Document


UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
Form 10-Q
_________________
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-34814
Capitol Federal Financial, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Maryland    
27-2631712
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
700 South Kansas Avenue, Topeka, Kansas
66603
(Address of principal executive offices)
(Zip Code)
 
 
 
(785) 235-1341
Registrant's telephone number, including area code

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

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

As of August 2, 2016, there were 137,344,222 shares of Capitol Federal Financial, Inc. common stock outstanding.





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




PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 
(Unaudited)
 
 
 
June 30,
 
September 30,
 
2016
 
2015
ASSETS:
 
 
 
Cash and cash equivalents (includes interest-earning deposits of $145,477 and $764,816)
$
152,831

 
$
772,632

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

 
758,171

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

 
1,271,122

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

 
6,625,027

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

 
150,543

Premises and equipment, net
81,928

 
75,810

Income taxes receivable, net
123

 
1,071

Other assets
198,119

 
189,785

TOTAL ASSETS
$
9,241,775

 
$
9,844,161

 
 
 
 
LIABILITIES:
 
 
 
Deposits
$
5,085,129

 
$
4,832,520

FHLB borrowings
2,472,026

 
3,270,521

Repurchase agreements
200,000

 
200,000

Advance payments by borrowers for taxes and insurance
37,902

 
61,818

Deferred income tax liabilities, net
25,925

 
26,391

Accounts payable and accrued expenses
39,978

 
36,685

Total liabilities
7,860,960

 
8,427,935

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

 

Common stock, $.01 par value; 1,400,000,000 shares authorized, 137,235,922 and 137,106,822
 
 
 
shares issued and outstanding as of June 30, 2016 and September 30, 2015, respectively
1,372

 
1,371

Additional paid-in capital
1,153,589

 
1,151,041

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

 
296,739

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

 
8,374

Total stockholders' equity
1,380,815

 
1,416,226

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

 
$
9,844,161

 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 


3


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)
 
 
 
 
 
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
60,840

 
$
58,922

 
$
181,795

 
$
175,739

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

 
8,849

 
22,934

 
28,387

FHLB stock
3,050

 
3,132

 
9,208

 
9,389

Cash and cash equivalents
2,730

 
1,357

 
7,057

 
4,174

Investment securities
1,506

 
1,914

 
4,524

 
5,262

Total interest and dividend income
75,527

 
74,174

 
225,518

 
222,951

INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB borrowings
16,361

 
17,072

 
48,829

 
51,258

Deposits
9,749

 
8,377

 
27,761

 
24,729

Repurchase agreements
1,487

 
1,712

 
4,478

 
5,136

Total interest expense
27,597

 
27,161

 
81,068

 
81,123

NET INTEREST INCOME
47,930

 
47,013

 
144,450

 
141,828

PROVISION FOR CREDIT LOSSES

 
323

 

 
771

NET INTEREST INCOME AFTER
 
 
 
 
 
 
 
PROVISION FOR CREDIT LOSSES
47,930

 
46,690

 
144,450

 
141,057

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

 
3,798

 
11,097

 
11,052

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

 
251

 
2,810

 
819

Insurance commissions
517

 
537

 
2,093

 
2,059

Loan fees
326

 
340

 
1,004

 
1,071

Other non-interest income
213

 
219

 
617

 
678

Total non-interest income
5,429

 
5,145

 
17,621

 
15,679

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

 
11,038

 
31,604

 
31,927

Occupancy, net
2,606

 
2,557

 
7,894

 
7,437

Information technology and communications
2,716

 
2,573

 
7,883

 
7,726

Federal insurance premium
1,377

 
1,342

 
4,158

 
4,092

Deposit and loan transaction costs
1,449

 
1,435

 
4,119

 
4,065

Regulatory and outside services
1,370

 
1,365

 
4,000

 
3,867

Advertising and promotional
1,053

 
1,069

 
3,190

 
2,707

Low income housing partnerships
721

 
492

 
2,815

 
3,404

Office supplies and related expense
545

 
499

 
2,016

 
1,560

Other non-interest expense
661

 
736

 
2,664

 
2,322

Total non-interest expense
23,327

 
23,106

 
70,343

 
69,107

INCOME BEFORE INCOME TAX EXPENSE
30,032

 
28,729

 
91,728

 
87,629

INCOME TAX EXPENSE
9,481

 
9,127

 
28,932

 
28,321

NET INCOME
$
20,551

 
$
19,602

 
$
62,796

 
$
59,308

 
 
 
 
 
 
 
 
Basic earnings per share ("EPS")
$
0.15

 
$
0.14

 
$
0.47

 
$
0.43

Diluted EPS
$
0.15

 
$
0.14

 
$
0.47

 
$
0.43

Dividends declared per share
$
0.34

 
$
0.34

 
$
0.76

 
$
0.76


 
 
 
 

 

Basic weighted average common shares
133,101,960

 
135,745,753

 
132,960,917

 
136,013,448

Diluted weighted average common shares
133,250,711

 
135,763,353

 
133,065,828

 
136,040,702

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 

4


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
 
 
 
 
 
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
20,551

 
$
19,602

 
$
62,796

 
$
59,308

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

Comprehensive income
$
20,357

 
$
18,089

 
$
61,242

 
$
60,549

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 


5


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

 
$
1,151,041

 
$
(41,299
)
 
$
296,739

 
$
8,374

 
$
1,416,226

Net income
 
 
 
 
 
 
62,796

 
 
 
62,796

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

 
1,239

 
 
 
 
 
1,590

Restricted stock activity, net
1

 
40

 
 
 
 
 
 
 
41

Stock-based compensation
 
 
960

 
 
 
 
 
 
 
960

Stock options exercised
 
 
1,197

 
 
 
 
 
 
 
1,197

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

 
$
1,153,589

 
$
(40,060
)
 
$
259,094

 
$
6,820

 
$
1,380,815

 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 
 


6


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
 
For the Nine Months Ended
 
June 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
62,796

 
$
59,308

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

 
771

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

 
4,217

Depreciation and amortization of premises and equipment
5,288

 
5,054

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

 
3,270

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

 
1,539

Stock-based compensation
960

 
1,566

Changes in:
 
 
 
Other assets, net
488

 
2,869

Income taxes payable/receivable
1,467

 
1,845

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

 
62,203

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

 
145,663

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

 
242,958

Proceeds from the redemption of FHLB stock
283,500

 
202,929

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

 
4,212

Proceeds from BOLI death benefit
783

 

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


7


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

 
157,916

Proceeds from borrowings
5,900,100

 
5,400,000

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

 
(29,842
)
Other, net
1,198

 
218

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

 
810,840

End of period
$
152,831

 
$
46,668

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

 
$
26,476

Interest payments
$
78,957

 
$
77,861

 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
(Concluded)


8


Notes to Consolidated Financial Statements (Unaudited)

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

Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers. The ASU, as amended, clarifies principles for recognizing revenue and provides a common revenue standard for GAAP and International Financial Reporting Standards. Additionally, the ASU provides implementation guidance on several topics and requires entities to disclose both quantitative and qualitative information regarding contracts with customers. ASU 2014-09 is effective for fiscal years beginning after December 15, 2017, including interim reporting periods within that reporting period, which is October 1, 2018 for the Company. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016. The Company has not yet completed its evaluation of ASU 2014-09.

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

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

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


9


In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU replaces the incurred loss impairment methodology in current GAAP, which requires credit losses to be recognized when it is probable that a loss has incurred, with a new impairment methodology. The new impairment methodology requires an entity to measure, at each reporting date, the expected credit losses of financial assets not measured at fair value, such as loans, HTM debt securities, and loan commitments, over their contractual lives. Under the new impairment methodology, expected credit losses will be measured at each reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU amends the current credit loss measurements for AFS debt securities. Credit losses related to AFS debt securities will be recorded through the ACL rather than as a direct write-down as per current GAAP. The ASU also requires enhanced disclosures related to credit quality and significant estimates and judgments used by management when estimating credit losses. The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, which is October 1, 2020 for the Company. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company has not yet completed its evaluation of ASU 2016-13.


2. EARNINGS PER SHARE
Shares acquired by the ESOP are not considered in the basic average shares outstanding until the shares are committed for allocation or vested to an employee's individual account. Unvested shares awarded pursuant to the Company's restricted stock benefit plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security.
 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands, except per share amounts)
Net income
$
20,551

 
$
19,602

 
$
62,796

 
$
59,308

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

 
$
19,578

 
$
62,742

 
$
59,215

 
 
 
 
 
 
 
 
Average common shares outstanding
133,018,908

 
135,662,701

 
132,919,316

 
135,971,846

Average committed ESOP shares outstanding
83,052

 
83,052

 
41,601

 
41,602

Total basic average common shares outstanding
133,101,960

 
135,745,753

 
132,960,917

 
136,013,448

 
 
 
 
 
 
 
 
Effect of dilutive stock options
148,751

 
17,600

 
104,911

 
27,254

 
 
 
 
 
 
 
 
Total diluted average common shares outstanding
133,250,711

 
135,763,353

 
133,065,828

 
136,040,702

 
 
 
 
 
 
 
 
Net EPS:
 
 
 
 
 
 
 
Basic
$
0.15

 
$
0.14

 
$
0.47

 
$
0.43

Diluted
$
0.15

 
$
0.14

 
$
0.47

 
$
0.43

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

 
1,240,309

 
906,634

 
1,253,057



10


3. SECURITIES
The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of AFS and HTM securities at the dates presented. The majority of the MBS and investment securities portfolios are composed of securities issued by United States Government-Sponsored Enterprises ("GSEs").
 
June 30, 2016
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
GSE debentures
$
471,143

 
$
1,570

 
$

 
$
472,713

MBS
181,903

 
9,807

 
4

 
191,706

Trust preferred securities
2,163

 

 
410

 
1,753

Municipal bonds
140

 
1

 

 
141

 
655,349

 
11,378

 
414

 
666,313

HTM:
 
 
 
 
 
 
 
MBS
1,152,775

 
25,888

 
815

 
1,177,848

Municipal bonds
36,138

 
516

 
4

 
36,650

 
1,188,913

 
26,404

 
819

 
1,214,498

 
$
1,844,262

 
$
37,782

 
$
1,233

 
$
1,880,811


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

 
$
1,304

 
$
60

 
$
526,620

MBS
217,006

 
12,489

 
4

 
229,491

Trust preferred securities
2,186

 

 
270

 
1,916

Municipal bonds
140

 
4

 

 
144

 
744,708

 
13,797

 
334

 
758,171

HTM:
 
 
 
 
 
 
 
MBS
1,233,048

 
27,325

 
3,590

 
1,256,783

Municipal bonds
38,074

 
437

 
20

 
38,491

 
1,271,122

 
27,762

 
3,610

 
1,295,274

 
$
2,015,830

 
$
41,559

 
$
3,944

 
$
2,053,445




11


The following tables summarize the estimated fair value and gross unrealized losses of those securities on which an unrealized loss at the dates presented was reported and the continuous unrealized loss position for less than 12 months and equal to or greater than 12 months as of the dates presented.
 
June 30, 2016
 
Less Than 12 Months
 
Equal to or Greater Than 12 Months
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
MBS

 

 
667

 
4

Trust preferred securities

 

 
1,753

 
410

 
$

 
$

 
$
2,420

 
$
414

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HTM:
 
 
 
 
 
 
 
MBS
$
43,035

 
$
46

 
$
89,245

 
$
769

Municipal bonds
1,462

 
3

 
392

 
1

 
$
44,497

 
$
49

 
$
89,637

 
$
770


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

 
$
15

 
$
49,955

 
$
45

MBS

 

 
687

 
4

Trust preferred securities

 

 
1,916

 
270

 
$
39,135

 
$
15

 
$
52,558

 
$
319

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HTM:
 
 
 
 
 
 
 
MBS
$
38,604

 
$
134

 
$
302,158

 
$
3,456

Municipal bonds
3,292

 
12

 
1,128

 
8

 
$
41,896

 
$
146

 
$
303,286

 
$
3,464


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

12


The amortized cost and estimated fair value of debt securities as of June 30, 2016, by contractual maturity, are shown below.  Actual principal repayments may differ from contractual maturities due to prepayment or early call privileges by the issuer. In the case of MBS, borrowers on the underlying loans generally have the right to prepay their loans without prepayment penalty. For this reason, MBS are not included in the maturity categories.
 
AFS
 
HTM
 
Amortized
 
Estimated
 
Amortized
 
Estimated
 
Cost
 
Fair Value
 
Cost
 
Fair Value
 
(Dollars in thousands)
One year or less
$
25,032

 
$
25,075

 
$
6,570

 
$
6,608

One year through five years
446,251

 
447,779

 
23,244

 
23,561

Five years through ten years

 

 
6,324

 
6,481

Ten years and thereafter
2,163

 
1,753

 

 

 
473,446

 
474,607

 
36,138

 
36,650

MBS
181,903

 
191,706

 
1,152,775

 
1,177,848

 
$
655,349

 
$
666,313

 
$
1,188,913

 
$
1,214,498



The following table presents the taxable and non-taxable components of interest income on investment securities for the periods presented.
 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Taxable
$
1,342

 
$
1,730

 
$
4,010

 
$
4,696

Non-taxable
164

 
184

 
514

 
566

 
$
1,506

 
$
1,914

 
$
4,524

 
$
5,262



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

 
$
343,385

Repurchase agreements
207,261

 
218,832

Federal Reserve Bank
16,999

 
20,600

FHLB borrowings

 
216,607

 
$
615,352

 
$
799,424


13


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

 
$
5,856,730

Purchased
439,954

 
485,682

Construction
78,358

 
75,152

Total
6,612,055

 
6,417,564

Commercial:
 
 
 
Permanent
110,601

 
110,938

Construction
187,705

 
54,768

Total
298,306

 
165,706

Total real estate loans
6,910,361

 
6,583,270

 
 
 
 
Consumer loans:
 
 
 
Home equity
123,673

 
125,844

Other
4,568

 
4,179

Total consumer loans
128,241

 
130,023

 
 
 
 
Total loans receivable
7,038,602

 
6,713,293

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

 
45,696

Commercial
166,237

 
44,869

ACL
9,312

 
9,443

Discounts/unearned loan fees
24,352

 
24,213

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

 
$
6,625,027


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

One- to four-family loans - Full documentation to support an applicant's credit and income, and sufficient funds to cover all applicable fees and reserves at closing, are required on all loans. Loans are underwritten according to the "ability to repay" and "qualified mortgage" standards, as issued by the Consumer Financial Protection Bureau ("CFPB"). Properties securing one- to four-family loans are appraised by either staff appraisers or fee appraisers, both of which are independent of the loan origination function and approved by our Board of Directors.

The underwriting standards for loans purchased from correspondent and nationwide lenders are generally similar to the Bank's internal underwriting standards. The underwriting of loans purchased from correspondent lenders on a loan-by-loan basis is performed by the Bank's underwriters. For the tables within this Note, correspondent loans purchased on a loan-by-loan basis are included with originated loans and loans purchased in loan packages ("bulk loans") are reported as purchased loans.

The Bank also originates construction-to-permanent loans secured by one- to four-family residential real estate. Construction loans are obtained by homeowners who will occupy the property when construction is complete. Construction loans to builders for

14


speculative purposes are not permitted. All construction loans are manually underwritten using the Bank's internal underwriting standards. Construction draw requests and the supporting documentation are reviewed and approved by designated personnel. The Bank also performs regular documented inspections of the construction project to ensure the funds are being used for the intended purpose and the project is being completed according to the plans and specifications provided.

Commercial real estate loans - The Bank's commercial real estate loans are originated by the Bank or are in participation with a lead bank. These loans are underwritten based on the income producing potential of the property, the collateral value, and the financial strength of the borrower. Additionally, the Bank generally requires personal guarantees. At the time of origination, loan-to-value ("LTV") ratios on commercial real estate loans generally do not exceed 80% of the appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.25. Appraisals on properties securing these loans are performed by independent state certified fee appraisers.

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

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

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

The Bank's primary credit quality indicators for the one- to four-family and consumer - home equity loan portfolios are delinquency status, asset classifications, LTV ratios, and borrower credit scores. The Bank's primary credit quality indicators for the commercial real estate and consumer - other loan portfolios are delinquency status and asset classifications.


15


The following tables present the recorded investment, by class, in loans 30 to 89 days delinquent, loans 90 or more days delinquent or in foreclosure, total delinquent loans, current loans, and total recorded investment at the dates presented. The recorded investment in loans is defined as the unpaid principal balance of a loan (net of unadvanced funds related to loans in process), less charge-offs and inclusive of unearned loan fees and deferred costs. At June 30, 2016 and September 30, 2015, all loans 90 or more days delinquent were on nonaccrual status.
 
June 30, 2016
 
 
 
90 or More Days
 
Total
 
 
 
Total
 
30 to 89 Days
 
Delinquent or
 
Delinquent
 
Current
 
Recorded
 
Delinquent
 
in Foreclosure
 
Loans
 
Loans
 
Investment
 
(Dollars in thousands)
One- to four-family - originated
$
15,517

 
$
9,156

 
$
24,673

 
$
6,121,791

 
$
6,146,464

One- to four-family - purchased
4,740

 
8,077

 
12,817

 
429,515

 
442,332

Commercial real estate

 

 

 
131,398

 
131,398

Consumer - home equity
548

 
436

 
984

 
122,689

 
123,673

Consumer - other
55

 
17

 
72

 
4,496

 
4,568

 
$
20,860

 
$
17,686

 
$
38,546

 
$
6,809,889

 
$
6,848,435

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

 
$
7,093

 
$
26,378

 
$
5,869,289

 
$
5,895,667

One- to four-family - purchased
7,305

 
8,956

 
16,261

 
472,114

 
488,375

Commercial real estate

 

 

 
120,405

 
120,405

Consumer - home equity
703

 
497

 
1,200

 
124,644

 
125,844

Consumer - other
17

 
12

 
29

 
4,150

 
4,179

 
$
27,310

 
$
16,558

 
$
43,868

 
$
6,590,602

 
$
6,634,470


The recorded investment of mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of June 30, 2016 was $5.9 million, which is included in loans 90 or more days delinquent or in foreclosure in the table above.   The carrying value of residential OREO held as a result of obtaining physical possession upon completion of a foreclosure or through completion of a deed in lieu of foreclosure was $3.1 million at June 30, 2016

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

 
$
16,093

One- to four-family - purchased
8,078

 
9,038

Commercial real estate

 

Consumer - home equity
699

 
792

Consumer - other
24

 
12

 
$
27,758

 
$
25,935



16


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

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

The following table sets forth the recorded investment in loans classified as special mention or substandard, by class, at the dates presented. Special mention and substandard loans are included in the ACL formula analysis model if the loans are not individually evaluated for loss. Loans classified as doubtful or loss are individually evaluated for loss. At the dates presented, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.
 
June 30, 2016
 
September 30, 2015
 
Special Mention
 
Substandard
 
Special Mention
 
Substandard
 
(Dollars in thousands)
One- to four-family - originated
$
11,303

 
$
31,162

 
$
16,149

 
$
29,282

One- to four-family - purchased
1,257

 
11,644

 
1,376

 
13,237

Commercial real estate

 

 

 

Consumer - home equity
57

 
1,259

 
151

 
1,301

Consumer - other

 
26

 

 
17

 
$
12,617

 
$
44,091

 
$
17,676

 
$
43,837


The following table shows the weighted average credit score and weighted average LTV for originated and purchased one- to four-family loans and originated consumer home equity loans at the dates presented. Borrower credit scores are intended to provide an indication as to the likelihood that a borrower will repay their debts. Credit scores are updated at least semiannually, with the last update in March 2016, from a nationally recognized consumer rating agency. The LTV ratios provide an estimate of the extent to which the Bank may incur a loss on any given loan that may go into foreclosure. The consumer - home equity LTV does not take into account the first lien position, if applicable.  The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. In most cases, the most recent appraisal was obtained at the time of origination.
 
June 30, 2016
 
September 30, 2015
 
Credit Score
 
LTV
 
Credit Score
 
LTV
One- to four-family - originated
765
 
65
%
 
765
 
65
%
One- to four-family - purchased
753
 
64

 
752
 
65

Consumer - home equity
754
 
20

 
753
 
18

 
764
 
64

 
764
 
64






17


Troubled Debt Restructurings ("TDRs") - The following tables present the recorded investment prior to restructuring and immediately after restructuring in all loans restructured during the periods presented. These tables do not reflect the recorded investment at the end of the periods indicated. Any increase in the recorded investment at the time of the restructuring was generally due to the capitalization of delinquent interest and/or escrow balances.
 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30, 2016
 
June 30, 2016
 
Number
 
Pre-
 
Post-
 
Number
 
Pre-
 
Post-
 
of
 
Restructured
 
Restructured
 
of
 
Restructured
 
Restructured
 
Contracts
 
Outstanding
 
Outstanding
 
Contracts
 
Outstanding
 
Outstanding
 
(Dollars in thousands)
One- to four-family - originated
28

 
$
4,488

 
$
4,603

 
90

 
$
11,853

 
$
12,143

One- to four-family - purchased

 

 

 
1

 
123

 
122

Commercial real estate

 

 

 

 

 

Consumer - home equity
8

 
202

 
206

 
13

 
266

 
270

Consumer - other

 

 

 
1

 
8

 
8

 
36

 
$
4,690

 
$
4,809

 
105

 
$
12,250

 
$
12,543

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

 
$
4,125

 
$
4,190

 
104

 
$
13,862

 
$
14,007

One- to four-family - purchased
2

 
874

 
876

 
4

 
1,140

 
1,144

Commercial real estate

 

 

 

 

 

Consumer - home equity
7

 
171

 
172

 
13

 
255

 
261

Consumer - other

 

 

 
3

 
12

 
12

 
39

 
$
5,170

 
$
5,238

 
124

 
$
15,269

 
$
15,424


The following table provides information on TDRs that became delinquent during the periods presented within 12 months after being restructured.
 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
Contracts
 
Investment
 
Contracts
 
Investment
 
(Dollars in thousands)
One- to four-family - originated
12

 
$
1,581

 
16

 
$
1,356

 
39

 
$
4,183

 
44

 
$
4,234

One- to four-family - purchased

 

 
1

 
551

 

 

 
4

 
890

Commercial real estate

 

 

 

 

 

 

 

Consumer - home equity

 

 
2

 
12

 
4

 
91

 
4

 
33

Consumer - other

 

 

 

 

 

 
1

 
5

 
12

 
$
1,581

 
19

 
$
1,919

 
43

 
$
4,274

 
53

 
$
5,162


18


Impaired loans - The following information pertains to impaired loans, by class, as of the dates presented. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement.
 
June 30, 2016
 
September 30, 2015
 
 
 
Unpaid
 
 
 
 
 
Unpaid
 
 
 
Recorded
 
Principal
 
Related
 
Recorded
 
Principal
 
Related
 
Investment
 
Balance
 
ACL
 
Investment
 
Balance
 
ACL
 
(Dollars in thousands)
With no related allowance recorded
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
$
12,128

 
$
12,729

 
$

 
$
11,169

 
$
11,857

 
$

One- to four-family - purchased
10,895

 
12,645

 

 
11,035

 
13,315

 

Commercial real estate

 

 

 

 

 

Consumer - home equity
597

 
823

 

 
591

 
837

 

Consumer - other
17

 
47

 

 
13

 
40

 

 
23,637

 
26,244

 

 
22,808

 
26,049

 

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

 
26,889

 
337

 
26,453

 
26,547

 
294

One- to four-family - purchased
2,033

 
2,009

 
63

 
3,764

 
3,731

 
110

Commercial real estate

 

 

 

 

 

Consumer - home equity
768

 
768

 
49

 
869

 
870

 
62

Consumer - other
9

 
9

 
1

 
10

 
10

 
1

 
29,635

 
29,675

 
450

 
31,096

 
31,158

 
467

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

 
39,618

 
337

 
37,622

 
38,404

 
294

One- to four-family - purchased
12,928

 
14,654

 
63

 
14,799

 
17,046

 
110

Commercial real estate

 

 

 

 

 

Consumer - home equity
1,365

 
1,591

 
49

 
1,460

 
1,707

 
62

Consumer - other
26

 
56

 
1

 
23

 
50

 
1

 
$
53,272

 
$
55,919

 
$
450

 
$
53,904

 
$
57,207

 
$
467



19


The following information pertains to impaired loans, by class, for the periods presented.
 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
Average
 
Interest
 
Average
 
Interest
 
Average
 
Interest
 
Average
 
Interest
 
Recorded
 
Income
 
Recorded
 
Income
 
Recorded
 
Income
 
Recorded
 
Income
 
Investment
 
Recognized
 
Investment
 
Recognized
 
Investment
 
Recognized
 
Investment
 
Recognized
 
(Dollars in thousands)
With no related allowance recorded
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
$
11,872

 
$
114

 
$
12,099

 
$
120

 
$
11,378

 
$
349

 
$
12,727

 
$
342

One- to four-family - purchased
10,958

 
47

 
10,765

 
48

 
11,115

 
147

 
11,254

 
147

Commercial real estate

 

 

 

 

 

 

 

Consumer - home equity
622

 
32

 
455

 
7

 
598

 
55

 
480

 
22

Consumer - other
22

 
1

 
8

 

 
15

 
1

 
14

 

 
23,474

 
194

 
23,327

 
175

 
23,106

 
552

 
24,475

 
511

With an allowance recorded
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
26,940

 
261

 
28,420

 
281

 
27,593

 
798

 
27,223

 
829

One- to four-family - purchased
1,805

 
7

 
3,101

 
10

 
2,348

 
21

 
2,770

 
33

Commercial real estate

 

 

 

 

 

 

 

Consumer - home equity
823

 
20

 
876

 
9

 
920

 
46

 
741

 
22

Consumer - other
14

 

 
17

 

 
15

 

 
16

 
1

 
29,582

 
288

 
32,414

 
300

 
30,876

 
865

 
30,750

 
885

Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
38,812

 
375

 
40,519

 
401

 
38,971

 
1,147

 
39,950

 
1,171

One- to four-family - purchased
12,763

 
54

 
13,866

 
58

 
13,463

 
168

 
14,024

 
180

Commercial real estate

 

 

 

 

 

 

 

Consumer - home equity
1,445

 
52

 
1,331

 
16

 
1,518

 
101

 
1,221

 
44

Consumer - other
36

 
1

 
25

 

 
30

 
1

 
30

 
1

 
$
53,056

 
$
482

 
$
55,741

 
$
475

 
$
53,982

 
$
1,417

 
$
55,225

 
$
1,396



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 June 30, 2016
 
One- to Four-
 
One- to Four-
 
One- to Four-
 

 
 
 
 
 
Family -
 
Family -
 
Family -
 
Commercial
 
 
 
 
 
Originated
 
Purchased
 
Total
 
Real Estate
 
Consumer
 
Total
 
(Dollars in thousands)
Beginning balance
$
6,839

 
$
1,243

 
$
8,082

 
$
837

 
$
274

 
$
9,193

Charge-offs
(23
)
 
(54
)
 
(77
)
 

 
(49
)
 
(126
)
Recoveries
17

 
222

 
239

 

 
6

 
245

Provision for credit losses
134

 
(262
)
 
(128
)
 
96

 
32

 

Ending balance
$
6,967

 
$
1,149

 
$
8,116

 
$
933

 
$
263

 
$
9,312

 
For the Nine Months Ended June 30, 2016
 
One- to Four-
 
One- to Four-
 
One- to Four-
 

 
 
 
 
 
Family -
 
Family -
 
Family -
 
Commercial
 
 
 
 
 
Originated
 
Purchased
 
Total
 
Real Estate
 
Consumer
 
Total
 
(Dollars in thousands)
Beginning balance
$
6,980

 
$
1,434

 
$
8,414

 
$
742

 
$
287

 
$
9,443

Charge-offs
(97
)
 
(267
)
 
(364
)
 

 
(87
)
 
(451
)
Recoveries
59

 
240

 
299

 

 
21

 
320

Provision for credit losses
25

 
(258
)
 
(233
)
 
191

 
42

 

Ending balance
$
6,967

 
$
1,149

 
$
8,116

 
$
933

 
$
263

 
$
9,312

 
For the Three Months Ended June 30, 2015
 
One- to Four-
 
One- to Four-
 
One- to Four-
 

 
 
 
 
 
Family -
 
Family -
 
Family -
 
Commercial
 
 
 
 
 
Originated
 
Purchased
 
Total
 
Real Estate
 
Consumer
 
Total
 
(Dollars in thousands)
Beginning balance
$
6,711

 
$
1,858

 
$
8,569

 
$
528

 
$
309

 
$
9,406

Charge-offs
(108
)
 
(28
)
 
(136
)
 

 
(21
)
 
(157
)
Recoveries
12

 

 
12

 

 
17

 
29

Provision for credit losses
516

 
(261
)
 
255

 
69

 
(1
)
 
323

Ending balance
$
7,131

 
$
1,569

 
$
8,700

 
$
597

 
$
304

 
$
9,601

 
For the Nine Months Ended June 30, 2015
 
One- to Four-
 
One- to Four-
 
One- to Four-
 

 
 
 
 
 
Family -
 
Family -
 
Family -
 
Commercial
 
 
 
 
 
Originated
 
Purchased
 
Total
 
Real Estate
 
Consumer
 
Total
 
(Dollars in thousands)
Beginning balance
$
6,263

 
$
2,323

 
$
8,586

 
$
400

 
$
241

 
$
9,227

Charge-offs
(260
)
 
(221
)
 
(481
)
 

 
(71
)
 
(552
)
Recoveries
45

 
58

 
103

 

 
52

 
155

Provision for credit losses
1,083

 
(591
)
 
492

 
197

 
82

 
771

Ending balance
$
7,131

 
$
1,569

 
$
8,700

 
$
597

 
$
304

 
$
9,601



21


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

 
June 30, 2016
 
One- to Four-
 
One- to Four-
 
One- to Four-
 

 
 
 
 
 
Family -
 
Family -
 
Family -
 
Commercial
 
 
 
 
 
Originated
 
Purchased
 
Total
 
Real Estate
 
Consumer
 
Total
 
(Dollars in thousands)
Recorded investment in loans
 
 
 
 
 
 
 
 
 
 
 
collectively evaluated for impairment
$
6,134,336

 
$
431,437

 
$
6,565,773

 
$
131,398

 
$
127,603

 
$
6,824,774

 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment in loans
 
 
 
 
 
 
 
 
 
 
 
individually evaluated for impairment
12,128

 
10,895

 
23,023

 

 
638

 
23,661

 
$
6,146,464

 
$
442,332

 
$
6,588,796

 
$
131,398

 
$
128,241

 
$
6,848,435

 
 
 
 
 
 
 
 
 
 
 
 
ACL for loans collectively
 
 
 
 
 
 
 
 
 
 
 
evaluated for impairment
$
6,967

 
$
1,149

 
$
8,116

 
$
933

 
$
263

 
$
9,312


 
September 30, 2015
 
One- to Four-
 
One- to Four-
 
One- to Four-
 

 
 
 
 
 
Family -
 
Family -
 
Family -
 
Commercial
 
 
 
 
 
Originated
 
Purchased
 
Total
 
Real Estate
 
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 $49.0 million and $41.8 million at June 30, 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 $19.7 million and $14.6 million at June 30, 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 $286 thousand and $859 thousand for the three and nine months ended June 30, 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 $3.6 million for the three and nine months ended June 30, 2016, respectively. There were no impairment losses during the three and nine months ended June 30, 2016 resulting from the forfeiture or ineligibility of tax credits or other circumstances.

6. REPURCHASE AGREEMENTS
At both June 30, 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 June 30, 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 June 30, 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 June 30, 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 nine months ended June 30, 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.
 
June 30, 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
$
472,713

 
$

 
$
472,713

 
$

MBS
191,706

 

 
191,706

 

Municipal bonds
141

 

 
141

 

Trust preferred securities
1,753

 

 

 
1,753

 
$
666,313

 
$

 
$
664,560

 
$
1,753


 
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 nine months ended June 30, 2016, except for principal repayments of $13 thousand and $44 thousand, respectively, and increases in net unrealized losses included in other comprehensive income of $19 thousand and $87 thousand, respectively. The Company's Level 3 AFS securities had no activity during the three months ended June 30, 2015, except for increases in net unrealized losses included in other comprehensive income of $1 thousand. The Company's Level 3 AFS securities had no activity during the nine months ended June 30, 2015, except for principal repayments of $193 thousand, and increases in net unrealized losses included in other comprehensive income of $55 thousand.

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

Loans Receivable - The balance of loans individually evaluated for impairment at June 30, 2016 and September 30, 2015 was $23.6 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 June 30, 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 June 30, 2016 and September 30, 2015 was $4.3 million.

The following tables provide the level of valuation assumptions used to determine the carrying value of the Company's assets measured at fair value on a non-recurring basis at the dates presented.
 
June 30, 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
$
23,610

 
$

 
$

 
$
23,610

OREO
4,332

 

 

 
4,332

 
$
27,942

 
$

 
$

 
$
27,942


 
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:
 
June 30, 2016
 
September 30, 2015
 
 
 
Estimated
 
 
 
Estimated
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Amount
 
Value
 
Amount
 
Value
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
152,831

 
$
152,831

 
$
772,632

 
$
772,632

AFS securities
666,313

 
666,313

 
758,171

 
758,171

HTM securities
1,188,913

 
1,214,498

 
1,271,122

 
1,295,274

Loans receivable
6,839,123

 
7,170,795

 
6,625,027

 
6,870,176

FHLB stock
114,425

 
114,425

 
150,543

 
150,543

Liabilities:
 
 
 
 
 
 
 
Deposits
5,085,129

 
5,135,675

 
4,832,520

 
4,869,312

FHLB borrowings
2,472,026

 
2,550,085

 
3,270,521

 
3,339,650

Repurchase agreements
200,000

 
209,278

 
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 commercial and consumer loans are based on the expected future cash flows assuming future prepayments and discount factors based on current offering rates. (Level 3)

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

Deposits - The estimated fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The estimated fair value of these deposits at June 30, 2016 and September 30, 2015 was $2.32 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 June 30, 2016 and September 30, 2015 was $2.82 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 and originate and participate in commercial real estate loans. We also invest in certain investment securities and MBS using funding from deposits, FHLB borrowings, and repurchase agreements.

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

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

Economic conditions in the Bank's local market areas have a significant impact on the ability of borrowers to repay loans and the value of the collateral securing these loans. The industries in our market areas are diversified, especially in the Kansas City metropolitan statistical area, which comprises the largest segment of our loan portfolio and deposit base. As of June 2016, the unemployment rate was 3.8% for Kansas and 4.5% for Missouri, compared to the national average of 4.9%, 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 June 30, 2016, the Company recognized net income of $20.6 million, or $0.15 per share, compared to net income of $19.6 million, or $0.14 per share, for the quarter ended June 30, 2015. The $949 thousand, or 4.8%, increase in net income was due primarily to a $917 thousand increase in net interest income. Net income attributable to the daily leverage strategy was $532 thousand during the current quarter, compared to $699 thousand for the prior year quarter.

The net interest margin increased two basis points, from 1.71% for the prior year quarter to 1.73% for the current year quarter. Excluding the effects of the daily leverage strategy, the net interest margin would have increased four basis points, from 2.05% for the prior year quarter to 2.09% for the current year quarter. The increase in the net interest margin was due mainly to a decrease in interest expense on term borrowings, partially offset by an increase in interest expense on deposits.

For the nine month period ended June 30, 2016, the Company recognized net income of $62.8 million, or $0.47 per share, compared to net income of $59.3 million, or $0.43 per share, for the nine month period ended June 30, 2015. The $3.5 million, or 5.9%, increase in net income was due primarily to a $2.6 million increase in net interest income and a $1.9 million increase in non-interest income, partially offset by a $1.2 million increase in non-interest expense. Net income attributable to the daily leverage strategy was $1.7 million during the current year nine month period, compared to $2.2 million for the prior year nine month period. 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 yield earned on the cash at the Federal Reserve Bank.

The net interest margin increased three basis points, from 1.72% for the prior year nine month period, to 1.75% for the current year nine month period. Excluding the effects of the daily leverage strategy, the net interest margin would have increased four basis points,

29


from 2.07% for the prior year nine month period to 2.11% for the current year nine month period. The increase in the net interest margin was due mainly to a decrease in interest expense on term borrowings, partially offset by an increase in interest expense on deposits.

Total assets were $9.24 billion at June 30, 2016 compared to $9.84 billion at September 30, 2015. The $602.4 million decrease was due primarily to decreases in cash and cash equivalents and FHLB stock, both due to the removal of the entire daily leverage strategy at June 30, 2016 compared to $700.0 million of the daily leverage strategy remaining in place at September 30, 2015.

The loans receivable portfolio, net, increased $214.1 million, to $6.84 billion at June 30, 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 nine month period, the Bank originated and refinanced $547.8 million of loans with a weighted average rate of 3.63%, purchased $460.9 million of loans from correspondent lenders with a weighted average rate of 3.50%, and purchased participations of $146.4 million in commercial real estate loans with a weighted average rate of 3.94%.

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 commercial real estate portfolio through loan participations with our correspondent lenders and other lead banks. These types of loans tend to be larger than 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 commercial real estates loans as of June 30, 2016 was $132.1 million and the combined total of undisbursed loan amounts and commitments as of June 30, 2016 was $217.8 million, resulting in a total commercial real estate loan concentration of $349.9 million at June 30, 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 $7.86 billion at June 30, 2016 compared to $8.43 billion at September 30, 2015. The $567.0 million decrease was due primarily to a $798.5 million decrease in FHLB borrowings largely as a result of the removal of the entire daily leverage strategy at June 30, 2016, along with a $100.0 million decrease in FHLB advances, partially offset by a $252.6 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 following quarter. The growth in deposits during the current year nine month period was primarily in the retail certificate of deposit, checking, and wholesale certificate of deposit portfolios, which increased $79.3 million, $60.3 million, and $55.9 million, respectively.

Stockholders' equity was $1.38 billion at June 30, 2016 compared to $1.42 billion at September 30, 2015. The $35.4 million decrease between dates was due primarily to the payment of $100.4 million in cash dividends, partially offset by net income of $62.8 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.
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
2016
 
2016
 
2015
 
2015
 
2015
 
(Dollars in thousands)
Total assets
$
9,241,775

 
$
9,316,684

 
$
9,133,422

 
$
9,844,161

 
$
9,131,181

Cash and cash equivalents
152,831

 
203,811

 
232,354

 
772,632

 
46,668

AFS securities
666,313

 
677,416

 
636,970

 
758,171

 
847,059

HTM securities
1,188,913

 
1,270,849

 
1,199,978

 
1,271,122

 
1,359,657

Loans receivable, net
6,839,123

 
6,769,194

 
6,665,128

 
6,625,027

 
6,496,468

FHLB stock, at cost
114,425

 
114,381

 
119,027

 
150,543

 
166,257

Deposits
5,085,129

 
5,119,829

 
4,972,480

 
4,832,520

 
4,813,188

FHLB borrowings
2,472,026

 
2,471,656

 
2,471,272

 
3,270,521

 
2,572,898

Repurchase agreements
200,000

 
200,000

 
200,000

 
200,000

 
220,000

Stockholders' equity
1,380,815

 
1,403,408

 
1,390,833

 
1,416,226

 
1,426,723

Equity to total assets at end of period
14.9
%
 
15.1
%
 
15.2
%
 
14.4
%
 
15.6
%

Assets. Total assets were $9.24 billion at June 30, 2016 compared to $9.84 billion at September 30, 2015. The $602.4 million decrease was due primarily to a $619.8 million decrease in cash and cash equivalents and a $36.1 million decrease in FHLB stock, both due to the removal of the entire daily leverage strategy at June 30, 2016 compared to $700.0 million of the daily leverage strategy remaining in place at September 30, 2015. The entire $2.10 billion daily leverage strategy was reinstated on July 1, 2016. Additionally, loans receivable, net, increased $214.1 million which was partially offset by a $174.1 million decrease in the securities portfolio.

Loans Receivable. Loans receivable, net, increased to $6.84 billion at June 30, 2016 from $6.63 billion at September 30, 2015. The growth in the loan portfolio during the current year nine 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 June 30, 2016, 61% of the loans had a balance at origination of less than $417 thousand.
 
June 30, 2016
 
September 30, 2015
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
Originated
$
4,001,135

 
3.78
%
 
$
4,010,517

 
3.84
%
Correspondent purchased
2,092,608

 
3.51

 
1,846,213

 
3.52

Bulk purchased
439,954

 
2.22

 
485,682

 
2.25

Construction
78,358

 
3.50

 
75,152

 
3.57

Total
6,612,055

 
3.59

 
6,417,564

 
3.62

Commercial:
 
 
 
 
 
 
 
Permanent
110,601

 
4.16

 
110,938

 
4.14

Construction
187,705

 
4.00

 
54,768

 
4.13

Total
298,306

 
4.06

 
165,706

 
4.14

Total real estate loans
6,910,361

 
3.61

 
6,583,270

 
3.64

 
 
 
 
 
 
 
 
Consumer loans:
 
 
 
 
 
 
 
Home equity
123,673

 
5.04

 
125,844

 
5.00

Other
4,568

 
4.17

 
4,179

 
4.03

Total consumer loans
128,241

 
5.01

 
130,023

 
4.97

Total loans receivable
7,038,602

 
3.64

 
6,713,293

 
3.66

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

 
 
 
45,696

 
 
Commercial
166,237

 
 
 
44,869

 
 
ACL
9,312

 
 
 
9,443

 
 
Discounts/unearned loan fees
24,352

 
 
 
24,213

 
 
Premiums/deferred costs
(40,017
)
 
 
 
(35,955
)
 
 
Total loans receivable, net
$
6,839,123

 
 
 
$
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 nine months ended June 30, 2016, the Bank endorsed $36.4 million and $80.5 million of one- to four-family loans, respectively, reducing the average rate on those loans by 95 and 89 basis points, respectively.
 
For the Three Months Ended
 
June 30, 2016
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Beginning balance
$
6,946,381

 
3.65
%
 
$
6,753,249

 
3.65
%
 
$
6,713,293

 
3.66
%
 
$
6,547,702

 
3.67
%
Originated and refinanced:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
155,179

 
3.52

 
117,205

 
3.65

 
157,447

 
3.67

 
165,646

 
3.73

Adjustable
44,319

 
3.61

 
35,495

 
3.77

 
38,117

 
3.74

 
51,634

 
3.59

Purchased and participations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
178,762

 
3.71

 
249,017

 
3.68

 
101,644

 
3.69

 
164,397

 
3.64

Adjustable
24,715

 
2.90

 
27,355

 
2.93

 
25,861

 
3.17

 
65,722

 
3.69

Repayments
(310,041
)
 
 
 
(235,202
)
 
 
 
(280,978
)
 
 
 
(280,671
)
 
 
Principal recoveries (charge-offs), net
119

 
 
 
(8
)
 
 
 
(242
)
 
 
 
(158
)
 
 
Other
(832
)
 
 
 
(730
)
 
 
 
(1,893
)
 
 
 
(979
)
 
 
Ending balance
$
7,038,602

 
3.64

 
$
6,946,381

 
3.65

 
$
6,753,249

 
3.65

 
$
6,713,293

 
3.66

 
For the Nine Months Ended
 
June 30, 2016
 
June 30, 2015
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Beginning balance
$
6,713,293

 
3.66
%
 
$
6,289,519

 
3.76
%
Originations and refinances:
 
 
 
 
 
 
 
Fixed
429,831

 
3.61

 
440,697

 
3.55

Adjustable
117,931

 
3.70

 
122,540

 
3.64

Purchases and participations:
 
 
 
 
 
 
 
Fixed
529,423

 
3.69

 
386,631

 
3.59

Adjustable
77,931

 
3.00

 
94,609

 
2.94

Repayments
(826,221
)
 
 
 
(781,197
)
 
 
Principal charge-offs, net
(131
)
 
 
 
(397
)
 
 
Other
(3,455
)
 
 
 
(4,700
)
 
 
Ending balance
$
7,038,602

 
3.64

 
$
6,547,702

 
3.67




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
 
June 30, 2016
 
June 30, 2015
 
Amount
 
Rate
 
% of Total
 
Amount
 
Rate
 
% of Total
 
(Dollars in thousands)
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 15 years
$
57,702

 
2.93
%
 
14.3
%
 
$
106,115

 
2.90
%
 
24.5
%
> 15 years
240,111

 
3.66

 
59.6

 
244,947

 
3.74

 
56.6

Commercial real estate
34,475

 
4.40

 
8.6

 
3,268

 
4.11

 
0.8

Home equity
1,452

 
5.62

 
0.4

 
1,265

 
6.21

 
0.3

Other
201

 
8.75

 

 
187

 
7.82

 

Total fixed-rate
333,941

 
3.62

 
82.9

 
355,782

 
3.50

 
82.2

 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 36 months
2,433

 
2.56

 
0.6

 
2,757

 
2.52

 
0.6

> 36 months
48,049

 
2.88

 
11.9

 
54,285

 
2.91

 
12.6

Home equity
17,833

 
4.72

 
4.4

 
19,250

 
4.58

 
4.5

Other
719

 
3.41

 
0.2

 
363

 
2.88

 
0.1

Total adjustable-rate
69,034

 
3.35

 
17.1

 
76,655

 
3.31

 
17.8

 
 
 
 
 
 
 
 
 
 
 
 
Total originated, refinanced and purchased
$
402,975

 
3.58

 
100.0
%
 
$
432,437

 
3.47

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Purchased and participation loans included above:
 
 
 
 
 
 
 
 
 
 
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
$
144,287

 
3.55

 
 
 
$
146,487

 
3.50

 
 
Participations - commercial real estate
34,475

 
4.40

 
 
 
1,400

 
4.25

 
 
Total fixed-rate purchased/participations
178,762

 
3.71

 
 
 
147,887

 
3.51

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
24,715

 
2.90

 
 
 
29,046

 
2.92

 
 
Total purchased/participation loans
$
203,477

 
3.61

 
 
 
$
176,933

 
3.41

 
 

34


 
For the Nine Months Ended
 
June 30, 2016
 
June 30, 2015
 
Amount
 
Rate
 
% of Total
 
Amount
 
Rate
 
% of Total
 
(Dollars in thousands)
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 15 years
$
176,597

 
3.00
%
 
15.3
%
 
$
253,435

 
2.97
%
 
24.3
%
> 15 years
605,575

 
3.73

 
52.4

 
543,934

 
3.82

 
52.1

Commercial real estate
173,199

 
4.00

 
15.0

 
26,518

 
3.74

 
2.5

Home equity
3,230

 
5.72

 
0.2

 
2,812

 
6.18

 
0.3

Other
653

 
9.02

 
0.1

 
629

 
7.72

 
0.1

Total fixed-rate
959,254

 
3.66

 
83.0

 
827,328

 
3.57

 
79.3

 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 36 months
4,255

 
2.61

 
0.4

 
5,197

 
2.57

 
0.5

> 36 months
134,220

 
2.95

 
11.6

 
159,092

 
2.95

 
15.2

Commercial real estate
3,376

 
4.25

 
0.3

 

 

 

Home equity
51,803

 
4.63

 
4.5

 
51,655

 
4.59

 
4.9

Other
2,208

 
3.45

 
0.2

 
1,205

 
3.08

 
0.1

Total adjustable-rate
195,862

 
3.42

 
17.0

 
217,149

 
3.33

 
20.7

 
 
 
 
 
 
 
 
 
 
 
 
Total originated, refinanced and purchased
$
1,155,116

 
3.62

 
100.0
%
 
$
1,044,477

 
3.52

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Purchased and participation loans included above:
 
 
 
 
 
 
 
 
 
 
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
$
386,355

 
3.60

 
 
 
$
363,661

 
3.58

 
 
Participations - commercial real estate
143,068

 
3.93

 
 
 
22,970

 
3.73

 
 
Total fixed-rate purchased/participations
529,423

 
3.69

 
 
 
386,631

 
3.59

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
74,555

 
2.94

 
 
 
94,609

 
2.94

 
 
Participations - commercial real estate
3,376

 
4.25

 
 
 

 

 
 
Total adjustable-rate purchased/participations
77,931

 
3.00

 
 
 
94,609

 
2.94

 
 
Total purchased/participation loans
$
607,354

 
3.60

 
 
 
$
481,240

 
3.46

 
 

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.
 
June 30, 2016
 
September 30, 2015
 
 
 
% of
 
Credit
 
 
 
Average
 
 
 
% of
 
Credit
 
 
 
Average
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
(Dollars in thousands)
Originated
$
4,001,135

 
61.2
%
 
767

 
63
%
 
$
131

 
$
4,010,517

 
63.2
%
 
765

 
64
%
 
$
129

Correspondent purchased
2,092,608

 
32.0

 
763

 
68

 
352

 
1,846,213

 
29.1

 
764

 
68

 
344

Bulk purchased
439,954

 
6.8

 
753

 
64

 
307

 
485,682

 
7.7

 
752

 
65

 
310

 
$
6,533,697

 
100.0
%
 
765

 
65

 
172

 
$
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 nine month period, 76% had loan values of $417 thousand or less. Of the correspondent loans purchased during the current year nine month period, 21% had loan values of $417 thousand or less.
 
For the Three Months Ended
 
June 30, 2016
 
June 30, 2015
 
 
 
 
 
Credit
 
 
 
 
 
Credit
 
Amount
 
LTV
 
Score
 
Amount
 
LTV
 
Score
 
(Dollars in thousands)
Originated
$
146,590

 
80
%
 
773

 
$
188,742

 
78
%
 
772

Refinanced by Bank customers
32,703

 
69

 
766

 
43,829

 
70

 
767

Correspondent purchased
169,002

 
74

 
761

 
175,533

 
74

 
767

 
$
348,295

 
76

 
766

 
$
408,104

 
75

 
769

 
For the Nine Months Ended
 
June 30, 2016
 
June 30, 2015
 
 
 
 
 
Credit
 
 
 
 
 
Credit
 
Amount
 
LTV
 
Score
 
Amount
 
LTV
 
Score
 
(Dollars in thousands)
Originated
$
361,651

 
78
%
 
769

 
$
401,357

 
77
%
 
771

Refinanced by Bank customers
98,086

 
69

 
768

 
102,031

 
68

 
768

Correspondent purchased
460,910

 
74

 
763

 
458,270

 
74

 
765

 
$
920,647

 
75

 
766

 
$
961,658

 
74

 
768


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 nine month period ended June 30, 2016.
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
June 30, 2016
 
June 30, 2016
State
 
Amount
 
% of Total
 
Rate
 
Amount
 
% of Total
 
Rate
 
 
(Dollars in thousands)
Kansas
 
$
162,151

 
46.5
%
 
3.40
%
 
$
420,566

 
45.7
%
 
3.46
%
Missouri
 
66,734

 
19.2

 
3.45

 
175,815

 
19.1

 
3.50

Texas
 
57,316

 
16.5

 
3.43

 
146,303

 
15.9

 
3.46

Tennessee
 
16,340

 
4.7

 
3.52

 
47,921

 
5.2

 
3.54

Other states
 
45,754

 
13.1

 
3.39

 
130,042

 
14.1

 
3.47

 
 
$
348,295

 
100.0
%
 
3.42

 
$
920,647

 
100.0
%
 
3.47



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 June 30, 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
$
27,392

 
$
54,321

 
$
21,306

 
$
103,019

 
3.31
%
Correspondent
14,893

 
126,771

 
15,244

 
156,908

 
3.62

 
$
42,285

 
$
181,092

 
$
36,550

 
$
259,927

 
3.50

 
 
 
 
 
 
 
 
 
 
Rate
3.11
%
 
3.71
%
 
2.90
%
 
 
 
 

Commercial Real Estate Loans - Commercial real estate 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 commercial real estate loans depending on the property type.

During the current quarter, the Bank continued to grow its commercial real estate loan portfolio by purchasing a $34.5 million participation in a commercial real estate construction loan. At June 30, 2016, the Bank had $51.6 million of outstanding commercial real estate loan commitments. The Bank intends to continue to grow its commercial real estate loan portfolio through participations with correspondent lenders and other lead banks with which the Bank already has commercial real estate lending relationships.
 
The following table presents the Bank's commercial real estate loans and commitments by industry classification, as defined by the North American Industry Classification System, as of June 30, 2016. Based on the terms of the construction loans as of June 30, 2016, the undisbursed amounts in the table are projected to be disbursed by March, 2018. It is possible that not all of the funds will be disbursed due to the nature of the funding of construction projects.
 
Unpaid
 
Undisbursed
 
Gross Loan
 
Outstanding
 
 
 
% of
 
Principal
 
Amount
 
Amount
 
Commitments
 
Total
 
Total
 
(Dollars in thousands)
Accommodation and food services
$
56,984

 
$
85,302

 
$
142,286

 
$

 
$
142,286

 
40.7
%
Health care and social assistance
11,896

 
44,857

 
56,753

 

 
56,753

 
16.2

Real estate rental and leasing
14,602

 
534

 
15,136

 
38,000

 
53,136

 
15.2

Arts, entertainment, and recreation

 
34,475

 
34,475

 

 
34,475

 
9.8

Multi-family
18,134

 
1,068

 
19,202

 
4,800

 
24,002

 
6.9

Retail trade
19,134

 

 
19,134

 
4,726

 
23,860

 
6.8

Other
11,320

 

 
11,320

 
4,086

 
15,406

 
4.4

 
$
132,070

 
$
166,236

 
$
298,306

 
$
51,612

 
$
349,918

 
100.0
%


37


The following table summarizes the Bank's commercial real estate loans by state as of June 30, 2016.
 
Unpaid
 
Undisbursed
 
Gross Loan
 
Outstanding
 
 
 
% of
 
Principal
 
Amount
 
Amount
 
Commitments
 
Total
 
Total
 
(Dollars in thousands)
Texas
$
28,194

 
$
86,380

 
$
114,574

 
$
38,000

 
$
152,574

 
43.6
%
Missouri
33,649

 
44,857

 
78,506

 
9,526

 
88,032

 
25.2

Kansas
44,635

 
34,475

 
79,110

 

 
79,110

 
22.6

Colorado
14,872

 
524

 
15,396

 

 
15,396

 
4.4

Arkansas
8,306

 

 
8,306

 

 
8,306

 
2.4

California
2,414

 

 
2,414

 
4,086

 
6,500

 
1.8

 
$
132,070

 
$
166,236

 
$
298,306

 
$
51,612

 
$
349,918

 
100.0
%

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

 
$
157,710

>$15 to $30 million
2

 
54,528

>$10 to $15 million
3

 
38,382

>$5 to $10 million
3

 
26,812

$1 to $5 million
23

 
67,869

Less than $1 million
14

 
4,617

 
49

 
$
349,918



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 June 30, 2016, approximately 76% were 59 days or less delinquent.
 
Loans Delinquent for 30 to 89 Days at:
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
2016
 
2,016
 
2015
 
2015
 
2015
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
141
 
$
12,962

 
139
 
$
14,336

 
159
 
$
14,277

 
158

 
$
16,955

 
150

 
$
16,320

Correspondent purchased
10
 
2,561

 
8
 
2,307

 
10
 
3,033

 
8

 
2,344

 
15

 
4,741

Bulk purchased
27
 
4,703

 
26
 
6,005

 
35
 
7,805

 
32

 
7,259

 
30

 
6,249

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
33
 
548

 
33
 
631

 
36
 
730

 
32

 
703

 
34

 
646

Other
11
 
55

 
5
 
28

 
13
 
88

 
11

 
17

 
18

 
80

 
222
 
$
20,829

 
211
 
$
23,307

 
253
 
$
25,933

 
241

 
$
27,278

 
247

 
$
28,036

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30 to 89 days delinquent loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
to total loans receivable, net
 
 
0.30
%
 
 
 
0.34
%
 
 
 
0.39
%
 
 
 
0.41
%
 
 
 
0.43
%

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 five months before the properties were sold.


39


 
Non-Performing Loans and OREO at:
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
2016
 
2,016
 
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
74

 
$
8,539

 
72

 
$
8,016

 
75

 
$
9,900

 
66

 
$
6,728

 
70

 
$
6,180

Correspondent purchased
2

 
652

 
3

 
864

 

 

 
1

 
394

 
1

 
67

Bulk purchased
32

 
8,017

 
33

 
7,483

 
32

 
7,199

 
36

 
8,898

 
29

 
7,577

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
20

 
437

 
26

 
622

 
28

 
574

 
24

 
497

 
19

 
443

Other
6

 
17

 
8

 
26

 
9

 
25

 
4

 
12

 
5

 
16

 
134

 
17,662

 
142

 
17,011

 
144

 
17,698

 
131

 
16,529

 
124

 
14,283

Nonaccrual loans less than 90 Days Delinquent:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
70

 
6,939

 
72

 
7,667

 
75

 
7,661

 
77

 
9,004

 
71

 
9,224

Correspondent purchased
8

 
2,872

 
4

 
825

 
1

 
24

 
1

 
25

 
2

 
398

Bulk purchased

 

 
1

 
80

 
1

 
81

 
1

 
82

 
5

 
959

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
11

 
263

 
9

 
151

 
14

 
259

 
12

 
295

 
10

 
219

Other
1

 
7

 
1

 
8

 

 

 

 

 

 

 
90

 
10,081

 
87

 
8,731

 
91

 
8,025

 
91

 
9,406

 
88

 
10,800

Total non-performing loans
224

 
27,743

 
229

 
25,742

 
235

 
25,723

 
222

 
25,935

 
212

 
25,083

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-performing loans as a percentage of total loans(2)
 
0.41
%
 
 
 
0.38
%
 
 
 
0.39
%
 
 
 
0.39
%
 
 
 
0.39
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OREO:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated(3)
14

 
$
1,142

 
22

 
$
1,364

 
25

 
$
1,410

 
29

 
$
1,752

 
28

 
$
1,920

Correspondent purchased
1

 
499

 
1

 
499

 
1

 
499

 
1

 
499

 
2

 
714

Bulk purchased
5

 
1,413

 
8

 
2,694

 
6

 
2,247

 
2

 
796

 
4

 
1,019

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
21

 
4,332

 
33

 
5,844

 
34

 
5,460

 
34

 
4,333

 
37

 
4,948

Total non-performing assets
245

 
$
32,075

 
262

 
$
31,586

 
269

 
$
31,183

 
256

 
$
30,268

 
249

 
$
30,031

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-performing assets as a percentage of total assets
0.35
%
 
 
 
0.34
%
 
 
 
0.34
%
 
 
 
0.31
%
 
 
 
0.33
%

40


(1)
Represents loans required to be reported as nonaccrual pursuant to regulatory reporting requirements even if the loans are current. At June 30, 2016, March 31, 2016, December 31, 2015, September 30, 2015, and June 30, 2015, this amount was comprised of $2.8 million, $1.8 million, $2.2 million, $2.2 million, and $3.4 million, respectively, of loans that were 30 to 89 days delinquent and are reported as such, and $7.3 million, $6.9 million, $5.8 million, $7.2 million, and $7.4 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 0.26%, 0.25%, 0.27%, 0.25%, and 0.22%, at June 30, 2016, March 31, 2016, December 31, 2015, September 30, 2015, and June 30, 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 June 30, 2016, $11.5 million, or 67%, 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 June 30, 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 June 30, 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
 
$
3,727,539

 
57.1
%
 
$
9,824

 
48.6
%
 
$
8,226

 
47.8
%
 
71
%
Missouri
 
1,266,730

 
19.4

 
4,722

 
23.4

 
1,505

 
8.7

 
69

Texas
 
465,108

 
7.1

 
1,518

 
7.5

 
351

 
2.1

 
75

California
 
251,074

 
3.8

 

 

 

 

 
n/a

Tennessee
 
183,233

 
2.8

 

 

 

 

 
n/a

Alabama
 
101,125

 
1.5

 

 

 

 

 
n/a

Oklahoma
 
73,108

 
1.1

 
427

 
2.1

 
23

 
0.1

 
35

Georgia
 
62,540

 
1.0

 
432

 
2.1

 
365

 
2.1

 
85

Other states
 
403,240

 
6.2

 
3,303

 
16.3

 
6,738

 
39.2

 
63

 
 
$
6,533,697

 
100.0
%
 
$
20,226

 
100.0
%
 
$
17,208

 
100.0
%
 
68


TDRs - The following table presents the Company's TDRs, based on accrual status, at the dates indicated. At June 30, 2016, $24.6 million of TDRs were included in the ACL formula analysis model and $113 thousand of the ACL was related to these loans. The remaining $13.6 million of TDRs at June 30, 2016 were individually evaluated for loss and any potential losses have been charged-off.
 
At
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
2016
 
2016
 
2015
 
2015
 
2015
 
(Dollars in thousands)
Accruing TDRs
$
21,663

 
$
24,239

 
$
24,956

 
$
24,331

 
$
25,444

Nonaccrual TDRs(1)
16,497

 
14,986

 
13,983

 
15,511

 
14,653

Total TDRs
$
38,160

 
$
39,225

 
$
38,939

 
$
39,842

 
$
40,097


(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 commercial real estate 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 nine month period due to the continued low level of net loan charge-offs and delinquent loan balances. Net loan charge-offs were $131 thousand for the current year nine month period. The improvement in collateral values has assisted in lowering our net charge-off amounts compared to prior years. At June 30, 2016, loans 30 to 89 days delinquent were 0.30% of total loans and loans 90 or more days delinquent or in foreclosure were 0.26% of total loans.


42


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 $248.5 million loans, or 56% of the total bulk purchased loan portfolio, at June 30, 2016, for which the seller of the loans has guaranteed, and has the ability, to repurchase or replace any 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 $191.4 million of bulk purchased loans at June 30, 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
 
June 30, 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)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
$
4,626

 
49.7
%
 
$
4,001,131

 
58.6
%
 
$
4,833

 
51.2
%
 
$
4,010,439

 
60.6
%
Correspondent purchased
2,299

 
24.7

 
2,092,608

 
30.6

 
2,115

 
22.4

 
1,846,213

 
27.9

Bulk purchased
1,149

 
12.3

 
439,954

 
6.4

 
1,434

 
15.2

 
485,682

 
7.3

Construction
42

 
0.5

 
38,766

 
0.6

 
32

 
0.3

 
29,534

 
0.4

Total
8,116

 
87.2

 
6,572,459

 
96.2

 
8,414

 
89.1

 
6,371,868

 
96.2

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent
709

 
7.6

 
109,873

 
1.6

 
604

 
6.4

 
109,314

 
1.6

Construction
224

 
2.4

 
22,197

 
0.3

 
138

 
1.5

 
11,523

 
0.2

Total
933

 
10.0

 
132,070

 
1.9

 
742

 
7.9

 
120,837

 
1.8

Total real estate loans
9,049

 
97.2

 
6,704,529

 
98.1

 
9,156

 
97.0

 
6,492,705

 
98.0

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
206

 
2.2

 
123,673

 
1.8

 
222

 
2.3

 
125,844

 
1.9

Other consumer
57

 
0.6

 
4,568

 
0.1

 
65

 
0.7

 
4,179

 
0.1

Total consumer loans
263

 
2.8

 
128,241

 
1.9

 
287

 
3.0

 
130,023

 
2.0

 
$
9,312

 
100.0
%
 
$
6,832,770

 
100.0
%
 
$
9,443

 
100.0
%
 
$
6,622,728

 
100.0
%

43


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
 
June 30, 2016
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
 
June 30, 2015
 
(Dollars in thousands)
ACL beginning balance
$
9,193

 
$
9,201

 
$
9,443

 
$
9,601

 
$
9,406

Charge-offs
(126
)
 
(75
)
 
(250
)
 
(183
)
 
(157
)
Recoveries
245

 
67

 
8

 
25

 
29

Provision for credit losses

 

 

 

 
323

ACL ending balance
$
9,312

 
$
9,193

 
$
9,201

 
$
9,443

 
$
9,601

 
 
 
 
 
 
 
 
 
 
ACL to loans receivable, net at end of period
0.14
 %
 
0.14
%
 
0.14
%
 
0.14
%
 
0.15
%
ACL to non-performing loans at end of period
33.57

 
35.71

 
35.77

 
36.41

 
38.28

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

 

 

 

 

Ratio of net (recoveries) charge-offs during the
 
 
 
 
 
 
 
 
 
period to average non-performing assets
(0.38
)
 
0.03

 
0.79

 
0.52

 
0.41

ACL to net charge-offs (annualized)
N/M

(1) 
294.7x

 
9.5x

 
15.0x

 
18.7x


(1)
The ACL coverage ratio is not presented for the time period noted due to loan recoveries exceeding loan charge-offs for the period presented.

 
For the Nine Months Ended
 
June 30, 2016
 
June 30, 2015
 
(Dollars in thousands)
ACL beginning balance
$
9,443

 
$
9,227

Charge-offs
(451
)
 
(552
)
Recoveries
320

 
155

Provision for credit losses

 
771

ACL ending balance
$
9,312

 
$
9,601

 
 
 
 
Ratio of net charge-offs during the period to
 
 
 
average loans outstanding during the period
%
 
0.01
%
Ratio of net charge-offs during the period to
 
 
 
average non-performing assets during the period
0.42

 
1.34

ACL to net charge-offs (annualized)
53.4x

 
18.2x



44


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 77% of these portfolios at June 30, 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.
 
June 30, 2016
 
March 31, 2016
 
September 30, 2015
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Fixed-rate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MBS
$
903,550

 
2.19
%
 
3.1

 
$
968,006

 
2.23
%
 
3.3

 
$
1,047,637

 
2.24
%
 
3.2

GSE debentures
471,143

 
1.16

 
0.8

 
471,215

 
1.14

 
1.3

 
525,376

 
1.14

 
1.6

Municipal bonds
36,278

 
1.78

 
2.5

 
37,248

 
1.80

 
2.6

 
38,214

 
1.87

 
2.9

Total fixed-rate securities
1,410,971

 
1.84

 
2.3

 
1,476,469

 
1.87

 
2.6

 
1,611,227

 
1.87

 
2.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MBS
431,128

 
2.25

 
5.6

 
458,350

 
2.31

 
5.9

 
402,417

 
2.22

 
5.3

Trust preferred securities
2,163

 
1.91

 
21.0

 
2,169

 
1.89

 
21.2

 
2,186

 
1.59

 
21.7

Total adjustable-rate securities
433,291

 
2.25

 
5.7

 
460,519

 
2.30

 
6.0

 
404,603

 
2.21

 
5.4

Total securities portfolio
$
1,844,262

 
1.93

 
3.1

 
$
1,936,988

 
1.97

 
3.4

 
$
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.
 
June 30, 2016
 
September 30, 2015
 
(Dollars in thousands)
Federal National Mortgage Association ("FNMA")
$
811,181

 
$
880,810

Federal Home Loan Mortgage Corporation ("FHLMC")
445,656

 
469,290

Government National Mortgage Association
87,644

 
112,439

 
$
1,344,481

 
$
1,462,539


45


Mortgage-Backed Securities - The balance of MBS, which primarily consists of securities of U.S. GSEs, decreased $118.1 million, from $1.46 billion at September 30, 2015, to $1.34 billion at June 30, 2016. The following tables summarize the activity in our portfolio of MBS for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yield for the ending balances are as of the last day of the period presented and are generally derived from recent prepayment activity on the securities in the portfolio as of the dates presented. The 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
 
June 30, 2016
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Beginning 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

Maturities and repayments
(90,291
)
 
 
 
 
 
(80,544
)
 
 
 
 
 
(83,835
)
 
 
 
 
 
(99,840
)
 
 
 
 
Net amortization of (premiums)/discounts
(1,387
)
 
 
 
 
 
(1,091
)
 
 
 
 
 
(1,188
)
 
 
 
 
 
(1,362
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed

 

 

 
42,827

 
1.83

 
4.1

 

 

 

 

 

 

Adjustable

 

 

 
100,133

 
2.02

 
5.4

 

 

 

 

 

 

Change in valuation on AFS securities
(615
)
 
 
 
 
 
(670
)
 
 
 
 
 
(1,397
)
 
 
 
 
 
(1,443
)
 
 
 
 
Ending balance - carrying value
$
1,344,481

 
2.21

 
3.9

 
$
1,436,774

 
2.25

 
4.1

 
$
1,376,119

 
2.26

 
3.9

 
$
1,462,539

 
2.24

 
3.8


 
For the Nine Months Ended
 
June 30, 2016
 
June 30, 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
(254,670
)
 
 
 
 
 
(276,489
)
 
 
 
 
Net amortization of (premiums)/discounts
(3,666
)
 
 
 
 
 
(4,002
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
Fixed
42,827

 
1.83

 
4.1

 
45,669

 
1.62

 
4.1

Adjustable
100,133

 
2.02

 
5.4

 

 

 

Change in valuation on AFS securities
(2,682
)
 
 
 
 
 
(2,541
)
 
 
 
 
Ending balance - carrying value
$
1,344,481

 
2.21

 
3.9

 
$
1,565,184

 
2.25

 
3.9



46


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 $56.1 million, from $566.8 million at September 30, 2015, to $510.7 million at June 30, 2016. The following tables summarize the activity of investment securities for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yields for the ending balances are as of the last day of the period presented. The beginning and ending WALs represent the estimated remaining principal repayment terms (in years) of the securities after projected call dates have been considered, based upon market rates at each date presented.
 
For the Three Months Ended
 
June 30, 2016
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Beginning 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

Maturities and calls
(25,873
)
 
 
 
 
 
(27,201
)
 
 
 
 
 
(104,155
)
 
 
 
 
 
(76,387
)
 
 
 
 
Net amortization of (premiums)/discounts
(115
)
 
 
 
 
 
(106
)
 
 
 
 
 
(101
)
 
 
 
 
 
(70
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
24,940

 
1.56

 
0.5

 
74,987

 
0.93

 
0.8

 
1,432

 
1.35

 
5.6

 

 

 

Change in valuation on AFS securities
302

 
 
 
 
 
2,982

 
 
 
 
 
(3,101
)
 
 
 
 
 
1,679

 
 
 
 
Ending balance - carrying value
$
510,745

 
1.21

 
1.1

 
$
511,491

 
1.19

 
1.5

 
$
460,829

 
1.24

 
2.6

 
$
566,754

 
1.19

 
1.8


 
For the Nine Months Ended
 
June 30, 2016
 
June 30, 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
(157,229
)
 
 
 
 
 
(112,132
)
 
 
 
 
Net amortization of (premiums)/discounts
(322
)
 
 
 
 
 
(215
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
Fixed
101,359

 
1.09

 
0.8

 
158,401

 
1.21

 
2.1

Change in valuation on AFS securities
183

 
 
 
 
 
4,536

 
 
 
 
Ending balance - carrying value
$
510,745

 
1.21

 
1.1

 
$
641,532

 
1.18

 
2.5



47


Liabilities. Total liabilities were $7.86 billion at June 30, 2016 compared to $8.43 billion at September 30, 2015. The $567.0 million decrease was due primarily to a $798.5 million decrease in FHLB borrowings, largely as a result of the removal of the entire daily leverage strategy at June 30, 2016, along with a $100.0 million decrease in term FHLB advances, partially offset by a $252.6 million increase in the deposit portfolio.

Deposits - Deposits were $5.09 billion at June 30, 2016 compared to $4.83 billion at September 30, 2015. The $252.6 million increase was due primarily to a $79.3 million increase in the retail certificate of deposit portfolio, a $60.3 million increase in the checking portfolio, and a $55.9 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.
 
June 30, 2016
 
March 31, 2016
 
September 30, 2015
 
 
 
 
 
% of
 
 
 
 
 
% of
 
 
 
 
 
% of
 
Amount
 
Rate
 
 Total
 
Amount
 
Rate
 
 Total
 
Amount
 
Rate
 
 Total
 
(Dollars in thousands)
Noninterest-bearing checking
$
209,358

 
%
 
4.1
%
 
$
211,068

 
%
 
4.1
%
 
$
188,007

 
%
 
3.9
%
Interest-bearing checking
589,668

 
0.05

 
11.6

 
604,790

 
0.05

 
11.8

 
550,741

 
0.05

 
11.4

Savings
335,403

 
0.20

 
6.6

 
330,467

 
0.17

 
6.5

 
311,670

 
0.16

 
6.4

Money market
1,182,255

 
0.24

 
23.3

 
1,165,592

 
0.23

 
22.8

 
1,148,935

 
0.23

 
23.8

Retail certificates of deposit
2,400,141

 
1.41

 
47.2

 
2,421,622

 
1.38

 
47.3

 
2,320,804

 
1.29

 
48.0

Public units
368,304

 
0.65

 
7.2

 
386,290

 
0.56

 
7.5

 
312,363

 
0.40

 
6.5

 
$
5,085,129

 
0.78

 
100.0
%
 
$
5,119,829

 
0.77

 
100.0
%
 
$
4,832,520

 
0.72

 
100.0
%

The following tables set forth scheduled maturity information for our certificates of deposit, along with associated weighted average rates, at June 30, 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%
 
$
784,762

 
$
193,979

 
$
966

 
$

 
$
979,707

 
0.66
%
1.00 – 1.99%
 
301,156

 
463,960

 
369,817

 
483,457

 
1,618,390

 
1.60

2.00 – 2.99%
 
7,166

 
162

 
1,494

 
161,210

 
170,032

 
2.24

3.00 – 3.99%
 
207

 
109

 

 

 
316

 
3.12

 
 
$
1,093,291

 
$
658,210

 
$
372,277

 
$
644,667

 
$
2,768,445

 
1.31

 
 
 
 
 
 
 
 
 
 
 
 
 
Percent of total
 
39.5
%
 
23.8
%
 
13.4
%
 
23.3
%
 
 
 
 
Weighted average rate
 
0.85

 
1.26

 
1.58

 
1.96

 
 
 
 
Weighted average maturity (in years)
 
0.5

 
1.4

 
2.5

 
3.8

 
1.7

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

 
 


48


 
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
$
138,939

 
$
152,301

 
$
250,306

 
$
983,443

 
$
1,524,989

Retail certificates of deposit of $100,000 or more
56,944

 
74,364

 
126,711

 
617,133

 
875,152

Public unit deposits of $100,000 or more
124,753

 
93,505

 
75,468

 
74,578

 
368,304

 
$
320,636

 
$
320,170

 
$
452,485

 
$
1,675,154

 
$
2,768,445


Borrowings - The following tables present term borrowing activity for the periods shown, which includes FHLB advances, at par, and repurchase agreements. Line of credit activity is excluded from the following tables. The weighted average effective rate includes the 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
 
June 30, 2016
 
March 31, 2016
 
December 31, 2015
 
September 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
%
 
3.0

 
$
2,675,000

 
2.29
%
 
3.2

 
$
2,775,000

 
2.29
%
 
3.3

 
$
2,795,000

 
2.49
%
 
3.3

Maturities and prepayments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FHLB advances
(100,000
)
 
3.17

 
 
 

 

 
 
 
(200,000
)
 
1.94

 
 
 
(175,000
)
 
5.08

 
 
Repurchase agreements

 

 
 
 

 

 
 
 

 

 
 
 
(20,000
)
 
4.45

 
 
New borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FHLB advances
100,000

 
1.82

 
7.0

 

 

 

 
100,000

 
1.45

 
3.0

 
175,000

 
2.18

 
3.0

Ending balance
$
2,675,000

 
2.24

 
3.0

 
$
2,675,000

 
2.29

 
3.0

 
$
2,675,000

 
2.29

 
3.2

 
$
2,775,000

 
2.29

 
3.3

 
For the Nine Months Ended
 
June 30, 2016
 
June 30, 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
(300,000
)
 
2.35

 
 
 
(600,000
)
 
1.88

 
 
New borrowings:
 
 
 
 
 
 
 
 
 
 
 
FHLB advances
200,000

 
1.64

 
5.0

 
600,000

 
2.06

 
6.0

Ending balance
$
2,675,000

 
2.24

 
3.0

 
$
2,795,000

 
2.49

 
3.3


49



Maturities - The following table presents the maturity of term borrowings (including FHLB advances, at par, and repurchase agreements), along with associated weighted average contractual and effective rates as of June 30, 2016. Subsequent to June 30, 2016, a $100.0 million FHLB advance with an effective rate of 0.83% matured. The advance was not renewed or replaced.
 
 
FHLB
 
Repurchase
 
 
 
 
 
 
Maturity by
 
Advances
 
Agreements
 
Total
 
Contractual
 
Effective
Fiscal year
 
Amount
 
Amount
 
Amount
 
Rate
 
Rate(1)
 
 
(Dollars in thousands)
 
 
 
 
2016
 
$
100,000

 
$

 
$
100,000

 
0.83
%
 
0.83
%
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

2023
 
100,000

 

 
100,000

 
1.82

 
1.82

 
 
$
2,475,000

 
$
200,000

 
$
2,675,000

 
2.18

 
2.24


(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 June 30, 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)
September 30, 2016
 
$
195,883

 
0.90
%
 
$
124,753

 
0.48
%
 
$
100,000

 
0.83
%
 
$
420,636

 
0.76
%
December 31, 2016
 
226,665

 
0.97

 
93,505

 
0.53

 
100,000

 
0.78

 
420,170

 
0.83

March 31, 2017
 
153,509

 
0.91

 
35,038

 
0.68

 

 

 
188,547

 
0.87

June 30, 2017
 
223,508

 
1.05

 
40,430

 
0.70

 
300,000

 
3.24

 
563,938

 
2.19

 
 
$
799,565

 
0.97

 
$
293,726

 
0.55

 
$
500,000

 
2.26

 
$
1,593,291

 
1.30



50


Stockholders' Equity. Stockholders' equity was $1.38 billion at June 30, 2016 compared to $1.42 billion at September 30, 2015. The $35.4 million decrease between periods was due primarily to the payment of $100.4 million in cash dividends, partially offset by net income of $62.8 million. The cash dividends paid during the current year nine 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, a $0.25 per share True Blue® Capitol dividend, and three regular quarterly cash dividends totaling $0.255 per share. On July 21, 2016, the Company declared a regular quarterly cash dividend of $0.085 per share, or approximately $11.3 million, payable on August 19, 2016 to stockholders of record as of the close of business on August 5, 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 nine month period ended June 30, 2016.

At June 30, 2016, Capitol Federal Financial, Inc., at the holding company level, had $93.6 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, in addition to the True Blue Capitol dividend paid in June 2016 which was funded with a $36.0 million capital contribution from the Bank. 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 September 30, 2016, the amount presented represents the dividend payable on August 19, 2016 to stockholders of record as of August 5, 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
11,311

 
0.085

 
11,585

 
0.085

 
10,399

 
0.075

Quarter ended September 30
11,323

 
0.085

 
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
33,274

 
0.250

 
33,924

 
0.250

 
34,663

 
0.250

Calendar year-to-date dividends paid
$
67,213

 
$
0.505

 
$
113,037

 
$
0.840

 
$
111,569

 
$
0.810





51


Operating Results
The following table presents selected income statement and other information for the quarters indicated.
 
For the Three Months Ended
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
2016
 
2016
 
2015
 
2015
 
2015
 
(Dollars in thousands, except per share data)
Interest and dividend income:
 
 
 
 
 
 
 
 
 
Loans receivable
$
60,840

 
$
60,732

 
$
60,223

 
$
59,761

 
$
58,922

MBS
7,401

 
7,702

 
7,831

 
8,260

 
8,849

FHLB stock
3,050

 
3,006

 
3,152

 
3,167

 
3,132

Cash and cash equivalents
2,730

 
2,707

 
1,620

 
1,303

 
1,357

Investment securities
1,506

 
1,485

 
1,533

 
1,920

 
1,914

Total interest and dividend income
75,527

 
75,632

 
74,359

 
74,411

 
74,174

 
 
 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
 
 
 
FHLB borrowings
16,361

 
16,394

 
16,074

 
16,539

 
17,072

Deposits
9,749

 
9,213

 
8,799

 
8,390

 
8,377

Repurchase agreements
1,487

 
1,487

 
1,504

 
1,542

 
1,712

Total interest expense
27,597

 
27,094

 
26,377

 
26,471

 
27,161

 
 
 
 
 
 
 
 
 
 
Net interest income
47,930

 
48,538

 
47,982

 
47,940

 
47,013

 
 
 
 
 
 
 
 
 
 
Provision for credit losses

 

 

 

 
323

 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
 
 
 
 
 
 
 
(after provision for credit losses)
47,930

 
48,538

 
47,982

 
47,940

 
46,690

 
 
 
 
 
 
 
 
 
 
Non-interest income
5,429

 
6,626

 
5,566

 
5,461

 
5,145

Non-interest expense
23,327

 
23,426

 
23,590

 
25,262

 
23,106

Income tax expense
9,481

 
10,211

 
9,240

 
9,354

 
9,127

Net income
$
20,551

 
$
21,527

 
$
20,718

 
$
18,785

 
$
19,602

 
 
 
 
 
 
 
 
 
 
Efficiency ratio
43.72
%
 
42.46
%
 
44.05
%
 
47.31
%
 
44.30
%
 
 
 
 
 
 
 
 
 
 
Basic EPS
$
0.15

 
$
0.16

 
$
0.16

 
$
0.14

 
$
0.14

Diluted EPS
0.15

 
0.16

 
0.16

 
0.14

 
0.14



52


Comparison of Operating Results for the Nine Months Ended June 30, 2016 and 2015

For the nine month period ended June 30, 2016, the Company recognized net income of $62.8 million, or $0.47 per share, compared to net income of $59.3 million, or $0.43 per share, for the nine month period ended June 30, 2015. The $3.5 million, or 5.9%, increase in net income was due primarily to a $2.6 million increase in net interest income and a $1.9 million increase in non-interest income, partially offset by a $1.2 million increase in non-interest expense. The $2.6 million, or 1.9%, increase in net interest income from the prior year nine month period was due primarily to a $6.4 million decrease in interest expense on term borrowings, partially offset by a $3.0 million increase in interest expense on deposits.

Net income attributable to the daily leverage strategy was $1.7 million during the current year nine month period, compared to $2.2 million for the prior year nine 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 a larger increase than the increase in the average yield earned on the cash balances held at the Federal Reserve Bank.

The net interest margin increased three basis points, from 1.72% for the prior year nine month period to 1.75% for the current year nine month period. Excluding the effects of the daily leverage strategy, the net interest margin would have increased four basis points, from 2.07% for the prior year nine month period, to 2.11% for the current year nine month period. The increase in the net interest margin was due mainly to a decrease in interest expense on term borrowings, partially offset by an increase in interest expense on deposits. The Company's efficiency ratio was 43.40% for the current year nine month period compared to 43.88% for the prior year nine month period.

Interest and Dividend Income
The weighted average yield on total interest-earning assets increased three basis points, from 2.71% for the prior year nine month period to 2.74% for the current year nine month period, and the average balance of interest-earning assets increased $19.9 million from the prior year nine 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 3.22% for the prior year nine month period to 3.21% for the current year nine month period, while the average balance would have increased $38.0 million. The following table presents the components of interest and dividend income for the time periods presented along with the change measured in dollars and percent.
 
For the Nine Months Ended
 
 
 
 
 
June 30,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
181,795

 
$
175,739

 
$
6,056

 
3.4
 %
MBS
22,934

 
28,387

 
(5,453
)
 
(19.2
)
FHLB stock
9,208

 
9,389

 
(181
)
 
(1.9
)
Cash and cash equivalents
7,057

 
4,174

 
2,883

 
69.1

Investment securities
4,524

 
5,262

 
(738
)
 
(14.0
)
Total interest and dividend income
$
225,518

 
$
222,951

 
$
2,567

 
1.2


The increase in interest income on loans receivable was due to a $391.4 million increase in the average balance of the portfolio, partially offset by a nine basis point decrease in the weighted average yield on the portfolio, to 3.61% for the current year nine 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 loans repricing to lower market rates and the origination and purchase of loans between periods at rates less than the existing portfolio rate, along with an increase in the amortization of premiums paid for correspondent loans as a result of prepayment activity.

The decrease in interest income on the MBS portfolio was due primarily to a $282.8 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 six basis points, from 2.26% during the prior year nine month period to 2.20% for the current year nine month period. The decrease in the weighted average yield was due to an increase in the impact of net premium amortization, as well as the purchase of MBS with yields lower than the weighted average yield on the existing portfolio. Net premium amortization of $3.7 million during the current year nine month period decreased the weighted average yield on the portfolio by 35 basis points. During the prior year nine month period, $4.0 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 32 basis points. As of June 30, 2016, the remaining net balance of premiums on our portfolio of MBS was $14.4 million.


53


The increase in interest income on cash and cash equivalents was due primarily to a 17 basis point increase in the weighted average yield resulting from an increase in the yield earned on balances held at the Federal Reserve Bank.

The decrease in interest income on investment securities was due primarily to a $95.5 million decrease in the average balance, partially offset by a three 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 two basis points, from 1.13% for the prior year nine month period to 1.11% for the current year nine month period, while the average balance of interest-bearing liabilities increased $142.7 million from the prior year nine 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 nine month period, to 1.28% for the current year nine month period, due primarily to a decrease in the cost of term borrowings, while the average balance of interest-bearing liabilities would have increased $160.8 million due primarily to growth in deposits. The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.
 
For the Nine Months Ended
 
 
 
 
 
June 30,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB advances
$
41,569

 
$
47,300

 
$
(5,731
)
 
(12.1
)%
FHLB line of credit
7,260

 
3,958

 
3,302

 
83.4

Deposits
27,761

 
24,729

 
3,032

 
12.3

Repurchase agreements
4,478

 
5,136

 
(658
)
 
(12.8
)
Total interest expense
$
81,068

 
$
81,123

 
$
(55
)
 
(0.1
)

The decrease in interest expense on FHLB advances was due primarily to a 23 basis point decrease in the weighted average rate paid on the portfolio, to 2.23% for the current year nine month period, mainly 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 21 basis point increase in the weighted average rate paid on the borrowings.

The increase in interest expense on deposits was due to growth in the portfolio, and a four basis point increase in the weighted average rate, to 0.74% for the current year nine month period. The average balance of the deposit portfolio increased $258.3 million for the current year nine 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% that was not replaced.

Provision for Credit Losses
The Bank did not record a provision for credit losses during the current year nine month period, compared to a provision for credit losses during the prior year nine month period of $771 thousand, due to the continued low level of net loan charge-offs and delinquent loan balances. Net loan charge-offs were $131 thousand for the current year nine month period compared to $397 thousand for the prior year nine month period. The improvement in collateral values has assisted in lowering our net charge-off amounts compared to prior years. At June 30, 2016, loans 30 to 89 days delinquent were 0.30% of total loans and loans 90 or more days delinquent or in foreclosure were 0.26% of total loans.


54


Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.
 
For the Nine Months Ended
 
 
 
 
 
June 30,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
$
11,097

 
$
11,052

 
$
45

 
0.4
 %
Income from BOLI
2,810

 
819

 
1,991

 
243.1

Insurance commissions
2,093

 
2,059

 
34

 
1.7

Loan fees
1,004

 
1,071

 
(67
)
 
(6.3
)
Other non-interest income
617

 
678

 
(61
)
 
(9.0
)
Total non-interest income
$
17,621

 
$
15,679

 
$
1,942

 
12.4


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 period with no such proceeds in the prior year period.

Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.
 
For the Nine Months Ended
 
 
 
 
 
June 30,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
31,604

 
$
31,927

 
$
(323
)
 
(1.0
)%
Occupancy, net
7,894

 
7,437

 
457

 
6.1

Information technology and communications
7,883

 
7,726

 
157

 
2.0

Federal insurance premium
4,158

 
4,092

 
66

 
1.6

Deposit and loan transaction costs
4,119

 
4,065

 
54

 
1.3

Regulatory and outside services
4,000

 
3,867

 
133

 
3.4

Advertising and promotional
3,190

 
2,707

 
483

 
17.8

Low income housing partnerships
2,815

 
3,404

 
(589
)
 
(17.3
)
Office supplies and related expense
2,016

 
1,560

 
456

 
29.2

Other non-interest expense
2,664

 
2,322

 
342

 
14.7

Total non-interest expense
$
70,343

 
$
69,107

 
$
1,236

 
1.8


The increase in occupancy, net expense was due mainly to non-capitalizable costs and depreciation 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 of $611 thousand in the prior year period, compared to $85 thousand in the current year 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 an increase in properties with deferred maintenance and damage issues.

Management anticipates that salaries and employee benefits will decrease approximately $500 thousand from fiscal year 2015, a change from our estimate in the previous quarter of a $500 thousand increase from fiscal year 2015. The change in our projection was due mainly to lower than anticipated employee benefit expenses.


55


The Bank invests in low income housing partnerships that make equity investments in affordable housing properties and is a limited partner in these partnerships. Currently the Bank accounts for these partnerships using the equity method of accounting as two of the Bank's officers are involved in the operational management of the low income housing partnership investment group. It is anticipated that, effective September 30, 2016, those two Bank officers will discontinue their involvement in the operational management of the investment group. This will allow the Bank to report the results of the investments utilizing the proportional method of accounting, beginning October 1, 2016, which will better reflect the economics of our investment in the partnerships. In fiscal year 2017, the Bank will no longer report low income housing partnership expenses in non-interest expense. Rather, the pretax operating losses and related tax benefits of the investments will be reported as a component of income tax expense. If this change would have occurred during fiscal year 2016, the effective income tax rate would have been approximately 250 basis points higher and the efficiency ratio would have been approximately 175 basis points lower.

Income Tax Expense
Income tax expense was $28.9 million for the current year nine month period compared to $28.3 million for the prior year nine month period. The effective tax rate for the current year nine month period was 31.5% compared to 32.3% for the prior year nine 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 June 30, 2016.





56


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 June 30, 2016. As previously discussed, the daily leverage strategy was not in place at June 30, 2016, so the end of period yields/rates presented at June 30, 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 Nine Months Ended
 
June 30,
 
June 30, 2016
 
June 30, 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)
3.61%
 
$
6,721,845

 
$
181,795

 
3.61
%
 
$
6,330,461

 
$
175,739

 
3.70
%
MBS(2)
2.21
 
1,391,441

 
22,934

 
2.20

 
1,674,246

 
28,387

 
2.26

Investment securities(2)(3)
1.21
 
497,794

 
4,524

 
1.21

 
593,268

 
5,262

 
1.18

FHLB stock
5.98
 
205,434

 
9,208

 
5.99

 
209,749

 
9,389

 
5.98

Cash and cash equivalents
0.49
 
2,167,680

 
7,057

 
0.43

 
2,156,567

 
4,174

 
0.26

Total interest-earning assets(1)(2)
3.25
 
10,984,194

 
225,518

 
2.74

 
10,964,291

 
222,951

 
2.71

Other noninterest-earning assets
 
 
290,854

 
 
 
 
 
231,154

 
 
 
 
Total assets
 
 
$
11,275,048

 
 
 
 
 
$
11,195,445

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Checking
0.04
 
$
781,509

 
218

 
0.04

 
$
723,699

 
204

 
0.04

Savings
0.20
 
323,300

 
464

 
0.19

 
304,716

 
335

 
0.15

Money market
0.24
 
1,168,086

 
2,054

 
0.23

 
1,147,014

 
1,999

 
0.23

Retail certificates
1.41
 
2,356,566

 
23,628

 
1.34

 
2,251,608

 
20,840

 
1.24

Wholesale certificates
0.65
 
370,784

 
1,397

 
0.50

 
314,942

 
1,351

 
0.57

Total deposits
0.78
 
5,000,245

 
27,761

 
0.74

 
4,741,979

 
24,729

 
0.70

FHLB advances(4)
2.18
 
2,491,414

 
41,569

 
2.23

 
2,571,417

 
47,300

 
2.46

FHLB line of credit
 
2,056,570

 
7,260

 
0.46

 
2,072,162

 
3,958

 
0.25

FHLB borrowings
2.18
 
4,547,984

 
48,829

 
1.43

 
4,643,579

 
51,258

 
1.47

Repurchase agreements
2.94
 
200,000

 
4,478

 
2.94

 
220,000

 
5,136

 
3.08

Total borrowings
2.24
 
4,747,984

 
53,307

 
1.49

 
4,863,579

 
56,394

 
1.55

Total interest-bearing liabilities
1.28
 
9,748,229

 
81,068

 
1.11

 
9,605,558

 
81,123

 
1.13

Other noninterest-bearing liabilities
 
 
118,180

 
 
 
 
 
107,457

 
 
 
 
Stockholders' equity
 
 
1,408,639

 
 
 
 
 
1,482,430

 
 
 
 
Total liabilities and stockholders' equity
 
$
11,275,048

 
 
 
 
 
$
11,195,445

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Continued)
 



57


 
At
 
For the Nine Months Ended
 
June 30,
 
June 30, 2016
 
June 30, 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)
 
 
 
 
$
144,450

 
 
 
 
 
$
141,828

 
 
Net interest rate spread(6)(11)
1.97%
 
 
 
 
 
1.63
%
 
 
 
 
 
1.58
%
Net interest-earning assets
 
 
$
1,235,965

 
 
 
 
 
$
1,358,733

 
 
 
 
Net interest margin(7)(11)
 
 
 
 
 
 
1.75

 
 
 
 
 
1.72

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

 
 
 
 
 
1.14x

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selected performance ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized)(11)
 
 
 
 
 
0.74
%
 
 
 
 
 
0.71
%
Return on average equity (annualized)(11)
 
 
 
 
 
5.94

 
 
 
 
 
5.33

Average equity to average assets
 
 
 
 
 
 
12.49

 
 
 
 
 
13.24

Operating expense ratio(8)
 
 
 
 
 
 
0.83

 
 
 
 
 
0.82

Efficiency ratio(9)
 
 
 
 
 
 
43.40

 
 
 
 
 
43.88

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 $37.6 million and $36.6 million for the nine months ended June 30, 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 certain financial ratios showing the financial results of the daily leverage strategy, along with financial ratios without the effects of the daily leverage strategy. Since the daily leverage strategy only involves assets and liabilities, there is no direct equity impact of the daily leverage strategy, outside of generating additional earnings. Therefore, the return on average equity of the daily leverage strategy is not applicable (N/A). Management believes it is important for comparability purposes to provide the financial ratios without the daily leverage strategy because of the unique nature of the daily leverage strategy.
 
For the Nine Months Ended
 
June 30, 2016
 
June 30, 2015
 
Daily
 
Reported without
 
Daily
 
Reported without
 
Leverage
 
the Daily
 
Leverage
 
the Daily
 
Strategy
 
Leverage Strategy
 
Strategy
 
Leverage Strategy
Return on average assets (annualized)
0.11
%
 
0.88
%
 
0.14
%
 
0.84
%
Return on average equity (annualized)
N/A

 
5.79

 
N/A

 
5.14

Net interest margin
0.22

 
2.11

 
0.26

 
2.07

Average net interest rate spread
0.22

 
1.93

 
0.27

 
1.85



58


Rate/Volume Analysis
The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the nine months ended June 30, 2016 to the nine months ended June 30, 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 Nine Months Ended
 
June 30, 2016 vs. June 30, 2015
 
Increase (Decrease) Due to
 
Volume
 
Rate
 
Total
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable
$
10,563

 
$
(4,507
)
 
$
6,056

MBS
(4,680
)
 
(773
)
 
(5,453
)
Investment securities
(865
)
 
127

 
(738
)
FHLB stock
(163
)
 
(18
)
 
(181
)
Cash and cash equivalents
22

 
2,861

 
2,883

Total interest-earning assets
4,877

 
(2,310
)
 
2,567

 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Checking
17

 
(3
)
 
14

Savings
22

 
107

 
129

Money market
42

 
13

 
55

Certificates of deposit
1,480

 
1,354

 
2,834

FHLB borrowings
(1,349
)
 
(1,080
)
 
(2,429
)
Repurchase agreements
(442
)
 
(216
)
 
(658
)
Total interest-bearing liabilities
(230
)
 
175

 
(55
)
 
 
 
 
 
 
Net change in net interest and dividend income
$
5,107

 
$
(2,485
)
 
$
2,622



Comparison of Operating Results for the Three Months Ended June 30, 2016 and 2015

For the quarter ended June 30, 2016, the Company recognized net income of $20.6 million, or $0.15 per share, compared to net income of $19.6 million, or $0.14 per share, for the quarter ended June 30, 2015. The $949 thousand, or 4.8%, increase in net income was due primarily to a $917 thousand increase in net interest income resulting from a decrease in interest expense on term borrowings, partially offset by an increase in interest expense on deposits.

Net income attributable to the daily leverage strategy was $532 thousand during the current year quarter, compared to $699 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 yield earned on the cash at the Federal Reserve Bank.

The net interest margin increased two basis points, from 1.71% for the prior year quarter to 1.73% for the current year quarter. Excluding the effects of the daily leverage strategy, the net interest margin would have increased four basis points, from 2.05% for the prior year quarter to 2.09% for the current year quarter. The increase in the net interest margin was due mainly to a decrease in interest expense on term borrowings, partially offset by an increase in interest expense on deposits.


59


Interest and Dividend Income
The weighted average yield on total interest-earning assets increased four basis points, from 2.69% for the prior year quarter to 2.73% for the current year quarter, and the average balance of interest-earning assets increased $38.3 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 decreased one basis point, from 3.20% for the prior year quarter to 3.19% for the current year quarter. The following table presents the components of interest and dividend income for the time periods presented along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
June 30,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
60,840

 
$
58,922

 
$
1,918

 
3.3
 %
MBS
7,401

 
8,849

 
(1,448
)
 
(16.4
)
FHLB stock
3,050

 
3,132

 
(82
)
 
(2.6
)
Cash and cash equivalents
2,730

 
1,357

 
1,373

 
101.2

Investment securities
1,506

 
1,914

 
(408
)
 
(21.3
)
Total interest and dividend income
$
75,527

 
$
74,174

 
$
1,353

 
1.8


The increase in interest income on loans receivable was due to a $375.4 million increase in the average balance of the portfolio, partially offset by a nine basis point decrease in the weighted average yield on the portfolio, to 3.58% for the current year 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 loans repricing to lower market rates and the origination and purchase of loans between periods at rates less than the existing portfolio rate, along with an increase in the amortization of premiums paid for correspondent loans as a result of prepayment activity.

The decrease in interest income on the MBS portfolio was due primarily to a $215.6 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 seven basis points, from 2.21% during the prior year quarter to 2.14% for the current year quarter. The decrease in the weighted average yield was due mainly to an increase in the impact of net premium amortization. During the current year quarter, $1.4 million of net premiums on MBS were amortized, which decreased the weighted average yield on the portfolio by 40 basis points. During the prior year quarter, $1.4 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 35 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 $134.6 million decrease in the average balance of the portfolio as cash flows not reinvested were used to fund loan growth.


60


Interest Expense
The weighted average rate paid on total interest-bearing liabilities increased one basis point, from 1.12% for the prior year quarter to 1.13% for the current year quarter, and the average balance of interest-bearing liabilities increased $148.3 million from the prior year quarter due to deposit growth. Absent the impact of the daily leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have decreased seven basis points from the prior year quarter to 1.29%, due primarily to a decrease in the cost of term borrowings. 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
 
 
 
 
 
June 30,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB advances
$
13,515

 
$
15,718

 
$
(2,203
)
 
(14.0
)%
FHLB line of credit
2,846

 
1,354

 
1,492

 
110.2

Deposits
9,749

 
8,377

 
1,372

 
16.4

Repurchase agreements
1,487

 
1,712

 
(225
)
 
(13.1
)
Total interest expense
$
27,597

 
$
27,161

 
$
436

 
1.6


The decrease in interest expense on FHLB advances was due primarily to a 24 basis point decrease in the weighted average rate paid on the portfolio to 2.21% for the current year quarter, mainly as a result of 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 due primarily to a seven basis point increase in the weighted average rate to 0.77% for the current year quarter, along with growth in deposits. The average balance of the deposit portfolio increased $268.8 million compared to the prior year quarter, with the majority of the increase in the higher costing retail certificate of deposit portfolio.
 
Provision for Credit Losses
The Bank did not record a provision for credit losses during the current year quarter, compared to a provision for credit losses during the prior year quarter of $323 thousand, due to the continued low level of net loan charge-offs and delinquent loan balances.  The Bank recognized a net recovery of $119 thousand for the current year quarter, compared to net charge-offs of $128 thousand for the prior year quarter.  At June 30, 2016, loans 30 to 89 days delinquent were 0.30% of total loans and loans 90 or more days delinquent or in foreclosure were 0.26% of total loans.

Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
June 30,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
$
3,725

 
$
3,798

 
$
(73
)
 
(1.9
)%
Income from BOLI
648

 
251

 
397

 
158.2

Insurance commissions
517

 
537

 
(20
)
 
(3.7
)
Loan fees
326

 
340

 
(14
)
 
(4.1
)
Other non-interest income
213

 
219

 
(6
)
 
(2.7
)
Total non-interest income
$
5,429

 
$
5,145

 
$
284

 
5.5


The increase in income from BOLI was due mainly to the purchase of a new BOLI investment between periods.

61


Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
June 30,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
10,829

 
$
11,038

 
$
(209
)
 
(1.9
)%
Occupancy, net
2,606

 
2,557

 
49

 
1.9

Information technology and communications
2,716

 
2,573

 
143

 
5.6

Federal insurance premium
1,377

 
1,342

 
35

 
2.6

Deposit and loan transaction costs
1,449

 
1,435

 
14

 
1.0

Regulatory and outside services
1,370

 
1,365

 
5

 
0.4

Advertising and promotional
1,053

 
1,069

 
(16
)
 
(1.5
)
Low income housing partnerships
721

 
492

 
229

 
46.5

Office supplies and related expense
545

 
499

 
46

 
9.2

Other non-interest expense
661

 
736

 
(75
)
 
(10.2
)
Total non-interest expense
$
23,327

 
$
23,106

 
$
221

 
1.0


The increase in low income housing partnerships expense was due primarily to an increase in amortization expense.

The Company's efficiency ratio was 43.72% for the current year quarter compared to 44.30% for the prior year quarter. The change in the efficiency ratio was due primarily to an increase in net interest income.

Income Tax Expense
Income tax expense was $9.5 million for the current year quarter compared to $9.1 million for the prior year quarter. The $354 thousand increase was due to an increase in pre-tax income. The effective tax rate for the current year quarter was 31.6% compared to 31.8% for the prior year quarter.


62


Average Balance Sheet
Average yields are derived by dividing annualized income by the average balance of the related assets and average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The yields and rates include amortization of fees, costs, premiums and discounts which are considered adjustments to yields/rates. Yields on tax-exempt securities were not calculated on a fully taxable equivalent basis.
 
For the Three Months Ended
 
June 30, 2016
 
June 30, 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)
$
6,797,602

 
$
60,840

 
3.58
%
 
$
6,422,240

 
$
58,922

 
3.67
%
MBS(2)
1,386,470

 
7,401

 
2.14

 
1,602,047

 
8,849

 
2.21

Investment securities(2)(3)
501,757

 
1,506

 
1.20

 
636,368

 
1,914

 
1.20

FHLB stock
204,870

 
3,050

 
5.99

 
209,890

 
3,132

 
5.98

Cash and cash equivalents
2,160,016

 
2,730

 
0.50

 
2,141,864

 
1,357

 
0.25

Total interest-earning assets(1)(2)
11,050,715

 
75,527

 
2.73

 
11,012,409

 
74,174

 
2.69

Other noninterest-earning assets
290,258

 
 
 
 
 
229,657

 
 
 
 
Total assets
$
11,340,973

 
 
 
 
 
$
11,242,066

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Checking
$
801,782

 
74

 
0.04

 
$
751,078

 
70

 
0.04

Savings
333,067

 
156

 
0.19

 
311,504

 
115

 
0.15

Money market
1,174,471

 
686

 
0.23

 
1,146,468

 
665

 
0.23

Retail certificates
2,401,381

 
8,287

 
1.39

 
2,283,125

 
7,158

 
1.26

Wholesale certificates
360,026

 
546

 
0.61

 
309,765

 
369

 
0.48

Total deposits
5,070,727

 
9,749

 
0.77

 
4,801,940

 
8,377

 
0.70

FHLB advances(4)
2,464,094

 
13,515

 
2.21

 
2,572,293

 
15,718

 
2.45

FHLB line of credit
2,084,616

 
2,846

 
0.54

 
2,076,924

 
1,354

 
0.26

FHLB borrowings
4,548,710

 
16,361

 
1.44

 
4,649,217

 
17,072

 
1.47

Repurchase agreements
200,000

 
1,487

 
2.94

 
220,000

 
1,712

 
3.08

Total borrowings
4,748,710

 
17,848

 
1.51

 
4,869,217

 
18,784

 
1.54

Total interest-bearing liabilities
9,819,437

 
27,597

 
1.13

 
9,671,157

 
27,161

 
1.12

Other noninterest-bearing liabilities
111,382

 
 
 
 
 
89,052

 
 
 
 
Stockholders' equity
1,410,154

 
 
 
 
 
1,481,857

 
 
 
 
Total liabilities and stockholders' equity
$
11,340,973

 
 
 
 
 
$
11,242,066

 
 
 
 
 
 
 
 
 
 
 
 
 
(Continued)
 



63


 
For the Three Months Ended
 
June 30, 2016
 
June 30, 2015
 
Average
 
Interest
 
 
 
Average
 
Interest
 
 
 
Outstanding
 
Earned/
 
Yield/
 
Outstanding
 
Earned/
 
Yield/
 
Amount
 
Paid
 
Rate
 
Amount
 
Paid
 
Rate
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income(5)
 
 
$
47,930

 
 
 
 
 
$
47,013

 
 
Net interest rate spread(6)(11)
 
 
 
 
1.60
%
 
 
 
 
 
1.57
%
Net interest-earning assets
$
1,231,278

 
 
 
 
 
$
1,341,252

 
 
 
 
Net interest margin(7)(11)
 
 
 
 
1.73

 
 
 
 
 
1.71

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

 
 
 
 
 
1.14x

 
 
 
 
 
 
 
 
 
 
 
 
Selected performance ratios:
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized)(11)
 
 
 
0.72
%
 
 
 
 
 
0.70
%
Return on average equity (annualized)(11)
 
 
 
5.83

 
 
 
 
 
5.29

Average equity to average assets
 
 
 
 
12.43

 
 
 
 
 
13.18

Operating expense ratio(8)
 
 
 
 
0.82

 
 
 
 
 
0.82

Efficiency ratio(9)
 
 
 
 
43.72

 
 
 
 
 
44.30

Pre-tax yield on daily leverage strategy(10)
 
 
 
0.15

 
 
 
 
 
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 $36.6 million and $37.9 million for the three months ended June 30, 2016 and June 30, 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 certain financial ratios showing the financial results of the daily leverage strategy, along with financial ratios without the effects of the daily leverage strategy. Since the daily leverage strategy only involves assets and liabilities, there is no direct equity impact of the daily leverage strategy, outside of generating additional earnings. Therefore, the return on average equity of the daily leverage strategy is not applicable (N/A). Management believes it is important for comparability purposes to provide the financial ratios without the daily leverage strategy because of the unique nature of the daily leverage strategy.
 
For the Three Months Ended
 
June 30, 2016
 
June 30, 2015
 
Daily
 
Reported without
 
Daily
 
Reported without
 
Leverage
 
the Daily
 
Leverage
 
the Daily
 
Strategy
 
Leverage Strategy
 
Strategy
 
Leverage Strategy
Return on average assets (annualized)
0.10
%
 
0.86
%
 
0.13
%
 
0.83
%
Return on average equity (annualized)
N/A

 
5.68

 
N/A

 
5.10

Net interest margin
0.21

 
2.09

 
0.25

 
2.05

Average net interest rate spread
0.21

 
1.90

 
0.25

 
1.84




64


Rate/Volume Analysis
The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended June 30, 2016 to the three months ended June 30, 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 June 30,
 
2016 vs. 2015
 
Increase (Decrease) Due to
 
Volume
 
Rate
 
Total
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable
$
3,350

 
$
(1,432
)
 
$
1,918

MBS
(1,159
)
 
(289
)
 
(1,448
)
Investment securities
(404
)
 
(4
)
 
(408
)
FHLB stock
(75
)
 
(7
)
 
(82
)
Cash and cash equivalents
12

 
1,361

 
1,373

Total interest-earning assets
1,724

 
(371
)
 
1,353

 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Checking
5

 
(1
)
 
4

Savings
8

 
34

 
42

Money market
16

 
4

 
20

Certificates of deposit
509

 
797

 
1,306

FHLB borrowings
(601
)
 
(110
)
 
(711
)
Repurchase agreements
(151
)
 
(74
)
 
(225
)
Total interest-bearing liabilities
(214
)
 
650

 
436

 
 
 
 
 
 
Net change in net interest and dividend income
$
1,938

 
$
(1,021
)
 
$
917



Comparison of Operating Results for the Three Months Ended June 30, 2016 and March 31, 2016

Net income decreased $976 thousand, or 4.5%, from the quarter ended March 31, 2016 to $20.6 million, or $0.15 per share, for the quarter ended June 30, 2016, due primarily to a decrease in non-interest income. Net income attributable to the daily leverage strategy was $532 thousand during the current quarter compared to $561 thousand for the prior quarter.

Net interest income decreased $608 thousand, or 1.3%, from the prior quarter to $47.9 million for the current quarter. The decrease was due primarily to an increase in interest expense on deposits, specifically an increase in the cost of our certificate of deposit portfolio. The net interest margin decreased five basis points from 1.78% for the prior quarter to 1.73% for the current quarter. Excluding the effects of the daily leverage strategy, the net interest margin would have been 2.09% for the current quarter compared to 2.13% for the prior quarter. The four basis point decrease was due mainly to a decrease in yield on loans receivable and the MBS portfolio, along with an increase in the cost of retail certificates of deposit, partially offset by a shift in the mix of interest-earning assets.


65


Interest and Dividend Income
The weighted average yield on total interest-earning assets for the current quarter decreased four basis points from the prior quarter, to 2.73%, while the average balance of interest-earning assets increased $125.8 million between the two periods. Absent the impact of the daily leverage strategy, the weighted average yield on total interest-earning assets would have decreased three basis points from the prior quarter, to 3.19%, while the average balance would have increased $56.6 million. The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
June 30,
 
March 31,
 
Change Expressed in:
 
2016
 
2016
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
60,840

 
$
60,732

 
$
108

 
0.2
 %
MBS
7,401

 
7,702

 
(301
)
 
(3.9
)
FHLB stock
3,050

 
3,006

 
44

 
1.5

Cash and cash equivalents
2,730

 
2,707

 
23

 
0.8

Investment securities
1,506

 
1,485

 
21

 
1.4

Total interest and dividend income
$
75,527

 
$
75,632

 
$
(105
)
 
(0.1
)

The increase in interest income on loans receivable was due to a $80.4 million increase in the average balance of the portfolio, partially offset by a four basis point decrease in the weighted average yield on the portfolio, to 3.58% for the current quarter. The loan growth was largely funded with cash flows from the securities portfolio during the current quarter. The decrease in yield was due primarily to an increase in the amortization of premiums paid for correspondent loans as a result of increased prepayment activity, mainly related to fixed-rate loans in this portfolio.

The decrease in interest income on MBS was due to a 10 basis point decrease in the weighted average yield on the portfolio, to 2.14% for the current quarter. The decrease in the weighted average yield was due mainly to an increase in net premium amortization. During the current quarter, $1.4 million of net premiums on MBS were amortized, which decreased the weighted average yield on the portfolio by 40 basis points. During the prior quarter, $1.1 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 32 basis points.

Interest Expense
The weighted average rate paid on total interest-bearing liabilities increased one basis point from the prior quarter, to 1.13%, and the average balance of interest-bearing liabilities increased $111.3 million between the two periods. Absent the impact of the daily leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased two basis points from the prior quarter, to 1.29%, and the average balance would have increased $42.0 million. The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
June 30,
 
March 31,
 
Change Expressed in:
 
2016
 
2016
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB advances
$
13,515

 
$
13,729

 
$
(214
)
 
(1.6
)%
FHLB line of credit
2,846

 
2,665

 
181

 
6.8

Deposits
9,749

 
9,213

 
536

 
5.8

Repurchase agreements
1,487

 
1,487

 

 

Total interest expense
$
27,597

 
$
27,094

 
$
503

 
1.9


The decrease in interest expense on FHLB advances was due primarily to a two basis point decrease in the average rate paid on the portfolio, to 2.21% for the current quarter. During the current quarter, a $100.0 million advance with an effective rate of 3.17% matured and was replaced with a $100.0 million advance with a rate of 1.82%. The increase in interest expense on FHLB line of credit borrowings was due mainly to a $76.9 million increase in the average balance, as well as a one basis point increase in the average rate paid on the borrowings, to 0.54% for the current quarter.


66


The increase in interest expense on deposits was due primarily to a three basis point increase in the weighted average rate paid on the deposit portfolio, to 0.77% for the current quarter, due mainly to an increase in the weighted average rate paid on the certificate of deposit portfolio, as well as a $41.6 million increase in the average balance of the deposit portfolio. The weighted average rate of the retail certificate of deposit portfolio increased six basis points during the current quarter, to 1.39%, due primarily to a full quarter impact of a promotional campaign on Presidents' Day during the prior quarter.

Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
June 30,
 
March 31,
 
Change Expressed in:
 
2016
 
2016
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
$
3,725

 
$
3,558

 
$
167

 
4.7
 %
Income from BOLI
648

 
1,459

 
(811
)
 
(55.6
)
Insurance commissions
517

 
1,060

 
(543
)
 
(51.2
)
Loan fees
326

 
336

 
(10
)
 
(3.0
)
Other non-interest income
213

 
213

 

 

Total non-interest income
$
5,429

 
$
6,626

 
$
(1,197
)
 
(18.1
)

The increase in retail fees and charges was due primarily to an increase in debit card income, due in part to seasonality, and an increase in service charges earned. The decrease in income from BOLI was due primarily to the receipt of death benefits during the prior quarter and no such proceeds in the current quarter. The decrease in insurance commissions was due largely to the receipt of annual commissions from certain insurance providers during the prior quarter and no such commissions in 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
 
 
 
 
 
June 30,
 
March 31,
 
Change Expressed in:
 
2016
 
2016
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
10,829

 
$
10,288

 
$
541

 
5.3
 %
Occupancy, net
2,606

 
2,616

 
(10
)
 
(0.4
)
Information technology and communications
2,716

 
2,609

 
107

 
4.1

Federal insurance premium
1,377

 
1,399

 
(22
)
 
(1.6
)
Deposit and loan transaction costs
1,449

 
1,396

 
53

 
3.8

Regulatory and outside services
1,370

 
1,144

 
226

 
19.8

Advertising and promotional
1,053

 
983

 
70

 
7.1

Low income housing partnerships
721

 
1,321

 
(600
)
 
(45.4
)
Office supplies and related expense
545

 
584

 
(39
)
 
(6.7
)
Other non-interest expense
661

 
1,086

 
(425
)
 
(39.1
)
Total non-interest expense
$
23,327

 
$
23,426

 
$
(99
)
 
(0.4
)

The increase in salaries and employee benefits expense was due primarily to compensation expense on unallocated ESOP shares related to the $0.25 per share True Blue Capitol dividend paid in June 2016. During the current quarter, $407 thousand of ESOP compensation expense was recognized related to the True Blue Capitol dividend. Similar to the current quarter, this dividend will result in $407 thousand of ESOP compensation expense in the fourth quarter of fiscal year 2016. The increase in regulatory and outside services was due primarily to the timing of external audit fees. The decrease in low income housing partnerships expense was

67


due primarily to a decrease in amortization expense. The decrease in other non-interest expenses was due mainly to a decrease in expenses related to OREO operations, as well as a decrease in deposit account charge-offs related to debit card fraud.

The Company's efficiency ratio was 43.72% for the current quarter compared to 42.46% for the prior quarter. The change in the efficiency ratio was due primarily to a decrease in non-interest income and 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 $9.5 million for the current quarter compared to $10.2 million for the prior quarter. The decrease between periods was due primarily to a decrease in pre-tax income, as well as to a decrease in the effective income tax rate, from 32.2% for the prior quarter, to 31.6% for the current quarter. The decrease in the effective income tax rate between quarters was primarily a result of higher deductible expenses associated with dividends paid on allocated ESOP shares due to the True Blue Capitol dividend paid in June 2016.




68


Average Balance Sheet
As previously mentioned, average yields are derived by dividing annualized income by the average balance of the related assets and average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The yields and rates include amortization of fees, costs, premiums and discounts which are considered adjustments to yields/rates. Yields on tax-exempt securities were not calculated on a fully taxable equivalent basis.
 
For the Three Months Ended
 
June 30, 2016
 
March 31, 2016
 
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)
$
6,797,602

 
$
60,840

 
3.58
%
 
$
6,717,174

 
$
60,732

 
3.62
%
MBS(2)
1,386,470

 
7,401

 
2.14

 
1,374,917

 
7,702

 
2.24

Investment securities(2)(3)
501,757

 
1,506

 
1.20

 
488,493

 
1,485

 
1.22

FHLB stock
204,870

 
3,050

 
5.99

 
202,006

 
3,006

 
5.98

Cash and cash equivalents
2,160,016

 
2,730

 
0.50

 
2,142,320

 
2,707

 
0.50

Total interest-earning assets(1)(2)
11,050,715

 
75,527

 
2.73

 
10,924,910

 
75,632

 
2.77

Other noninterest-earning assets
290,258

 
 
 
 
 
295,430

 
 
 
 
Total assets
$
11,340,973

 
 
 
 
 
$
11,220,340

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Checking
$
801,782

 
74

 
0.04

 
$
785,149

 
72

 
0.04

Savings
333,067

 
156

 
0.19

 
323,572

 
168

 
0.21

Money market
1,174,471

 
686

 
0.23

 
1,170,684

 
683

 
0.23

Retail certificates
2,401,381

 
8,287

 
1.39

 
2,357,389

 
7,805

 
1.33

Wholesale certificates
360,026

 
546

 
0.61

 
392,286

 
485

 
0.50

Total deposits
5,070,727

 
9,749

 
0.77

 
5,029,080

 
9,213

 
0.74

FHLB advances(4)
2,464,094

 
13,515

 
2.21

 
2,471,404

 
13,729

 
2.23

FHLB line of credit
2,084,616

 
2,846

 
0.54

 
2,007,692

 
2,665

 
0.53

FHLB borrowings
4,548,710

 
16,361

 
1.44

 
4,479,096

 
16,394

 
1.47

Repurchase agreements
200,000

 
1,487

 
2.94

 
200,000

 
1,487

 
2.94

Total borrowings
4,748,710

 
17,848

 
1.51

 
4,679,096

 
17,881

 
1.53

Total interest-bearing liabilities
9,819,437

 
27,597

 
1.13

 
9,708,176

 
27,094

 
1.12

Other noninterest-bearing liabilities
111,382

 
 
 
 
 
110,635

 
 
 
 
Stockholders' equity
1,410,154

 
 
 
 
 
1,401,529

 
 
 
 
Total liabilities and stockholders' equity
$
11,340,973

 
 
 
 
 
$
11,220,340

 
 
 
 
 
 
 
 
 
 
 
 
 
(Continued)
 



69


 
For the Three Months Ended
 
June 30, 2016
 
March 31, 2016
 
Average
 
Interest
 
 
 
Average
 
Interest
 
 
 
Outstanding
 
Earned/
 
Yield/
 
Outstanding
 
Earned/
 
Yield/
 
Amount
 
Paid
 
Rate
 
Amount
 
Paid
 
Rate
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income(5)
 
 
$
47,930

 
 
 
 
 
$
48,538

 
 
Net interest rate spread(6)(11)
 
 
 
 
1.60
%
 
 
 
 
 
1.65
%
Net interest-earning assets
$
1,231,278

 
 
 
 
 
$
1,216,734

 
 
 
 
Net interest margin(7)(11)
 
 
 
 
1.73

 
 
 
 
 
1.78

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

 
 
 
 
 
1.13x

 
 
 
 
 
 
 
 
 
 
 
 
Selected performance ratios:
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized)(11)
 
 
 
0.72
%
 
 
 
 
 
0.77
%
Return on average equity (annualized)(11)
 
 
 
5.83

 
 
 
 
 
6.14

Average equity to average assets
 
 
 
 
12.43

 
 
 
 
 
12.49

Operating expense ratio(8)
 
 
 
 
0.82

 
 
 
 
 
0.84

Efficiency ratio(9)
 
 
 
 
43.72

 
 
 
 
 
42.46

Pre-tax yield on daily leverage strategy(10)
 
 
 
0.15

 
 
 
 
 
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 $36.6 million and $37.9 million for the three months ended June 30, 2016 and March 31, 2016, 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 certain financial ratios showing the financial results of the daily leverage strategy, along with financial ratios without the effects of the daily leverage strategy. Since the daily leverage strategy only involves assets and liabilities, there is no direct equity impact of the daily leverage strategy, outside of generating additional earnings. Therefore, the return on average equity of the daily leverage strategy is not applicable (N/A). Management believes it is important for comparability purposes to provide the financial ratios without the daily leverage strategy because of the unique nature of the daily leverage strategy.
 
For the Three Months Ended
 
June 30, 2016
 
March 31, 2016
 
Daily
 
Reported without
 
Daily
 
Reported without
 
Leverage
 
the Daily
 
Leverage
 
the Daily
 
Strategy
 
Leverage Strategy
 
Strategy
 
Leverage Strategy
Return on average assets (annualized)
0.10
%
 
0.86
%
 
0.11
%
 
0.91
%
Return on average equity (annualized)
N/A

 
5.68

 
N/A

 
5.98

Net interest margin
0.21

 
2.09

 
0.22

 
2.13

Average net interest rate spread
0.21

 
1.90

 
0.22

 
1.95



70


Rate/Volume Analysis
The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended June 30, 2016 to the three months ended March 31, 2016. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous quarter's average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous quarter. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.
 
For the Three Months Ended
 
June 30, 2016 vs. March 31, 2016
 
Increase (Decrease) Due to
 
Volume
 
Rate
 
Total
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Loans receivable
$
713

 
$
(605
)
 
$
108

MBS
64

 
(365
)
 
(301
)
Investment securities
40

 
(19
)
 
21

FHLB stock
42

 
2

 
44

Cash and cash equivalents
23

 

 
23

Total interest-earning assets
882

 
(987
)
 
(105
)
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Checking
2

 

 
2

Savings
4

 
(16
)
 
(12
)
Money market
2

 

 
2

Certificates of deposit
36

 
508

 
544

FHLB borrowings
62

 
(95
)
 
(33
)
Repurchase agreements

 

 

Total interest-bearing liabilities
106

 
397

 
503

 
 
 
 
 
 
Net change in net interest and dividend income
$
776

 
$
(1,384
)
 
$
(608
)


71


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 June 2016, the president of FHLB approved an increase, through July 2017, 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 June 30, 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 June 30, 2016 was $2.48 billion, of which $500.0 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. At June 30, 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 June 30, 2016, the Bank had $1.12 billion of securities that were eligible but unused as collateral for borrowing or other liquidity needs. 

At June 30, 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 $214.2 million as collateral for repurchase agreements as of June 30, 2016. The securities pledged for the repurchase agreements will be delivered back to the Bank when the repurchase agreements mature.

The Bank has access to other sources of funds for liquidity purposes, such as brokered and public unit deposits. As of June 30, 2016, the Bank's policy allowed for combined brokered and public unit deposits up to 15% of total deposits. At June 30, 2016, the Bank had public unit deposits totaling $368.3 million, which had an average remaining term to maturity of eight months, or approximately 7% 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 $399.0 million as collateral for public unit deposits at June 30, 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.

72



At June 30, 2016, $1.09 billion of the Bank's $2.77 billion of certificates of deposit was scheduled to mature within one year. Included in the $1.09 billion was $293.7 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 $293.7 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 June 30, 2016, cash and cash equivalents totaled $152.8 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 redemption of FHLB stock in conjunction with the removal of the entire daily leverage strategy at June 30, 2016. A majority of the cash received from the redemption of the FHLB stock was used to reacquire FHLB stock when the full daily leverage strategy was reinstated on July 1, 2016.



73


The following table presents the contractual maturities of our loan, MBS, and investment securities portfolios at June 30, 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 June 30, 2016, the amortized cost of investment securities in our portfolio which are callable or have pre-refunding dates within one year was $326.7 million.
 
Loans(1)
 
MBS
 
Investment Securities
 
Total
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
(Dollars in thousands)
Amounts due:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Within one year
$
130,083

 
3.84
%
 
$
2

 
4.12
%
 
$
31,645

 
1.50
%
 
$
161,730

 
3.38
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
After one year:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over one to two years
167,892

 
3.90

 
1,575

 
3.80

 
253,023

 
1.12

 
422,490

 
2.23

Over two to three years
22,783

 
4.68

 
21,943

 
4.32

 
80,609

 
1.10

 
125,335

 
2.31

Over three to five years
39,887

 
4.43

 
69,609

 
3.04

 
137,391

 
1.34

 
246,887

 
2.32

Over five to ten years
457,995

 
3.93

 
449,050

 
2.17

 
6,324

 
1.67

 
913,369

 
3.05

Over ten to fifteen years
1,420,710

 
3.26

 
358,867

 
1.86

 

 

 
1,779,577

 
2.98

After fifteen years
4,799,252

 
3.66

 
443,435

 
2.29

 
1,753

 
1.91

 
5,244,440

 
3.54

Total due after one year
6,908,519

 
3.61

 
1,344,479

 
2.21

 
479,100

 
1.19

 
8,732,098

 
3.26

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
7,038,602

 
3.61

 
$
1,344,481

 
2.21

 
$
510,745

 
1.21

 
$
8,893,828

 
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.

74


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. Savings institutions must also maintain an applicable capital conservation buffer above minimum risk-based capital requirements in order to avoid restrictions on capital distributions, including 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 nine months ended June 30, 2016 was $2.60 billion, and the average balance of short-term FHLB borrowings outstanding during this period was $2.41 billion at a weighted average contractual rate of 0.63%. The majority of the short-term FHLB borrowings amount related to borrowings on the FHLB line of credit in conjunction with the daily leverage strategy. This compares to a balance of short-term FHLB borrowings outstanding at June 30, 2016 of $500.0 million at a weighted average contractual rate of 2.24%.

Contingencies

In the normal course of business, the Company and its subsidiary are named defendants in various lawsuits and counter claims. In the opinion of management, after consultation with legal counsel, none of the currently pending suits are expected to have a materially adverse effect on the Company's consolidated financial statements for the quarter ended June 30, 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 June 30, 2016, the Bank and Company exceeded all regulatory capital requirements. The following table presents the regulatory capital ratios of the Bank and the Company at June 30, 2016.
 
 
 
 
 
 
 
Regulatory
 
 
 
 
 
Minimum
 
Requirement For
 
Bank
 
Company
 
Regulatory
 
"Well-Capitalized"
 
Ratios
 
Ratios
 
Requirement
 
Status of Bank
Tier 1 leverage ratio
10.9
%
 
12.1
%
 
4.0
%
 
5.0
%
Common equity tier 1 capital ratio
28.8

 
32.0

 
4.5

 
6.5

Tier 1 capital ratio
28.8

 
32.0

 
6.0

 
8.0

Total capital ratio
29.0

 
32.3

 
8.0

 
10.0



75


The following table presents a reconciliation of equity under GAAP to regulatory capital amounts, as of June 30, 2016, for the Bank and the Company (dollars in thousands):
 
Bank
 
Company
Total equity as reported under GAAP
$
1,240,932

 
$
1,380,815

Unrealized gains on AFS securities
(6,820
)
 
(6,820
)
Total tier 1 capital
1,234,112

 
1,373,995

ACL
9,312

 
9,312

Total capital
$
1,243,424

 
$
1,383,307


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 on deposit 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 Bank's interest rate risk exposure 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.

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.

76


Change
 
Net Interest Income At
(in Basis Points)
 
June 30, 2016
 
September 30, 2015
in Interest Rates(1)
 
Amount ($)
 
Change ($)
 
Change (%)
 
Amount ($)
 
Change ($)
 
Change (%)
 
 
(Dollars in thousands)
 -100 bp
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

  000 bp
 
$
189,156

 
$

 
%
 
$
190,776

 
$

 
 %
+100 bp
 
192,114

 
2,958

 
1.56

 
189,248

 
(1,528
)
 
(0.80
)
+200 bp
 
192,522

 
3,366

 
1.78

 
186,443

 
(4,333
)
 
(2.27
)
+300 bp
 
191,116

 
1,960

 
1.04

 
181,652

 
(9,124
)
 
(4.78
)

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

During the quarter ending June 30, 2016, management began using the results of a new deposit study that analyzed historical behavior of the Bank's non-maturity deposits, and also analyzed historical correlation of the Bank's deposit rates to market interest rates. This information is used in the Bank's interest rate risk model to predict the future balances of non-maturity deposit accounts, as well as future offering rates on certificates of deposit. The change in net interest income projections at June 30, 2016 compared to September 30, 2015 was due primarily to the utilization of the new deposit study in the Bank's interest rate risk model, specifically related to certificates of deposit. The new deposit study indicated a reduction in the correlation of interest rates offered by the Bank on certificates of deposit to market interest rates, compared to the previous methodology. As a result, the Bank's projected offering rates on certificates of deposit do not respond as quickly to changes in market interest rates so interest expense on certificates of deposit in the rising interest rate scenarios over the 12-month horizon was significantly lower at June 30, 2016 compared to September 30, 2015, which increased net interest income projections.

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)
 
June 30, 2016
 
September 30, 2015
in Interest Rates(1)
 
Amount ($)
 
Change ($)
 
Change (%)
 
Amount ($)
 
Change ($)
 
Change (%)
 
 
(Dollars in thousands)
 -100 bp
 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

  000 bp
 
$
1,410,892

 
$

 
 %
 
$
1,457,514

 
$

 
 %
+100 bp
 
1,330,245

 
(80,647
)
 
(5.72
)
 
1,343,864

 
(113,650
)
 
(7.80
)
+200 bp
 
1,176,900

 
(233,992
)
 
(16.58
)
 
1,189,194

 
(268,320
)
 
(18.41
)
+300 bp
 
986,994

 
(423,898
)
 
(30.04
)
 
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 June 30, 2016, as compared to September 30, 2015, decreased the Bank's risk to higher interest rates. The new deposit study discussed above did not have a material impact on the MVPE at June 30, 2016.


77


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)
$
2,015,888

 
$
2,043,015

 
$
1,090,822

 
$
1,871,215

 
$
7,020,940

Securities(2)
939,195

 
529,867

 
206,754

 
168,446

 
1,844,262

Other interest-earning assets
142,176

 

 

 

 
142,176

Total interest-earning assets
3,097,259

 
2,572,882

 
1,297,576

 
2,039,661

 
9,007,378

 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
Non-maturity deposits(3)
348,154

 
378,273

 
288,622

 
1,395,226

 
2,410,275

Certificates of deposit
1,098,239

 
1,025,539

 
643,536

 
1,131

 
2,768,445

Borrowings(4)
500,000

 
875,000

 
1,000,000

 
344,984

 
2,719,984

Total interest-bearing liabilities
1,946,393

 
2,278,812

 
1,932,158

 
1,741,341

 
7,898,704

 
 
 
 
 
 
 
 
 
 
Excess (deficiency) of interest-earning assets over
 
 
 
 
 
 
 
 
interest-bearing liabilities
$
1,150,866

 
$
294,070

 
$
(634,582
)
 
$
298,320

 
$
1,108,674

 
 
 
 
 
 
 
 
 
 
Cumulative excess of interest-earning assets over
 
 
 
 
 
 
 
 
interest-bearing liabilities
$
1,150,866

 
$
1,444,936

 
$
810,354

 
$
1,108,674

 
 
 
 
 
 
 
 
 
 
 
 
Cumulative excess of interest-earning assets over interest-bearing
 
 
 
 
 
 
liabilities as a percent of total Bank assets at:
 
 
 
 
 
 
 
 
June 30, 2016
12.45
%
 
15.63
%
 
8.77
%
 
11.99
%
 
 
September 30, 2015
7.48

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative one-year gap - interest rates +200 bps at:
 
 
 
 
 
 
 
 
June 30, 2016
2.11

 
 
 
 
 
 
 
 
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 June 30, 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 $911.3 million, for a cumulative one-year gap of -9.9% of total assets.
(4)
Borrowings exclude deferred prepayment penalty costs.
 

78


The increase in the one-year gap at June 30, 2016 compared to September 30, 2015 was largely a result of lower interest rates at June 30, 2016 than at September 30, 2015. In addition, the utilization of the new deposit study discussed above increased the expected average lives of non-maturity deposits which reduced the amount of deposits repricing over the 12-month horizon and increased the one-year gap at June 30, 2016 compared to September 30, 2015.

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.
 
June 30, 2016
 
Amount
 
Yield/Rate
 
WAL
 
% of Category
 
% of Total
 
(Dollars in thousands)
Investment securities
$
510,745

 
1.21
%
 
1.1

 
27.5
%
 
5.6
%
MBS - fixed
906,775

 
2.19

 
3.1

 
48.9

 
9.9

MBS - adjustable
437,706

 
2.25

 
5.6

 
23.6

 
4.8

Total investment securities and MBS
1,855,226

 
1.93

 
3.1

 
100.0
%
 
20.3

Loans receivable:
 
 
 
 
 
 
 
 
 
Fixed-rate one- to four-family:
 
 
 
 
 
 
 
 
 
<= 15 years
1,239,954

 
3.18

 
3.7

 
17.6
%
 
13.5

> 15 years
4,104,395

 
3.95

 
5.3

 
58.3

 
44.8

All other fixed-rate loans
338,380

 
4.11

 
2.9

 
4.8

 
3.7

Total fixed-rate loans
5,682,729

 
3.79

 
4.8

 
80.7

 
62.0

Adjustable-rate one- to four-family:
 
 
 
 
 
 
 
 
 
<= 36 months
303,600

 
1.82

 
3.6

 
4.3

 
3.3

> 36 months
885,748

 
2.95

 
2.7

 
12.6

 
9.7

All other adjustable-rate loans
166,525

 
4.42

 
1.6

 
2.4

 
1.8

Total adjustable-rate loans
1,355,873

 
2.87

 
2.7

 
19.3

 
14.8

Total loans receivable
7,038,602

 
3.61

 
4.4

 
100.0
%
 
76.8

FHLB stock
114,425

 
5.98

 
3.0

 
 
 
1.2

Cash and cash equivalents
152,831

 
0.49

 

 
 
 
1.7

Total interest-earning assets
$
9,161,084

 
3.25

 
4.0

 
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
Non-maturity deposits
$
2,316,684

 
0.16

 
8.4

 
45.6
%
 
29.8
%
Certificates of deposit
2,768,445

 
1.31

 
1.7

 
54.4

 
35.7

Total deposits
5,085,129

 
0.78

 
4.8

 
100.0
%
 
65.5

Term borrowings
2,675,000

 
2.24

 
3.0

 
 
 
34.5

Total interest-bearing liabilities
$
7,760,129

 
1.28

 
4.2

 
 
 
100.0
%

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, the "Act") as of June 30, 2016. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of June 30, 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.


79


Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Act) that occurred during the Company's quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and the Bank are involved as plaintiff or defendant in various legal actions arising in the normal course of business. In our opinion, after consultation with legal counsel, we believe it unlikely that such pending legal actions will have a material adverse effect on our financial condition, results of operations or liquidity.
Item 1A. Risk Factors
There have been no material changes to our risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 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 June 30, 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
April 1, 2016 through
 
 
 
 
 
 
 
April 30, 2016

 
$

 

 
$
70,000,000

May 1, 2016 through
 
 
 
 
 
 
 
May 31, 2016

 

 

 
70,000,000

June 1, 2016 through
 
 
 
 
 
 
 
June 30, 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.

80


SIGNATURES

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

CAPITOL FEDERAL FINANCIAL, INC.
 
 
 
 
 
 
 
 
 
 
 
 
 
Date: August 9, 2016
By:
/s/ John B. Dicus
 
 
 
John B. Dicus, Chairman, President and Chief Executive Officer
 
 
 
 
 
Date: August 9, 2016
By:
/s/ Kent G. Townsend
 
 
 
Kent G. Townsend, Executive Vice President,
 
 
 
Chief Financial Officer and Treasurer
 


81


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

82


101
 
The following information from the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016, filed with the Securities and Exchange Commission on August 9, 2016, has been formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets at June 30, 2016 and September 30, 2015, (ii) Consolidated Statements of Income for the three and nine months ended June 30, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2016 and 2015, (iv) Consolidated Statement of Stockholders' Equity for the nine months ended June 30, 2016, (v) Consolidated Statements of Cash Flows for the nine months ended June 30, 2016 and 2015, and (vi) Notes to the Unaudited Consolidated Financial Statements

83