10-Q


UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
Form 10-Q
_________________
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-34814
Capitol Federal Financial, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Maryland    
27-2631712
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
700 South Kansas Avenue, Topeka, Kansas
66603
(Address of principal executive offices)
(Zip Code)
 
 
 
(785) 235-1341
Registrant's telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller Reporting Company ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of May 3, 2016, there were 137,218,222 shares of Capitol Federal Financial, Inc. common stock outstanding.





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




PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 
(Unaudited)
 
 
 
March 31,
 
September 30,
 
2016
 
2015
ASSETS:
 
 
 
Cash and cash equivalents (includes interest-earning deposits of $196,910 and $764,816)
$
203,811

 
$
772,632

Securities:
 
 
 
Available-for-sale ("AFS"), at estimated fair value (amortized cost of $666,139 and $744,708)
677,416

 
758,171

Held-to-maturity ("HTM"), at amortized cost (estimated fair value of $1,293,441 and $1,295,274)
1,270,849

 
1,271,122

Loans receivable, net (allowance for credit losses ("ACL") of $9,193 and $9,443)
6,769,194

 
6,625,027

Federal Home Loan Bank Topeka ("FHLB") stock, at cost
114,381

 
150,543

Premises and equipment, net
80,857

 
75,810

Income taxes receivable, net

 
1,071

Other assets
200,176

 
189,785

TOTAL ASSETS
$
9,316,684

 
$
9,844,161

 
 
 
 
LIABILITIES:
 
 
 
Deposits
$
5,119,829

 
$
4,832,520

FHLB borrowings
2,471,656

 
3,270,521

Repurchase agreements
200,000

 
200,000

Advance payments by borrowers for taxes and insurance
52,229

 
61,818

Income taxes payable, net
1,778

 

Deferred income tax liabilities, net
25,924

 
26,391

Accounts payable and accrued expenses
41,860

 
36,685

Total liabilities
7,913,276

 
8,427,935

 
 
 
 
STOCKHOLDERS' EQUITY:
 
 
 
Preferred stock, $.01 par value; 100,000,000 shares authorized, no shares issued or outstanding

 

Common stock, $.01 par value; 1,400,000,000 shares authorized, 137,159,138 and 137,106,822
 
 
 
shares issued and outstanding as of March 31, 2016 and September 30, 2015, respectively
1,372

 
1,371

Additional paid-in capital
1,152,367

 
1,151,041

Unearned compensation, Employee Stock Ownership Plan ("ESOP")
(40,473
)
 
(41,299
)
Retained earnings
283,128

 
296,739

Accumulated other comprehensive income ("AOCI"), net of tax
7,014

 
8,374

Total stockholders' equity
1,403,408

 
1,416,226

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
9,316,684

 
$
9,844,161

 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 


3


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)
 
 
 
 
 
 
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
March 31,
 
2016
 
2015
 
2016
 
2015
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
60,732

 
$
58,198

 
$
120,955

 
$
116,817

Mortgage-backed securities ("MBS")
7,702

 
9,537

 
15,533

 
19,538

FHLB stock
3,006

 
3,076

 
6,158

 
6,257

Cash and cash equivalents
2,707

 
1,393

 
4,327

 
2,817

Investment securities
1,485

 
1,673

 
3,018

 
3,348

Total interest and dividend income
75,632

 
73,877

 
149,991

 
148,777

INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB borrowings
16,394

 
17,198

 
32,468

 
34,186

Deposits
9,213

 
8,207

 
18,012

 
16,352

Repurchase agreements
1,487

 
1,693

 
2,991

 
3,424

Total interest expense
27,094

 
27,098

 
53,471

 
53,962

NET INTEREST INCOME
48,538

 
46,779

 
96,520

 
94,815

PROVISION FOR CREDIT LOSSES

 
275

 

 
448

NET INTEREST INCOME AFTER
 
 
 
 
 
 
 
PROVISION FOR CREDIT LOSSES
48,538

 
46,504

 
96,520

 
94,367

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
3,558

 
3,471

 
7,372

 
7,254

Income from bank-owned life insurance ("BOLI")
1,459

 
252

 
2,162

 
568

Insurance commissions
1,060

 
973

 
1,576

 
1,522

Loan fees
336

 
357

 
678

 
731

Other non-interest income
213

 
224

 
404

 
459

Total non-interest income
6,626

 
5,277

 
12,192

 
10,534

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
10,288

 
10,412

 
20,775

 
20,889

Occupancy, net
2,616

 
2,461

 
5,288

 
4,880

Information technology and communications
2,609

 
2,585

 
5,167

 
5,153

Federal insurance premium
1,399

 
1,468

 
2,781

 
2,750

Deposit and loan transaction costs
1,396

 
1,256

 
2,670

 
2,630

Regulatory and outside services
1,144

 
1,206

 
2,630

 
2,502

Advertising and promotional
983

 
749

 
2,137

 
1,638

Low income housing partnerships
1,321

 
1,366

 
2,094

 
2,912

Office supplies and related expense
584

 
588

 
1,471

 
1,062

Other non-interest expense
1,086

 
768

 
2,003

 
1,585

Total non-interest expense
23,426

 
22,859

 
47,016

 
46,001

INCOME BEFORE INCOME TAX EXPENSE
31,738

 
28,922

 
61,696

 
58,900

INCOME TAX EXPENSE
10,211

 
9,688

 
19,451

 
19,194

NET INCOME
$
21,527

 
$
19,234

 
$
42,245

 
$
39,706

 
 
 
 
 
 
 
 
Basic earnings per share ("EPS")
$
0.16

 
$
0.14

 
$
0.32

 
$
0.29

Diluted EPS
$
0.16

 
$
0.14

 
$
0.32

 
$
0.29

Dividends declared per share
$
0.09

 
$
0.09

 
$
0.42

 
$
0.42


 
 
 
 

 

Basic weighted average common shares
132,960,030

 
136,208,029

 
132,890,781

 
136,147,295

Diluted weighted average common shares
133,031,042

 
136,245,785

 
132,971,254

 
136,179,622

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 

4


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
 
 
 
 
 
 
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
March 31,
 
2016
 
2015
 
2016
 
2015
Net income
$
21,527

 
$
19,234

 
$
42,245

 
$
39,706

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Changes in unrealized holding gains (losses) on AFS securities,
 
 
 
 
 
 
 
net of deferred income taxes of $(874), $(1,202), $826 and $(1,673)
1,438

 
1,978

 
(1,360
)
 
2,754

Comprehensive income
$
22,965

 
$
21,212

 
$
40,885

 
$
42,460

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 


5


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
Unearned
 
 
 
 
 
Total
 
Common
 
Paid-In
 
Compensation
 
Retained
 
 
 
Stockholders'
 
Stock
 
Capital
 
ESOP
 
Earnings
 
AOCI
 
Equity
Balance at October 1, 2015
$
1,371

 
$
1,151,041

 
$
(41,299
)
 
$
296,739

 
$
8,374

 
$
1,416,226

Net income
 
 
 
 
 
 
42,245

 
 
 
42,245

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
(1,360
)
 
(1,360
)
ESOP activity, net
 
 
213

 
826

 
 
 
 
 
1,039

Restricted stock activity, net
1

 
31

 
 
 
 
 
 
 
32

Stock-based compensation
 
 
783

 
 
 
 
 
 
 
783

Stock options exercised

 
299

 
 
 
 
 
 
 
299

Cash dividends to stockholders ($0.42 per share)
 
 
 
 
 
(55,856
)
 
 
 
(55,856
)
Balance at March 31, 2016
$
1,372

 
$
1,152,367

 
$
(40,473
)
 
$
283,128

 
$
7,014

 
$
1,403,408

 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 
 


6


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
 
For the Six Months Ended
 
March 31,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
42,245

 
$
39,706

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
FHLB stock dividends
(6,158
)
 
(6,257
)
Provision for credit losses

 
448

Amortization and accretion of premiums and discounts on securities
2,486

 
2,753

Depreciation and amortization of premises and equipment
3,475

 
3,312

Amortization of deferred amounts related to FHLB advances, net
1,135

 
2,342

Common stock committed to be released for allocation - ESOP
1,039

 
1,036

Stock-based compensation
783

 
1,051

Changes in:
 
 
 
Other assets, net
353

 
3,049

Income taxes payable/receivable
3,240

 
1,922

Accounts payable and accrued expenses
(4,901
)
 
(5,167
)
Net cash provided by operating activities
43,697

 
44,195

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of AFS securities
(74,987
)
 
(99,937
)
Purchase of HTM securities
(144,392
)
 
(29,153
)
Proceeds from calls, maturities and principal reductions of AFS securities
153,512

 
102,261

Proceeds from calls, maturities and principal reductions of HTM securities
142,223

 
155,822

Proceeds from the redemption of FHLB stock
189,000

 
155,679

Purchase of FHLB stock
(146,680
)
 
(91,319
)
Net increase in loans receivable
(146,790
)
 
(135,746
)
Purchase of premises and equipment
(8,446
)
 
(5,123
)
Proceeds from sale of other real estate owned ("OREO")
1,096

 
2,784

Proceeds from BOLI death benefit
783

 

Net cash (used in) provided by investing activities
(34,681
)
 
55,268

 
 
 
 
 
 
 
(Continued)


7


 
 
 
 
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
 
For the Six Months Ended
 
March 31,
 
2016
 
2015
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Dividends paid
(55,856
)
 
(57,268
)
Deposits, net of withdrawals
287,309

 
182,002

Proceeds from borrowings
3,600,000

 
3,900,000

Repayments on borrowings
(4,400,000
)
 
(3,900,000
)
Change in advance payments by borrowers for taxes and insurance
(9,589
)
 
(6,684
)
Repurchase of common stock

 
(7,208
)
Other, net
299

 
5

Net cash (used in) provided by financing activities
(577,837
)
 
110,847

 
 
 
 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(568,821
)
 
210,310

 
 
 
 
CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of period
772,632

 
810,840

End of period
$
203,811

 
$
1,021,150

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Income tax payments
$
16,212

 
$
17,273

Interest payments
$
51,766

 
$
51,296

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
(Concluded)


8


Notes to Consolidated Financial Statements (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements include the accounts of Capitol Federal® Financial, Inc. (the "Company") and its wholly-owned subsidiary, Capitol Federal Savings Bank (the "Bank"). The Bank has a wholly-owned subsidiary, Capitol Funds, Inc. Capitol Funds, Inc. has a wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2015, filed with the Securities and Exchange Commission ("SEC"). Interim results are not necessarily indicative of results for a full year.

Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers. The ASU 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 August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, which deferred the effective date of ASU 2014-09 one year, making the ASU effective for fiscal years beginning after December 15, 2017, including interim reporting periods within that reporting period, which is October 1, 2018 for the Company. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, which is intended to clarify the new revenue recognition guidance by specifically addressing principal versus agent considerations. The Company has not yet completed its evaluation of the above noted ASUs.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments, Recognition and Measurement of Financial Assets and Liabilities. The ASU supersedes certain accounting guidance related to equity securities with readily determinable fair values and the related impairment assessment. An entity's equity investments that are accounted for under the equity method of accounting or result in consolidation of an investee are not included within the scope of this ASU. The ASU requires public business entities to utilize the exit price notation in determining fair value for financial instruments measured at amortized cost on the balance sheet. The ASU requires additional reporting in other comprehensive income for financial liabilities measured at fair value in accordance with the fair value option. The ASU also requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balances or in the notes to the financial statements. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods with those fiscal years, which is October 1, 2018 for the Company. Early adoption is not permitted except in certain circumstances. The Company has not yet completed its evaluation of ASU 2016-01.

In February 2016, the FASB issued ASU 2016-02, Leases. The ASU amends lease accounting guidance by requiring that lessees recognize the assets and liabilities arising from leases on the balance sheet. Additionally, the ASU requires entities to disclose both quantitative and qualitative information regarding their leasing activities. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, which is October 1, 2019 for the Company. Early adoption is permitted. The Company has not yet completed its evaluation of ASU 2016-02.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, along with simplifying the classification in the statement of cash flows. The ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods, which is October 1, 2017 for the Company. The Company has not yet completed its evaluation of ASU 2016-09.



9


2. EARNINGS PER SHARE
Shares acquired by the ESOP are not considered in the basic average shares outstanding until the shares are committed for allocation or vested to an employee's individual account. Unvested shares awarded pursuant to the Company's restricted stock benefit plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
March 31,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands, except per share amounts)
Net income
$
21,527

 
$
19,234

 
$
42,245

 
$
39,706

Income allocated to participating securities
(16
)
 
(27
)
 
(43
)
 
(69
)
Net income available to common stockholders
$
21,511

 
$
19,207

 
$
42,202

 
$
39,637

 
 
 
 
 
 
 
 
Average common shares outstanding
132,918,277

 
136,166,271

 
132,869,793

 
136,126,419

Average committed ESOP shares outstanding
41,753

 
41,758

 
20,988

 
20,876

Total basic average common shares outstanding
132,960,030

 
136,208,029

 
132,890,781

 
136,147,295

 
 
 
 
 
 
 
 
Effect of dilutive stock options
71,012

 
37,756

 
80,473

 
32,327

 
 
 
 
 
 
 
 
Total diluted average common shares outstanding
133,031,042

 
136,245,785

 
132,971,254

 
136,179,622

 
 
 
 
 
 
 
 
Net EPS:
 
 
 
 
 
 
 
Basic
$
0.16

 
$
0.14

 
$
0.32

 
$
0.29

Diluted
$
0.16

 
$
0.14

 
$
0.32

 
$
0.29

 
 
 
 
 
 
 
 
Antidilutive stock options, excluded from the diluted average
 
 
 
 
 
 
common shares outstanding calculation
921,199

 
863,827

 
898,386

 
920,365



10


3. SECURITIES
The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of AFS and HTM securities at the dates presented. The majority of the MBS and investment securities portfolios are composed of securities issued by United States Government-Sponsored Enterprises ("GSEs").
 
March 31, 2016
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
GSE debentures
$
471,215

 
$
1,266

 
$
30

 
$
472,451

MBS
192,615

 
10,422

 
4

 
203,033

Trust preferred securities
2,169

 

 
379

 
1,790

Municipal bonds
140

 
2

 

 
142

 
666,139

 
11,690

 
413

 
677,416

HTM:
 
 
 
 
 
 
 
MBS
1,233,741

 
23,813

 
1,702

 
1,255,852

Municipal bonds
37,108

 
489

 
8

 
37,589

 
1,270,849

 
24,302

 
1,710

 
1,293,441

 
$
1,936,988

 
$
35,992

 
$
2,123

 
$
1,970,857


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

 
$
1,304

 
$
60

 
$
526,620

MBS
217,006

 
12,489

 
4

 
229,491

Trust preferred securities
2,186

 

 
270

 
1,916

Municipal bonds
140

 
4

 

 
144

 
744,708

 
13,797

 
334

 
758,171

HTM:
 
 
 
 
 
 
 
MBS
1,233,048

 
27,325

 
3,590

 
1,256,783

Municipal bonds
38,074

 
437

 
20

 
38,491

 
1,271,122

 
27,762

 
3,610

 
1,295,274

 
$
2,015,830

 
$
41,559

 
$
3,944

 
$
2,053,445




11


The following tables summarize the estimated fair value and gross unrealized losses of those securities on which an unrealized loss at the dates presented was reported and the continuous unrealized loss position for less than 12 months and equal to or greater than 12 months as of the dates presented.
 
March 31, 2016
 
Less Than 12 Months
 
Equal to or Greater Than 12 Months
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
GSE debentures
$
74,977

 
$
22

 
$
24,993

 
$
8

MBS

 

 
698

 
4

Trust preferred securities

 

 
1,790

 
379

 
$
74,977

 
$
22

 
$
27,481

 
$
391

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HTM:
 
 
 
 
 
 
 
MBS
$
156,618

 
$
485

 
$
121,029

 
$
1,217

Municipal bonds
3,525

 
6

 
393

 
2

 
$
160,143

 
$
491

 
$
121,422

 
$
1,219


 
September 30, 2015
 
Less Than 12 Months
 
Equal to or Greater Than 12 Months
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
GSE debentures
$
39,135

 
$
15

 
$
49,955

 
$
45

MBS

 

 
687

 
4

Trust preferred securities

 

 
1,916

 
270

 
$
39,135

 
$
15

 
$
52,558

 
$
319

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HTM:
 
 
 
 
 
 
 
MBS
$
38,604

 
$
134

 
$
302,158

 
$
3,456

Municipal bonds
3,292

 
12

 
1,128

 
8

 
$
41,896

 
$
146

 
$
303,286

 
$
3,464


The unrealized losses at March 31, 2016 and September 30, 2015 were primarily a result of an increase in market yields from the time the securities were purchased. In general, as market yields rise, the fair value of securities will decrease; as market yields fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. The impairment is also considered temporary because scheduled coupon payments have been made, it is anticipated that the entire principal balance will be collected as scheduled, and management neither intends to sell the securities, nor is it more likely than not that the Company will be required to sell the securities before the recovery of the remaining amortized cost amount, which could be at maturity. As a result of the analysis, management has concluded that no other-than-temporary impairments existed at March 31, 2016 or September 30, 2015.

12


The amortized cost and estimated fair value of debt securities as of March 31, 2016, by contractual maturity, are shown below.  Actual principal repayments may differ from contractual maturities due to prepayment or early call privileges by the issuer. In the case of MBS, borrowers on the underlying loans generally have the right to prepay their loans without prepayment penalty. For this reason, MBS are not included in the maturity categories.
 
AFS
 
HTM
 
Amortized
 
Estimated
 
Amortized
 
Estimated
 
Cost
 
Fair Value
 
Cost
 
Fair Value
 
(Dollars in thousands)
One year or less
$
25,075

 
$
25,167

 
$
5,545

 
$
5,603

One year through five years
446,280

 
447,426

 
24,422

 
24,700

Five years through ten years

 

 
7,141

 
7,286

Ten years and thereafter
2,169

 
1,790

 

 

 
473,524

 
474,383

 
37,108

 
37,589

MBS
192,615

 
203,033

 
1,233,741

 
1,255,852

 
$
666,139

 
$
677,416

 
$
1,270,849

 
$
1,293,441



The following table presents the taxable and non-taxable components of interest income on investment securities for the periods presented.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31,
 
March 31,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Taxable
$
1,314

 
$
1,493

 
$
2,668

 
$
2,966

Non-taxable
171

 
180

 
350

 
382

 
$
1,485

 
$
1,673

 
$
3,018

 
$
3,348



The following table summarizes the amortized cost and estimated fair value of securities pledged as collateral for the obligations listed below as of the dates presented.
 
March 31, 2016
 
September 30, 2015
 
Amortized
 
Estimated
 
Amortized
 
Estimated
 
Cost
 
Fair Value
 
Cost
 
Fair Value
 
(Dollars in thousands)
Public unit deposits
$
419,018

 
$
426,084

 
$
342,620

 
$
347,505

Repurchase agreements
217,030

 
225,975

 
217,073

 
225,806

FHLB borrowings
190,373

 
191,616

 
216,607

 
218,199

Federal Reserve Bank
17,611

 
18,274

 
20,134

 
20,989

 
$
844,032

 
$
861,949

 
$
796,434

 
$
812,499


13


4. LOANS RECEIVABLE and ALLOWANCE FOR CREDIT LOSSES
Loans receivable, net at the dates presented is summarized as follows:
 
March 31, 2016
 
September 30, 2015
 
(Dollars in thousands)
Real estate loans:
 
 
 
One- to four-family:
 
 
 
Originated
$
6,019,559

 
$
5,856,730

Purchased
456,876

 
485,682

Construction
76,457

 
75,152

Total
6,552,892

 
6,417,564

Multi-family and commercial:
 
 
 
Permanent
112,414

 
110,938

Construction
153,231

 
54,768

Total
265,645

 
165,706

Total real estate loans
6,818,537

 
6,583,270

 
 
 
 
Consumer loans:
 
 
 
Home equity
123,565

 
125,844

Other
4,279

 
4,179

Total consumer loans
127,844

 
130,023

 
 
 
 
Total loans receivable
6,946,381

 
6,713,293

 
 
 
 
Less:
 
 
 
Undisbursed loan funds:
 
 
 
One- to four-family
42,906

 
45,696

Multi-family and commercial
139,495

 
44,869

ACL
9,193

 
9,443

Discounts/unearned loan fees
24,347

 
24,213

Premiums/deferred costs
(38,754
)
 
(35,955
)
 
$
6,769,194

 
$
6,625,027


Lending Practices and Underwriting Standards - Originating and purchasing one- to four-family loans is the Bank's primary lending business, resulting in a loan concentration in residential first mortgage loans. The Bank purchases one- to four-family loans, on a loan-by-loan basis, from a select group of correspondent lenders. The Bank also originates consumer loans, commercial and multi-family real estate loans, and construction loans secured by residential, multi-family or commercial real estate and participates in commercial and multi-family real estate and construction-to-permanent loans. As a result of our one- to four-family lending activities, the Bank has a concentration of loans secured by real property located in Kansas and Missouri.

One- to four-family loans - Full documentation to support an applicant's credit and income, and sufficient funds to cover all applicable fees and reserves at closing, are required on all loans. 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.


14


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 underwritten based on the income producing potential of the property, the collateral value, and the financial strength of the borrower. Additionally, the Bank generally requires personal guarantees. At the time of origination, loan-to-value ("LTV") ratios on multi-family, commercial real estate, and related construction loans generally cannot exceed 80% of the appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.25. Appraisals on properties securing these loans are performed by independent state certified fee appraisers.

Consumer loans - The Bank offers a variety of secured consumer loans, including home equity loans and lines of credit, home improvement loans, auto loans, and loans secured by savings deposits. The Bank also originates a very limited amount of unsecured loans. The Bank does not originate any consumer loans on an indirect basis, such as contracts purchased from retailers of goods or services which have extended credit to their customers. The majority of the consumer loan portfolio is comprised of home equity lines of credit for which the Bank also has the first mortgage or the home equity line of credit is in the first lien position.

The underwriting standards for consumer loans include a determination of an applicant's payment history on other debts and an assessment of an applicant's ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of an applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security in relation to the proposed loan amount.

Credit Quality Indicators - Based on the Bank's lending emphasis and underwriting standards, management has segmented the loan portfolio into three segments: (1) one- to four-family loans; (2) consumer loans; and (3) multi-family and commercial loans. The one- to four-family and consumer loan portfolios are further segmented into classes for purposes of providing disaggregated information about the credit quality of the loan portfolio. The classes are: one- to four-family 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.


15


The following tables present the recorded investment, by class, in loans 30 to 89 days delinquent, loans 90 or more days delinquent or in foreclosure, total delinquent loans, current loans, and total recorded investment at the dates presented. The recorded investment in loans is defined as the unpaid principal balance of a loan (net of unadvanced funds related to loans in process), less charge-offs and inclusive of unearned loan fees and deferred costs. At March 31, 2016 and September 30, 2015, all loans 90 or more days delinquent were on nonaccrual status.
 
March 31, 2016
 
 
 
90 or More Days
 
Total
 
 
 
Total
 
30 to 89 Days
 
Delinquent or
 
Delinquent
 
Current
 
Recorded
 
Delinquent
 
in Foreclosure
 
Loans
 
Loans
 
Investment
 
(Dollars in thousands)
One- to four-family loans - originated
$
16,625

 
$
8,861

 
$
25,486

 
$
6,040,139

 
$
6,065,625

One- to four-family loans - purchased
6,045

 
7,534

 
13,579

 
445,800

 
459,379

Multi-family and commercial loans

 

 

 
125,539

 
125,539

Consumer - home equity
631

 
622

 
1,253

 
122,312

 
123,565

Consumer - other
28

 
26

 
54

 
4,225

 
4,279

 
$
23,329

 
$
17,043

 
$
40,372

 
$
6,738,015

 
$
6,778,387

 
September 30, 2015
 
 
 
90 or More Days
 
Total
 
 
 
Total
 
30 to 89 Days
 
Delinquent or
 
Delinquent
 
Current
 
Recorded
 
Delinquent
 
in Foreclosure
 
Loans
 
Loans
 
Investment
 
(Dollars in thousands)
One- to four-family loans - originated
$
19,285

 
$
7,093

 
$
26,378

 
$
5,869,289

 
$
5,895,667

One- to four-family loans - purchased
7,305

 
8,956

 
16,261

 
472,114

 
488,375

Multi-family and commercial loans

 

 

 
120,405

 
120,405

Consumer - home equity
703

 
497

 
1,200

 
124,644

 
125,844

Consumer - other
17

 
12

 
29

 
4,150

 
4,179

 
$
27,310

 
$
16,558

 
$
43,868

 
$
6,590,602

 
$
6,634,470


The recorded investment of mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of March 31, 2016 was $5.9 million, which is included in loans 90 or more days delinquent or in foreclosure in the table above.   The carrying value of residential OREO held as a result of obtaining physical possession upon completion of a foreclosure or through completion of a deed in lieu of foreclosure was $4.6 million at March 31, 2016

The following table presents the recorded investment, by class, in loans classified as nonaccrual at the dates presented.
 
March 31, 2016
 
September 30, 2015
 
(Dollars in thousands)
One- to four-family loans - originated
$
17,338

 
$
16,093

One- to four-family loans - purchased
7,615

 
9,038

Multi-family and commercial loans

 

Consumer - home equity
774

 
792

Consumer - other
33

 
12

 
$
25,760

 
$
25,935



16


In accordance with the Bank's asset classification policy, management regularly reviews the problem loans in the Bank's portfolio to determine whether any loans require classification. Loan classifications are defined as follows:

Special mention - These loans are performing loans on which known information about the collateral pledged or the possible credit problems of the borrower(s) have caused management to have doubts as to the ability of the borrower(s) to comply with present loan repayment terms and which may result in the future inclusion of such loans in the non-performing loan categories.
Substandard - A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those characterized by the distinct possibility the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses present make collection or liquidation in full on the basis of currently existing facts and conditions and values highly questionable and improbable.
Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as assets on the books is not warranted.

The following table sets forth the recorded investment in loans classified as special mention or substandard, by class, at the dates presented. Special mention and substandard loans are included in the ACL formula analysis model if the loans are not individually evaluated for loss. Loans classified as doubtful or loss are individually evaluated for loss. At the dates presented, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.
 
March 31, 2016
 
September 30, 2015
 
Special Mention
 
Substandard
 
Special Mention
 
Substandard
 
(Dollars in thousands)
One- to four-family - originated
$
13,625

 
$
30,222

 
$
16,149

 
$
29,282

One- to four-family - purchased
1,369

 
11,672

 
1,376

 
13,237

Multi-family and commercial

 

 

 

Consumer - home equity
55

 
1,397

 
151

 
1,301

Consumer - other

 
35

 

 
17

 
$
15,049

 
$
43,326

 
$
17,676

 
$
43,837


The following table shows the weighted average credit score and weighted average LTV for originated and purchased one- to four-family loans and originated consumer home equity loans at the dates presented. Borrower credit scores are intended to provide an indication as to the likelihood that a borrower will repay their debts. Credit scores are updated at least semiannually, with the last update in March 2016, from a nationally recognized consumer rating agency. The LTV ratios provide an estimate of the extent to which the Bank may incur a loss on any given loan that may go into foreclosure. The consumer - home equity LTV does not take into account the first lien position, if applicable.  The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. In most cases, the most recent appraisal was obtained at the time of origination.
 
March 31, 2016
 
September 30, 2015
 
Credit Score
 
LTV
 
Credit Score
 
LTV
One- to four-family - originated
766
 
65
%
 
765
 
65
%
One- to four-family - purchased
753
 
65

 
752
 
65

Consumer - home equity
754
 
19

 
753
 
18

 
765
 
64

 
764
 
64






17


Troubled Debt Restructurings ("TDRs") - The following tables present the recorded investment prior to restructuring and immediately after restructuring in all loans restructured during the periods presented. These tables do not reflect the recorded investment at the end of the periods indicated. Any increase in the recorded investment at the time of the restructuring was generally due to the capitalization of delinquent interest and/or escrow balances.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31, 2016
 
March 31, 2016
 
Number
 
Pre-
 
Post-
 
Number
 
Pre-
 
Post-
 
of
 
Restructured
 
Restructured
 
of
 
Restructured
 
Restructured
 
Contracts
 
Outstanding
 
Outstanding
 
Contracts
 
Outstanding
 
Outstanding
 
(Dollars in thousands)
One- to four-family loans - originated
32

 
$
4,259

 
$
4,375

 
62

 
$
7,365

 
$
7,540

One- to four-family loans - purchased

 

 

 
1

 
123

 
122

Multi-family and commercial loans

 

 

 

 

 

Consumer - home equity
1

 
3

 
3

 
5

 
64

 
64

Consumer - other
1

 
8

 
8

 
1

 
8

 
8

 
34

 
$
4,270

 
$
4,386

 
69

 
$
7,560

 
$
7,734

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

 
$
4,413

 
$
4,445

 
74

 
$
9,737

 
$
9,817

One- to four-family loans - purchased

 

 

 
2

 
266

 
268

Multi-family and commercial loans

 

 

 

 

 

Consumer - home equity
2

 
20

 
24

 
6

 
84

 
89

Consumer - other

 

 

 
3

 
12

 
12

 
33

 
$
4,433

 
$
4,469

 
85

 
$
10,099

 
$
10,186


The following table provides information on TDRs that became delinquent during the periods presented within 12 months after being restructured.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31, 2016
 
March 31, 2015
 
March 31, 2016
 
March 31, 2015
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
Contracts
 
Investment
 
Contracts
 
Investment
 
(Dollars in thousands)
One- to four-family loans - originated
16

 
$
1,802

 
9

 
$
1,121

 
27

 
$
2,602

 
28

 
$
2,878

One- to four-family loans - purchased

 

 
1

 
71

 

 

 
3

 
339

Multi-family and commercial loans

 

 

 

 

 

 

 

Consumer - home equity
2

 
13

 
1

 
6

 
4

 
91

 
2

 
21

Consumer - other

 

 

 

 

 

 
1

 
5

 
18

 
$
1,815

 
11

 
$
1,198

 
31

 
$
2,693

 
34

 
$
3,243


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.
 
March 31, 2016
 
September 30, 2015
 
 
 
Unpaid
 
 
 
 
 
Unpaid
 
 
 
Recorded
 
Principal
 
Related
 
Recorded
 
Principal
 
Related
 
Investment
 
Balance
 
ACL
 
Investment
 
Balance
 
ACL
 
(Dollars in thousands)
With no related allowance recorded
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
$
12,273

 
$
12,887

 
$

 
$
11,169

 
$
11,857

 
$

One- to four-family - purchased
11,213

 
13,121

 

 
11,035

 
13,315

 

Multi-family and commercial

 

 

 

 

 

Consumer - home equity
671

 
863

 

 
591

 
837

 

Consumer - other
24

 
55

 

 
13

 
40

 

 
24,181

 
26,926

 

 
22,808

 
26,049

 

With an allowance recorded
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
26,933

 
26,995

 
364

 
26,453

 
26,547

 
294

One- to four-family - purchased
1,941

 
1,925

 
60

 
3,764

 
3,731

 
110

Multi-family and commercial

 

 

 

 

 

Consumer - home equity
835

 
835

 
63

 
869

 
870

 
62

Consumer - other
11

 
11

 
1

 
10

 
10

 
1

 
29,720

 
29,766

 
488

 
31,096

 
31,158

 
467

Total
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
39,206

 
39,882

 
364

 
37,622

 
38,404

 
294

One- to four-family - purchased
13,154

 
15,046

 
60

 
14,799

 
17,046

 
110

Multi-family and commercial

 

 

 

 

 

Consumer - home equity
1,506

 
1,698

 
63

 
1,460

 
1,707

 
62

Consumer - other
35

 
66

 
1

 
23

 
50

 
1

 
$
53,901

 
$
56,692

 
$
488

 
$
53,904

 
$
57,207

 
$
467



19


The following information pertains to impaired loans, by class, for the periods presented.
 
For the Three Months Ended
 
For the Six Months Ended
 
March 31, 2016
 
March 31, 2015
 
March 31, 2016
 
March 31, 2015
 
Average
 
Interest
 
Average
 
Interest
 
Average
 
Interest
 
Average
 
Interest
 
Recorded
 
Income
 
Recorded
 
Income
 
Recorded
 
Income
 
Recorded
 
Income
 
Investment
 
Recognized
 
Investment
 
Recognized
 
Investment
 
Recognized
 
Investment
 
Recognized
 
(Dollars in thousands)
With no related allowance recorded
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
$
11,584

 
$
122

 
$
13,223

 
$
110

 
$
11,224

 
$
235

 
$
13,109

 
$
222

One- to four-family - purchased
11,637

 
49

 
11,286

 
47

 
11,218

 
100

 
11,475

 
99

Multi-family and commercial

 

 

 

 

 

 

 

Consumer - home equity
636

 
15

 
486

 
7

 
595

 
23

 
497

 
15

Consumer - other
14

 

 
20

 

 
12

 

 
17

 

 
23,871

 
186

 
25,015

 
164

 
23,049

 
358

 
25,098

 
336

With an allowance recorded
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
27,653

 
272

 
27,039

 
277

 
27,872

 
537

 
26,569

 
549

One- to four-family - purchased
1,515

 
7

 
2,878

 
11

 
2,601

 
14

 
2,642

 
22

Multi-family and commercial

 

 

 

 

 

 

 

Consumer - home equity
957

 
15

 
746

 
7

 
963

 
26

 
661

 
13

Consumer - other
17

 

 
16

 

 
14

 

 
15

 
1

 
30,142

 
294

 
30,679

 
295

 
31,450

 
577

 
29,887

 
585

Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
39,237

 
394

 
40,262

 
387

 
39,096

 
772

 
39,678

 
771

One- to four-family - purchased
13,152

 
56

 
14,164

 
58

 
13,819

 
114

 
14,117

 
121

Multi-family and commercial

 

 

 

 

 

 

 

Consumer - home equity
1,593

 
30

 
1,232

 
14

 
1,558

 
49

 
1,158

 
28

Consumer - other
31

 

 
36

 

 
26

 

 
32

 
1

 
$
54,013

 
$
480

 
$
55,694

 
$
459

 
$
54,499

 
$
935

 
$
54,985

 
$
921


20


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

 
For the Three Months Ended March 31, 2016
 
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
$
6,832

 
$
1,290

 
$
8,122

 
$
801

 
$
278

 
$
9,201

Charge-offs
(17
)
 
(38
)
 
(55
)
 

 
(20
)
 
(75
)
Recoveries
39

 
18

 
57

 

 
10

 
67

Provision for credit losses
(15
)
 
(27
)
 
(42
)
 
36

 
6

 

Ending balance
$
6,839

 
$
1,243

 
$
8,082

 
$
837

 
$
274

 
$
9,193

 
For the Six Months Ended March 31, 2016
 
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
$
6,980

 
$
1,434

 
$
8,414

 
$
742

 
$
287

 
$
9,443

Charge-offs
(74
)
 
(213
)
 
(287
)
 

 
(38
)
 
(325
)
Recoveries
42

 
18

 
60

 

 
15

 
75

Provision for credit losses
(109
)
 
4

 
(105
)
 
95

 
10

 

Ending balance
$
6,839

 
$
1,243

 
$
8,082

 
$
837

 
$
274

 
$
9,193

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

 
$
1,994

 
$
8,478

 
$
505

 
$
314

 
$
9,297

Charge-offs
(94
)
 
(80
)
 
(174
)
 

 
(15
)
 
(189
)
Recoveries
12

 
4

 
16

 

 
7

 
23

Provision for credit losses
309

 
(60
)
 
249

 
23

 
3

 
275

Ending balance
$
6,711

 
$
1,858

 
$
8,569

 
$
528

 
$
309

 
$
9,406

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

 
$
2,323

 
$
8,586

 
$
400

 
$
241

 
$
9,227

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

 
(50
)
 
(395
)
Recoveries
33

 
58

 
91

 

 
35

 
126

Provision for credit losses
567

 
(330
)
 
237

 
128

 
83

 
448

Ending balance
$
6,711

 
$
1,858

 
$
8,569

 
$
528

 
$
309

 
$
9,406



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.

 
March 31, 2016
 
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
$
6,053,352

 
$
448,166

 
$
6,501,518

 
$
125,539

 
$
127,124

 
$
6,754,181

 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment in loans
 
 
 
 
 
 
 
 
 
 
 
individually evaluated for impairment
12,273

 
11,213

 
23,486

 

 
720

 
24,206

 
$
6,065,625

 
$
459,379

 
$
6,525,004

 
$
125,539

 
$
127,844

 
$
6,778,387

 
 
 
 
 
 
 
 
 
 
 
 
ACL for loans collectively
 
 
 
 
 
 
 
 
 
 
 
evaluated for impairment
$
6,839

 
$
1,243

 
$
8,082

 
$
837

 
$
274

 
$
9,193


 
September 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
$
5,884,498

 
$
477,340

 
$
6,361,838

 
$
120,405

 
$
129,419

 
$
6,611,662

 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment in loans
 
 
 
 
 
 
 
 
 
 
 
individually evaluated for impairment
11,169

 
11,035

 
22,204

 

 
604

 
22,808

 
$
5,895,667

 
$
488,375

 
$
6,384,042

 
$
120,405

 
$
130,023

 
$
6,634,470

 
 
 
 
 
 
 
 
 
 
 
 
ACL for loans collectively
 
 
 
 
 
 
 
 
 
 
 
evaluated for impairment
$
6,980

 
$
1,434

 
$
8,414

 
$
742

 
$
287

 
$
9,443




22


5. LOW INCOME HOUSING PARTNERSHIPS
The Bank's investment in low income housing partnerships, which is included in other assets in the consolidated balance sheets, was $49.7 million and $41.8 million at March 31, 2016 and September 30, 2015, respectively.  The Bank's obligations related to unfunded commitments, which are included in accounts payable and accrued expenses in the consolidated balance sheets, were $21.6 million and $14.6 million at March 31, 2016 and September 30, 2015, respectively. The majority of the commitments are projected to be funded through the end of calendar year 2018.

Expenses associated with the Bank's investment in the low income housing partnerships are included in low income housing partnerships in the consolidated statements of income. The low income housing partnership expenses resulted in other tax benefits of $500 thousand and $792 thousand for the three and six months ended March 31, 2016, respectively, which are a component of income tax expense in the consolidated statements of income.  Affordable housing tax credits are recognized as a component of income tax expense in the consolidated statements of income and totaled $1.2 million and $2.4 million for the three and six months ended March 31, 2016, respectively. There were no impairment losses during the three and six months ended March 31, 2016 resulting from the forfeiture or ineligibility of tax credits or other circumstances.

6. REPURCHASE AGREEMENTS
At both March 31, 2016 and September 30, 2015, the Company had repurchase agreements outstanding in the amount of $200.0 million with a weighted average contractual rate of 2.94%. All of the Company's repurchase agreements at March 31, 2016 and September 30, 2015 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 March 31, 2016:
 
Amount
 
(Dollars in thousands)
2016
$

2017

2018
100,000

2019

2020
100,000

Thereafter

 
$
200,000



23


7. 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 Accounting Standards Codification ("ASC") 820 and ASC 825. The Company did not have any liabilities that were measured at fair value at March 31, 2016 or September 30, 2015. The Company's AFS securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets or liabilities on a non-recurring basis, such as OREO and loans individually evaluated for impairment. These non-recurring fair value adjustments involve the application of lower-of-cost-or-fair value accounting or write-downs of individual assets.

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

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

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

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

AFS Securities - The Company's AFS securities portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as AOCI in stockholders' equity. The majority of the securities within the AFS portfolio were issued by GSEs. The Company primarily uses prices obtained from third party pricing services to determine the fair value of its securities. On a quarterly basis, management corroborates a sample of prices obtained from the third party pricing service for Level 2 securities by comparing them to an independent source. If the price provided by the independent source varies by more than a predetermined percentage from the price received from the third party pricing service, then the variance is researched by management. The Company did not have to adjust prices obtained from the third party pricing service when determining the fair value of its securities during the six months ended March 31, 2016 or during fiscal year 2015. 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)


24


The following tables provide the level of valuation assumption used to determine the carrying value of the Company's assets measured at fair value on a recurring basis at the dates presented.
 
March 31, 2016
 
 
 
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)
AFS Securities:
 
 
 
 
 
 
 
GSE debentures
$
472,451

 
$

 
$
472,451

 
$

MBS
203,033

 

 
203,033

 

Municipal bonds
142

 

 
142

 

Trust preferred securities
1,790

 

 

 
1,790

 
$
677,416

 
$

 
$
675,626

 
$
1,790


 
September 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)
AFS Securities:
 
 
 
 
 
 
 
GSE debentures
$
526,620

 
$

 
$
526,620

 
$

MBS
229,491

 

 
229,491

 

Municipal bonds
144

 

 
144

 

Trust preferred securities
1,916

 

 

 
1,916

 
$
758,171

 
$

 
$
756,255

 
$
1,916


The Company's Level 3 AFS securities had no activity during the three and six months ended March 31, 2016, except for principal repayments of $26 thousand and $31 thousand, respectively, and increases in net unrealized losses included in other comprehensive income of $29 thousand and $68 thousand, respectively. The Company's Level 3 AFS securities had no activity during the three and six months ended March 31, 2015, except for principal repayments of $167 thousand and $193 thousand, respectively, and increases in net unrealized losses included in other comprehensive income of $3 thousand and $54 thousand, respectively.

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

Loans Receivable - The balance of loans individually evaluated for impairment at March 31, 2016 and September 30, 2015 was $24.2 million and $22.8 million, respectively. Substantially all of these loans were secured by residential real estate and were individually evaluated to determine if the carrying value of the loan was in excess of the fair value of the collateral, less estimated selling costs of 10%. When no impairment is indicated, the carrying amount is considered to approximate fair value. Fair values were estimated through current appraisals or current Federal Housing Finance Agency ("FHFA") housing price indices, which is a broad based measure of the movement of single-family house prices and is a weighted, repeat-sales index. Management does not adjust or apply a discount to the appraised value or FHFA housing price indices, except for the estimated sales costs noted above. The primary significant unobservable input for impaired loans with fair values estimated using appraisals was the appraisal. Fair values of impaired loans cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the loan and, as such, are classified as Level 3. Based on this evaluation, the Bank charged-off any loss amounts as of March 31, 2016 and September 30, 2015; 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 of 10%. Management does not adjust or apply a discount to the appraised value or listing prices, except for the estimated sales costs noted above. The primary significant unobservable input for OREO was the appraisal or listing price. Fair values of foreclosed property

25


cannot be determined with precision and may not be realized in an actual sale of the property and, as such, are classified as Level 3. The fair value of OREO at March 31, 2016 and September 30, 2015 was $5.8 million and $4.3 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.
 
March 31, 2016
 
 
 
Quoted Prices
 
Significant
 
Significant
 
 
 
in Active Markets
 
Other Observable
 
Unobservable
 
Carrying
 
for Identical Assets
 
 Inputs
 
Inputs
 
Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(Dollars in thousands)
Loans individually evaluated for impairment
$
24,156

 
$

 
$

 
$
24,156

OREO
5,844

 

 

 
5,844

 
$
30,000

 
$

 
$

 
$
30,000


 
September 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
$
22,762

 
$

 
$

 
$
22,762

OREO
4,333

 

 

 
4,333

 
$
27,095

 
$

 
$

 
$
27,095


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

The carrying amounts and estimated fair values of the Company's financial instruments, at the dates presented, were as follows:
 
March 31, 2016
 
September 30, 2015
 
 
 
Estimated
 
 
 
Estimated
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Amount
 
Value
 
Amount
 
Value
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
203,811

 
$
203,811

 
$
772,632

 
$
772,632

AFS securities
677,416

 
677,416

 
758,171

 
758,171

HTM securities
1,270,849

 
1,293,441

 
1,271,122

 
1,295,274

Loans receivable
6,769,194

 
7,057,287

 
6,625,027

 
6,870,176

FHLB stock
114,381

 
114,381

 
150,543

 
150,543

Liabilities:
 
 
 
 
 
 
 
Deposits
5,119,829

 
5,163,254

 
4,832,520

 
4,869,312

FHLB borrowings
2,471,656

 
2,541,045

 
3,270,521

 
3,339,650

Repurchase agreements
200,000

 
208,779

 
200,000

 
209,807



26


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

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

Deposits - The estimated fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The estimated fair value of these deposits at March 31, 2016 and September 30, 2015 was $2.31 billion and $2.20 billion, respectively. (Level 1) The fair value of certificates of deposit is estimated by discounting future cash flows using current London Interbank Offered Rates ("LIBOR"). The estimated fair value of certificates of deposit at March 31, 2016 and September 30, 2015 was $2.85 billion and $2.67 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)

27


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 and loan participations;
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

28


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, 2015, 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 March 2016, the unemployment rate was 3.9% for Kansas and 4.2% for Missouri, compared to the national average of 5.0%, based on information from the Bureau of Labor Statistics. The Kansas City market area has an average household income of approximately $75 thousand per annum, based on 2015 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 $70 thousand per annum, with 90% of the population at or above the poverty level, also based on the 2015 estimates from the American Community Survey. The FHFA price index for Kansas and Missouri has not experienced significant fluctuations during the past 10 years, unlike other market areas of the United States, which indicates relative stability in property values in our local market areas.

For the quarter ended March 31, 2016, the Company recognized net income of $21.5 million, or $0.16 per share, compared to net income of $19.2 million, or $0.14 per share, for the quarter ended March 31, 2015. The $2.3 million, or 11.9%, increase in net income was due primarily to a $1.8 million increase in net interest income and a $1.3 million increase in non-interest income, specifically an increase in income from BOLI. Net income attributable to the daily leverage strategy was $561 thousand during the current quarter, compared to $682 thousand for the prior year quarter.

The net interest margin increased seven basis points, from 1.71% for the prior year quarter to 1.78% for the current year quarter. Excluding the effects of the daily leverage strategy, the net interest margin would have increased nine basis points, from 2.04% for the prior year quarter to 2.13% for the current year quarter. The increase in the net interest margin was due mainly to a decrease in interest expense on term borrowings.

For the six month period ended March 31, 2016, the Company recognized net income of $42.2 million, or $0.32 per share, compared to net income of $39.7 million, or $0.29 per share, for the six month period ended March 31, 2015. The $2.5 million, or 6.4%, increase in net income was due primarily to a $1.7 million increase in net interest income and a $1.7 million increase in non-interest income, partially offset by a $1.0 million increase in non-interest expense. Net income attributable to the daily leverage strategy was $1.1 million during the current year six month period, compared to $1.5 million for the prior year six month period. The decrease in

29


the net income attributable to the daily leverage strategy was due to an increase in the FHLB line of credit borrowings rate, which was larger than the increase in the average yield earned on the cash at the Federal Reserve Bank.

The net interest margin increased three basis points, from 1.73% for the prior year six month period, to 1.76% for the current year six month period. Excluding the effects of the daily leverage strategy, the net interest margin would have increased four basis points, from 2.08% for the prior year six month period to 2.12% for the current year six month period. The increase in the net interest margin was due mainly to a decrease in interest expense on term borrowings.

Total assets were $9.32 billion at March 31, 2016 compared to $9.84 billion at September 30, 2015. The $527.5 million decrease was due primarily to a $568.8 million decrease in cash and cash equivalents and $36.2 million decrease in FHLB stock, both due to the removal of the entire daily leverage strategy at March 31, 2016 compared to $700.0 million of the daily leverage strategy being in place at September 30, 2015.

The loans receivable portfolio, net, increased $144.2 million, to $6.77 billion at March 31, 2016, from $6.63 billion at September 30, 2015. This growth was primarily funded with cash flows from the securities portfolio and growth in the deposit portfolio. During the current year six month period, the Bank originated and refinanced $348.3 million of loans with a weighted average rate of 3.68%, purchased $291.9 million of loans from correspondent lenders with a weighted average rate of 3.52%, and purchased participations of $112.0 million of multi-family and commercial real estate and construction-to-permanent loans with a weighted average rate of 3.80%.

As previously indicated in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015, we have continued to expand our multi-family and commercial real estate portfolio, especially commercial construction-to-permanent loans, through loan participations with our correspondent lenders and other lead banks. These types of loans tend to be larger and in different geographic regions from most of our existing loan portfolio and are generally considered to have different and greater risks than one- to four-family residential real estate loans. The net amount of multi-family and commercial loans as of March 31, 2016 was $126.1 million and the undisbursed loan amounts and total commitments as of March 31, 2016 were $208.0 million, resulting in a total concentration of $334.1 million at March 31, 2016. For more information regarding these participations and their potential risks, see "Part I, Item 1. Business - Multi-Family and Commercial Lending” and "Part I, Item 1A - Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015.

Total liabilities were $7.91 billion at March 31, 2016 compared to $8.43 billion at September 30, 2015. The $514.7 million decrease was due primarily to a $798.9 million decrease in FHLB borrowings largely as a result of the removal of the entire daily leverage strategy at March 31, 2016, along with a $100.0 million decrease in FHLB advances, partially offset by a $287.3 million increase in the deposit portfolio. Management intends to continue to remove the entire daily leverage strategy at each quarter end during fiscal year 2016, and reinstate the strategy at the beginning of the next quarter. The growth in deposits during the current year six month period was primarily in the retail certificate of deposit, checking, and wholesale certificate of deposit portfolios, which increased $100.8 million, $77.1 million, and $73.9 million, respectively.

Stockholders' equity was $1.40 billion at March 31, 2016 compared to $1.42 billion at September 30, 2015. The $12.8 million decrease between dates was due primarily to the payment of $55.9 million in cash dividends, partially offset by net income of $42.2 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, 2015.


30


Financial Condition
The following table presents selected balance sheet information as of the dates indicated.
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
2016
 
2015
 
2015
 
2015
 
2015
 
(Dollars in thousands)
Total assets
$
9,316,684

 
$
9,133,422

 
$
9,844,161

 
$
9,131,181

 
$
10,023,099

Cash and cash equivalents
203,811

 
232,354

 
772,632

 
46,668

 
1,021,150

AFS securities
677,416

 
636,970

 
758,171

 
847,059

 
842,856

HTM securities
1,270,849

 
1,199,978

 
1,271,122

 
1,359,657

 
1,425,383

Loans receivable, net
6,769,194

 
6,665,128

 
6,625,027

 
6,496,468

 
6,365,320

FHLB stock
114,381

 
119,027

 
150,543

 
166,257

 
154,951

Deposits
5,119,829

 
4,972,480

 
4,832,520

 
4,813,188

 
4,837,274

FHLB borrowings
2,471,656

 
2,471,272

 
3,270,521

 
2,572,898

 
3,371,970

Repurchase agreements
200,000

 
200,000

 
200,000

 
220,000

 
220,000

Stockholders' equity
1,403,408

 
1,390,833

 
1,416,226

 
1,426,723

 
1,476,656

Equity to total assets at end of period
15.1
%
 
15.2
%
 
14.4
%
 
15.6
%
 
14.7
%

Assets. Total assets were $9.32 billion at March 31, 2016 compared to $9.84 billion at September 30, 2015. The $527.5 million decrease was due primarily to a $568.8 million decrease in cash and cash equivalents and a $36.2 million decrease in FHLB stock, both due to the removal of the entire daily leverage strategy at March 31, 2016 compared to $700.0 million of the daily leverage strategy being in place at September 30, 2015. The entire $2.10 billion daily leverage strategy was reinstated on April 1, 2016.

Loans Receivable. Loans receivable, net, increased $144.2 million, to $6.77 billion at March 31, 2016, from $6.63 billion at September 30, 2015. The growth in the loan portfolio during the current year six month period was primarily in the correspondent one- to four-family purchased loan portfolio and was largely funded with cash flows from the securities portfolio and deposit growth.


31


The following table presents the balance and weighted average rate of our loan portfolio as of the dates indicated. Within the one- to four-family loan portfolio at March 31, 2016, 62% of the loans had a balance at origination of less than $417 thousand.
 
March 31, 2016
 
September 30, 2015
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
Originated
$
4,002,874

 
3.81
%
 
$
4,010,517

 
3.84
%
Correspondent purchased
2,016,685

 
3.52

 
1,846,213

 
3.52

Bulk purchased
456,876

 
2.23

 
485,682

 
2.25

Construction
76,457

 
3.51

 
75,152

 
3.57

Total
6,552,892

 
3.61

 
6,417,564

 
3.62

Multi-family and commercial:
 
 
 
 
 
 
 
Permanent
112,414

 
4.15

 
110,938

 
4.14

Construction
153,231

 
3.91

 
54,768

 
4.13

Total
265,645

 
4.01

 
165,706

 
4.14

Total real estate loans
6,818,537

 
3.62

 
6,583,270

 
3.64

 
 
 
 
 
 
 
 
Consumer loans:
 
 
 
 
 
 
 
Home equity
123,565

 
5.07

 
125,844

 
5.00

Other
4,279

 
4.17

 
4,179

 
4.03

Total consumer loans
127,844

 
5.04

 
130,023

 
4.97

Total loans receivable
6,946,381

 
3.65

 
6,713,293

 
3.66

 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
Undisbursed loan funds:
 
 
 
 
 
 
 
One- to four-family
42,906

 
 
 
45,696

 
 
Multi-family and commercial
139,495

 
 
 
44,869

 
 
ACL
9,193

 
 
 
9,443

 
 
Discounts/unearned loan fees
24,347

 
 
 
24,213

 
 
Premiums/deferred costs
(38,754
)
 
 
 
(35,955
)
 
 
Total loans receivable, net
$
6,769,194

 
 
 
$
6,625,027

 
 



32


Loan Activity - The following table summarizes 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. Loan endorsements are not included in the activity in the following table because a new loan is not generated at the time of the endorsement. The endorsed balance and rate are included in the ending loan portfolio balance and rate. During the three and six months ended March 31, 2016, the Bank endorsed $20.6 million and $44.1 million of one- to four-family loans, respectively, reducing the average rate on those loans by 77 and 84 basis points, respectively.
 
For the Three Months Ended
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
 
June 30, 2015
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Beginning balance
$
6,753,249

 
3.65
%
 
$
6,713,293

 
3.66
%
 
$
6,547,702

 
3.67
%
 
$
6,418,780

 
3.71
%
Originated and refinanced:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
117,205

 
3.65

 
157,447

 
3.67

 
165,646

 
3.73

 
207,895

 
3.50

Adjustable
35,495

 
3.77

 
38,117

 
3.74

 
51,634

 
3.59

 
47,609

 
3.55

Purchased and participations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
249,017

 
3.68

 
101,644

 
3.69

 
164,397

 
3.64

 
147,887

 
3.51

Adjustable
27,355

 
2.93

 
25,861

 
3.17

 
65,722

 
3.69

 
29,046

 
2.92

Repayments
(235,202
)
 
 
 
(280,978
)
 
 
 
(280,671
)
 
 
 
(301,835
)
 
 
Principal charge-offs, net
(8
)
 
 
 
(242
)
 
 
 
(158
)
 
 
 
(128
)
 
 
Other
(730
)
 
 
 
(1,893
)
 
 
 
(979
)
 
 
 
(1,552
)
 
 
Ending balance
$
6,946,381

 
3.65

 
$
6,753,249

 
3.65

 
$
6,713,293

 
3.66

 
$
6,547,702

 
3.67

 
For the Six Months Ended
 
March 31, 2016
 
March 31, 2015
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Beginning balance
$
6,713,293

 
3.66
%
 
$
6,289,519

 
3.76
%
Originations and refinances:
 
 
 
 
 
 
 
Fixed
274,652

 
3.66

 
232,802

 
3.60

Adjustable
73,612

 
3.75

 
74,931

 
3.69

Purchases and participations:
 
 
 
 
 
 
 
Fixed
350,661

 
3.68

 
238,744

 
3.63

Adjustable
53,216

 
3.05

 
65,563

 
2.94

Repayments
(516,180
)
 
 
 
(479,362
)
 
 
Principal charge-offs, net
(250
)
 
 
 
(269
)
 
 
Other
(2,623
)
 
 
 
(3,148
)
 
 
Ending balance
$
6,946,381

 
3.65

 
$
6,418,780

 
3.71




33


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.
 
For the Three Months Ended
 
March 31, 2016
 
March 31, 2015
 
Amount
 
Rate
 
% of Total
 
Amount
 
Rate
 
% of Total
 
(Dollars in thousands)
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 15 years
$
58,468

 
3.05
%
 
13.6
%
 
$
87,435

 
2.96
%
 
24.7
%
> 15 years
199,081

 
3.77

 
46.4

 
181,668

 
3.79

 
51.3

Multi-family and commercial real estate
107,560

 
3.80

 
25.1

 
5,900

 
3.45

 
1.7

Home equity
885

 
5.94

 
0.2

 
659

 
6.08

 
0.2

Other
228

 
9.85

 
0.1

 
240

 
7.34

 
0.1

Total fixed-rate
366,222

 
3.67

 
85.4

 
275,902

 
3.53

 
78.0

 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 36 months
918

 
2.70

 
0.2

 
1,073

 
2.62

 
0.3

> 36 months
45,074

 
2.97

 
10.5

 
61,277

 
2.94

 
17.3

Multi-family and commercial real estate

 

 

 

 

 

Home equity
15,911

 
4.67

 
3.7

 
15,144

 
4.57

 
4.3

Other
947

 
3.48

 
0.2

 
417

 
2.99

 
0.1

Total adjustable-rate
62,850

 
3.40

 
14.6

 
77,911

 
3.26

 
22.0

 
 
 
 
 
 
 
 
 
 
 
 
Total originated, refinanced and purchased
$
429,072

 
3.63

 
100.0
%
 
$
353,813

 
3.47

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Purchased and participation loans included above:
 
 
 
 
 
 
 
 
 
 
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
$
145,957

 
3.62

 
 
 
$
138,470

 
3.57

 
 
Participations - multi-family and commercial real estate
103,060

 
3.76

 
 
 
5,900

 
3.45

 
 
Total fixed-rate purchased/participations
249,017

 
3.68

 
 
 
144,370

 
3.56

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
27,355

 
2.93

 
 
 
41,858

 
2.94

 
 
Total purchased/participation loans
$
276,372

 
3.60

 
 
 
$
186,228

 
3.42

 
 

34


 
For the Six Months Ended
 
March 31, 2016
 
March 31, 2015
 
Amount
 
Rate
 
% of Total
 
Amount
 
Rate
 
% of Total
 
(Dollars in thousands)
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 15 years
$
118,895

 
3.03
%
 
15.8
%
 
$
147,320

 
3.03
%
 
24.1
%
> 15 years
365,464

 
3.78

 
48.6

 
298,987

 
3.88

 
48.9

Multi-family and commercial real estate
138,724

 
3.90

 
18.4

 
23,250

 
3.69

 
3.8

Home equity
1,778

 
5.79

 
0.2

 
1,547

 
6.16

 
0.2

Other
452

 
9.14

 
0.1

 
442

 
7.68

 
0.1

Total fixed-rate
625,313

 
3.67

 
83.1

 
471,546

 
3.62

 
77.1

 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 36 months
1,822

 
2.68

 
0.2

 
2,440

 
2.63

 
0.4

> 36 months
86,171

 
2.99

 
11.6

 
104,807

 
2.97

 
17.1

Multi-family and commercial real estate
3,376

 
4.25

 
0.4

 

 

 

Home equity
33,970

 
4.59

 
4.5

 
32,405

 
4.60

 
5.3

Other
1,489

 
3.46

 
0.2

 
842

 
3.17

 
0.1

Total adjustable-rate
126,828

 
3.46

 
16.9

 
140,494

 
3.34

 
22.9

 
 
 
 
 
 
 
 
 
 
 
 
Total originated, refinanced and purchased
$
752,141

 
3.64

 
100.0
%
 
$
612,040

 
3.55

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Purchased and participation loans included above:
 
 
 
 
 
 
 
 
 
 
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
$
242,068

 
3.64

 
 
 
$
217,174

 
3.63

 
 
Participations - multi-family and commercial real estate
108,593

 
3.79

 
 
 
21,570

 
3.70

 
 
Total fixed-rate purchased/participations
350,661

 
3.68

 
 
 
238,744

 
3.63

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
49,840

 
2.96

 
 
 
65,563

 
2.94

 
 
Participations - multi-family and commercial real estate
3,376

 
4.25

 
 
 

 

 
 
Total adjustable-rate purchased/participations
53,216

 
3.05

 
 
 
65,563

 
2.94

 
 
Total purchased/participation loans
$
403,877

 
3.60

 
 
 
$
304,307

 
3.49

 
 

One- to Four-Family Loans - 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 as of the dates presented. Credit scores are updated at least semiannually, with the latest update in March 2016, from a nationally recognized consumer rating agency. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. In most cases, the most recent appraisal was obtained at the time of origination.
 
March 31, 2016
 
September 30, 2015
 
 
 
% of
 
Credit
 
 
 
Average
 
 
 
% of
 
Credit
 
 
 
Average
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
(Dollars in thousands)
Originated
$
4,002,874

 
61.8
%
 
765

 
63
%
 
$
130

 
$
4,010,517

 
63.2
%
 
765

 
64
%
 
$
129

Correspondent purchased
2,016,685

 
31.1

 
764

 
68

 
348

 
1,846,213

 
29.1

 
764

 
68

 
344

Bulk purchased
456,876

 
7.1

 
753

 
65

 
308

 
485,682

 
7.7

 
752

 
65

 
310

 
$
6,476,435

 
100.0
%
 
764

 
65

 
170

 
$
6,342,412

 
100.0
%
 
764

 
65

 
167


35


The following table presents originated, refinanced, and correspondent purchased 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. Of the loans originated and refinanced during the current year six month period, 76% had loan values of $417 thousand or less. Of the correspondent loans purchased during the current year six month period, 24% had loan values of $417 thousand or less.
 
For the Three Months Ended
 
March 31, 2016
 
March 31, 2015
 
 
 
 
 
Credit
 
 
 
 
 
Credit
 
Amount
 
LTV
 
Score
 
Amount
 
LTV
 
Score
 
(Dollars in thousands)
Originated
$
101,405

 
77
%
 
766

 
$
115,606

 
76
%
 
769

Refinanced by Bank customers
28,824

 
69

 
768

 
35,519

 
68

 
772

Correspondent purchased
173,312

 
74

 
765

 
180,328

 
73

 
764

 
$
303,541

 
75

 
766

 
$
331,453

 
74

 
767

 
For the Six Months Ended
 
March 31, 2016
 
March 31, 2015
 
 
 
 
 
Credit
 
 
 
 
 
Credit
 
Amount
 
LTV
 
Score
 
Amount
 
LTV
 
Score
 
(Dollars in thousands)
Originated
$
215,061

 
76
%
 
766

 
$
212,615

 
76
%
 
769

Refinanced by Bank customers
65,383

 
69

 
769

 
58,202

 
67

 
769

Correspondent purchased
291,908

 
74

 
764

 
282,737

 
74

 
765

 
$
572,352

 
74

 
766

 
$
553,554

 
74

 
767


The following table presents the amount, percent of total, and weighted average rate, by state, of one- to four-family loan originations and correspondent purchases where originations and purchases in the state exceeded five percent of the total amount originated and purchased during the six month period ended March 31, 2016.
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
March 31, 2016
 
March 31, 2016
State
 
Amount
 
% of Total
 
Rate
 
Amount
 
% of Total
 
Rate
 
 
(Dollars in thousands)
Kansas
 
$
125,779

 
41.5
%
 
3.50
%
 
$
258,415

 
45.2
%
 
3.49
%
Missouri
 
51,389

 
16.9

 
3.53

 
109,081

 
19.1

 
3.53

Texas
 
58,282

 
19.2

 
3.47

 
88,987

 
15.5

 
3.48

Tennessee
 
16,418

 
5.4

 
3.60

 
31,581

 
5.5

 
3.55

Other states
 
51,673

 
17.0

 
3.51

 
84,288

 
14.7

 
3.52

 
 
$
303,541

 
100.0
%
 
3.51

 
$
572,352

 
100.0
%
 
3.50



36


One- to Four-Family Loan Commitments - The following table summarizes our one- to four-family loan origination and refinance commitments and one- to four-family correspondent purchase commitments as of March 31, 2016, along with associated weighted average rates. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a rate lock fee. A percentage of the commitments are expected to expire unfunded, so the amounts reflected in the table below are not necessarily indicative of future cash requirements.
 
Fixed-Rate
 
 
 
 
 
 
 
15 years
 
More than
 
Adjustable-
 
Total
 
or less
 
15 years
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Originate/refinance
$
12,584

 
$
49,661

 
$
17,612

 
$
79,857

 
3.46
%
Correspondent
10,958

 
85,669

 
11,178

 
107,805

 
3.73

 
$
23,542

 
$
135,330

 
$
28,790

 
$
187,662

 
3.62

 
 
 
 
 
 
 
 
 
 
Rate
3.08
%
 
3.83
%
 
3.02
%
 
 
 
 

Multi-Family and Commercial Real Estate Loans - Multi-family and commercial real estate permanent and construction loans are originated or participated in based on the income producing potential of the property, the collateral value, and the financial strength of the borrower. Additionally, the Bank generally requires personal guarantees. The Bank generally requires a minimum debt service coverage ratio of 1.25 and limits LTV ratios to 80% for multi-family and commercial real estate loans depending on the property type.

During the current quarter, the Bank continued to grow the commercial construction-to-permanent and permanent loan portfolio through the correspondent lending channel by purchasing participations of $103.1 million, including $94.8 million of commercial construction-to-permanent loans with gross loan amounts ranging from $14.8 million to $50.0 million and funding periods of up to three years. At March 31, 2016, the Bank also had $68.5 million of outstanding commercial construction-to-permanent loan commitments. The Bank intends to continue to grow its commercial construction-to-permanent and permanent loan portfolio, largely through participations with correspondent lenders and other lead banks with which the Bank already has commercial construction-to-permanent and permanent loan relationships.
 
The following table presents multi-family and commercial real estate and construction loans and commitments by industry classification, as defined by the North American Industry Classification System, as of March 31, 2016.
 
Unpaid
 
Undisbursed
 
Gross Loan
 
Outstanding
 
 
 
% of
 
Principal
 
Amount
 
Amount
 
Commitments
 
Total
 
Total
 
(Dollars in thousands)
Accommodation and food services
$
51,209

 
$
91,358

 
$
142,567

 
$

 
$
142,567

 
42.7
%
Health care and social assistance
11,200

 
45,554

 
56,754

 

 
56,754

 
17.0

Real estate rental and leasing
14,805

 
581

 
15,386

 
34,000

 
49,386

 
14.8

Arts, entertainment, and recreation

 

 

 
34,480

 
34,480

 
10.3

Multi-family
17,378

 
2,002

 
19,380

 

 
19,380

 
5.8

Retail trade
19,277

 

 
19,277

 

 
19,277

 
5.7

Other
12,281

 

 
12,281

 

 
12,281

 
3.7

 
$
126,150

 
$
139,495

 
$
265,645

 
$
68,480

 
$
334,125

 
100.0
%


37


The following table summarizes multi-family and commercial real estate and construction loans and commitments by state as of March 31, 2016.
 
Unpaid
 
Undisbursed
 
Gross Loan
 
Outstanding
 
 
 
% of
 
Principal
 
Amount
 
Amount
 
Commitments
 
Total
 
Total
 
(Dollars in thousands)
Texas
$
21,318

 
$
93,407

 
$
114,725

 
$
34,000

 
$
148,725

 
44.5
%
Kansas
45,138

 

 
45,138

 
34,480

 
79,618

 
23.9

Missouri
34,008

 
45,554

 
79,562

 

 
79,562

 
23.8

Colorado
14,945

 
534

 
15,479

 

 
15,479

 
4.6

Arkansas
8,306

 

 
8,306

 

 
8,306

 
2.5

California
2,435

 

 
2,435

 

 
2,435

 
0.7

 
$
126,150

 
$
139,495

 
$
265,645

 
$
68,480

 
$
334,125

 
100.0
%

The following table presents the Bank's multi-family and commercial real estate and construction loan portfolio and outstanding commitments, categorized by gross loan amount (unpaid principal plus undisbursed amounts) or outstanding commitment amount, as of March 31, 2016.
 
Count
 
Amount
 
(Dollars in thousands)
Greater than $30 million
4

 
153,716

>$15 to $30 million
2

 
54,668

>$10 to $15 million
3

 
38,483

>$5 to $10 million
3

 
23,705

$1 to $5 million
21

 
58,797

Less than $1 million
14

 
4,756

 
47

 
$
334,125



38



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, participates in 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, 2015. In the following asset quality discussion, unless otherwise noted, correspondent purchased loans are included with originated loans and bulk purchased loans are reported as purchased loans.

Delinquent and non-performing loans and OREO - The following table presents the Company's 30 to 89 day delinquent loans at the dates indicated. Of the loans 30 to 89 days delinquent at March 31, 2016, approximately 69% were 59 days or less delinquent.
 
Loans Delinquent for 30 to 89 Days at:
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
2016
 
2015
 
2015
 
2015
 
2015
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
139
 
$
14,336

 
159
 
$
14,277

 
158
 
$
16,955

 
150

 
$
16,320

 
128

 
$
13,097

Correspondent purchased
8
 
2,307

 
10
 
3,033

 
8
 
2,344

 
15

 
4,741

 
7

 
2,206

Bulk purchased
26
 
6,005

 
35
 
7,805

 
32
 
7,259

 
30

 
6,249

 
35

 
8,137

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
33
 
631

 
36
 
730

 
32
 
703

 
34

 
646

 
30

 
681

Other
5
 
28

 
13
 
88

 
11
 
17

 
18

 
80

 
9

 
36

 
211
 
$
23,307

 
253
 
$
25,933

 
241
 
$
27,278

 
247

 
$
28,036

 
209

 
$
24,157

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30 to 89 days delinquent loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
to total loans receivable, net
 
 
0.34
%
 
 
 
0.39
%
 
 
 
0.41
%
 
 
 
0.43
%
 
 
 
0.38
%

The table below presents the Company's non-performing loans and OREO as of the dates indicated. Non-performing loans are loans that are 90 or more days delinquent or in foreclosure and nonaccrual loans less than 90 days delinquent but 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.


39


 
Non-Performing Loans and OREO at:
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
2016
 
2015
 
2015
 
2015
 
2015
 
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
72

 
$
8,016

 
75

 
$
9,900

 
66

 
$
6,728

 
70

 
$
6,180

 
79

 
$
8,047

Correspondent purchased
3

 
864

 

 

 
1

 
394

 
1

 
67

 
1

 
490

Bulk purchased
33

 
7,483

 
32

 
7,199

 
36

 
8,898

 
29

 
7,577

 
27

 
8,040

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
26

 
622

 
28

 
574

 
24

 
497

 
19

 
443

 
23

 
366

Other
8

 
26

 
9

 
25

 
4

 
12

 
5

 
16

 
6

 
19

 
142

 
17,011

 
144

 
17,698

 
131

 
16,529

 
124

 
14,283

 
136

 
16,962

Nonaccrual loans less than 90 Days Delinquent:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
72

 
7,667

 
75

 
7,661

 
77

 
9,004

 
71

 
9,224

 
80

 
9,709

Correspondent purchased
4

 
825

 
1

 
24

 
1

 
25

 
2

 
398

 
2

 
401

Bulk purchased
1

 
80

 
1

 
81

 
1

 
82

 
5

 
959

 
5

 
732

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
9

 
151

 
14

 
259

 
12

 
295

 
10

 
219

 
6

 
108

Other
1

 
8

 

 

 

 

 

 

 
3

 
11

 
87

 
8,731

 
91

 
8,025

 
91

 
9,406

 
88

 
10,800

 
96

 
10,961

Total non-performing loans
229

 
25,742

 
235

 
25,723

 
222

 
25,935

 
212

 
25,083

 
232

 
27,923

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-performing loans as a percentage of total loans(2)
 
0.38
%
 
 
 
0.39
%
 
 
 
0.39
%
 
 
 
0.39
%
 
 
 
0.44
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OREO:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated(3)
22

 
$
1,364

 
25

 
$
1,410

 
29

 
$
1,752

 
28

 
$
1,920

 
36

 
$
1,989

Correspondent purchased
1

 
499

 
1

 
499

 
1

 
499

 
2

 
714

 
1

 
216

Bulk purchased
8

 
2,694

 
6

 
2,247

 
2

 
796

 
4

 
1,019

 
5

 
1,162

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
1

 
9

 
1

 
26

 
1

 
8

 
2

 
17

 

 

Other(4)
1

 
1,278

 
1

 
1,278

 
1

 
1,278

 
1

 
1,278

 
1

 
1,278

 
33

 
5,844

 
34

 
5,460

 
34

 
4,333

 
37

 
4,948

 
43

 
4,645

Total non-performing assets
262

 
$
31,586

 
269

 
$
31,183

 
256

 
$
30,268

 
249

 
$
30,031

 
275

 
$
32,568

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-performing assets as a percentage of total assets
0.34
%
 
 
 
0.34
%
 
 
 
0.31
%
 
 
 
0.33
%
 
 
 
0.32
%

40


(1)
Represents loans required to be reported as nonaccrual pursuant to regulatory reporting requirements even if the loans are current. At March 31, 2016, December 31, 2015, September 30, 2015, June 30, 2015, and March 31, 2015, this amount was comprised of $1.8 million, $2.2 million, $2.2 million, $3.4 million, and $1.2 million, respectively, of loans that were 30 to 89 days delinquent and are reported as such, and $6.9 million, $5.8 million, $7.2 million, $7.4 million, and $9.8 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 0.25%, 0.27%, 0.25%, 0.22%, and 0.27%, at March 31, 2016, December 31, 2015, September 30, 2015, June 30, 2015, and March 31, 2015, 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 March 31, 2016, $11.1 million, or 68%, 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 states where the properties securing one percent or more of the total amount of our one- to four-family loans are located and the corresponding balance of loans 30 to 89 days delinquent, 90 or more days delinquent or in foreclosure, and weighted average LTV ratios for loans 90 or more days delinquent or in foreclosure at March 31, 2016. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. At March 31, 2016, 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
 
$
3,733,980

 
57.6
%
 
$
10,917

 
48.2
%
 
$
7,599

 
46.4
%
 
73
%
Missouri
 
1,268,267

 
19.6

 
4,754

 
21.0

 
1,281

 
7.8

 
71

Texas
 
424,545

 
6.6

 
579

 
2.6

 

 

 
n/a

California
 
256,011

 
4.0

 

 

 

 

 
n/a

Tennessee
 
175,513

 
2.7

 

 

 

 

 
n/a

Alabama
 
98,126

 
1.5

 
254

 
1.1

 

 

 
n/a

Oklahoma
 
72,998

 
1.1

 
429

 
1.9

 
23

 
0.1

 
35

Other states
 
446,995

 
6.9

 
5,715

 
25.2

 
7,460

 
45.7

 
63

 
 
$
6,476,435

 
100.0
%
 
$
22,648

 
100.0
%
 
$
16,363

 
100.0
%
 
68


TDRs - The following table presents the Company's TDRs, based on accrual status, at the dates indicated. At March 31, 2016, $24.6 million of TDRs were included in the ACL formula analysis model and $98 thousand of the ACL was related to these loans. The remaining $14.6 million of TDRs at March 31, 2016 were individually evaluated for loss and any potential losses have been charged-off.
 
At
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
2016
 
2015
 
2015
 
2015
 
2015
 
(Dollars in thousands)
Accruing TDRs
$
24,239

 
$
24,956

 
$
24,331

 
$
25,444

 
$
23,861

Nonaccrual TDRs(1)
14,986

 
13,983

 
15,511

 
14,653

 
15,337

Total TDRs
$
39,225

 
$
38,939

 
$
39,842

 
$
40,097

 
$
39,198


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

41


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. The ACL is maintained through provisions for credit losses which are either charged to or credited to income. 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. We continually monitor the level of risk in our multi-family and commercial real estate and construction loan portfolio, including concentrations in such factors as geographic locations, property types, tenant brand name, borrowing relationships, and lending relationships in the case of participations loans, among other factors. For additional information on the 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, 2015.

The Bank did not record a provision for credit losses during the current six month period due to the continued low level of net loan charge-offs and stabilization of delinquent loan balances. Net loan charge-offs were $250 thousand for the current year six month period and the ACL to net charge-offs (annualized) was 18.3 times at March 31, 2016. The improvement in collateral values has assisted in lowering our net charge-off amounts compared to prior years.

The distribution of our ACL at the dates indicated is summarized below. The loan amount in the table below represents outstanding loan balances net of undisbursed loan funds. Included in bulk purchased loans are $253.4 million loans, or 55% of the total bulk purchased loan portfolio, at March 31, 2016, for which the seller of the loans has guaranteed, and has the ability, to repurchase or replace delinquent loans. The Bank has not experienced any loan losses with this group of loans since the loan package was purchased in fiscal year 2012. For the $203.5 million of bulk purchased loans at March 31, 2016 that do not have the above noted guarantee, the Bank has continued to experience a reduction in loan losses due to an improvement in collateral values. A large portion of these loans were originally interest-only loans with interest-only terms up to 10 years. All of the interest-only loans are now fully amortizing loans. Our correspondent purchased loans are purchased on a loan-by-loan basis from a select group of correspondent lenders and are underwritten by the Bank's underwriters based on underwriting standards that are generally the same as for our originated loans.

 
At
 
March 31, 2016
 
September 30, 2015
 
 
 
% 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
$
4,542

 
49.4
%
 
$
4,002,811

 
59.1
%
 
$
4,833

 
51.2
%
 
$
4,010,439

 
60.6
%
Correspondent purchased
2,262

 
24.6

 
2,016,685

 
29.8

 
2,115

 
22.4

 
1,846,213

 
27.9

Bulk purchased
1,243

 
13.5

 
456,877

 
6.8

 
1,434

 
15.2

 
485,682

 
7.3

Multi-family and commercial
652

 
7.1

 
111,638

 
1.7

 
604

 
6.4

 
109,314

 
1.6

Construction
220

 
2.4

 
48,125

 
0.7

 
170

 
1.8

 
41,057

 
0.6

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
216

 
2.4

 
123,565

 
1.8

 
222

 
2.3

 
125,844

 
1.9

Other consumer
58

 
0.6

 
4,279

 
0.1

 
65

 
0.7

 
4,179

 
0.1

 
$
9,193

 
100.0
%
 
$
6,763,980

 
100.0
%
 
$
9,443

 
100.0
%
 
$
6,622,728

 
100.0
%

42


The following tables present ACL activity and selected ACL ratios for the periods or at the dates presented. See "Note 4 - Loans Receivable and Allowance for Credit Losses" for additional information related to ACL activity by specific loan categories.
 
For the Three Months Ended
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
 
June 30, 2015
 
March 31, 2015
 
(Dollars in thousands)
ACL beginning balance
$
9,201

 
$
9,443

 
$
9,601

 
$
9,406

 
$
9,297

Charge-offs
(75
)
 
(250
)
 
(183
)
 
(157
)
 
(189
)
Recoveries
67

 
8

 
25

 
29

 
23

Provision for credit losses

 

 

 
323

 
275

ACL ending balance
$
9,193

 
$
9,201

 
$
9,443

 
$
9,601

 
$
9,406

 
 
 
 
 
 
 
 
 
 
ACL to loans receivable, net at end of period
0.14
%
 
0.14
%
 
0.14
%
 
0.15
%
 
0.15
%
ACL to non-performing loans at end of period
35.71

 
35.77

 
36.41

 
38.28

 
33.69

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
0.03

 
0.79

 
0.52

 
0.41

 
0.51

ACL to net charge-offs (annualized)
294.7x

 
9.5x

 
15.0x

 
18.7x

 
14.2x

 
For the Six Months Ended
 
March 31, 2016
 
March 31, 2015
 
(Dollars in thousands)
ACL beginning balance
$
9,443

 
$
9,227

Charge-offs
(325
)
 
(395
)
Recoveries
75

 
126

Provision for credit losses

 
448

ACL ending balance
$
9,193

 
$
9,406

 
 
 
 
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 during the period
0.81

 
0.87

ACL to net charge-offs (annualized)
18.3x

 
17.5x



43


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 76% of these portfolios at March 31, 2016. The weighted average life ("WAL") is the estimated remaining maturity (in years) after three-month historical prepayment speeds and projected call option assumptions have been applied. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Fixed-rate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MBS
$
968,006

 
2.23
%
 
3.3

 
$
985,287

 
2.26
%
 
3.2

 
$
1,047,637

 
2.24
%
 
3.2

GSE debentures
471,215

 
1.14

 
1.3

 
421,231

 
1.18

 
2.4

 
525,376

 
1.14

 
1.6

Municipal bonds
37,248

 
1.80

 
2.6

 
39,534

 
1.85

 
2.7

 
38,214

 
1.87

 
2.9

Total fixed-rate securities
1,476,469

 
1.87

 
2.6

 
1,446,052

 
1.93

 
3.0

 
1,611,227

 
1.87

 
2.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MBS
458,350

 
2.31

 
5.9

 
379,745

 
2.26

 
5.6

 
402,417

 
2.22

 
5.3

Trust preferred securities
2,169

 
1.89

 
21.2

 
2,186

 
1.77

 
21.5

 
2,186

 
1.59

 
21.7

Total adjustable-rate securities
460,519

 
2.30

 
6.0

 
381,931

 
2.25

 
5.7

 
404,603

 
2.21

 
5.4

Total securities portfolio
$
1,936,988

 
1.97

 
3.4

 
$
1,827,983

 
2.00

 
3.6

 
$
2,015,830

 
1.94

 
3.2



The following table presents the carrying value of MBS in our portfolio by issuer at the dates presented.
 
March 31, 2016
 
September 30, 2015
 
(Dollars in thousands)
Federal National Mortgage Association ("FNMA")
$
863,968

 
$
880,810

Federal Home Loan Mortgage Corporation ("FHLMC")
477,101

 
469,290

Government National Mortgage Association
95,705

 
112,439

 
$
1,436,774

 
$
1,462,539


44


Mortgage-Backed Securities - The balance of MBS, which primarily consists of securities of U.S. GSEs, decreased $25.8 million from $1.46 billion at September 30, 2015 to $1.44 billion at March 31, 2016. The following table summarizes the activity in our portfolio of MBS for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yield for the ending balances are as of the last day of the period presented and are generally derived from recent prepayment activity on the securities in the portfolio as of the dates presented. The beginning and ending WAL is the estimated remaining principal repayment term (in years) after three-month historical prepayment speeds have been applied.

 
For the Three Months Ended
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
 
June 30, 2015
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Beginning balance - carrying value
$
1,376,119

 
2.26
%
 
3.9

 
$
1,462,539

 
2.24
%
 
3.8

 
$
1,565,184

 
2.25
%
 
3.9

 
$
1,648,046

 
2.30
%
 
4.3

Maturities and repayments
(80,544
)
 
 
 
 
 
(83,835
)
 
 
 
 
 
(99,840
)
 
 
 
 
 
(100,538
)
 
 
 
 
Net amortization of (premiums)/discounts
(1,091
)
 
 
 
 
 
(1,188
)
 
 
 
 
 
(1,362
)
 
 
 
 
 
(1,412
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
42,827

 
1.83

 
4.1

 

 

 

 

 

 

 
20,532

 
1.74

 
4.5

Adjustable
100,133

 
2.02

 
5.4

 

 

 

 

 

 

 

 

 

Change in valuation on AFS securities
(670
)
 
 
 
 
 
(1,397
)
 
 
 
 
 
(1,443
)
 
 
 
 
 
(1,444
)
 
 
 
 
Ending balance - carrying value
$
1,436,774

 
2.25

 
4.1

 
$
1,376,119

 
2.26

 
3.9

 
$
1,462,539

 
2.24

 
3.8

 
$
1,565,184

 
2.25

 
3.9


 
For the Six Months Ended
 
March 31, 2016
 
March 31, 2015
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Beginning balance - carrying value
$
1,462,539

 
2.24
%
 
3.8

 
$
1,802,547

 
2.32
%
 
4.2

Maturities and repayments
(164,379
)
 
 
 
 
 
(175,951
)
 
 
 
 
Net amortization of (premiums)/discounts
(2,279
)
 
 
 
 
 
(2,590
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
Fixed
42,827

 
1.83

 
4.1

 
25,137

 
1.53

 
3.8

Adjustable
100,133

 
2.02

 
5.4

 

 

 

Change in valuation on AFS securities
(2,067
)
 
 
 
 
 
(1,097
)
 
 
 
 
Ending balance - carrying value
$
1,436,774

 
2.25

 
4.1

 
$
1,648,046

 
2.30

 
4.3



45


Investment Securities - Investment securities, which consist of U.S. GSE debentures (primarily issued by FNMA, FHLMC, or Federal Home Loan Banks) and municipal investments, decreased $55.3 million, from $566.8 million at September 30, 2015 to $511.5 million at March 31, 2016. The following table summarizes 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 beginning and ending WALs represent the estimated remaining principal repayment terms (in years) of the securities after projected call dates have been considered, based upon market rates at each date presented.
 
For the Three Months Ended
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
 
June 30, 2015
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Beginning balance - carrying value
$
460,829

 
1.24
%
 
2.6

 
$
566,754

 
1.19
%
 
1.8

 
$
641,532

 
1.18
%
 
2.5

 
$
620,193

 
1.18
%
 
2.2

Maturities and calls
(27,201
)
 
 
 
 
 
(104,155
)
 
 
 
 
 
(76,387
)
 
 
 
 
 
(30,000
)
 
 
 
 
Net amortization of (premiums)/discounts
(106
)
 
 
 
 
 
(101
)
 
 
 
 
 
(70
)
 
 
 
 
 
(52
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
74,987

 
0.93

 
0.8

 
1,432

 
1.35

 
5.6

 

 

 

 
52,379

 
1.31

 
3.1

Change in valuation on AFS securities
2,982

 
 
 
 
 
(3,101
)
 
 
 
 
 
1,679

 
 
 
 
 
(988
)
 
 
 
 
Ending balance - carrying value
$
511,491

 
1.19

 
1.5

 
$
460,829

 
1.24

 
2.6

 
$
566,754

 
1.19

 
1.8

 
$
641,532

 
1.18

 
2.5


 
For the Six Months Ended
 
March 31, 2016
 
March 31, 2015
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Beginning balance - carrying value
$
566,754

 
1.19
%
 
1.8

 
$
590,942

 
1.15
%
 
3.0

Maturities and calls
(131,356
)
 
 
 
 
 
(82,132
)
 
 
 
 
Net amortization of (premiums)/discounts
(207
)
 
 
 
 
 
(163
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
Fixed
76,419

 
0.94

 
0.9

 
106,022

 
1.16

 
1.7

Change in valuation on AFS securities
(119
)
 
 
 
 
 
5,524

 
 
 
 
Ending balance - carrying value
$
511,491

 
1.19

 
1.5

 
$
620,193

 
1.18

 
2.2



46


Liabilities. Total liabilities were $7.91 billion at March 31, 2016 compared to $8.43 billion at September 30, 2015. The $514.7 million decrease was due primarily to a $798.9 million decrease in FHLB borrowings largely as a result of the removal of the daily leverage strategy at March 31, 2016, along with a $100.0 million decrease in term advances, partially offset by a $287.3 million increase in the deposit portfolio.

Deposits - Deposits were $5.12 billion at March 31, 2016 compared to $4.83 billion at September 30, 2015. The $287.3 million increase was due primarily to a $100.8 million increase in the retail certificate of deposit portfolio, a $77.1 million increase in the checking portfolio, and a $73.9 million increase in the wholesale certificate of deposit portfolio. We continue to be competitive on deposit rates and, in some cases, our offer rates for certificates of deposit have been higher than peers. 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 short-term interest rates continue to rise, our customers may move 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. The $116.8 million increase in the retail certificate of deposit portfolio from December 31, 2015 to March 31, 2016 was due mainly to a promotion deposit campaign on President's Day.
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
 
 
 
 
 
% of
 
 
 
 
 
% of
 
 
 
 
 
% of
 
Amount
 
Rate
 
 Total
 
Amount
 
Rate
 
 Total
 
Amount
 
Rate
 
 Total
 
(Dollars in thousands)
Noninterest-bearing checking
$
211,068

 
%
 
4.1
%
 
$
205,374

 
%
 
4.1
%
 
$
188,007

 
%
 
3.9
%
Interest-bearing checking
604,790

 
0.05

 
11.8

 
612,656

 
0.05

 
12.3

 
550,741

 
0.05

 
11.4

Savings
330,467

 
0.17

 
6.5

 
317,384

 
0.21

 
6.4

 
311,670

 
0.16

 
6.4

Money market
1,165,592

 
0.23

 
22.8

 
1,183,050

 
0.24

 
23.8

 
1,148,935

 
0.23

 
23.8

Retail certificates of deposit
2,421,622

 
1.38

 
47.3

 
2,304,865

 
1.31

 
46.4

 
2,320,804

 
1.29

 
48.0

Public units
386,290

 
0.56

 
7.5

 
349,151

 
0.43

 
7.0

 
312,363

 
0.40

 
6.5

 
$
5,119,829

 
0.77

 
100.0
%
 
$
4,972,480

 
0.71

 
100.0
%
 
$
4,832,520

 
0.72

 
100.0
%

At March 31, 2016, public unit deposits totaled $386.3 million, compared to $312.4 million at September 30, 2015, and had a weighted average rate of 0.56% and an average remaining term to maturity of seven months. There were no brokered deposits at March 31, 2016 or September 30, 2015. Management will continue to monitor the wholesale deposit market for attractive opportunities relative to the use of proceeds.

The following tables set forth scheduled maturity information for our certificates of deposit, along with associated weighted average rates, at March 31, 2016.
 
 
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%
 
$
824,170

 
$
191,686

 
$
1,536

 
$

 
$
1,017,392

 
0.62
%
1.00 – 1.99%
 
290,964

 
501,933

 
367,029

 
452,320

 
1,612,246

 
1.57

2.00 – 2.99%
 
15,300

 
80

 
1,516

 
160,947

 
177,843

 
2.24

3.00 – 3.99%
 
175

 
256

 

 

 
431

 
3.19

 
 
$
1,130,609

 
$
693,955

 
$
370,081

 
$
613,267

 
$
2,807,912

 
1.27

 
 
 
 
 
 
 
 
 
 
 
 
 
Percent of total
 
40.3
%
 
24.7
%
 
13.2
%
 
21.8
%
 
 
 
 
Weighted average rate
 
0.82

 
1.26

 
1.54

 
1.95

 
 
 
 
Weighted average maturity (in years)
 
0.4

 
1.5

 
2.5

 
3.9

 
1.7

 
 
Weighted average maturity for the retail certificate of deposit portfolio (in years)
 
 
 
1.9

 
 


47


 
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
$
178,240

 
$
137,032

 
$
249,099

 
$
974,668

 
$
1,539,039

Retail certificates of deposit of $100,000 or more
87,023

 
54,646

 
117,071

 
623,843

 
882,583

Public unit deposits of $100,000 or more
149,907

 
82,253

 
75,338

 
78,792

 
386,290

 
$
415,170

 
$
273,931

 
$
441,508

 
$
1,677,303

 
$
2,807,912


Borrowings - The following table presents 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 impact of the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. Rates on new borrowings are fixed-rate. The weighted average maturity ("WAM") is the remaining weighted average contractual term in years. The beginning and ending WAMs represent the remaining maturity at each date presented. For new borrowings, the WAMs presented are as of the date of issue.
 
For the Three Months Ended
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
 
June 30, 2015
 
 
 
Effective
 
 
 
 
 
Effective
 
 
 
 
 
Effective
 
 
 
 
 
Effective
 
 
 
Amount
 
Rate
 
WAM
 
Amount
 
Rate
 
WAM
 
Amount
 
Rate
 
WAM
 
Amount
 
Rate
 
WAM
 
(Dollars in thousands)
Beginning balance
$
2,675,000

 
2.29
%
 
3.2

 
$
2,775,000

 
2.29
%
 
3.3

 
$
2,795,000

 
2.49
%
 
3.3

 
$
2,795,000

 
2.51
%
 
3.3

Maturities and prepayments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FHLB advances

 

 
 
 
(200,000
)
 
1.94

 
 
 
(175,000
)
 
5.08

 
 
 
(100,000
)
 
3.01

 
 
Repurchase agreements

 

 
 
 

 

 
 
 
(20,000
)
 
4.45

 
 
 

 

 
 
New borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FHLB advances

 

 

 
100,000

 
1.45

 
3.0

 
175,000

 
2.18

 
3.0

 
100,000

 
2.25

 
7.0

Ending balance
$
2,675,000

 
2.29

 
3.0

 
$
2,675,000

 
2.29

 
3.2

 
$
2,775,000

 
2.29

 
3.3

 
$
2,795,000

 
2.49

 
3.3

 
For the Six Months Ended
 
March 31, 2016
 
March 31, 2015
 
 
 
Effective
 
 
 
 
 
Effective
 
 
 
Amount
 
Rate
 
WAM
 
Amount
 
Rate
 
WAM
 
(Dollars in thousands)
Beginning balance
$
2,775,000

 
2.29
%
 
3.3

 
$
2,795,000

 
2.45
%
 
2.8

Maturities and prepayments:
 
 
 
 
 
 
 
 
 
 
FHLB advances
(200,000
)
 
1.94

 
 
 
(500,000
)
 
1.66

 
 
New borrowings:
 
 
 
 
 
 
 
 
 
 
 
FHLB advances
100,000

 
1.45

 
3.0

 
500,000

 
2.03

 
5.8

Ending balance
$
2,675,000

 
2.29

 
3.0

 
$
2,795,000

 
2.51

 
3.3


48



Maturities - The following table presents the maturity of FHLB advances, at par, and repurchase agreements, along with associated weighted average contractual and effective rates as of March 31, 2016.
 
 
FHLB
 
Repurchase
 
 
 
 
 
 
Maturity by
 
Advances
 
Agreements
 
Total
 
Contractual
 
Effective
Fiscal year
 
Amount
 
Amount
 
Amount
 
Rate
 
Rate(1)
 
 
(Dollars in thousands)
 
 
 
 
2016
 
$
200,000

 
$

 
$
200,000

 
1.94
%
 
2.00
%
2017
 
500,000

 

 
500,000

 
2.69

 
2.72

2018
 
375,000

 
100,000

 
475,000

 
2.35

 
2.64

2019
 
400,000

 

 
400,000

 
1.62

 
1.62

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

 
 
$
2,475,000

 
$
200,000

 
$
2,675,000

 
2.23

 
2.29


(1)
The effective rate includes the impact of the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid.


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 March 31, 2016.
 
 
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)
June 30, 2016
 
$
265,263

 
0.93
%
 
$
149,907

 
0.38
%
 
$
100,000

 
3.17
%
 
$
515,170

 
1.21
%
September 30, 2016
 
191,678

 
0.93

 
82,253

 
0.48

 
100,000

 
0.83

 
373,931

 
0.80

December 31, 2016
 
219,393

 
1.00

 
51,500

 
0.54

 
100,000

 
0.78

 
370,893

 
0.88

March 31, 2017
 
146,777

 
0.94

 
23,838

 
0.70

 

 

 
170,615

 
0.91

 
 
$
823,111

 
0.95

 
$
307,498

 
0.46

 
$
300,000

 
1.59

 
$
1,430,609

 
0.98



49


Stockholders' Equity. Stockholders' equity was $1.40 billion at March 31, 2016 compared to $1.42 billion at September 30, 2015. The $12.8 million decrease between periods was due primarily to the payment of $55.9 million in cash dividends, partially offset by net income of $42.2 million. The cash dividends paid during the current year six month period consisted of a $0.25 per share cash true-up dividend related to fiscal year 2015 earnings per the Company's dividend policy, and two regular quarterly cash dividends totaling $0.17 per share. On April 20, 2016, the Company declared a regular quarterly cash dividend of $0.085 per share, or approximately $11.3 million, payable on May 20, 2016 to stockholders of record as of the close of business on May 6, 2016.

In October 2015, the Company announced a stock repurchase plan for up to $70.0 million of common stock. It is anticipated that shares will be purchased from time to time based upon market conditions and available liquidity. There is no expiration for this repurchase plan. The Company did not repurchase any shares during the six month period ended March 31, 2016.

At March 31, 2016, Capitol Federal Financial, Inc., at the holding company level, had $80.1 million on deposit at the Bank. For fiscal year 2016, 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 2016, 2015, and 2014. The amounts represent cash dividends paid during each period. For the quarter ending June 30, 2016, the amount presented represents the dividend payable on May 20, 2016 to stockholders of record as of May 6, 2016.
 
Calendar Year
 
2016
 
2015
 
2014
 
Amount
 
Per Share
 
Amount
 
Per Share
 
Amount
 
Per Share
 
(Dollars in thousands, except per share amounts)
Regular quarterly dividends paid
 
 
 
 
 
 
 
 
 
 
 
Quarter ended March 31
$
11,305

 
$
0.085

 
$
11,592

 
$
0.085

 
$
10,513

 
$
0.075

Quarter ended June 30
11,312

 
0.085

 
11,585

 
0.085

 
10,399

 
0.075

Quarter ended September 30

 

 
11,385

 
0.085

 
10,318

 
0.075

Quarter ended December 31

 

 
11,303

 
0.085

 
10,226

 
0.075

True-up dividends paid

 

 
33,248

 
0.250

 
35,450

 
0.260

True Blue dividends paid

 

 
33,924

 
0.250

 
34,663

 
0.250

Calendar year-to-date dividends paid
$
22,617

 
$
0.170

 
$
113,037

 
$
0.840

 
$
111,569

 
$
0.810





50


Operating Results
The following table presents selected income statement and other information for the quarters indicated.
 
For the Three Months Ended
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
2016
 
2015
 
2015
 
2015
 
2015
 
(Dollars in thousands, except per share data)
Interest and dividend income:
 
 
 
 
 
 
 
 
 
Loans receivable
$
60,732

 
$
60,223

 
$
59,761

 
$
58,922

 
$
58,198

MBS
7,702

 
7,831

 
8,260

 
8,849

 
9,537

FHLB stock
3,006

 
3,152

 
3,167

 
3,132

 
3,076

Cash and cash equivalents
2,707

 
1,620

 
1,303

 
1,357

 
1,393

Investment securities
1,485

 
1,533

 
1,920

 
1,914

 
1,673

Total interest and dividend income
75,632

 
74,359

 
74,411

 
74,174

 
73,877

 
 
 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
 
 
 
FHLB borrowings
16,394

 
16,074

 
16,539

 
17,072

 
17,198

Deposits
9,213

 
8,799

 
8,390

 
8,377

 
8,207

Repurchase agreements
1,487

 
1,504

 
1,542

 
1,712

 
1,693

Total interest expense
27,094

 
26,377

 
26,471

 
27,161

 
27,098

 
 
 
 
 
 
 
 
 
 
Net interest income
48,538

 
47,982

 
47,940

 
47,013

 
46,779

 
 
 
 
 
 
 
 
 
 
Provision for credit losses

 

 

 
323

 
275

 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
 
 
 
 
 
 
 
(after provision for credit losses)
48,538

 
47,982

 
47,940

 
46,690

 
46,504

 
 
 
 
 
 
 
 
 
 
Non-interest income
6,626

 
5,566

 
5,461

 
5,145

 
5,277

Non-interest expense
23,426

 
23,590

 
25,262

 
23,106

 
22,859

Income tax expense
10,211

 
9,240

 
9,354

 
9,127

 
9,688

Net income
$
21,527

 
$
20,718

 
$
18,785

 
$
19,602

 
$
19,234

 
 
 
 
 
 
 
 
 
 
Efficiency ratio
42.46
%
 
44.05
%
 
47.31
%
 
44.30
%
 
43.91
%
 
 
 
 
 
 
 
 
 
 
Basic EPS
$
0.16

 
$
0.16

 
$
0.14

 
$
0.14

 
$
0.14

Diluted EPS
0.16

 
0.16

 
0.14

 
0.14

 
0.14



51


Comparison of Operating Results for the Six Months Ended March 31, 2016 and 2015

For the six month period ended March 31, 2016, the Company recognized net income of $42.2 million, or $0.32 per share, compared to net income of $39.7 million, or $0.29 per share, for the six month period ended March 31, 2015. The $2.5 million, or 6.4%, increase in net income was due primarily to a $1.7 million increase in net interest income and a $1.7 million increase in non-interest income, partially offset by a $1.0 million increase in non-interest expense. The $1.7 million, or 1.8%, increase in net interest income from the prior year six month period was due primarily to a $3.5 million decrease in interest expense on term borrowings, partially offset by a $1.7 million increase in interest expense on deposits.

Net income attributable to the daily leverage strategy was $1.1 million during the current year six month period, compared to $1.5 million for the prior year six month period. The decrease in net income attributable to the daily leverage strategy was due to an increase in the average FHLB line of credit borrowings rate, which was larger than the increase in the average yield earned on the cash at the Federal Reserve Bank. The Company's efficiency ratio was 43.25% for the current year six month period compared to 43.66% for the prior year six month period.

The net interest margin increased three basis points, from 1.73% for the prior year six month period to 1.76% for the current year six month period. Excluding the effects of the daily leverage strategy, the net interest margin would have increased four basis points, from 2.08% for the prior year six month period, to 2.12% for the current year six month period. The increase in the net interest margin was due mainly to a decrease in interest expense on term borrowings.

Interest and Dividend Income
The weighted average yield on total interest-earning assets increased two basis points, from 2.72% for the prior year six month period to 2.74% for the current year six month period, while the average balance of interest-earning assets increased $10.9 million from the prior year six month period. Absent the impact of the daily leverage strategy, the weighted average yield on total interest-earning assets would have decreased one basis point, from 3.23% for the prior year six month period to 3.22% for the current year six month period, while the average balance would have increased $38.1 million. The following table presents the components of interest and dividend income for the time periods presented along with the change measured in dollars and percent.
 
For the Six Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
120,955

 
$
116,817

 
$
4,138

 
3.5
 %
MBS
15,533

 
19,538

 
(4,005
)
 
(20.5
)
FHLB stock
6,158

 
6,257

 
(99
)
 
(1.6
)
Cash and cash equivalents
4,327

 
2,817

 
1,510

 
53.6

Investment securities
3,018

 
3,348

 
(330
)
 
(9.9
)
Total interest and dividend income
$
149,991

 
$
148,777

 
$
1,214

 
0.8


The increase in interest income on loans receivable was due to a $399.6 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, to 3.62% for the current six month period. Loan growth was funded through cash flows from the securities portfolio along with deposit growth. The decrease in the weighted average yield was due primarily to endorsements and refinances repricing loans to lower market rates, along with the origination and purchase of loans between periods at rates less than the existing portfolio rate.

The decrease in interest income on the MBS portfolio was due primarily to a $316.4 million decrease in the average balance of the portfolio as cash flows not reinvested were used to fund loan growth. Additionally, the weighted average yield on the MBS portfolio decreased five basis points, from 2.28% during the prior year six month period to 2.23% for the current year six month period. Net premium amortization of $2.3 million during the current year six month period decreased the weighted average yield on the portfolio by 33 basis points. During the prior year six month period, $2.6 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 31 basis points. As of March 31, 2016, the remaining net balance of premiums on our portfolio of MBS was $15.8 million.

The increase in interest income on cash and cash equivalents was due primarily to a 13 basis point increase in the weighted average yield resulting from an increase in the yield earned on balances held at the Federal Reserve Bank.


52


The decrease in interest income on investment securities was due primarily to a $75.9 million decrease in the average balance, partially offset by a five basis point increase in the weighted average yield on the portfolio. Cash flows not reinvested in the portfolio were used to fund loan growth.

Interest Expense
The weighted average rate paid on total interest-bearing liabilities decreased three basis points, from 1.13% for the prior year six month period to 1.10% for the current year six month period, while the average balance of interest-bearing liabilities increased $140.1 million from the prior year six month period. Absent the impact of the daily leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have decreased nine basis points from the prior year six month period, to 1.28% for the current year six month period, due primarily to a decrease in the cost of term borrowings, while the average balance of interest-bearing liabilities would have increased $167.2 million due to deposit growth. The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.
 
For the Six Months Ended
 
 
 
March 31,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB advances
$
28,053

 
$
31,582

 
$
(3,529
)
 
(11.2
)%
FHLB line of credit
4,415

 
2,604

 
1,811

 
69.5

Deposits
18,012

 
16,352

 
1,660

 
10.2

Repurchase agreements
2,991

 
3,424

 
(433
)
 
(12.6
)
Total interest expense
$
53,471

 
$
53,962

 
$
(491
)
 
(0.9
)

The decrease in interest expense on FHLB advances was due primarily to a 22 basis point decrease in the weighted average rate paid on the portfolio, to 2.24% for the current year six month period, resulting from the prepayment of a $175.0 million advance between periods with an effective rate of 5.08%, which was replaced with a $175.0 million advance with an effective rate of 2.18%. The increase in interest expense on FHLB line of credit borrowings was due primarily to an 18 basis point increase in the weighted average rate paid on the borrowings.

The increase in interest expense on deposits was primarily a result of deposit growth, along with a three basis point increase in the weighted average rate, to 0.73% for the current year six month period. The average balance of the deposit portfolio increased $253.2 million for the current year six month period, with the majority of the increase in the retail deposit portfolio, specifically the certificates of deposit and checking portfolios.

The decrease in interest expense on repurchase agreements was due to the maturity between periods of a $20.0 million repurchase agreement at a rate of 4.45%, which was not replaced.

Provision for Credit Losses
The Bank did not record a provision for credit losses during the current year six month period, compared to a provision for credit losses during the prior year six month period of $448 thousand. No provision for credit losses was recorded during the current year six month period due to the continued low level of net loan charge-offs and stabilization of delinquent loan balances. Net loan charge-offs were $250 thousand for the current year six month period and the ACL to net charge-offs (annualized) was 18.3 times at March 31, 2016. The improvement in collateral values has assisted in lowering our net charge-off amounts compared to prior years. At March 31, 2016, loans 90 or more days delinquent or in foreclosure were 0.25% of total loans, down slightly from 0.27% at March 31, 2015.


53


Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.
 
For the Six Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
$
7,372

 
$
7,254

 
$
118

 
1.6
 %
Income from BOLI
2,162

 
568

 
1,594

 
280.6

Insurance commissions
1,576

 
1,522

 
54

 
3.5

Loan fees
678

 
731

 
(53
)
 
(7.3
)
Other non-interest income
404

 
459

 
(55
)
 
(12.0
)
Total non-interest income
$
12,192

 
$
10,534

 
$
1,658

 
15.7


The increase in income from BOLI was due mainly to the purchase of a new BOLI investment between periods, as well as to the receipt of death benefits in the current year.

Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.
 
For the Six Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
20,775

 
$
20,889

 
$
(114
)
 
(0.5
)%
Occupancy, net
5,288

 
4,880

 
408

 
8.4

Information technology and communications
5,167

 
5,153

 
14

 
0.3

Federal insurance premium
2,781

 
2,750

 
31

 
1.1

Deposit and loan transaction costs
2,670

 
2,630

 
40

 
1.5

Regulatory and outside services
2,630

 
2,502

 
128

 
5.1

Advertising and promotional
2,137

 
1,638

 
499

 
30.5

Low income housing partnerships
2,094

 
2,912

 
(818
)
 
(28.1
)
Office supplies and related expense
1,471

 
1,062

 
409

 
38.5

Other non-interest expense
2,003

 
1,585

 
418

 
26.4

Total non-interest expense
$
47,016

 
$
46,001

 
$
1,015

 
2.2


The increase in occupancy, net expense was due mainly to non-capitalizable costs associated with the remodel of the Bank's Kansas City market area operations center. The increase in advertising and promotional expense was due primarily to the timing of media campaigns and sponsorships. The decrease in low income housing partnerships expense was due primarily to impairments in the prior year six month period. The increase in office supplies and related expense was due primarily to the purchase of cards enabled with chip card technology. The increase in other non-interest expense was due largely to higher deposit account charge-offs related to debit card fraud in the current year, along with an increase in expenses related to OREO operations due to a recent increase in properties with deferred maintenance and damage issues.

Management anticipates that salaries and employee benefits will increase $500 thousand from fiscal year 2015, a decrease from our original estimate of a $1.4 million increase, due mainly to lower than anticipated employee benefit expenses. Additionally, management anticipates information technology and communications expense will increase $700 thousand from fiscal year 2015, a decrease from our original estimate of a $1.5 million increase.



54


Income Tax Expense
Income tax expense was $19.5 million for the current year six month period compared to $19.2 million for the prior year six month period, due to an increase in pre-tax income. The effective tax rate for the current year six month period was 31.5% compared to 32.6% for the prior year six month period. The decrease in the effective tax rate was due primarily to an increase in nontaxable income related to BOLI and higher low income housing tax credits in the current fiscal year. Management anticipates the effective tax rate for fiscal year 2016 will be approximately 32%, based on fiscal year 2016 estimates as of March 31, 2016.

Average Balance Sheet
The following table presents the average balances of our assets, liabilities, and stockholders' equity, and the related annualized weighted average yields and rates on our interest-earning assets and interest-bearing liabilities for the periods indicated and the weighted average yield/rate on our interest-earning assets and interest-bearing liabilities at March 31, 2016. As previously discussed, the daily leverage strategy was not in place at March 31, 2016, so the end of period yields/rates presented at March 31, 2016 in the table 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 weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.
 
At
 
For the Six Months Ended
 
March 31,
 
March 31, 2016
 
March 31, 2015
 
2016
 
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)
3.63%
 
$
6,684,173

 
$
120,955

 
3.62
%
 
$
6,284,572

 
$
116,817

 
3.72
%
MBS(2)
2.25
 
1,393,913

 
15,533

 
2.23

 
1,710,345

 
19,538

 
2.28

Investment securities(2)(3)
1.19
 
495,824

 
3,018

 
1.22

 
571,717

 
3,348

 
1.17

FHLB stock
5.98
 
205,714

 
6,158

 
5.99

 
209,679

 
6,257

 
5.98

Cash and cash equivalents
0.49
 
2,171,491

 
4,327

 
0.39

 
2,163,918

 
2,817

 
0.26

Total interest-earning assets(1)(2)
3.24
 
10,951,115

 
149,991

 
2.74

 
10,940,231

 
148,777

 
2.72

Other noninterest-earning assets
 
 
291,151

 
 
 
 
 
231,904

 
 
 
 
Total assets
 
 
$
11,242,266

 
 
 
 
 
$
11,172,135

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Checking
0.04
 
$
771,428

 
144

 
0.04

 
$
710,009

 
134

 
0.04

Savings
0.17
 
318,444

 
308

 
0.19

 
301,322

 
220

 
0.15

Money market
0.23
 
1,164,912

 
1,368

 
0.23

 
1,147,287

 
1,334

 
0.23

Retail certificates
1.38
 
2,334,281

 
15,341

 
1.31

 
2,235,850

 
13,682

 
1.23

Wholesale certificates
0.56
 
376,133

 
851

 
0.45

 
317,531

 
982

 
0.62

Total deposits
0.77
 
4,965,198

 
18,012

 
0.73

 
4,711,999

 
16,352

 
0.70

FHLB advances(4)
2.23
 
2,504,999

 
28,053

 
2.24

 
2,570,980

 
31,582

 
2.46

FHLB line of credit
 
2,042,623

 
4,415

 
0.43

 
2,069,780

 
2,604

 
0.25

FHLB borrowings
2.23
 
4,547,622

 
32,468

 
1.43

 
4,640,760

 
34,186

 
1.47

Repurchase agreements
2.94
 
200,000

 
2,991

 
2.94

 
220,000

 
3,424

 
3.08

Total borrowings
2.29
 
4,747,622

 
35,459

 
1.49

 
4,860,760

 
37,610

 
1.55

Total interest-bearing liabilities
1.29
 
9,712,820

 
53,471

 
1.10

 
9,572,759

 
53,962

 
1.13

Other noninterest-bearing liabilities
 
 
121,560

 
 
 
 
 
116,659

 
 
 
 
Stockholders' equity
 
 
1,407,886

 
 
 
 
 
1,482,717

 
 
 
 
Total liabilities and stockholders' equity
 
$
11,242,266

 
 
 
 
 
$
11,172,135

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Continued)
 



55


 
At
 
For the Six Months Ended
 
March 31,
 
March 31, 2016
 
March 31, 2015
 
2016
 
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)
 
 
 
 
$
96,520

 
 
 
 
 
$
94,815

 
 
Net interest rate spread(6)(11)
1.95%
 
 
 
 
 
1.64
%
 
 
 
 
 
1.59
%
Net interest-earning assets
 
 
$
1,238,295

 
 
 
 
 
$
1,367,472

 
 
 
 
Net interest margin(7)(11)
 
 
 
 
 
 
1.76

 
 
 
 
 
1.73

Ratio of interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 to interest-bearing liabilities
 
 
 
 
 
 
1.13x

 
 
 
 
 
1.14x

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selected performance ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized)(11)
 
 
 
 
 
0.75
%
 
 
 
 
 
0.71
%
Return on average equity (annualized)(11)
 
 
 
 
 
6.00

 
 
 
 
 
5.36

Average equity to average assets
 
 
 
 
 
 
12.52

 
 
 
 
 
13.27

Operating expense ratio(8)
 
 
 
 
 
 
0.84

 
 
 
 
 
0.82

Efficiency ratio(9)
 
 
 
 
 
 
43.25

 
 
 
 
 
43.66

Pre-tax yield on daily leverage strategy(10)
 
 
 
 
 
0.16

 
 
 
 
 
0.21

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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 $38.0 million and $36.0 million for the six month period March 31, 2016 and 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 annualized net interest income as a percentage of average interest-earning assets.
(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.
(11)
The table below presents a reconciliation of actual financial ratios to adjusted financial ratios excluding the effects of the daily leverage strategy. The adjusted financial ratios are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide these adjusted financial ratios because of the unique nature of the daily leverage strategy.
 
For the Six Months Ended
 
March 31, 2016
 
March 31, 2015
 
 
 
Daily Leverage
 
 
 
 
 
Daily Leverage
 
 
 
Actual
 
Strategy
 
Adjusted
 
Actual
 
Strategy
 
Adjusted
Return on average assets (annualized)
0.75
%
 
(0.14
)%
 
0.89
%
 
0.71
%
 
(0.13
)%
 
0.84
%
Return on average equity (annualized)
6.00

 
0.16

 
5.84

 
5.36

 
0.20

 
5.16

Net interest margin
1.76

 
(0.36
)
 
2.12

 
1.73

 
(0.35
)
 
2.08

Average net interest rate spread
1.64

 
(0.30
)
 
1.94

 
1.59

 
(0.27
)
 
1.86



56


Rate/Volume Analysis
The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the six month period March 31, 2016 to the six month period 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 year's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.
 
For the Six Months Ended
 
March 31, 2016 vs. March 31, 2015
 
Increase (Decrease) Due to
 
Volume
 
Rate
 
Total
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable
$
7,219

 
$
(3,081
)
 
$
4,138

MBS
(3,537
)
 
(468
)
 
(4,005
)
Investment securities
(458
)
 
128

 
(330
)
FHLB stock
(88
)
 
(11
)
 
(99
)
Cash and cash equivalents
10

 
1,500

 
1,510

Total interest-earning assets
3,146

 
(1,932
)
 
1,214

 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Checking
12

 
(2
)
 
10

Savings
13

 
74

 
87

Money market
26

 
9

 
35

Certificates of deposit
978

 
550

 
1,528

FHLB borrowings
(752
)
 
(966
)
 
(1,718
)
Repurchase agreements
(291
)
 
(142
)
 
(433
)
Total interest-bearing liabilities
(14
)
 
(477
)
 
(491
)
 
 
 
 
 
 
Net change in net interest and dividend income
$
3,160

 
$
(1,455
)
 
$
1,705



Comparison of Operating Results for the Three Months Ended March 31, 2016 and 2015

For the quarter ended March 31, 2016, the Company recognized net income of $21.5 million, or $0.16 per share, compared to net income of $19.2 million, or $0.14 per share, for the quarter ended March 31, 2015. The $2.3 million, or 11.9%, increase in net income was due primarily to a $1.8 million increase in net interest income and a $1.3 million increase in non-interest income due mainly to income from BOLI. The $1.8 million, or 3.8%, increase in net interest income was due primarily to a $2.4 million decrease in interest expense on term borrowings.

Net income attributable to the daily leverage strategy was $561 thousand during the current quarter, compared to $682 thousand for the prior year quarter. The decrease in the net income attributable to the daily leverage strategy was due to an increase in the FHLB line of credit borrowings rate, which was larger than the increase in the average yield earned on the cash at the Federal Reserve Bank.

The net interest margin increased seven basis points, from 1.71% for the prior year quarter to 1.78% for the current year quarter. Excluding the effects of the daily leverage strategy, the net interest margin would have increased nine basis points, from 2.04% for the prior year quarter to 2.13% for the current year quarter. The increase in the net interest margin was due mainly to a decrease in interest expense on term borrowings.


57


Interest and Dividend Income
The weighted average yield on total interest-earning assets increased seven basis points, from 2.70% for the prior year quarter to 2.77% for the current quarter, while the average balance of interest-earning assets decreased $34.9 million from the prior year quarter. Absent the impact of the daily leverage strategy, the weighted average yield on total interest-earning assets would have increased one basis point, from 3.21% for the prior year quarter to 3.22% for the current year quarter, while the average balance would have increased $19.7 million. The following table presents the components of interest and dividend income for the time periods presented along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
60,732

 
$
58,198

 
$
2,534

 
4.4
 %
MBS
7,702

 
9,537

 
(1,835
)
 
(19.2
)
FHLB stock
3,006

 
3,076

 
(70
)
 
(2.3
)
Cash and cash equivalents
2,707

 
1,393

 
1,314

 
94.3

Investment securities
1,485

 
1,673

 
(188
)
 
(11.2
)
Total interest and dividend income
$
75,632

 
$
73,877

 
$
1,755

 
2.4


The increase in interest income on loans receivable was due to a $403.9 million increase in the average balance of the portfolio, partially offset by a seven basis point decrease in the weighted average yield on the portfolio, to 3.62% for the current quarter. Loan growth was funded through cash flows from the securities portfolio along with deposit growth. The decrease in the weighted average yield was due primarily to endorsements and refinances repricing loans to lower market rates, along with the origination and purchase of loans between periods at rates less than the existing portfolio rate.

The decrease in interest income on the MBS portfolio was due primarily to a $300.1 million decrease in the average balance of the portfolio as cash flows not reinvested were used to fund loan growth. Additionally, the weighted average yield on the MBS portfolio decreased four basis points, from 2.28% during the prior year quarter to 2.24% for the current year quarter. Net premium amortization of $1.1 million during the current year quarter decreased the weighted average yield on the portfolio by 32 basis points. During the prior year quarter, $1.3 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 30 basis points.

The increase in interest income on cash and cash equivalents was due primarily to a 25 basis point increase in the weighted average yield resulting from an increase in yield earned on balances held at the Federal Reserve Bank.

The decrease in interest income on investment securities was due primarily to a $71.9 million decrease in the average balance. Cash flows not reinvested into the portfolio were used to fund loan growth.


58


Interest Expense
The weighted average rate paid on total interest-bearing liabilities decreased two basis points, from 1.14% for the prior year quarter to 1.12% for the current year quarter, while the average balance of interest-bearing liabilities increased $96.1 million from the prior year quarter. Absent the impact of the daily leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have decreased 12 basis points from the prior year quarter, to 1.27%, due primarily to a decrease in the cost of term borrowings, while the average balance of interest-bearing liabilities would have increased $150.7 million due to deposit growth. The following table presents the components of interest expense for the periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
March 31,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB advances
$
13,729

 
$
15,900

 
$
(2,171
)
 
(13.7
)%
FHLB line of credit
2,665

 
1,298

 
1,367

 
105.3

Deposits
9,213

 
8,207

 
1,006

 
12.3

Repurchase agreements
1,487

 
1,693

 
(206
)
 
(12.2
)
Total interest expense
$
27,094

 
$
27,098

 
$
(4
)
 


The decrease in interest expense on FHLB advances was due primarily to a 28 basis point decrease in the weighted average rate paid on the portfolio, to 2.23% for the current year quarter, resulting from the prepayment of a $175.0 million advance between periods, with an effective rate of 5.08%, which was replaced with a $175.0 million advance with an effective rate of 2.18%. The increase in interest expense on FHLB line of credit borrowings was due primarily to a 28 basis point increase in the weighted average rate paid on the borrowings.

The increase in interest expense on deposits was primarily a result of deposit growth, along with a four basis point increase in the weighted average rate, to 0.74% for the current quarter. The average balance of the deposit portfolio increased $270.6 million compared to the prior year quarter, with the majority of the increase in the higher costing certificate of deposit portfolio.
 
Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
$
3,558

 
$
3,471

 
$
87

 
2.5
 %
Income from BOLI
1,459

 
252

 
1,207

 
479.0

Insurance commissions
1,060

 
973

 
87

 
8.9

Loan fees
336

 
357

 
(21
)
 
(5.9
)
Other non-interest income
213

 
224

 
(11
)
 
(4.9
)
Total non-interest income
$
6,626

 
$
5,277

 
$
1,349

 
25.6


The increase in income from BOLI was due mainly to the receipt of a death benefit during the current quarter, as well as to the purchase of a new BOLI investment between periods.


59


Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
10,288

 
$
10,412

 
$
(124
)
 
(1.2
)%
Occupancy, net
2,616

 
2,461

 
155

 
6.3

Information technology and communications
2,609

 
2,585

 
24

 
0.9

Federal insurance premium
1,399

 
1,468

 
(69
)
 
(4.7
)
Deposit and loan transaction costs
1,396

 
1,256

 
140

 
11.1

Regulatory and outside services
1,144

 
1,206

 
(62
)
 
(5.1
)
Advertising and promotional
983

 
749

 
234

 
31.2

Low income housing partnerships
1,321

 
1,366

 
(45
)
 
(3.3
)
Office supplies and related expense
584

 
588

 
(4
)
 
(0.7
)
Other non-interest expense
1,086

 
768

 
318

 
41.4

Total non-interest expense
$
23,426

 
$
22,859

 
$
567

 
2.5


The increase in advertising and promotional expense was due primarily to the timing of media campaigns and sponsorships. The increase in other non-interest expense was due mainly to an increase in expenses related to OREO operations due to a recent increase in properties with deferred maintenance and damage issues, as well as to an increase in deposit account charge-offs related to debit card fraud.

The Company's efficiency ratio was 42.46% for the current quarter compared to 43.91% for the prior year quarter. The change in the efficiency ratio was due primarily to an increase in net interest income, as well as to an increase in non-interest income.

Income Tax Expense
Income tax expense was $10.2 million for the current quarter compared to $9.7 million for the prior year quarter, due to an increase in pre-tax income. The effective tax rate for the current quarter was 32.2% compared to 33.5% for the prior year quarter. The decrease in the effective tax rate was due primarily to an increase in nontaxable income related to BOLI and higher low income housing tax credits in the current quarter.


60


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
 
March 31, 2016
 
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)
$
6,717,174

 
$
60,732

 
3.62
%
 
$
6,313,311

 
$
58,198

 
3.69
%
MBS(2)
1,374,917

 
7,702

 
2.24

 
1,674,986

 
9,537

 
2.28

Investment securities(2)(3)
488,493

 
1,485

 
1.22

 
560,434

 
1,673

 
1.19

FHLB stock
202,006

 
3,006

 
5.98

 
208,770

 
3,076

 
5.98

Cash and cash equivalents
2,142,320

 
2,707

 
0.50

 
2,202,290

 
1,393

 
0.25

Total interest-earning assets(1)(2)
10,924,910

 
75,632

 
2.77

 
10,959,791

 
73,877

 
2.70

Other noninterest-earning assets
295,430

 
 
 
 
 
233,237

 
 
 
 
Total assets
$
11,220,340

 
 
 
 
 
$
11,193,028

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Checking
$
785,149

 
72

 
0.04

 
$
724,637

 
67

 
0.04

Savings
323,572

 
168

 
0.21

 
305,182

 
115

 
0.15

Money market
1,170,684

 
683

 
0.23

 
1,153,612

 
664

 
0.23

Retail certificates
2,357,389

 
7,805

 
1.33

 
2,246,166

 
6,862

 
1.24

Wholesale certificates
392,286

 
485

 
0.50

 
328,910

 
499

 
0.61

Total deposits
5,029,080

 
9,213

 
0.74

 
4,758,507

 
8,207

 
0.70

FHLB advances(4)
2,471,404

 
13,729

 
2.23

 
2,571,309

 
15,900

 
2.51

FHLB line of credit
2,007,692

 
2,665

 
0.53

 
2,062,222

 
1,298

 
0.25

FHLB borrowings
4,479,096

 
16,394

 
1.47

 
4,633,531

 
17,198

 
1.50

Repurchase agreements
200,000

 
1,487

 
2.94

 
220,000

 
1,693

 
3.08

Total borrowings
4,679,096

 
17,881

 
1.53

 
4,853,531

 
18,891

 
1.58

Total interest-bearing liabilities
9,708,176

 
27,094

 
1.12

 
9,612,038

 
27,098

 
1.14

Other noninterest-bearing liabilities
110,635

 
 
 
 
 
105,621

 
 
 
 
Stockholders' equity
1,401,529

 
 
 
 
 
1,475,369

 
 
 
 
Total liabilities and stockholders' equity
$
11,220,340

 
 
 
 
 
$
11,193,028

 
 
 
 
 
 
 
 
 
 
 
 
 
(Continued)
 



61


 
For the Three Months Ended
 
March 31, 2016
 
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)
 
 
$
48,538

 
 
 
 
 
$
46,779

 
 
Net interest rate spread(6)(11)
 
 
 
 
1.65
%
 
 
 
 
 
1.56
%
Net interest-earning assets
$
1,216,734

 
 
 
 
 
$
1,347,753

 
 
 
 
Net interest margin(7)(11)
 
 
 
 
1.78

 
 
 
 
 
1.71

Ratio of interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
to interest-bearing liabilities
 
 
 
 
1.13x

 
 
 
 
 
1.14x

 
 
 
 
 
 
 
 
 
 
 
 
Selected performance ratios:
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized)(11)
 
 
 
0.77
%
 
 
 
 
 
0.69
%
Return on average equity (annualized)(11)
 
 
 
6.14

 
 
 
 
 
5.21

Average equity to average assets
 
 
 
 
12.49

 
 
 
 
 
13.18

Operating expense ratio(8)
 
 
 
 
0.84

 
 
 
 
 
0.82

Efficiency ratio(9)
 
 
 
 
42.46

 
 
 
 
 
43.91

Pre-tax yield on daily leverage strategy(10)
 
 
 
0.16

 
 
 
 
 
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 March 31, 2016 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.
(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.
(11)
The table below presents a reconciliation of actual financial ratios to adjusted financial ratios excluding the effects of the daily leverage strategy. The adjusted financial ratios are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide these adjusted financial ratios because of the unique nature of the daily leverage strategy.
 
For the Three Months Ended
 
March 31, 2016
 
March 31, 2015
 
 
 
Daily Leverage
 
 
 
 
 
Daily Leverage
 
 
 
Actual
 
Strategy
 
Adjusted
 
Actual
 
Strategy
 
Adjusted
Return on average assets (annualized)
0.77
%
 
(0.14
)%
 
0.91
%
 
0.69
%
 
(0.12
)%
 
0.81
%
Return on average equity (annualized)
6.14

 
0.16

 
5.98

 
5.21

 
0.18

 
5.03

Net interest margin
1.78

 
(0.35
)
 
2.13

 
1.71

 
(0.33
)
 
2.04

Average net interest rate spread
1.65

 
(0.30
)
 
1.95

 
1.56

 
(0.26
)
 
1.82




62


Rate/Volume Analysis
The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended March 31, 2016 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 year's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.
 
For the Three Months Ended March 31,
 
2016 vs. 2015
 
Increase (Decrease) Due to
 
Volume
 
Rate
 
Total
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable
$
3,641

 
$
(1,108
)
 
$
2,533

MBS
(1,683
)
 
(152
)
 
(1,835
)
Investment securities
(218
)
 
31

 
(187
)
FHLB stock
(67
)
 
(3
)
 
(70
)
Cash and cash equivalents
(39
)
 
1,353

 
1,314

Total interest-earning assets
1,634

 
121

 
1,755

 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Checking
6

 
(1
)
 
5

Savings
7

 
45

 
52

Money market
16

 
4

 
20

Certificates of deposit
568

 
361

 
929

FHLB borrowings
(567
)
 
(237
)
 
(804
)
Repurchase agreements
(138
)
 
(68
)
 
(206
)
Total interest-bearing liabilities
(108
)
 
104

 
(4
)
 
 
 
 
 
 
Net change in net interest and dividend income
$
1,742

 
$
17

 
$
1,759



Comparison of Operating Results for the Three Months Ended March 31, 2016 and December 31, 2015

Net income increased $809 thousand, or 3.9%, from the quarter ended December 31, 2015 to $21.5 million, or $0.16 per share, for the quarter ended March 31, 2016, due primarily to an increase in non-interest income. Net income attributable to the daily leverage strategy was $561 thousand during the current quarter compared to $583 thousand in the prior quarter.

Net interest income increased $556 thousand, or 1.2%, from the prior quarter to $48.5 million for the current quarter. The increase was due primarily to a decrease in interest expense on FHLB advances. The net interest margin increased three basis points from 1.75% for the prior quarter to 1.78% for the current quarter. Excluding the effects of the daily leverage strategy, the net interest margin would have been 2.13% for the current quarter compared to 2.11% for the prior quarter. The two basis point increase was due mainly to a decrease in interest expense on FHLB advances.


63


Interest and Dividend Income
The weighted average yield on total interest-earning assets for the current quarter increased six basis points from the prior quarter, to 2.77%, while the average balance of interest-earning assets decreased $52.1 million between the two periods. Absent the impact of the daily leverage strategy, the weighted average yield on total interest-earning assets would have increased one basis point from the prior quarter, to 3.22%, while the average balance would have increased $17.4 million. The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
December 31,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
60,732

 
$
60,223

 
$
509

 
0.8
 %
MBS
7,702

 
7,831

 
(129
)
 
(1.6
)
FHLB stock
3,006

 
3,152

 
(146
)
 
(4.6
)
Cash and cash equivalents
2,707

 
1,620

 
1,087

 
67.1

Investment securities
1,485

 
1,533

 
(48
)
 
(3.1
)
Total interest and dividend income
$
75,632

 
$
74,359

 
$
1,273

 
1.7


The increase in interest income on loans receivable was due to a $65.6 million increase in the average balance of the portfolio. The loan growth was largely funded with deposit growth during the current quarter. The weighted average yield on the portfolio was 3.62% for the current quarter, unchanged from the prior quarter.

The decrease in interest income on MBS was due to a $37.8 million decrease in the average balance of the portfolio, partially offset by a two basis point increase in the weighted average yield on the portfolio. During the current quarter, $1.1 million of net premiums on MBS were amortized, which decreased the weighted average yield on the portfolio by 32 basis points. During the prior quarter, $1.2 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 33 basis points.

The increase in interest income on cash and cash equivalents was due primarily to a 21 basis point increase in the weighted average yield resulting from a full quarter impact, in the current quarter, of the increase in yield earned on balances held at the Federal Reserve Bank.

Interest Expense
The weighted average rate paid on total interest-bearing liabilities increased four basis point from the prior quarter, to 1.12%, while the average balance of interest-bearing liabilities decreased $9.2 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 one basis point from the prior quarter, to 1.27%, and the average balance would have increased $60.2 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
 
 
 
 
 
March 31,
 
December 31,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB advances
$
13,729

 
$
14,325

 
$
(596
)
 
(4.2
)%
FHLB line of credit
2,665

 
1,749

 
916

 
52.4

Deposits
9,213

 
8,799

 
414

 
4.7

Repurchase agreements
1,487

 
1,504

 
(17
)
 
(1.1
)
Total interest expense
$
27,094

 
$
26,377

 
$
717

 
2.7


The decrease in interest expense on FHLB advances was due primarily to a $66.8 million decrease in the average balance of the portfolio. Late in the prior quarter, a $200.0 million advance with an effective rate of 1.94% matured and was partially replaced with a $100.0 million advance with a contractual rate of 1.45%. The increase in interest expense on FHLB line of credit borrowings was due largely to a 20 basis point increase in the average rate paid on the borrowings, to 0.53% for the current quarter.


64


The increase in interest expense on deposits was due primarily to a three basis point increase in the average rate paid on the deposit portfolio, to 0.74% for the current quarter, as well as to deposit growth. The average balance of the deposit portfolio increased by $127.1 million, which was largely in the certificates of deposit and checking portfolios.

Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
March 31,
 
December 31,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
$
3,558

 
$
3,814

 
$
(256
)
 
(6.7
)%
Income from BOLI
1,459

 
703

 
756

 
107.5

Insurance commissions
1,060

 
516

 
544

 
105.4

Loan fees
336

 
342

 
(6
)
 
(1.8
)
Other non-interest income
213

 
191

 
22

 
11.5

Total non-interest income
$
6,626

 
$
5,566

 
$
1,060

 
19.0


The decrease in retail fees and charges was due primarily to a decrease in service fees earned and debit card income, due in part to seasonality. The increase in income from BOLI was due primarily to the receipt of death benefits during the current quarter. The increase in insurance commissions was due largely to the receipt of annual contingent commissions from certain insurance providers during the current 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
 
 
 
 
 
March 31,
 
December 31,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
10,288

 
$
10,487

 
$
(199
)
 
(1.9
)%
Occupancy, net
2,616

 
2,672

 
(56
)
 
(2.1
)
Information technology and communications
2,609

 
2,558

 
51

 
2.0

Federal insurance premium
1,399

 
1,382

 
17

 
1.2

Deposit and loan transaction costs
1,396

 
1,274

 
122

 
9.6

Regulatory and outside services
1,144

 
1,486

 
(342
)
 
(23.0
)
Advertising and promotional
983

 
1,154

 
(171
)
 
(14.8
)
Low income housing partnerships
1,321

 
773

 
548

 
70.9

Office supplies and related expense
584

 
887

 
(303
)
 
(34.2
)
Other non-interest expense
1,086

 
917

 
169

 
18.4

Total non-interest expense
$
23,426

 
$
23,590

 
$
(164
)
 
(0.7
)

The decrease in regulatory and outside services was due primarily to a decrease in external audit fees. The decrease in advertising and promotional expense was due primarily to the timing of media campaigns and sponsorships. The decrease in office supplies and related expense was due primarily to the purchase of cards enabled with chip card technology during the prior quarter. The increase in low income housing partnerships expense was due primarily to an increase in amortization expense.


65


The Company's efficiency ratio was 42.46% for the current quarter compared to 44.05% for the prior quarter. The change in the efficiency ratio was due primarily to an increase in non-interest income, as well as to an increase in net interest income. The efficiency ratio is a measure of a financial institution's total non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income. A lower value indicates that the financial institution is generating revenue with a lower level of expense.

Income Tax Expense
Income tax expense was $10.2 million for the current quarter compared to $9.2 million for the prior quarter. The increase between periods was due primarily to an increase in pre-tax income as well as to an increase in the effective income tax rate from 30.8% for the prior quarter to 32.2% for the current quarter. The increase in the effective income tax rate between quarters was due primarily to the prior quarter including favorable discrete items related to state income tax liabilities.



66


Average Balance Sheet
As previously mentioned, average yields are derived by dividing annualized income by the average balance of the related assets and average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The yields and rates include amortization of fees, costs, premiums and discounts which are considered adjustments to yields/rates. Yields on tax-exempt securities were not calculated on a fully taxable equivalent basis.
 
For the Three Months Ended
 
March 31, 2016
 
December 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)
$
6,717,174

 
$
60,732

 
3.62
%
 
$
6,651,531

 
$
60,223

 
3.62
%
MBS(2)
1,374,917

 
7,702

 
2.24

 
1,412,702

 
7,831

 
2.22

Investment securities(2)(3)
488,493

 
1,485

 
1.22

 
503,075

 
1,533

 
1.22

FHLB stock
202,006

 
3,006

 
5.98

 
209,382

 
3,152

 
5.97

Cash and cash equivalents
2,142,320

 
2,707

 
0.50

 
2,200,345

 
1,620

 
0.29

Total interest-earning assets(1)(2)
10,924,910

 
75,632

 
2.77

 
10,977,035

 
74,359

 
2.71

Other noninterest-earning assets
295,430

 
 
 
 
 
286,920

 
 
 
 
Total assets
$
11,220,340

 
 
 
 
 
$
11,263,955

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Checking
$
785,149

 
72

 
0.04

 
$
757,857

 
72

 
0.04

Savings
323,572

 
168

 
0.21

 
313,372

 
140

 
0.18

Money market
1,170,684

 
683

 
0.23

 
1,159,201

 
685

 
0.23

Retail certificates
2,357,389

 
7,805

 
1.33

 
2,311,424

 
7,536

 
1.29

Wholesale certificates
392,286

 
485

 
0.50

 
360,156

 
366

 
0.40

Total deposits
5,029,080

 
9,213

 
0.74

 
4,902,010

 
8,799

 
0.71

FHLB advances(4)
2,471,404

 
13,729

 
2.23

 
2,538,230

 
14,325

 
2.24

FHLB line of credit
2,007,692

 
2,665

 
0.53

 
2,077,174

 
1,749

 
0.33

FHLB borrowings
4,479,096

 
16,394

 
1.47

 
4,615,404

 
16,074

 
1.38

Repurchase agreements
200,000

 
1,487

 
2.94

 
200,000

 
1,504

 
2.94

Total borrowings
4,679,096

 
17,881

 
1.53

 
4,815,404

 
17,578

 
1.44

Total interest-bearing liabilities
9,708,176

 
27,094

 
1.12

 
9,717,414

 
26,377

 
1.08

Other noninterest-bearing liabilities
110,635

 
 
 
 
 
132,368

 
 
 
 
Stockholders' equity
1,401,529

 
 
 
 
 
1,414,173

 
 
 
 
Total liabilities and stockholders' equity
$
11,220,340

 
 
 
 
 
$
11,263,955

 
 
 
 
 
 
 
 
 
 
 
 
 
(Continued)
 



67


 
For the Three Months Ended
 
March 31, 2016
 
December 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)
 
 
$
48,538

 
 
 
 
 
$
47,982

 
 
Net interest rate spread(6)(11)
 
 
 
 
1.65
%
 
 
 
 
 
1.63
%
Net interest-earning assets
$
1,216,734

 
 
 
 
 
$
1,259,621

 
 
 
 
Net interest margin(7)(11)
 
 
 
 
1.78

 
 
 
 
 
1.75

Ratio of interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
to interest-bearing liabilities
 
 
 
 
1.13x

 
 
 
 
 
1.13x

 
 
 
 
 
 
 
 
 
 
 
 
Selected performance ratios:
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized)(11)
 
 
 
0.77
%
 
 
 
 
 
0.74
%
Return on average equity (annualized)(11)
 
 
 
6.14

 
 
 
 
 
5.86

Average equity to average assets
 
 
 
 
12.49

 
 
 
 
 
12.55

Operating expense ratio(8)
 
 
 
 
0.84

 
 
 
 
 
0.84

Efficiency ratio(9)
 
 
 
 
42.46

 
 
 
 
 
44.05

Pre-tax yield on daily leverage strategy(10)
 
 
 
0.16

 
 
 
 
 
0.16

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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 $38.2 million for the quarters ended March 31, 2016 and December 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.
(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.
(11)
The table below presents a reconciliation of actual financial ratios to adjusted financial ratios excluding the effects of the daily leverage strategy. The adjusted financial ratios are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide these adjusted financial ratios because of the unique nature of the daily leverage strategy.
 
For the Three Months Ended
 
March 31, 2016
 
December 31, 2015
 
 
 
Daily Leverage
 
 
 
 
 
Daily Leverage
 
 
 
Actual
 
Strategy
 
Adjusted
 
Actual
 
Strategy
 
Adjusted
Return on average assets (annualized)
0.77
%
 
(0.14
)%
 
0.91
%
 
0.74
%
 
(0.14
)%
 
0.88
%
Return on average equity (annualized)
6.14

 
0.16

 
5.98

 
5.86

 
0.16

 
5.70

Net interest margin
1.78

 
(0.35
)
 
2.13

 
1.75

 
(0.36
)
 
2.11

Average net interest rate spread
1.65

 
(0.30
)
 
1.95

 
1.63

 
(0.30
)
 
1.93



68


Rate/Volume Analysis
The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended March 31, 2016 to the three months ended December 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
 
March 31, 2016 vs. December 31, 2015
 
Increase (Decrease) Due to
 
Volume
 
Rate
 
Total
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable
$
567

 
$
(59
)
 
$
508

MBS
(211
)
 
82

 
(129
)
Investment securities
(45
)
 
(2
)
 
(47
)
FHLB stock
(143
)
 
(3
)
 
(146
)
Cash and cash equivalents
(44
)
 
1,131

 
1,087

Total interest-earning assets
124

 
1,149

 
1,273

 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Checking
2

 
(1
)
 
1

Savings
4

 
24

 
28

Money market

 
(1
)
 
(1
)
Certificates of deposit
190

 
196

 
386

FHLB borrowings
(551
)
 
871

 
320

Repurchase agreements
(8
)
 
(9
)
 
(17
)
Total interest-bearing liabilities
(363
)
 
1,080

 
717

 
 
 
 
 
 
Net change in net interest and dividend income
$
487

 
$
69

 
$
556



69


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 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 FHLB's lending guidelines, total FHLB borrowings cannot exceed 40% of regulatory total assets without the pre-approval of FHLB senior management. In July 2015, the president of FHLB approved an increase for one year in the Bank's borrowing limit to 55% of Bank Call Report total assets. 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 Bank's internal policy limits total borrowings to 55% of total assets. At March 31, 2016, the Bank had term borrowings, at par, of $2.68 billion or approximately 29% of total assets.

The amount of FHLB advances outstanding at March 31, 2016 was $2.48 billion, of which $300.0 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 FHLB along with certain securities. The Bank pledged securities with an estimated fair value of $191.6 million as collateral for FHLB borrowings at March 31, 2016. At March 31, 2016, the Bank's ratio of the par value of FHLB borrowings to Call Report total assets was 27%. When the full daily leverage strategy is in place, FHLB borrowings are in excess of 40% of the Bank's Call Report total assets, and are expected to be in excess of 40% as long as the Bank continues its daily leverage strategy and FHLB senior management continues to approve the Bank's borrowing limit being in excess of 40% of Call Report total 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. Additionally, the Bank could utilize the repayment and maturity of outstanding loans, MBS, and other investments for liquidity needs rather than reinvesting such funds into the related portfolios. At March 31, 2016, the Bank had $992.7 million of securities that were eligible but unused as collateral for borrowing or other liquidity needs. 

At March 31, 2016, the Bank had repurchase agreements of $200.0 million, or approximately 2% of total assets, none of which 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% discussed above. The Bank has pledged securities with an estimated fair value of $226.0 million as collateral for repurchase agreements as of March 31, 2016. The securities pledged for the repurchase agreements will be delivered back to the Bank when the repurchase agreements mature.


70


The Bank has access to and utilizes other sources of funds for liquidity purposes, such as brokered and public unit deposits. As of March 31, 2016, the Bank's policy allowed for combined brokered and public unit deposits up to 15% of total deposits. At March 31, 2016, the Bank had public unit deposits totaling $386.3 million, or approximately 8% of total deposits, and no brokered deposits. 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 $426.1 million as collateral for public unit deposits at March 31, 2016. The securities pledged as collateral for public unit deposits are held under joint custody by FHLB and generally will be released upon deposit maturity.

At March 31, 2016, $1.13 billion of the Bank's $2.81 billion of certificates of deposit was scheduled to mature within one year. Included in the $1.13 billion was $307.5 million of public unit deposits. Based on our deposit retention experience and our current pricing strategy, we anticipate the 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 the majority of the $307.5 million of 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 March 31, 2016, cash and cash equivalents totaled $203.8 million, compared to $105.6 million at September 30, 2015, excluding cash related to the daily leverage strategy. The increase in operating cash between periods was due primarily to the Bank maintaining cash for seasonal operational needs, as well as the redemption of FHLB stock in conjunction with the removal of the daily leverage strategy at March 31, 2016. A majority of the cash received from the redemption of the FHLB stock was used to acquire FHLB stock when the full daily leverage strategy was reinstated on April 1, 2016.

As of March 31, 2016, the Bank had $2.3 million of agreements outstanding in connection with the remodeling of the Bank's Kansas City market area operations center.  The project scope includes replacement of all mechanical and electrical systems, interior finishes, and exterior building components.  The completed project will result in a more energy efficient building which is expected to lower our utility and maintenance expenses.  There may be additional agreements and expenses related to the project through late fiscal year 2016, 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. 

71


The following table presents the contractual maturities of our loan, MBS, and investment securities portfolios at March 31, 2016, along with associated weighted average yields. Loans and securities which have adjustable interest rates are shown as maturing in the period during which the contract is due. The table does not reflect the effects of possible prepayments or enforcement of due on sale clauses. As of March 31, 2016, the amortized cost of investment securities in our portfolio which are callable or have pre-refunding dates within one year was $301.7 million.
 
Loans(1)
 
MBS
 
Investment Securities
 
Total
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
(Dollars in thousands)
Amounts due:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Within one year
$
93,613

 
3.69
%
 
$
27

 
4.49
%
 
$
30,712

 
1.53
%
 
$
124,352

 
3.16
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
After one year:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over one to two years
166,948

 
3.88

 
1,044

 
4.53

 
157,290

 
1.06

 
325,282

 
2.52

Over two to three years
20,405

 
4.66

 
16,343

 
4.21

 
203,030

 
1.16

 
239,778

 
1.67

Over three to five years
43,755

 
4.51

 
80,553

 
3.28

 
111,528

 
1.29

 
235,836

 
2.57

Over five to ten years
469,820

 
3.94

 
483,578

 
2.21

 
7,141

 
1.69

 
960,539

 
3.05

Over ten to fifteen years
1,419,746

 
3.28

 
383,993

 
1.88

 

 

 
1,803,739

 
2.98

After fifteen years
4,732,094

 
3.67

 
471,236

 
2.35

 
1,790

 
1.89

 
5,205,120

 
3.55

Total due after one year
6,852,768

 
3.62

 
1,436,747

 
2.25

 
480,779

 
1.17

 
8,770,294

 
3.26

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
6,946,381

 
3.63

 
$
1,436,774

 
2.25

 
$
511,491

 
1.19

 
$
8,894,646

 
3.26


(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.

72


Limitations on Dividends and Other Capital Distributions

Office of the Comptroller of the Currency ("OCC") regulations impose restrictions on savings institutions 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. Under FRB and OCC safe harbor regulations, savings institutions generally may make capital distributions during any calendar year equal to earnings of the previous two calendar years and current year-to-date earnings. Beginning March 31, 2016, savings institutions must also maintain an applicable capital conservation buffer above minimum risk-based capital requirements in order to distribute dividends. 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, sufficiently capitalized following a proposed capital distribution must obtain regulatory non-objection prior to making such a distribution.
 
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.  So long as the Bank remains "well-capitalized" after each capital distribution, operates in a safe and sound manner, and maintains an applicable capital conservation buffer above its minimum risk-based capital requirements, it is management's belief that the OCC and FRB will continue to allow the Bank to distribute its earnings to the Company, although no assurance can be given in this regard.

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, 2015. 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, 2015. We anticipate that we will continue to have sufficient funds, through repayments and maturities of loans and securities, deposits and borrowings, to meet our current commitments.

The maximum balance of short-term FHLB borrowings outstanding at any month-end during the six months ended March 31, 2016 was $2.60 billion, and the average balance of short-term FHLB borrowings outstanding during this period was $2.39 billion at a weighted average contractual rate of 0.58%. 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 March 31, 2016 of $300.0 million at a weighted average contractual rate of 1.55%.

Contingencies

In the normal course of business, the Company and its subsidiary are named defendants in various lawsuits and counter claims. In the opinion of management, after consultation with legal counsel, none of the currently pending suits are expected to have a materially adverse effect on the Company's consolidated financial statements for the quarter ended March 31, 2016, or future periods.

Capital

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a "well-capitalized" status for the Bank and Company in accordance with regulatory standards. As of March 31, 2016, the Company and Bank exceeded all regulatory capital requirements. The following table presents the regulatory capital ratios of the Bank and the Company at March 31, 2016.
 
 
 
 
 
 
 
Regulatory
 
 
 
 
 
Minimum
 
Requirement For
 
Bank
 
Company
 
Regulatory
 
"Well-Capitalized"
 
Ratios
 
Ratios
 
Requirement
 
Status of Bank
Tier 1 leverage ratio
11.3
%
 
12.4
%
 
4.0
%
 
5.0
%
Common equity tier 1 capital ratio
29.8

 
32.8

 
4.5

 
6.5

Tier 1 capital ratio
29.8

 
32.8

 
6.0

 
8.0

Total capital ratio
30.0

 
33.0

 
8.0

 
10.0



73


The following table presents a reconciliation of equity under GAAP to regulatory capital amounts, as of March 31, 2016, for the Bank and the Company (dollars in thousands):
 
Bank
 
Company
Total equity as reported under GAAP
$
1,277,427

 
$
1,403,408

Unrealized gains on AFS securities
(7,014
)
 
(7,014
)
Total tier 1 capital
1,270,413

 
1,396,394

ACL
9,193

 
9,193

Total capital
$
1,279,606

 
$
1,405,587


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, 2015. The analysis presented in the tables below reflects 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 manage, to the extent practicable, the exposure of net interest income to changes in market interest rates. The Board of Directors and Asset and Liability Management Committee ("ALCO") regularly review 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 management strategies considered. The MVPE and net interest income analysis are also conducted to estimate our sensitivity to rates for future time horizons based upon market conditions as of the date of the analysis. In addition to the interest rate environments presented below, management also reviews the impact of non-parallel rate shock scenarios on a quarterly 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.


74


For each date presented in the following table, the estimated change in the Bank's net interest income is based on the indicated instantaneous, parallel and permanent change in interest rates presented. The 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
 
Net Interest Income At
(in Basis Points)
 
March 31, 2016
 
September 30, 2015
in Interest Rates(1)
 
Amount ($)
 
Change ($)
 
Change (%)
 
Amount ($)
 
Change ($)
 
Change (%)
 -100 bp
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

  000 bp
 
$
190,499

 
$

 
 %
 
$
190,776

 
$

 
 %
+100 bp
 
190,721

 
222

 
0.12

 
189,248

 
(1,528
)
 
(0.80
)
+200 bp
 
188,771

 
(1,728
)
 
(0.91
)
 
186,443

 
(4,333
)
 
(2.27
)
+300 bp
 
184,485

 
(6,014
)
 
(3.16
)
 
181,652

 
(9,124
)
 
(4.78
)

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

As interest rates rise, cash flows from the Bank's mortgage related assets and callable investment securities decrease to such a level that the Bank's liabilities are projected to reprice to higher interest rates at a faster pace over the 12-month horizon than the Bank's assets, which decreases the net interest income projection. Lower interest rates at March 31, 2016, as compared to September 30, 2015, increased the amount of assets expected to reprice over the 12-month horizon, which reduced the Bank's exposure to higher interest rates at March 31, 2016 compared to September 30, 2015. See the gap table below for additional information.

The following table sets forth the estimated change in the MVPE for each date presented based on the indicated instantaneous, parallel, and permanent change in interest rates. The 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. 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 table below presents the effects of the changes in interest rates on our assets and liabilities as they mature, repay, or reprice, as shown by the change in the MVPE for alternative interest rates.
Change
 
Market Value of Portfolio Equity At
(in Basis Points)
 
March 31, 2016
 
September 30, 2015
in Interest Rates(1)
 
Amount ($)
 
Change ($)
 
Change (%)
 
Amount ($)
 
Change ($)
 
Change (%)
 -100 bp
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

  000 bp
 
$
1,462,752

 
$

 
 %
 
$
1,457,514

 
$

 
 %
+100 bp
 
1,364,170

 
(98,582
)
 
(6.74
)
 
1,343,864

 
(113,650
)
 
(7.80
)
+200 bp
 
1,213,248

 
(249,504
)
 
(17.06
)
 
1,189,194

 
(268,320
)
 
(18.41
)
+300 bp
 
1,042,343

 
(420,409
)
 
(28.74
)
 
1,021,380

 
(436,134
)
 
(29.92
)

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

As interest rates rise, the market value of the Bank's assets decreases at a faster pace than the market value of the Bank's liabilities, which results in a decrease to the Bank's MVPE. As interest rates decrease, the opposite is true. Lower interest rates at March 31, 2016, as compared to September 30, 2015, decreased the Bank's risk to higher interest rates.

75


The following gap table summarizes the anticipated maturities or repricing periods of the Bank's interest-earning assets and interest-bearing liabilities 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 adjustable-rate mortgage ("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.
 
 
 
More Than
 
More Than
 
 
 
 
 
Within
 
One Year to
 
Three Years
 
Over
 
 
 
One Year
 
Three Years
 
to Five Years
 
Five Years
 
Total
Interest-earning assets
(Dollars in thousands)
Loans receivable(1)
$
2,037,244

 
$
1,967,534

 
$
1,062,921

 
$
1,861,671

 
$
6,929,370

Securities(2)
939,289

 
577,971

 
228,484

 
191,244

 
1,936,988

Other interest-earning assets
194,325

 

 

 

 
194,325

Total interest-earning assets
3,170,858

 
2,545,505

 
1,291,405

 
2,052,915

 
9,060,683

 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
Transaction deposits(3)
685,008

 
422,631

 
284,161

 
1,000,174

 
2,391,974

Certificates of deposit
1,135,533

 
1,059,112

 
612,418

 
849

 
2,807,912

Borrowings(4)
300,000

 
1,075,000

 
1,000,000

 
344,984

 
2,719,984

Total interest-bearing liabilities
2,120,541

 
2,556,743

 
1,896,579

 
1,346,007

 
7,919,870

 
 
 
 
 
 
 
 
 
 
Excess (deficiency) of interest-earning assets over
 
 
 
 
 
 
 
 
interest-bearing liabilities
$
1,050,317

 
$
(11,238
)
 
$
(605,174
)
 
$
706,908

 
$
1,140,813

 
 
 
 
 
 
 
 
 
 
Cumulative excess of interest-earning assets over
 
 
 
 
 
 
 
 
interest-bearing liabilities
$
1,050,317

 
$
1,039,079

 
$
433,905

 
$
1,140,813

 
 
 
 
 
 
 
 
 
 
 
 
Cumulative excess of interest-earning assets over interest-bearing
 
 
 
 
 
 
liabilities as a percent of total Bank assets at:
 
 
 
 
 
 
 
 
March 31, 2016
11.27
%
 
11.15
%
 
4.66
%
 
12.25
%
 
 
September 30, 2015
7.48

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative one-year gap - interest rates +200 bps at:
 
 
 
 
 
 
 
 
March 31, 2016
2.42

 
 
 
 
 
 
 
 
September 30, 2015
0.26

 
 
 
 
 
 
 
 
(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)
MBS reflect projected prepayments at amortized cost. Investment securities are presented based on contractual maturities, term to call dates or pre-refunding dates as of March 31, 2016, at amortized cost.
(3)
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 $656.6 million, for a cumulative one-year gap of -7.0% of total assets.
(4)
Borrowings exclude deferred prepayment penalty costs.
 
The change in the one-year gap of 11.27% at March 31, 2016 compared to the one-year gap of 7.48% at September 30, 2015 was largely a result of lower interest rates at March 31, 2016 than at September 30, 2015.

76


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. The maturity and repricing terms presented for one- to four-family loans represent the contractual terms of the loan.
 
March 31, 2016
 
Amount
 
Yield/Rate
 
WAL
 
% of Category
 
% of Total
 
(Dollars in thousands)
Investment securities
$
511,491

 
1.19
%
 
1.5

 
26.2
%
 
5.6
%
MBS - fixed
971,651

 
2.23

 
3.3

 
49.9

 
10.5

MBS - adjustable
465,123

 
2.31

 
5.9

 
23.9

 
5.0

Total investment securities and MBS
1,948,265

 
1.97

 
3.4

 
100.0
%
 
21.1

Loans receivable:
 
 
 
 
 
 
 
 
 
Fixed-rate one- to four-family:
 
 
 
 
 
 
 
 
 
<= 15 years
1,251,410

 
3.20

 
3.7

 
18.0
%
 
13.6

> 15 years
4,026,012

 
3.98

 
5.1

 
57.9

 
43.7

All other fixed-rate loans
303,988

 
4.09

 
2.8

 
4.4

 
3.3

Total fixed-rate loans
5,581,410

 
3.81

 
4.7

 
80.3

 
60.6

Adjustable-rate one- to four-family:
 
 
 
 
 
 
 
 
 
<= 36 months
309,822

 
1.84

 
3.5

 
4.5

 
3.4

> 36 months
889,191

 
2.93

 
2.6

 
12.8

 
9.7

All other adjustable-rate loans
165,958

 
4.42

 
1.4

 
2.4

 
1.8

Total adjustable-rate loans
1,364,971

 
2.86

 
2.7

 
19.7

 
14.9

Total loans receivable
6,946,381

 
3.63

 
4.3

 
100.0
%
 
75.5

FHLB stock
114,381

 
5.98

 
2.9

 
 
 
1.2

Cash and cash equivalents
203,811

 
0.49

 

 
 
 
2.2

Total interest-earning assets
$
9,212,838

 
3.24

 
4.0

 
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
Transaction deposits
$
2,311,917

 
0.16

 
6.5

 
45.2
%
 
29.7
%
Certificates of deposit
2,807,912

 
1.27

 
1.7

 
54.8

 
36.0

Total deposits
5,119,829

 
0.77

 
3.9

 
100.0
%
 
65.7

Term borrowings
2,675,000

 
2.29

 
3.0

 
 
 
34.3

Total interest-bearing liabilities
$
7,794,829

 
1.29

 
3.6

 
 
 
100.0
%

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, the "Act") as of March 31, 2016. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of March 31, 2016, 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 March 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


77


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, 2015.

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 three months ended March 31, 2016 and additional information regarding our share repurchase program. In October 2015, the Company announced a stock repurchase plan for up to $70.0 million of common stock. It is anticipated that shares will be purchased from time to time in the open-market based upon market conditions and available liquidity. There is no expiration for this repurchase plan.
 
 
 
 
 
 
 
Approximate
 
Total
 
 
 
Total Number of
 
Dollar Value of
 
Number of
 
Average
 
Shares Purchased as
 
Shares that May
 
Shares
 
Price Paid
 
Part of Publicly
 
Yet Be Purchased
 
Purchased
 
per Share
 
Announced Plans
 
Under the Plan
January 1, 2016 through
 
 
 
 
 
 
 
January 31, 2016

 
$

 

 
$
70,000,000

February 1, 2016 through
 
 
 
 
 
 
 
February 29, 2016

 

 

 
70,000,000

March 1, 2016 through
 
 
 
 
 
 
 
March 31, 2016

 

 

 
70,000,000

Total

 

 

 
70,000,000


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.

78


SIGNATURES

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

CAPITOL FEDERAL FINANCIAL, INC.
 
 
 
 
 
 
 
 
 
 
 
 
 
Date: May 10, 2016
By:
/s/ John B. Dicus
 
 
 
John B. Dicus, Chairman, President and Chief Executive Officer
 
 
 
 
 
Date: May 10, 2016
By:
/s/ Kent G. Townsend
 
 
 
Kent G. Townsend, Executive Vice President,
 
 
 
Chief Financial Officer and Treasurer
 


79


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 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
10.4
 
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
10.5
 
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
10.6
 
Description of Named Executive Officer Salary and Bonus Arrangements filed on November 25, 2015 as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K and incorporated herein by reference
10.7
 
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
10.8
 
Short-term Performance Plan filed on August 4, 2015 as Exhibit 10.10 to the Registrant's June 30, 2015 Form 10-Q and incorporated herein by reference
10.9
 
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
10.10
 
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
10.11
 
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
10.12
 
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
10.13
 
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
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

80


101
 
The following information from the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016, filed with the Securities and Exchange Commission on May 10, 2016, has been formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets at March 31, 2016 and September 30, 2015, (ii) Consolidated Statements of Income for the three and six months ended March 31, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2016 and 2015, (iv) Consolidated Statement of Stockholders' Equity for the six months ended March 31, 2016, (v) Consolidated Statements of Cash Flows for the six months ended March 31, 2016 and 2015, and (vi) Notes to the Unaudited Consolidated Financial Statements

81