CFFN-063015-10Q



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 June 30, 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 July 24, 2015, there were 138,421,120 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)
 
 
 
 
 
June 30,
 
September 30,
 
2015
 
2014
ASSETS:
 
 
 
Cash and cash equivalents (includes interest-earning deposits of $40,408 and $799,340)
$
46,668

 
$
810,840

Securities:
 
 
 
Available-for-sale ("AFS"), at estimated fair value (amortized cost of $833,832 and $829,558)
847,059

 
840,790

Held-to-maturity ("HTM"), at amortized cost (estimated fair value of $1,378,612 and $1,571,524)
1,359,657

 
1,552,699

Loans receivable, net (allowance for credit losses ("ACL") of $9,601 and $9,227)
6,496,468

 
6,233,170

Federal Home Loan Bank Topeka ("FHLB") stock, at cost
166,257

 
213,054

Premises and equipment, net
73,066

 
70,530

Income taxes receivable, net
417

 

Other assets
141,589

 
143,945

TOTAL ASSETS
$
9,131,181

 
$
9,865,028

 
 
 
 
LIABILITIES:
 
 
 
Deposits
$
4,813,188

 
$
4,655,272

FHLB borrowings
2,572,898

 
3,369,677

Repurchase agreements
220,000

 
220,000

Advance payments by borrowers for taxes and insurance
37,431

 
58,105

Income taxes payable, net

 
368

Deferred income tax liabilities, net
25,671

 
22,367

Accounts payable and accrued expenses
35,270

 
46,357

Total liabilities
7,704,458

 
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, 138,699,031 and 140,951,203
 
 
 
 shares issued and outstanding as of June 30, 2015 and September 30, 2014, respectively
1,387

 
1,410

Additional paid-in capital
1,163,824

 
1,180,732

Unearned compensation, Employee Stock Ownership Plan ("ESOP")
(41,712
)
 
(42,951
)
Retained earnings
294,997

 
346,705

Accumulated other comprehensive income ("AOCI"), net of tax
8,227

 
6,986

Total stockholders' equity
1,426,723

 
1,492,882

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
9,131,181

 
$
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 Nine Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
58,922

 
$
57,474

 
$
175,739

 
$
171,539

Mortgage-backed securities ("MBS")
8,849

 
11,206

 
28,387

 
34,765

Investment securities
1,914

 
1,739

 
5,262

 
5,674

FHLB stock
3,132

 
1,452

 
9,389

 
3,877

Cash and cash equivalents
1,357

 
50

 
4,174

 
157

Total interest and dividend income
74,174

 
71,921

 
222,951

 
216,012

INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB borrowings
17,072

 
14,826

 
51,258

 
47,000

Deposits
8,377

 
8,124

 
24,729

 
24,523

Repurchase agreements
1,712

 
2,773

 
5,136

 
8,319

Total interest expense
27,161

 
25,723

 
81,123

 
79,842

NET INTEREST INCOME
47,013

 
46,198

 
141,828

 
136,170

PROVISION FOR CREDIT LOSSES
323

 
307

 
771

 
982

NET INTEREST INCOME AFTER
 
 
 
 
 
 
 
PROVISION FOR CREDIT LOSSES
46,690

 
45,891

 
141,057

 
135,188

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
3,798

 
3,792

 
11,052

 
11,056

Insurance commissions
537

 
827

 
2,059

 
2,589

Loan fees
340

 
367

 
1,071

 
1,221

Income from bank-owned life insurance ("BOLI")
251

 
333

 
819

 
1,001

Other non-interest income
219

 
300

 
678

 
979

Total non-interest income
5,145

 
5,619

 
15,679

 
16,846

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
11,038

 
10,929

 
31,927

 
32,379

Information technology and communications
2,573

 
2,373

 
7,726

 
6,985

Occupancy, net
2,557

 
2,479

 
7,437

 
7,662

Federal insurance premium
1,342

 
1,078

 
4,092

 
3,264

Deposit and loan transaction costs
1,435

 
1,326

 
4,065

 
3,976

Regulatory and outside services
1,365

 
1,437

 
3,867

 
3,990

Low income housing partnerships
492

 
547

 
3,404

 
1,966

Advertising and promotional
1,069

 
942

 
2,707

 
2,825

Other non-interest expense
1,235

 
1,269

 
3,882

 
3,948

Total non-interest expense
23,106

 
22,380

 
69,107

 
66,995

INCOME BEFORE INCOME TAX EXPENSE
28,729

 
29,130

 
87,629

 
85,039

INCOME TAX EXPENSE
9,127

 
9,147

 
28,321

 
27,555

NET INCOME
$
19,602

 
$
19,983

 
$
59,308

 
$
57,484

 
 
 
 
 
 
 
 
Basic earnings per share ("EPS")
$
0.14

 
$
0.14

 
$
0.43

 
$
0.41

Diluted EPS
$
0.14

 
$
0.14

 
$
0.43

 
$
0.41

Dividends declared per share
$
0.34

 
$
0.33

 
$
0.76

 
$
0.91


 
 
 
 

 

Basic weighted average common shares
135,745,753

 
138,331,681

 
136,013,448

 
140,246,658

Diluted weighted average common shares
135,763,353

 
138,334,404

 
136,040,702

 
140,247,794

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 

4


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
 
 
 
 
 
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
19,602

 
$
19,983

 
$
59,308

 
$
57,484

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Changes in unrealized holding gains/(losses) on AFS securities,
 
 
 
 
 
 
 
net of deferred income tax (benefits) expenses of $919 and
 
 
 
 
 
 
 
$(1,260) for the three months ended June 30, 2015 and 2014,
 
 
 
 
 
 
 
respectively, and $(754) and $103 for the nine months ended
 
 
 
 
 
 
 
June 30, 2015 and 2014, respectively
(1,513
)
 
2,074

 
1,241

 
(167
)
Comprehensive income
$
18,089

 
$
22,057

 
$
60,549

 
$
57,317

 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
59,308

 
 
 
59,308

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
1,241

 
1,241

ESOP activity, net
 
 
300

 
1,239

 
 
 
 
 
1,539

Restricted stock activity, net
 
 
80

 
 
 
 
 
 
 
80

Stock-based compensation
 
 
1,566

 
 
 
 
 
 
 
1,566

Repurchase of common stock
(23
)
 
(19,121
)
 
 
 
(8,239
)
 
 
 
(27,383
)
Stock options exercised

 
267

 
 
 
 
 
 
 
267

Dividends on common stock to
 
 
 
 
 
 
 
 
 
 
 
stockholders ($0.76 per share)
 
 
 
 
 
 
(102,777
)
 
 
 
(102,777
)
Balance at June 30, 2015
$
1,387

 
$
1,163,824

 
$
(41,712
)
 
$
294,997

 
$
8,227

 
$
1,426,723

 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 
 


6


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
 
For the Nine Months Ended
 
June 30,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
59,308

 
$
57,484

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
FHLB stock dividends
(9,389
)
 
(3,877
)
Provision for credit losses
771

 
982

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

 
(1,325
)
Proceeds from sales of LHFS

 
1,998

Amortization and accretion of premiums and discounts on securities
4,217

 
4,502

Depreciation and amortization of premises and equipment
5,054

 
4,704

Amortization of deferred amounts related to FHLB advances, net
3,270

 
4,882

Common stock committed to be released for allocation - ESOP
1,539

 
1,516

Stock-based compensation
1,566

 
1,617

Changes in:
 
 
 
Other assets, net
2,869

 
2,375

Income taxes payable/receivable
1,845

 
3,766

Accounts payable and accrued expenses
(8,847
)
 
(11,983
)
Net cash provided by operating activities
62,203

 
66,641

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of AFS securities
(149,937
)
 
(120,817
)
Purchase of HTM securities
(54,133
)
 
(164,128
)
Proceeds from calls, maturities and principal reductions of AFS securities
145,663

 
332,841

Proceeds from calls, maturities and principal reductions of HTM securities
242,958

 
240,907

Proceeds from the redemption of FHLB stock
202,929

 
22,387

Purchase of FHLB stock
(146,743
)
 
(2,856
)
Net increase in loans receivable
(268,769
)
 
(177,483
)
Purchase of premises and equipment
(7,396
)
 
(5,036
)
Proceeds from sale of other real estate owned ("OREO")
4,212

 
3,888

Net cash (used in) provided by investing activities
(31,216
)
 
129,703

 
 
 
 
 
 
 
(Continued)


7


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
 
For the Nine Months Ended
 
June 30,
 
2015
 
2014
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Dividends paid
(102,777
)
 
(127,854
)
Deposits, net of withdrawals
157,916

 
43,416

Proceeds from borrowings
5,400,000

 
644,477

Repayments on borrowings
(6,200,000
)
 
(694,477
)
Change in advance payments by borrowers for taxes and insurance
(20,674
)
 
(21,956
)
Repurchase of common stock
(29,842
)
 
(65,823
)
Other, net
218

 
411

Net cash used in financing activities
(795,159
)
 
(221,806
)
 
 
 
 
NET DECREASE IN CASH AND CASH EQUIVALENTS
(764,172
)
 
(25,462
)
 
 
 
 
CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of period
810,840

 
113,886

End of period
$
46,668

 
$
88,424

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Income tax payments
$
26,476

 
$
23,790

Interest payments
$
77,861

 
$
75,705

 
 
 
 
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.

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 July 2015, the FASB approved a one-year deferral of the effective date of the new revenue recognition standard, making 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 was January 1, 2015 for the Company, and should be applied using a cumulative-effect transition method. The adoption of this ASU did not have an impact on the Company's financial condition or results of operations. 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 was April 1, 2015 for the Company. The expanded disclosures required by the adoption of the ASU are included in the Repurchase Agreements Note.

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.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. This ASU requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this ASU. 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, and should be applied retrospectively. Early adoption is allowed for all entities, including adoption in an interim period. The Company has not yet completed its evaluation of this ASU.

In April 2015, the FASB issued ASU 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. This ASU provides explicit guidance related to a customer's accounting for fees paid in a cloud computing arrangement. 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, and can be applied either prospectively or retrospectively upon adoption. Early adoption is allowed for all entities. The Company has not yet completed its evaluation of this ASU.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. The amendments in the ASU represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Amendments in the ASU that require transition guidance are 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, including adoption in an interim period. All other amendments in the ASU were effective upon the issuance of the ASU. The Company has not yet completed its evaluation of the transition guidance associated with this ASU. All other amendments in the ASU did not have an impact on the Company's financial condition or results of operations.


10


2. EARNINGS PER SHARE
Shares acquired by the ESOP are not considered in the basic average shares outstanding until the shares are committed for allocation or vested to an employee's individual account. Unvested shares awarded pursuant to the Company's restricted stock benefit plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security.
 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands, except per share amounts)
Net income
$
19,602

 
$
19,983

 
$
59,308

 
$
57,484

Income allocated to participating securities
(24
)
 
(41
)
 
(93
)
 
(135
)
Net income available to common stockholders
$
19,578

 
$
19,942

 
$
59,215

 
$
57,349

 
 
 
 
 
 
 
 
Average common shares outstanding
135,662,701

 
138,248,629

 
135,971,846

 
140,205,057

Average committed ESOP shares outstanding
83,052

 
83,052

 
41,602

 
41,601

Total basic average common shares outstanding
135,745,753

 
138,331,681

 
136,013,448

 
140,246,658

 
 
 
 
 
 
 
 
Effect of dilutive stock options
17,600

 
2,723

 
27,254

 
1,136

 
 
 
 
 
 
 
 
Total diluted average common shares outstanding
135,763,353

 
138,334,404

 
136,040,702

 
140,247,794

 
 
 
 
 
 
 
 
Net EPS:
 
 
 
 
 
 
 
Basic
$
0.14

 
$
0.14

 
$
0.43

 
$
0.41

Diluted
$
0.14

 
$
0.14

 
$
0.43

 
$
0.41

 
 
 
 
 
 
 
 
Antidilutive stock options, excluded
 
 
 
 
 
 
 
from the diluted average common shares
 
 
 
 
 
 
 
outstanding calculation
1,240,309

 
2,052,485

 
1,253,057

 
2,064,175



11


3. SECURITIES
The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of AFS and HTM securities at the dates presented. The majority of the MBS and investment securities portfolios are composed of securities issued by United States Government-Sponsored Enterprises ("GSEs").
 
June 30, 2015
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
GSE debentures
$
600,376

 
$
656

 
$
1,076

 
$
599,956

MBS
230,615

 
13,932

 
5

 
244,542

Trust preferred securities
2,351

 

 
287

 
2,064

Municipal bonds
490

 
7

 

 
497

 
833,832

 
14,595

 
1,368

 
847,059

HTM:
 
 
 
 
 
 
 
MBS
1,320,642

 
26,521

 
7,827

 
1,339,336

Municipal bonds
39,015

 
354

 
93

 
39,276

 
1,359,657

 
26,875

 
7,920

 
1,378,612

 
$
2,193,489

 
$
41,470

 
$
9,288

 
$
2,225,671


 
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




12


The following tables summarize the estimated fair value and gross unrealized losses of those securities on which an unrealized loss at the dates presented was reported and the continuous unrealized loss position for less than 12 months and equal to or greater than 12 months as of the dates presented.
 
June 30, 2015
 
Less Than 12 Months
 
Equal to or Greater Than 12 Months
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
GSE debentures
$
278,414

 
$
731

 
$
74,655

 
$
345

MBS

 

 
875

 
5

Trust preferred securities

 

 
2,064

 
287

 
$
278,414

 
$
731

 
$
77,594

 
$
637

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HTM:
 
 
 
 
 
 
 
MBS
$
130,703

 
$
571

 
$
315,011

 
$
7,256

Municipal bonds
14,761

 
81

 
1,126

 
12

 
$
145,464

 
$
652

 
$
316,137

 
$
7,268


 
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 June 30, 2015 were primarily a result of an increase in market yields from the time the securities were purchased. In general, as market yields rise, the fair value of securities will decrease; as market yields fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. The impairment is also considered temporary because scheduled coupon payments have been made, it is anticipated that the entire principal balance will be collected as scheduled, and management neither intends to sell the securities, nor is it more likely than not that the Company will be required to sell the securities before the recovery of the remaining amortized cost amount, which could be at maturity. As a result of the analysis, management has concluded that no other-than-temporary impairments existed at June 30, 2015.

13


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

 
$

 
$
3,135

 
$
3,166

One year through five years
600,866

 
600,453

 
25,002

 
25,289

Five years through ten years

 

 
10,878

 
10,821

Ten years and thereafter
2,351

 
2,064

 

 

 
603,217

 
602,517

 
39,015

 
39,276

MBS
230,615

 
244,542

 
1,320,642

 
1,339,336

 
$
833,832

 
$
847,059

 
$
1,359,657

 
$
1,378,612



The following table presents the taxable and non-taxable components of interest income on investment securities for the periods presented.
 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Taxable
$
1,730

 
$
1,508

 
$
4,696

 
$
4,947

Non-taxable
184

 
231

 
566

 
727

 
$
1,914

 
$
1,739

 
$
5,262

 
$
5,674



The following table summarizes the amortized cost and estimated fair value of securities pledged as collateral as of the dates presented.
 
June 30, 2015
 
September 30, 2014
 
Amortized
 
Estimated
 
Amortized
 
Estimated
 
Cost
 
Fair Value
 
Cost
 
Fair Value
 
(Dollars in thousands)
FHLB borrowings
$
231,663

 
$
232,568

 
$
487,736

 
$
488,368

Public unit deposits
345,537

 
348,023

 
282,464

 
284,251

Repurchase agreements
238,010

 
246,666

 
239,922

 
247,306

Federal Reserve Bank
21,377

 
22,260

 
25,969

 
27,067

 
$
836,587

 
$
849,517

 
$
1,036,091

 
$
1,046,992


14


4. LOANS RECEIVABLE and ALLOWANCE FOR CREDIT LOSSES
Loans receivable, net at the dates presented is summarized as follows:
 
June 30, 2015
 
September 30, 2014
 
(Dollars in thousands)
Real estate loans:
 
 
 
One- to four-family
$
6,222,818

 
$
5,972,031

Multi-family and commercial
108,576

 
75,677

Construction
86,168

 
106,790

Total real estate loans
6,417,562

 
6,154,498

 
 
 
 
Consumer loans:
 
 
 
Home equity
125,907

 
130,484

Other
4,233

 
4,537

Total consumer loans
130,140

 
135,021

 
 
 
 
Total loans receivable
6,547,702

 
6,289,519

 
 
 
 
Less:
 
 
 
Undisbursed loan funds
51,523

 
52,001

ACL
9,601

 
9,227

Discounts/unearned loan fees
23,850

 
23,687

Premiums/deferred costs
(33,740
)
 
(28,566
)
 
$
6,496,468

 
$
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

15


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, current loans, and total recorded investment at the dates presented. The recorded investment in loans is defined as the unpaid principal balance of a loan (net of unadvanced funds related to loans in process), less charge-offs and inclusive of unearned loan fees and deferred costs. At June 30, 2015 and September 30, 2014, all loans 90 or more days delinquent were on nonaccrual status.
 
June 30, 2015
 
 
 
90 or More Days
 
Total
 
 
 
Total
 
30 to 89 Days
 
Delinquent or
 
Delinquent
 
Current
 
Recorded
 
Delinquent
 
in Foreclosure
 
Loans
 
Loans
 
Investment
 
(Dollars in thousands)
One- to four-family loans - originated
$
21,057

 
$
6,223

 
$
27,280

 
$
5,727,919

 
$
5,755,199

One- to four-family loans - purchased
6,274

 
7,655

 
13,929

 
492,676

 
506,605

Multi-family and commercial loans

 

 

 
114,125

 
114,125

Consumer - home equity
646

 
443

 
1,089

 
124,818

 
125,907

Consumer - other
80

 
16

 
96

 
4,137

 
4,233

 
$
28,057

 
$
14,337

 
$
42,394

 
$
6,463,675

 
$
6,506,069

 
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



16


The following table presents the recorded investment, by class, in loans classified as nonaccrual at the dates presented.
 
June 30, 2015
 
September 30, 2014
 
(Dollars in thousands)
One- to four-family loans - originated
$
15,806

 
$
16,546

One- to four-family loans - purchased
8,625

 
7,940

Multi-family and commercial loans

 

Consumer - home equity
662

 
442

Consumer - other
16

 
13

 
$
25,109

 
$
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.
 
June 30, 2015
 
September 30, 2014
 
Special Mention
 
Substandard
 
Special Mention
 
Substandard
 
(Dollars in thousands)
One- to four-family - originated
$
17,549

 
$
29,025

 
$
20,068

 
$
29,151

One- to four-family - purchased
1,103

 
12,662

 
2,738

 
11,470

Multi-family and commercial

 

 

 

Consumer - home equity
148

 
1,206

 
146

 
887

Consumer - other

 
26

 
5

 
13

 
$
18,800

 
$
42,919

 
$
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.
 
June 30, 2015
 
September 30, 2014
 
Credit Score
 
LTV
 
Credit Score
 
LTV
One- to four-family - originated
765
 
65
%
 
764
 
65
%
One- to four-family - purchased
752
 
66

 
749
 
66

Consumer - home equity
751
 
18

 
751
 
18

 
764
 
64

 
762
 
64


17


Troubled Debt Restructurings ("TDRs") - The following tables present the recorded investment prior to restructuring and immediately after restructuring in all loans restructured during the periods presented. These tables do not reflect the recorded investment at the end of the periods indicated. Any increase in the recorded investment at the time of the restructuring was generally due to the capitalization of delinquent interest and/or escrow balances.
 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30, 2015
 
June 30, 2015
 
Number
 
Pre-
 
Post-
 
Number
 
Pre-
 
Post-
 
of
 
Restructured
 
Restructured
 
of
 
Restructured
 
Restructured
 
Contracts
 
Outstanding
 
Outstanding
 
Contracts
 
Outstanding
 
Outstanding
 
(Dollars in thousands)
One- to four-family loans - originated
30

 
$
4,125

 
$
4,190

 
104

 
$
13,862

 
$
14,007

One- to four-family loans - purchased
2

 
874

 
876

 
4

 
1,140

 
1,144

Multi-family and commercial loans

 

 

 

 

 

Consumer - home equity
7

 
171

 
172

 
13

 
255

 
261

Consumer - other

 

 

 
3

 
12

 
12

 
39

 
$
5,170

 
$
5,238

 
124

 
$
15,269

 
$
15,424

 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30, 2014
 
June 30, 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
36

 
$
5,438

 
$
5,461

 
105

 
$
13,510

 
$
13,534

One- to four-family loans - purchased
3

 
642

 
644

 
5

 
840

 
842

Multi-family and commercial loans

 

 

 

 

 

Consumer - home equity
1

 
20

 
20

 
6

 
100

 
101

Consumer - other

 

 

 

 

 

 
40

 
$
6,100

 
$
6,125

 
116

 
$
14,450

 
$
14,477


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 Nine Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 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
16

 
$
1,356

 
13

 
$
1,818

 
44

 
$
4,234

 
29

 
$
3,299

One- to four-family loans - purchased
1

 
551

 
1

 
442

 
4

 
890

 
3

 
780

Multi-family and commercial loans

 

 

 

 

 

 

 

Consumer - home equity
2

 
12

 
1

 
29

 
4

 
33

 
2

 
56

Consumer - other

 

 

 

 
1

 
5

 

 

 
19

 
$
1,919

 
15

 
$
2,289

 
53

 
$
5,162

 
34

 
$
4,135


18


Impaired loans - The following information pertains to impaired loans, by class, as of the dates presented. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement.
 
June 30, 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
$
11,765

 
$
12,347

 
$

 
$
13,871

 
$
14,507

 
$

One- to four-family - purchased
11,080

 
13,346

 

 
12,405

 
14,896

 

Multi-family and commercial

 

 

 

 

 

Consumer - home equity
468

 
726

 

 
605

 
892

 

Consumer - other
8

 
35

 

 
13

 
22

 

 
23,321

 
26,454

 

 
26,894

 
30,317

 

With an allowance recorded
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
26,909

 
27,015

 
214

 
23,675

 
23,767

 
107

One- to four-family - purchased
2,818

 
2,785

 
82

 
1,820

 
1,791

 
56

Multi-family and commercial

 

 

 

 

 

Consumer - home equity
902

 
902

 
62

 
464

 
464

 
39

Consumer - other
18

 
18

 
1

 

 

 

 
30,647

 
30,720

 
359

 
25,959

 
26,022

 
202

Total
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
38,674

 
39,362

 
214

 
37,546

 
38,274

 
107

One- to four-family - purchased
13,898

 
16,131

 
82

 
14,225

 
16,687

 
56

Multi-family and commercial

 

 

 

 

 

Consumer - home equity
1,370

 
1,628

 
62

 
1,069

 
1,356

 
39

Consumer - other
26

 
53

 
1

 
13

 
22

 

 
$
53,968

 
$
57,174

 
$
359

 
$
52,853

 
$
56,339

 
$
202



19


The following information pertains to impaired loans, by class, for the periods presented.
 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 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
$
12,099

 
$
120

 
$
14,012

 
$
110

 
$
12,727

 
$
342

 
$
13,448

 
$
307

One- to four-family - purchased
10,765

 
48

 
13,636

 
55

 
11,254

 
147

 
13,549

 
147

Multi-family and commercial

 

 

 

 

 

 

 

Consumer - home equity
455

 
7

 
583

 
8

 
480

 
22

 
578

 
25

Consumer - other
8

 

 
7

 

 
14

 

 
5

 

 
23,327

 
175

 
28,238

 
173

 
24,475

 
511

 
27,580

 
479

With an allowance recorded
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
28,420

 
281

 
25,704

 
261

 
27,223

 
829

 
29,425

 
875

One- to four-family - purchased
3,101

 
10

 
1,839

 
13

 
2,770

 
33

 
2,354

 
41

Multi-family and commercial

 

 

 

 

 

 
22

 
1

Consumer - home equity
876

 
9

 
524

 
6

 
741

 
22

 
564

 
17

Consumer - other
17

 

 
12

 

 
16

 
1

 
13

 

 
32,414

 
300

 
28,079

 
280

 
30,750

 
885

 
32,378

 
934

Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
40,519

 
401

 
39,716

 
371

 
39,950

 
1,171

 
42,873

 
1,182

One- to four-family - purchased
13,866

 
58

 
15,475

 
68

 
14,024

 
180

 
15,903

 
188

Multi-family and commercial

 

 

 

 

 

 
22

 
1

Consumer - home equity
1,331

 
16

 
1,107

 
14

 
1,221

 
44

 
1,142

 
42

Consumer - other
25

 

 
19

 

 
30

 
1

 
18

 

 
$
55,741

 
$
475

 
$
56,317

 
$
453

 
$
55,225

 
$
1,396

 
$
59,958

 
$
1,413


20


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 June 30, 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
$
6,711

 
$
1,858

 
$
8,569

 
$
528

 
$
309

 
$
9,406

Charge-offs
(108
)
 
(28
)
 
(136
)
 

 
(21
)
 
(157
)
Recoveries
12

 

 
12

 

 
17

 
29

Provision for credit losses
516

 
(261
)
 
255

 
69

 
(1
)
 
323

Ending balance
$
7,131

 
$
1,569

 
$
8,700

 
$
597

 
$
304

 
$
9,601

 
For the Nine Months Ended June 30, 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
(260
)
 
(221
)
 
(481
)
 

 
(71
)
 
(552
)
Recoveries
45

 
58

 
103

 

 
52

 
155

Provision for credit losses
1,083

 
(591
)
 
492

 
197

 
82

 
771

Ending balance
$
7,131

 
$
1,569

 
$
8,700

 
$
597

 
$
304

 
$
9,601

 
For the Three Months Ended June 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)
Beginning balance
$
6,737

 
$
1,817

 
$
8,554

 
$
143

 
$
270

 
$
8,967

Charge-offs
(144
)
 
(149
)
 
(293
)
 

 
(15
)
 
(308
)
Recoveries

 
64

 
64

 

 
52

 
116

Provision for credit losses
(394
)
 
749

 
355

 
18

 
(66
)
 
307

Ending balance
$
6,199

 
$
2,481

 
$
8,680

 
$
161

 
$
241

 
$
9,082

 
For the Nine Months Ended June 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)
Beginning balance
$
5,771

 
$
2,486

 
$
8,257

 
$
185

 
$
380

 
$
8,822

Charge-offs
(284
)
 
(536
)
 
(820
)
 

 
(34
)
 
(854
)
Recoveries
1

 
64

 
65

 

 
67

 
132

Provision for credit losses
711

 
467

 
1,178

 
(24
)
 
(172
)
 
982

Ending balance
$
6,199

 
$
2,481

 
$
8,680

 
$
161

 
$
241

 
$
9,082



21


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

 
June 30, 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
$
5,743,434

 
$
495,525

 
$
6,238,959

 
$
114,125

 
$
129,664

 
$
6,482,748

 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment in loans
 
 
 
 
 
 
 
 
 
 
 
individually evaluated for impairment
11,765

 
11,080

 
22,845

 

 
476

 
23,321

 
$
5,755,199

 
$
506,605

 
$
6,261,804

 
$
114,125

 
$
130,140

 
$
6,506,069

 
 
 
 
 
 
 
 
 
 
 
 
ACL for loans collectively
 
 
 
 
 
 
 
 
 
 
 
evaluated for impairment
$
7,131

 
$
1,569

 
$
8,700

 
$
597

 
$
304

 
$
9,601


 
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




22


5. REPURCHASE AGREEMENTS
At both June 30, 2015 and September 30, 2014, the Company had repurchase agreements outstanding in the amount of $220.0 million with a weighted average contractual rate of 3.08%. All of the Company's repurchase agreements at June 30, 2015 and September 30, 2014 were fixed-rate. See Note 3 for information regarding the amount of securities pledged as collateral in conjunction with repurchase agreements. Securities are delivered to the party with whom each transaction is executed and the party agrees to resell the same securities to the Bank at the maturity of the agreement. The Bank retains the right to substitute similar or like securities throughout the terms of the agreements. The repurchase agreements and collateral are subject to valuation at current market levels and the Bank may ask for the return of excess collateral or be required to post additional collateral due to changes in the market values of these items. The Bank may also be required to post additional collateral as a result of principal payments received on the securities pledged.
The following table presents the scheduled maturity of repurchase agreements by fiscal year as of June 30, 2015:
 
Amount
 
(Dollars in thousands)
2015
$
20,000

2016

2017

2018
100,000

2019

Thereafter
100,000

 
$
220,000



6. 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 June 30, 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

23


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 nine months ended June 30, 2015 or during 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)

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.
 
June 30, 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
$
599,956

 
$

 
$
599,956

 
$

MBS
244,542

 

 
244,542

 

Municipal bonds
497

 

 
497

 

Trust preferred securities
2,064

 

 

 
2,064

 
$
847,059

 
$

 
$
844,995

 
$
2,064


 
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 nine months ended June 30, 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 nine months ended June 30, 2015 were $55 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.


24


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 June 30, 2015 and September 30, 2014 was $23.3 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 June 30, 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 June 30, 2015 and September 30, 2014 was $4.9 million and $4.1 million, respectively.

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.
 
June 30, 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
$
23,253

 
$

 
$

 
$
23,253

OREO
4,948

 

 

 
4,948

 
$
28,201

 
$

 
$

 
$
28,201


 
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.


25


The carrying amounts and estimated fair values of the Company's financial instruments, at the dates presented, were as follows:
 
June 30, 2015
 
September 30, 2014
 
 
 
Estimated
 
 
 
Estimated
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Amount
 
Value
 
Amount
 
Value
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
46,668

 
$
46,668

 
$
810,840

 
$
810,840

AFS securities
847,059

 
847,059

 
840,790

 
840,790

HTM securities
1,359,657

 
1,378,612

 
1,552,699

 
1,571,524

Loans receivable
6,496,468

 
6,688,958

 
6,233,170

 
6,429,840

FHLB stock
166,257

 
166,257

 
213,054

 
213,054

Liabilities:
 
 
 
 
 
 
 
Deposits
4,813,188

 
4,836,506

 
4,655,272

 
4,674,268

FHLB borrowings
2,572,898

 
2,622,229

 
3,369,677

 
3,423,547

Repurchase agreements
220,000

 
227,630

 
220,000

 
227,539


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 June 30, 2015 and September 30, 2014 was $2.21 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 June 30, 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)

7. SUBSEQUENT EVENTS
In preparing these financial statements, management has evaluated events occurring subsequent to June 30, 2015 for potential recognition and disclosure. There have been no material events or transactions which would require adjustments to the consolidated financial statements at June 30, 2015.

26


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 maintain overhead costs at reasonable levels;
our ability to originate and purchase a sufficient volume of one- to four-family loans in order to maintain the balance of that portfolio at a level desired by management;
our ability to invest funds in wholesale or secondary markets at favorable yields compared to the related funding source;
our ability to access cost-effective funding;
the 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

27


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 diversified, especially in the Kansas City metropolitan statistical area, which comprises the largest segment of our loan portfolio and deposit base. As of June 2015, the unemployment rate was 4.5% for Kansas and 5.8% for Missouri, compared to the national average of 5.3%, 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.

During the fourth quarter of fiscal year 2014, management implemented a daily leverage strategy that 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 nine months ended June 30, 2015, respectively. Net income attributable to the daily leverage strategy was $699 thousand and $2.2 million for the three and nine months ended June 30, 2015, respectively.

For the quarter ended June 30, 2015, the Company recognized net income of $19.6 million, compared to net income of $20.0 million for the quarter ended June 30, 2014. The $381 thousand, or 1.9%, decrease in net income was due primarily to a decrease in non-interest income and an increase in non-interest expense, partially offset by net income associated with the daily leverage strategy.

The net interest margin decreased 38 basis points, from 2.09% 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

28


2.05% for the current quarter, or a four 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.

The Company recognized net income of $19.2 million during the prior quarter, compared to net income of $19.6 million for the current quarter. The $368 thousand, or 1.9%, increase in net income during the current quarter was due primarily to a decrease in income tax expense resulting largely from a decrease in the effective income tax rate. The net interest margin for the current quarter held steady from the prior quarter at 1.71%. Excluding the effects of the daily leverage strategy, the net interest margin would have been 2.05% for the current quarter, compared to 2.04% for the prior quarter.

For the nine month period ended June 30, 2015, the Company recognized net income of $59.3 million, compared to net income of $57.5 million for the nine month period ended June 30, 2014. The $1.8 million, or 3.2%, increase in net income was due primarily to the daily leverage strategy.

The net interest margin decreased 32 basis points, from 2.04% for the prior year nine month period, to 1.72% for the current nine 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 2.07% for the current nine month period, or three basis points higher than the prior year nine 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.

Total assets were $9.13 billion at June 30, 2015 compared to $9.87 billion at September 30, 2014. The $733.8 million decrease in total assets was primarily in cash and cash equivalents due to the removal of the entire daily leverage strategy at June 30, 2015, compared to having $800.0 million of the daily leverage strategy in place at September 30, 2014. The full daily leverage strategy was reinstated on July 1, 2015. Loans receivable, net, increased $263.3 million, or 4.2%, to $6.50 billion at June 30, 2015, from $6.23 billion at September 30, 2014. During the current year nine month period, the Bank originated and refinanced $563.2 million of loans with a weighted average rate of 3.57%, purchased $458.3 million of loans from correspondent lenders with a weighted average rate of 3.44%, and participated in $23.0 million of commercial real estate loans with a weighted average rate of 3.73%. Cash flows from the MBS portfolio largely funded the loan growth.

Total liabilities were $7.70 billion at June 30, 2015 compared to $8.37 billion at September 30, 2014. The $667.7 million decrease was due primarily to a decrease in FHLB borrowings due to the removal of the entire daily leverage strategy at June 30, 2015 compared to having $800.0 million of the daily leverage strategy in place at September 30, 2014. This decrease was partially offset by a $157.9 million, or 4.5% annualized, increase in the deposit portfolio. The growth in deposits was primarily in the checking portfolio and retail certificate of deposit portfolio, which increased $56.6 million and $53.3 million, respectively.

Stockholders' equity was $1.43 billion at June 30, 2015 compared to $1.49 billion at September 30, 2014. The $66.2 million decrease between periods was due primarily to the payment of $102.8 million in dividends and the repurchase of $27.4 million of common stock, partially offset by net income of $59.3 million.

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.


29


Financial Condition
The following table presents selected balance sheet information as of the dates presented.
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
2015
 
2015
 
2014
 
2014
 
2014
 
(Dollars in thousands)
Total assets
$
9,131,181

 
$
10,023,099

 
$
9,056,356

 
$
9,865,028

 
$
9,031,039

Cash and cash equivalents
46,668

 
1,021,150

 
208,642

 
810,840

 
88,424

AFS securities
847,059

 
842,856

 
777,329

 
840,790

 
857,372

HTM securities
1,359,657

 
1,425,383

 
1,472,914

 
1,552,699

 
1,637,043

Loans receivable, net
6,496,468

 
6,365,320

 
6,261,619

 
6,233,170

 
6,132,520

FHLB stock
166,257

 
154,951

 
121,306

 
213,054

 
112,876

Deposits
4,813,188

 
4,837,274

 
4,705,012

 
4,655,272

 
4,654,862

FHLB borrowings
2,572,898

 
3,371,970

 
2,570,946

 
3,369,677

 
2,468,420

Repurchase agreements
220,000

 
220,000

 
220,000

 
220,000

 
320,000

Stockholders' equity
1,426,723

 
1,476,656

 
1,465,929

 
1,492,882

 
1,498,907

Equity to total assets at end of period
15.6
%
 
14.7
%
 
16.2
%
 
15.1
%
 
16.6
%

Assets. Total assets were $9.13 billion at June 30, 2015 compared to $9.87 billion at September 30, 2014. The decrease in total assets was primarily in cash and cash equivalents due to the removal of the entire daily leverage strategy at June 30, 2015, compared to having $800.0 million of the daily leverage strategy in place at September 30, 2014. The full daily leverage strategy was reinstated on July 1, 2015.

Loans Receivable. Loans receivable, net, increased $263.3 million from September 30, 2014, to $6.50 billion at June 30, 2015. The growth in the loan portfolio was primarily in the correspondent one- to four-family purchased loan portfolio.

Included in the loan portfolio at June 30, 2015 were $81.4 million, or 1.3% of the total loan portfolio, of adjustable-rate mortgage ("ARM") loans that were originated as interest-only. Of these interest-only loans, $69.0 million were purchased in bulk loan packages from nationwide lenders, primarily during fiscal year 2005.  The $69.0 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 June 30, 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 June 30, 2015, $20.7 million, or 25%, of the interest-only loans were still in their interest-only payment term. Included in the $20.7 million of interest-only loans were $9.8 million of bulk purchased interest-only ARM loans, all of which were scheduled to begin amortizing by September 30, 2015. At June 30, 2015, $3.5 million, or 14% of non-performing loans, were interest-only ARMs.

30


The following table presents the balance and weighted average rate of our loan portfolio as of the dates indicated. The weighted average rate of the portfolio decreased nine basis points from 3.76% at September 30, 2014 to 3.67% at June 30, 2015. The decrease in the weighted average rate was due primarily to loan purchases and originations/refinances at market rates less than the weighted average rate of the existing portfolio, as well as to endorsements to current market rates and adjustable-rate loans repricing to lower rates. Within the one- to four-family loan portfolio at June 30, 2015, 65% of the loans had a balance at origination of less than $417 thousand.
 
June 30, 2015
 
September 30, 2014
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
One- to four-family
$
6,222,818

 
3.64
%
 
$
5,972,031

 
3.72
%
Multi-family and commercial
108,576

 
4.14

 
75,677

 
4.39

Construction:
 
 
 
 
 
 
 
One- to four-family
68,748

 
3.54

 
72,113

 
3.66

Multi-family and commercial
17,420

 
3.85

 
34,677

 
4.01

Total construction
86,168

 
3.60

 
106,790

 
3.77

Total real estate loans
6,417,562

 
3.65

 
6,154,498

 
3.73

 
 
 
 
 
 
 
 
Consumer loans:
 
 
 
 
 
 
 
Home equity
125,907

 
5.04

 
130,484

 
5.14

Other
4,233

 
4.08

 
4,537

 
4.16

Total consumer loans
130,140

 
5.01

 
135,021

 
5.11

Total loans receivable
6,547,702

 
3.67

 
6,289,519

 
3.76

 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
Undisbursed loan funds
51,523

 
 
 
52,001

 
 
ACL
9,601

 
 
 
9,227

 
 
Discounts/unearned loan fees
23,850

 
 
 
23,687

 
 
Premiums/deferred costs
(33,740
)
 
 
 
(28,566
)
 
 
Total loans receivable, net
$
6,496,468

 
 
 
$
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 up-dated 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.
 
June 30, 2015
 
September 30, 2014
 
 
 
% of
 
Credit
 
 
 
Average
 
 
 
% of
 
Credit
 
 
 
Average
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
(Dollars in thousands)
Originated
$
4,001,231

 
64.3
%
 
765

 
64
%
 
$
128

 
$
3,978,396

 
66.6
%
 
764

 
64
%
 
$
127

Correspondent purchased
1,717,845

 
27.6

 
764

 
68

 
340

 
1,431,745

 
24.0

 
764

 
68

 
332

Bulk purchased
503,742

 
8.1

 
752

 
66

 
309

 
561,890

 
9.4

 
749

 
67

 
311

 
$
6,222,818

 
100.0
%
 
764

 
65

 
164

 
$
5,972,031

 
100.0
%
 
763

 
65

 
159


31


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 nine months ended June 30, 2015, the Bank endorsed $27.9 million and $112.5 million of one- to four-family loans, respectively, reducing the average rate on those loans by 99 and 95 basis points, respectively.
 
For the Three Months Ended
 
June 30, 2015
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Beginning balance
$
6,418,780

 
3.71
%
 
$
6,317,251

 
3.74
%
 
$
6,289,519

 
3.76
%
 
$
6,197,114

 
3.78
%
Originated and refinanced:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
207,895

 
3.50

 
131,532

 
3.49

 
101,270

 
3.74

 
116,296

 
3.88

Adjustable
47,609

 
3.55

 
36,053

 
3.63

 
38,878

 
3.75

 
47,025

 
3.67

Purchased and participations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
147,887

 
3.51

 
144,370

 
3.56

 
94,374

 
3.74

 
127,814

 
3.75

Adjustable
29,046

 
2.92

 
41,858

 
2.94

 
23,705

 
2.96

 
44,417

 
3.07

Repayments
(301,835
)
 
 
 
(250,422
)
 
 
 
(228,940
)
 
 
 
(241,320
)
 
 
Principal charge-offs, net
(128
)
 
 
 
(166
)
 
 
 
(103
)
 
 
 
(282
)
 
 
Other
(1,552
)
 
 
 
(1,696
)
 
 
 
(1,452
)
 
 
 
(1,545
)
 
 
Ending balance
$
6,547,702

 
3.67

 
$
6,418,780

 
3.71

 
$
6,317,251

 
3.74

 
$
6,289,519

 
3.76

 
For the Nine Months Ended
 
June 30, 2015
 
June 30, 2014
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Beginning balance
$
6,289,519

 
3.76
%
 
$
6,011,799

 
3.82
%
Originations and refinances:
 
 
 
 
 
 
 
Fixed
440,697

 
3.55

 
271,418

 
4.04

Adjustable
122,540

 
3.64

 
132,169

 
3.76

Purchases and participations:
 
 
 
 
 
 
 
Fixed
386,631

 
3.59

 
282,735

 
4.01

Adjustable
94,609

 
2.94

 
118,817

 
3.25

Repayments
(781,197
)
 
 
 
(616,253
)
 
 
Principal charge-offs, net
(397
)
 
 
 
(722
)
 
 
Other
(4,700
)
 
 
 
(2,849
)
 
 
Ending balance
$
6,547,702

 
3.67

 
$
6,197,114

 
3.78


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 nine months ended June 30, 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.

32


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 $503.4 million of one- to four-family loans originated and refinanced during the current year nine month period, 76% had loan values of $417 thousand or less. Of the $458.3 million of one- to four-family correspondent loans purchased during the current year nine month period, 27% had loan values of $417 thousand or less.
 
For the Three Months Ended
 
June 30, 2015
 
June 30, 2014
 
Amount
 
Rate
 
% of Total
 
Amount
 
Rate
 
% of Total
 
(Dollars in thousands)
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 15 years
$
106,115

 
2.90
%
 
24.5
%
 
$
43,359

 
3.34
%
 
14.0
%
> 15 years
244,947

 
3.74

 
56.6

 
148,570

 
4.26

 
48.0

Multi-family and commercial real estate
3,268

 
4.11

 
0.8

 
27,850

 
4.09

 
9.0

Home equity
1,265

 
6.21

 
0.3

 
635

 
6.36

 
0.2

Other
187

 
7.82

 

 
661

 
5.54

 
0.2

Total fixed-rate
355,782

 
3.50

 
82.2

 
221,075

 
4.07

 
71.4

 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 36 months
2,757

 
2.52

 
0.6

 
2,472

 
2.76

 
0.8

> 36 months
54,285

 
2.91

 
12.6

 
66,656

 
3.15

 
21.5

Home equity
19,250

 
4.58

 
4.5

 
19,053

 
4.66

 
6.2

Other
363

 
2.88

 
0.1

 
269

 
3.37

 
0.1

Total adjustable-rate
76,655

 
3.31

 
17.8

 
88,450

 
3.46

 
28.6

 
 
 
 
 
 
 
 
 
 
 
 
Total originated, refinanced and purchased
$
432,437

 
3.47

 
100.0
%
 
$
309,525

 
3.90

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Purchased and participation loans included above:
 
 
 
 
 
 
 
 
 
 
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
$
146,487

 
3.50

 
 
 
$
98,007

 
4.02

 
 
Participations - commercial real estate
1,400

 
4.25

 
 
 
24,400

 
4.08

 
 
Total fixed-rate purchased/participations
147,887

 
3.51

 
 
 
122,407

 
4.03

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
29,046

 
2.92

 
 
 
40,344

 
3.12

 
 
Total purchased/participation loans
$
176,933

 
3.41

 
 
 
$
162,751

 
3.81

 
 

33


 
For the Nine Months Ended
 
June 30, 2015
 
June 30, 2014
 
Amount
 
Rate
 
% of Total
 
Amount
 
Rate
 
% of Total
 
(Dollars in thousands)
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 15 years
$
253,435

 
2.97
%
 
24.3
%
 
$
130,457

 
3.35
%
 
16.2
%
> 15 years
543,934

 
3.82

 
52.1

 
384,435

 
4.24

 
47.8

Multi-family and commercial real estate
26,518

 
3.74

 
2.5

 
36,450

 
4.08

 
4.5

Home equity
2,812

 
6.18

 
0.3

 
1,812

 
6.19

 
0.2

Other
629

 
7.72

 
0.1

 
999

 
7.08

 
0.1

Total fixed-rate
827,328

 
3.57

 
79.3

 
554,153

 
4.03

 
68.8

 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 36 months
5,197

 
2.57

 
0.5

 
5,982

 
2.76

 
0.8

> 36 months
159,092

 
2.95

 
15.2

 
177,818

 
3.15

 
22.1

Multi-family and commercial real estate

 

 

 
14,358

 
4.34

 
1.8

Home equity
51,655

 
4.59

 
4.9

 
51,791

 
4.65

 
6.4

Other
1,205

 
3.08

 
0.1

 
1,037

 
3.17

 
0.1

Total adjustable-rate
217,149

 
3.33

 
20.7

 
250,986

 
3.52

 
31.2

 
 
 
 
 
 
 
 
 
 
 
 
Total originated, refinanced and purchased
$
1,044,477

 
3.52

 
100.0
%
 
$
805,139

 
3.87

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Purchased and participation loans included above:
 
 
 
 
 
 
 
 
 
 
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
$
363,661

 
3.58

 
 
 
$
253,335

 
4.01

 
 
Participations - commercial real estate
22,970

 
3.73

 
 
 
29,400

 
4.07

 
 
Total fixed-rate purchased/participations
386,631

 
3.59

 
 
 
282,735

 
4.01

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
94,609

 
2.94

 
 
 
104,459

 
3.10

 
 
Participations - commercial real estate

 

 
 
 
14,358

 
4.34

 
 
Total adjustable-rate purchased/participations
94,609

 
2.94

 
 
 
118,817

 
3.25

 
 
Total purchased/participation loans
$
481,240

 
3.46

 
 
 
$
401,552

 
3.79

 
 

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
 
June 30, 2015
 
June 30, 2014
 
 
 
 
 
Credit
 
 
 
 
 
Credit
 
Amount
 
LTV
 
Score
 
Amount
 
LTV
 
Score
 
(Dollars in thousands)
Originated
$
188,742

 
78
%
 
772

 
$
112,219

 
79
%
 
768

Refinanced by Bank customers
43,829

 
70

 
767

 
10,487

 
68

 
759

Correspondent purchased
175,533

 
74

 
767

 
138,351

 
76

 
765

 
$
408,104

 
75

 
769

 
$
261,057

 
77

 
766


34


 
For the Nine Months Ended
 
June 30, 2015
 
June 30, 2014
 
 
 
 
 
Credit
 
 
 
 
 
Credit
 
Amount
 
LTV
 
Score
 
Amount
 
LTV
 
Score
 
(Dollars in thousands)
Originated
$
401,357

 
77
%
 
771

 
$
297,850

 
78
%
 
766

Refinanced by Bank customers
102,031

 
68

 
768

 
43,048

 
69

 
760

Correspondent purchased
458,270

 
74

 
765

 
357,794

 
75

 
763

 
$
961,658

 
74

 
768

 
$
698,692

 
76

 
764


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 nine months ended June 30, 2015.
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
June 30, 2015
 
June 30, 2015
State
 
Amount
 
% of Total
 
Rate
 
Amount
 
% of Total
 
Rate
 
 
(Dollars in thousands)
Kansas
 
$
208,018

 
51.0
%
 
3.39
%
 
$
460,641

 
47.9
%
 
3.46
%
Missouri
 
92,533

 
22.7

 
3.39

 
227,163

 
23.6

 
3.42

Texas
 
42,991

 
10.5

 
3.41

 
122,558

 
12.8

 
3.40

Other states
 
64,562

 
15.8

 
3.42

 
151,296

 
15.7

 
3.46

 
 
$
408,104

 
100.0
%
 
3.40

 
$
961,658

 
100.0
%
 
3.44


The following table summarizes our one- to four-family loan origination, refinance, and correspondent purchase commitments as of June 30, 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. In addition to the amounts presented in the following table, as of June 30, 2015, the Bank had commitments outstanding to originate $4.0 million of commercial real estate loans and participate in $36.6 million of commercial construction-permanent loans. Subsequent to June 30, 2015, the Bank entered into $61.1 million of additional commitments to participate in commercial construction-permanent loans. It is anticipated that the $97.7 million of commercial construction-permanent loan participations will be disbursed over a 24-month period. As a result of expanding relationships with some of its correspondent lenders, the Bank has taken opportunities to participate in high-quality commercial construction-permanent loans, and plans to continue doing so. Based upon our underwriting, we expect that these loans will continue meeting the credit quality standards established by the Bank for its existing commercial real estate loans.
 
Fixed-Rate
 
 
 
 
 
 
 
15 years
 
More than
 
Adjustable-
 
Total
 
or less
 
15 years
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Originate/refinance
$
15,861

 
$
61,937

 
$
19,540

 
$
97,338

 
3.53
%
Correspondent
17,913

 
76,427

 
12,158

 
106,498

 
3.64

 
$
33,774

 
$
138,364

 
$
31,698

 
$
203,836

 
3.59

 
 
 
 
 
 
 
 
 
 
Rate
3.01
%
 
3.86
%
 
3.02
%
 
 
 
 


35



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 June 30, 2015, approximately 77% were 59 days or less delinquent.
 
Loans Delinquent for 30 to 89 Days at:
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
2015
 
2015
 
2014
 
2014
 
2014
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
150
 
$
16,320

 
128
 
$
13,097

 
164
 
$
16,638

 
138

 
$
13,074

 
130

 
$
14,435

Correspondent purchased
15
 
4,741

 
7
 
2,206

 
6
 
1,280

 
9

 
2,335

 
5

 
1,301

Bulk purchased
30
 
6,249

 
35
 
8,137

 
46
 
10,047

 
37

 
7,860

 
36

 
6,826

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
34
 
646

 
30
 
681

 
41
 
916

 
33

 
770

 
33

 
628

Other
18
 
80

 
9
 
36

 
14
 
29

 
18

 
69

 
11

 
40

 
247
 
$
28,036

 
209
 
$
24,157

 
271
 
$
28,910

 
235

 
$
24,108

 
215

 
$
23,230

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30 to 89 days delinquent loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
to total loans receivable, net
 
 
0.43
%
 
 
 
0.38
%
 
 
 
0.46
%
 
 
 
0.39
%
 
 
 
0.38
%

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.

36


 
Non-Performing Loans and OREO at:
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
2015
 
2015
 
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
70

 
$
6,180

 
79

 
$
8,047

 
75

 
$
7,762

 
82

 
$
7,880

 
83

 
$
8,130

Correspondent purchased
1

 
67

 
1

 
490

 
3

 
1,039

 
2

 
709

 
2

 
314

Bulk purchased
29

 
7,577

 
27

 
8,040

 
24

 
7,191

 
28

 
7,120

 
29

 
8,322

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
19

 
443

 
23

 
366

 
20

 
354

 
25

 
397

 
23

 
345

Other
5

 
16

 
6

 
19

 
5

 
28

 
4

 
13

 
6

 
24

 
124

 
14,283

 
136

 
16,962

 
127

 
16,374

 
141

 
16,119

 
143

 
17,135

Nonaccrual loans less than 90 Days Delinquent:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
71

 
9,224

 
80

 
9,709

 
89

 
9,636

 
67

 
7,473

 
66

 
8,379

Correspondent purchased
2

 
398

 
2

 
401

 
3

 
492

 
4

 
553

 
2

 
134

Bulk purchased
5

 
959

 
5

 
732

 
6

 
872

 
5

 
724

 
3

 
630

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
10

 
219

 
6

 
108

 
5

 
91

 
2

 
45

 
3

 
61

Other

 

 
3

 
11

 
3

 
12

 

 

 

 

 
88

 
10,800

 
96

 
10,961

 
106

 
11,103

 
78

 
8,795

 
74

 
9,204

Total non-performing loans
212

 
25,083

 
232

 
27,923

 
233

 
27,477

 
219

 
24,914

 
217

 
26,339

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-performing loans as a percentage of total loans(2)
0.39
%
 
 
 
0.44
%
 
 
 
0.44
%
 
 
 
0.40
%
 
 
 
0.43
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OREO:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated(3)
28

 
$
1,920

 
36

 
$
1,989

 
26

 
$
2,551

 
25

 
$
2,040

 
24

 
$
1,430

Correspondent purchased
2

 
714

 
1

 
216

 

 

 
1

 
179

 
1

 
179

Bulk purchased
4

 
1,019

 
5

 
1,162

 
5

 
685

 
2

 
575

 
2

 
369

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
2

 
17

 

 

 

 

 

 

 

 

Other(4)
1

 
1,278

 
1

 
1,278

 
1

 
1,300

 
1

 
1,300

 
1

 
1,300

 
37

 
4,948

 
43

 
4,645

 
32

 
4,536

 
29

 
4,094

 
28

 
3,278

Total non-performing assets
249

 
$
30,031

 
275

 
$
32,568

 
265

 
$
32,013

 
248

 
$
29,008

 
245

 
$
29,617

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

37


(1)
Represents loans required to be reported as nonaccrual pursuant to regulatory reporting requirements even if the loans are current. At June 30, 2015, March 31, 2015, December 31, 2014, September 30, 2014 and June 30, 2014, this amount was comprised of $3.4 million, $1.2 million, $2.7 million, $1.1 million and $2.5 million, respectively, of loans that were 30 to 89 days delinquent and are reported as such, and $7.4 million, $9.8 million, $8.4 million, $7.7 million and $6.7 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 0.22%, 0.27%, 0.26%, 0.26% and 0.28%, at June 30, 2015, March 31, 2015, December 31, 2014, September 30, 2014 and June 30, 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.

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 June 30, 2015, $9.7 million, or 70%, 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 June 30, 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 June 30, 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
 
$
3,732,200

 
60.0
%
 
$
13,770

 
50.4
%
 
$
5,778

 
41.8
%
 
72
%
Missouri
 
1,219,824

 
19.6

 
4,492

 
16.4

 
469

 
3.4

 
80

Texas
 
315,224

 
5.1

 
2,855

 
10.5

 

 

 
n/a

California
 
273,408

 
4.4

 

 

 

 

 
n/a

Tennessee
 
133,778

 
2.1

 
649

 
2.4

 

 

 
n/a

Alabama
 
92,796

 
1.5

 
258

 
0.9

 

 

 
n/a

Oklahoma
 
75,854

 
1.2

 

 

 
328

 
2.4

 
63

North Carolina
 
45,020

 
0.7

 

 

 
767

 
5.5

 
48

Colorado
 
33,324

 
0.5

 

 

 

 

 
n/a

Nebraska
 
30,149

 
0.5

 
168

 
0.6

 
570

 
4.1

 
78

Illinois
 
28,050

 
0.5

 
379

 
1.4

 
1,078

 
7.8

 
63

Georgia
 
26,482

 
0.4

 
761

 
2.8

 

 

 
n/a

Other states
 
216,709

 
3.5

 
3,978

 
14.6

 
4,834

 
35.0

 
71

 
 
$
6,222,818

 
100.0
%
 
$
27,310

 
100.0
%
 
$
13,824

 
100.0
%
 
70


TDRs - The following table presents the Company's TDRs, based on accrual status, at the dates indicated. At June 30, 2015, $26.9 million of TDRs were included in the ACL formula analysis model and $118 thousand of the ACL was related to these loans. The remaining $13.2 million of TDRs at June 30, 2015 were individually evaluated for loss and any potential losses have been charged-off.
 
At
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
2015
 
2015
 
2014
 
2014
 
2014
 
(Dollars in thousands)
Accruing TDRs
$
25,444

 
$
23,861

 
$
24,365

 
$
24,636

 
$
26,081

Nonaccrual TDRs(1)
14,653

 
15,337

 
15,912

 
13,370

 
13,987

Total TDRs
$
40,097

 
$
39,198

 
$
40,277

 
$
38,006

 
$
40,068


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

38


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 nine months ended June 30, 2015, the Company recorded a provision for credit losses of $771 thousand, which takes into account net charge-offs of $397 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
 
June 30, 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
$
7,097

 
73.9
%
 
$
5,719,076

 
87.3
%
 
$
6,228

 
67.5
%
 
$
5,410,140

 
86.0
%
Purchased
1,569

 
16.3

 
503,742

 
7.7

 
2,323

 
25.2

 
561,890

 
8.9

Multi-family and commercial
566

 
5.9

 
108,576

 
1.7

 
312

 
3.4

 
75,677

 
1.2

Construction
65

 
0.8

 
86,168

 
1.3

 
123

 
1.3

 
106,791

 
1.7

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
233

 
2.4

 
125,907

 
1.9

 
211

 
2.3

 
130,484

 
2.1

Other consumer
71

 
0.7

 
4,233

 
0.1

 
30

 
0.3

 
4,537

 
0.1

 
$
9,601

 
100.0
%
 
$
6,547,702

 
100.0
%
 
$
9,227

 
100.0
%
 
$
6,289,519

 
100.0
%

39


The following tables present ACL activity and selected ACL ratios for, or at, 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
 
June 30, 2015
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 
June 30, 2014
 
(Dollars in thousands)
ACL beginning balance
$
9,406

 
$
9,297

 
$
9,227

 
$
9,082

 
$
8,967

Charge-offs
(157
)
 
(189
)
 
(206
)
 
(288
)
 
(308
)
Recoveries
29

 
23

 
103

 
6

 
116

Provision for credit losses
323

 
275

 
173

 
427

 
307

ACL ending balance
$
9,601

 
$
9,406

 
$
9,297

 
$
9,227

 
$
9,082

 
 
 
 
 
 
 
 
 
 
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
38.28

 
33.69

 
33.84

 
37.04

 
34.48

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
0.41

 
0.51

 
0.34

 
0.97

 
0.62

ACL to net charge-offs (annualized)
18.7x

 
14.2x

 
22.6x

 
8.2x

 
11.8x


 
For the Nine Months Ended
 
June 30, 2015
 
June 30, 2014
 
(Dollars in thousands)
ACL beginning balance
$
9,227

 
$
8,822

Charge-offs
(552
)
 
(854
)
Recoveries
155

 
132

Provision for credit losses
771

 
982

ACL ending balance
$
9,601

 
$
9,082

 
 
 
 
Ratio of net charge-offs during the period to
 
 
 
average loans outstanding during the period
0.01
%
 
0.01
%
Ratio of net charge-offs during the period to
 
 
 
average non-performing assets during the period
1.34

 
2.41

ACL to net charge-offs (annualized)
18.2x

 
9.4x



40


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 80% of these portfolios at June 30, 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. The decrease in the weighted average yield on the securities portfolio from September 30, 2014 to June 30, 2015 was due primarily to repayments of MBS with yields greater than the weighted average yield on the existing portfolio, as well as to investment securities representing a larger percentage of the overall securities portfolio at June 30, 2015. Generally, investment securities have a lower yield than MBS and a shorter WAL. Purchasing shorter-term agency debentures has been an on-going balance sheet strategy by management in anticipation of higher interest rates.
 
June 30, 2015
 
March 31, 2015
 
September 30, 2014
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Fixed-rate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MBS
$
1,120,019

 
2.26
%
 
3.3

 
$
1,173,186

 
2.32
%
 
3.6

 
$
1,279,990

 
2.35
%
 
3.7

GSE debentures
600,376

 
1.13

 
2.3

 
579,731

 
1.12

 
2.0

 
554,811

 
1.06

 
2.9

Municipal bonds
39,505

 
1.91

 
3.1

 
37,828

 
1.96

 
3.1

 
38,874

 
2.29

 
2.8

Total fixed-rate securities
1,759,900

 
1.87

 
3.0

 
1,790,745

 
1.93

 
3.1

 
1,873,675

 
1.97

 
3.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MBS
431,238

 
2.22

 
5.3

 
459,489

 
2.25

 
5.9

 
506,089

 
2.24

 
5.4

Trust preferred securities
2,351

 
1.54

 
22.0

 
2,346

 
1.53

 
22.2

 
2,493

 
1.49

 
22.7

Total adjustable-rate securities
433,589

 
2.21

 
5.4

 
461,835

 
2.24

 
6.0

 
508,582

 
2.24

 
5.5

Total securities portfolio
$
2,193,489

 
1.93

 
3.4

 
$
2,252,580

 
1.99

 
3.7

 
$
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.
 
June 30, 2015
 
September 30, 2014
 
(Dollars in thousands)
Federal National Mortgage Association ("FNMA")
$
940,763

 
$
1,052,464

Federal Home Loan Mortgage Corporation ("FHLMC")
502,393

 
598,153

Government National Mortgage Association
122,028

 
151,930

 
$
1,565,184

 
$
1,802,547


41


Mortgage-Backed Securities - The balance of MBS, which primarily consists of securities of U.S. GSEs, decreased $237.4 million from $1.80 billion at September 30, 2014 to $1.57 billion at June 30, 2015. The following tables summarize 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 decrease in the weighted average yield on the MBS portfolio from September 30, 2014 to June 30, 2015 was due primarily to repayments of MBS with yields greater than the weighted average yield on the existing portfolio. 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
 
June 30, 2015
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Beginning 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

Maturities and repayments
(100,538
)
 
 
 
 
 
(86,156
)
 
 
 
 
 
(89,795
)
 
 
 
 
 
(100,521
)
 
 
 
 
Net amortization of (premiums)/discounts
(1,412
)
 
 
 
 
 
(1,258
)
 
 
 
 
 
(1,332
)
 
 
 
 
 
(1,464
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
20,532

 
1.74

 
4.5

 
25,137

 
1.53

 
3.8

 

 

 

 

 

 

Change in valuation on AFS securities
(1,444
)
 
 
 
 
 
(908
)
 
 
 
 
 
(189
)
 
 
 
 
 
522

 
 
 
 
Ending balance - carrying value
$
1,565,184

 
2.25

 
3.9

 
$
1,648,046

 
2.30

 
4.3

 
$
1,711,231

 
2.32

 
4.5

 
$
1,802,547

 
2.32

 
4.2


 
For the Nine Months Ended
 
June 30, 2015
 
June 30, 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
(276,489
)
 
 
 
 
 
(287,473
)
 
 
 
 
Net amortization of (premiums)/discounts
(4,002
)
 
 
 
 
 
(4,210
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
Fixed
45,669

 
1.62

 
4.1

 
129,002

 
1.73

 
3.8

Adjustable

 

 

 
21,737

 
1.92

 
5.2

Change in valuation on AFS securities
(2,541
)
 
 
 
 
 
(2,754
)
 
 
 
 
Ending balance - carrying value
$
1,565,184

 
2.25

 
3.9

 
$
1,904,010

 
2.32

 
4.4


42


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 $50.6 million, from $590.9 million at September 30, 2014 to $641.5 million at June 30, 2015. The following tables summarize 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 June 30, 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
 
June 30, 2015
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Beginning 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

Maturities and calls
(30,000
)
 
 
 
 
 
(28,051
)
 
 
 
 
 
(54,081
)
 
 
 
 
 
(3,374
)
 
 
 
 
Net amortization of (premiums)/discounts
(52
)
 
 
 
 
 
(68
)
 
 
 
 
 
(95
)
 
 
 
 
 
(87
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
52,379

 
1.31

 
3.1

 
105,212

 
1.16

 
1.7

 
810

 
1.22

 
5.0

 
4,702

 
1.57

 
5.2

Change in valuation on AFS securities
(988
)
 
 
 
 
 
4,088

 
 
 
 
 
1,436

 
 
 
 
 
(704
)
 
 
 
 
Ending balance - carrying value
$
641,532

 
1.18

 
2.5

 
$
620,193

 
1.18

 
2.2

 
$
539,012

 
1.18

 
2.9

 
$
590,942

 
1.15

 
3.0


 
For the Nine Months Ended
 
June 30, 2015
 
June 30, 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
(112,132
)
 
 
 
 
 
(286,275
)
 
 
 
 
Net amortization of (premiums)/discounts
(215
)
 
 
 
 
 
(292
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
Fixed
158,401

 
1.21

 
2.1

 
134,206

 
1.01

 
2.7

Change in valuation on AFS securities
4,536

 
 
 
 
 
2,484

 
 
 
 
Ending balance - carrying value
$
641,532

 
1.18

 
2.5

 
$
590,405

 
1.15

 
3.4



43


Liabilities. Total liabilities were $7.70 billion at June 30, 2015 compared to $8.37 billion at September 30, 2014. The $667.7 million decrease was due primarily to a decrease in FHLB borrowings due to the removal of the entire daily leverage strategy at June 30, 2015 compared to having $800.0 million of the daily leverage strategy in place at September 30, 2014. This decrease was partially offset by a $157.9 million, or 4.5% annualized, increase in the deposit portfolio.

Deposits - Deposits were $4.81 billion at June 30, 2015 compared to $4.66 billion at September 30, 2014. The $157.9 million increase was due primarily to a $56.6 million increase in the checking portfolio and a $53.3 million increase in the retail certificate of deposit portfolio. We remain competitive on deposit rates and, in some cases, our offer rates for certificates of deposit have been higher than peers. Increasing rates offered on longer-term certificates of deposit has been an on-going balance sheet strategy by management in anticipation of higher interest rates. If interest rates rise, 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.
 
June 30, 2015
 
March 31, 2015
 
September 30, 2014
 
 
 
 
 
% of
 
 
 
 
 
% of
 
 
 
 
 
% of
 
Amount
 
Rate
 
 Total
 
Amount
 
Rate
 
 Total
 
Amount
 
Rate
 
 Total
 
(Dollars in thousands)
Noninterest-bearing checking
$
188,127

 
%
 
3.9
%
 
$
187,139

 
%
 
3.9
%
 
$
167,045

 
%
 
3.6
%
Interest-bearing checking
559,428

 
0.05

 
11.6

 
573,632

 
0.05

 
11.9

 
523,959

 
0.05

 
11.2

Savings
311,658

 
0.16

 
6.5

 
311,878

 
0.14

 
6.4

 
296,187

 
0.15

 
6.4

Money market
1,148,490

 
0.23

 
23.8

 
1,156,764

 
0.23

 
23.9

 
1,135,915

 
0.23

 
24.4

Retail certificates of deposit
2,285,046

 
1.27

 
47.5

 
2,279,154

 
1.26

 
47.1

 
2,231,737

 
1.22

 
47.9

Public units/brokered deposits
320,439

 
0.31

 
6.7

 
328,707

 
0.65

 
6.8

 
300,429

 
0.63

 
6.5

 
$
4,813,188

 
0.70

 
100.0
%
 
$
4,837,274

 
0.71

 
100.0
%
 
$
4,655,272

 
0.70

 
100.0
%

At June 30, 2015, public unit deposits totaled $320.4 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 seven months. There were no brokered deposits at June 30, 2015 compared to $41.9 million at September 30, 2014. 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 June 30, 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%
 
$
830,161

 
$
203,198

 
$
10,804

 
$

 
$
1,044,163

 
0.53
%
1.00 – 1.99%
 
262,468

 
307,529

 
451,809

 
437,439

 
1,459,245

 
1.51

2.00 – 2.99%
 
92,149

 
7,483

 
158

 
1,718

 
101,508

 
2.51

3.00 – 3.99%
 
113

 
220

 
105

 

 
438

 
3.20

4.00 – 4.99%
 
131

 

 

 

 
131

 
4.40

 
 
$
1,185,022

 
$
518,430

 
$
462,876

 
$
439,157

 
$
2,605,485

 
1.15

 
 
 
 
 
 
 
 
 
 
 
 
 
Percent of total
 
45.5
%
 
19.9
%
 
17.8
%
 
16.8
%
 
 
 
 
Weighted average rate
 
0.81

 
1.19

 
1.44

 
1.75

 
 
 
 
Weighted average maturity (in years)
 
0.4

 
1.5

 
2.5

 
3.9

 
1.6

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

 
 



44


 
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
$
180,642

 
$
139,360

 
$
326,045

 
$
847,153

 
$
1,493,200

Retail certificates of deposit of $100,000 or more
83,926

 
49,952

 
146,829

 
511,139

 
791,846

Public unit deposits of $100,000 or more
153,277

 
56,903

 
48,088

 
62,171

 
320,439

 
$
417,845

 
$
246,215

 
$
520,962

 
$
1,420,463

 
$
2,605,485


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. 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
 
June 30, 2015
 
March 31, 2015
 
December 31, 2014
 
September 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

 
2.51
%
 
3.3

 
$
2,795,000

 
2.55
%
 
3.0

 
$
2,795,000

 
2.45
%
 
2.8

 
$
2,795,000

 
2.53
%
 
2.9

Maturities and prepayments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FHLB advances
(100,000
)
 
3.01

 
 
 
(250,000
)
 
2.48

 
 
 
(250,000
)
 
0.84

 
 
 

 

 
 
Repurchase agreements

 

 
 
 

 

 
 
 

 

 
 
 
(100,000
)
 
4.20

 
 
New borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FHLB advances
100,000

 
2.25

 
7.0

 
250,000

 
2.06

 
6.4

 
250,000

 
1.99

 
5.2

 
100,000

 
1.96

 
5.0

Ending balance
$
2,795,000

 
2.49

 
3.3

 
$
2,795,000

 
2.51

 
3.3

 
$
2,795,000

 
2.55

 
3.0

 
$
2,795,000

 
2.45

 
2.8

 
For the Nine Months Ended
 
June 30, 2015
 
June 30, 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
(600,000
)
 
1.88

 
 
 
(450,000
)
 
3.90

 
 
New borrowings:
 
 
 
 
 
 
 
 
 
 
 
FHLB advances
600,000

 
2.06

 
6.0

 
400,000

 
2.45

 
6.6

Ending balance
$
2,795,000

 
2.49

 
3.3

 
$
2,795,000

 
2.53

 
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 June 30, 2015. In mid-July 2015, a $20.0 million repurchase agreement matured and was not renewed or replaced by another type of borrowing.
 
 
FHLB
 
Repurchase
 
 
 
 
 
 
Maturity by
 
Advances
 
Agreements
 
Total
 
Contractual
 
Effective
Fiscal year
 
Amount
 
Amount
 
Amount
 
Rate
 
Rate(1)
 
 
(Dollars in thousands)
 
 
 
 
2015
 
$

 
$
20,000

 
$
20,000

 
4.45
%
 
4.45
%
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
 
200,000

 

 
200,000

 
2.23

 
2.23

 
 
$
2,575,000

 
$
220,000

 
$
2,795,000

 
2.35

 
2.49


(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 amounts, and term borrowings for the next four quarters as of June 30, 2015.
 
 
Retail
 
 
 
Public Unit
 
 
 
Term
 
 
 
 
 
 
Maturity by
 
Certificate
 
Repricing
 
Deposit
 
Repricing
 
Borrowings
 
Repricing
 
 
 
Repricing
Quarter End
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
Total
 
Rate
 
 
(Dollars in thousands)
September 30, 2015
 
$
264,568

 
1.19
%
 
$
153,277

 
0.14
%
 
$
20,000

 
4.45
%
 
$
437,845

 
0.97
%
December 31, 2015
 
189,312

 
0.74

 
56,903

 
0.23

 
200,000

 
1.94

 
446,215

 
1.21

March 31, 2016
 
212,851

 
0.88

 
17,803

 
0.22

 
175,000

 
5.08

 
405,654

 
2.66

June 30, 2016
 
260,023

 
1.00

 
30,285

 
0.45

 
100,000

 
3.17

 
390,308

 
1.51

 
 
$
926,754

 
0.97

 
$
258,268

 
0.20

 
$
495,000

 
3.40

 
$
1,680,022

 
1.57



46


Stockholders' Equity. Stockholders' equity was $1.43 billion at June 30, 2015 compared to $1.49 billion at September 30, 2014. The $66.2 million decrease between periods was due primarily to the payment of $102.8 million in dividends and the repurchase of $27.4 million of common stock, partially offset by net income of $59.3 million. The $102.8 million in dividends paid during the current nine 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, a $0.25 per share, or $33.9 million, True Blue® Capitol Dividend, and three regular quarterly dividends totaling $0.245 per share, or $33.4 million. The $33.9 million True Blue Capitol Dividend was funded by a $36.0 million capital distribution from the Bank to the holding company. On July 22, 2015, the Company declared a regular quarterly cash dividend of $0.085 per share, or approximately $11.4 million, payable on August 21, 2015 to stockholders of record as of the close of business on August 7, 2015.

At June 30, 2015, Capitol Federal Financial, Inc., at the holding company level, had $105.7 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 September 30, 2015, the amount presented does not represent the actual dividend payout, but rather management's estimate of the dividend announced on July 22, 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
11,585

 
0.085

 
10,399

 
0.075

 
10,796

 
0.075

Quarter ended September 30
11,399

 
0.085

 
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
33,924

 
0.250

 
34,663

 
0.250

 
35,710

 
0.250

Calendar year-to-date dividends paid
$
68,500

 
$
0.505

 
$
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 $15.7 million remained available as of July 29, 2015. The Company repurchased $23.8 million of shares during the current quarter at an average price of $12.02 per share, bringing share repurchases to $27.4 million at an average price of $12.01 per share for the nine months ended June 30, 2015. Subsequent to the end of the current quarter, through July 29, 2015, the Company repurchased an additional $3.4 million of shares at an average price of $12.06 per share, resulting in a total of 13,331,092 shares having been repurchased at an average price of $11.95 per share, or $159.3 million, since the inception of the current stock repurchase plan.

47


Operating Results
The following table presents selected income statement and other information for the quarters indicated.
 
For the Three Months Ended
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
2015
 
2015
 
2014
 
2014
 
2014
 
(Dollars in thousands, except per share data)
Interest and dividend income:
 
 
 
 
 
 
 
 
 
Loans receivable
$
58,922

 
$
58,198

 
$
58,619

 
$
58,405

 
$
57,474

MBS
8,849

 
9,537

 
10,001

 
10,535

 
11,206

Investment securities
1,914

 
1,673

 
1,675

 
1,711

 
1,739

FHLB stock
3,132

 
3,076

 
3,181

 
2,678

 
1,452

Cash and cash equivalents
1,357

 
1,393

 
1,424

 
905

 
50

Total interest and dividend income
74,174

 
73,877

 
74,900

 
74,234

 
71,921

 
 
 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
 
 
 
FHLB borrowings
17,072

 
17,198

 
16,988

 
16,217

 
14,826

Deposits
8,377

 
8,207

 
8,145

 
8,081

 
8,124

Repurchase agreements
1,712

 
1,693

 
1,731

 
1,963

 
2,773

Total interest expense
27,161

 
27,098

 
26,864

 
26,261

 
25,723

 
 
 
 
 
 
 
 
 
 
Net interest income
47,013

 
46,779

 
48,036

 
47,973

 
46,198

 
 
 
 
 
 
 
 
 
 
Provision for credit losses
323

 
275

 
173

 
427

 
307

 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
 
 
 
 
 
 
 
(after provision for credit losses)
46,690

 
46,504

 
47,863

 
47,546

 
45,891

 
 
 
 
 
 
 
 
 
 
Non-interest income
5,145

 
5,277

 
5,257

 
6,109

 
5,619

Non-interest expense
23,106

 
22,859

 
23,142

 
23,542

 
22,380

Income tax expense
9,127

 
9,688

 
9,506

 
9,903

 
9,147

Net income
$
19,602

 
$
19,234

 
$
20,472

 
$
20,210

 
$
19,983

 
 
 
 
 
 
 
 
 
 
Efficiency ratio
44.30
%
 
43.91
%
 
43.42
%
 
43.53
%
 
43.19
%
 
 
 
 
 
 
 
 
 
 
Basic EPS
$
0.14

 
$
0.14

 
$
0.15

 
$
0.15

 
$
0.14

Diluted EPS
0.14

 
0.14

 
0.15

 
0.15

 
0.14



48


Comparison of Operating Results for the Nine Months Ended June 30, 2015 and 2014

For the nine month period ended June 30, 2015, the Company recognized net income of $59.3 million, compared to net income of $57.5 million for the nine month period ended June 30, 2014. The $1.8 million, or 3.2%, increase in net income was due primarily to the daily leverage strategy. Net income attributable to the daily leverage strategy was $2.2 million during the current nine month period.

Net interest income increased $5.7 million, or 4.2%, from the prior year nine month period to $141.8 million for the current nine month period due primarily to the daily leverage strategy. The net interest margin decreased 32 basis points, from 2.04% for the prior year nine month period, to 1.72% for the current nine 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 2.07% for the current nine month period, or three basis points higher than the prior year nine 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 yielding 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 53 basis points, from 3.24% for the prior year nine month period, to 2.71% for the current nine month period, while the average balance of interest-earning assets increased $2.08 billion from the prior year nine 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-earning assets would have decreased two basis points from the prior year nine month period, to 3.22%, and the average balance would have decreased $6.3 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 Nine Months Ended
 
 
 
 
 
June 30,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
175,739

 
$
171,539

 
$
4,200

 
2.4
 %
MBS
28,387

 
34,765

 
(6,378
)
 
(18.3
)
Investment securities
5,262

 
5,674

 
(412
)
 
(7.3
)
FHLB stock
9,389

 
3,877

 
5,512

 
142.2

Cash and cash equivalents
4,174

 
157

 
4,017

 
2,558.6

Total interest and dividend income
$
222,951

 
$
216,012

 
$
6,939

 
3.2


The increase in interest income on loans receivable was due to a $283.2 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 eight basis points, from 3.78% for the prior year nine month period, to 3.70% for the current nine month period. The decrease in the weighted average yield was due primarily to adjustable-rate loans, endorsements, and refinances repricing to lower rates.

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 $287.2 million and the average balance of the investment securities portfolio decreased $74.0 million between the two periods. Additionally, the weighted average yield on the MBS portfolio decreased 10 basis points, from 2.36% during the prior year nine month period, to 2.26% for the current nine 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 $4.0 million during the current nine month period, which decreased the weighted average yield on the portfolio by 32 basis points. During the prior year nine month period, $4.2 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 29 basis points. At June 30, 2015, the net balance of premiums/(discounts) on our portfolio of MBS was $15.6 million.

The increase in dividends received on FHLB stock was due primarily to an $83.9 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 $2.07 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 30 basis points, from 1.43% for the prior year nine month period, to 1.13% for the current nine month period, while the average balance of interest-bearing liabilities increased $2.17 billion from the prior year nine 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 six basis points from the prior nine 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 $100.6 million due mainly 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 Nine Months Ended
 
 
 
June 30,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB borrowings
$
51,258

 
$
47,000

 
$
4,258

 
9.1
 %
Deposits
24,729

 
24,523

 
206

 
0.8

Repurchase agreements
5,136

 
8,319

 
(3,183
)
 
(38.3
)
Total interest expense
$
81,123

 
$
79,842

 
$
1,281

 
1.6


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 106 basis point decrease in the weighted average rate paid on FHLB 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 nine 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 seven basis points from the prior year nine month period, to 2.46% for the current nine 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 nine month period of $771 thousand compared to a provision for credit losses during the prior year nine month period of $982 thousand. The $771 thousand provision for credit losses in the current nine month period takes into account net charge-offs of $397 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 Nine Months Ended
 
 
 
 
 
June 30,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
$
11,052

 
$
11,056

 
$
(4
)
 
 %
Insurance commissions
2,059

 
2,589

 
(530
)
 
(20.5
)
Loan fees
1,071

 
1,221

 
(150
)
 
(12.3
)
BOLI
819

 
1,001

 
(182
)
 
(18.2
)
Other non-interest income
678

 
979

 
(301
)
 
(30.7
)
Total non-interest income
$
15,679

 
$
16,846

 
$
(1,167
)
 
(6.9
)


50


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 our original estimate of a $1.3 million decrease. 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 Nine Months Ended
 
 
 
 
 
June 30,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
31,927

 
$
32,379

 
$
(452
)
 
(1.4
)%
Information technology and communications
7,726

 
6,985

 
741

 
10.6

Occupancy, net
7,437

 
7,662

 
(225
)
 
(2.9
)
Federal insurance premium
4,092

 
3,264

 
828

 
25.4

Deposit and loan transaction costs
4,065

 
3,976

 
89

 
2.2

Regulatory and outside services
3,867

 
3,990

 
(123
)
 
(3.1
)
Low income housing partnerships
3,404

 
1,966

 
1,438

 
73.1

Advertising and promotional
2,707

 
2,825

 
(118
)
 
(4.2
)
Other non-interest expense
3,882

 
3,948

 
(66
)
 
(1.7
)
Total non-interest expense
$
69,107

 
$
66,995

 
$
2,112

 
3.2


The decrease in salaries and employee benefits expense was due primarily to the prior year nine month period including compensation expense on unallocated ESOP shares related to two True Blue Capitol dividends paid compared to one True Blue Capitol dividend paid during the current nine month period. 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. 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 Company's efficiency ratio was 43.88% for the current nine month period compared to 43.78% for the prior year nine month period. 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 $28.3 million for the current nine month period compared to $27.6 million for the prior year nine month period. The $766 thousand increase between periods was due to an increase in pre-tax income. The effective tax rate for the current nine month period was 32.3% compared to 32.4% in the prior year nine 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 June 30, 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 June 30, 2015. As previously discussed, the daily leverage strategy was not in place at June 30, 2015, so the end of period yields/rates presented at June 30, 2015 in the tables below do not reflect the 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 Nine Months Ended
 
June 30,
 
June 30, 2015
 
June 30, 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)
3.66%
 
$
6,330,461

 
$
175,739

 
3.70
%
 
$
6,047,247

 
$
171,539

 
3.78
%
MBS(2)
2.25
 
1,674,246

 
28,387

 
2.26

 
1,961,441

 
34,765

 
2.36

Investment securities(2)(3)
1.18
 
593,268

 
5,262

 
1.18

 
667,317

 
5,674

 
1.13

FHLB stock
5.98
 
209,749

 
9,389

 
5.98

 
125,821

 
3,877

 
4.12

Cash and cash equivalents
0.23
 
2,156,567

 
4,174

 
0.26

 
83,988

 
157

 
0.25

Total interest-earning assets(1)(2)
3.26
 
10,964,291

 
222,951

 
2.71

 
8,885,814

 
216,012

 
3.24

Other noninterest-earning assets
 
 
231,154

 
 
 
 
 
220,029

 
 
 
 
Total assets
 
 
$
11,195,445

 
 
 
 
 
$
9,105,843

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Checking
0.04
 
$
723,699

 
204

 
0.04

 
$
672,218

 
193

 
0.04

Savings
0.16
 
304,716

 
335

 
0.15

 
290,569

 
240

 
0.11

Money market
0.23
 
1,147,014

 
1,999

 
0.23

 
1,135,195

 
1,964

 
0.23

Retail certificates
1.27
 
2,251,608

 
20,840

 
1.24

 
2,222,808

 
20,454

 
1.23

Wholesale certificates
0.31
 
314,942

 
1,351

 
0.57

 
302,711

 
1,672

 
0.74

Total deposits
0.70
 
4,741,979

 
24,729

 
0.70

 
4,623,501

 
24,523

 
0.71

FHLB advances(4)
2.44
 
2,571,417

 
47,300

 
2.46

 
2,486,538

 
46,995

 
2.53

FHLB line of credit
0.26
 
2,072,162

 
3,958

 
0.25

 
2,800

 
5

 
0.22

FHLB borrowings
2.44
 
4,643,579

 
51,258

 
1.47

 
2,489,338

 
47,000

 
2.53

Repurchase agreements
3.08
 
220,000

 
5,136

 
3.08

 
320,000

 
8,319

 
3.43

Total borrowings
2.49
 
4,863,579

 
56,394

 
1.55

 
2,809,338

 
55,319

 
2.63

Total interest-bearing liabilities
1.35
 
9,605,558

 
81,123

 
1.13

 
7,432,839

 
79,842

 
1.43

Other noninterest-bearing liabilities
 
 
107,457

 
 
 
 
 
103,376

 
 
 
 
Stockholders' equity
 
 
1,482,430

 
 
 
 
 
1,569,628

 
 
 
 
Total liabilities and stockholders' equity
 
$
11,195,445

 
 
 
 
 
$
9,105,843

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Continued)
 



52


 
At
 
For the Nine Months Ended
 
June 30,
 
June 30, 2015
 
June 30, 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)
 
 
 
 
$
141,828

 
 
 
 
 
$
136,170

 
 
Net interest rate spread(6)
1.91%
 
 
 
 
 
1.58
%
 
 
 
 
 
1.81
%
Net interest-earning assets
 
 
$
1,358,733

 
 
 
 
 
$
1,452,975

 
 
 
 
Net interest margin(7)
 
 
 
 
 
 
1.72

 
 
 
 
 
2.04

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

 
 
 
 
 
1.20x

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selected performance ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized)
 
 
 
 
 
 
0.71
%
 
 
 
 
 
0.84
%
Return on average equity (annualized)
 
 
 
 
 
 
5.33

 
 
 
 
 
4.88

Average equity to average assets
 
 
 
 
 
 
13.24

 
 
 
 
 
17.24

Operating expense ratio(8)
 
 
 
 
 
 
0.82

 
 
 
 
 
0.98

Efficiency ratio(9)
 
 
 
 
 
 
43.88

 
 
 
 
 
43.78

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 $36.6 million for each of the nine months ended June 30, 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 2.07% for the nine months ended June 30, 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 nine months ended June 30, 2015 to the nine months ended June 30, 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 Nine Months Ended
 
June 30, 2015 vs. June 30, 2014
 
Increase (Decrease) Due to
 
Volume
 
Rate
 
Total
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable
$
7,796

 
$
(3,596
)
 
$
4,200

MBS
(4,920
)
 
(1,458
)
 
(6,378
)
Investment securities
(649
)
 
237

 
(412
)
FHLB stock
3,283

 
2,229

 
5,512

Cash and cash equivalents
4,014

 
3

 
4,017

Total interest-earning assets
9,524

 
(2,585
)
 
6,939

 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Checking
15

 
(3
)
 
12

Savings
12

 
82

 
94

Money market
20

 
15

 
35

Certificates of deposit
357

 
(292
)
 
65

FHLB borrowings
5,307

 
(1,049
)
 
4,258

Repurchase agreements
(2,399
)
 
(784
)
 
(3,183
)
Total interest-bearing liabilities
3,312

 
(2,031
)
 
1,281

 
 
 
 
 
 
Net change in net interest and dividend income
$
6,212

 
$
(554
)
 
$
5,658


54


Comparison of Operating Results for the Three Months Ended June 30, 2015 and 2014

For the quarter ended June 30, 2015, the Company recognized net income of $19.6 million, compared to net income of $20.0 million for the quarter ended June 30, 2014. The $381 thousand, or 1.9%, decrease in net income was due primarily to a decrease in non-interest income and an increase in non-interest expense, partially offset by net income associated with the daily leverage strategy. Net income attributable to the daily leverage strategy was $699 thousand for the current quarter.

Net interest income increased $815 thousand, or 1.8%, from the prior year quarter to $47.0 million for the current quarter. The increase in net interest income was due primarily to the daily leverage strategy. The net interest margin decreased 38 basis points, from 2.09% 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 2.05% for the current quarter, or a four 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. 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 more than offset by a decrease in market interest rates.

Interest and Dividend Income
The weighted average yield on total interest-earning assets decreased 56 basis points, from 3.25% for the prior year quarter, to 2.69% for the current quarter, while the average balance of interest-earning assets increased $2.16 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 five basis points from the prior year quarter, to 3.20%, while the average balance would have increased $83.6 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
 
 
 
 
 
June 30,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
58,922

 
$
57,474

 
$
1,448

 
2.5
 %
MBS
8,849

 
11,206

 
(2,357
)
 
(21.0
)
Investment securities
1,914

 
1,739

 
175

 
10.1

FHLB stock
3,132

 
1,452

 
1,680

 
115.7

Cash and cash equivalents
1,357

 
50

 
1,307

 
2,614.0

Total interest and dividend income
$
74,174

 
$
71,921

 
$
2,253

 
3.1


The increase in interest income on loans receivable was due to a $326.6 million increase in the average balance of the portfolio, partially offset by a 10 basis point decrease in the weighted average yield on the portfolio, from 3.77% for the prior year quarter, to 3.67% for the current quarter. The decrease in the weighted average yield was due primarily to adjustable-rate loans, endorsements, and refinances repricing to lower rates. Net premium/deferred cost amortization of $184 thousand during the current quarter decreased the average yield on the portfolio by one basis point. During the prior year quarter, $17 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 $344.6 million between the two periods. Additionally, the weighted average yield on the MBS portfolio decreased nine basis points, from 2.30% for the prior year quarter, to 2.21% 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 $1.4 million during the current quarter, which decreased the weighted average yield on the portfolio by 35 basis points. During the prior year quarter, $1.5 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 32 basis points.

The increase in dividends received on FHLB stock was due primarily to a $91.8 million increase in the average balance of the portfolio, largely as a result of the daily leverage strategy, as well as 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 $2.06 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 26 basis points, from 1.38% for the prior year quarter, to 1.12% for the current quarter, while the average balance of interest-bearing liabilities increased $2.23 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 two basis points from the prior year quarter, to 1.36%, and the average balance would have increased $155.5 million due primarily to growth in the deposit portfolio, largely the checking and retail certificates of deposit portfolios. 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
 
 
 
 
 
June 30,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB borrowings
$
17,072

 
$
14,826

 
$
2,246

 
15.1
 %
Deposits
8,377

 
8,124

 
253

 
3.1

Repurchase agreements
1,712

 
2,773

 
(1,061
)
 
(38.3
)
Total interest expense
$
27,161

 
$
25,723

 
$
1,438

 
5.6


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, as well as to an increase in the average balance of FHLB advances. The increase in the average balance of FHLB advances was due primarily to a maturing $100.0 million repurchase agreement being replaced with a FHLB advance.

Provision for Credit Losses
The Bank recorded a provision for credit losses during the current quarter of $323 thousand compared to a provision for credit losses during the prior year quarter of $307 thousand. The $323 thousand provision for credit losses in the current quarter takes into account net charge-offs of $128 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
 
 
 
 
 
June 30,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
$
3,798

 
$
3,792

 
$
6

 
0.2
 %
Insurance commissions
537

 
827

 
(290
)
 
(35.1
)
Loan fees
340

 
367

 
(27
)
 
(7.4
)
BOLI
251

 
333

 
(82
)
 
(24.6
)
Other non-interest income
219

 
300

 
(81
)
 
(27.0
)
Total non-interest income
$
5,145

 
$
5,619

 
$
(474
)
 
(8.4
)

The decrease in insurance commissions was due largely to the receipt of annual commissions from certain insurance providers during the prior year quarter.

56



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
 
 
 
 
 
June 30,
 
Change Expressed in:
 
2015
 
2014
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
11,038

 
$
10,929

 
$
109

 
1.0
 %
Information technology and communications
2,573

 
2,373

 
200

 
8.4

Occupancy, net
2,557

 
2,479

 
78

 
3.1

Federal insurance premium
1,342

 
1,078

 
264

 
24.5

Deposit and loan transaction costs
1,435

 
1,326

 
109

 
8.2

Regulatory and outside services
1,365

 
1,437

 
(72
)
 
(5.0
)
Low income housing partnerships
492

 
547

 
(55
)
 
(10.1
)
Advertising and promotional
1,069

 
942

 
127

 
13.5

Other non-interest expense
1,235

 
1,269

 
(34
)
 
(2.7
)
Total non-interest expense
$
23,106

 
$
22,380

 
$
726

 
3.2


The increase in information technology and communications expense was primarily related to continued upgrades to our information technology infrastructure. The increase in federal insurance premium was due primarily to the daily leverage strategy.

The Company's efficiency ratio was 44.30% for the current quarter compared to 43.19% 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 $9.1 million for the current quarter and the prior year quarter. The effective tax rate for the current quarter was 31.8% compared to 31.4% for the prior year quarter.


57


Average Balance Sheet
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
 
 
June 30, 2015
 
June 30, 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)
 
$
6,422,240

 
$
58,922

 
3.67
%
 
$
6,095,618

 
$
57,474

 
3.77
%
MBS(2)
 
1,602,047

 
8,849

 
2.21

 
1,946,653

 
11,206

 
2.30

Investment securities(2)(3)
 
636,368

 
1,914

 
1.20

 
610,101

 
1,739

 
1.14

FHLB stock
 
209,890

 
3,132

 
5.98

 
118,095

 
1,452

 
4.93

Cash and cash equivalents
 
2,141,864

 
1,357

 
0.25

 
81,393

 
50

 
0.25

Total interest-earning assets(1)(2)
 
11,012,409

 
74,174

 
2.69

 
8,851,860

 
71,921

 
3.25

Other noninterest-earning assets
 
229,657

 
 
 
 
 
216,959

 
 
 
 
Total assets
 
$
11,242,066

 
 
 
 
 
$
9,068,819

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Checking
 
$
751,078

 
70

 
0.04

 
$
691,454

 
66

 
0.04

Savings
 
311,504

 
115

 
0.15

 
296,424

 
92

 
0.13

Money market
 
1,146,468

 
665

 
0.23

 
1,133,901

 
653

 
0.23

Retail certificates
 
2,283,125

 
7,158

 
1.26

 
2,229,439

 
6,784

 
1.22

Wholesale certificates
 
309,765

 
369

 
0.48

 
300,557

 
529

 
0.71

Total deposits
 
4,801,940

 
8,377

 
0.70

 
4,651,775

 
8,124

 
0.70

FHLB advances(4)
 
2,572,293

 
15,718

 
2.45

 
2,459,911

 
14,822

 
2.42

FHLB line of credit
 
2,076,924

 
1,354

 
0.26

 
7,043

 
4

 
0.23

FHLB borrowings
 
4,649,217

 
17,072

 
1.47

 
2,466,954

 
14,826

 
2.41

Repurchase agreements
 
220,000

 
1,712

 
3.08

 
320,000

 
2,773

 
3.43

Total borrowings
 
4,869,217

 
18,784

 
1.54

 
2,786,954

 
17,599

 
2.53

Total interest-bearing liabilities
 
9,671,157

 
27,161

 
1.12

 
7,438,729

 
25,723

 
1.38

Other noninterest-bearing liabilities
 
89,052

 
 
 
 
 
93,984

 
 
 
 
Stockholders' equity
 
1,481,857

 
 
 
 
 
1,536,106

 
 
 
 
Total liabilities and stockholders' equity
 
$
11,242,066

 
 
 
 
 
$
9,068,819

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Continued)
 


58


 
 
For the Three Months Ended
 
 
June 30, 2015
 
June 30, 2014
 
 
Average
 
Interest
 
 
 
Average
 
Interest
 
 
 
 
Outstanding
 
Earned/
 
Yield/
 
Outstanding
 
Earned/
 
Yield/
 
 
Amount
 
Paid
 
Rate
 
Amount
 
Paid
 
Rate
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income(5)
 
 
 
$
47,013

 
 
 
 
 
$
46,198

 
 
Net interest rate spread(6)
 
 
 
 
 
1.57
%
 
 
 
 
 
1.87
%
Net interest-earning assets
 
$
1,341,252

 
 
 
 
 
$
1,413,131

 
 
 
 
Net interest margin(7)
 
 
 
 
 
1.71

 
 
 
 
 
2.09

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

 
 
 
 
 
1.19x

 
 
 
 
 
 
 
 
 
 
 
 
 
Selected performance ratios:
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized)
 
 
 
 
 
0.70
%
 
 
 
 
 
0.88
%
Return on average equity (annualized)
 
 
 
 
 
5.29

 
 
 
 
 
5.20

Average equity to average assets
 
 
 
 
 
13.18

 
 
 
 
 
16.94

Operating expense ratio(8)
 
 
 
 
 
0.82

 
 
 
 
 
0.99

Efficiency ratio(9)
 
 
 
 
 
44.30

 
 
 
 
 
43.19

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 $37.9 million and $37.1 million for the quarters ended June 30, 2015 and June 30, 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 2.05% for the quarter ended June 30, 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 June 30, 2015 to the three months ended June 30, 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 June 30,
 
2015 vs. 2014
 
Increase (Decrease) Due to
 
Volume
 
Rate
 
Total
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable
$
2,982

 
$
(1,534
)
 
$
1,448

MBS
(1,918
)
 
(439
)
 
(2,357
)
Investment securities
77

 
98

 
175

FHLB stock
1,317

 
363

 
1,680

Cash equivalents
1,307

 

 
1,307

Total interest-earning assets
3,765

 
(1,512
)
 
2,253

 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Checking
6

 
(1
)
 
5

Savings
5

 
17

 
22

Money market
7

 
5

 
12

Certificates of deposit
182

 
32

 
214

FHLB borrowings
1,958

 
288

 
2,246

Repurchase agreements
(800
)
 
(261
)
 
(1,061
)
Total interest-bearing liabilities
1,358

 
80

 
1,438

 
 
 
 
 
 
Net change in net interest and dividend income
$
2,407

 
$
(1,592
)
 
$
815



Comparison of Operating Results for the Three Months Ended June 30, 2015 and March 31, 2015

Net income increased $368 thousand, or 1.9%, from the quarter ended March 31, 2015 to $19.6 million for the quarter ended June 30, 2015, due primarily to a decrease in income tax expense resulting largely from a decrease in the effective income tax rate. Net income attributable to the daily leverage strategy was $699 thousand during the current quarter.

Net interest income increased $234 thousand, or 0.5%, from the prior quarter to $47.0 million for the current quarter. The increase was due primarily to an increase in total interest and dividend income resulting largely from an increase in interest income on loans receivable and investment securities, partially offset by a decrease in interest income on mortgage-backed securities ("MBS"). The net interest margin for the current quarter held steady from the prior quarter at 1.71%. Excluding the effects of the daily leverage strategy, the net interest margin would have been 2.05% for the current quarter, compared to 2.04% for the prior quarter.
 

60


Interest and Dividend Income
The weighted average yield on total interest-earning assets for the current quarter decreased one basis point from the prior quarter, to 2.69%, while the average balance of interest-earning assets increased $52.6 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 one basis point from the prior quarter, to 3.20%, while the average balance would have increased $37.9 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
 
 
 
 
 
June 30,
 
March 31,
 
Change Expressed in:
 
2015
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
58,922

 
$
58,198

 
$
724

 
1.2
 %
MBS
8,849

 
9,537

 
(688
)
 
(7.2
)
Investment securities
1,914

 
1,673

 
241

 
14.4

FHLB stock
3,132

 
3,076

 
56

 
1.8

Cash and cash equivalents
1,357

 
1,393

 
(36
)
 
(2.6
)
Total interest and dividend income
$
74,174

 
$
73,877

 
$
297

 
0.4


The increase in interest income on loans receivable was due to a $108.9 million increase in the average balance of the portfolio, partially offset by a two basis point decrease in the weighted average yield on the portfolio, to 3.67% for the current quarter. Net premium/deferred cost amortization of $184 thousand during the current quarter decreased the average yield on the portfolio by one basis point. During the prior quarter, $331 thousand of net premiums/deferred costs were amortized, which decreased the average yield on the portfolio by two basis points.

The decrease in interest income on MBS was due to a $72.9 million decrease in the average balance of the portfolio, as well as to a seven basis point decrease in the weighted average yield on the portfolio. Cash flows not reinvested in the portfolio were used primarily to fund loan growth. During the current quarter, $1.4 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 35 basis points. During the prior quarter, $1.3 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 30 basis points. The increase in interest income on investment securities was due primarily to a $75.9 million increase in the average balance of the portfolio as a portion of cash, held in excess of the daily leverage strategy, was invested into the portfolio during the current quarter.

Interest Expense
The weighted average rate paid on total interest-bearing liabilities decreased two basis points from the prior quarter, to 1.12%, due mainly to a decrease in the weighted average rate paid on FHLB advances, while the average balance of interest-bearing liabilities increased $59.1 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 decreased three basis points from the prior quarter, to 1.36%, while the average balance would have increased $44.4 million. The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
June 30,
 
March 31,
 
Change Expressed in:
 
2015
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB borrowings
$
17,072

 
$
17,198

 
$
(126
)
 
(0.7
)%
Deposits
8,377

 
8,207

 
170

 
2.1

Repurchase agreements
1,712

 
1,693

 
19

 
1.1

Total interest expense
$
27,161

 
$
27,098

 
$
63

 
0.2


The decrease in interest expense on FHLB borrowings was due to a six basis points decrease in the weighted average rate paid on FHLB advances during the current quarter, to 2.45%. This decrease was due primarily to a full quarter impact of the renewal of a maturing advance during the prior quarter at a lower rate, as well as to the renewal of another maturing advance in the current quarter at a lower rate.

61



The increase in interest expense on deposits was due primarily to an increase in the average balance and rate paid on our retail certificate of deposit portfolio. The average balance of our retail certificate of deposit portfolio increased $37.0 million and the weighted average rate paid increased two basis points, to 1.26%, during the current quarter.

Provision for Credit Losses
The Bank recorded a provision for credit losses during the current quarter of $323 thousand compared to a provision for credit losses during the prior quarter of $275 thousand. The $323 thousand provision for credit losses in the current quarter takes into account net charge-offs of $128 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
 
 
 
 
 
June 30,
 
March 31,
 
Change Expressed in:
 
2015
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
$
3,798

 
$
3,471

 
$
327

 
9.4
 %
Insurance commissions
537

 
973

 
(436
)
 
(44.8
)
Loan fees
340

 
357

 
(17
)
 
(4.8
)
BOLI
251

 
252

 
(1
)
 
(0.4
)
Other non-interest income
219

 
224

 
(5
)
 
(2.2
)
Total non-interest income
$
5,145

 
$
5,277

 
$
(132
)
 
(2.5
)

The increase in retail fees and charges was due primarily to an increase in debit card income, due in part to seasonality, and an increase in service charges earned. The decrease in insurance commissions was due largely to the receipt of annual commissions from certain insurance providers during the prior quarter.

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
 
 
 
 
 
June 30,
 
March 31,
 
Change Expressed in:
 
2015
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
11,038

 
$
10,412

 
$
626

 
6.0
 %
Information technology and communications
2,573

 
2,585

 
(12
)
 
(0.5
)
Occupancy, net
2,557

 
2,461

 
96

 
3.9

Federal insurance premium
1,342

 
1,468

 
(126
)
 
(8.6
)
Deposit and loan transaction costs
1,435

 
1,256

 
179

 
14.3

Regulatory and outside services
1,365

 
1,206

 
159

 
13.2

Low income housing partnerships
492

 
1,366

 
(874
)
 
(64.0
)
Advertising and promotional
1,069

 
749

 
320

 
42.7

Other non-interest expense
1,235

 
1,356

 
(121
)
 
(8.9
)
Total non-interest expense
$
23,106

 
$
22,859

 
$
247

 
1.1


The increase in salaries and employee benefits expense was due primarily to compensation expense on unallocated ESOP shares related to the $0.25 per share True Blue Capitol dividend paid in June 2015. Similar to the current quarter, this dividend will result in $476 thousand of ESOP compensation expense in the fourth quarter of fiscal year 2015. The decrease in low income housing

62


partnerships expense was due primarily to the prior quarter including impairments, as well as to a decrease in amortization expense in the current quarter. The decrease in amortization expense included an adjustment to the prior quarter estimate of amortization expense, as well as to the current quarter estimate based on prior quarter activity. The increase in advertising and promotional expense was due primarily to the timing of media campaigns and sponsorships.

The Company's efficiency ratio was 44.30% for the current quarter compared to 43.91% for the prior quarter. The change in the efficiency ratio was due primarily to an increase in non-interest expense.

Income Tax Expense
Income tax expense was $9.1 million for the current quarter compared to $9.7 million for the prior quarter. The decrease between periods was due primarily to a decrease in the effective income tax rate, from 33.5% for the prior quarter, to 31.8% for the current quarter. The decrease in the effective income tax rate between periods was largely a result of reducing income tax expense to account for the impact of a lower effective tax rate year-to-date, primarily a result of higher deductible expenses associated with dividends paid on ESOP shares due to the True Blue Capitol dividend paid in June 2015.

63


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
 
 
June 30, 2015
 
March 31, 2015
 
 
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)
 
$
6,422,240

 
$
58,922

 
3.67
%
 
$
6,313,311

 
$
58,198

 
3.69
%
MBS(2)
 
1,602,047

 
8,849

 
2.21

 
1,674,986

 
9,537

 
2.28

Investment securities(2)(3)
 
636,368

 
1,914

 
1.20

 
560,434

 
1,673

 
1.19

FHLB stock
 
209,890

 
3,132

 
5.98

 
208,770

 
3,076

 
5.98

Cash and cash equivalents
 
2,141,864

 
1,357

 
0.25

 
2,202,290

 
1,393

 
0.25

Total interest-earning assets(1)(2)
 
11,012,409

 
74,174

 
2.69

 
10,959,791

 
73,877

 
2.70

Other noninterest-earning assets
 
229,657

 
 
 
 
 
233,237

 
 
 
 
Total assets
 
$
11,242,066

 
 
 
 
 
$
11,193,028

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Checking
 
$
751,078

 
70

 
0.04

 
$
724,637

 
67

 
0.04

Savings
 
311,504

 
115

 
0.15

 
305,182

 
115

 
0.15

Money market
 
1,146,468

 
665

 
0.23

 
1,153,612

 
664

 
0.23

Retail certificates
 
2,283,125

 
7,158

 
1.26

 
2,246,166

 
6,862

 
1.24

Wholesale certificates
 
309,765

 
369

 
0.48

 
328,910

 
499

 
0.61

Total deposits
 
4,801,940

 
8,377

 
0.70

 
4,758,507

 
8,207

 
0.70

FHLB advances(4)
 
2,572,293

 
15,718

 
2.45

 
2,571,309

 
15,900

 
2.51

FHLB line of credit
 
2,076,924

 
1,354

 
0.26

 
2,062,222

 
1,298

 
0.25

FHLB borrowings
 
4,649,217

 
17,072

 
1.47

 
4,633,531

 
17,198

 
1.50

Repurchase agreements
 
220,000

 
1,712

 
3.08

 
220,000

 
1,693

 
3.08

Total borrowings
 
4,869,217

 
18,784

 
1.54

 
4,853,531

 
18,891

 
1.58

Total interest-bearing liabilities
 
9,671,157

 
27,161

 
1.12

 
9,612,038

 
27,098

 
1.14

Other noninterest-bearing liabilities
 
89,052

 
 
 
 
 
105,621

 
 
 
 
Stockholders' equity
 
1,481,857

 
 
 
 
 
1,475,369

 
 
 
 
Total liabilities and stockholders' equity
 
$
11,242,066

 
 
 
 
 
$
11,193,028

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Continued)
 


64


 
 
For the Three Months Ended
 
 
June 30, 2015
 
March 31, 2015
 
 
Average
 
Interest
 
 
 
Average
 
Interest
 
 
 
 
Outstanding
 
Earned/
 
Yield/
 
Outstanding
 
Earned/
 
Yield/
 
 
Amount
 
Paid
 
Rate
 
Amount
 
Paid
 
Rate
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income(5)
 
 
 
$
47,013

 
 
 
 
 
$
46,779

 
 
Net interest rate spread(6)
 
 
 
 
 
1.57
%
 
 
 
 
 
1.56
%
Net interest-earning assets
 
$
1,341,252

 
 
 
 
 
$
1,347,753

 
 
 
 
Net interest margin(7)
 
 
 
 
 
1.71

 
 
 
 
 
1.71

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

 
 
 
 
 
1.14x

 
 
 
 
 
 
 
 
 
 
 
 
 
Selected performance ratios:
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized)
 
 
 
 
 
0.70
%
 
 
 
 
 
0.69
%
Return on average equity (annualized)
 
 
 
 
 
5.29

 
 
 
 
 
5.21

Average equity to average assets
 
 
 
 
 
13.18

 
 
 
 
 
13.18

Operating expense ratio(8)
 
 
 
 
 
0.82

 
 
 
 
 
0.82

Efficiency ratio(9)
 
 
 
 
 
44.30

 
 
 
 
 
43.91

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

 
 
 
 
 
0.20

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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 $37.9 million and $35.1 million for the quarters ended June 30, 2015 and March 31, 2015, 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 2.05% and 2.04% for the quarters ended June 30, 2015 and March 31, 2015, 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.

65


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 June 30, 2015 to the three months ended March 31, 2015. 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
 
June 30, 2015 vs. March 31, 2015
 
Increase (Decrease) Due to
 
Volume
 
Rate
 
Total
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable
$
998

 
$
(274
)
 
$
724

MBS
(408
)
 
(280
)
 
(688
)
Investment securities
228

 
13

 
241

FHLB stock
44

 
12

 
56

Cash and cash equivalents
(27
)
 
(9
)
 
(36
)
Total interest-earning assets
835

 
(538
)
 
297

 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Checking
3

 

 
3

Savings
3

 
(3
)
 

Money market
1

 

 
1

Certificates of deposit
101

 
65

 
166

FHLB borrowings
9

 
(135
)
 
(126
)
Repurchase agreements
10

 
9

 
19

Total interest-bearing liabilities
127

 
(64
)
 
63

 
 
 
 
 
 
Net change in net interest and dividend income
$
708

 
$
(474
)
 
$
234



66


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

In the event short-term liquidity needs exceed available cash, the Bank has access to a line of credit at the FHLB and the Federal Reserve Bank discount window. When the daily leverage strategy is in place, the Bank maintains the resulting excess cash reserves from the borrowings on the FHLB line of credit at the Federal Reserve Bank, which can be used to meet any short-term liquidity needs. 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. In July 2015, the president of the FHLB approved the increase in the Bank's borrowings limit to 55% of total assets through July 2016. 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 amount of FHLB advances outstanding at June 30, 2015 was $2.58 billion, 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 $232.6 million as collateral for FHLB borrowings at June 30, 2015. At June 30, 2015, the Bank's ratio of the par value of FHLB borrowings to total assets, as reported to the OCC, was 28%. When the full daily leverage strategy is in place, FHLB borrowings are in excess of 40% of the Bank's total assets, 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 June 30, 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 $246.7 million as collateral for repurchase agreements as of June 30, 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 June 30, 2015, the Bank had term borrowings, at par, of $2.80 billion, or approximately 31% 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 June 30, 2015, the Bank had $1.27 billion of securities that were eligible but unused as collateral for borrowing or other liquidity needs.


67


The Bank has access to and utilizes other sources of funds for liquidity purposes, such as brokered and public unit deposits. As of June 30, 2015, the Bank's policy allowed for combined brokered and public unit deposits up to 15% of total deposits. At June 30, 2015, the Bank had $320.4 million of public unit deposits, or approximately 7% of total deposits. There were no brokered deposits at June 30, 2015. Management continuously monitors the wholesale deposit market for opportunities to obtain funds at attractive rates. The Bank had pledged securities with an estimated fair value of $348.0 million as collateral for public unit deposits at June 30, 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.

As of June 30, 2015, $1.19 billion of the Bank's $2.61 billion of certificates of deposit was scheduled to mature within one year. Included in the $1.19 billion was $258.3 million of public unit 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.

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 June 30, 2015, cash and cash equivalents totaled $46.7 million, a decrease of $764.2 million from September 30, 2014. The decrease was due mainly to the removal of the entire daily leverage strategy at June 30, 2015, compared to having $800.0 million of the daily leverage strategy in place at September 30, 2014. This decrease was partially offset by an increase in the balance of operating cash at June 30, 2015 compared to September 30, 2014 as the balance of operating cash at September 30, 2014 was lower than the normal range. The full daily leverage strategy was reinstated on July 1, 2015.

During the nine months ended June 30, 2015, loan originations and purchases, net of principal repayments and related loan activity, resulted in cash outflows of $268.8 million. Cash flows from the security portfolio and the retail deposit portfolio were used to fund loan growth during the fiscal year. During the nine months ended June 30, 2015, net security portfolio cash inflows were $184.6 million and net retail deposit inflows were $157.9 million.

During the nine months ended June 30, 2015, the Bank purchased $146.7 million of FHLB stock and redeemed $202.9 million. The FHLB stock activity was due primarily to the daily leverage strategy.

At June 30, 2015, Capitol Federal Financial, Inc., at the holding company level, had $105.7 million on deposit at the Bank. During the nine months ended June 30, 2015, the Company paid $102.8 million in cash dividends and repurchased 2,279,472 shares at a total cost of $27.4 million. See additional discussion regarding dividends and stock repurchases in "Financial Condition - Stockholders' Equity."

As of June 30, 2015, the Bank had $9.7 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. 

68


The following table presents the contractual maturities of our loan, MBS, and investment securities portfolios at June 30, 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 June 30, 2015, the amortized cost of investment securities in our portfolio which are callable or have pre-refunding dates within one year was $404.5 million.
 
Loans(1)
 
MBS
 
Investment Securities
 
Total
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
(Dollars in thousands)
Amounts due:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Within one year
$
75,705

 
3.92
%
 
$
78

 
5.47
%
 
$
3,135

 
2.50
%
 
$
78,918

 
3.86
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
After one year:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over one to two years
59,454

 
3.59

 
111

 
5.55

 
32,134

 
1.50

 
91,699

 
2.86

Over two to three years
21,124

 
4.96

 
3,242

 
3.92

 
403,006

 
1.10

 
427,372

 
1.31

Over three to five years
53,130

 
4.71

 
53,907

 
4.51

 
190,315

 
1.24

 
297,352

 
2.45

Over five to ten years
391,104

 
4.00

 
436,196

 
1.94

 
10,878

 
1.62

 
838,178

 
2.90

Over ten to fifteen years
1,466,483

 
3.35

 
627,362

 
2.22

 

 

 
2,093,845

 
3.01

After fifteen years
4,480,702

 
3.71

 
444,288

 
2.29

 
2,064

 
1.54

 
4,927,054

 
3.58

Total due after one year
6,471,997

 
3.65

 
1,565,106

 
2.25

 
638,397

 
1.17

 
8,675,500

 
3.22

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
6,547,702

 
3.66

 
$
1,565,184

 
2.25

 
$
641,532

 
1.18

 
$
8,754,418

 
3.22


(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.

69


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 $102.8 million during the nine months ended June 30, 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 nine months ended June 30, 2015 was $2.70 billion, and the average balance of short-term FHLB borrowings outstanding during this period was $2.56 billion at a weighted average contractual rate of 0.63%. The majority of the short-term FHLB borrowings amount related to borrowings on the FHLB line of credit in conjunction with the daily leverage strategy. This compares to a balance of short-term FHLB borrowings outstanding at June 30, 2015 of $475.0 million at a weighted average contractual rate of 2.60%.

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 June 30, 2015, or future periods.


70


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 June 30, 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 June 30, 2015.
 
 
 
 
 
Regulatory
 
 
 
 
 
Requirement For
 
Bank
 
Company
 
"Well-Capitalized"
 
Ratios
 
Ratios
 
Status
Tier 1 leverage ratio(1)
11.3
%
 
12.6
%
 
5.0
%
Common equity tier 1 capital ratio(2)
30.8

 
34.5

 
6.5

Tier 1 capital ratio(2)
30.8

 
34.5

 
8.0

Total capital ratio(2)
31.0

 
34.7

 
10.0


(1)
In prior periods, the Bank ratio was calculated using total assets at quarter end in the denominator in accordance with regulatory capital rules at that point in time. The 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 June 30, 2015, for the Bank and the Company (dollars in thousands):

 
Bank
 
Company
Total equity as reported under GAAP
$
1,274,129

 
$
1,426,723

Unrealized gains on AFS securities
(8,227
)
 
(8,227
)
Total tier 1 capital
1,265,902

 
1,418,496

ACL
9,601

 
9,601

Total capital
$
1,275,503

 
$
1,428,097



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

71


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

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 points scenario was not applicable. Estimations of net interest income used in preparing the table below were based upon the assumptions that the total composition of interest-earning assets and interest-bearing liabilities does not change materially and that any repricing of assets or liabilities occurs at anticipated product and market rates for the alternative rate environments as of the dates presented. The estimation of net interest income does not include any projected gains or losses related to the sale of loans or securities, or income derived from non-interest income sources, but does include the use of different prepayment assumptions in the alternative interest rate environments. It is important to consider that estimated changes in net interest income are for a cumulative four-quarter period. These do not reflect the earnings expectations of management.
Change
 
Percentage Change in Net Interest Income
(in Basis Points)
 
At
in Interest Rates(1)
 
June 30, 2015
 
March 31, 2015
 
September 30, 2014
 -100 bp
 
N/A

 
N/A

 
N/A

  000 bp
 

 

 

+100 bp
 
(1.47
)%
 
(0.27
)%
 
(2.32
)%
+200 bp
 
(3.47
)
 
(1.86
)
 
(5.54
)
+300 bp
 
(6.45
)
 
(4.84
)
 
(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 greater degree in the increasing interest rate scenarios at June 30, 2015 compared to March 31, 2015 primarily as a result of a decrease in the amount of assets projected to reprice in the base case at June 30, 2015 compared to the prior quarter. This resulted in a decrease in the positive gap position between the two periods and, therefore, it is expected that assets will reprice higher at a slower pace in a rising interest rate environment at June 30, 2015 compared to March 31, 2015. Conversely, interest rates were lower at June 30, 2015 than at September 30, 2014 and, as a result, it is expected that assets will reprice higher at a faster pace in a rising interest rate environment at June 30, 2015 compared to September 30, 2015. The Bank was in a positive gap position at June 30, 2015 compared to a negative gap position at September 30, 2014. The positive gap at June 30, 2015 was a result of lower interest rates, which increased projected cash flows for the Bank's callable agency debentures and mortgage-related assets due to higher expected option calls and mortgage prepayment projections. The higher amount of projected asset cash flows resulted in a less adverse impact to net interest income in the rising rate scenarios for June 30, 2015 compared to 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 June 30, 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.

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 points scenario was not applicable. The estimations of the MVPE used in preparing the table below were based upon the assumptions that the total composition of interest-earning assets and interest-bearing liabilities does not change, that any repricing of assets or liabilities occurs at current product or market rates for the alternative rate environments as of the dates presented, and that different prepayment rates were used in each alternative interest rate environment.

72


Change
 
Percentage Change in MVPE
(in Basis Points)
 
At
in Interest Rates(1)
 
June 30, 2015
 
March 31, 2015
 
September 30, 2014
 -100 bp
 
N/A

 
N/A

 
N/A

  000 bp
 

 

 

+100 bp
 
(8.90
)%
 
(5.98
)%
 
(9.51
)%
+200 bp
 
(19.89
)
 
(14.90
)
 
(21.00
)
+300 bp
 
(31.44
)
 
(24.96
)
 
(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, the market value for both financial assets and liabilities generally 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 is expected to increase, as is the sensitivity of these assets in higher rate environments.

The percentage change in the Bank's MVPE was 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 greater 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, which resulted in a decrease in the MVPE in all of the rising interest rate environments presented. The percentage change in the Bank's MVPE at June 30, 2015 was more adversely impacted in the increasing interest rate scenarios than at March 31, 2015, and less adversely impacted in the increasing interest rate scenarios than at September 30, 2014. Long-term interest rates were higher at June 30, 2015 compared to March 31, 2015 which resulted in greater weighted average lives for these assets in the base case, thereby increasing the sensitivity of their market values as interest rates increase. Interest rates at September 30, 2014 were higher than at both March 31, 2015 and June 30, 2015, and, as a result, these assets had greater average lives at September 30, 2014 and had a greater sensitivity to rising interest rates.

The following gap table summarizes the anticipated maturities or repricing periods of the Bank's interest-earning assets and interest-bearing liabilities as of June 30, 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 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
$
271,432

 
$
640,836

 
$
1,215,228

 
$
811,167

 
$
2,238,439

 
$
5,177,102

Adjustable-rate
110,133

 
580,162

 
364,318

 
119,505

 
52,576

 
1,226,694

Other loans
111,347

 
7,639

 
6,950

 
2,088

 
1,599

 
129,623

Investment securities(2)
93,961

 
3,405

 
424,833

 
109,695

 
10,338

 
642,232

MBS(3)
206,105

 
443,046

 
392,591

 
241,139

 
268,376

 
1,551,257

Other interest-earning assets
37,676

 

 

 

 

 
37,676

Total interest-earning assets
830,654

 
1,675,088

 
2,403,920

 
1,283,594

 
2,571,328

 
8,764,584

 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Checking(4)
153,671

 
48,985

 
115,379

 
91,270

 
338,250

 
747,555

Savings(4)
66,496

 
16,337

 
37,670

 
29,217

 
161,938

 
311,658

Money market(4)
224,159

 
143,340

 
262,928

 
155,710

 
468,093

 
1,254,230

Certificates
441,727

 
749,826

 
976,279

 
436,989

 
664

 
2,605,485

Borrowings(5)
20,000

 
475,000

 
900,000

 
550,000

 
896,140

 
2,841,140

Total interest-bearing liabilities
906,053

 
1,433,488

 
2,292,256

 
1,263,186

 
1,865,085

 
7,760,068

 
 
 
 
 
 
 
 
 
 
 
 
Excess (deficiency) of interest-earning assets over
 
 
 
 
 
 
 
 
 
 
 
interest-bearing liabilities
$
(75,399
)
 
$
241,600

 
$
111,664

 
$
20,408

 
$
706,243

 
$
1,004,516

 
 
 
 
 
 
 
 
 
 
 
 
Cumulative excess (deficiency) of interest-earning
 
 
 
 
 
 
 
 
 
 
 
assets over interest-bearing liabilities
$
(75,399
)
 
$
166,201

 
$
277,865

 
$
298,273

 
$
1,004,516

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative excess (deficiency) of interest-earning
 
 
 
 
 
 
 
 
 
 
 
assets over interest-bearing liabilities as a
 
 
 
 
 
 
 
 
 
 
 
percent of total Bank assets at
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
(0.83
)%
 
1.82
 %
 
3.04
 %
 
3.27
%
 
11.00
%
 
 
March 31, 2015
0.24

 
4.62

 
5.35

 
7.89

 
10.62

 
 
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 June 30, 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 $1.49 billion, for a cumulative one-year gap of -16.4% of total assets.
(5)
Borrowings exclude deferred prepayment penalty costs and deferred gains on interest rate swap agreements previously terminated.

The decrease in the one-year gap amount at June 30, 2015 compared to March 31, 2015 was due primarily to higher interest rates at June 30, 2015. This resulted in a decrease in prepayment projections on the Bank's mortgage loan and MBS portfolios, as well as a decrease in the amount of investment securities projected to be called, resulting in a decrease in the amount of assets expected to reprice over the 12-month horizon. Interest rate were higher at September 30, 2014 than at both March 31, 2015 and June 30, 2015. As a result, the Bank had a negative gap position in the base case at September 30, 2014 as asset cash flow projections decreased to such a level that more liabilities were expected to reprice over the 12-month horizon than assets. If interest rates were to increase 200 basis points, as of June 30, 2015, the Bank's one-year gap is projected to be -$271.2 million, or -2.97% of total assets.

The gap position of the Bank has been managed over the past several years in anticipation of higher interest rates. Because of the on-balance sheet strategies implemented over the past several years of lengthening FHLB advances, increasing rates offered on longer-term certificate of deposit products, purchasing shorter term agency debentures, and focusing on the long-term value of the balance sheet through the measurement and management of our MVPE, management believes the Bank is well-positioned to move into a market rate environment where interest rates are higher.

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.
 
June 30, 2015
 
Amount
 
Yield/Rate
 
WAL
 
% of Category
 
% of Total
 
(Dollars in thousands)
Investment securities
$
641,532

 
1.18
%
 
2.5

 
29.1
%
 
7.1
%
MBS - fixed
1,125,174

 
2.26

 
3.3

 
51.0

 
12.5

MBS - adjustable
440,010

 
2.22

 
5.3

 
19.9

 
4.9

Total investment securities and MBS
2,206,716

 
1.93

 
3.4

 
100.0
%
 
24.5

Loans receivable:
 
 
 
 
 
 
 
 
 
Fixed-rate one- to four-family:
 
 
 
 
 
 
 
 
 
<= 15 years
1,235,124

 
3.28

 
4.1

 
18.9
%
 
13.8

> 15 years
3,790,022

 
4.04

 
6.4

 
57.9

 
42.3

All other fixed-rate loans
180,424

 
4.32

 
3.5

 
2.7

 
2.0

Total fixed-rate loans
5,205,570

 
3.87

 
5.7

 
79.5

 
58.1

Adjustable-rate one- to four-family:
 
 
 
 
 
 
 
 
 
<= 36 months
339,738

 
1.97

 
4.1

 
5.2

 
3.8

> 36 months
857,934

 
2.90

 
3.1

 
13.1

 
9.6

All other adjustable-rate loans
144,460

 
4.38

 
1.0

 
2.2

 
1.6

Total adjustable-rate loans
1,342,132

 
2.83

 
3.1

 
20.5

 
15.0

Total loans receivable
6,547,702

 
3.66

 
5.2

 
100.0
%
 
73.1

FHLB stock
166,257

 
5.98

 
2.4

 
 
 
1.9

Cash and cash equivalents
46,668

 
0.23

 

 
 
 
0.5

Total interest-earning assets
$
8,967,343

 
3.26

 
4.7

 
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
Transaction deposits
$
2,207,703

 
0.16

 
6.5

 
45.9
%
 
29.0
%
Certificates of deposit
2,605,485

 
1.15

 
1.6

 
54.1

 
34.2

Total deposits
4,813,188

 
0.70

 
3.9

 
100.0
%
 
63.2

Term borrowings
2,795,000

 
2.49

 
3.3

 
 
 
36.8

Total interest-bearing liabilities
$
7,608,188

 
1.35

 
3.7

 
 
 
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 June 30, 2015. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of June 30, 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.

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 June 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

76



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 June 30, 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
April 1, 2015 through
 
 
 
 
 
 
 
April 30, 2015

 
$

 

 
$
42,803,878

May 1, 2015 through
 
 
 
 
 
 
 
May 31, 2015
672,367

 
12.04

 
672,367

 
34,711,624

June 1, 2015 through
 
 
 
 
 
 
 
June 30, 2015
1,304,960

 
12.01

 
1,304,960

 
19,043,638

Total
1,977,327

 
12.02

 
1,977,327

 
19,043,638


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: August 4, 2015
By:
/s/ John B. Dicus
 
 
 
John B. Dicus, Chairman, President and Chief Executive Officer
 
 
 
 
 
Date: August 4, 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
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 June 30, 2015, filed with the Securities and Exchange Commission on August 4, 2015, has been formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets at June 30, 2015 and September 30, 2014, (ii) Consolidated Statements of Income for the three and nine months ended June 30, 2015 and 2014, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2015 and 2014, (iv) Consolidated Statement of Stockholders' Equity for the nine months ended June 30, 2015, (v) Consolidated Statements of Cash Flows for the nine months ended June 30, 2015 and 2014, and (vi) Notes to the Unaudited Consolidated Financial Statements

80