 
Purchased
 
Total
 
Real Estate
 
Consumer
 
Total