CFFN-033115-10Q



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, 2015
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 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 April 24, 2015, there were 140,663,758 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 (Unaudited)
(Dollars in thousands, except per share amounts)
 
 
 
 
 
March 31,
 
September 30,
 
2015
 
2014
ASSETS:
 
 
 
Cash and cash equivalents (includes interest-earning deposits of $1,009,446 and $799,340)
$
1,021,150

 
$
810,840

Securities:
 
 
 
Available-for-sale ("AFS"), at estimated fair value (amortized cost of $827,197 and $829,558)
842,856

 
840,790

Held-to-maturity ("HTM"), at amortized cost (estimated fair value of $1,455,828 and $1,571,524)
1,425,383

 
1,552,699

Loans receivable, net (allowance for credit losses ("ACL") of $9,406 and $9,227)
6,365,320

 
6,233,170

Federal Home Loan Bank Topeka ("FHLB") stock, at cost
154,951

 
213,054

Premises and equipment, net
72,154

 
70,530

Other assets
141,285

 
143,945

TOTAL ASSETS
$
10,023,099

 
$
9,865,028

 
 
 
 
LIABILITIES:
 
 
 
Deposits
$
4,837,274

 
$
4,655,272

FHLB borrowings
3,371,970

 
3,369,677

Repurchase agreements
220,000

 
220,000

Advance payments by borrowers for taxes and insurance
51,421

 
58,105

Income taxes payable
815

 
368

Deferred income tax liabilities, net
25,451

 
22,367

Accounts payable and accrued expenses
39,512

 
46,357

Total liabilities
8,546,443

 
8,372,146

 
 
 
 
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, 140,655,958 and 140,951,203
 
 
 
 shares issued and outstanding as of March 31, 2015 and September 30, 2014, respectively
1,407

 
1,410

Additional paid-in capital
1,179,579

 
1,180,732

Unearned compensation, Employee Stock Ownership Plan ("ESOP")
(42,125
)
 
(42,951
)
Retained earnings
328,055

 
346,705

Accumulated other comprehensive income ("AOCI"), net of tax
9,740

 
6,986

Total stockholders' equity
1,476,656

 
1,492,882

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
10,023,099

 
$
9,865,028

 
 
 
 
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,
 
2015
 
2014
 
2015
 
2014
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
58,198

 
$
57,117

 
$
116,817

 
$
114,065

Mortgage-backed securities ("MBS")
9,537

 
11,597

 
19,538

 
23,559

Investment securities
1,673

 
1,869

 
3,348

 
3,935

FHLB stock
3,076

 
1,229

 
6,257

 
2,425

Cash and cash equivalents
1,393

 
45

 
2,817

 
107

Total interest and dividend income
73,877

 
71,857

 
148,777

 
144,091

INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB borrowings
17,198

 
15,311

 
34,186

 
32,174

Deposits
8,207

 
8,076

 
16,352

 
16,399

Repurchase agreements
1,693

 
2,743

 
3,424

 
5,546

Total interest expense
27,098

 
26,130

 
53,962

 
54,119

NET INTEREST INCOME
46,779

 
45,727

 
94,815

 
89,972

PROVISION FOR CREDIT LOSSES
275

 
160

 
448

 
675

NET INTEREST INCOME AFTER
 
 
 
 
 
 
 
PROVISION FOR CREDIT LOSSES
46,504

 
45,567

 
94,367

 
89,297

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
3,471

 
3,454

 
7,254

 
7,264

Insurance commissions
973

 
1,204

 
1,522

 
1,762

Loan fees
357

 
404

 
731

 
854

Income from bank-owned life insurance ("BOLI")
252

 
330

 
568

 
668

Other non-interest income
224

 
335

 
459

 
679

Total non-interest income
5,277

 
5,727

 
10,534

 
11,227

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
10,412

 
10,724

 
20,889

 
21,450

Information technology and communications
2,585

 
2,320

 
5,153

 
4,612

Occupancy, net
2,461

 
2,634

 
4,880

 
5,183

Low income housing partnerships
1,366

 
323

 
2,912

 
1,419

Federal insurance premium
1,468

 
1,103

 
2,750

 
2,186

Deposit and loan transaction costs
1,256

 
1,263

 
2,630

 
2,650

Regulatory and outside services
1,206

 
1,157

 
2,502

 
2,553

Advertising and promotional
749

 
877

 
1,638

 
1,883

Other non-interest expense
1,356

 
1,427

 
2,647

 
2,679

Total non-interest expense
22,859

 
21,828

 
46,001

 
44,615

INCOME BEFORE INCOME TAX EXPENSE
28,922

 
29,466

 
58,900

 
55,909

INCOME TAX EXPENSE
9,688

 
9,778

 
19,194

 
18,408

NET INCOME
$
19,234

 
$
19,688

 
$
39,706

 
$
37,501

 
 
 
 
 
 
 
 
Basic earnings per share ("EPS")
$
0.14

 
$
0.14

 
$
0.29

 
$
0.26

Diluted EPS
$
0.14

 
$
0.14

 
$
0.29

 
$
0.26

Dividends declared per share
$
0.09

 
$
0.08

 
$
0.42

 
$
0.58


 
 
 
 

 

Basic weighted average common shares
136,208,029

 
139,489,033

 
136,147,295

 
141,204,147

Diluted weighted average common shares
136,245,785

 
139,489,324

 
136,179,622

 
141,204,751

 
 
 
 
 
 
 
 
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,
 
2015
 
2014
 
2015
 
2014
Net income
$
19,234

 
$
19,688

 
$
39,706

 
$
37,501

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Changes in unrealized holding gains/(losses) on AFS securities,
 
 
 
 
 
 
 
net of deferred income tax (benefits) expenses of $(1,202) and
 
 
 
 
 
 
 
$(279) for the three months ended March 31, 2015 and 2014,
 
 
 
 
 
 
 
respectively, and $(1,673) and $1,363 for the six months ended
 
 
 
 
 
 
 
March 31, 2015 and 2014, respectively
1,978

 
459

 
2,754

 
(2,241
)
Comprehensive income
$
21,212

 
$
20,147

 
$
42,460

 
$
35,260

 
 
 
 
 
 
 
 
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, 2014
$
1,410

 
$
1,180,732

 
$
(42,951
)
 
$
346,705

 
$
6,986

 
$
1,492,882

Net income
 
 
 
 
 
 
39,706

 
 
 
39,706

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
2,754

 
2,754

ESOP activity, net
 
 
210

 
826

 
 
 
 
 
1,036

Restricted stock activity, net
 
 
64

 
 
 
 
 
 
 
64

Stock-based compensation
 
 
1,051

 
 
 
 
 
 
 
1,051

Repurchase of common stock
(3
)
 
(2,532
)
 
 
 
(1,088
)
 
 
 
(3,623
)
Stock options exercised

 
54

 
 
 
 
 
 
 
54

Dividends on common stock to
 
 
 
 
 
 
 
 
 
 
 
stockholders ($0.42 per share)
 
 
 
 
 
 
(57,268
)
 
 
 
(57,268
)
Balance at March 31, 2015
$
1,407

 
$
1,179,579

 
$
(42,125
)
 
$
328,055

 
$
9,740

 
$
1,476,656

 
 
 
 
 
 
 
 
 
 
 
 
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,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
39,706

 
$
37,501

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
FHLB stock dividends
(6,257
)
 
(2,425
)
Provision for credit losses
448

 
675

Originations of loans receivable held-for-sale ("LHFS")

 
(1,325
)
Proceeds from sales of LHFS

 
1,881

Amortization and accretion of premiums and discounts on securities
2,753

 
2,866

Depreciation and amortization of premises and equipment
3,312

 
3,122

Amortization of deferred amounts related to FHLB advances, net
2,342

 
3,631

Common stock committed to be released for allocation - ESOP
1,036

 
1,014

Stock-based compensation
1,051

 
1,105

Changes in:
 
 
 
Other assets, net
3,049

 
1,096

Income taxes payable/receivable
1,922

 
4,707

Accounts payable and accrued expenses
(5,167
)
 
(10,151
)
Net cash provided by operating activities
44,195

 
43,697

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of AFS securities
(99,937
)
 
(120,817
)
Purchase of HTM securities
(29,153
)
 
(159,707
)
Proceeds from calls, maturities and principal reductions of AFS securities
102,261

 
291,348

Proceeds from calls, maturities and principal reductions of HTM securities
155,822

 
154,790

Proceeds from the redemption of FHLB stock
155,679

 
7,845

Purchases of FHLB stock
(91,319
)
 
(2,719
)
Net increase in loans receivable
(135,746
)
 
(97,805
)
Purchases of premises and equipment
(5,123
)
 
(4,003
)
Proceeds from sales of other real estate owned ("OREO")
2,784

 
2,814

Net cash provided by investing activities
55,268

 
71,746

 
 
 
 
 
 
 
(Continued)


7


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
 
For the Six Months Ended
 
March 31,
 
2015
 
2014
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Dividends paid
(57,268
)
 
(82,792
)
Deposits, net of withdrawals
182,002

 
82,316

Proceeds from borrowings
3,900,000

 
420,180

Repayments on borrowings
(3,900,000
)
 
(470,180
)
Change in advance payments by borrowers for taxes and insurance
(6,684
)
 
(7,223
)
Repurchase of common stock
(7,208
)
 
(57,206
)
Other, net
5

 
411

Net cash provided by (used in) financing activities
110,847

 
(114,494
)
 
 
 
 
NET INCREASE IN CASH AND CASH EQUIVALENTS
210,310

 
949

 
 
 
 
CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of period
810,840

 
113,886

End of period
$
1,021,150

 
$
114,835

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Income tax payments
$
17,273

 
$
13,700

Interest payments
$
51,296

 
$
50,880

 
 
 
 
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, 2014, filed with the Securities and Exchange Commission ("SEC"). Interim results are not necessarily indicative of results for a full year.

Recent Accounting Pronouncements - In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. The ASU provides recognition, measurement, and disclosure guidance for certain obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. ASU 2013-04 is effective for fiscal years beginning after December 15, 2013, which was October 1, 2014 for the Company, and should be applied retrospectively. The adoption of this ASU did not have a material impact on the Company's consolidated financial condition or result of operations when adopted.

In January 2014, the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. The ASU revised the conditions that an entity must meet to elect to use the effective yield method when accounting for qualified affordable housing project investments. Per current accounting guidance, an entity that invests in a qualified affordable housing project may elect to account for that investment using the effective yield method if all required conditions are met. For those investments that are not accounted for using the effective yield method, current accounting guidance requires that the investments be accounted for under either the equity method or the cost method. Certain existing conditions required to be met to use the effective yield method are restrictive and thus prevent many such investments from qualifying for the use of the effective yield method. The ASU replaces the effective yield method with the proportional amortization method and modifies the conditions that an entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable housing project investments. If the modified conditions are met, the ASU permits an entity to use the proportional amortization method to amortize the initial cost of the investment in proportion to the amount of tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense. Additionally, the ASU requires new disclosures about all investments in qualified affordable housing projects irrespective of the method used to account for the investments. ASU 2014-01 is effective for fiscal years beginning after December 15, 2014, which is October 1, 2015 for the Company, and should be applied retrospectively. The ASU is not expected to have a material impact on the Company's consolidated financial condition or result of operations when adopted.

In January 2014, the FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The ASU clarifies when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The ASU also requires disclosure of both (1) the amount of foreclosed residential real estate property held by a creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU 2014-04 is effective for fiscal years beginning after December 15, 2014, which is October 1, 2015 for the Company, and can be applied using either a modified retrospective transition method or a prospective transition method. The ASU is not expected to have a material impact on the Company's consolidated financial condition or result of operations when adopted.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The ASU 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, 2016, which is October 1, 2017 for the Company, and can be applied using either a retrospective or cumulative-effect transition method. In April 2015, the FASB issued a proposed ASU to defer the effective date of the new revenue recognition standard by one year, which would make the ASU effective for fiscal years beginning after December 15, 2017, which is October 1, 2018 for the Company. Early adoption is permitted but not before the original effective date, which is October 1, 2017 for the Company. The Company has not yet completed its evaluation of this ASU.


9


In June 2014, the FASB issued ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The ASU makes limited amendments to the current guidance on accounting for certain repurchase agreements. The ASU also expands disclosure requirements for certain transfers of financial assets accounted for as sales or as secured borrowings. The accounting changes in ASU 2014-11 are effective for the first quarterly period or fiscal year beginning after December 15, 2014, which is January 1, 2015 for the Company, and should be applied using a cumulative-effect transition method. The expanded disclosure requirements for ASU 2014-11 are effective for fiscal years beginning after December 15, 2014, and for quarterly periods beginning after March 15, 2015, which is April 1, 2015 for the Company. The Company accounts for its repurchase agreements as secured borrowings; therefore, the adoption of the accounting requirements of ASU 2014-11 did not have an impact on its financial condition or results of operations. The expanded disclosure requirements of ASU 2014-11 are not expected to have an impact on the Company's financial condition or results of operations when adopted.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. The ASU amends the consolidation requirements in Accounting Standards Codification ("ASC") 810 and significantly changes the consolidation analysis required under GAAP. The ASU is expected to result in the deconsolidation of many entities; therefore, companies will need to reevaluate all of their previous consolidation conclusions. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, which is October 1, 2016 for the Company. Early adoption is allowed for all entities, but the guidance must be applied as of the beginning of the annual period containing the adoption date. The Company has not yet completed its evaluation of this ASU.

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,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands, except per share amounts)
Net income
$
19,234

 
$
19,688

 
$
39,706

 
$
37,501

Income allocated to participating securities
(27
)
 
(44
)
 
(69
)
 
(94
)
Net income available to common stockholders
$
19,207

 
$
19,644

 
$
39,637

 
$
37,407

 
 
 
 
 
 
 
 
Average common shares outstanding
136,166,271

 
139,447,275

 
136,126,419

 
141,183,271

Average committed ESOP shares outstanding
41,758

 
41,758

 
20,876

 
20,876

Total basic average common shares outstanding
136,208,029

 
139,489,033

 
136,147,295

 
141,204,147

 
 
 
 
 
 
 
 
Effect of dilutive stock options
37,756

 
291

 
32,327

 
604

 
 
 
 
 
 
 
 
Total diluted average common shares outstanding
136,245,785

 
139,489,324

 
136,179,622

 
141,204,751

 
 
 
 
 
 
 
 
Net EPS:
 
 
 
 
 
 
 
Basic
$
0.14

 
$
0.14

 
$
0.29

 
$
0.26

Diluted
$
0.14

 
$
0.14

 
$
0.29

 
$
0.26

 
 
 
 
 
 
 
 
Antidilutive stock options, excluded
 
 
 
 
 
 
 
from the diluted average common shares
 
 
 
 
 
 
 
outstanding calculation
863,827

 
2,060,216

 
920,365

 
2,396,610



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").
 
March 31, 2015
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
GSE debentures
$
579,731

 
$
1,158

 
$
597

 
$
580,292

MBS
244,630

 
15,377

 
6

 
260,001

Trust preferred securities
2,346

 

 
284

 
2,062

Municipal bonds
490

 
11

 

 
501

 
827,197

 
16,546

 
887

 
842,856

HTM:
 
 
 
 
 
 
 
MBS
1,388,045

 
34,403

 
4,465

 
1,417,983

Municipal bonds
37,338

 
531

 
24

 
37,845

 
1,425,383

 
34,934

 
4,489

 
1,455,828

 
$
2,252,580

 
$
51,480

 
$
5,376

 
$
2,298,684


 
September 30, 2014
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
GSE debentures
$
554,811

 
$
413

 
$
5,469

 
$
549,755

MBS
271,138

 
16,640

 
172

 
287,606

Trust preferred securities
2,493

 

 
197

 
2,296

Municipal bonds
1,116

 
17

 

 
1,133

 
829,558

 
17,070

 
5,838

 
840,790

HTM:
 
 
 
 
 
 
 
MBS
1,514,941

 
31,130

 
12,935

 
1,533,136

Municipal bonds
37,758

 
654

 
24

 
38,388

 
1,552,699

 
31,784

 
12,959

 
1,571,524

 
$
2,382,257

 
$
48,854

 
$
18,797

 
$
2,412,314




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.
 
March 31, 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
$
139,695

 
$
300

 
$
74,703

 
$
297

MBS
962

 
6

 

 

Trust preferred securities

 

 
2,062

 
284

 
$
140,657

 
$
306

 
$
76,765

 
$
581

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HTM:
 
 
 
 
 
 
 
MBS
$
41,884

 
$
278

 
$
317,724

 
$
4,187

Municipal bonds
3,790

 
13

 
1,131

 
11

 
$
45,674

 
$
291

 
$
318,855

 
$
4,198


 
September 30, 2014
 
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
$
70,666

 
$
209

 
$
403,389

 
$
5,260

MBS
18,571

 
172

 

 

Trust preferred securities

 

 
2,296

 
197

 
$
89,237

 
$
381

 
$
405,685

 
$
5,457

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HTM:
 
 
 
 
 
 
 
MBS
$
353,344

 
$
2,194

 
$
409,275

 
$
10,741

Municipal bonds
4,688

 
19

 
739

 
5

 
$
358,032

 
$
2,213

 
$
410,014

 
$
10,746


The unrealized losses at March 31, 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 March 31, 2015.

12


The amortized cost and estimated fair value of debt securities as of March 31, 2015, by contractual maturity, are shown below.  Actual principal repayments may differ from contractual maturities due to prepayment or early call privileges by the issuer.
 
AFS
 
HTM
 
Amortized
 
Estimated
 
Amortized
 
Estimated
 
Cost
 
Fair Value
 
Cost
 
Fair Value
 
(Dollars in thousands)
One year or less
$

 
$

 
$
2,818

 
$
2,858

One year through five years
555,271

 
555,799

 
22,201

 
22,599

Five years through ten years
24,950

 
24,994

 
12,319

 
12,388

Ten years and thereafter
2,346

 
2,062

 

 

 
582,567

 
582,855

 
37,338

 
37,845

MBS
244,630

 
260,001

 
1,388,045

 
1,417,983

 
$
827,197

 
$
842,856

 
$
1,425,383

 
$
1,455,828



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,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Taxable
$
1,493

 
$
1,632

 
$
2,966

 
$
3,439

Non-taxable
180

 
237

 
382

 
496

 
$
1,673

 
$
1,869

 
$
3,348

 
$
3,935



The following table summarizes the amortized cost and estimated fair value of securities pledged as collateral as of the dates presented.
 
March 31, 2015
 
September 30, 2014
 
Amortized
 
Estimated
 
Amortized
 
Estimated
 
Cost
 
Fair Value
 
Cost
 
Fair Value
 
(Dollars in thousands)
FHLB borrowings
$
443,886

 
$
449,834

 
$
487,736

 
$
488,368

Public unit deposits
311,122

 
316,217

 
282,464

 
284,251

Repurchase agreements
236,276

 
246,341

 
239,922

 
247,306

Federal Reserve Bank
22,632

 
23,719

 
25,969

 
27,067

 
$
1,013,916

 
$
1,036,111

 
$
1,036,091

 
$
1,046,992


13


4. LOANS RECEIVABLE and ALLOWANCE FOR CREDIT LOSSES
Loans receivable, net at the dates presented is summarized as follows:
 
March 31, 2015
 
September 30, 2014
 
(Dollars in thousands)
Real estate loans:
 
 
 
One- to four-family
$
6,094,729

 
$
5,972,031

Multi-family and commercial
107,494

 
75,677

Construction
86,063

 
106,790

Total real estate loans
6,288,286

 
6,154,498

 
 
 
 
Consumer loans:
 
 
 
Home equity
126,146

 
130,484

Other
4,348

 
4,537

Total consumer loans
130,494

 
135,021

 
 
 
 
Total loans receivable
6,418,780

 
6,289,519

 
 
 
 
Less:
 
 
 
Undisbursed loan funds
52,063

 
52,001

ACL
9,406

 
9,227

Discounts/unearned loan fees
23,670

 
23,687

Premiums/deferred costs
(31,679
)
 
(28,566
)
 
$
6,365,320

 
$
6,233,170


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, and also originates consumer loans, commercial and multi-family real estate loans, and construction loans secured by residential, multi-family or commercial real estate. 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. 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 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 management. 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.

Multi-family and commercial loans - The Bank's multi-family, commercial real estate, and related construction loans are originated by the Bank or are in participation with a lead bank. These loans are granted based on the income producing potential of the property and the financial strength of the borrower and/or guarantor. At the time of origination, loan-to-value ("LTV") ratios on multi-family, commercial real estate, and related construction loans generally cannot exceed 80% of the appraised value of the property securing the loans. The net operating income, which is the income derived from the operation of the property less all operating expenses, must generally be in excess of the required payments related to the outstanding debt at the time of origination. The Bank generally requires

14


personal guarantees from the borrowers covering a portion of the debt in addition to the security property as collateral for these loans. 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 loans; (2) consumer loans; and (3) multi-family and commercial loans. The one- to four-family and consumer segments 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 loans - originated, one- to four-family loans - purchased, consumer loans - home equity, and consumer loans - other.

The Bank's primary credit quality indicators for the one- to four-family loan 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 multi-family and commercial loan and consumer - other loan portfolios are delinquency status and asset classifications.

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, total 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 March 31, 2015 and September 30, 2014, all loans 90 or more days delinquent were on nonaccrual status.
 
March 31, 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 loans - originated
$
15,287

 
$
8,516

 
$
23,803

 
$
5,583,147

 
$
5,606,950

One- to four-family loans - purchased
8,221

 
8,130

 
16,351

 
510,520

 
526,871

Multi-family and commercial loans

 

 

 
110,411

 
110,411

Consumer - home equity
681

 
366

 
1,047

 
125,099

 
126,146

Consumer - other
36

 
19

 
55

 
4,293

 
4,348

 
$
24,225

 
$
17,031

 
$
41,256

 
$
6,333,470

 
$
6,374,726

 
September 30, 2014
 
 
 
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 loans - originated
$
15,396

 
$
8,566

 
$
23,962

 
$
5,421,112

 
$
5,445,074

One- to four-family loans - purchased
7,937

 
7,190

 
15,127

 
550,229

 
565,356

Multi-family and commercial loans

 

 

 
96,946

 
96,946

Consumer - home equity
770

 
397

 
1,167

 
129,317

 
130,484

Consumer - other
69

 
13

 
82

 
4,455

 
4,537

 
$
24,172

 
$
16,166

 
$
40,338

 
$
6,202,059

 
$
6,242,397



15


The following table presents the recorded investment, by class, in loans classified as nonaccrual at the dates presented.
 
March 31, 2015
 
September 30, 2014
 
(Dollars in thousands)
One- to four-family loans - originated
$
18,582

 
$
16,546

One- to four-family loans - purchased
8,885

 
7,940

Multi-family and commercial loans

 

Consumer - home equity
473

 
442

Consumer - other
30

 
13

 
$
27,970

 
$
24,941


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 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, 2015
 
September 30, 2014
 
Special Mention
 
Substandard
 
Special Mention
 
Substandard
 
(Dollars in thousands)
One- to four-family - originated
$
16,713

 
$
31,018

 
$
20,068

 
$
29,151

One- to four-family - purchased
2,082

 
11,741

 
2,738

 
11,470

Multi-family and commercial

 

 

 

Consumer - home equity
73

 
1,049

 
146

 
887

Consumer - other
4

 
30

 
5

 
13

 
$
18,872

 
$
43,838

 
$
22,957

 
$
41,521


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 2015, 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 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, 2015
 
September 30, 2014
 
Credit Score
 
LTV
 
Credit Score
 
LTV
One- to four-family - originated
765
 
65
%
 
764
 
65
%
One- to four-family - purchased
751
 
66

 
749
 
66

Consumer - home equity
751
 
18

 
751
 
18

 
764
 
64

 
762
 
64


16


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, 2015
 
March 31, 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 loans - originated
31

 
$
4,413

 
$
4,445

 
74

 
$
9,737

 
$
9,817

One- to four-family loans - purchased

 

 

 
2

 
266

 
268

Multi-family and commercial loans

 

 

 

 

 

Consumer - home equity
2

 
20

 
24

 
6

 
84

 
89

Consumer - other

 

 

 
3

 
12

 
12

 
33

 
$
4,433

 
$
4,469

 
85

 
$
10,099

 
$
10,186

 
For the Three Months Ended
 
For the Six Months Ended
 
March 31, 2014
 
March 31, 2014
 
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 loans - originated
31

 
$
4,247

 
$
4,220

 
69

 
$
8,072

 
$
8,073

One- to four-family loans - purchased

 

 

 
2

 
198

 
198

Multi-family and commercial loans

 

 

 

 

 

Consumer - home equity
1

 
15

 
15

 
5

 
80

 
81

Consumer - other

 

 

 

 

 

 
32

 
$
4,262

 
$
4,235

 
76

 
$
8,350

 
$
8,352


The following table provides information on TDRs restructured within the last 12 months that became delinquent during the periods presented.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31, 2015
 
March 31, 2014
 
March 31, 2015
 
March 31, 2014
 
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 loans - originated
9

 
$
1,121

 
5

 
$
665

 
28

 
$
2,878

 
16

 
$
1,481

One- to four-family loans - purchased
1

 
71

 

 

 
3

 
339

 
2

 
338

Multi-family and commercial loans

 

 

 

 

 

 

 

Consumer - home equity
1

 
6

 
1

 
27

 
2

 
21

 
1

 
27

Consumer - other

 

 

 

 
1

 
5

 

 

 
11

 
$
1,198

 
6

 
$
692

 
34

 
$
3,243

 
19

 
$
1,846


17


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, 2015
 
September 30, 2014
 
 
 
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
$
12,885

 
$
13,473

 
$

 
$
13,871

 
$
14,507

 
$

One- to four-family - purchased
10,844

 
13,095

 

 
12,405

 
14,896

 

Multi-family and commercial

 

 

 

 

 

Consumer - home equity
498

 
777

 

 
605

 
892

 

Consumer - other
14

 
33

 

 
13

 
22

 

 
24,241

 
27,378

 

 
26,894

 
30,317

 

With an allowance recorded
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
27,436

 
27,550

 
290

 
23,675

 
23,767

 
107

One- to four-family - purchased
3,198

 
3,133

 
156

 
1,820

 
1,791

 
56

Multi-family and commercial

 

 

 

 

 

Consumer - home equity
720

 
720

 
66

 
464

 
464

 
39

Consumer - other
15

 
15

 
3

 

 

 

 
31,369

 
31,418

 
515

 
25,959

 
26,022

 
202

Total
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
40,321

 
41,023

 
290

 
37,546

 
38,274

 
107

One- to four-family - purchased
14,042

 
16,228

 
156

 
14,225

 
16,687

 
56

Multi-family and commercial

 

 

 

 

 

Consumer - home equity
1,218

 
1,497

 
66

 
1,069

 
1,356

 
39

Consumer - other
29

 
48

 
3

 
13

 
22

 

 
$
55,610

 
$
58,796

 
$
515

 
$
52,853

 
$
56,339

 
$
202



18


The following information pertains to impaired loans, by class, for the periods presented.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31, 2015
 
March 31, 2014
 
March 31, 2015
 
March 31, 2014
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
$
13,223

 
$
110

 
$
14,022

 
$
102

 
$
13,109

 
$
222

 
$
13,263

 
$
199

One- to four-family - purchased
11,286

 
47

 
13,706

 
47

 
11,475

 
99

 
13,645

 
92

Multi-family and commercial

 

 

 

 

 

 

 

Consumer - home equity
486

 
7

 
611

 
8

 
497

 
15

 
577

 
16

Consumer - other
20

 

 
5

 

 
17

 

 
4

 

 
25,015

 
164

 
28,344

 
157

 
25,098

 
336

 
27,489

 
307

With an allowance recorded
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
27,039

 
277

 
28,010

 
295

 
26,569

 
549

 
31,021

 
614

One- to four-family - purchased
2,878

 
11

 
2,287

 
12

 
2,642

 
22

 
2,573

 
28

Multi-family and commercial

 

 

 

 

 

 
31

 
1

Consumer - home equity
746

 
7

 
542

 
6

 
661

 
13

 
581

 
11

Consumer - other
16

 

 
11

 

 
15

 
1

 
13

 

 
30,679

 
295

 
30,850

 
313

 
29,887

 
585

 
34,219

 
654

Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
40,262

 
387

 
42,032

 
397

 
39,678

 
771

 
44,284

 
813

One- to four-family - purchased
14,164

 
58

 
15,993

 
59

 
14,117

 
121

 
16,218

 
120

Multi-family and commercial

 

 

 

 

 

 
31

 
1

Consumer - home equity
1,232

 
14

 
1,153

 
14

 
1,158

 
28

 
1,158

 
27

Consumer - other
36

 

 
16

 

 
32

 
1

 
17

 

 
$
55,694

 
$
459

 
$
59,194

 
$
470

 
$
54,985

 
$
921

 
$
61,708

 
$
961





19


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

 
For the Three Months Ended March 31, 2015
 
One- to Four-
 
One- to Four-
 
One- to Four-
 
Multi-family
 
 
 
 
 
Family -
 
Family -
 
Family -
 
and
 
 
 
 
 
Originated
 
Purchased
 
Total
 
Commercial
 
Consumer
 
Total
 
(Dollars in thousands)
Beginning balance
$
6,484

 
$
1,994

 
$
8,478

 
$
505

 
$
314

 
$
9,297

Charge-offs
(94
)
 
(80
)
 
(174
)
 

 
(15
)
 
(189
)
Recoveries
12

 
4

 
16

 

 
7

 
23

Provision for credit losses
309

 
(60
)
 
249

 
23

 
3

 
275

Ending balance
$
6,711

 
$
1,858

 
$
8,569

 
$
528

 
$
309

 
$
9,406

 
For the Six Months Ended March 31, 2015
 
One- to Four-
 
One- to Four-
 
One- to Four-
 
Multi-family
 
 
 
 
 
Family -
 
Family -
 
Family -
 
and
 
 
 
 
 
Originated
 
Purchased
 
Total
 
Commercial
 
Consumer
 
Total
 
(Dollars in thousands)
Beginning balance
$
6,263

 
$
2,323

 
$
8,586

 
$
400

 
$
241

 
$
9,227

Charge-offs
(152
)
 
(193
)
 
(345
)
 

 
(50
)
 
(395
)
Recoveries
33

 
58

 
91

 

 
35

 
126

Provision for credit losses
567

 
(330
)
 
237

 
128

 
83

 
448

Ending balance
$
6,711

 
$
1,858

 
$
8,569

 
$
528

 
$
309

 
$
9,406

 
For the Three Months Ended March 31, 2014
 
One- to Four-
 
One- to Four-
 
One- to Four-
 
Multi-family
 
 
 
 
 
Family -
 
Family -
 
Family -
 
and
 
 
 
 
 
Originated
 
Purchased
 
Total
 
Commercial
 
Consumer
 
Total
 
(Dollars in thousands)
Beginning balance
$
5,839

 
$
2,513

 
$
8,352

 
$
182

 
$
385

 
$
8,919

Charge-offs
(52
)
 
(60
)
 
(112
)
 

 
(9
)
 
(121
)
Recoveries

 

 

 

 
9

 
9

Provision for credit losses
950

 
(636
)
 
314

 
(39
)
 
(115
)
 
160

Ending balance
$
6,737

 
$
1,817

 
$
8,554

 
$
143

 
$
270

 
$
8,967

 
For the Six Months Ended March 31, 2014
 
One- to Four-
 
One- to Four-
 
One- to Four-
 
Multi-family
 
 
 
 
 
Family -
 
Family -
 
Family -
 
and
 
 
 
 
 
Originated
 
Purchased
 
Total
 
Commercial
 
Consumer
 
Total
 
(Dollars in thousands)
Beginning balance
$
5,771

 
$
2,486

 
$
8,257

 
$
185

 
$
380

 
$
8,822

Charge-offs
(140
)
 
(387
)
 
(527
)
 

 
(19
)
 
(546
)
Recoveries
1

 

 
1

 

 
15

 
16

Provision for credit losses
1,105

 
(282
)
 
823

 
(42
)
 
(106
)
 
675

Ending balance
$
6,737

 
$
1,817

 
$
8,554

 
$
143

 
$
270

 
$
8,967



20


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 potential losses were charged-off.

 
March 31, 2015
 
One- to Four-
 
One- to Four-
 
One- to Four-
 
Multi-family
 
 
 
 
 
Family -
 
Family -
 
Family -
 
and
 
 
 
 
 
Originated
 
Purchased
 
Total
 
Commercial
 
Consumer
 
Total
 
(Dollars in thousands)
Recorded investment in loans
 
 
 
 
 
 
 
 
 
 
 
collectively evaluated for impairment
$
5,594,065

 
$
516,027

 
$
6,110,092

 
$
110,411

 
$
129,982

 
$
6,350,485

 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment in loans
 
 
 
 
 
 
 
 
 
 
 
individually evaluated for impairment
12,885

 
10,844

 
23,729

 

 
512

 
24,241

 
$
5,606,950

 
$
526,871

 
$
6,133,821

 
$
110,411

 
$
130,494

 
$
6,374,726

 
 
 
 
 
 
 
 
 
 
 
 
ACL for loans collectively
 
 
 
 
 
 
 
 
 
 
 
evaluated for impairment
$
6,711

 
$
1,858

 
$
8,569

 
$
528

 
$
309

 
$
9,406


 
September 30, 2014
 
One- to Four-
 
One- to Four-
 
One- to Four-
 
Multi-family
 
 
 
 
 
Family -
 
Family -
 
Family -
 
and
 
 
 
 
 
Originated
 
Purchased
 
Total
 
Commercial
 
Consumer
 
Total
 
(Dollars in thousands)
Recorded investment in loans
 
 
 
 
 
 
 
 
 
 
 
collectively evaluated for impairment
$
5,431,203

 
$
552,951

 
$
5,984,154

 
$
96,946

 
$
134,403

 
$
6,215,503

 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment in loans
 
 
 
 
 
 
 
 
 
 
 
individually evaluated for impairment
13,871

 
12,405

 
26,276

 

 
618

 
26,894

 
$
5,445,074

 
$
565,356

 
$
6,010,430

 
$
96,946

 
$
135,021

 
$
6,242,397

 
 
 
 
 
 
 
 
 
 
 
 
ACL for loans collectively
 
 
 
 
 
 
 
 
 
 
 
evaluated for impairment
$
6,263

 
$
2,323

 
$
8,586

 
$
400

 
$
241

 
$
9,227




21


5. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair Value Measurements - The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures in accordance with ASC 820 and ASC 825. The Company did not have any liabilities that were measured at fair value at March 31, 2015 or September 30, 2014. The Company's AFS securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets or liabilities on a non-recurring basis, such as OREO and loans individually evaluated for impairment. These non-recurring fair value adjustments involve the application of lower-of-cost-or-fair value accounting or write-downs of individual assets.

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

Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company's own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models, and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.

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

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

AFS Securities - The Company's AFS securities portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as AOCI in stockholders' equity. The majority of the securities within the AFS portfolio were issued by GSEs. The Company primarily uses prices obtained from third party pricing services to determine the fair value of its securities. On a quarterly basis, management corroborates a sample of prices obtained from the third party pricing service for Level 2 securities by comparing them to an independent source. If the price provided by the independent source varies by more than a predetermined percentage from the price received from the third party pricing service, then the variance is researched by management. The Company did not have to adjust prices obtained from the third party pricing service when determining the fair value of its securities during the six months ended March 31, 2015 and fiscal year 2014. The Company's major security types, based on the nature and risks of the securities, are:

GSE Debentures - Estimated fair values are based on a discounted cash flow method. Cash flows are determined by taking any embedded options into consideration and are discounted using current market yields for similar securities. (Level 2)
MBS - Estimated fair values are based on a discounted cash flow method. Cash flows are determined based on prepayment projections of the underlying mortgages and are discounted using current market yields for benchmark securities. (Level 2)
Municipal Bonds - Estimated fair values are based on a discounted cash flow method. Cash flows are determined by taking any embedded options into consideration and are discounted using current market yields for securities with similar credit profiles. (Level 2)
Trust Preferred Securities - Estimated fair values are based on a discounted cash flow method. Cash flows are determined by taking prepayment and underlying credit considerations into account. The discount rates are derived from secondary trades and bid/offer prices. (Level 3)


22


The following tables provide the level of valuation assumption used to determine the carrying value of the Company's assets measured at fair value on a recurring basis at the dates presented.
 
March 31, 2015
 
 
 
Quoted Prices
 
Significant
 
Significant
 
 
 
in Active Markets
 
Other Observable
 
Unobservable
 
Carrying
 
for Identical Assets
 
 Inputs
 
Inputs
 
Value
 
(Level 1)
 
(Level 2)
 
(Level 3)(1)
 
(Dollars in thousands)
AFS Securities:
 
 
 
 
 
 
 
GSE debentures
$
580,292

 
$

 
$
580,292

 
$

MBS
260,001

 

 
260,001

 

Municipal bonds
501

 

 
501

 

Trust preferred securities
2,062

 

 

 
2,062

 
$
842,856

 
$

 
$
840,794

 
$
2,062


 
September 30, 2014
 
 
 
Quoted Prices
 
Significant
 
Significant
 
 
 
in Active Markets
 
Other Observable
 
Unobservable
 
Carrying
 
for Identical Assets
 
 Inputs
 
Inputs
 
Value
 
(Level 1)
 
(Level 2)
 
(Level 3)(2)
 
(Dollars in thousands)
AFS Securities:
 
 
 
 
 
 
 
GSE debentures
$
549,755

 
$

 
$
549,755

 
$

MBS
287,606

 

 
287,606

 

Municipal bonds
1,133

 

 
1,133

 

Trust preferred securities
2,296

 

 

 
2,296

 
$
840,790

 
$

 
$
838,494

 
$
2,296


(1)
The Company's Level 3 AFS securities had no activity during the six months ended March 31, 2015, except for principal repayments of $193 thousand and increases in net unrealized losses recognized in other comprehensive income. Increases in net unrealized losses included in other comprehensive income for the six months ended March 31, 2015 were $54 thousand.
(2)
The Company's Level 3 AFS securities had no activity during the year ended September 30, 2014, except for principal repayments of $150 thousand and increases in net unrealized losses recognized in other comprehensive income. Increases in net unrealized losses included in other comprehensive income for the year ended September 30, 2014 were $16 thousand.

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

Loans Receivable - The balance of loans individually evaluated for impairment at March 31, 2015 and September 30, 2014 was $24.2 million and $26.8 million, respectively. Substantially all of these loans were secured by residential real estate and were individually evaluated to ensure that the carrying value of the loan was not in excess of the estimated fair value of the collateral, less estimated selling costs. When no impairment is indicated, the carrying amount is considered to approximate fair value. Fair values were estimated through current appraisals or analyzed based on market indicators. Fair values may be adjusted by management to reflect current economic and market conditions and, as such, are classified as Level 3. Based on this evaluation, the Bank charged-off any loss amounts as of March 31, 2015 and September 30, 2014; therefore, there was no ACL related to these loans.

OREO - OREO primarily represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at lower-of-cost or fair value. Fair value is estimated through current appraisals or listing prices, less estimated selling costs. As these properties are actively marketed, estimated fair values may be adjusted by management to reflect current economic and market conditions and, as such, are classified as Level 3. The fair value of OREO at March 31, 2015 and September 30, 2014 was $4.6 million and $4.1 million, respectively.


23


The following tables provide the level of valuation assumptions used to determine the carrying value of the Company's assets measured at fair value on a non-recurring basis at the dates presented.
 
March 31, 2015
 
 
 
Quoted Prices
 
Significant
 
Significant
 
 
 
in Active Markets
 
Other Observable
 
Unobservable
 
Carrying
 
for Identical Assets
 
 Inputs
 
Inputs
 
Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(Dollars in thousands)
Loans individually evaluated for impairment
$
24,181

 
$

 
$

 
$
24,181

OREO
4,645

 

 

 
4,645

 
$
28,826

 
$

 
$

 
$
28,826


 
September 30, 2014
 
 
 
Quoted Prices
 
Significant
 
Significant
 
 
 
in Active Markets
 
Other Observable
 
Unobservable
 
Carrying
 
for Identical Assets
 
 Inputs
 
Inputs
 
Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(Dollars in thousands)
Loans individually evaluated for impairment
$
26,828

 
$

 
$

 
$
26,828

OREO
4,094

 

 

 
4,094

 
$
30,922

 
$

 
$

 
$
30,922


Fair Value Disclosures - The Company determined estimated fair value amounts using available market information and from a variety of valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amount the Company could realize in a current market exchange. The use of different market assumptions and estimation methodologies may have a material impact on the estimated fair value amounts. The fair value estimates presented herein were based on pertinent information available to management as of the dates presented.

The carrying amounts and estimated fair values of the Company's financial instruments, at the dates presented, were as follows:
 
March 31, 2015
 
September 30, 2014
 
 
 
Estimated
 
 
 
Estimated
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Amount
 
Value
 
Amount
 
Value
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,021,150

 
$
1,021,150

 
$
810,840

 
$
810,840

AFS securities
842,856

 
842,856

 
840,790

 
840,790

HTM securities
1,425,383

 
1,455,828

 
1,552,699

 
1,571,524

Loans receivable
6,365,320

 
6,654,060

 
6,233,170

 
6,429,840

FHLB stock
154,951

 
154,951

 
213,054

 
213,054

Liabilities:
 
 
 
 
 
 
 
Deposits
4,837,274

 
4,863,861

 
4,655,272

 
4,674,268

FHLB borrowings
3,371,970

 
3,443,749

 
3,369,677

 
3,423,547

Repurchase agreements
220,000

 
229,736

 
220,000

 
227,539



24


The following methods and assumptions were used to estimate the fair value of the financial instruments:

Cash and Cash Equivalents - The carrying amounts of cash and cash equivalents are considered to approximate their fair value due to the nature of the financial assets. (Level 1)

HTM Securities - Estimated fair values of securities are based on one of three methods: (1) quoted market prices where available; (2) quoted market prices for similar instruments if quoted market prices are not available; (3) unobservable data that represents the Bank's assumptions about items that market participants would consider in determining fair value where no market data is available. HTM securities are carried at amortized cost. (Level 2)

Loans Receivable - The fair value of one- to four-family mortgages and home equity loans are generally estimated using the present value of expected future cash flows, assuming future prepayments and using discount factors determined by prices obtained from securitization markets, less a discount for the cost of servicing and lack of liquidity. The estimated fair value of the Bank's multi-family, commercial, and consumer loans are based on the expected future cash flows assuming future prepayments and discount factors based on current offering rates. (Level 3)

FHLB stock - The carrying value and estimated fair value of FHLB stock equals cost, which is based on redemption at par value. (Level 1)

Deposits - The estimated fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The estimated fair value of these deposits at March 31, 2015 and September 30, 2014 was $2.23 billion and $2.12 billion, respectively. (Level 1) The fair value of certificates of deposit is estimated by discounting future cash flows using current London Interbank Offered Rates ("LIBOR"). The estimated fair value of certificates of deposit at March 31, 2015 and September 30, 2014 was $2.63 billion and $2.55 billion, respectively. (Level 2)

FHLB borrowings and Repurchase Agreements - The fair value of fixed-maturity borrowed funds is estimated by discounting estimated future cash flows using current offer rates. (Level 2) The carrying value of FHLB line of credit is considered to approximate its fair value due to the nature of the financial liability. (Level 1)
6. SUBSEQUENT EVENTS
In preparing these financial statements, management has evaluated events occurring subsequent to March 31, 2015, for potential recognition and disclosure. There have been no material events or transactions which would require adjustments to the consolidated financial statements at March 31, 2015.

25


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The Company and its wholly-owned subsidiary may, from time to time, make written or oral "forward-looking statements," including statements contained in documents filed or furnished by the Company with the SEC. These forward-looking statements may be included in this Quarterly Report on Form 10-Q, in the Company's reports to stockholders, in the Company's press releases, and in other communications by the Company, which are made in good faith by us pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

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

our ability to continue to maintain overhead costs at reasonable levels;
our ability to continue to originate and purchase a sufficient volume of one- to four-family loans in order to at least maintain the balance of that portfolio at a level desired by management;
our ability to invest funds in wholesale or secondary markets at favorable yields compared to the related funding source;
our ability to access cost-effective funding;
the future earnings and capital levels of the Bank and the continued non-objection by our primary federal banking regulators, to the extent required, to distribute capital from the Bank to the Company, which could affect the ability of the Company to pay dividends in accordance with its dividend policy;
fluctuations in deposit flows, loan demand, and/or real estate values, as well as unemployment levels, which may adversely affect our business;
the credit risks of lending and investing activities, including changes in the level and direction of loan delinquencies and charge-offs, changes in home values, and changes in estimates of the adequacy of the ACL;
results of examinations of the Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our ACL;
changes in accounting principles, policies, or guidelines;
the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations, including areas where we have purchased large amounts of correspondent loans;
the effects of, and changes in, trade, fiscal policies and laws, and monetary and interest rate policies of the Board of Governors of the Federal Reserve System ("FRB");
the effects of, and changes in, foreign and military policies of the United States government;
inflation, interest rate, market, monetary, and currency fluctuations;
the timely development and acceptance of our new products and services and the perceived overall value of these products and services by users, including the features, pricing, and quality compared to competitors' products and services;
the willingness of users to substitute competitors' products and services for our products and services;
our success in gaining regulatory approval of our products and services and branching locations, when required;
the impact of changes in financial services laws and regulations, including laws concerning taxes, banking, securities, consumer protection and insurance and the impact of other governmental initiatives affecting the financial services industry;
implementing business initiatives may be more difficult or expensive than anticipated;
significant litigation;
technological changes;
acquisitions and dispositions;
changes in consumer spending and saving habits; and
our success at managing the risks involved in our business.

This list of important factors is not all inclusive. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank.

As used in this Form 10-Q, unless the context indicates otherwise, "the Company," "we," "us," and "our" refer to Capitol Federal Financial, Inc. a Maryland corporation, and its consolidated subsidiaries. "Capitol Federal Savings," and "the Bank," refer to Capitol Federal Savings Bank, a federal savings bank and the wholly-owned subsidiary of Capitol Federal Financial, Inc.

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

26


analysis should be read in conjunction with Management's Discussion and Analysis included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2014, filed with the SEC.

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

We have been, and intend to continue to be, a community-oriented financial institution offering a variety of financial services to meet the needs of the communities we serve. We attract retail deposits from the general public and invest those funds primarily in permanent loans secured by first mortgages on owner-occupied, one- to four-family residences. We also originate consumer loans primarily secured by mortgages on one- to four-family residences, commercial and multi-family real estate loans, and construction loans secured by residential, multi-family, or commercial real estate. While our primary business is the origination of one- to four-family mortgage loans funded through retail deposits, we also purchase whole one- to four-family mortgage loans from correspondent and nationwide lenders, participate in loans with other lenders that are secured by multi-family or commercial real estate, and invest in certain investment securities and MBS using funding from deposits, FHLB borrowings, and repurchase agreements.

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

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

Economic conditions in the Bank's local market areas have a significant impact on the ability of borrowers to repay loans and the value of the collateral securing these loans. The industries in our market areas are very diversified, specifically in the Kansas City metropolitan statistical area which comprises the largest segment of our loan portfolio and deposit base. As of March 2015, the unemployment rate was 4.2% for Kansas and 5.6% for Missouri, compared to the national average of 5.5%, based on information from the Bureau of Labor Statistics. The Kansas City market area has an average household income of approximately $74 thousand per annum, based on 2014 estimates from the American Community Survey, which is a statistical survey by the U.S. Census Bureau. The average household income in our combined market areas is approximately $69 thousand per annum, with 90% of the population at or above the poverty level, also based on the 2014 estimates from the American Community Survey. The Federal Housing Finance Agency ("FHFA") price index for Kansas and Missouri has not experienced significant fluctuations during the past 10 years, unlike other market areas of the United States, which indicates relative stability in property values in our local market areas.

For the quarter ended March 31, 2015, the Company recognized net income of $19.2 million, compared to net income of $19.7 million for the quarter ended March 31, 2014. The $454 thousand, or 2.3%, decrease in net income was due primarily to a $1.0 million increase in total non-interest expense, mainly associated with our low income housing partnership investments, and a $450 thousand decrease in total non-interest income, partially offset by a $1.1 million increase in net interest income.

The net interest margin decreased 36 basis points, from 2.07% for the prior year quarter to 1.71% for the current quarter, primarily as a result of the daily leverage strategy. Excluding the effects of the daily leverage strategy, the net interest margin would have been 2.04% for the current quarter, or a three basis point decrease from the prior year quarter. This decrease was due primarily to a decrease in the weighted average yield on the loans receivable portfolio and to an increase in cash and cash equivalents held, in excess of the daily leverage strategy.
  
For the six month period ended March 31, 2015, the Company recognized net income of $39.7 million, compared to net income of $37.5 million for the six month period ended March 31, 2014. The $2.2 million, or 5.9%, increase in net income was due primarily to a $4.7 million increase in interest income, partially offset by a $1.4 million increase in total non-interest expense and a $786 thousand increase in income tax expense due mainly to an increase in pre-tax income.


27


The net interest margin decreased 29 basis points, from 2.02% for the prior year six month period, to 1.73% for the current six month period as a result of the daily leverage strategy. Excluding the effects of the daily leverage strategy, the net interest margin would have been 2.08% for the current six month period, or six basis points higher than the prior year six month period. This increase was primarily a result of a decrease in the cost of funds and an increase in the dividend rate received on FHLB stock between the two periods.

Net income attributable to the daily leverage strategy was $682 thousand and $1.5 million for the three and six months ended March 31, 2015, respectively. The daily leverage strategy, implemented during the fourth quarter of fiscal year 2014, involves borrowing up to $2.10 billion on the Bank's FHLB line of credit in two leverage tiers. The first tier of $800.0 million is intended to remain borrowed on the FHLB line of credit for an extended period of time, but will be paid off prior to the December and June quarter ends, only to be re-borrowed at the beginning of the subsequent quarter, to minimize regulatory fees. The second tier of $1.30 billion is borrowed at the beginning of each quarter and paid off prior to each quarter end. The proceeds of the borrowings, net of the required FHLB stock holdings, are deposited at the Federal Reserve Bank of Kansas City. The pre-tax yield of the daily leverage strategy, which is defined as the annualized pre-tax income resulting from the transaction as a percentage of the average interest-earning assets associated with the transaction, was 0.20% and 0.21% for the three and six months ended March 31, 2015, respectively.

Total assets were $10.02 billion at March 31, 2015 compared to $9.87 billion at September 30, 2014. The increase in total assets was primarily in cash and cash equivalents held in excess of the daily leverage strategy. Loans receivable, net, increased $132.2 million, or 2.1%, to $6.37 billion at March 31, 2015, from $6.23 billion at September 30, 2014. Cash flows from the securities portfolio largely funded the loan growth. During the current year six month period, the Bank originated and refinanced $307.7 million of loans with a weighted average rate of 3.62%, purchased $282.7 million of loans from correspondent lenders with a weighted average rate of 3.47%, and participated in $21.6 million of commercial real estate loans with a weighted average rate of 3.70%.

Total liabilities were $8.55 billion at March 31, 2015 compared to $8.37 billion at September 30, 2014. The $174.3 million increase was due primarily to a $182.0 million increase in the deposit portfolio. The increase in deposits was comprised of a $75.7 million increase in the certificate of deposit portfolio, a $69.8 million increase in the checking portfolio, a $20.8 million increase in the money market portfolio, and a $15.7 million increase in the savings portfolio.

Stockholders' equity was $1.48 billion at March 31, 2015 compared to $1.49 billion at September 30, 2014. The $16.2 million decrease between periods was due primarily to the payment of $57.3 million in dividends and the repurchase of $3.6 million of stock, partially offset by net income of $39.7 million and a $2.8 million increase in AOCI resulting from an increase in unrealized gains on AFS securities due to a decrease in market yields between periods.

Available Information
Financial and other Company information, including press releases, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports can be obtained free of charge from our investor relations website, http://ir.capfed.com. SEC filings are available on our website immediately after they are electronically filed with or furnished to the SEC, and are also available on the SEC's website at www.sec.gov.

Critical Accounting Policies
Our most critical accounting policies are the methodologies used to determine the ACL and fair value measurements. These policies are important to the presentation of our financial condition and results of operations, involve a high degree of complexity, and require management to make difficult and subjective judgments that may require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could cause reported results to differ materially. These critical accounting policies and their application are reviewed at least annually by the audit committee of our Board of Directors. For a full discussion of our critical accounting policies, see Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2014.


28


Financial Condition
The following table presents selected balance sheet information as of the dates presented.
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
2015
 
2014
 
2014
 
2014
 
2014
 
(Dollars in thousands)
Total assets
$
10,023,099

 
$
9,056,356

 
$
9,865,028

 
$
9,031,039

 
$
9,115,417

Cash and cash equivalents
1,021,150

 
208,642

 
810,840

 
88,424

 
114,835

AFS securities
842,856

 
777,329

 
840,790

 
857,372

 
895,623

HTM securities
1,425,383

 
1,472,914

 
1,552,699

 
1,637,043

 
1,720,283

Loans receivable, net
6,365,320

 
6,261,619

 
6,233,170

 
6,132,520

 
6,053,897

FHLB stock
154,951

 
121,306

 
213,054

 
112,876

 
125,829

Deposits
4,837,274

 
4,705,012

 
4,655,272

 
4,654,862

 
4,693,762

FHLB borrowings
3,371,970

 
2,570,946

 
3,369,677

 
2,468,420

 
2,467,169

Repurchase agreements
220,000

 
220,000

 
220,000

 
320,000

 
320,000

Stockholders' equity
1,476,656

 
1,465,929

 
1,492,882

 
1,498,907

 
1,530,005

Equity to total assets at end of period
14.7
%
 
16.2
%
 
15.1
%
 
16.6
%
 
16.8
%

Assets. Total assets were $10.02 billion at March 31, 2015 compared to $9.87 billion at September 30, 2014. Total assets were in excess of $10.0 billion at March 31, 2015 due primarily to an increase in cash and cash equivalents. Management does not currently anticipate being in excess of $10.0 billion in total assets in future quarters as the daily leverage tier strategy will be adjusted accordingly. Nor do we anticipate being subject to any additional regulatory requirements as a result of exceeding $10.0 billion in total assets at March 31, 2015, as we have not exceeded this regulatory threshold for four consecutive quarters. The increase in total assets was primarily in cash and cash equivalents held, in excess of the daily leverage strategy, due mainly to the balance of operating cash at September 30, 2014 being lower than the normal range, maintaining cash for increased loan closings and for brokered deposits maturing in late April and throughout the month of May, and from the redemption of $58.5 million of FHLB stock due to the removal of $1.30 billion from the FHLB line of credit in conjunction with the daily leverage strategy at March 31, 2015. A majority of the cash received from the redemption of the FHLB stock was used to acquire FHLB stock when the full daily leverage strategy was reinstated on April 1, 2015.

Loans Receivable. Loans receivable, net, increased $132.2 million, or 2.1%, to $6.37 billion at March 31, 2015, from $6.23 billion at September 30, 2014. The increase in the loan portfolio was primarily in the correspondent one- to four-family purchased loan portfolio.

Included in the loan portfolio at March 31, 2015 were $87.3 million, or 1.4% of the total loan portfolio, of adjustable-rate mortgage ("ARM") loans that were originated as interest-only. Of these interest-only loans, $73.6 million were purchased in bulk loan packages from nationwide lenders, primarily during fiscal year 2005.  The $73.6 million of bulk purchased interest-only ARM loans had a weighted average credit score of 723 and a weighted average LTV ratio of 69% at March 31, 2015. Interest-only ARM loans do not typically require principal payments during their initial term, and have initial interest-only terms of either 5 or 10 years.  At March 31, 2015, $38.5 million, or 44%, of the interest-only loans were still in their interest-only payment term. Included in the $38.5 million of interest-only loans were $26.4 million of bulk purchased interest-only ARM loans, all of which were scheduled to begin amortizing by September 30, 2015. At March 31, 2015, $4.2 million, or 15% of non-performing loans, were interest-only ARMs.

29


The following table presents the balance and weighted average rate of our loan portfolio as of the dates indicated. Within the one- to four-family loan portfolio at March 31, 2015, 65% of the loans had a balance at origination of less than $417 thousand.
 
March 31, 2015
 
September 30, 2014
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
One- to four-family
$
6,094,729

 
3.67
%
 
$
5,972,031

 
3.72
%
Multi-family and commercial
107,494

 
4.16

 
75,677

 
4.39

Construction:
 
 
 
 
 
 
 
One- to four-family
68,643

 
3.60

 
72,113

 
3.66

Multi-family and commercial
17,420

 
3.85

 
34,677

 
4.01

Total real estate loans
6,288,286

 
3.68

 
6,154,498

 
3.73

 
 
 
 
 
 
 
 
Consumer loans:
 
 
 
 
 
 
 
Home equity
126,146

 
5.09

 
130,484

 
5.14

Other
4,348

 
4.14

 
4,537

 
4.16

Total consumer loans
130,494

 
5.06

 
135,021

 
5.11

Total loans receivable
6,418,780

 
3.71

 
6,289,519

 
3.76

 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
Undisbursed loan funds
52,063

 
 
 
52,001

 
 
ACL
9,406

 
 
 
9,227

 
 
Discounts/unearned loan fees
23,670

 
 
 
23,687

 
 
Premiums/deferred costs
(31,679
)
 
 
 
(28,566
)
 
 
Total loans receivable, net
$
6,365,320

 
 
 
$
6,233,170

 
 

The following table presents, for our portfolio of one- to four-family loans, the balance, percentage of total, weighted average credit score, weighted average LTV ratio, and the average balance per loan at the dates presented. Credit scores are updated at least semiannually, with the last update in March 2015, from a nationally recognized consumer rating agency. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. In most cases, the most recent appraisal was obtained at the time of origination.
 
March 31, 2015
 
September 30, 2014
 
 
 
% of
 
Credit
 
 
 
Average
 
 
 
% of
 
Credit
 
 
 
Average
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
(Dollars in thousands)
Originated
$
3,962,884

 
65.0
%
 
764

 
64
%
 
$
127

 
$
3,978,396

 
66.6
%
 
764

 
64
%
 
$
127

Correspondent purchased
1,608,074

 
26.4

 
764

 
68

 
335

 
1,431,745

 
24.0

 
764

 
68

 
332

Bulk purchased
523,771

 
8.6

 
751

 
66

 
308

 
561,890

 
9.4

 
749

 
67

 
311

 
$
6,094,729

 
100.0
%
 
763

 
65

 
162

 
$
5,972,031

 
100.0
%
 
763

 
65

 
159



The following tables summarize activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in undisbursed loan funds, ACL, discounts/unearned loan fees, and premiums/deferred costs. Loans that were paid-off as a result of refinances are included in repayments. Purchased loans include purchases from correspondent and nationwide lenders. There were no bulk loan purchases from nationwide lenders during the periods presented. Loan endorsements are not included in the activity in the following table because a new loan is not generated at the time of the endorsement. The endorsed balance and rate are included in the ending loan portfolio balance and rate. During the three and six months ended March 31, 2015, the Bank endorsed $70.2 million and $84.6 million of one- to four-family loans, respectively, reducing the average rate on those loans by 93 and 94 basis points, respectively.

30


 
For the Three Months Ended
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 
June 30, 2014
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Beginning balance
$
6,317,251

 
3.74
%
 
$
6,289,519

 
3.76
%
 
$
6,197,114

 
3.78
%
 
$
6,117,440

 
3.79
%
Originated and refinanced:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
131,532

 
3.49

 
101,270

 
3.74

 
116,296

 
3.88

 
98,668

 
4.11

Adjustable
36,053

 
3.63

 
38,878

 
3.75

 
47,025

 
3.67

 
48,106

 
3.75

Purchased and participations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
144,370

 
3.56

 
94,374

 
3.74

 
127,814

 
3.75

 
122,407

 
4.03

Adjustable
41,858

 
2.94

 
23,705

 
2.96

 
44,417

 
3.07

 
40,344

 
3.12

Repayments
(250,422
)
 
 
 
(228,940
)
 
 
 
(241,320
)
 
 
 
(228,911
)
 
 
Principal charge-offs, net
(166
)
 
 
 
(103
)
 
 
 
(282
)
 
 
 
(192
)
 
 
Other
(1,696
)
 
 
 
(1,452
)
 
 
 
(1,545
)
 
 
 
(748
)
 
 
Ending balance
$
6,418,780

 
3.71

 
$
6,317,251

 
3.74

 
$
6,289,519

 
3.76

 
$
6,197,114

 
3.78

 
For the Six Months Ended
 
March 31, 2015
 
March 31, 2014
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Beginning balance
$
6,289,519

 
3.76
%
 
$
6,011,799

 
3.82
%
Originations and refinances:
 
 
 
 
 
 
 
Fixed
232,802

 
3.60

 
172,750

 
4.01

Adjustable
74,931

 
3.69

 
84,063

 
3.76

Purchases and participations:
 
 
 
 
 
 
 
Fixed
238,744

 
3.63

 
160,328

 
4.00

Adjustable
65,563

 
2.94

 
78,473

 
3.31

Repayments
(479,362
)
 
 
 
(387,342
)
 
 
Principal charge-offs, net
(269
)
 
 
 
(530
)
 
 
Other
(3,148
)
 
 
 
(2,101
)
 
 
Ending balance
$
6,418,780

 
3.71

 
$
6,117,440

 
3.79


The Bank's pricing strategy for originated first mortgage loan products includes setting interest rates based on secondary market prices and local competitor pricing for our local lending markets, and secondary market prices and national competitor pricing for our correspondent lending markets. During the six months ended March 31, 2015, the average rate offered on the Bank's 30-year fixed-rate originated one- to four-family loans, with no points paid by the borrower, was approximately 170 basis points above the average 10-year Treasury rate, while the average rate offered on the Bank's 15-year fixed-rate originated one- to four-family loans was approximately 90 basis points above the average 10-year Treasury rate.

31


The following tables present loan origination, refinance, and purchase activity for the periods indicated, excluding endorsement activity, along with associated weighted average rates and percent of total. Loan originations, purchases and refinances are reported together. The fixed-rate one- to four-family loans less than or equal to 15 years have an original maturity at origination of less than or equal to 15 years, while fixed-rate one- to four-family loans greater than 15 years have an original maturity at origination of greater than 15 years. The adjustable-rate one- to four-family loans less than or equal to 36 months have a term to first reset of less than or equal to 36 months at origination and adjustable-rate one- to four-family loans greater than 36 months have a term to first reset of greater than 36 months at origination. Of the $270.8 million of one- to four-family loans originated and refinanced during the current year six month period, 73% had loan values of $417 thousand or less. Of the $282.7 million of one- to four-family correspondent loans purchased during the current year six month period, 30% had loan values of $417 thousand or less.
 
For the Three Months Ended
 
March 31, 2015
 
March 31, 2014
 
Amount
 
Rate
 
% of Total
 
Amount
 
Rate
 
% of Total
 
(Dollars in thousands)
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 15 years
$
87,435

 
2.96
%
 
24.7
%
 
$
35,695

 
3.39
%
 
17.7
%
> 15 years
181,668

 
3.79

 
51.3

 
89,806

 
4.28

 
44.6

Multi-family and commercial real estate
5,900

 
3.45

 
1.7

 
3,600

 
4.13

 
1.8

Home equity
659

 
6.08

 
0.2

 
444

 
6.17

 
0.2

Other
240

 
7.34

 
0.1

 
169

 
9.10

 
0.1

Total fixed-rate
275,902

 
3.53

 
78.0

 
129,714

 
4.04

 
64.4

 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 36 months
1,073

 
2.62

 
0.3

 
1,480

 
2.78

 
0.7

> 36 months
61,277

 
2.94

 
17.3

 
53,190

 
3.20

 
26.4

Multi-family and commercial real estate

 

 

 
2,595

 
4.75

 
1.3

Home equity
15,144

 
4.57

 
4.3

 
13,999

 
4.66

 
7.0

Other
417

 
2.99

 
0.1

 
458

 
3.26

 
0.2

Total adjustable-rate
77,911

 
3.26

 
22.0

 
71,722

 
3.54

 
35.6

 
 
 
 
 
 
 
 
 
 
 
 
Total originated, refinanced and purchased
$
353,813

 
3.47

 
100.0
%
 
$
201,436

 
3.86

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Purchased and participation loans included above:
 
 
 
 
 
 
 
 
 
 
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
$
138,470

 
3.57

 
 
 
$
65,793

 
4.00

 
 
Participations - commercial real estate
5,900

 
3.45

 
 
 

 

 
 
Total fixed-rate purchased/participations
144,370

 
3.56

 
 
 
65,793

 
4.00

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
41,858

 
2.94

 
 
 
30,337

 
3.14

 
 
Participations - commercial real estate

 

 
 
 
2,595

 
4.75

 
 
Total adjustable-rate purchased/participations
41,858

 
2.94

 
 
 
32,932

 
3.27

 
 
Total purchased/participation loans
$
186,228

 
3.42

 
 
 
$
98,725

 
3.75

 
 

32


 
For the Six Months Ended
 
March 31, 2015
 
March 31, 2014
 
Amount
 
Rate
 
% of Total
 
Amount
 
Rate
 
% of Total
 
(Dollars in thousands)
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 15 years
$
147,320

 
3.03
%
 
24.1
%
 
$
87,098

 
3.35
%
 
17.6
%
> 15 years
298,987

 
3.88

 
48.9

 
235,865

 
4.22

 
47.6

Multi-family and commercial real estate
23,250

 
3.69

 
3.8

 
8,600

 
4.05

 
1.7

Home equity
1,547

 
6.16

 
0.2

 
1,177

 
6.10

 
0.2

Other
442

 
7.68

 
0.1

 
338

 
10.09

 
0.1

Total fixed-rate
471,546

 
3.62

 
77.1

 
333,078

 
4.00

 
67.2

 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 36 months
2,440

 
2.63

 
0.4

 
3,510

 
2.77

 
0.7

> 36 months
104,807

 
2.97

 
17.1

 
111,162

 
3.14

 
22.4

Multi-family and commercial real estate

 

 

 
14,358

 
4.34

 
2.9

Home equity
32,405

 
4.60

 
5.3

 
32,738

 
4.65

 
6.6

Other
842

 
3.17

 
0.1

 
768

 
3.11

 
0.2

Total adjustable-rate
140,494

 
3.34

 
22.9

 
162,536

 
3.54

 
32.8

 
 
 
 
 
 
 
 
 
 
 
 
Total originated, refinanced and purchased
$
612,040

 
3.55

 
100.0
%
 
$
495,614

 
3.85

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Purchased and participation loans included above:
 
 
 
 
 
 
 
 
 
 
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
$
217,174

 
3.63

 
 
 
$
155,328

 
4.00

 
 
Participations - commercial real estate
21,570

 
3.70

 
 
 
5,000

 
4.00

 
 
Total fixed-rate purchased/participations
238,744

 
3.63

 
 
 
160,328

 
4.00

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
65,563

 
2.94

 
 
 
64,115

 
3.08

 
 
Participations - commercial real estate

 

 
 
 
14,358

 
4.34

 
 
Total adjustable-rate purchased/participations
65,563

 
2.94

 
 
 
78,473

 
3.31

 
 
Total purchased/participation loans
$
304,307

 
3.49

 
 
 
$
238,801

 
3.77

 
 

The following tables present originated, refinanced, and correspondent activity in our one- to four-family loan portfolio, excluding endorsement activity, along with associated weighted average LTVs and weighted average credit scores for the periods indicated.
 
For the Three Months Ended
 
March 31, 2015
 
March 31, 2014
 
 
 
 
 
Credit
 
 
 
 
 
Credit
 
Amount
 
LTV
 
Score
 
Amount
 
LTV
 
Score
 
(Dollars in thousands)
Originated
$
115,606

 
76
%
 
769

 
$
70,125

 
77
%
 
762

Refinanced by Bank customers
35,519

 
68

 
772

 
13,916

 
67

 
763

Correspondent purchased
180,328

 
73

 
764

 
96,130

 
74

 
762

 
$
331,453

 
74

 
767

 
$
180,171

 
75

 
762


33


 
For the Six Months Ended
 
March 31, 2015
 
March 31, 2014
 
 
 
 
 
Credit
 
 
 
 
 
Credit
 
Amount
 
LTV
 
Score
 
Amount
 
LTV
 
Score
 
(Dollars in thousands)
Originated
$
212,615

 
76
%
 
769

 
$
185,631

 
77
%
 
766

Refinanced by Bank customers
58,202

 
67

 
769

 
32,561

 
69

 
761

Correspondent purchased
282,737

 
74

 
765

 
219,443

 
74

 
761

 
$
553,554

 
74

 
767

 
$
437,635

 
75

 
763


The following table presents the amount, percent of total, and weighted average rate, by state, for one- to four-family loan originations and correspondent purchases where originations and purchases in the state exceeded five percent of the total amount originated and purchased during the six months ended March 31, 2015.
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
March 31, 2015
 
March 31, 2015
State
 
Amount
 
% of Total
 
Rate
 
Amount
 
% of Total
 
Rate
 
 
(Dollars in thousands)
Kansas
 
$
140,893

 
42.5
%
 
3.44
%
 
$
252,623

 
45.6
%
 
3.52
%
Missouri
 
79,527

 
24.0

 
3.35

 
134,630

 
24.3

 
3.44

Texas
 
54,797

 
16.5

 
3.35

 
79,567

 
14.4

 
3.39

Other states
 
56,236

 
17.0

 
3.51

 
86,734

 
15.7

 
3.50

 
 
$
331,453

 
100.0
%
 
3.41

 
$
553,554

 
100.0
%
 
3.48


The following table summarizes our one- to four-family loan origination, refinance, and correspondent purchase commitments as of March 31, 2015, along with associated weighted average rates. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a rate lock fee. A percentage of the commitments are expected to expire unfunded, so the amounts reflected in the table below are not necessarily indicative of future cash requirements.

 
Fixed-Rate
 
 
 
 
 
 
 
15 years
 
More than
 
Adjustable-
 
Total
 
or less
 
15 years
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Originate/refinance
$
20,035

 
$
58,747

 
$
18,349

 
$
97,131

 
3.46
%
Correspondent
13,397

 
50,811

 
14,835

 
79,043

 
3.60

 
$
33,432

 
$
109,558

 
$
33,184

 
$
176,174

 
3.52

 
 
 
 
 
 
 
 
 
 
Rate
2.97
%
 
3.84
%
 
3.02
%
 
 
 
 


34



Asset Quality. The Bank's traditional underwriting guidelines have provided the Bank with generally low delinquencies and low levels of non-performing assets compared to national levels. Of particular importance is the complete and full documentation required for each loan the Bank originates or purchases. One- to four-family owner occupied loans are underwritten according to the "ability to repay" and "qualified mortgage" standards, as issued by the CFPB, with total debt-to-income ratios not exceeding 43% of the borrower's verified income. This allows the Bank to make an informed credit decision based upon a thorough assessment of the borrower's ability to repay the loan. See additional discussion regarding underwriting standards in "Part I, Item 1. Business - Lending Practices and Underwriting Standards" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2014. In the following asset quality discussion, unless otherwise noted, correspondent purchased loans are included with originated loans and bulk purchased loans are reported as purchased loans.

Delinquent and non-performing loans and OREO - The following table presents the Company's 30 to 89 day delinquent loans at the dates indicated. Of the loans 30 to 89 days delinquent at March 31, 2015, 68% were 59 days or less delinquent.
 
Loans Delinquent for 30 to 89 Days at:
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
2015
 
2014
 
2014
 
2014
 
2014
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
128
 
$
13,097

 
164
 
$
16,638

 
138
 
$
13,074

 
130

 
$
14,435

 
119

 
$
13,139

Correspondent purchased
7
 
2,206

 
6
 
1,280

 
9
 
2,335

 
5

 
1,301

 
5

 
998

Bulk purchased
35
 
8,137

 
46
 
10,047

 
37
 
7,860

 
36

 
6,826

 
33

 
7,272

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
30
 
681

 
41
 
916

 
33
 
770

 
33

 
628

 
35

 
665

Other
9
 
36

 
14
 
29

 
18
 
69

 
11

 
40

 
14

 
52

 
209
 
$
24,157

 
271
 
$
28,910

 
235
 
$
24,108

 
215

 
$
23,230

 
206

 
$
22,126

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30 to 89 days delinquent loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
to total loans receivable, net
 
 
0.38
%
 
 
 
0.46
%
 
 
 
0.39
%
 
 
 
0.38
%
 
 
 
0.37
%

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

35


 
Non-Performing Loans and OREO at:
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
2015
 
2014
 
2014
 
2014
 
2014
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
Loans 90 or More Days Delinquent or in Foreclosure:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
79

 
$
8,047

 
75

 
$
7,762

 
82

 
$
7,880

 
83

 
$
8,130

 
95

 
$
9,508

Correspondent purchased
1

 
490

 
3

 
1,039

 
2

 
709

 
2

 
314

 
2

 
443

Bulk purchased
27

 
8,040

 
24

 
7,191

 
28

 
7,120

 
29

 
8,322

 
33

 
10,301

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
23

 
366

 
20

 
354

 
25

 
397

 
23

 
345

 
23

 
305

Other
6

 
19

 
5

 
28

 
4

 
13

 
6

 
24

 
4

 
8

 
136

 
16,962

 
127

 
16,374

 
141

 
16,119

 
143

 
17,135

 
157

 
20,565

Nonaccrual loans less than 90 Days Delinquent:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
80

 
9,709

 
89

 
9,636

 
67

 
7,473

 
66

 
8,379

 
66

 
7,111

Correspondent purchased
2

 
401

 
3

 
492

 
4

 
553

 
2

 
134

 
1

 
478

Bulk purchased
5

 
732

 
6

 
872

 
5

 
724

 
3

 
630

 
4

 
472

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
6

 
108

 
5

 
91

 
2

 
45

 
3

 
61

 
4

 
74

Other
3

 
11

 
3

 
12

 

 

 

 

 

 

 
96

 
10,961

 
106

 
11,103

 
78

 
8,795

 
74

 
9,204

 
75

 
8,135

Total non-performing loans
232

 
27,923

 
233

 
27,477

 
219

 
24,914

 
217

 
26,339

 
232

 
28,700

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-performing loans as a percentage of total loans(2)
0.44
%
 
 
 
0.44
%
 
 
 
0.40
%
 
 
 
0.43
%
 
 
 
0.47
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OREO:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated(3)
36

 
$
1,989

 
26

 
$
2,551

 
25

 
$
2,040

 
24

 
$
1,430

 
26

 
$
1,548

Correspondent purchased
1

 
216

 

 

 
1

 
179

 
1

 
179

 
4

 
403

Bulk purchased
5

 
1,162

 
5

 
685

 
2

 
575

 
2

 
369

 
4

 
398

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity

 

 

 

 

 

 

 

 
1

 
18

Other(4)
1

 
1,278

 
1

 
1,300

 
1

 
1,300

 
1

 
1,300

 
1

 
1,300

 
43

 
4,645

 
32

 
4,536

 
29

 
4,094

 
28

 
3,278

 
36

 
3,667

Total non-performing assets
275

 
$
32,568

 
265

 
$
32,013

 
248

 
$
29,008

 
245

 
$
29,617

 
268

 
$
32,367

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-performing assets as a percentage of total assets
0.32
%
 
 
 
0.35
%
 
 
 
0.29
%
 
 
 
0.33
%
 
 
 
0.36
%

36


(1)
Represents loans required to be reported as nonaccrual pursuant to regulatory reporting requirements even if the loans are current. At March 31, 2015, December 31, 2014, September 30, 2014, June 30, 2014 and March 31, 2014, this amount was comprised of $1.2 million, $2.7 million, $1.1 million, $2.5 million and $881 thousand, respectively, of loans that were 30 to 89 days delinquent and are reported as such, and $9.8 million, $8.4 million, $7.7 million, $6.7 million and $7.3 million, respectively, of loans that were current.
(2)
Excluding loans required to be reported as nonaccrual pursuant to regulatory reporting requirements even if the loans are current, non-performing loans as a percentage of total loans were 0.27%, 0.26%, 0.26%, 0.28% and 0.34%, at March 31, 2015, December 31, 2014, September 30, 2014, June 30, 2014 and March 31, 2014, respectively.
(3)
Real estate-related consumer loans where we also hold the first mortgage are included in the one- to four-family category as the underlying collateral is one- to four-family property.
(4)
Represents a single property the Bank purchased for a potential branch site but now intends to sell.

Of the $8.0 million of bulk purchased one- to four-family loans 90 or more days delinquent or in foreclosure as of March 31, 2015, 89% were originated in calendar year 2004 or 2005. Of the $8.0 million of originated one- to four-family loans 90 or more days delinquent or in foreclosure as of March 31, 2015, 75% of the loans were originated in calendar years 2003 to 2009.

Once a one- to four-family loan is generally 180 days delinquent, a new collateral value is obtained through an appraisal, less estimated selling costs and anticipated private mortgage insurance ("PMI") receipts. Any loss amounts identified as a result of this review are charged-off. At March 31, 2015, $10.9 million, or 66%, of the one- to four-family loans 90 or more days delinquent or in foreclosure had been individually evaluated for loss and any related losses have been charged-off.

The following table presents the top states where the properties securing our one- to four-family loans are located and the corresponding balance of loans 30 to 89 days delinquent, 90 or more days delinquent or in foreclosure, and weighted average LTV ratios for loans 90 or more days delinquent or in foreclosure at March 31, 2015. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. At March 31, 2015, potential losses, after taking into consideration anticipated PMI proceeds and estimated selling costs, have been charged-off.
 
 
 
 
 
 
Loans 30 to 89
 
Loans 90 or More Days Delinquent
 
 
One- to Four-Family
 
Days Delinquent
 
or in Foreclosure
State
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Amount
 
% of Total
 
LTV
 
 
(Dollars in thousands)
Kansas
 
$
3,701,940

 
60.8
%
 
$
10,892

 
46.5
%
 
$
7,142

 
43.1
%
 
71
%
Missouri
 
1,185,058

 
19.5

 
3,094

 
13.2

 
1,958

 
11.8

 
67

Texas
 
284,243

 
4.7

 
1,373

 
5.9

 
705

 
4.3

 
78

California
 
279,487

 
4.6

 

 

 

 

 
n/a

Tennessee
 
117,471

 
1.9

 
1,165

 
5.0

 

 

 
n/a

Alabama
 
87,085

 
1.4

 
434

 
1.8

 

 

 
n/a

Oklahoma
 
76,032

 
1.2

 
25

 
0.1

 
303

 
1.8

 
65

North Carolina
 
43,375

 
0.7

 

 

 

 

 
n/a

Colorado
 
31,203

 
0.5

 
163

 
0.7

 

 

 
n/a

Nebraska
 
30,489

 
0.5

 
1,222

 
5.2

 
452

 
2.7

 
68

Illinois
 
29,367

 
0.5

 
773

 
3.3

 
1,473

 
8.9

 
61

Georgia
 
20,374

 
0.3

 
361

 
1.5

 

 

 
n/a

Other states
 
208,605

 
3.4

 
3,938

 
16.8

 
4,544

 
27.4

 
72

 
 
$
6,094,729

 
100.0
%
 
$
23,440

 
100.0
%
 
$
16,577

 
100.0
%
 
70


TDRs - The following table presents the Company's TDRs, based on accrual status, at the dates indicated. At March 31, 2015, $26.1 million of TDRs were included in the ACL formula analysis model and $119 thousand of the ACL was related to these loans. The remaining $13.1 million of TDRs at March 31, 2015 were individually evaluated for loss and any potential losses have been charged-off.
 
At
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
2015
 
2014
 
2014
 
2014
 
2014
 
(Dollars in thousands)
Accruing TDRs
$
23,861

 
$
24,365

 
$
24,636

 
$
26,081

 
$
26,376

Nonaccrual TDRs(1)
15,337

 
15,912

 
13,370

 
13,987

 
15,061

Total TDRs
$
39,198

 
$
40,277

 
$
38,006

 
$
40,068

 
$
41,437


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

37


Allowance for credit losses and provision for credit losses - Management maintains an ACL to absorb inherent losses in the loan portfolio based on ongoing quarterly assessments of the loan portfolio. Our ACL methodology considers a number of factors including the trend and composition of delinquent loans, results of foreclosed property and short sale transactions, charge-off activity and trends, the current status and trends of local and national economies (particularly levels of unemployment), trends and current conditions in the real estate and housing markets, loan portfolio growth and concentrations, and certain ACL ratios such as ACL to loans receivable, net and annualized historical losses to ACL. See "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2014.

The ACL is maintained through provisions for credit losses which are either charged to or credited to income. The provision for credit losses is based upon the results of management's quarterly assessment of the ACL. During the six months ended March 31, 2015, the Company recorded a provision for credit losses of $448 thousand, which takes into account net charge-offs of $269 thousand during the period and loan growth.

The distribution of our ACL at the dates indicated is summarized below. Correspondent purchased one- to four-family loans are included with originated one- to four-family loans, and bulk purchased one- to four-family loans are reported as purchased one- to four-family loans.

 
At
 
March 31, 2015
 
September 30, 2014
 
 
 
% of ACL
 
 
 
% of
 
 
 
% of ACL
 
 
 
% of
 
Amount
 
to Total
 
Total
 
Loans to
 
Amount
 
to Total
 
Total
 
Loans to
 
of ACL
 
ACL
 
Loans
 
Total Loans
 
of ACL
 
ACL
 
Loans
 
Total Loans
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
$
6,678

 
71.0
%
 
$
5,570,958

 
86.8
%
 
$
6,228

 
67.5
%
 
$
5,410,140

 
86.0
%
Purchased
1,858

 
19.8

 
523,771

 
8.2

 
2,323

 
25.2

 
561,890

 
8.9

Multi-family and commercial
507

 
5.3

 
107,494

 
1.7

 
312

 
3.4

 
75,677

 
1.2

Construction
54

 
0.6

 
86,063

 
1.3

 
123

 
1.3

 
106,791

 
1.7

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
232

 
2.5

 
126,146

 
1.9

 
211

 
2.3

 
130,484

 
2.1

Other consumer
77

 
0.8

 
4,348

 
0.1

 
30

 
0.3

 
4,537

 
0.1

 
$
9,406

 
100.0
%
 
$
6,418,780

 
100.0
%
 
$
9,227

 
100.0
%
 
$
6,289,519

 
100.0
%

38


The following tables present ACL activity and selected ACL ratios for the periods presented. See "Note 4 - Loans Receivable and Allowance for Credit Losses" for additional information related to ACL activity by loan segment.
 
For the Three Months Ended
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 
June 30, 2014
 
March 31, 2014
 
(Dollars in thousands)
ACL beginning balance
$
9,297

 
$
9,227

 
$
9,082

 
$
8,967

 
$
8,919

Charge-offs
(189
)
 
(206
)
 
(288
)
 
(308
)
 
(121
)
Recoveries
23

 
103

 
6

 
116

 
9

Provision for credit losses
275

 
173

 
427

 
307

 
160

ACL ending balance
$
9,406

 
$
9,297

 
$
9,227

 
$
9,082

 
$
8,967

 
 
 
 
 
 
 
 
 
 
ACL to loans receivable, net at end of period
0.15
%
 
0.15
%
 
0.15
%
 
0.15
%
 
0.15
%
ACL to non-performing loans at end of period
33.69

 
33.84

 
37.04

 
34.48

 
31.24

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

 

 

 

 

Ratio of net charge-offs during the period
 
 
 
 
 
 
 
 
 
to average non-performing assets
0.51

 
0.34

 
0.97

 
0.62

 
0.35

ACL to net charge-offs (annualized)
14.2x

 
22.6x

 
8.2x

 
11.8x

 
20.0x


 
For the Six Months Ended
 
March 31, 2015
 
March 31, 2014
 
(Dollars in thousands)
ACL beginning balance
$
9,227

 
$
8,822

Charge-offs
(395
)
 
(546
)
Recoveries
126

 
16

Provision for credit losses
448

 
675

ACL ending balance
$
9,406

 
$
8,967

 
 
 
 
Ratio of net charge-offs during the period to
 
 
 
average loans outstanding during the period
%
 
0.01
%
Ratio of net charge-offs during the period to
 
 
 
average non-performing assets during the period
0.87

 
1.69

ACL to net charge-offs (annualized)
17.5x

 
8.5x



39


Securities. The following table presents the distribution of our MBS and investment securities portfolios, at amortized cost, at the dates indicated. Overall, fixed-rate securities comprised 79% of these portfolios at March 31, 2015. The weighted average life ("WAL") is the estimated remaining principal repayment term (in years) after three-month historical prepayment speeds and projected call option assumptions have been applied. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Fixed-rate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MBS
$
1,173,186

 
2.32
%
 
3.6

 
$
1,212,911

 
2.35
%
 
3.7

 
$
1,279,990

 
2.35
%
 
3.7

GSE debentures
579,731

 
1.12

 
2.0

 
504,802

 
1.11

 
2.8

 
554,811

 
1.06

 
2.9

Municipal bonds
37,828

 
1.96

 
3.1

 
35,534

 
2.11

 
2.8

 
38,874

 
2.29

 
2.8

Total fixed-rate securities
1,790,745

 
1.93

 
3.1

 
1,753,247

 
1.99

 
3.4

 
1,873,675

 
1.97

 
3.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MBS
459,489

 
2.25

 
5.9

 
482,040

 
2.26

 
6.6

 
506,089

 
2.24

 
5.4

Trust preferred securities
2,346

 
1.53

 
22.2

 
2,477

 
1.50

 
22.5

 
2,493

 
1.49

 
22.7

Total adjustable-rate securities
461,835

 
2.24

 
6.0

 
484,517

 
2.26

 
6.7

 
508,582

 
2.24

 
5.5

Total securities portfolio
$
2,252,580

 
1.99

 
3.7

 
$
2,237,764

 
2.04

 
4.1

 
$
2,382,257

 
2.02

 
3.9


The following table presents the carrying value of MBS in our portfolio by issuer at the dates presented.
 
March 31, 2015
 
September 30, 2014
 
(Dollars in thousands)
Federal National Mortgage Association ("FNMA")
$
978,280

 
$
1,052,464

Federal Home Loan Mortgage Corporation ("FHLMC")
535,660

 
598,153

Government National Mortgage Association
134,106

 
151,930

 
$
1,648,046

 
$
1,802,547


40


Mortgage-Backed Securities - The balance of MBS, which primarily consists of securities of U.S. GSEs, decreased $154.5 million from $1.80 billion at September 30, 2014 to $1.65 billion at March 31, 2015. The following tables provide a summary of the activity in our portfolio of MBS for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yield for the ending balances are as of the last day of the period presented and are generally derived from recent prepayment activity on the securities in the portfolio as of the dates presented. The beginning and ending WAL is the estimated remaining principal repayment term (in years) after three-month historical prepayment speeds have been applied. Fixed-rate MBS purchased during the current fiscal year were generally comprised of loans with contractual terms-to-maturity of 15 years or less to help mitigate exposure to rising interest rates.

 
For the Three Months Ended
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 
June 30, 2014
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Beginning balance - carrying value
$
1,711,231

 
2.32
%
 
4.5

 
$
1,802,547

 
2.32
%
 
4.2

 
$
1,904,010

 
2.32
%
 
4.4

 
$
2,005,138

 
2.37
%
 
4.7

Maturities and repayments
(86,156
)
 
 
 
 
 
(89,795
)
 
 
 
 
 
(100,521
)
 
 
 
 
 
(99,000
)
 
 
 
 
Net amortization of (premiums)/discounts
(1,258
)
 
 
 
 
 
(1,332
)
 
 
 
 
 
(1,464
)
 
 
 
 
 
(1,542
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
25,137

 
1.53

 
3.8

 

 

 

 

 

 

 

 

 

Change in valuation on AFS securities
(908
)
 
 
 
 
 
(189
)
 
 
 
 
 
522

 
 
 
 
 
(586
)
 
 
 
 
Ending balance - carrying value
$
1,648,046

 
2.30

 
4.3

 
$
1,711,231

 
2.32

 
4.5

 
$
1,802,547

 
2.32

 
4.2

 
$
1,904,010

 
2.32

 
4.4


 
For the Six Months Ended
 
March 31, 2015
 
March 31, 2014
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Beginning balance - carrying value
$
1,802,547

 
2.32
%
 
4.2

 
$
2,047,708

 
2.40
%
 
3.9

Maturities and repayments
(175,951
)
 
 
 
 
 
(188,473
)
 
 
 
 
Net amortization of (premiums)/discounts
(2,590
)
 
 
 
 
 
(2,668
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
Fixed
25,137

 
1.53

 
3.8

 
129,002

 
1.73

 
3.8

Adjustable

 

 

 
21,737

 
1.92

 
5.2

Change in valuation on AFS securities
(1,097
)
 
 
 
 
 
(2,168
)
 
 
 
 
Ending balance - carrying value
$
1,648,046

 
2.30

 
4.3

 
$
2,005,138

 
2.37

 
4.7


41


Investment Securities - Investment securities, which consist of U.S. GSE debentures (primarily issued by FNMA, FHLMC, or Federal Home Loan Banks) and municipal investments, increased $29.3 million, from $590.9 million at September 30, 2014 to $620.2 million at March 31, 2015. The following tables provide a summary of the activity of investment securities for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yields for the ending balances are as of the last day of the period presented. The increase in the weighted average yield between September 30, 2014 and March 31, 2015 was due primarily to lower rate securities being called during the period. The beginning and ending WALs represent the estimated remaining principal repayment terms (in years) of the securities after projected call dates have been considered, based upon market rates at each date presented.
 
For the Three Months Ended
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 
June 30, 2014
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Beginning balance - carrying value
$
539,012

 
1.18
%
 
2.9

 
$
590,942

 
1.15
%
 
3.0

 
$
590,405

 
1.15
%
 
3.4

 
$
610,768

 
1.13
%
 
3.5

Maturities and calls
(28,051
)
 
 
 
 
 
(54,081
)
 
 
 
 
 
(3,374
)
 
 
 
 
 
(28,610
)
 
 
 
 
Net amortization of (premiums)/discounts
(68
)
 
 
 
 
 
(95
)
 
 
 
 
 
(87
)
 
 
 
 
 
(94
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
105,212

 
1.16

 
1.7

 
810

 
1.22

 
5.0

 
4,702

 
1.57

 
5.2

 
4,421

 
1.53

 
6.3

Change in valuation on AFS securities
4,088

 
 
 
 
 
1,436

 
 
 
 
 
(704
)
 
 
 
 
 
3,920

 
 
 
 
Ending balance - carrying value
$
620,193

 
1.18

 
2.2

 
$
539,012

 
1.18

 
2.9

 
$
590,942

 
1.15

 
3.0

 
$
590,405

 
1.15

 
3.4


 
For the Six Months Ended
 
March 31, 2015
 
March 31, 2014
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Beginning balance - carrying value
$
590,942

 
1.15
%
 
3.0

 
$
740,282

 
1.14
%
 
2.9

Maturities and calls
(82,132
)
 
 
 
 
 
(257,665
)
 
 
 
 
Net amortization of (premiums)/discounts
(163
)
 
 
 
 
 
(198
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
Fixed
106,022

 
1.16

 
1.7

 
129,785

 
1.00

 
2.6

Change in valuation on AFS securities
5,524

 
 
 
 
 
(1,436
)
 
 
 
 
Ending balance - carrying value
$
620,193

 
1.18

 
2.2

 
$
610,768

 
1.13

 
3.5



42


Liabilities. Total liabilities were $8.55 billion at March 31, 2015 compared to $8.37 billion at September 30, 2014. The $174.3 million increase was due primarily to a $182.0 million increase in the deposit portfolio.

Deposits - Deposits were $4.84 billion at March 31, 2015 compared to $4.66 billion at September 30, 2014. The $182.0 million increase was due to a $75.7 million increase in the certificate of deposit portfolio, a $69.8 million increase in the checking portfolio, a $20.8 million increase in the money market portfolio, and a $15.7 million increase in the savings portfolio. We continue to be competitive on deposit rates and, in some cases, our offer rates for certificates of deposit have been higher than peers. If interest rates were to rise, it is possible that our customers may move the funds from their checking, savings, and money market accounts to higher yielding deposit products within the Bank or withdraw their funds from these accounts, including certificates of deposit, to invest in higher yielding investments outside of the Bank.

The following table presents the amount, weighted average rate and percentage of total for the components of our deposit portfolio at the dates presented.
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 
 
 
 
 
% of
 
 
 
 
 
% of
 
 
 
 
 
% of
 
Amount
 
Rate
 
 Total
 
Amount
 
Rate
 
 Total
 
Amount
 
Rate
 
 Total
 
(Dollars in thousands)
Noninterest-bearing checking
$
187,139

 
%
 
3.9
%
 
$
174,744

 
%
 
3.7
%
 
$
167,045

 
%
 
3.6
%
Interest-bearing checking
573,632

 
0.05

 
11.9

 
557,895

 
0.05

 
11.8

 
523,959

 
0.05

 
11.2

Savings
311,878

 
0.14

 
6.4

 
299,100

 
0.15

 
6.4

 
296,187

 
0.15

 
6.4

Money market
1,156,764

 
0.23

 
23.9

 
1,151,297

 
0.23

 
24.5

 
1,135,915

 
0.23

 
24.4

Retail certificates of deposit
2,279,154

 
1.26

 
47.1

 
2,222,391

 
1.24

 
47.2

 
2,231,737

 
1.22

 
47.9

Public units/brokered deposits
328,707

 
0.65

 
6.8

 
299,585

 
0.66

 
6.4

 
300,429

 
0.63

 
6.5

 
$
4,837,274

 
0.71

 
100.0
%
 
$
4,705,012

 
0.70

 
100.0
%
 
$
4,655,272

 
0.70

 
100.0
%

Brokered deposits totaled $41.9 million at both March 31, 2015 and September 30, 2014. The brokered deposits at March 31, 2015 had a weighted average rate of 2.93% and a remaining term to maturity of one month. The Bank monitors the cost of brokered deposits and considers them as a potential source of funding, provided that investment opportunities are balanced with the funding cost. At March 31, 2015, public unit deposits were $286.9 million, compared to $258.6 million at September 30, 2014, and had a weighted average rate of 0.31% and an average remaining term to maturity of eight months. Management will continue to monitor the wholesale deposit market for attractive opportunities relative to the use of proceeds.

The following tables set forth scheduled maturity information for our certificates of deposit, along with associated weighted average rates, at March 31, 2015.
 
 
Amount Due
 
 
 
 
 
 
More than
 
More than
 
 
 
 
 
 
 
 
1 year
 
1 year to
 
2 years to 3
 
More than
 
Total
 
 
Rate range
 
or less
 
2 years
 
years
 
3 years
 
Amount
 
Rate
 
 
(Dollars in thousands)
 
 
0.00 – 0.99%
 
$
812,136

 
$
204,277

 
$
26,121

 
$

 
$
1,042,534

 
0.52
%
1.00 – 1.99%
 
168,490

 
317,542

 
485,785

 
379,148

 
1,350,965

 
1.47

2.00 – 2.99%
 
178,663

 
15,833

 
78

 
1,799

 
196,373

 
2.56

3.00 – 3.99%
 
17,287

 
186

 
249

 

 
17,722

 
3.03

4.00 – 4.99%
 
267

 

 

 

 
267

 
4.40

 
 
$
1,176,843

 
$
537,838

 
$
512,233

 
$
380,947

 
$
2,607,861

 
1.18

 
 
 
 
 
 
 
 
 
 
 
 
 
Percent of total
 
45.1
%
 
20.6
%
 
19.7
%
 
14.6
%
 
 
 
 
Weighted average rate
 
0.93

 
1.17

 
1.42

 
1.66

 
 
 
 
Weighted average maturity (in years)
 
0.4

 
1.4

 
2.5

 
3.9

 
1.5

 
 
Weighted average maturity for the retail certificate of deposit portfolio (in years)
 
 
 
1.7

 
 


43


 
Amount Due
 
 
 
 
 
Over
 
Over
 
 
 
 
 
3 months
 
3 to 6
 
6 to 12
 
Over
 
 
 
or less
 
months
 
months
 
12 months
 
Total
 
(Dollars in thousands)
Retail certificates of deposit less than $100,000
$
191,993

 
$
179,987

 
$
283,938

 
$
848,028

 
$
1,503,946

Retail certificates of deposit of $100,000 or more
77,188

 
83,010

 
108,260

 
506,750

 
775,208

Brokered deposits less than $100,000
41,854

 

 

 

 
41,854

Public unit deposits of $100,000 or more
122,730

 
56,277

 
31,606

 
76,240

 
286,853

 
$
433,765

 
$
319,274

 
$
423,804

 
$
1,431,018

 
$
2,607,861


44


Borrowings - The following tables present term borrowing activity for the periods shown, which includes FHLB advances, at par, and repurchase agreements. Line of credit activity is excluded from the following tables. At March 31, 2015, the Bank had $800.0 million outstanding on the FHLB line of credit, at a rate of 0.25%, in conjunction with the daily leverage strategy. The weighted average effective rate includes the net impact of the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid and deferred gains related to interest rate swaps previously terminated. Rates on new borrowings are fixed-rate. The weighted average maturity ("WAM") is the remaining weighted average contractual term in years. The beginning and ending WAMs represent the remaining maturity at each date presented. For new borrowings, the WAMs presented are as of the date of issue.
 
For the Three Months Ended
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 
June 30, 2014
 
 
 
Effective
 
 
 
 
 
Effective
 
 
 
 
 
Effective
 
 
 
 
 
Effective
 
 
 
Amount
 
Rate
 
WAM
 
Amount
 
Rate
 
WAM
 
Amount
 
Rate
 
WAM
 
Amount
 
Rate
 
WAM
 
(Dollars in thousands)
Beginning balance
$
2,795,000

 
2.55
%
 
3.0

 
$
2,795,000

 
2.45
%
 
2.8

 
$
2,795,000

 
2.53
%
 
2.9

 
$
2,795,000

 
2.54
%
 
2.9

Maturities and prepayments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FHLB advances
(250,000
)
 
2.48

 
 
 
(250,000
)
 
0.84

 
 
 

 

 
 
 
(100,000
)
 
2.80

 
 
Repurchase agreements

 

 
 
 

 

 
 
 
(100,000
)
 
4.20

 
 
 

 

 
 
New borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FHLB advances
250,000

 
2.06

 
6.4

 
250,000

 
1.99

 
5.2

 
100,000

 
1.96

 
5.0

 
100,000

 
2.45

 
7.0

Ending balance
$
2,795,000

 
2.51

 
3.3

 
$
2,795,000

 
2.55

 
3.0

 
$
2,795,000

 
2.45

 
2.8

 
$
2,795,000

 
2.53

 
2.9


 
For the Six Months Ended
 
March 31, 2015
 
March 31, 2014
 
 
 
Effective
 
 
 
 
 
Effective
 
 
 
Amount
 
Rate
 
WAM
 
Amount
 
Rate
 
WAM
 
(Dollars in thousands)
Beginning balance
$
2,795,000

 
2.45
%
 
2.8

 
$
2,845,000

 
2.75
%
 
2.6

Maturities and prepayments:
 
 
 
 
 
 
 
 
 
 
FHLB advances
(500,000
)
 
1.66

 
 
 
(350,000
)
 
4.22

 
 
New borrowings:
 
 
 
 
 
 
 
 
 
 
 
FHLB advances
500,000

 
2.03

 
5.8

 
300,000

 
2.46

 
6.5

Ending balance
$
2,795,000

 
2.51

 
3.3

 
$
2,795,000

 
2.54

 
2.9


45


Maturities - The following table presents the maturity of FHLB advances, at par, and repurchase agreements, along with associated weighted average contractual and effective rates as of March 31, 2015. At March 31, 2015, the Bank had $800.0 million outstanding on the FHLB line of credit, at a rate of 0.25%, in conjunction with the daily leverage strategy, that is not included in the following table.
 
 
FHLB
 
Repurchase
 
 
 
 
 
 
Maturity by
 
Advances
 
Agreements
 
Total
 
Contractual
 
Effective
Fiscal year
 
Amount
 
Amount
 
Amount
 
Rate
 
Rate(1)
 
 
(Dollars in thousands)
 
 
 
 
2015
 
$
100,000

 
$
20,000

 
$
120,000

 
3.13
%
 
3.25
%
2016
 
575,000

 

 
575,000

 
2.29

 
2.91

2017
 
500,000

 

 
500,000

 
2.69

 
2.72

2018
 
200,000

 
100,000

 
300,000

 
2.90

 
2.90

2019
 
300,000

 

 
300,000

 
1.68

 
1.68

2020
 
250,000

 
100,000

 
350,000

 
2.18

 
2.18

2021
 
550,000

 

 
550,000

 
2.27

 
2.27

2022
 
100,000

 

 
100,000

 
2.21

 
2.21

 
 
$
2,575,000

 
$
220,000

 
$
2,795,000

 
2.38

 
2.51


(1)
The effective rate includes the net impact of the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid and deferred gains related to interest rate swaps previously terminated.

The following table presents the maturity and weighted average repricing rate, which is also the weighted average effective rate, of certificates of deposit, split between retail and public unit/brokered deposit amounts, and term borrowings for the next four quarters as of March 31, 2015.
 
 
 
 
 
 
Public Unit/
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
 
 
Brokered
 
 
 
Term
 
 
 
 
 
 
Maturity by
 
Certificate
 
Repricing
 
Deposit
 
Repricing
 
Borrowings
 
Repricing
 
 
 
Repricing
Quarter End
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
Total
 
Rate
 
 
(Dollars in thousands)
June 30, 2015
 
$
269,181

 
1.08
%
 
$
164,584

 
0.85
%
 
$
100,000

 
3.01
%
 
$
533,765

 
1.37
%
September 30, 2015
 
262,997

 
1.21

 
56,277

 
0.18

 
20,000

 
4.45

 
339,274

 
1.23

December 31, 2015
 
179,072

 
0.77

 
25,103

 
0.34

 
200,000

 
1.94

 
404,175

 
1.32

March 31, 2016
 
213,126

 
0.89

 
6,503

 
0.30

 
175,000

 
5.08

 
394,629

 
2.74

 
 
$
924,376

 
1.01

 
$
252,467

 
0.64

 
$
495,000

 
3.37

 
$
1,671,843

 
1.65



46


Stockholders' Equity. Stockholders' equity was $1.48 billion at March 31, 2015 compared to $1.49 billion at September 30, 2014. The $16.2 million decrease was due primarily to the payment of $57.3 million in dividends and the repurchase of $3.6 million of stock, partially offset by net income of $39.7 million and a $2.8 million increase in AOCI resulting from an increase in unrealized gains on AFS securities due to a decrease in market yields between periods. The $57.3 million in dividends paid during the current six month period consisted of a $0.26 per share, or $35.5 million, true-up dividend related to fiscal year 2014 earnings per the Company's dividend policy, and two regular quarterly dividends totaling $0.16 per share, or $21.8 million. On April 17, 2015, the Company declared a regular quarterly cash dividend of $0.085 per share, or approximately $11.6 million, payable on May 15, 2015 to stockholders of record as of the close of business on May 1, 2015.

At March 31, 2015, Capitol Federal Financial, Inc., at the holding company level, had $118.7 million on deposit at the Bank. For fiscal year 2015, it is the intent of the Board of Directors and management to continue with the payout of 100% of the Company's earnings to its stockholders. Dividend payments depend upon a number of factors including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company.

The following table presents regular quarterly dividends and special dividends paid in calendar years 2015, 2014, and 2013. The amounts represent cash dividends paid during each period. For the quarter ending June 30, 2015, the amount presented does not represent the actual dividend payout, but rather management's estimate of the dividend announced on April 17, 2015.
 
Calendar Year
 
2015
 
2014
 
2013
 
Amount
 
Per Share
 
Amount
 
Per Share
 
Amount
 
Per Share
 
(Dollars in thousands, except per share amounts)
Regular quarterly dividends paid
 
 
 
 
 
 
 
 
 
 
 
Quarter ended March 31
$
11,592

 
$
0.085

 
$
10,513

 
$
0.075

 
$
11,023

 
$
0.075

Quarter ended June 30
11,587

 
0.085

 
10,399

 
0.075

 
10,796

 
0.075

Quarter ended September 30

 

 
10,318

 
0.075

 
10,703

 
0.075

Quarter ended December 31

 

 
10,226

 
0.075

 
10,754

 
0.075

True-up dividends paid

 

 
35,450

 
0.260

 
25,815

 
0.180

True Blue dividends paid

 

 
34,663

 
0.250

 
35,710

 
0.250

Calendar year-to-date dividends paid
$
23,179

 
$
0.170

 
$
111,569

 
$
0.810

 
$
104,801

 
$
0.730


The Company's current stock repurchase plan, which does not have an expiration date, is for $175.0 million of common stock, of which $42.8 million remained available as of April 29, 2015. The Company did not repurchase any shares during the current quarter but did repurchase $3.6 million during the December 31, 2014 quarter. Through April 29, 2015, the Company had repurchased 11,075,854 shares at an average price of $11.94 per share, or $132.2 million.

47


Operating Results
The following table presents selected income statement and other information for the quarters indicated.
 
For the Three Months Ended
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
2015
 
2014
 
2014
 
2014
 
2014
 
(Dollars in thousands, except per share data)
Interest and dividend income:
 
 
 
 
 
 
 
 
 
Loans receivable
$
58,198

 
$
58,619

 
$
58,405

 
$
57,474

 
$
57,117

MBS
9,537

 
10,001

 
10,535

 
11,206

 
11,597

Investment securities
1,673

 
1,675

 
1,711

 
1,739

 
1,869

FHLB stock
3,076

 
3,181

 
2,678

 
1,452

 
1,229

Cash and cash equivalents
1,393

 
1,424

 
905

 
50

 
45

Total interest and dividend income
73,877

 
74,900

 
74,234

 
71,921

 
71,857

 
 
 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
 
 
 
FHLB borrowings
17,198

 
16,988

 
16,217

 
14,826

 
15,311

Deposits
8,207

 
8,145

 
8,081

 
8,124

 
8,076

Repurchase agreements
1,693

 
1,731

 
1,963

 
2,773

 
2,743

Total interest expense
27,098

 
26,864

 
26,261

 
25,723

 
26,130

 
 
 
 
 
 
 
 
 
 
Net interest income
46,779

 
48,036

 
47,973

 
46,198

 
45,727

 
 
 
 
 
 
 
 
 
 
Provision for credit losses
275

 
173

 
427

 
307

 
160

 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
 
 
 
 
 
 
 
(after provision for credit losses)
46,504

 
47,863

 
47,546

 
45,891

 
45,567

 
 
 
 
 
 
 
 
 
 
Non-interest income
5,277

 
5,257

 
6,109

 
5,619

 
5,727

Non-interest expense
22,859

 
23,142

 
23,542

 
22,380

 
21,828

Income tax expense
9,688

 
9,506

 
9,903

 
9,147

 
9,778

Net income
$
19,234

 
$
20,472

 
$
20,210

 
$
19,983

 
$
19,688

 
 
 
 
 
 
 
 
 
 
Efficiency ratio
43.91
%
 
43.42
%
 
43.53
%
 
43.19
%
 
42.42
%
 
 
 
 
 
 
 
 
 
 
Basic EPS
$
0.14

 
$
0.15

 
$
0.15

 
$
0.14

 
$
0.14

Diluted EPS
0.14

 
0.15

 
0.15

 
0.14

 
0.14



48


Comparison of Operating Results for the Six Months Ended March 31, 2015 and 2014

For the six month period ended March 31, 2015, the Company recognized net income of $39.7 million, compared to net income of $37.5 million for the six month period ended March 31, 2014. The $2.2 million, or 5.9%, increase in net income was due primarily to a $4.7 million increase in interest income, partially offset by a $1.4 million increase in total non-interest expense and a $786 thousand increase in income tax expense due mainly to an increase in pre-tax income.

The net interest margin decreased 29 basis points, from 2.02% for the prior year six month period, to 1.73% for the current six month period as a result of the daily leverage strategy. Excluding the effects of the daily leverage strategy, the net interest margin would have been 2.08% for the current six month period, or six basis points higher than the prior year six month period. This increase was primarily a result of a decrease in the cost of funds and an increase in the dividend rate received on FHLB stock between the two periods. The positive impact on the net interest margin resulting from the shift in the mix of interest-earning assets from relatively lower yielding securities to higher yield loans was mostly offset by a decrease in market interest rates.

Interest and Dividend Income
The weighted average yield on total interest-earning assets decreased 52 basis points, from 3.24% for the prior year six month period, to 2.72% for the current six month period, while the average balance of interest-earning assets increased $2.04 billion from the prior year six month period. The decrease in the weighted average yield and the increase in the average balance both were due primarily to the daily leverage strategy. Absent the impact of the daily leverage strategy, the weighted average yield on total interest-earnings assets would have decreased one basis point from the prior year six month period, to 3.23%, and the average balance would have decreased $32.4 million. The following table presents the components of interest and dividend income for the time periods presented along with the change measured in dollars and percent.
 
For the Six Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
116,817

 
$
114,065

 
$
2,752

 
2.4
 %
MBS
19,538

 
23,559

 
(4,021
)
 
(17.1
)
Investment securities
3,348

 
3,935

 
(587
)
 
(14.9
)
FHLB stock
6,257

 
2,425

 
3,832

 
158.0

Cash and cash equivalents
2,817

 
107

 
2,710

 
2,532.7

Total interest and dividend income
$
148,777

 
$
144,091

 
$
4,686

 
3.3


The increase in interest income on loans receivable was due to a $261.5 million increase in the average balance of the portfolio, partially offset by a decrease in the weighted average yield on the portfolio. The weighted average yield on the portfolio decreased seven basis points, from 3.79% for the prior year six month period, to 3.72% for the current six month period. The decrease in the weighted average yield was due primarily to downward repricing of adjustable-rate loans, as well as to repayments of higher-yielding loans.

The decrease in interest income on MBS and investment securities was due primarily to a decrease in the average balance of each portfolio as cash flows not reinvested in the portfolios were used largely to fund loan growth. The average balance of the MBS portfolio decreased $258.5 million and the average balance of the investment securities portfolio decreased $124.2 million between the two periods. Additionally, the weighted average yield on the MBS portfolio decreased 11 basis points, from 2.39% during the prior year six month period, to 2.28% for the current six month period. The decrease in the weighted average yield on the MBS portfolio was due primarily to repayments of MBS with yields greater than the weighted average yield on the existing portfolio, and to an increase in the impact of net premium amortization. Net premium amortization was $2.6 million during the current six month period, which decreased the weighted average yield on the portfolio by 31 basis points. During the prior year six month period, $2.7 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 27 basis points. At March 31, 2015, the net balance of premiums/(discounts) on our portfolio of MBS was $16.4 million.

The increase in dividends received on FHLB stock was due primarily to an $80.0 million increase in the average balance of the portfolio as a result of the daily leverage strategy, as well as an increase in the FHLB dividend rate between the two periods. The increase in interest income on cash and cash equivalents was due primarily to a $2.08 billion increase in the average balance resulting mainly from the daily leverage strategy.


49


Interest Expense
The weighted average rate paid on total interest-bearing liabilities decreased 33 basis points, from 1.46% for the prior year six month period, to 1.13% for the current six month period, while the average balance of interest-bearing liabilities increased $2.14 billion from the prior year six month period due primarily to the daily leverage strategy. Absent the impact of the daily leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have decreased nine basis points from the prior six month period, to 1.37%, due primarily to a decrease in the cost of term borrowings. The average balance of interest-bearing liabilities would have increased $73.1 million due to deposit growth. The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.
 
For the Six Months Ended
 
 
 
March 31,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB borrowings
$
34,186

 
$
32,174

 
$
2,012

 
6.3
 %
Deposits
16,352

 
16,399

 
(47
)
 
(0.3
)
Repurchase agreements
3,424

 
5,546

 
(2,122
)
 
(38.3
)
Total interest expense
$
53,962

 
$
54,119

 
$
(157
)
 
(0.3
)

The increase in interest expense on FHLB borrowings was due primarily to a $2.07 billion increase in the average balance on the FHLB line of credit as a result of the daily leverage strategy, partially offset by a 111 basis point decrease in the weighted average rate paid on the borrowings. The decrease in the weighted average rate paid on the FHLB borrowings portfolio was primarily a result of borrowings on the FHLB line of credit, at an average rate of 0.25% for the current six month period, in conjunction with the daily leverage strategy. Absent the impact of the daily leverage strategy, the average rate paid on FHLB borrowings would have decreased 12 basis points from the prior year six month period, to 2.46% for the current six month period, primarily as a result of renewals of advances to lower market rates during the prior fiscal year.

The decrease in interest expense on repurchase agreements was due to the maturity of a $100.0 million agreement at 4.20% between periods. The repurchase agreement was replaced with an FHLB advance, which was at a lower rate than the maturing repurchase agreement.
 
Provision for Credit Losses
The Bank recorded a provision for credit losses during the current six month period of $448 thousand compared to a provision for credit losses during the prior year six month period of $675 thousand. The $448 thousand provision for credit losses in the current six month period takes into account net charge-offs of $269 thousand and loan growth. See "Financial Condition - Asset Quality" for additional information related to ACL activity.

Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.
 
For the Six Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
$
7,254

 
$
7,264

 
$
(10
)
 
(0.1
)%
Insurance commissions
1,522

 
1,762

 
(240
)
 
(13.6
)
Loan fees
731

 
854

 
(123
)
 
(14.4
)
BOLI
568

 
668

 
(100
)
 
(15.0
)
Other non-interest income
459

 
679

 
(220
)
 
(32.4
)
Total non-interest income
$
10,534

 
$
11,227

 
$
(693
)
 
(6.2
)

The decrease in insurance commissions was due primarily to a decrease in annual commissions received from certain insurance providers as a result of less favorable claims experience year-over-year. Management currently anticipates retail fees and charges earned will decrease approximately $100 thousand during the full fiscal year 2015 compared to the full fiscal year 2014, as opposed to

50


our original estimate of $1.3 million. The change in our estimate is due primarily to higher than anticipated growth in our checking portfolio, resulting in higher than anticipated fee and debit card activity.

Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.
 
For the Six Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
20,889

 
$
21,450

 
$
(561
)
 
(2.6
)%
Information technology and communications
5,153

 
4,612

 
541

 
11.7

Occupancy, net
4,880

 
5,183

 
(303
)
 
(5.8
)
Low income housing partnerships
2,912

 
1,419

 
1,493

 
105.2

Federal insurance premium
2,750

 
2,186

 
564

 
25.8

Deposit and loan transaction costs
2,630

 
2,650

 
(20
)
 
(0.8
)
Regulatory and outside services
2,502

 
2,553

 
(51
)
 
(2.0
)
Advertising and promotional
1,638

 
1,883

 
(245
)
 
(13.0
)
Other non-interest expense
2,647

 
2,679

 
(32
)
 
(1.2
)
Total non-interest expense
$
46,001

 
$
44,615

 
$
1,386

 
3.1


The decrease in salaries and employee benefits expense was due primarily to the prior year six month period including compensation expense on unallocated ESOP shares related to the True Blue® Too Capitol dividend paid in December 2013 (with no similar dividend being paid in the current year six month period). The increase in information technology and communications expense was primarily related to continued upgrades to our information technology infrastructure. The decrease in occupancy, net was due mainly to a decrease in building repair and maintenance. The increase in low income housing partnership expense was due mainly to impairments, as well as to an increase in amortization expense due to an increase in the overall investment balance as a result of funding new partnerships and the general life cycle of the partnership activities. We have grown our investments in newly formed low income housing partnerships over the past couple of years. Generally, losses associated with these partnerships out-pace the tax credit benefit in the early years as they establish their operations. Management anticipates that low income housing partnership expense will increase approximately $2.6 million in fiscal year 2015 compared to fiscal year 2014, an increase from our original estimate of $2.0 million. The overall increase in low income housing expense year over year is due to an increase in impairments and amortization expense. The increase in federal insurance premium was due primarily to the daily leverage strategy. The decrease in advertising and promotional expense was due primarily to the timing of media campaigns and sponsorships.

The Company's efficiency ratio was 43.66% for the current six month period compared to 44.09% for the prior year six month period. The change in the efficiency ratio was due primarily to an increase in net interest income. The efficiency ratio is a measure of a financial institution's total non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income. A lower value indicates that the financial institution is generating revenue with a lower level of expense.

Income Tax Expense
Income tax expense was $19.2 million for the current six month period compared to $18.4 million for the prior year six month period. The $786 thousand increase between periods was due to an increase in pre-tax income. The effective tax rate for the current six month period was 32.6% compared to 32.9% in the prior year six month period. Management anticipates the effective tax rate for fiscal year 2015 will be approximately 32% to 33%, based on fiscal year 2015 estimates as of March 31, 2015. The tax benefit associated with the low income housing tax credits is expected to be $4.3 million for fiscal year 2015, which is reflected in the effective tax rate range.

51


Average Balance Sheet
The following table presents the average balances of our assets, liabilities, and stockholders' equity and the related annualized yields and rates on our interest-earning assets and interest-bearing liabilities for the periods indicated and the weighted average yield/rate on our interest-earning assets and interest-bearing liabilities at March 31, 2015. As previously discussed, $1.30 billion of the daily leverage strategy was removed at March 31, 2015, so the yields/rates presented at March 31, 2015 in the tables below do not reflect the full effects of this strategy. Weighted average yields are derived by dividing annualized income by the average balance of the related assets and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The yields and rates include amortization of fees, costs, premiums and discounts which are considered adjustments to yields/rates. Yields on tax-exempt securities were not calculated on a fully taxable equivalent basis.
 
At
 
For the Six Months Ended
 
March 31,
 
March 31, 2015
 
March 31, 2014
 
2015
 
Average
 
Interest
 
 
 
Average
 
Interest
 
 
 
Yield/
 
Outstanding
 
Earned/
 
Yield/
 
Outstanding
 
Earned/
 
Yield/
 
Rate
 
Amount
 
Paid
 
Rate
 
Amount
 
Paid
 
Rate
Assets:
 
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans receivable(1)
3.69%
 
$
6,284,572

 
$
116,817

 
3.72
%
 
$
6,023,062

 
$
114,065

 
3.79
%
MBS(2)
2.30
 
1,710,345

 
19,538

 
2.28

 
1,968,835

 
23,559

 
2.39

Investment securities(2)(3)
1.18
 
571,717

 
3,348

 
1.17

 
695,925

 
3,935

 
1.13

FHLB stock
5.98
 
209,679

 
6,257

 
5.98

 
129,685

 
2,425

 
3.75

Cash and cash equivalents
0.25
 
2,163,918

 
2,817

 
0.26

 
85,286

 
107

 
0.25

Total interest-earning assets(1)(2)
2.98
 
10,940,231

 
148,777

 
2.72

 
8,902,793

 
144,091

 
3.24

Other noninterest-earning assets
 
 
231,904

 
 
 
 
 
221,562

 
 
 
 
Total assets
 
 
$
11,172,135

 
 
 
 
 
$
9,124,355

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Checking
0.04
 
$
710,009

 
134

 
0.04

 
$
662,600

 
127

 
0.04

Savings
0.14
 
301,322

 
220

 
0.15

 
287,642

 
148

 
0.10

Money market
0.23
 
1,147,287

 
1,334

 
0.23

 
1,135,843

 
1,310

 
0.23

Retail certificates
1.27
 
2,235,850

 
13,682

 
1.23

 
2,219,493

 
13,671

 
1.24

Wholesale certificates
0.65
 
317,531

 
982

 
0.62

 
303,788

 
1,143

 
0.75

Total deposits
0.71
 
4,711,999

 
16,352

 
0.70

 
4,609,366

 
16,399

 
0.71

FHLB advances(4)
2.47
 
2,570,980

 
31,582

 
2.46

 
2,499,851

 
32,173

 
2.58

FHLB line of credit
0.25
 
2,069,780

 
2,604

 
0.25

 
679

 
1

 
0.20

FHLB borrowings
1.94
 
4,640,760

 
34,186

 
1.47

 
2,500,530

 
32,174

 
2.58

Repurchase agreements
3.08
 
220,000

 
3,424

 
3.08

 
320,000

 
5,546

 
3.43

Total borrowings
2.01
 
4,860,760

 
37,610

 
1.55

 
2,820,530

 
37,720

 
2.68

Total interest-bearing liabilities
1.26
 
9,572,759

 
53,962

 
1.13

 
7,429,896

 
54,119

 
1.46

Other noninterest-bearing liabilities
 
 
116,659

 
 
 
 
 
108,070

 
 
 
 
Stockholders' equity
 
 
1,482,717

 
 
 
 
 
1,586,389

 
 
 
 
Total liabilities and stockholders' equity
 
$
11,172,135

 
 
 
 
 
$
9,124,355

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Continued)
 



52


 
At
 
For the Six Months Ended
 
March 31,
 
March 31, 2015
 
March 31, 2014
 
2015
 
Average
 
Interest
 
 
 
Average
 
Interest
 
 
 
Yield/
 
Outstanding
 
Earned/
 
Yield/
 
Outstanding
 
Earned/
 
Yield/
 
Rate
 
Balance
 
Paid
 
Rate
 
Balance
 
Paid
 
Rate
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income(5)
 
 
 
 
$
94,815

 
 
 
 
 
$
89,972

 
 
Net interest rate spread(6)
1.72%
 
 
 
 
 
1.59
%
 
 
 
 
 
1.78
%
Net interest-earning assets
 
 
$
1,367,472

 
 
 
 
 
$
1,472,897

 
 
 
 
Net interest margin(7)
 
 
 
 
 
 
1.73

 
 
 
 
 
2.02

Ratio of interest-earning assets to
 
 
 
 
 
 
 
 
 
 
 
 
 
interest-bearing liabilities
 
 
 
 
 
 
1.14x

 
 
 
 
 
1.20x

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selected performance ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized)
 
 
 
 
 
 
0.71
%
 
 
 
 
 
0.82
%
Return on average equity (annualized)
 
 
 
 
 
 
5.36

 
 
 
 
 
4.73

Average equity to average assets
 
 
 
 
 
 
13.27

 
 
 
 
 
17.39

Operating expense ratio(8)
 
 
 
 
 
 
0.82

 
 
 
 
 
0.98

Efficiency ratio(9)
 
 
 
 
 
 
43.66

 
 
 
 
 
44.09

Pre-tax yield on daily leverage strategy(10)
 
 
 
 
 
0.21

 
 
 
 
 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Concluded)
 

(1)
Calculated net of unearned loan fees, deferred costs, and undisbursed loan funds. Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent.
(2)
MBS and investment securities classified as AFS are stated at amortized cost, adjusted for unamortized purchase premiums or discounts.
(3)
The average balance of investment securities includes an average balance of nontaxable securities of $36.0 million and $36.4 million for the six months ended March 31, 2015 and 2014, respectively.
(4)
The balance and rate of FHLB advances are stated net of deferred gains and deferred prepayment penalties.
(5)
Net interest income represents the difference between interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income depends on the balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them.
(6)
Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(7)
Net interest margin represents net interest income as a percentage of average interest-earning assets. Excluding the effects of the daily leverage strategy, the net interest margin would have been 2.08% for the six months ended March 31, 2015.
(8)
The operating expense ratio represents annualized non-interest expense as a percentage of average assets.
(9)
The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income.
(10)
The pre-tax yield on the daily leverage strategy represents annualized pre-tax income resulting from the transaction as a percentage of the average interest-earning assets associated with the transaction.

53


Rate/Volume Analysis
The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the six months ended March 31, 2015 to the six months ended March 31, 2014. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.
 
For the Six Months Ended
 
March 31, 2015 vs. March 31, 2014
 
Increase (Decrease) Due to
 
Volume
 
Rate
 
Total
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable
$
4,810

 
$
(2,058
)
 
$
2,752

MBS
(2,989
)
 
(1,032
)
 
(4,021
)
Investment securities
(723
)
 
136

 
(587
)
FHLB stock
1,949

 
1,883

 
3,832

Cash and cash equivalents
2,707

 
3

 
2,710

Total interest-earning assets
5,754

 
(1,068
)
 
4,686

 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Checking
9

 
(2
)
 
7

Savings
7

 
65

 
72

Money market
13

 
10

 
23

Certificates of deposit
176

 
(325
)
 
(149
)
FHLB borrowings
3,349

 
(1,337
)
 
2,012

Repurchase agreements
(1,600
)
 
(522
)
 
(2,122
)
Total interest-bearing liabilities
1,954

 
(2,111
)
 
(157
)
 
 
 
 
 
 
Net change in net interest and dividend income
$
3,800

 
$
1,043

 
$
4,843


54


Comparison of Operating Results for the Three Months Ended March 31, 2015 and 2014

For the quarter ended March 31, 2015, the Company recognized net income of $19.2 million, compared to net income of $19.7 million for the quarter ended March 31, 2014. The $454 thousand, or 2.3%, decrease in net income was due primarily to a $1.0 million increase in total non-interest expense, mainly associated with our low income housing partnership investments, and a $450 thousand decrease in total non-interest income, partially offset by a $1.1 million increase in net interest income. The net interest margin decreased 36 basis points, from 2.07% for the prior year quarter to 1.71% for the current quarter, primarily as a result of the daily leverage strategy. Excluding the effects of the daily leverage strategy, the net interest margin would have been 2.04% for the current quarter, or a three basis point decrease from the prior year quarter. This decrease was due primarily to a decrease in the weighted average yield on the loans receivable portfolio and to an increase in cash and cash equivalents held, in excess of the daily leverage strategy. The positive impact on the net interest margin resulting from the shift in the mix of interest-earning assets from relatively lower yielding securities to higher yield loans was mostly offset by a decrease in market interest rates.

Interest and Dividend Income
The weighted average yield on total interest-earning assets decreased 55 basis points, from 3.25% for the prior year quarter, to 2.70% for the current quarter, while the average balance of interest-earning assets increased $2.11 billion from the prior year quarter. The decrease in the weighted average yield and the increase in the average balance was due primarily to the daily leverage strategy. Absent the impact of the daily leverage strategy, the weighted average yield on total interest-earnings assets would have decreased four basis points from the prior year quarter, to 3.21%, while the average balance would have increased $46.9 million. The following table presents the components of interest and dividend income for the time periods presented along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
58,198

 
$
57,117

 
$
1,081

 
1.9
 %
MBS
9,537

 
11,597

 
(2,060
)
 
(17.8
)
Investment securities
1,673

 
1,869

 
(196
)
 
(10.5
)
FHLB stock
3,076

 
1,229

 
1,847

 
150.3

Cash and cash equivalents
1,393

 
45

 
1,348

 
2,995.6

Total interest and dividend income
$
73,877

 
$
71,857

 
$
2,020

 
2.8


The increase in interest income on loans receivable was due to a $267.8 million increase in the average balance of the portfolio, partially offset by a nine basis point decrease in the weighted average yield on the portfolio, from 3.78% for the prior year quarter, to 3.69% for the current quarter. The decrease in the weighted average yield was due primarily to downward repricing of adjustable-rate loans, as well as to repayments of higher-yielding loans and an increase in the net amortization of premiums/deferred costs. Net premium/deferred cost amortization of $331 thousand during the current quarter decreased the average yield on the portfolio by two basis points. During the prior year quarter, $67 thousand of net discounts/unearned loan fees were accreted, which increased the average yield on the portfolio by less than one basis point.

The decrease in interest income on MBS was due primarily to a decrease in the average balance of the portfolio as cash flows not reinvested in the portfolio were used largely to fund loan growth. The average balance of the MBS portfolio decreased $267.3 million between the two periods. Additionally, the weighted average yield on the MBS portfolio decreased 11 basis points, from 2.39% during the prior year quarter, to 2.28% for the current quarter. The decrease in the weighted average yield on the MBS portfolio was due primarily to repayments of MBS with yields greater than the weighted average yield on the existing portfolio, and to an increase in the impact of net premium amortization. Net premium amortization was $1.3 million during the current quarter, which decreased the weighted average yield on the portfolio by 30 basis points. During the prior year quarter, $1.3 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 26 basis points.

The increase in dividends received on FHLB stock was due to a $79.9 million increase in the average balance of the portfolio as a result of the daily leverage strategy, and to an increase in the FHLB dividend rate between the two periods. The increase in interest income on cash and cash equivalents was due primarily to a $2.13 billion increase in the average balance resulting mainly from the daily leverage strategy.


55


Interest Expense
The weighted average rate paid on total interest-bearing liabilities decreased 28 basis points, from 1.42% for the prior year quarter, to 1.14% for the current quarter, while the average balance of interest-bearing liabilities increased $2.18 billion from the prior year quarter due primarily to the daily leverage strategy. Absent the impact of the daily leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have decreased three basis points from the prior year quarter to 1.39%, while the average balance would have increased $116.0 million due to growth in the deposit portfolio. The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB borrowings
$
17,198

 
$
15,311

 
$
1,887

 
12.3
 %
Deposits
8,207

 
8,076

 
131

 
1.6

Repurchase agreements
1,693

 
2,743

 
(1,050
)
 
(38.3
)
Total interest expense
$
27,098

 
$
26,130

 
$
968

 
3.7


The increase in interest expense on FHLB borrowings was due primarily to a $2.06 billion increase in the average balance on the FHLB line of credit as a result of the daily leverage strategy, as well as to an increase in the average balance of FHLB advances. The decrease in interest expense on repurchase agreements was due to the maturity of a $100.0 million agreement at 4.20% during the prior year quarter. The repurchase agreement was replaced with an FHLB advance, which was at a lower rate than the maturing repurchase agreement.

Provision for Credit Losses
The Bank recorded a provision for credit losses during the current quarter of $275 thousand compared to a provision for credit losses during the prior year quarter of $160 thousand. The $275 thousand provision for credit losses in the current quarter takes into account net charge-offs of $166 thousand and loan growth. See "Financial Condition - Asset Quality" for additional information related to ACL activity.

Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
$
3,471

 
$
3,454

 
$
17

 
0.5
 %
Insurance commissions
973

 
1,204

 
(231
)
 
(19.2
)
Loan fees
357

 
404

 
(47
)
 
(11.6
)
BOLI
252

 
330

 
(78
)
 
(23.6
)
Other non-interest income
224

 
335

 
(111
)
 
(33.1
)
Total non-interest income
$
5,277

 
$
5,727

 
$
(450
)
 
(7.9
)


56


The decrease in insurance commissions was due primarily to a decrease in annual commissions received from certain insurance providers as a result of less favorable claims experience year-over-year.

Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
10,412

 
$
10,724

 
$
(312
)
 
(2.9
)%
Information technology and communications
2,585

 
2,320

 
265

 
11.4

Occupancy, net
2,461

 
2,634

 
(173
)
 
(6.6
)
Low income housing partnerships
1,366

 
323

 
1,043

 
322.9

Federal insurance premium
1,468

 
1,103

 
365

 
33.1

Deposit and loan transaction costs
1,256

 
1,263

 
(7
)
 
(0.6
)
Regulatory and outside services
1,206

 
1,157

 
49

 
4.2

Advertising and promotional
749

 
877

 
(128
)
 
(14.6
)
Other non-interest expense
1,356

 
1,427

 
(71
)
 
(5.0
)
Total non-interest expense
$
22,859

 
$
21,828

 
$
1,031

 
4.7


The decrease in salaries and employee benefits expense was due primarily to the prior year quarter including compensation expense on unallocated ESOP shares related to the True Blue® Too Capitol dividend paid in December 2013, along with a decrease in costs associated with the short-term performance plan. The increase in information technology and communications expense was primarily related to continued upgrades to our information technology infrastructure. The increase in low income housing partnership expense was due mainly to impairments, as well as to an increase in amortization expense due to an increase in the overall investment balance as a result of funding new partnerships and the general life cycle of the partnership activities. The increase in federal insurance premium was due primarily to the daily leverage strategy.

The Company's efficiency ratio was 43.91% for the current quarter compared to 42.42% for the prior year quarter. The change in the efficiency ratio was due primarily to an increase in non-interest expense.

Income Tax Expense
Income tax expense was $9.7 million for the current quarter compared to $9.8 million for the prior year quarter. The $90 thousand decrease between periods was due to a decrease in pre-tax income, partially offset by an increase in the effective tax rate. The effective tax rate for the current quarter was 33.5% compared to 33.2% for the prior year quarter.


57


Average Balance Sheet
As previously mentioned, average yields are derived by dividing annualized income by the average balance of the related assets and average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The yields and rates include amortization of fees, costs, premiums and discounts which are considered adjustments to yields/rates. Yields on tax-exempt securities were not calculated on a fully taxable equivalent basis.
 
 
For the Three Months Ended
 
 
March 31, 2015
 
March 31, 2014
 
 
Average
 
Interest
 
 
 
Average
 
Interest
 
 
 
 
Outstanding
 
Earned/
 
Yield/
 
Outstanding
 
Earned/
 
Yield/
 
 
Amount
 
Paid
 
Rate
 
Amount
 
Paid
 
Rate
Assets:
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans receivable(1)
 
$
6,313,311

 
$
58,198

 
3.69
%
 
$
6,045,516

 
$
57,117

 
3.78
%
MBS(2)
 
1,674,986

 
9,537

 
2.28

 
1,942,336

 
11,597

 
2.39

Investment securities(2)(3)
 
560,434

 
1,673

 
1.19

 
662,266

 
1,869

 
1.13

FHLB stock
 
208,770

 
3,076

 
5.98

 
128,859

 
1,229

 
3.87

Cash and cash equivalents
 
2,202,290

 
1,393

 
0.25

 
71,652

 
45

 
0.25

Total interest-earning assets(1)(2)
 
10,959,791

 
73,877

 
2.70

 
8,850,629

 
71,857

 
3.25

Other noninterest-earning assets
 
233,237

 
 
 
 
 
222,552

 
 
 
 
Total assets
 
$
11,193,028

 
 
 
 
 
$
9,073,181

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Checking
 
$
724,637

 
67

 
0.04

 
$
674,447

 
63

 
0.04

Savings
 
305,182

 
115

 
0.15

 
291,106

 
77

 
0.11

Money market
 
1,153,612

 
664

 
0.23

 
1,139,010

 
650

 
0.23

Retail certificates
 
2,246,166

 
6,862

 
1.24

 
2,217,967

 
6,699

 
1.22

Wholesale certificates
 
328,910

 
499

 
0.61

 
305,848

 
587

 
0.78

Total deposits
 
4,758,507

 
8,207

 
0.70

 
4,628,378

 
8,076

 
0.71

FHLB advances(4)
 
2,571,309

 
15,900

 
2.51

 
2,485,130

 
15,311

 
2.50

FHLB line of credit
 
2,062,222

 
1,298

 
0.25

 
263

 

 
0.19

FHLB borrowings
 
4,633,531

 
17,198

 
1.50

 
2,485,393

 
15,311

 
2.50

Repurchase agreements
 
220,000

 
1,693

 
3.08

 
320,000

 
2,743

 
3.43

Total borrowings
 
4,853,531

 
18,891

 
1.58

 
2,805,393

 
18,054

 
2.60

Total interest-bearing liabilities
 
9,612,038

 
27,098

 
1.14

 
7,433,771

 
26,130

 
1.42

Other noninterest-bearing liabilities
 
105,621

 
 
 
 
 
96,460

 
 
 
 
Stockholders' equity
 
1,475,369

 
 
 
 
 
1,542,950

 
 
 
 
Total liabilities and stockholders' equity
 
$
11,193,028

 
 
 
 
 
$
9,073,181

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Continued)
 


58


 
 
For the Three Months Ended
 
 
March 31, 2015
 
March 31, 2014
 
 
Average
 
Interest
 
 
 
Average
 
Interest
 
 
 
 
Outstanding
 
Earned/
 
Yield/
 
Outstanding
 
Earned/
 
Yield/
 
 
Amount
 
Paid
 
Rate
 
Amount
 
Paid
 
Rate
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income(5)
 
 
 
$
46,779

 
 
 
 
 
$
45,727

 
 
Net interest rate spread(6)
 
 
 
 
 
1.56
%
 
 
 
 
 
1.83
%
Net interest-earning assets
 
$
1,347,753

 
 
 
 
 
$
1,416,858

 
 
 
 
Net interest margin(7)
 
 
 
 
 
1.71

 
 
 
 
 
2.07

Ratio of interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
to interest-bearing liabilities
 
 
 
 
 
1.14x

 
 
 
 
 
1.19x

 
 
 
 
 
 
 
 
 
 
 
 
 
Selected performance ratios:
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized)
 
 
 
 
 
0.69
%
 
 
 
 
 
0.87
%
Return on average equity (annualized)
 
 
 
 
 
5.21

 
 
 
 
 
5.10

Average equity to average assets
 
 
 
 
 
13.18

 
 
 
 
 
17.01

Operating expense ratio(8)
 
 
 
 
 
0.82

 
 
 
 
 
0.96

Efficiency ratio(9)
 
 
 
 
 
43.91

 
 
 
 
 
42.42

Pre-tax yield on daily leverage strategy(10)
 
 
 
0.20

 
 
 
 
 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Concluded)
 

(1)
Calculated net of unearned loan fees, deferred costs, and undisbursed loan funds. Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent.
(2)
MBS and investment securities classified as AFS are stated at amortized cost, adjusted for unamortized purchase premiums or discounts.
(3)
The average balance of investment securities includes an average balance of nontaxable securities of $35.1 million and $36.4 million for the quarters ended March 31, 2015 and March 31, 2014, respectively.
(4)
The balance and rate of FHLB advances are stated net of deferred gains and deferred prepayment penalties.
(5)
Net interest income represents the difference between interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income depends on the balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them.
(6)
Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(7)
Net interest margin represents net interest income as a percentage of average interest-earning assets. Excluding the effects of the daily leverage strategy, the net interest margin would have been 2.04% for the quarter ended March 31, 2015.
(8)
The operating expense ratio represents annualized non-interest expense as a percentage of average assets.
(9)
The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income.
(10)
The pre-tax yield on the daily leverage strategy represents annualized pre-tax income resulting from the transaction as a percentage of the average interest-earning assets associated with the transaction.

59


Rate/Volume Analysis
The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended March 31, 2015 to the three months ended March 31, 2014. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.
 
For the Three Months Ended March 31,
 
2015 vs. 2014
 
Increase (Decrease) Due to
 
Volume
 
Rate
 
Total
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable
$
2,454

 
$
(1,373
)
 
$
1,081

MBS
(1,541
)
 
(519
)
 
(2,060
)
Investment securities
(300
)
 
104

 
(196
)
FHLB stock
984

 
863

 
1,847

Cash equivalents
1,348

 

 
1,348

Total interest-earning assets
2,945

 
(925
)
 
2,020

 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Checking
5

 
(1
)
 
4

Savings
4

 
35

 
39

Money market
8

 
5

 
13

Certificates of deposit
147

 
(72
)
 
75

FHLB borrowings
1,758

 
129

 
1,887

Repurchase agreements
(791
)
 
(259
)
 
(1,050
)
Total interest-bearing liabilities
1,131

 
(163
)
 
968

 
 
 
 
 
 
Net change in net interest and dividend income
$
1,814

 
$
(762
)
 
$
1,052



Comparison of Operating Results for the Three Months Ended March 31, 2015 and December 31, 2014

Net income decreased $1.2 million, or 6.0%, from the quarter ended December 31, 2014 to $19.2 million for the quarter ended March 31, 2015, due primarily to a decrease in interest income. Net income attributable to the daily leverage strategy was $682 thousand during the current quarter. The net interest margin decreased five basis points from the prior quarter to 1.71% for the current quarter. Excluding the effects of the daily leverage strategy, the net interest margin would have been 2.04% for the current quarter, compared to 2.11% for the prior quarter. The decrease in the net interest margin from the prior quarter, both including and excluding the effects of the daily leverage strategy, was due primarily to a decrease in the weighted average yield on the loans receivable portfolio.
 

60


Interest and Dividend Income
The weighted average yield on total interest-earning assets for the current quarter decreased four basis points from the prior quarter, to 2.70%, due mainly to a decrease in the weighted average yield on the loans receivable portfolio, while the average balance of interest-earning assets increased $38.7 million between the two periods. Absent the impact of the daily leverage strategy, the weighted average yield on total interest-earnings assets would have decreased five basis points from the prior quarter, to 3.21%, while the average balance would have increased $53.6 million. The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
December 31,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
58,198

 
$
58,619

 
$
(421
)
 
(0.7
)%
MBS
9,537

 
10,001

 
(464
)
 
(4.6
)
Investment securities
1,673

 
1,675

 
(2
)
 
(0.1
)
FHLB stock
3,076

 
3,181

 
(105
)
 
(3.3
)
Cash and cash equivalents
1,393

 
1,424

 
(31
)
 
(2.2
)
Total interest and dividend income
$
73,877

 
$
74,900

 
$
(1,023
)
 
(1.4
)

The decrease in interest income on loans receivable was due to a six basis point decrease in the weighted average yield on the portfolio, to 3.69% for the current quarter, partially offset by a $56.9 million increase in the average balance of the portfolio. The decrease in the weighted average yield was due primarily to an increase in the net amortization of premiums/deferred costs and to the downward repricing of adjustable-rate loans. Net premium/deferred cost amortization of $331 thousand during the current quarter decreased the average yield on the portfolio by two basis points. During the prior quarter, $118 thousand of net discounts/unearned loan fees were accreted, which increased the average yield on the portfolio by one basis point.

The decrease in interest income on MBS was due to a $70.0 million decrease in the average balance of the portfolio as cash flows not reinvested in the portfolio were used primarily to fund loan growth. During the current quarter, $1.3 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 30 basis points. During the prior quarter, $1.3 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 31 basis points.

Interest Expense
The weighted average rate paid on total interest-bearing liabilities increased three basis points from the prior quarter, to 1.14% for the current quarter due mainly to an increase in the weighted average rate paid on FHLB advances, and the average balance of interest-bearing liabilities increased $77.7 million between the two periods. Absent the impact of the daily leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased three basis points from the prior quarter, to 1.39%, and the average balance would have increased $92.7 million due mainly to an increase in the average balance of the deposit portfolio. The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
December 31,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB borrowings
$
17,198

 
$
16,988

 
$
210

 
1.2
 %
Deposits
8,207

 
8,145

 
62

 
0.8

Repurchase agreements
1,693

 
1,731

 
(38
)
 
(2.2
)
Total interest expense
$
27,098

 
$
26,864

 
$
234

 
0.9


The increase in interest expense on FHLB borrowings was due primarily to a nine basis point increase in the weighted average rate paid on FHLB advances, to 2.51%, during the current quarter. This increase was due primarily to a full quarter impact of the renewal of $250.0 million of advances during the prior quarter with a previous weighted average rate of 0.84% to a new weighted average rate of 1.99%.

61



Provision for Credit Losses
The Bank recorded a provision for credit losses during the current quarter of $275 thousand compared to a provision for credit losses during the prior quarter of $173 thousand. The $275 thousand provision for credit losses in the current quarter takes into account net charge-offs of $166 thousand and loan growth. See "Financial Condition - Asset Quality" for additional information related to ACL activity.

Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
December 31,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
$
3,471

 
$
3,783

 
$
(312
)
 
(8.2
)%
Insurance commissions
973

 
549

 
424

 
77.2

Loan fees
357

 
374

 
(17
)
 
(4.5
)
BOLI
252

 
316

 
(64
)
 
(20.3
)
Other non-interest income
224

 
235

 
(11
)
 
(4.7
)
Total non-interest income
$
5,277

 
$
5,257

 
$
20

 
0.4


The increase in insurance commissions was due largely to the receipt of annual commissions from certain insurance providers as a result of favorable claims experience during the prior year. The decrease in retail fees and charges was due primarily to a decrease in debit card income, due in part to seasonality, and a decrease in service charges earned.
 
 
 
 
 
 
 
 
Income Tax Expense
Income tax expense was $9.7 million for the current quarter compared to $9.5 million for the prior quarter. The increase between periods was due to an increase in the effective tax rate, from 31.7% for the prior quarter, to 33.5% for the current quarter. The change in the effective tax rate was due largely to the prior quarter including discrete items related to state income tax liabilities which lowered the effective tax rate, along with a reduction in the benefit of the low income housing tax credits in the current quarter. The reduction in benefit was due to adjusting the tax credits to actual credits we expect to realize during the tax year due to the receipt of the related Schedule K-1s.

62


Average Balance Sheet
As previously mentioned, average yields are derived by dividing annualized income by the average balance of the related assets and average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The yields and rates include amortization of fees, costs, premiums and discounts which are considered adjustments to yields/rates. Yields on tax-exempt securities were not calculated on a fully taxable equivalent basis.
 
 
For the Three Months Ended
 
 
March 31, 2015
 
December 31, 2014
 
 
Average
 
Interest
 
 
 
Average
 
Interest
 
 
 
 
Outstanding
 
Earned/
 
Yield/
 
Outstanding
 
Earned/
 
Yield/
 
 
Amount
 
Paid
 
Rate
 
Amount
 
Paid
 
Rate
Assets:
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans receivable(1)
 
$
6,313,311

 
$
58,198

 
3.69
%
 
$
6,256,458

 
$
58,619

 
3.75
%
MBS(2)
 
1,674,986

 
9,537

 
2.28

 
1,744,936

 
10,001

 
2.29

Investment securities(2)(3)
 
560,434

 
1,673

 
1.19

 
582,755

 
1,675

 
1.15

FHLB stock
 
208,770

 
3,076

 
5.98

 
210,569

 
3,181

 
5.99

Cash and cash equivalents
 
2,202,290

 
1,393

 
0.25

 
2,126,380

 
1,424

 
0.26

Total interest-earning assets(1)(2)
 
10,959,791

 
73,877

 
2.70

 
10,921,098

 
74,900

 
2.74

Other noninterest-earning assets
 
233,237

 
 
 
 
 
230,598

 
 
 
 
Total assets
 
$
11,193,028

 
 
 
 
 
$
11,151,696

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Checking
 
$
724,637

 
67

 
0.04

 
$
695,699

 
67

 
0.04

Savings
 
305,182

 
115

 
0.15

 
297,546

 
105

 
0.14

Money market
 
1,153,612

 
664

 
0.23

 
1,141,099

 
670

 
0.23

Retail certificates
 
2,246,166

 
6,862

 
1.24

 
2,225,759

 
6,820

 
1.22

Wholesale certificates
 
328,910

 
499

 
0.61

 
306,399

 
483

 
0.63

Total deposits
 
4,758,507

 
8,207

 
0.70

 
4,666,502

 
8,145

 
0.69

FHLB advances(4)
 
2,571,309

 
15,900

 
2.51

 
2,570,657

 
15,682

 
2.42

FHLB line of credit
 
2,062,222

 
1,298

 
0.25

 
2,077,174

 
1,306

 
0.25

FHLB borrowings
 
4,633,531

 
17,198

 
1.50

 
4,647,831

 
16,988

 
1.45

Repurchase agreements
 
220,000

 
1,693

 
3.08

 
220,000

 
1,731

 
3.08

Total borrowings
 
4,853,531

 
18,891

 
1.58

 
4,867,831

 
18,719

 
1.52

Total interest-bearing liabilities
 
9,612,038

 
27,098

 
1.14

 
9,534,333

 
26,864

 
1.11

Other noninterest-bearing liabilities
 
105,621

 
 
 
 
 
127,458

 
 
 
 
Stockholders' equity
 
1,475,369

 
 
 
 
 
1,489,905

 
 
 
 
Total liabilities and stockholders' equity
 
$
11,193,028

 
 
 
 
 
$
11,151,696

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Continued)
 


63


 
 
For the Three Months Ended
 
 
March 31, 2015
 
December 31, 2014
 
 
Average
 
Interest
 
 
 
Average
 
Interest
 
 
 
 
Outstanding
 
Earned/
 
Yield/
 
Outstanding
 
Earned/
 
Yield/
 
 
Amount
 
Paid
 
Rate
 
Amount
 
Paid
 
Rate
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income(5)
 
 
 
$
46,779

 
 
 
 
 
$
48,036

 
 
Net interest rate spread(6)
 
 
 
 
 
1.56
%
 
 
 
 
 
1.63
%
Net interest-earning assets
 
$
1,347,753

 
 
 
 
 
$
1,386,765

 
 
 
 
Net interest margin(7)
 
 
 
 
 
1.71

 
 
 
 
 
1.76

Ratio of interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
to interest-bearing liabilities
 
 
 
 
 
1.14x

 
 
 
 
 
1.15x

 
 
 
 
 
 
 
 
 
 
 
 
 
Selected performance ratios:
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized)
 
 
 
 
 
0.69
%
 
 
 
 
 
0.73
%
Return on average equity (annualized)
 
 
 
 
 
5.21

 
 
 
 
 
5.50

Average equity to average assets
 
 
 
 
 
13.18

 
 
 
 
 
13.36

Operating expense ratio(8)
 
 
 
 
 
0.82

 
 
 
 
 
0.83

Efficiency ratio(9)
 
 
 
 
 
43.91

 
 
 
 
 
43.42

Pre-tax yield on daily leverage strategy(10)
 
 
 
0.20

 
 
 
 
 
0.22

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Concluded)
 

(1)
Calculated net of unearned loan fees, deferred costs, and undisbursed loan funds. Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent.
(2)
MBS and investment securities classified as AFS are stated at amortized cost, adjusted for unamortized purchase premiums or discounts.
(3)
The average balance of investment securities includes an average balance of nontaxable securities of $35.1 million and $36.9 million for the quarters ended March 31, 2015 and December 31, 2014, respectively.
(4)
The balance and rate of FHLB advances are stated net of deferred gains and deferred prepayment penalties.
(5)
Net interest income represents the difference between interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income depends on the balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them.
(6)
Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(7)
Net interest margin represents net interest income as a percentage of average interest-earning assets. Excluding the effects of the daily leverage strategy, the net interest margin would have been 2.04% and 2.11% for the quarters ended March 31, 2015 and December 31, 2014, respectively.
(8)
The operating expense ratio represents annualized non-interest expense as a percentage of average assets.
(9)
The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income.
(10)
The pre-tax yield on the daily leverage strategy represents annualized pre-tax income resulting from the transaction as a percentage of the average interest-earning assets associated with the transaction.

64


Rate/Volume Analysis
The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended March 31, 2015 to the three months ended December 31, 2014. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous quarter's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous quarter. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.
 
For the Three Months Ended
 
March 31, 2015 vs. December 31, 2014
 
Increase (Decrease) Due to
 
Volume
 
Rate
 
Total
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable
$
505

 
$
(926
)
 
$
(421
)
MBS
(399
)
 
(65
)
 
(464
)
Investment securities
(65
)
 
63

 
(2
)
FHLB stock
(79
)
 
(26
)
 
(105
)
Cash and cash equivalents
33

 
(64
)
 
(31
)
Total interest-earning assets
(5
)
 
(1,018
)
 
(1,023
)
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Checking
2

 
(1
)
 
1

Savings
2

 
8

 
10

Money market
(5
)
 
(1
)
 
(6
)
Certificates of deposit
32

 
25

 
57

FHLB borrowings
(14
)
 
224

 
210

Repurchase agreements
(19
)
 
(19
)
 
(38
)
Total interest-bearing liabilities
(2
)
 
236

 
234

 
 
 
 
 
 
Net change in net interest and dividend income
$
(3
)
 
$
(1,254
)
 
$
(1,257
)


65


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

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

In the event short-term liquidity needs exceed available cash, the Bank has access to a line of credit at the FHLB and the Federal Reserve Bank discount window. Per the FHLB's lending guidelines, total FHLB borrowings cannot exceed 40% of total Bank assets, as reported on the Bank's Call Report to the Office of the Comptroller of the Currency ("OCC"), without pre-approval from the FHLB president. In July 2014, the president of the FHLB approved an increase in the Bank's borrowing limit to 55% of total assets for one year in conjunction with the implementation of the daily leverage strategy. The amount that can be borrowed from the Federal Reserve Bank discount window is based upon the fair value of securities pledged as collateral and certain other characteristics of those securities, and is used only when other sources of short-term liquidity are unavailable. Management tests the Bank's access to the Federal Reserve Bank discount window annually with a nominal, overnight borrowing.

If management observes a trend in the amount and frequency of line of credit utilization that is not in conjunction with a planned strategy, such as the daily leverage strategy, the Bank will likely utilize long-term wholesale borrowing sources such as FHLB advances and/or repurchase agreements to provide permanent fixed-rate funding. The maturities of these borrowings are generally staggered in order to mitigate the risk of a highly negative cash flow position at maturity.
 
The outstanding amount of FHLB advances was $2.58 billion at March 31, 2015, of which $475.0 million was scheduled to mature in the next 12 months. All FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with the FHLB along with certain securities. The Bank pledged securities with an estimated fair value of $449.8 million as collateral for FHLB borrowings at March 31, 2015. At March 31, 2015, the Bank's ratio of the par value of FHLB borrowings to total assets, as reported to the OCC, was 34%. When the daily leverage strategy was in place during the current quarter, FHLB borrowings to the Bank's total assets were in excess of 40%, and are expected to be in excess of 40% as long as the Bank continues its daily leverage strategy and the FHLB president continues to approve the Bank's borrowing limit being in excess of 40% of total Bank assets. All or a portion of the borrowings against the FHLB line of credit in conjunction with the daily leverage strategy could be repaid at any point in time while the strategy is in effect, if necessary.

At March 31, 2015, the Bank had repurchase agreements of $220.0 million, or approximately 2% of total assets, of which $20.0 million was scheduled to mature in the next 12 months. The Bank may enter into additional repurchase agreements as management deems appropriate, not to exceed 15% of total assets, and subject to a total borrowings limit of 55% as discussed below. The Bank had pledged securities with an estimated fair value of $246.3 million as collateral for repurchase agreements as of March 31, 2015. The securities pledged for the repurchase agreements will be delivered back to the Bank when the repurchase agreements mature.

The Bank's internal policy limits total borrowings to 55% of total assets. At March 31, 2015, the Bank had term borrowings, at par, of $2.80 billion, or approximately 28% of total assets. Additionally, the Bank could utilize the repayment and maturity of outstanding loans, MBS, and other investments for liquidity needs rather than reinvesting such funds into the related portfolios. At March 31, 2015, the Bank had $1.14 billion of securities that were eligible but unused as collateral for borrowing or other liquidity needs.

The Bank has access to and utilizes other sources of funds for liquidity purposes, such as brokered deposits and public unit deposits. As of March 31, 2015, the Bank's policy allows for combined brokered and public unit deposits up to 15% of total deposits. At March 31, 2015, the Bank had brokered and public unit deposits totaling $328.7 million, or approximately 7% of total deposits. Management continuously monitors the wholesale deposit market for opportunities to obtain brokered and public unit deposits at attractive rates. The Bank had pledged securities with an estimated fair value of $316.2 million as collateral for public unit deposits at March 31, 2015. The securities pledged as collateral for public unit deposits are held under joint custody by the FHLB and generally will be released upon deposit maturity.

66



As of March 31, 2015, $1.18 billion of the Bank's $2.61 billion of certificates of deposit was scheduled to mature within one year. Included in the $1.18 billion was $252.5 million of public unit and brokered deposits. Based on our deposit retention experience and our current pricing strategy, we anticipate that a majority of the maturing retail certificates of deposit will renew or transfer to other deposit products at the prevailing rate, although no assurance can be given in this regard.  We also anticipate that a majority of the maturing public unit deposits will be replaced with similar wholesale funding products and we are currently evaluating the replacement of the maturing brokered deposits.

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

At March 31, 2015, cash and cash equivalents totaled $1.02 billion, an increase of $210.3 million from September 30, 2014. The increase in cash and cash equivalents was due mainly to the balance of operating cash at September 30, 2014 being lower than normal, the Bank maintaining cash for increased loan closings and for brokered deposits maturing in late April and throughout the month of May, and from the redemption of $58.5 million of FHLB stock due to the removal of $1.30 billion from the FHLB line of credit in conjunction with the daily leverage strategy at March 31, 2015. A majority of the cash received from the redemption of the FHLB stock was used to acquire FHLB stock when the full daily leverage strategy was reinstated on April 1, 2015.

During the six months ended March 31, 2015, loan originations and purchases, net of principal repayments and related loan activity, resulted in a cash outflow of $135.7 million. See additional discussion regarding loan activity in "Financial Condition - Loans Receivable." During the six months ended March 31, 2015, net security portfolio cash outflows were $129.0 million and were used primarily to fund loan growth. Due primarily to the daily leverage strategy, $91.3 million of FHLB stock was purchased during the six months ended March 31, 2015 and $155.7 million was redeemed.

At March 31, 2015, Capitol Federal Financial, Inc., at the holding company level, had $118.7 million on deposit at the Bank. During the six months ended March 31, 2015, the Company paid $57.3 million in cash dividends and repurchased 302,145 shares at a total cost of $3.6 million. See additional discussion regarding dividends and stock repurchases in "Financial Condition - Stockholders' Equity."

As of March 31, 2015, the Bank had $10.3 million of agreements outstanding in connection with the remodeling of the Bank's Kansas City market area operations center.  The project scope includes replacement of all mechanical and electrical systems, interior finishes, and exterior building components.  The completed project will result in a more energy efficient building, which is expected to lower our utility and maintenance expenses.  There may be additional agreements and expenses related to the project through early fiscal year 2017, which is when the project is expected to be completed.  Costs related to the project will be capitalized and depreciated according to the estimated useful life of the assets as they are placed in service. 

67


The following table presents the contractual maturities of our loan, MBS, and investment securities portfolios at March 31, 2015, along with associated weighted average yields. Loans and securities which have adjustable interest rates are shown as maturing in the period during which the contract is due. The table does not reflect the effects of possible prepayments or enforcement of due on sale clauses. As of March 31, 2015, the amortized cost of investment securities in our portfolio which are callable or have pre-refunding dates within one year was $433.9 million.
 
Loans(1)
 
MBS
 
Investment Securities
 
Total
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
(Dollars in thousands)
Amounts due:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Within one year
$
72,698

 
3.91
%
 
$

 
%
 
$
2,818

 
2.57
%
 
$
75,516

 
3.86
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
After one year:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over one to two years
64,345

 
3.78

 
257

 
5.57

 
31,551

 
1.56

 
96,153

 
3.06

Over two to three years
17,259

 
5.01

 
2,096

 
4.65

 
257,921

 
1.04

 
277,276

 
1.31

Over three to five years
59,588

 
4.75

 
59,760

 
4.46

 
288,528

 
1.23

 
407,876

 
2.22

Over five to ten years
384,936

 
4.05

 
470,637

 
2.01

 
37,313

 
1.33

 
892,886

 
2.86

Over ten to fifteen years
1,434,552

 
3.40

 
641,921

 
2.29

 

 

 
2,076,473

 
3.06

After fifteen years
4,385,402

 
3.73

 
473,375

 
2.33

 
2,062

 
1.53

 
4,860,839

 
3.59

Total due after one year
6,346,082

 
3.69

 
1,648,046

 
2.30

 
617,375

 
1.17

 
8,611,503

 
3.24

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
6,418,780

 
3.69

 
$
1,648,046

 
2.30

 
$
620,193

 
1.18

 
$
8,687,019

 
3.25


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

68


Limitations on Dividends and Other Capital Distributions

The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company. OCC regulations impose restrictions on savings institutions, such as the Bank, with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers, and other transactions charged to the capital account. Generally, savings institutions may make capital distributions during any calendar year equal to earnings of the previous two calendar years and current year-to-date earnings under the FRB and OCC safe harbor regulations. It is generally required that the Bank remain well capitalized before and after a proposed distribution; however, an institution deemed to be in need of more than normal supervision by the OCC may have its capital distribution authority restricted. A savings institution that is a subsidiary of a savings and loan holding company, such as the Company, that proposes to make a capital distribution must submit written notice to the OCC and FRB 30 days prior to such distribution. The OCC and FRB may object to the distribution during that 30-day period based on safety and soundness or other concerns. Savings institutions that desire to make a larger capital distribution, are under special restrictions, or are not, or would not be, well capitalized following a proposed capital distribution, however, must obtain regulatory non-objection prior to making such a distribution. So long as the Bank continues to remain well capitalized after each capital distribution and operates in a safe and sound manner, it is management's belief that the OCC and FRB will continue to allow the Bank to distribute its net income to the Company, although no assurance can be given in this regard.
 
The Company paid cash dividends of $57.3 million during the six months ended March 31, 2015. Dividend payments depend upon a number of factors including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company level.

Off-Balance Sheet Arrangements, Commitments and Contractual Obligations

The Company, in the normal course of business, makes commitments to buy or sell assets or to incur or fund liabilities. There have been no material changes in commitments, contractual obligations or off-balance sheet arrangements from September 30, 2014. For additional information, see "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Off-Balance Sheet Arrangements, Commitments and Contractual Obligations" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2014. We anticipate that we will continue to have sufficient funds, through repayments and maturities of loans and securities, deposits and borrowings, to meet our current commitments.

The maximum balance of short-term FHLB borrowings outstanding at any month-end during the six months ended March 31, 2015 was $2.70 billion, and the average short-term balance of FHLB borrowings outstanding during the six months ended March 31, 2015 was $2.57 billion, at a weighted average rate of 0.60%. This compares to a balance of short-term FHLB borrowings outstanding at the end of the current period of $1.28 billion at a weighted average rate of 1.11%.

Contingencies

In the normal course of business, the Company and its subsidiary are named defendants in various lawsuits and counter claims. In the opinion of management, after consultation with legal counsel, none of the currently pending suits are expected to have a materially adverse effect on the Company's consolidated financial statements for the quarter ended March 31, 2015, or future periods.


69


Capital

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a "well-capitalized" status for the Bank and Company in accordance with regulatory standards. As of March 31, 2015, the Company and Bank exceeded all regulatory capital requirements. The following table presents the regulatory capital ratios of the Bank and the Company at March 31, 2015.
 
 
 
 
 
Regulatory
 
 
 
 
 
Requirement For
 
Bank
 
Company
 
"Well-Capitalized"
 
Ratios
 
Ratios
 
Status
Tier 1 leverage ratio(1)
11.6
%
 
13.1
%
 
5.0
%
Common equity tier 1 capital ratio(2)
31.7

 
35.8

 
6.5

Tier 1 capital ratio(2)
31.7

 
35.8

 
8.0

Total capital ratio(2)
32.0

 
36.0

 
10.0


(1)
In prior periods, this ratio was calculated using total assets at quarter end in the denominator in accordance with regulatory capital rules at that point in time. This ratio is now calculated using current quarter average assets in the denominator in accordance with current regulatory capital rules.
(2)
These ratios are calculated using risk weighted assets in the denominator.

The following table presents a reconciliation of equity under GAAP to regulatory capital amounts, as of March 31, 2015, for the Bank and the Company (dollars in thousands):

 
Bank
 
Company
Total equity as reported under GAAP
$
1,310,286

 
$
1,476,656

Unrealized gains on AFS securities
(9,740
)
 
(9,740
)
Total tier 1 capital
1,300,546

 
1,466,916

ACL
9,406

 
9,406

Total capital
$
1,309,952

 
$
1,476,322



Item 3. Quantitative and Qualitative Disclosure about Market Risk
Asset and Liability Management and Market Risk
For a complete discussion of the Bank's asset and liability management policies, as well as the potential impact of interest rate changes upon the market value of the Bank's portfolios, see "Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk" in the Company's Annual Report on Form 10-K for the year ended September 30, 2014. The analysis presented in the tables below reflect the level of market risk at the Bank, including the cash the holding company has deposited at the Bank.

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

The general objective of our interest rate risk management program is to determine and manage an appropriate level of interest rate risk while maximizing net interest income in a manner consistent with our policy to reduce, to the extent practicable, the exposure of net interest income to changes in market interest rates. The Asset and Liability Committee regularly reviews the interest rate risk exposure of the Bank by forecasting the impact of hypothetical, alternative interest rate environments on net interest income and the market value of portfolio equity ("MVPE") at various dates. The MVPE is defined as the net of the present value of cash flows from existing assets, liabilities, and off-balance sheet instruments. The present values are determined based upon market conditions as of the date of the analysis, as well as in alternative interest rate environments providing potential changes in the MVPE under those alternative interest rate environments. Net interest income is projected in the same alternative interest rate environments with both a static balance sheet and with management strategies considered. The MVPE and net interest income analysis are also conducted to estimate our sensitivity to rates for future time horizons based upon market conditions as of the date of the analysis. In addition to the interest rate environments presented below, management also reviews the impact of non-parallel rate shock scenarios on a quarterly

70


basis. These scenarios consist of flattening and steepening the yield curve by changing short-term and long-term interest rates independent of each other, and simulating cash flows and determining valuations as a result of these hypothetical changes in interest rates to identify rate environments that pose the greatest risk to the Bank. This analysis helps management quantify the Bank's exposure to changes in the shape of the yield curve.

For each date presented in the following table, the estimated percentage change in the Bank's net interest income based on the indicated instantaneous, parallel, and permanent change in interest rates is presented. The percentage change in each interest rate environment represents the difference between estimated net interest income in the 0 basis point interest rate environment ("base case," assumes the forward market and product interest rates implied by the yield curve are realized) and the estimated net interest income in each alternative interest rate environment (assumes market and product interest rates have a parallel shift in rates across all maturities by the indicated change in rates). At all dates presented, the three-month Treasury bill yield was less than one percent, so the -100 basis point scenario is not presented. Estimations of net interest income used in preparing the table below were based upon the assumptions that the total composition of interest-earning assets and interest-bearing liabilities do not change materially and that any repricing of assets or liabilities occurs at anticipated product and market rates for the alternative rate environments as of the dates presented. The estimation of net interest income does not include any projected gains or losses related to the sale of loans or securities, or income derived from non-interest income sources, but does include the use of different prepayment assumptions in the alternative interest rate environments. It is important to consider that estimated changes in net interest income are for a cumulative four-quarter period. These do not reflect the earnings expectations of management.
Change
 
Percentage Change in Net Interest Income
(in Basis Points)
 
At
in Interest Rates(1)
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 -100 bp
 
N/A

 
N/A

 
N/A

  000 bp
 

 

 

+100 bp
 
(0.27
)%
 
(1.36
)%
 
(2.32
)%
+200 bp
 
(1.86
)
 
(4.10
)
 
(5.54
)
+300 bp
 
(4.84
)
 
(8.01
)
 
(9.67
)

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

The projected percentage change in net interest income was impacted to a lesser degree in the increasing interest rate scenarios at March 31, 2015 than at December 31, 2014 and September 30, 2014. This was largely driven by an increase in the amount of assets projected to reprice in the base case at March 31, 2015 compared to the prior two periods, which resulted in a larger positive gap position. Due to the change in gap position, it is expected that assets will reprice higher and at a faster pace in a rising interest rate environment at March 31, 2015, compared to both December 31, 2014 and September 30, 2014. See the gap table below for additional information.

Net interest income is projected to decrease in a rising interest rate environment at March 31, 2015, despite the positive gap position, due to a projected reduction in cash flows from the Bank's mortgage-related assets and callable agency debentures as interest rates rise. In all of the scenarios presented, cash flows from the Bank's assets decrease to such a level that the Bank's liabilities are projected to reprice to higher interest rates at a faster pace than the Bank's assets.


71


The following table sets forth the estimated percentage change in the MVPE for each date presented based on the indicated instantaneous, parallel, and permanent change in interest rates. The estimated MVPE results from the valuation of cash flows from financial assets and liabilities over the anticipated lives of each for each interest rate environment. The percentage change in each interest rate environment represents the difference between the MVPE in the base case (assumes the forward market interest rates implied by the yield curve are realized) and the MVPE in each alternative interest rate environment (assumes market interest rates have a parallel shift in rates). At all dates presented, the three-month Treasury bill yield was less than one percent, so the -100 basis point scenario is not presented. The estimations of the MVPE used in preparing the table below were based upon the assumptions that the total composition of interest-earning assets and interest-bearing liabilities do not change, that any repricing of assets or liabilities occurs at current product or market rates for the alternative rate environments as of the dates presented, and that different prepayment rates were used in each alternative interest rate environment.
Change
 
Percentage Change in MVPE
(in Basis Points)
 
At
in Interest Rates(1)
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 -100 bp
 
N/A

 
N/A

 
N/A

  000 bp
 

 

 

+100 bp
 
(5.98
)%
 
(7.27
)%
 
(9.51
)%
+200 bp
 
(14.90
)
 
(17.22
)
 
(21.00
)
+300 bp
 
(24.96
)
 
(28.19
)
 
(32.96
)

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

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

The percentage change in the Bank's MVPE is adversely impacted in rising interest rate scenarios for all periods presented due primarily to the Bank's mortgage-related assets and callable investment securities. As interest rates increase, repayments on mortgage-related assets will likely only be realized through changes in borrowers' lives such as divorce, death, job-related relocations, or other life changing events, resulting in an increase in the average life of mortgage-related assets. Similarly, call projections for the Bank's callable agency debentures decrease as interest rates rise, which results in their cash flows moving towards their contractual maturity dates. The longer expected average lives of these assets, relative to the assumptions in the base case interest rate environment, increased the sensitivity of their market value to changes in interest rates. As a result, the market value of the Bank's financial assets decreased more than the decrease in the market value of its financial liabilities, resulting in a decrease in the MVPE in all rising interest rate environments. However, the percentage change in the Bank's MVPE at March 31, 2015 was less adversely impacted in the increasing interest rate scenarios than at December 31, 2014 and September 30, 2014 due primarily to lower long-term interest rates, particularly lower mortgage interest rates. The lower long-term interest rates resulted in shorter weighted average lives for these assets in the base case, thereby decreasing the sensitivity of their market values as interest rates increase.

The following gap table summarizes the anticipated maturities or repricing periods of the Bank's interest-earning assets and interest-bearing liabilities as of March 31, 2015 based on the information and assumptions set forth in the notes below. Cash flow projections for mortgage-related assets are calculated based on current interest rates. Prepayment projections are subjective in nature, involve uncertainties and assumptions and, therefore, cannot be determined with a high degree of accuracy. Although certain assets and liabilities may have similar maturities or periods to repricing, they may react differently to changes in market interest rates. Assumptions may not reflect how actual yields and costs respond to market interest rate changes. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early

72


withdrawal levels would likely deviate significantly from those assumed in calculating the gap table below. For additional information regarding the impact of changes in interest rates, see the preceding Percentage Change in Net Interest Income and Percentage Change in MVPE discussions and tables.

73


 
Within
 
Three to
 
More Than
 
More Than
 
 
 
 
 
Three
 
 Twelve
 
One Year to
 
Three Years
 
Over
 
 
 
Months
 
Months
 
Three Years
 
to Five Years
 
Five Years
 
Total
Interest-earning assets:
(Dollars in thousands)
Loans receivable:(1)
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate
$
299,533

 
$
724,100

 
$
1,330,600

 
$
842,598

 
$
1,847,591

 
$
5,044,422

Adjustable-rate
128,787

 
627,729

 
330,296

 
104,246

 
36,302

 
1,227,360

Other loans
111,258

 
8,293

 
7,071

 
2,017

 
1,397

 
130,036

Investment securities(2)
30,005

 
3,219

 
313,529

 
262,390

 
10,762

 
619,905

MBS(3)
230,041

 
425,185

 
464,225

 
250,436

 
262,788

 
1,632,675

Other interest-earning assets
1,007,482

 

 

 

 

 
1,007,482

Total interest-earning assets
1,807,106

 
1,788,526

 
2,445,721

 
1,461,687

 
2,158,840

 
9,661,880

 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Checking(4)
152,068

 
50,648

 
119,148

 
91,121

 
347,786

 
760,771

Savings(4)
68,302

 
16,232

 
37,426

 
29,028

 
160,890

 
311,878

Money market(4)
219,863

 
147,668

 
270,690

 
157,967

 
479,318

 
1,275,506

Certificates
443,142

 
739,428

 
1,045,413

 
379,364

 
514

 
2,607,861

Borrowings(5)
900,000

 
395,000

 
900,000

 
550,000

 
896,140

 
3,641,140

Total interest-bearing liabilities
1,783,375

 
1,348,976

 
2,372,677

 
1,207,480

 
1,884,648

 
8,597,156

 
 
 
 
 
 
 
 
 
 
 
 
Excess of interest-earning assets over
 
 
 
 
 
 
 
 
 
 
 
interest-bearing liabilities
$
23,731

 
$
439,550

 
$
73,044

 
$
254,207

 
$
274,192

 
$
1,064,724

 
 
 
 
 
 
 
 
 
 
 
 
Cumulative excess of interest-earning
 
 
 
 
 
 
 
 
 
 
 
assets over interest-bearing liabilities
$
23,731

 
$
463,281

 
$
536,325

 
$
790,532

 
$
1,064,724

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative excess (deficiency) of interest-earning
 
 
 
 
 
 
 
 
 
 
 
assets over interest-bearing liabilities as a
 
 
 
 
 
 
 
 
 
 
 
percent of total Bank assets at
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
0.24
 %
 
4.62
 %
 
5.35
 %
 
7.89
%
 
10.62
%
 
 
December 31, 2014
(2.55
)
 
3.60

 
1.13

 
4.83

 
11.75

 
 
September 30, 2014
(3.65
)
 
(0.82
)
 
(4.14
)
 
0.69

 
10.31

 
 

74


(1)
ARM loans are included in the period in which the rate is next scheduled to adjust or in the period in which repayments are expected to occur, or prepayments are expected to be received, prior to their next rate adjustment, rather than in the period in which the loans are due. Fixed-rate loans are included in the periods in which they are scheduled to be repaid, based on scheduled amortization and prepayment assumptions. Balances are net of deferred fees and exclude loans 90 or more days delinquent or in foreclosure.
(2)
Based on contractual maturities, term to call dates or pre-refunding dates as of March 31, 2015, at amortized cost.
(3)
Reflects projected prepayments of MBS, at amortized cost.
(4)
Although the Bank's checking, savings, and money market accounts are subject to immediate withdrawal, management considers a substantial amount of these accounts to be core deposits having significantly longer effective maturities. The decay rates (the assumed rates at which the balances of existing accounts decline) used on these accounts is based on assumptions developed from our actual experiences with these accounts. If all of the Bank's checking, savings, and money market accounts had been assumed to be subject to repricing within one year, interest-bearing liabilities which were estimated to mature or reprice within one year would have exceeded interest-earning assets with comparable characteristics by $1.23 billion, for a cumulative one-year gap of -12.3% of total assets.
(5)
Borrowings exclude deferred prepayment penalty costs and deferred gains on interest rate swap agreements previously terminated.

The increase in the one-year gap amount at March 31, 2015 was primarily due to lower interest rates at March 31, 2015 than at December 31, 2014 and September 30, 2014. This resulted in an increase in prepayment projections on the Bank's mortgage loan and MBS portfolios, as well as an increase in the amount of securities projected to be called, resulting in an increase in the amount of assets expected to reprice over the 12-month horizon. Additionally, the Bank repriced $250.0 million of term borrowings during the current quarter, which decreased the amount of liabilities expected to reprice during the 12-month horizon compared to the prior quarter projections. If interest rates were to increase 200 basis points, as of March 31, 2015, the Bank's one-year gap is projected to be -$20.0 million, or -0.2% of total assets.

75


The following table presents the weighted average yields/rates and WALs (in years), after applying prepayment, call assumptions, and decay rates for our interest-earning assets and interest-bearing liabilities as of the date presented. Yields presented for interest-earning assets include the amortization of fees, costs, premiums and discounts which are considered adjustments to the yield. The interest rate presented for term borrowings is the effective rate, which includes the net impact of the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid and deferred gains related to interest rate swaps previously terminated. The loan terms presented for one- to four-family loans represent the contractual terms of the loan.
 
March 31, 2015
 
Amount
 
Yield/Rate
 
WAL
 
% of Category
 
% of Total
 
(Dollars in thousands)
Investment securities
$
620,193

 
1.18
%
 
2.2

 
27.3
%
 
6.3
%
MBS - fixed
1,179,234

 
2.32

 
3.6

 
52.0

 
12.0

MBS - adjustable
468,812

 
2.25

 
5.9

 
20.7

 
4.7

Total investment securities and MBS
2,268,239

 
1.99

 
3.7

 
100.0
%
 
23.0

Loans receivable:
 
 
 
 
 
 
 
 
 
Fixed-rate one- to four-family:
 
 
 
 
 
 
 
 
 
<= 15 years
1,189,759

 
3.34

 
3.9

 
18.5
%
 
12.1

> 15 years
3,708,088

 
4.08

 
5.5

 
57.8

 
37.6

All other fixed-rate loans
176,530

 
4.39

 
3.1

 
2.8

 
1.8

Total fixed-rate loans
5,074,377

 
3.92

 
5.0

 
79.1

 
51.5

Adjustable-rate one- to four-family:
 
 
 
 
 
 
 
 
 
<= 36 months
349,173

 
2.01

 
3.7

 
5.4

 
3.5

> 36 months
847,709

 
2.90

 
2.9

 
13.2

 
8.6

All other adjustable-rate loans
147,521

 
4.37

 
1.0

 
2.3

 
1.5

Total adjustable-rate loans
1,344,403

 
2.83

 
2.9

 
20.9

 
13.6

Total loans receivable
6,418,780

 
3.69

 
4.6

 
100.0
%
 
65.1

FHLB stock
154,951

 
5.98

 
2.5

 
 
 
1.6

Cash and cash equivalents
1,021,150

 
0.25

 

 
 
 
10.3

Total interest-earning assets
$
9,863,120

 
2.98

 
3.9

 
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
Transaction deposits
$
2,229,413

 
0.15

 
6.5

 
46.1
%
 
26.4
%
Certificates of deposit
2,607,861

 
1.18

 
1.5

 
53.9

 
30.9

Total deposits
4,837,274

 
0.71

 
3.8

 
100.0
%
 
57.3

Term borrowings
2,795,000

 
2.51

 
3.3

 
77.7
%
 
33.2

FHLB line of credit
800,000

 
0.25

 

 
22.3

 
9.5

Total borrowings
3,595,000

 
2.01

 
2.6

 
100.0
%
 
42.7

Total interest-bearing liabilities
$
8,432,274

 
1.26

 
3.3

 
 
 
100.0
%


Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, the "Act") as of March 31, 2015.  Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of March 31, 2015, such disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Act is accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms.


76


Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Act) that occurred during the Company's quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and the Bank are involved as plaintiff or defendant in various legal actions arising in the normal course of business. In our opinion, after consultation with legal counsel, we believe it unlikely that such pending legal actions will have a material adverse effect on our financial condition, results of operations or liquidity.
Item 1A. Risk Factors
There have been no material changes to our risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

See "Liquidity and Capital Resources - Capital" in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding OCC restrictions on dividends from the Bank to the Company.

The following table summarizes our share repurchase activity during the quarter ended March 31, 2015 and additional information regarding our share repurchase program. In November 2012, the Company announced its Board of Directors approved a $175.0 million stock repurchase program. This plan has no expiration date.
 
 
 
 
 
 
 
Approximate
 
Total
 
 
 
Total Number of
 
Dollar Value of
 
Number of
 
Average
 
Shares Purchased as
 
Shares that May
 
Shares
 
Price Paid
 
Part of Publicly
 
Yet Be Purchased
 
Purchased
 
per Share
 
Announced Plans
 
Under the Plan
January 1, 2015 through
 
 
 
 
 
 
 
January 31, 2015

 
$

 

 
$
42,803,878

February 1, 2015 through
 
 
 
 
 
 
 
February 28, 2015

 

 

 
42,803,878

March 1, 2015 through
 
 
 
 
 
 
 
March 31, 2015

 

 

 
42,803,878

Total

 
N/A

 

 
42,803,878


Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
See Index to Exhibits.

77


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CAPITOL FEDERAL FINANCIAL, INC.
 
 
 
 
 
 
 
 
 
 
 
 
 
Date: May 5, 2015
By:
/s/ John B. Dicus
 
 
 
John B. Dicus, Chairman, President and Chief Executive Officer
 
 
 
 
 
Date: May 5, 2015
By:
/s/ Kent G. Townsend
 
 
 
Kent G. Townsend, Executive Vice President,
 
 
 
Chief Financial Officer and Treasurer
 


78


INDEX TO EXHIBITS
Exhibit
Number
 
Document
3(i)
 
Charter of Capitol Federal Financial, Inc., as filed on May 6, 2010, as Exhibit 3(i) to Capitol Federal Financial, Inc.'s Registration Statement on Form S-1 (File No. 333-166578) and incorporated herein by reference
3(ii)
 
Bylaws of Capitol Federal Financial, Inc. as filed on May 6, 2010, as Exhibit 3(ii) to Capitol Federal Financial Inc.'s Registration Statement on Form S-1 (File No. 333-166578) and incorporated herein by reference
10.1(i)
 
Capitol Federal Financial, Inc.'s Employee Stock Ownership Plan, as amended, filed on May 10, 2011 as Exhibit 10.1(ii) to the March 31, 2011 Form 10-Q for Capitol Federal Financial, Inc., and incorporated herein by reference
10.1(ii)
 
Form of Change of Control Agreement with each of John B. Dicus, Kent G. Townsend, and Rick C. Jackson filed on January 20, 2011 as Exhibit 10.1 to the Registrant's Current Report on Form 8-K and incorporated herein by reference
10.1(iii)
 
Form of Change of Control Agreement with each of Natalie G. Haag and Carlton A. Ricketts filed on November 29, 2012 as Exhibit 10.1(iv) to the Registrant's Annual Report on Form 10-K and incorporated herein by reference
10.1(iv)
 
Form of Change of Control Agreement with Frank H. Wright filed on November 29, 2013 as Exhibit 10.1(v) to the Registrant's Annual Report on Form 10-K and incorporated herein by reference
10.2
 
Capitol Federal Financial's 2000 Stock Option and Incentive Plan (the "Stock Option Plan") filed on April 13, 2000 as Appendix A to Capitol Federal Financial's Revised Proxy Statement (File No. 000-25391) and incorporated herein by reference
10.3
 
Capitol Federal Financial's 2000 Recognition and Retention Plan filed on April 13, 2000 as Appendix B to Capitol Federal Financial's Revised Proxy Statement (File No. 000-25391) and incorporated herein by reference
10.4
 
Capitol Federal Financial Deferred Incentive Bonus Plan, as amended, filed on May 5, 2009 as Exhibit 10.4 to the March 31, 2009 Form 10-Q for Capitol Federal Financial and incorporated herein by reference
10.5
 
Form of Incentive Stock Option Agreement under the Stock Option Plan filed on February 4, 2005 as Exhibit 10.5 to the December 31, 2004 Form 10-Q for Capitol Federal Financial and incorporated herein by reference
10.6
 
Form of Non-Qualified Stock Option Agreement under the Stock Option Plan filed on February 4, 2005 as Exhibit 10.6 to the December 31, 2004 Form 10-Q for Capitol Federal Financial and incorporated herein by reference
10.7
 
Form of Restricted Stock Agreement under the Recognition and Retention Plan filed on February 4, 2005 as Exhibit 10.7 to the December 31, 2004 Form 10-Q for Capitol Federal Financial and incorporated herein by reference
10.8
 
Description of Named Executive Officer Salary and Bonus Arrangements filed on November 26, 2014 as Exhibit 10.8 to the Registrant's Annual Report on Form 10-K and incorporated herein by reference
10.9
 
Description of Director Fee Arrangements filed on August 1, 2014 as Exhibit 10.9 to the Registrant's June 30, 2014 Form 10-Q and incorporated herein by reference
10.10
 
Short-term Performance Plan filed on August 4, 2011 as Exhibit 10.10 to the Registrant's June 30, 2011 Form 10-Q and incorporated herein by reference
10.11
 
Capitol Federal Financial, Inc. 2012 Equity Incentive Plan (the "Equity Incentive Plan") filed on December 22, 2011 as Appendix A to Capitol Federal Financial, Inc.'s Proxy Statement (File No. 001-34814) and incorporated herein by reference
10.12
 
Form of Incentive Stock Option Agreement under the Equity Incentive Plan filed on February 6, 2012 as Exhibit 10.12 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
10.13
 
Form of Non-Qualified Stock Option Agreement under the Equity Incentive Plan filed on February 6, 2012 as Exhibit 10.13 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
10.14
 
Form of Stock Appreciation Right Agreement under the Equity Incentive Plan filed on February 6, 2012 as Exhibit 10.14 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
10.15
 
Form of Restricted Stock Agreement under the Equity Incentive Plan filed on February 6, 2012 as Exhibit 10.15 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
11
 
Calculations of Basic and Diluted EPS (See "Part I, Item 1. Financial Statements – Notes to Consolidated Financial Statements – Note 2 – Earnings Per Share")
31.1
 
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by John B. Dicus, Chairman, President and Chief Executive Officer
31.2
 
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Kent G. Townsend, Executive Vice President, Chief Financial Officer and Treasurer

79


32
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 made by John B. Dicus, Chairman, President and Chief Executive Officer, and Kent G. Townsend, Executive Vice President, Chief Financial Officer and Treasurer
101
 
The following information from the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015, filed with the Securities and Exchange Commission on May 5, 2015, has been formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets at March 31, 2015 and September 30, 2014, (ii) Consolidated Statements of Income for the three and six months ended March 31, 2015 and 2014, (iii) Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2015 and 2014, (iv) Consolidated Statement of Stockholders' Equity for the six months ended March 31, 2015, (v) Consolidated Statements of Cash Flows for the six months ended March 31, 2015 and 2014, and (vi) Notes to the Unaudited Consolidated Financial Statements

80