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 December 31, 2016
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-34814
Capitol Federal Financial, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Maryland    
27-2631712
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
700 South Kansas Avenue, Topeka, Kansas
66603
(Address of principal executive offices)
(Zip Code)
 
 
 
(785) 235-1341
Registrant's telephone number, including area code

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

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

As of February 3, 2017, there were 137,975,531 shares of Capitol Federal Financial, Inc. common stock outstanding.





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




PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 
(Unaudited)
 
 
 
December 31,
 
September 30,
 
2016
 
2016
ASSETS:
 
 
 
Cash and cash equivalents (includes interest-earning deposits of $128,460 and $267,829)
$
150,560

 
$
281,764

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

 
527,301

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

 
1,100,874

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

 
6,958,024

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

 
109,970

Premises and equipment, net
83,838

 
83,221

Other assets
206,331

 
206,093

TOTAL ASSETS
$
9,139,510

 
$
9,267,247

 
 
 
 
LIABILITIES:
 
 
 
Deposits
$
5,192,674

 
$
5,164,018

FHLB borrowings
2,272,754

 
2,372,389

Repurchase agreements
200,000

 
200,000

Advance payments by borrowers for taxes and insurance
25,403

 
62,643

Income taxes payable, net
9,369

 
310

Deferred income tax liabilities, net
24,594

 
25,374

Accounts payable and accrued expenses
46,541

 
49,549

Total liabilities
7,771,335

 
7,874,283

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

 

Common stock, $.01 par value; 1,400,000,000 shares authorized, 137,915,672 and 137,486,172
 
 
 
shares issued and outstanding as of December 31, 2016 and September 30, 2016, respectively
1,379

 
1,375

Additional paid-in capital
1,162,584

 
1,156,855

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

 
268,466

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

 
5,915

Total stockholders' equity
1,368,175

 
1,392,964

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

 
$
9,267,247

 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 


3


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)
 
 
 
For the Three Months Ended
 
December 31,
 
2016
 
2015
INTEREST AND DIVIDEND INCOME:
 
 
 
Loans receivable
$
61,945

 
$
60,223

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

 
7,831

Cash and cash equivalents
2,969

 
1,620

FHLB stock
2,939

 
3,152

Investment securities
1,107

 
1,533

Total interest and dividend income
75,322

 
74,359

INTEREST EXPENSE:
 
 
 
FHLB borrowings
16,117

 
16,074

Deposits
10,396

 
8,799

Repurchase agreements
1,503

 
1,504

Total interest expense
28,016

 
26,377

NET INTEREST INCOME
47,306

 
47,982

PROVISION FOR CREDIT LOSSES

 

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
47,306

 
47,982

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

 
3,814

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

 
703

Other non-interest income
1,036

 
1,049

Total non-interest income
5,268

 
5,566

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

 
10,487

Information technology and communications
2,834

 
2,558

Occupancy, net
2,675

 
2,672

Deposit and loan transaction costs
1,386

 
1,274

Regulatory and outside services
1,346

 
1,486

Federal insurance premium
894

 
1,382

Advertising and promotional
690

 
1,154

Office supplies and related expense
437

 
887

Low income housing partnerships

 
773

Other non-interest expense
701

 
917

Total non-interest expense
21,597

 
23,590

INCOME BEFORE INCOME TAX EXPENSE
30,977

 
29,958

INCOME TAX EXPENSE
10,399

 
9,240

NET INCOME
$
20,578

 
$
20,718

 
 
 
 
Basic earnings per share ("EPS")
$
0.15

 
$
0.16

Diluted EPS
$
0.15

 
$
0.16

Dividends declared per share
$
0.38

 
$
0.34


 
 
 
Basic weighted average common shares
133,696,574

 
132,822,283

Diluted weighted average common shares
133,949,796

 
132,911,156

 
 
 
 
See accompanying notes to consolidated financial statements.
 
 

4


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
 
 
 
For the Three Months Ended
 
December 31,
 
2016
 
2015
Net income
$
20,578

 
$
20,718

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

 
$
17,920

 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 


5


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
Unearned
 
 
 
 
 
Total
 
Common
 
Paid-In
 
Compensation
 
Retained
 
 
 
Stockholders'
 
Stock
 
Capital
 
ESOP
 
Earnings
 
AOCI
 
Equity
Balance at October 1, 2016
$
1,375

 
$
1,156,855

 
$
(39,647
)
 
$
268,466

 
$
5,915

 
$
1,392,964

Net income
 
 
 
 
 
 
20,578

 
 
 
20,578

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

 
412

 
 
 
 
 
634

Restricted stock activity, net
 
 
14

 
 
 
 
 
 
 
14

Stock-based compensation
 
 
157

 
 
 
 
 
 
 
157

Stock options exercised
4

 
5,336

 
 
 
 
 
 
 
5,340

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

 
$
1,162,584

 
$
(39,235
)
 
$
238,846

 
$
4,601

 
$
1,368,175

 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 
 


6


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
 
For the Three Months Ended
 
December 31,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
20,578

 
$
20,718

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

 
1,289

Depreciation and amortization of premises and equipment
1,891

 
1,706

Amortization of deferred amounts related to FHLB advances, net
365

 
751

Common stock committed to be released for allocation - ESOP
634

 
525

Stock-based compensation
157

 
533

Changes in:
 
 
 
Other assets, net
(437
)
 
83

Income taxes payable/receivable
8,899

 
9,226

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

 
26,165

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

Purchase of HTM securities

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

 
116,678

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

 
71,312

Proceeds from the redemption of FHLB stock
98,950

 
94,500

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

 
815

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

 
 
 
 
 
 
 
(Continued)


7


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

 
139,960

Proceeds from borrowings
2,100,000

 
1,500,000

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

 
158

Excess tax benefits from stock options
193

 

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

 
772,632

End of period
$
150,560

 
$
232,354

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

 
$
13

Interest payments
$
29,016

 
$
25,686

 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
(Concluded)


8


Notes to Consolidated Financial Statements (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements include the accounts of Capitol Federal® Financial, Inc. (the "Company") and its wholly-owned subsidiary, Capitol Federal Savings Bank (the "Bank"). The Bank has a wholly-owned subsidiary, Capitol Funds, Inc. Capitol Funds, Inc. has a wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2016, filed with the Securities and Exchange Commission ("SEC"). Interim results are not necessarily indicative of results for a full year.

Net Presentation of Cash Flows Related to Borrowings - Beginning in fiscal year 2014, the Bank implemented a leverage strategy ("leverage strategy") to increase earnings. This leverage strategy involves borrowing up to $2.10 billion either on the Bank's FHLB line of credit or by entering into short-term FHLB advances, depending on the rates offered by the FHLB at the time of the borrowings, with some or all of the balance being repaid prior to the end of each quarter for regulatory purposes. Proceeds from the borrowings, net of required FHLB stock holdings, are deposited at the Federal Reserve Bank of Kansas City. The contractual maturities of the FHLB advances utilized in conjunction with the leverage strategy beginning in the current quarter are seven days or less; therefore, cash flows related to these advances are reported on a net basis within the consolidated statements of cash flows.

Low Income Housing Partnerships - As part of the Bank's community reinvestment initiatives, the Bank invests in affordable housing limited partnerships ("low income housing partnerships") that make equity investments in affordable housing properties.  The Bank is a limited partner in each partnership in which it invests.  A separate, unrelated third party is the general partner.  The Bank receives affordable housing tax credits and other tax benefits for these investments. Prior to October 1, 2016, the Bank accounted for its low income housing partnership investments using the equity method of accounting, as two of the Bank’s officers were involved in the operational management of the low income housing partnership investment group. On October 1, 2016, due to both officers' resignation from operational management, the Bank began using the proportional method of accounting for its low income housing partnership investments.

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

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

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


9


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

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


2. EARNINGS PER SHARE
Shares acquired by the ESOP are not considered in the basic average shares outstanding until the shares are committed for allocation or vested to an employee's individual account. Unvested shares awarded pursuant to the Company's restricted stock benefit plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security.
 
For the Three Months Ended
 
December 31,
 
2016
 
2015
 
(Dollars in thousands, except per share amounts)
Net income
$
20,578

 
$
20,718

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

 
$
20,691

 
 
 
 
Average common shares outstanding
133,696,125

 
132,821,834

Average committed ESOP shares outstanding
449

 
449

Total basic average common shares outstanding
133,696,574

 
132,822,283

 
 
 
 
Effect of dilutive stock options
253,222

 
88,873

 
 
 
 
Total diluted average common shares outstanding
133,949,796

 
132,911,156

 
 
 
 
Net EPS:
 
 
 
Basic
$
0.15

 
$
0.16

Diluted
$
0.15

 
$
0.16

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

 
872,039



10


3. SECURITIES
The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of AFS and HTM securities at the dates presented. The majority of the MBS and investment securities portfolios are composed of securities issued by United States Government-Sponsored Enterprises ("GSEs").
 
December 31, 2016
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
GSE debentures
$
321,246

 
$
156

 
$
798

 
$
320,604

MBS
169,037

 
8,284

 
7

 
177,314

Trust preferred securities
2,112

 

 
238

 
1,874

 
$
492,395

 
$
8,440

 
$
1,043

 
$
499,792

HTM:
 
 
 
 
 
 
 
MBS
$
989,012

 
$
13,084

 
$
7,858

 
$
994,238

Municipal bonds
33,203

 
68

 
217

 
33,054

 
$
1,022,215

 
$
13,152

 
$
8,075

 
$
1,027,292


 
September 30, 2016
 
 
 
Gross
 
Gross
 
Estimated
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
GSE debentures
$
346,226

 
$
815

 
$
3

 
$
347,038

MBS
169,442

 
9,069

 
4

 
178,507

Trust preferred securities
2,123

 

 
367

 
1,756

 
$
517,791

 
$
9,884

 
$
374

 
$
527,301

HTM:
 
 
 
 
 
 
 
MBS
$
1,067,571

 
$
22,862

 
$
1,219

 
$
1,089,214

Municipal bonds
33,303

 
357

 
7

 
33,653

 
$
1,100,874

 
$
23,219

 
$
1,226

 
$
1,122,867




11


The following tables summarize the estimated fair value and gross unrealized losses of those securities on which an unrealized loss at the dates presented was reported and the continuous unrealized loss position for less than 12 months and equal to or greater than 12 months as of the dates presented.
 
December 31, 2016
 
Less Than 12 Months
 
Equal to or Greater Than 12 Months
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
GSE debentures
$
199,151

 
$
798

 
$

 
$

MBS
10,936

 
2

 
641

 
5

Trust preferred securities

 

 
1,874

 
238

 
$
210,087

 
$
800

 
$
2,515

 
$
243

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HTM:
 
 
 
 
 
 
 
MBS
$
505,924

 
$
6,170

 
$
61,781

 
$
1,688

Municipal bonds
22,649

 
212

 
836

 
5

 
$
528,573

 
$
6,382

 
$
62,617

 
$
1,693


 
September 30, 2016
 
Less Than 12 Months
 
Equal to or Greater Than 12 Months
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
(Dollars in thousands)
AFS:
 
 
 
 
 
 
 
GSE debentures
$
24,997

 
$
3

 
$

 
$

MBS

 

 
654

 
4

Trust preferred securities

 

 
1,756

 
367

 
$
24,997

 
$
3

 
$
2,410

 
$
371

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HTM:
 
 
 
 
 
 
 
MBS
$
147,930

 
$
538

 
$
66,646

 
$
681

Municipal bonds
4,771

 
6

 
391

 
1

 
$
152,701

 
$
544

 
$
67,037

 
$
682


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

12


The amortized cost and estimated fair value of debt securities as of December 31, 2016, by contractual maturity, are shown below.  Actual principal repayments may differ from contractual maturities due to prepayment or early call privileges by the issuer. In the case of MBS, borrowers on the underlying loans generally have the right to prepay their loans without prepayment penalty. For this reason, MBS are not included in the maturity categories.
 
AFS
 
HTM
 
Amortized
 
Estimated
 
Amortized
 
Estimated
 
Cost
 
Fair Value
 
Cost
 
Fair Value
 
(Dollars in thousands)
One year or less
$
25,030

 
$
25,032

 
$
7,576

 
$
7,610

One year through five years
296,216

 
295,572

 
20,699

 
20,565

Five years through ten years

 

 
4,928

 
4,879

Ten years and thereafter
2,112

 
1,874

 

 

 
323,358

 
322,478

 
33,203

 
33,054

MBS
169,037

 
177,314

 
989,012

 
994,238

 
$
492,395

 
$
499,792

 
$
1,022,215

 
$
1,027,292



The following table presents the taxable and non-taxable components of interest income on investment securities for the periods presented.
 
For the Three Months Ended
 
December 31,
 
2016
 
2015
 
(Dollars in thousands)
Taxable
$
964

 
$
1,354

Non-taxable
143

 
179

 
$
1,107

 
$
1,533



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

 
$
419,282

Repurchase agreements
217,193

 
217,374

Federal Reserve Bank
14,765

 
15,938

 
$
659,035

 
$
652,594


13


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

 
$
4,005,615

Correspondent purchased
2,288,368

 
2,206,072

Bulk purchased
400,506

 
416,653

Construction
37,524

 
39,430

Total
6,754,389

 
6,667,770

Commercial:
 
 
 
Permanent
104,323

 
110,768

Construction
76,254

 
43,375

Total
180,577

 
154,143

Total real estate loans
6,934,966

 
6,821,913

 
 
 
 
Consumer loans:
 
 
 
Home equity
122,378

 
123,345

Other
4,213

 
4,264

Total consumer loans
126,591

 
127,609

 
 
 
 
Total loans receivable
7,061,557

 
6,949,522

 
 
 
 
Less:
 
 
 
ACL
8,521

 
8,540

Discounts/unearned loan fees
25,028

 
24,933

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

 
$
6,958,024


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

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

The underwriting standards for loans purchased from correspondent and nationwide lenders are generally similar to the Bank's internal underwriting standards. The underwriting of loans purchased from correspondent lenders on a loan-by-loan basis is performed by the Bank's underwriters.

The Bank also originates construction-to-permanent loans secured by one- to four-family residential real estate. Construction loans are obtained by homeowners who will occupy the property when construction is complete. Construction loans to builders for speculative purposes are not permitted by the Bank's lending policies. Construction draw requests and the supporting documentation are reviewed and approved by designated personnel. The Bank also performs regular documented inspections of the construction

14


project to ensure the funds are being used for the intended purpose and the project is being completed according to the plans and specifications provided.

Commercial real estate loans - The Bank's commercial real estate loans are originated by the Bank or are in participation with a lead bank. When underwriting a commercial real estate loan, several factors are considered, such as the income producing potential of the property, cash equity provided by the borrower, the financial strength of the borrower, managerial expertise of the borrower or tenant, feasibility studies, lending experience with the borrower and the marketability of the property. For commercial real estate participation loans, the Bank performs the same underwriting procedures as if the loan was being originated by the Bank.
At the time of origination, loan-to-value ("LTV") ratios on commercial real estate loans generally do not exceed 80% of the appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.25. Appraisals on properties securing these loans are performed by independent state certified fee appraisers.

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

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

Credit Quality Indicators - Based on the Bank's lending emphasis and underwriting standards, management has segmented the loan portfolio into three segments: (1) one- to four-family; (2) consumer; and (3) commercial real estate. The one- to four-family and consumer loan portfolios are further segmented into classes for purposes of providing disaggregated information about the credit quality of the loan portfolio. The classes are: one- to four-family - originated, one- to four-family - correspondent purchased, one- to four-family - bulk purchased, consumer - home equity, and consumer - other. The one- to four-family - correspondent purchased class was segregated from the one- to four-family originated class in the current quarter due to the size of the portfolio along with the loan product composition, geographic locations and inherent credit risks within the portfolio. The prior period information presented within this note has been conformed to the new loan class presentation.

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


15


The following tables present the recorded investment, by class, in loans 30 to 89 days delinquent, loans 90 or more days delinquent or in foreclosure, total delinquent loans, current loans, and total recorded investment at the dates presented. The recorded investment in loans is defined as the unpaid principal balance of a loan, less charge-offs and inclusive of unearned loan fees and deferred costs. At December 31, 2016 and September 30, 2016, all loans 90 or more days delinquent were on nonaccrual status.
 
December 31, 2016
 
 
 
90 or More Days
 
Total
 
 
 
Total
 
30 to 89 Days
 
Delinquent or
 
Delinquent
 
Current
 
Recorded
 
Delinquent
 
in Foreclosure
 
Loans
 
Loans
 
Investment
 
(Dollars in thousands)
One- to four-family - originated
$
11,199

 
$
6,625

 
$
17,824

 
$
4,032,155

 
$
4,049,979

One- to four-family - correspondent
7,928

 
555

 
8,483

 
2,312,776

 
2,321,259

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

 
8,053

 
12,948

 
389,661

 
402,609

Commercial real estate

 

 

 
179,493

 
179,493

Consumer - home equity
665

 
456

 
1,121

 
121,257

 
122,378

Consumer - other
17

 
18

 
35

 
4,178

 
4,213

 
$
24,704

 
$
15,707

 
$
40,411

 
$
7,039,520

 
$
7,079,931

 
September 30, 2016
 
 
 
90 or More Days
 
Total
 
 
 
Total
 
30 to 89 Days
 
Delinquent or
 
Delinquent
 
Current
 
Recorded
 
Delinquent
 
in Foreclosure
 
Loans
 
Loans
 
Investment
 
(Dollars in thousands)
One- to four-family - originated
$
13,545

 
$
8,153

 
$
21,698

 
$
4,007,012

 
$
4,028,710

One- to four-family - correspondent
3,389

 
992

 
4,381

 
2,233,941

 
2,238,322

One- to four-family - bulk purchased
5,082

 
7,380

 
12,462

 
406,379

 
418,841

Commercial real estate

 

 

 
153,082

 
153,082

Consumer - home equity
635

 
520

 
1,155

 
122,190

 
123,345

Consumer - other
62

 
9

 
71

 
4,193

 
4,264

 
$
22,713

 
$
17,054

 
$
39,767

 
$
6,926,797

 
$
6,966,564


The recorded investment of mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of December 31, 2016 and September 30, 2016 was $7.2 million and $5.7 million, respectively, which is included in loans 90 or more days delinquent or in foreclosure in the table above.   The carrying value of residential OREO held as a result of obtaining physical possession upon completion of a foreclosure or through completion of a deed in lieu of foreclosure was $2.1 million at December 31, 2016 and $2.5 million at September 30, 2016.

The following table presents the recorded investment, by class, in loans classified as nonaccrual at the dates presented.
 
December 31, 2016
 
September 30, 2016
 
(Dollars in thousands)
One- to four-family - originated
$
17,985

 
$
17,086

One- to four-family - correspondent
1,794

 
3,788

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

 
7,411

Commercial real estate

 

Consumer - home equity
827

 
848

Consumer - other
18

 
10

 
$
28,824

 
$
29,143



16


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

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

The following table sets forth the recorded investment in loans classified as special mention or substandard, by class, at the dates presented. Special mention and substandard loans are included in the ACL formula analysis model if the loans are not individually evaluated for loss. Loans classified as doubtful or loss are individually evaluated for loss. At the dates presented, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.
 
December 31, 2016
 
September 30, 2016
 
Special Mention
 
Substandard
 
Special Mention
 
Substandard
 
(Dollars in thousands)
One- to four-family - originated
$
8,764

 
$
28,564

 
$
10,242

 
$
27,818

One- to four-family - correspondent
6,838

 
4,850

 
2,496

 
5,168

One- to four-family - bulk purchased
880

 
11,616

 
1,156

 
11,480

Commercial real estate

 

 

 

Consumer - home equity
58

 
1,469

 
54

 
1,431

Consumer - other

 
30

 
8

 
16

 
$
16,540

 
$
46,529

 
$
13,956

 
$
45,913


The following table shows the weighted average credit score and weighted average LTV for originated and purchased one- to four-family loans and originated consumer home equity loans at the dates presented. Borrower credit scores are intended to provide an indication as to the likelihood that a borrower will repay their debts. Credit scores are updated at least semiannually, with the last update in September 2016, from a nationally recognized consumer rating agency. The LTV ratios provide an estimate of the extent to which the Bank may incur a loss on any given loan that may go into foreclosure. The consumer - home equity LTV does not take into account the first lien position, if applicable.  The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. In most cases, the most recent appraisal was obtained at the time of origination.
 
December 31, 2016
 
September 30, 2016
 
Credit Score
 
LTV
 
Credit Score
 
LTV
One- to four-family - originated
766
 
63
%
 
766
 
63
%
One- to four-family - correspondent
764
 
68

 
764
 
68

One- to four-family - bulk purchased
753
 
64

 
753
 
64

Consumer - home equity
755
 
20

 
755
 
20

 
764
 
64

 
764
 
64






17


Troubled Debt Restructurings ("TDRs") - The following tables present the recorded investment prior to restructuring and immediately after restructuring in all loans restructured during the periods presented. These tables do not reflect the recorded investment at the end of the periods indicated. Any increase in the recorded investment at the time of the restructuring was generally due to the capitalization of delinquent interest and/or escrow balances.
 
For the Three Months Ended
 
December 31, 2016
 
Number
 
Pre-
 
Post-
 
of
 
Restructured
 
Restructured
 
Contracts
 
Outstanding
 
Outstanding
 
(Dollars in thousands)
One- to four-family - originated
38

 
$
3,928

 
$
4,185

One- to four-family - correspondent

 

 

One- to four-family - purchased

 

 

Commercial real estate

 

 

Consumer - home equity
8

 
206

 
212

Consumer - other

 

 

 
46

 
$
4,134

 
$
4,397

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

 
$
3,106

 
$
3,165

One- to four-family - correspondent

 

 

One- to four-family - bulk purchased
1

 
123

 
122

Commercial real estate

 

 

Consumer - home equity
4

 
61

 
61

Consumer - other

 

 

 
35

 
$
3,290

 
$
3,348


The following table provides information on TDRs that became delinquent during the periods presented within 12 months after being restructured.
 
For the Three Months Ended
 
December 31, 2016
 
December 31, 2015
 
Number of
 
Recorded
 
Number of
 
Recorded
 
Contracts
 
Investment
 
Contracts
 
Investment
 
(Dollars in thousands)
One- to four-family - originated
11

 
$
978

 
11

 
$
800

One- to four-family - correspondent

 

 

 

One- to four-family - bulk purchased

 

 

 

Commercial real estate

 

 

 

Consumer - home equity
4

 
115

 
2

 
78

Consumer - other

 

 

 

 
15

 
$
1,093

 
13

 
$
878


18


Impaired loans - The following information pertains to impaired loans, by class, as of the dates presented. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement.
 
December 31, 2016
 
September 30, 2016
 
 
 
Unpaid
 
 
 
 
 
Unpaid
 
 
 
Recorded
 
Principal
 
Related
 
Recorded
 
Principal
 
Related
 
Investment
 
Balance
 
ACL
 
Investment
 
Balance
 
ACL
 
(Dollars in thousands)
With no related allowance recorded
 
 
 
 
 
 
 
 
 
 
 
One- to four-family - originated
$
24,077

 
$
24,759

 
$

 
$
22,982

 
$
23,640

 
$

One- to four-family - correspondent
4,244

 
4,233

 

 
2,963

 
2,950

 

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

 
12,870

 

 
10,985

 
12,684

 

Commercial real estate

 

 

 

 

 

Consumer - home equity
1,070

 
1,269

 

 
1,014

 
1,230

 

Consumer - other
16

 
39

 

 
10

 
42

 

 
40,582

 
43,170

 

 
37,954

 
40,546

 

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

 
11,760

 
89

 
13,430

 
13,476

 
125

One- to four-family - correspondent
1,056

 
1,059

 
2

 
2,662

 
2,664

 
4

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

 
1,313

 
15

 
1,650

 
1,627

 
49

Commercial real estate

 

 

 

 

 

Consumer - home equity
499

 
499

 
31

 
548

 
548

 
38

Consumer - other
14

 
14

 
1

 
6

 
6

 
1

 
14,612

 
14,645

 
138

 
18,296

 
18,321

 
217

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

 
36,519

 
89

 
36,412

 
37,116

 
125

One- to four-family - correspondent
5,300

 
5,292

 
2

 
5,625

 
5,614

 
4

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

 
14,183

 
15

 
12,635

 
14,311

 
49

Commercial real estate

 

 

 

 

 

Consumer - home equity
1,569

 
1,768

 
31

 
1,562

 
1,778

 
38

Consumer - other
30

 
53

 
1

 
16

 
48

 
1

 
$
55,194

 
$
57,815

 
$
138

 
$
56,250

 
$
58,867

 
$
217



19


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

 
$
205

 
$
10,843

 
$
110

One- to four-family - correspondent
3,138

 
24

 
129

 
3

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

 
46

 
11,090

 
51

Commercial real estate

 

 

 

Consumer - home equity
991

 
30

 
574

 
8

Consumer - other
11

 

 
9

 

 
37,725

 
305

 
22,645

 
172

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

 
125

 
26,779

 
252

One- to four-family - correspondent
2,254

 
20

 
1,335

 
13

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

 
6

 
3,246

 
7

Commercial real estate

 

 

 

Consumer - home equity
587

 
15

 
954

 
11

Consumer - other
13

 

 
13

 

 
17,571

 
166

 
32,327

 
283

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

 
330

 
37,622

 
362

One- to four-family - correspondent
5,392

 
44

 
1,464

 
16

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

 
52

 
14,336

 
58

Commercial real estate

 

 

 

Consumer - home equity
1,578

 
45

 
1,528

 
19

Consumer - other
24

 

 
22

 

 
$
55,296

 
$
471

 
$
54,972

 
$
455



20


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

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

 
 
 
 
 

 
Correspondent
 
Bulk
 

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

 
$
2,102

 
$
1,065

 
$
7,095

 
$
1,208

 
$
237

 
$
8,540

Charge-offs
(24
)
 

 

 
(24
)
 

 
(8
)
 
(32
)
Recoveries

 

 

 

 

 
13

 
13

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

 
(35
)
 

Ending balance
$
3,743

 
$
2,064

 
$
1,012

 
$
6,819

 
$
1,495

 
$
207

 
$
8,521

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

 
 
 
 
 

 
Correspondent
 
Bulk
 

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

 
$
2,115

 
$
1,434

 
$
8,414

 
$
742

 
$
287

 
$
9,443

Charge-offs
(57
)
 

 
(175
)
 
(232
)
 

 
(18
)
 
(250
)
Recoveries
3

 

 

 
3

 

 
5

 
8

Provision for credit losses
1

 
(95
)
 
31

 
(63
)
 
59

 
4

 

Ending balance
$
4,812

 
$
2,020

 
$
1,290

 
$
8,122

 
$
801

 
$
278

 
$
9,201

 
 
 
 
 
 
 
 
 
 
 
 
 
 


21


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

 
December 31, 2016
 
One- to Four-Family
 

 
 
 
 
 

 
Correspondent
 
Bulk
 

 
Commercial
 
 
 
 
 
Originated
 
Purchased
 
Purchased
 
Total
 
Real Estate
 
Consumer
 
Total
 
(Dollars in thousands)
Recorded investment in loans
 
 
 
 
 
 
 
 
 
 
 
 
 
collectively evaluated for impairment
$
4,024,073

 
$
2,311,667

 
$
391,175

 
$
6,726,915

 
$
179,493

 
$
125,358

 
$
7,031,766

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment in loans
 
 
 
 
 
 
 
 
 
 
 
 
 
individually evaluated for impairment
25,906

 
9,592

 
11,434

 
46,932

 

 
1,233

 
48,165

 
$
4,049,979

 
$
2,321,259

 
$
402,609

 
$
6,773,847

 
$
179,493

 
$
126,591

 
$
7,079,931

 
 
 
 
 
 
 
 
 
 
 
 
 
 
ACL for loans collectively
 
 
 
 
 
 
 
 
 
 
 
 
 
evaluated for impairment
$
3,743

 
$
2,064

 
$
1,012

 
$
6,819

 
$
1,495

 
$
207

 
$
8,521


 
September 30, 2016
 
One- to Four-Family
 

 
 
 
 
 

 
Correspondent
 
Bulk
 

 
Commercial
 
 
 
 
 
Originated
 
Purchased
 
Purchased
 
Total
 
Real Estate
 
Consumer
 
Total
 
(Dollars in thousands)
Recorded investment in loans
 
 
 
 
 
 
 
 
 
 
 
 
 
collectively evaluated for impairment
$
4,003,750

 
$
2,233,347

 
$
407,833

 
$
6,644,930

 
$
153,082

 
$
126,504

 
$
6,924,516

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment in loans
 
 
 
 
 
 
 
 
 
 
 
 
 
individually evaluated for impairment
24,960

 
4,975

 
11,008

 
40,943

 

 
1,105

 
42,048

 
$
4,028,710

 
$
2,238,322

 
$
418,841

 
$
6,685,873

 
$
153,082

 
$
127,609

 
$
6,966,564

 
 
 
 
 
 
 
 
 
 
 
 
 
 
ACL for loans collectively
 
 
 
 
 
 
 
 
 
 
 
 
 
evaluated for impairment
$
3,928

 
$
2,102

 
$
1,065

 
$
7,095

 
$
1,208

 
$
237

 
$
8,540




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 $56.9 million and $58.0 million at December 31, 2016 and September 30, 2016, respectively.  The Bank's obligations related to unfunded commitments, which are included in accounts payable and accrued expenses in the consolidated balance sheets, were $26.3 million and $27.2 million at December 31, 2016 and September 30, 2016, respectively. The majority of the commitments are projected to be funded through the end of calendar year 2019.

For the three months ended December 31, 2016, the net income tax benefit associated with these investments, which consists of proportional amortization expense and affordable housing tax credits and other related tax benefits, was reported in income tax expense in the consolidated statements of income. The amount of proportional amortization expense during the three months ended December 31, 2016 was $1.1 million and the amount of affordable housing tax credits and other related tax benefits was $1.7 million, resulting in a net income tax benefit of $577 thousand. For the three months ended December 31, 2015, low income housing partnership expenses were reported in low income housing partnerships in the consolidated statements of income, other tax benefits were $292 thousand, and affordable housing tax credits were $1.2 million. There were no impairment losses during the three months ended December 31, 2016 and 2015 resulting from the forfeiture or ineligibility of tax credits or other circumstances.

6. REPURCHASE AGREEMENTS
At both December 31, 2016 and September 30, 2016, 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 December 31, 2016 and September 30, 2016 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 December 31, 2016:
 
Amount
 
(Dollars in thousands)
2017
$

2018
100,000

2019

2020
100,000

2021

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 December 31, 2016 or September 30, 2016. 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 under current market conditions. 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 three month months ended December 31, 2016 or during fiscal year 2016. 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.
 
December 31, 2016
 
 
 
Quoted Prices
 
Significant
 
Significant
 
 
 
in Active Markets
 
Other Observable
 
Unobservable
 
Carrying
 
for Identical Assets
 
 Inputs
 
Inputs
 
Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(Dollars in thousands)
AFS Securities:
 
 
 
 
 
 
 
GSE debentures
$
320,604

 
$

 
$
320,604

 
$

MBS
177,314

 

 
177,314

 

Municipal bonds

 

 

 

Trust preferred securities
1,874

 

 

 
1,874

 
$
499,792

 
$

 
$
497,918

 
$
1,874


 
September 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
$
347,038

 
$

 
$
347,038

 
$

MBS
178,507

 

 
178,507

 

Municipal bonds

 

 

 

Trust preferred securities
1,756

 

 

 
1,756

 
$
527,301

 
$

 
$
525,545

 
$
1,756


The Company's Level 3 AFS securities had no activity during the three months ended December 31, 2016, except for principal repayments of $19 thousand and decreases in net unrealized losses included in other comprehensive income of $80 thousand. The Company's Level 3 AFS securities had no activity during the three months ended December 31, 2015, except for principal repayments of $5 thousand, and increases in net unrealized losses included in other comprehensive income of $39 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 December 31, 2016 and September 30, 2016 was $48.1 million and $42.0 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 loans individually evaluated for impairment using appraisals to determine the estimated fair value was the appraisal. Fair values of loans individually evaluated for impairment 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 all loss amounts as of December 31, 2016 and September 30, 2016; 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 price, 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 December 31, 2016 and September 30, 2016 was $3.4 million and $3.7 million, respectively.

The following tables provide the level of valuation assumptions used to determine the carrying value of the Company's assets measured at fair value on a non-recurring basis at the dates presented.
 
December 31, 2016
 
 
 
Quoted Prices
 
Significant
 
Significant
 
 
 
in Active Markets
 
Other Observable
 
Unobservable
 
Carrying
 
for Identical Assets
 
 Inputs
 
Inputs
 
Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(Dollars in thousands)
Loans individually evaluated for impairment
$
48,065

 
$

 
$

 
$
48,065

OREO
3,362

 

 

 
3,362

 
$
51,427

 
$

 
$

 
$
51,427


 
September 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
$
41,995

 
$

 
$

 
$
41,995

OREO
3,734

 

 

 
3,734

 
$
45,729

 
$

 
$

 
$
45,729


Fair Value Disclosures - The Company determined estimated fair value amounts using available market information and a variety of valuation methodologies as of the dates presented. Considerable judgment is required to interpret market data to develop the estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company would realize from a current market exchange at subsequent dates.

The carrying amounts and estimated fair values of the Company's financial instruments, at the dates presented, were as follows:
 
December 31, 2016
 
September 30, 2016
 
 
 
Estimated
 
 
 
Estimated
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Amount
 
Value
 
Amount
 
Value
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
150,560

 
$
150,560

 
$
281,764

 
$
281,764

AFS securities
499,792

 
499,792

 
527,301

 
527,301

HTM securities
1,022,215

 
1,027,292

 
1,100,874

 
1,122,867

Loans receivable
7,071,410

 
7,188,403

 
6,958,024

 
7,292,971

FHLB stock
105,364

 
105,364

 
109,970

 
109,970

Liabilities:
 
 
 
 
 
 
 
Deposits
5,192,674

 
5,207,640

 
5,164,018

 
5,204,251

FHLB borrowings
2,272,754

 
2,293,591

 
2,372,389

 
2,434,151

Repurchase agreements
200,000

 
203,861

 
200,000

 
207,303



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 December 31, 2016 and September 30, 2016 was $2.41 billion and $2.34 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 December 31, 2016 and September 30, 2016 was $2.80 billion and $2.87 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)

27


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The Company and the Bank 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 and the exhibits attached to it, 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 similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause our future results to differ materially from the beliefs, 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;
fluctuations in deposit flows;
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;
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;
changes in real estate values, unemployment levels, and the level and direction of loan delinquencies and charge-offs may require changes in the estimates of the adequacy of the ACL, which may adversely affect our business;
increases in non-performing assets, which may require the Bank to increase the ACL, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets;
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 effects of, and changes in, monetary and interest rate policies of the Board of Governors of the Federal Reserve System ("FRB");
the effects of, and changes in, trade and fiscal policies and laws of the United States government;
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, borrowing 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 we specify otherwise, "the Company," "we," "us," and "our" refer to Capitol Federal Financial, Inc. a Maryland corporation. "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,

28


references to management actions, strategies and results of actions apply to both the Bank and the Company. This discussion and 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, 2016, 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 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 stated maturities 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.

Local economic conditions have a significant impact on the ability of borrowers to repay loans and the value of the collateral securing these loans. The industries in the Bank's local market areas, where the property securing approximately 70% of the Bank's one- to four-family loans is located, are diversified, especially in the Kansas City metropolitan statistical area, which comprises the largest segment of our loan portfolio and deposit base. As of December 2016, the unemployment rate was 4.2% for Kansas and 4.4% for Missouri, compared to the national average of 4.7%, based on information from the Bureau of Labor Statistics. The Kansas City market area has an average household income of approximately $74 thousand per annum, based on 2016 estimates from Nielsen. 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 2016 estimates from Nielsen. The FHFA price index for Kansas and Missouri has not experienced any significant fluctuations over the past several years, which indicates relative stability in property values in our local market areas.

For the quarter ended December 31, 2016, the Company recognized net income of $20.6 million, or $0.15 per share, compared to net income of $20.7 million, or $0.16 per share, for the quarter ended December 31, 2015. The Bank continued to utilize a leverage strategy to increase earnings during the current quarter. The leverage strategy during the current quarter involved borrowing up to $2.10 billion either on the Bank's FHLB line of credit or by entering into short-term FHLB advances, depending on the rates offered by FHLB. The borrowings were repaid prior to quarter end for regulatory purposes. The proceeds from the borrowings, net of the required FHLB stock holdings, were deposited at the Federal Reserve Bank of Kansas City. Net income attributable to the leverage strategy was $642 thousand during the current quarter, compared to $583 thousand for the prior year quarter.

The net interest margin decreased two basis points, from 1.75% for the prior year quarter to 1.73% for the current year quarter. Excluding the effects of the leverage strategy, the net interest margin would have decreased four basis points, from 2.11% for the prior year quarter to 2.07% for the current year quarter. The decrease in the net interest margin was due mainly to an increase in interest expense on deposits and a decrease in the yield on the MBS portfolio, partially offset by a decrease in interest expense on borrowings not related to the leverage strategy. The positive impact on the net interest margin resulting from the shift in the mix of interest-earning assets from relatively lower yielding securities to higher yielding loans was offset by a decrease in the loan portfolio yield.

Total assets were $9.14 billion at December 31, 2016 compared to $9.27 billion at September 30, 2016. The $127.7 million decrease was due primarily to a $131.2 million decrease in cash and cash equivalents and a $106.2 million decrease in the securities portfolio. These cash flows were used to fund loan growth and pay off a maturing $100.0 million FHLB advance during the current quarter.


29


The loans receivable portfolio, net, increased $113.4 million, to $7.07 billion at December 31, 2016, from $6.96 billion at September 30, 2016. During the current quarter, the Bank originated and refinanced $223.1 million of loans with a weighted average rate of 3.32% and purchased $180.6 million of one- to four-family loans from correspondent lenders with a weighted average rate of 3.33%. The Bank also entered into participations of $32.3 million of commercial real estate loans with a weighted average rate of 3.96%, of which $24.5 million had not yet been funded as of December 31, 2016.

Total liabilities were $7.77 billion at December 31, 2016 compared to $7.87 billion at September 30, 2016. The $102.9 million decrease was due primarily to a $99.6 million decrease in FHLB borrowings as a result of the maturity of a $100.0 million FHLB advance during the current quarter which was not replaced.

Stockholders' equity was $1.37 billion at December 31, 2016 compared to $1.39 billion at September 30, 2016. The $24.8 million decrease was due primarily to the payment of $50.2 million in cash dividends, partially offset by net income of $20.6 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 our audit committee. 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, 2016.

Financial Condition
The following table presents selected balance sheet information as of the dates indicated.
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
2016
 
2016
 
2016
 
2016
 
2015
 
(Dollars in thousands)
Total assets
$
9,139,510

 
$
9,267,247

 
$
9,241,775

 
$
9,316,684

 
$
9,133,422

Cash and cash equivalents
150,560

 
281,764

 
152,831

 
203,811

 
232,354

AFS securities
499,792

 
527,301

 
666,313

 
677,416

 
636,970

HTM securities
1,022,215

 
1,100,874

 
1,188,913

 
1,270,849

 
1,199,978

Loans receivable, net
7,071,410

 
6,958,024

 
6,839,123

 
6,769,194

 
6,665,128

FHLB stock, at cost
105,364

 
109,970

 
114,425

 
114,381

 
119,027

Deposits
5,192,674

 
5,164,018

 
5,085,129

 
5,119,829

 
4,972,480

FHLB borrowings
2,272,754

 
2,372,389

 
2,472,026

 
2,471,656

 
2,471,272

Repurchase agreements
200,000

 
200,000

 
200,000

 
200,000

 
200,000

Stockholders' equity
1,368,175

 
1,392,964

 
1,380,815

 
1,403,408

 
1,390,833

Equity to total assets at end of period
15.0
%
 
15.0
%
 
14.9
%
 
15.1
%
 
15.2
%

Assets. Total assets were $9.14 billion at December 31, 2016 compared to $9.27 billion at September 30, 2016. The $127.7 million decrease was due primarily to a $131.2 million decrease in cash and cash equivalents and a $106.2 million decrease in the securities portfolio. These cash flows were used to fund loan growth and pay off a maturing $100.0 million FHLB advance during the current quarter.

Loans Receivable. Loans receivable, net, increased $113.4 million to $7.07 billion at December 31, 2016 from $6.96 billion at September 30, 2016. The annualized loan portfolio growth during the current quarter was 6.5%. The growth in the loan portfolio during the current quarter was primarily in the correspondent one- to four-family purchased loan portfolio, which increased $82.3 million.

30



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 December 31, 2016, 59% of the loans had a balance at origination of less than $417 thousand.
 
December 31, 2016
 
September 30, 2016
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
Originated
$
4,027,991

 
3.70
%
 
$
4,005,615

 
3.74
%
Correspondent purchased
2,288,368

 
3.48

 
2,206,072

 
3.50

Bulk purchased
400,506

 
2.24

 
416,653

 
2.23

Construction
37,524

 
3.44

 
39,430

 
3.45

Total
6,754,389

 
3.54

 
6,667,770

 
3.56

Commercial:
 
 
 
 
 
 
 
Permanent
104,323

 
4.15

 
110,768

 
4.16

Construction
76,254

 
4.10

 
43,375

 
4.13

Total
180,577

 
4.13

 
154,143

 
4.15

Total real estate loans
6,934,966

 
3.55

 
6,821,913

 
3.58

 
 
 
 
 
 
 
 
Consumer loans:
 
 
 
 
 
 
 
Home equity
122,378

 
4.99

 
123,345

 
5.01

Other
4,213

 
4.19

 
4,264

 
4.21

Total consumer loans
126,591

 
4.96

 
127,609

 
4.99

Total loans receivable
7,061,557

 
3.58

 
6,949,522

 
3.60

 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
ACL
8,521

 
 
 
8,540

 
 
Discounts/unearned loan fees
25,028

 
 
 
24,933

 
 
Premiums/deferred costs
(43,402
)
 
 
 
(41,975
)
 
 
Total loans receivable, net
$
7,071,410

 
 
 
$
6,958,024

 
 



31


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 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 months ended December 31, 2016 and 2015, the Bank endorsed $33.8 million and $23.6 million of one- to four-family loans, respectively, reducing the average rate on those loans by 89 and 90 basis points, respectively.
 
For the Three Months Ended
 
December 31, 2016
 
September 30, 2016
 
June 30, 2016
 
March 31, 2016
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Beginning balance
$
6,949,522

 
3.60
%
 
$
6,832,770

 
3.63
%
 
$
6,763,980

 
3.64
%
 
$
6,661,648

 
3.65
%
Originated and refinanced:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
176,554

 
3.26

 
176,534

 
3.31

 
155,179

 
3.52

 
117,205

 
3.65

Adjustable
46,566

 
3.54

 
48,608

 
3.53

 
44,319

 
3.61

 
35,495

 
3.77

Purchased and participations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
187,674

 
3.52

 
190,830

 
3.50

 
178,762

 
3.71

 
249,017

 
3.68

Adjustable
25,262

 
2.73

 
65,748

 
3.79

 
24,715

 
2.90

 
27,355

 
2.93

Change in undisbursed loan funds
3,696

 
 
 
(26,760
)
 
 
 
(23,431
)
 
 
 
(90,800
)
 
 
Repayments
(326,839
)
 
 
 
(337,779
)
 
 
 
(310,041
)
 
 
 
(235,202
)
 
 
Principal (charge-offs) recoveries, net
(19
)
 
 
 
(22
)
 
 
 
119

 
 
 
(8
)
 
 
Other
(859
)
 
 
 
(407
)
 
 
 
(832
)
 
 
 
(730
)
 
 
Ending balance
$
7,061,557

 
3.58

 
$
6,949,522

 
3.60

 
$
6,832,770

 
3.63

 
$
6,763,980

 
3.64

 
 
 
 
 
 
 
 



32


The following tables present loan origination, refinance, and purchase activity for the periods indicated, excluding endorsement activity, along with associated weighted average rates and percent of total. Loan originations, purchases, and refinances are reported together. The fixed-rate one- to four-family loans less than or equal to 15 years have an original maturity at origination of less than or equal to 15 years, while fixed-rate one- to four-family loans greater than 15 years have an original maturity at origination of greater than 15 years. The adjustable-rate one- to four-family loans less than or equal to 36 months have a term to first reset of less than or equal to 36 months at origination and adjustable-rate one- to four-family loans greater than 36 months have a term to first reset of greater than 36 months at origination.
 
For the Three Months Ended
 
December 31, 2016
 
December 31, 2015
 
Amount
 
Rate
 
% of Total
 
Amount
 
Rate
 
% of Total
 
(Dollars in thousands)
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 15 years
$
84,347

 
2.78
%
 
19.3
%
 
$
60,427

 
3.01
%
 
18.7
%
> 15 years
246,730

 
3.52

 
56.6

 
166,383

 
3.79

 
51.5

Commercial real estate
32,291

 
3.96

 
7.4

 
31,164

 
4.25

 
9.6

Home equity
733

 
6.09

 
0.2

 
893

 
5.65

 
0.3

Other
127

 
9.90

 

 
224

 
8.41

 
0.1

Total fixed-rate
364,228

 
3.39

 
83.5

 
259,091

 
3.68

 
80.2

 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
<= 36 months
1,427

 
2.42

 
0.3

 
904

 
2.66

 
0.3

> 36 months
52,031

 
2.76

 
12.0

 
41,097

 
3.02

 
12.7

Commercial real estate

 

 

 
3,376

 
4.25

 
1.0

Home equity
17,933

 
4.77

 
4.1

 
18,059

 
4.52

 
5.6

Other
437

 
3.30

 
0.1

 
542

 
3.44

 
0.2

Total adjustable-rate
71,828

 
3.25

 
16.5

 
63,978

 
3.51

 
19.8

 
 
 
 
 
 
 
 
 
 
 
 
Total originated, refinanced and purchased
$
436,056

 
3.37

 
100.0
%
 
$
323,069

 
3.64

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Purchased and participation loans included above:
 
 
 
 
 
 
 
 
 
 
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
$
155,383

 
3.43

 
 
 
$
96,111

 
3.66

 
 
Participations - commercial real estate
32,291

 
3.96

 
 
 
5,533

 
4.25

 
 
Total fixed-rate purchased/participations
187,674

 
3.52

 
 
 
101,644

 
3.69

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate:
 
 
 
 
 
 
 
 
 
 
 
Correspondent - one- to four-family
25,262

 
2.73

 
 
 
22,485

 
3.01

 
 
Participations - commercial real estate

 

 
 
 
3,376

 
4.25

 
 
Total adjustable-rate purchased/participations
25,262

 
2.73

 
 
 
25,861

 
3.17

 
 
Total purchased/participation loans
$
212,936

 
3.43

 
 
 
$
127,505

 
3.59

 
 
 
 
 
 
 
 
 
 
 
 
 
 


33


One- to Four-Family Loans - The following table presents, for our portfolio of one- to four-family loans, the amount, percent 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 September 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.
 
December 31, 2016
 
September 30, 2016
 
 
 
% of
 
Credit
 
 
 
Average
 
 
 
% of
 
Credit
 
 
 
Average
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
Amount
 
Total
 
Score
 
LTV
 
Balance
 
(Dollars in thousands)
Originated
$
4,027,991

 
60.0
%
 
766

 
63
%
 
$
133

 
$
4,005,615

 
60.4
%
 
766

 
63
%
 
$
132

Correspondent purchased
2,288,368

 
34.0

 
764

 
68

 
366

 
2,206,072

 
33.3

 
764

 
68

 
360

Bulk purchased
400,506

 
6.0

 
753

 
64

 
307

 
416,653

 
6.3

 
753

 
64

 
308

 
$
6,716,865

 
100.0
%
 
765

 
65

 
178

 
$
6,628,340

 
100.0
%
 
765

 
65

 
175


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 quarter, 68% had loan values of $417 thousand or less. Of the correspondent loans purchased during the current quarter, 10% had loan values of $417 thousand or less.
 
For the Three Months Ended
 
December 31, 2016
 
December 31, 2015
 
 
 
 
 
Credit
 
 
 
 
 
Credit
 
Amount
 
LTV
 
Score
 
Amount
 
LTV
 
Score
 
(Dollars in thousands)
Originated
$
144,737

 
76
%
 
771

 
$
113,655

 
76
%
 
766

Refinanced by Bank customers
59,153

 
66

 
768

 
36,560

 
68

 
769

Correspondent purchased
180,645

 
72

 
767

 
118,596

 
74

 
763

 
$
384,535

 
73

 
769

 
$
268,811

 
74

 
765

 
 
 
 
 
 
 
 
 
 
 
 
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 quarter ended December 31, 2016.
State
 
Amount
 
% of Total
 
Rate
 
 
(Dollars in thousands)
Kansas
 
$
179,453

 
46.6
%
 
3.17
%
Texas
 
78,100

 
20.3

 
3.31

Missouri
 
60,206

 
15.7

 
3.29

Other states
 
66,776

 
17.4

 
3.35

 
 
$
384,535

 
100.0
%
 
3.25



34


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 loan purchase commitments as of December 31, 2016, along with associated weighted average rates. Loan commitments generally have fixed expiration dates or other termination clauses and may require the payment of a rate lock fee. A percentage of the loan commitments are expected to expire unfunded, so the amounts reflected in the table below are not necessarily indicative of future cash requirements.
 
Fixed-Rate
 
 
 
 
 
 
 
15 years
 
More than
 
Adjustable-
 
Total
 
or less
 
15 years
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Originate/refinance
$
20,406

 
$
56,251

 
$
16,591

 
$
93,248

 
3.37
%
Correspondent
16,967

 
98,218

 
20,959

 
136,144

 
3.63

 
$
37,373

 
$
154,469

 
$
37,550

 
$
229,392

 
3.52

 
 
 
 
 
 
 
 
 
 
Rate
2.99
%
 
3.78
%
 
3.01
%
 
 
 
 

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 entered into commercial real estate loan participations of $32.3 million. 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 has commercial real estate lending relationships.
 
The following table presents the Bank's commercial real estate loans and loan commitments by industry classification, as defined by the North American Industry Classification System, as of December 31, 2016. Based on the terms of the construction loans as of December 31, 2016, of the $184.7 million of undisbursed amounts in the table, approximately $140 million is projected to be disbursed by September 30, 2017. 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
$
76,062

 
$
66,228

 
$
142,290

 
$

 
$
142,290

 
38.8
%
Health care and social assistance
21,841

 
53,431

 
75,272

 

 
75,272

 
20.6

Real estate rental and leasing
17,042

 
42,269

 
59,311

 
1,250

 
60,561

 
16.5

Arts, entertainment, and recreation
19,700

 
14,775

 
34,475

 

 
34,475

 
9.4

Retail trade
22,411

 
5,367

 
27,778

 

 
27,778

 
7.6

Multi-family
10,736

 

 
10,736

 

 
10,736

 
2.9

Other
12,785

 
2,590

 
15,375

 

 
15,375

 
4.2

 
$
180,577

 
$
184,660

 
$
365,237

 
$
1,250

 
$
366,487

 
100.0
%


35


The following table summarizes the Bank's commercial real estate loans by state as of December 31, 2016.
 
Unpaid
 
Undisbursed
 
Gross Loan
 
Outstanding
 
 
 
% of
 
Principal
 
Amount
 
Amount
 
Commitments
 
Total
 
Total
 
(Dollars in thousands)
Texas
$
38,804

 
$
106,108

 
$
144,912

 
$

 
$
144,912

 
39.5
%
Missouri
49,263

 
59,390

 
108,653

 

 
108,653

 
29.6

Kansas
64,167

 
14,775

 
78,942

 
1,250

 
80,192

 
21.9

Colorado
14,726

 
298

 
15,024

 

 
15,024

 
4.1

Arkansas
8,215

 

 
8,215

 

 
8,215

 
2.3

California
3,910

 
2,589

 
6,499

 

 
6,499

 
1.8

Montana
1,492

 
1,500

 
2,992

 

 
2,992

 
0.8

 
$
180,577

 
$
184,660

 
$
365,237

 
$
1,250

 
$
366,487

 
100.0
%

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

 
$
157,711

>$15 to $30 million
3

 
72,759

>$10 to $15 million
3

 
38,175

>$5 to $10 million
3

 
23,536

$1 to $5 million
24

 
70,064

Less than $1 million
14

 
4,242

 
51

 
$
366,487



36



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. Generally, 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, 2016.

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 December 31, 2016 and September 30, 2016, approximately 75% were 59 days or less delinquent. Of the correspondent purchased loans 30 to 89 days delinquent at December 31, 2016, approximately 97% were 59 days or less delinquent.
 
Loans Delinquent for 30 to 89 Days at:
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
2016
 
2016
 
2016
 
2016
 
2015
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
130
 
$
11,232

 
143
 
$
13,593

 
141
 
$
12,962

 
139

 
$
14,336

 
159

 
$
14,277

Correspondent purchased
17
 
7,809

 
9
 
3,329

 
10
 
2,561

 
8

 
2,307

 
10

 
3,033

Bulk purchased
26
 
4,844

 
21
 
5,008

 
27
 
4,703

 
26

 
6,005

 
35

 
7,805

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
38
 
665

 
36
 
635

 
33
 
548

 
33

 
631

 
36

 
730

Other
7
 
17

 
5
 
62

 
11
 
55

 
5

 
28

 
13

 
88

 
218
 
$
24,567

 
214
 
$
22,627

 
222
 
$
20,829

 
211

 
$
23,307

 
253

 
$
25,933

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans 30 to 89 days delinquent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
to total loans receivable, net
 
 
0.35
%
 
 
 
0.33
%
 
 
 
0.30
%
 
 
 
0.34
%
 
 
 
0.39
%

The table below presents the Company's non-performing loans and OREO at the dates indicated. Non-performing loans are loans that are 90 or more days delinquent or in foreclosure and other loans 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 acquired in the settlement of loans were owned by the Bank, on average, for approximately six months before the properties were sold.

37


 
Non-Performing Loans and OREO at:
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
2016
 
2,016
 
2016
 
2016
 
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
79

 
$
6,647

 
73

 
$
8,190

 
74

 
$
8,539

 
72

 
$
8,016

 
75

 
$
9,900

Correspondent purchased
2

 
553

 
3

 
985

 
2

 
652

 
3

 
864

 

 

Bulk purchased
27

 
7,982

 
28

 
7,323

 
32

 
8,017

 
33

 
7,483

 
32

 
7,199

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
29

 
456

 
26

 
520

 
20

 
437

 
26

 
622

 
28

 
574

Other
7

 
18

 
5

 
9

 
6

 
17

 
8

 
26

 
9

 
25

 
144

 
15,656

 
135

 
17,027

 
134

 
17,662

 
142

 
17,011

 
144

 
17,698

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans 90 or more days delinquent or in foreclosure
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 as a percentage of total loans
 
 
0.22
%
 
 
 
0.24
%
 
 
 
0.24
%
 
 
 
0.25
%
 
 
 
0.26
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonaccrual loans less than 90 Days Delinquent:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated
82

 
$
11,393

 
70

 
$
8,956

 
70

 
$
6,939

 
72

 
$
7,667

 
75

 
$
7,661

Correspondent purchased
6

 
1,231

 
9

 
2,786

 
8

 
2,872

 
4

 
825

 
1

 
24

Bulk purchased
2

 
147

 
1

 
31

 

 

 
1

 
80

 
1

 
81

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
14

 
371

 
12

 
328

 
11

 
263

 
9

 
151

 
14

 
259

Other

 

 

 

 
1

 
7

 
1

 
8

 

 

 
104

 
13,142

 
92

 
12,101

 
90

 
10,081

 
87

 
8,731

 
91

 
8,025

Total non-performing loans
248

 
28,798

 
227

 
29,128

 
224

 
27,743

 
229

 
25,742

 
235

 
25,723

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-performing loans as a percentage of total loans
 
 
0.41
%
 
 
 
0.42
%
 
 
 
0.41
%
 
 
 
0.38
%
 
 
 
0.39
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OREO:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to four-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Originated(2)
10

 
$
888

 
12

 
$
692

 
14

 
$
1,142

 
22

 
$
1,364

 
25

 
$
1,410

Correspondent purchased

 

 
1

 
499

 
1

 
499

 
1

 
499

 
1

 
499

Bulk purchased
3

 
1,196

 
4

 
1,265

 
5

 
1,413

 
8

 
2,694

 
6

 
2,247

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity

 

 

 

 

 

 
1

 
9

 
1

 
26

Other(3)
1

 
1,278

 
1

 
1,278

 
1

 
1,278

 
1

 
1,278

 
1

 
1,278

 
14

 
3,362

 
18

 
3,734

 
21

 
4,332

 
33

 
5,844

 
34

 
5,460

Total non-performing assets
262

 
$
32,160

 
245

 
$
32,862

 
245

 
$
32,075

 
262

 
$
31,586

 
269

 
$
31,183

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

38


(1)
Represents loans required to be reported as nonaccrual pursuant to regulatory reporting requirements even if the loans are current. At December 31, 2016, September 30, 2016, June 30, 2016, March 31, 2016, and December 31, 2015, this amount was comprised of $2.0 million, $2.3 million, $2.8 million, $1.8 million, and $2.2 million, respectively, of loans that were 30 to 89 days delinquent and were reported as such, and $11.1 million, $9.8 million, $7.3 million, $6.9 million, and $5.8 million, respectively, of loans that were current.
(2)
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.
(3)
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 December 31, 2016, $13.0 million, or 86%, 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 December 31, 2016. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. At December 31, 2016, potential losses, after taking into consideration anticipated PMI proceeds and estimated selling costs, have been charged-off.
 
 
 
 
 
 
Loans 30 to 89
 
Loans 90 or More Days Delinquent
 
 
One- to Four-Family
 
Days Delinquent
 
or in Foreclosure
State
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Amount
 
% of Total
 
LTV
 
 
(Dollars in thousands)
Kansas
 
$
3,749,333

 
55.8
%
 
$
8,628

 
36.1
%
 
$
7,192

 
47.4
%
 
71
%
Missouri
 
1,259,065

 
18.7

 
3,538

 
14.8

 
843

 
5.5

 
52

Texas
 
580,832

 
8.6

 
4,540

 
19.0

 
350

 
2.3

 
74

California
 
234,353

 
3.5

 

 

 

 

 
n/a

Tennessee
 
206,583

 
3.1

 
434

 
1.8

 

 

 
n/a

Alabama
 
109,691

 
1.6

 

 

 

 

 
n/a

Oklahoma
 
72,554

 
1.1

 

 

 

 

 
n/a

Georgia
 
70,587

 
1.1

 
422

 
1.8

 
615

 
4.1

 
78

Pennsylvania
 
67,978

 
1.0

 
447

 
1.9

 

 

 
n/a

North Carolina
 
66,118

 
1.0

 
1,520

 
6.4

 
1,234

 
8.1

 
38

Other states
 
299,771

 
4.5

 
4,356

 
18.2

 
4,948

 
32.6

 
72

 
 
$
6,716,865

 
100.0
%
 
$
23,885

 
100.0
%
 
$
15,182

 
100.0
%
 
68


TDRs - The following table presents the Company's TDRs, based on accrual status, at the dates indicated. At December 31, 2016, $12.3 million of TDRs were included in the ACL formula analysis model and $34 thousand of the ACL was related to these loans. The remaining $28.4 million of TDRs at December 31, 2016 were individually evaluated for loss and any losses have been charged-off.
 
At
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
2016
 
2016
 
2016
 
2016
 
2015
 
(Dollars in thousands)
Accruing TDRs
$
22,726

 
$
23,177

 
$
21,663

 
$
24,239

 
$
24,956

Nonaccrual TDRs(1)
17,983

 
18,725

 
16,497

 
14,986

 
13,983

Total TDRs
$
40,709

 
$
41,902

 
$
38,160

 
$
39,225

 
$
38,939


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


39


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, trends in foreclosed property and short sale transactions and charge-off activity, the current status and trends of local and national employment levels, trends and current conditions in the real estate and housing markets, loan portfolio growth and concentrations, industry and peer charge-off information, and certain ACL ratios. For our commercial real estate portfolio, we also consider qualitative factors such as geographic locations, property types, tenant brand name, borrowing relationships, and lending relationships in the case of participation loans, among other factors. See "Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" and "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2016 for a full discussion of our ACL methodology.

Net loan charge-offs were $19 thousand during the current quarter compared to $22 thousand for the September 30, 2016 quarter and $242 thousand for the December 31, 2015 quarter. At December 31, 2016, September 30, 2016, and December 31, 2015 loans 30 to 89 days delinquent were 0.35%, 0.33%, and 0.39%, respectively, of total loans. At December 31, 2016, September 30, 2016, and December 31, 2015 loans 90 or more days delinquent or in foreclosure were 0.22%, 0.24%, and 0.26%, respectively, of total loans. Based on management's assessment of the ACL formula analysis model and several other factors, management determined that no provision for credit losses was necessary in the current quarter.


40


The distribution of our ACL at the dates indicated is summarized below. Included in bulk purchased loans are $231.9 million of loans, or 58% of the total bulk purchased loan portfolio, at December 31, 2016, for which the seller of the loans has guaranteed to repurchase or replace any delinquent loans. The Bank has not experienced any losses on loans acquired from this seller as all delinquent loans have been repurchased by this seller since the loan package was purchased in fiscal year 2012. For the $168.6 million of bulk purchased loans at December 31, 2016 that do not have the above noted guarantee, the Bank has continued to experience a reduction in loan losses due to an improvement in collateral values. A large portion of these loans were originally interest-only loans with interest-only terms up to 10 years. All of the interest-only loans are now fully amortizing loans. Our correspondent purchased loans are purchased on a loan-by-loan basis from a select group of correspondent lenders and are underwritten by the Bank's underwriters based on underwriting standards that are generally the same as for our originated loans.
 
At
 
December 31, 2016
 
September 30, 2016
 
 
 
% 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
$
3,709

 
43.5
%
 
$
4,027,991

 
57.0
%
 
$
3,892

 
45.6
%
 
$
4,005,615

 
57.6
%
Correspondent purchased
2,064

 
24.2

 
2,288,368

 
32.4

 
2,102

 
24.6

 
2,206,072

 
31.7

Bulk purchased
1,012

 
11.9

 
400,506

 
5.7

 
1,065

 
12.5

 
416,653

 
6.0

Construction
34

 
0.4

 
37,524

 
0.5

 
36

 
0.4

 
39,430

 
0.6

Total
6,819

 
80.0

 
6,754,389

 
95.6

 
7,095

 
83.1

 
6,667,770

 
95.9

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Permanent
733

 
8.6

 
104,323

 
1.5

 
774

 
9.1

 
110,768

 
1.6

Construction
762

 
9.0

 
76,254

 
1.1

 
434

 
5.1

 
43,375

 
0.6

Total
1,495

 
17.6

 
180,577

 
2.6

 
1,208

 
14.2

 
154,143

 
2.2

Total real estate loans
8,314

 
97.6

 
6,934,966

 
98.2

 
8,303

 
97.3

 
6,821,913

 
98.1

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
161

 
1.9

 
122,378

 
1.7

 
187

 
2.1

 
123,345

 
1.8

Other consumer
46

 
0.5

 
4,213

 
0.1

 
50

 
0.6

 
4,264

 
0.1

Total consumer loans
207

 
2.4

 
126,591

 
1.8

 
237

 
2.7

 
127,609

 
1.9

 
$
8,521

 
100.0
%
 
$
7,061,557

 
100.0
%
 
$
8,540

 
100.0
%
 
$
6,949,522

 
100.0
%

41


The following table presents ACL activity and related ratios at the dates and for the periods indicated. See "Note 4 - Loans Receivable and Allowance for Credit Losses" for additional information related to ACL activity by specific loan categories. Using the Bank's annualized historical losses over the past five years, the Bank would have approximately six years of net loan loss coverage based on the ACL balance at December 31, 2016.
 
For the Three Months Ended
 
December 31, 2016
 
September 30, 2016
 
June 30, 2016
 
March 31, 2016
 
December 31, 2015
 
(Dollars in thousands)
ACL beginning balance
$
8,540

 
$
9,312

 
$
9,193

 
$
9,201

 
$
9,443

Charge-offs
(32
)
 
(179
)
 
(126
)
 
(75
)
 
(250
)
Recoveries
13

 
157

 
245

 
67

 
8

Provision for credit losses

 
(750
)
 

 

 

ACL ending balance
$
8,521

 
$
8,540

 
$
9,312

 
$
9,193

 
$
9,201

 
 
 
 
 
 
 
 
 
 
ACL to loans receivable, net at end of period
0.12
%
 
0.12
%
 
0.14
 %
 
0.14
%
 
0.14
%
ACL to non-performing loans at end of period
29.59

 
29.32

 
33.57

 
35.71

 
35.77

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

 

 

 

 

Ratio of net charge-offs (recoveries) during the
 
 
 
 
 
 
 
 
 
period to average non-performing assets
0.06

 
0.07

 
(0.38
)
 
0.03

 
0.79

ACL to net charge-offs (annualized)
111.5x

 
95.6x

 
N/M

(1) 
294.7x

 
9.5x


(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.

 
 
 
 


42


Securities. The following table presents the distribution of our securities portfolio, at amortized cost, at the dates indicated. Overall, fixed-rate securities comprised 75% of our securities portfolio at December 31, 2016. The weighted average life ("WAL") is the estimated remaining maturity (in years) after three-month historical prepayment speeds and projected call option assumptions have been applied. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.
 
December 31, 2016
 
September 30, 2016
 
December 31, 2015
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Fixed-rate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MBS
$
784,640

 
2.14
%
 
2.8

 
$
836,852

 
2.16
%
 
2.9

 
$
985,287

 
2.26
%
 
3.2

GSE debentures
321,246

 
1.21

 
1.8

 
346,226

 
1.15

 
0.9

 
421,231

 
1.18

 
2.4

Municipal bonds
33,203

 
1.78

 
2.4

 
33,303

 
1.69

 
2.4

 
39,534

 
1.85

 
2.7

Total fixed-rate securities
1,139,089

 
1.87

 
2.5

 
1,216,381

 
1.86

 
2.3

 
1,446,052

 
1.93

 
3.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MBS
373,409

 
2.26

 
4.8

 
400,161

 
2.25

 
4.7

 
379,745

 
2.26

 
5.6

Trust preferred securities
2,112

 
2.22

 
20.5

 
2,123

 
2.11

 
20.7

 
2,186

 
1.77

 
21.5

Total adjustable-rate securities
375,521

 
2.26

 
4.9

 
402,284

 
2.24

 
4.8

 
381,931

 
2.25

 
5.7

Total securities portfolio
$
1,514,610

 
1.97

 
3.1

 
$
1,618,665

 
1.95

 
2.9

 
$
1,827,983

 
2.00

 
3.6



The following table presents the carrying value of MBS in our portfolio by issuer at the dates presented.
 
December 31, 2016
 
September 30, 2016
 
(Dollars in thousands)
Federal National Mortgage Association ("FNMA")
$
708,540

 
$
752,141

Federal Home Loan Mortgage Corporation ("FHLMC")
382,236

 
413,458

Government National Mortgage Association
75,550

 
80,479

 
$
1,166,326

 
$
1,246,078


43


Mortgage-Backed Securities - The balance of MBS, which primarily consists of securities of U.S. GSEs, decreased $79.8 million, from $1.25 billion at September 30, 2016, to $1.17 billion at December 31, 2016. The following table summarizes the activity in our portfolio of MBS for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yields 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
 
December 31, 2016
 
September 30, 2016
 
June 30, 2016
 
March 31, 2016
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Beginning balance - carrying value
$
1,246,078

 
2.19
%
 
3.5

 
$
1,344,481

 
2.21
%
 
3.9

 
$
1,436,774

 
2.25
%
 
4.1

 
$
1,376,119

 
2.26
%
 
3.9

Maturities and repayments
(88,564
)
 
 
 
 
 
(96,320
)
 
 
 
 
 
(90,291
)
 
 
 
 
 
(80,544
)
 
 
 
 
Net amortization of (premiums)/discounts
(1,290
)
 
 
 
 
 
(1,345
)
 
 
 
 
 
(1,387
)
 
 
 
 
 
(1,091
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
10,890

 
1.99

 
3.8

 

 

 

 

 

 

 
42,827

 
1.83

 
4.1

Adjustable

 

 

 

 

 

 

 

 

 
100,133

 
2.02

 
5.4

Change in valuation on AFS securities
(788
)
 
 
 
 
 
(738
)
 
 
 
 
 
(615
)
 
 
 
 
 
(670
)
 
 
 
 
Ending balance - carrying value
$
1,166,326

 
2.18

 
3.5

 
$
1,246,078

 
2.19

 
3.5

 
$
1,344,481

 
2.21

 
3.9

 
$
1,436,774

 
2.25

 
4.1

 
 
 
 
 
 
 
 
 
 
 
 
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 $26.4 million, from $382.1 million at September 30, 2016, to $355.7 million at December 31, 2016. The following table summarizes the activity of investment securities for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yields for the ending balances are as of the last day of the period presented. The beginning and ending WALs represent the estimated remaining principal repayment terms (in years) of the securities after projected call dates have been considered, based upon market rates at each date presented. The increase in the WAL between September 30, 2016 and December 31, 2016 was due primarily to a decrease in call projections due to an increase in market interest rates between periods.
 
For the Three Months Ended
 
December 31, 2016
 
September 30, 2016
 
June 30, 2016
 
March 31, 2016
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
Amount
 
Yield
 
WAL
 
(Dollars in thousands)
Beginning balance - carrying value
$
382,097

 
1.20
%
 
1.2

 
$
510,745

 
1.21
%
 
1.1

 
$
511,491

 
1.19
%
 
1.5

 
$
460,829

 
1.24
%
 
2.6

Maturities and calls
(50,019
)
 
 
 
 
 
(127,923
)
 
 
 
 
 
(25,873
)
 
 
 
 
 
(27,201
)
 
 
 
 
Net amortization of (premiums)/discounts
(72
)
 
 
 
 
 
(9
)
 
 
 
 
 
(115
)
 
 
 
 
 
(106
)
 
 
 
 
Purchases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
25,000

 
1.70

 
4.0

 

 

 

 
24,940

 
1.56

 
0.5

 
74,987

 
0.93

 
0.8

Change in valuation on AFS securities
(1,325
)
 
 
 
 
 
(716
)
 
 
 
 
 
302

 
 
 
 
 
2,982

 
 
 
 
Ending balance - carrying value
$
355,681

 
1.27

 
2.0

 
$
382,097

 
1.20

 
1.2

 
$
510,745

 
1.21

 
1.1

 
$
511,491

 
1.19

 
1.5


44


Liabilities. Total liabilities were $7.77 billion at December 31, 2016 compared to $7.87 billion at September 30, 2016. The $102.9 million decrease was due primarily to a $99.6 million decrease in FHLB borrowings as a result of the maturity of a $100.0 million FHLB advance during the current quarter which was not replaced.

Deposits - Deposits were $5.19 billion at December 31, 2016 compared to $5.16 billion at September 30, 2016. The $28.7 million increase was due primarily to a $35.9 million increase in the checking portfolio and a $32.4 million increase in the money market portfolio, partially offset by a $43.7 million decrease in the retail certificate of deposit portfolio. The decrease in retail certificates of deposit was in the short-term and medium-term certificate of deposit portfolios, partially offset by an increase in the long-term certificate of deposit portfolio. We continue to be competitive on deposit rates and, in some cases, our offer rates for longer-term certificates of deposit have been higher than peers. Offering competitive rates 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 percent of total for the components of our deposit portfolio at the dates presented.
 
December 31, 2016
 
September 30, 2016
 
December 31, 2015
 
 
 
 
 
% of
 
 
 
 
 
% of
 
 
 
 
 
% of
 
Amount
 
Rate
 
 Total
 
Amount
 
Rate
 
 Total
 
Amount
 
Rate
 
 Total
 
(Dollars in thousands)
Non-interest-bearing checking
$
223,896

 
%
 
4.3
%
 
$
217,009

 
%
 
4.2
%
 
$
205,374

 
%
 
4.1
%
Interest-bearing checking
626,379

 
0.05

 
12.1

 
597,319

 
0.05

 
11.6

 
612,656

 
0.05

 
12.3

Savings
338,661

 
0.21

 
6.5

 
335,426

 
0.17

 
6.5

 
317,384

 
0.21

 
6.4

Money market
1,218,545

 
0.24

 
23.5

 
1,186,132

 
0.24

 
23.0

 
1,183,050

 
0.24

 
23.8

Retail certificates of deposit
2,414,489

 
1.44

 
46.5

 
2,458,160

 
1.43

 
47.6

 
2,304,865

 
1.31

 
46.4

Public units
370,704

 
0.74

 
7.1

 
369,972

 
0.70

 
7.1

 
349,151

 
0.43

 
7.0

 
$
5,192,674

 
0.80

 
100.0
%
 
$
5,164,018

 
0.80

 
100.0
%
 
$
4,972,480

 
0.71

 
100.0
%

The following tables set forth scheduled maturity information for our certificates of deposit, along with associated weighted average rates, at December 31, 2016.
 
 
Amount Due
 
 
 
 
 
 
More than
 
More than
 
 
 
 
 
 
 
 
1 year
 
1 year to
 
2 years to 3
 
More than
 
Total
 
 
Rate range
 
or less
 
2 years
 
years
 
3 years
 
Amount
 
Rate
 
 
(Dollars in thousands)
 
 
0.00 – 0.99%
 
$
775,872

 
$
116,283

 
$
1,105

 
$

 
$
893,260

 
0.68
%
1.00 – 1.99%
 
435,067

 
394,819

 
416,667

 
481,037

 
1,727,590

 
1.61

2.00 – 2.99%
 
40

 
1,353

 
50,241

 
112,404

 
164,038

 
2.24

3.00 – 3.99%
 
305

 

 

 

 
305

 
3.11

 
 
$
1,211,284

 
$
512,455

 
$
468,013

 
$
593,441

 
$
2,785,193

 
1.35

 
 
 
 
 
 
 
 
 
 
 
 
 
Percent of total
 
43.5
%
 
18.4
%
 
16.8
%
 
21.3
%
 
 
 
 
Weighted average rate
 
0.92

 
1.34

 
1.69

 
1.97

 
 
 
 
Weighted average maturity (in years)
 
0.5

 
1.5

 
2.5

 
3.7

 
1.7

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

 
 


45


 
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
$
115,375

 
$
149,933

 
$
333,843

 
$
915,252

 
$
1,514,403

Retail certificates of deposit of $100,000 or more
47,609

 
84,607

 
156,166

 
611,704

 
900,086

Public unit deposits of $100,000 or more
161,368

 
87,050

 
75,333

 
46,953

 
370,704

 
$
324,352

 
$
321,590

 
$
565,342

 
$
1,573,909

 
$
2,785,193


Borrowings - The following table presents long-term borrowing activity for the periods shown. Long-term borrowings presented in the table have original contractual terms of one year or longer. FHLB advances are presented at par. 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
 
December 31, 2016
 
September 30, 2016
 
June 30, 2016
 
March 31, 2016
 
 
 
Effective
 
 
 
 
 
Effective
 
 
 
 
 
Effective
 
 
 
 
 
Effective
 
 
 
Amount
 
Rate
 
WAM
 
Amount
 
Rate
 
WAM
 
Amount
 
Rate
 
WAM
 
Amount
 
Rate
 
WAM
 
(Dollars in thousands)
Beginning balance
$
2,575,000

 
2.29
%
 
2.9

 
$
2,675,000

 
2.24
%
 
3.0

 
$
2,675,000

 
2.29
%
 
3.0

 
$
2,675,000

 
2.29
%
 
3.2

Maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FHLB advances
(100,000
)
 
0.78

 
 
 
(100,000
)
 
0.83

 
 
 
(100,000
)
 
3.17

 
 
 

 

 
 
New borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FHLB advances

 

 

 

 

 

 
100,000

 
1.82

 
7.0

 

 

 

Ending balance
$
2,475,000

 
2.35

 
2.7

 
$
2,575,000

 
2.29

 
2.9

 
$
2,675,000

 
2.24

 
3.0

 
$
2,675,000

 
2.29

 
3.0

 
 
 
 
 
 
 
 
 
 
 
 

46


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 December 31, 2016.
 
 
FHLB
 
Repurchase
 
 
 
 
 
 
Maturity by
 
Advances
 
Agreements
 
Total
 
Contractual
 
Effective
Fiscal year
 
Amount
 
Amount
 
Amount
 
Rate
 
Rate(1)
 
 
(Dollars in thousands)
 
 
 
 
2017
 
$
400,000

 
$

 
$
400,000

 
3.17
%
 
3.21
%
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

 
 
$
2,275,000

 
$
200,000

 
$
2,475,000

 
2.29

 
2.35


(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 December 31, 2016.
 
 
Retail
 
 
 
Public Unit
 
 
 
Term
 
 
 
 
 
 
Maturity by
 
Certificate
 
Repricing
 
Deposit
 
Repricing
 
Borrowings
 
Repricing
 
 
 
Repricing
Quarter End
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
 
Total
 
Rate
 
 
(Dollars in thousands)
March 31, 2017
 
$
162,984

 
0.84
%
 
$
161,368

 
0.59
%
 
$

 
%
 
$
324,352

 
0.72
%
June 30, 2017
 
234,540

 
1.01

 
87,050

 
0.65

 
300,000

 
3.24

 
621,590

 
2.03

September 30, 2017
 
247,341

 
1.07

 
45,152

 
0.85

 
100,000

 
3.12

 
392,493

 
1.56

December 31, 2017
 
242,668

 
1.07

 
30,181

 
0.84

 
200,000

 
2.94

 
472,849

 
1.84

 
 
$
887,533

 
1.01

 
$
323,751

 
0.67

 
$
600,000

 
3.12

 
$
1,811,284

 
1.65



47


Stockholders' Equity. Stockholders' equity was $1.37 billion at December 31, 2016 compared to $1.39 billion at September 30, 2016. The $24.8 million decrease was due primarily to the payment of $50.2 million in cash dividends, partially offset by net income of $20.6 million. The cash dividends paid during the current quarter totaled $0.375 per share and consisted of a $0.29 per share cash true-up dividend related to fiscal year 2016 earnings per the Company's dividend policy, and a regular quarterly cash dividend of $0.085 per share. On January 24, 2017, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.4 million, payable on February 17, 2017 to stockholders of record as of the close of business on February 3, 2017.

At December 31, 2016, Capitol Federal Financial, Inc., at the holding company level, had $83.6 million on deposit at the Bank. For fiscal year 2017, it is the intent of the Board of Directors and management to continue with the payout of 100% of the Company's earnings to its stockholders. Dividend payments depend upon a number of factors including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company.

The following table presents regular quarterly dividends and special dividends paid in calendar years 2017, 2016, and 2015. The amounts represent cash dividends paid during each period. For the quarter ending March 31, 2017, the amount presented represents the dividend payable on February 17, 2017 to stockholders of record as of February 3, 2017.
 
Calendar Year
 
2017
 
2016
 
2015
 
Amount
 
Per Share
 
Amount
 
Per Share
 
Amount
 
Per Share
 
(Dollars in thousands, except per share amounts)
Regular quarterly dividends paid
 
 
 
 
 
 
 
 
 
 
 
Quarter ended March 31
$
11,387

 
$
0.085

 
$
11,305

 
$
0.085

 
$
11,592

 
$
0.085

Quarter ended June 30

 

 
11,314

 
0.085

 
11,585

 
0.085

Quarter ended September 30

 

 
11,323

 
0.085

 
11,385

 
0.085

Quarter ended December 31

 

 
11,363

 
0.085

 
11,303

 
0.085

True-up dividends paid

 

 
38,835

 
0.290

 
33,248

 
0.250

True Blue dividends paid

 

 
33,274

 
0.250

 
33,924

 
0.250

Calendar year-to-date dividends paid
$
11,387

 
$
0.085

 
$
117,414

 
$
0.880

 
$
113,037

 
$
0.840


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 quarter ended December 31, 2016.


48


Operating Results
The following table presents selected income statement and other information for the quarters indicated.
 
For the Three Months Ended
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
December 31,
 
2016
 
2016
 
2016
 
2016
 
2015
 
(Dollars in thousands, except per share data)
Interest and dividend income:
 
 
 
 
 
 
 
 
 
Loans receivable
$
61,945

 
$
61,516

 
$
60,840

 
$
60,732

 
$
60,223

MBS
6,362

 
6,860

 
7,401

 
7,702

 
7,831

Cash and cash equivalents
2,969

 
2,774

 
2,730

 
2,707

 
1,620

FHLB stock
2,939

 
3,044

 
3,050

 
3,006

 
3,152

Investment securities
1,107

 
1,401

 
1,506

 
1,485

 
1,533

Total interest and dividend income
75,322

 
75,595

 
75,527

 
75,632

 
74,359

 
 
 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
 
 
 
FHLB borrowings
16,117

 
16,262

 
16,361

 
16,394

 
16,074

Deposits
10,396

 
10,098

 
9,749

 
9,213

 
8,799

Repurchase agreements
1,503

 
1,503

 
1,487

 
1,487

 
1,504

Total interest expense
28,016

 
27,863

 
27,597

 
27,094

 
26,377

 
 
 
 
 
 
 
 
 
 
Net interest income
47,306

 
47,732

 
47,930

 
48,538

 
47,982

 
 
 
 
 
 
 
 
 
 
Provision for credit losses

 
(750
)
 

 

 

 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
 
 
 
 
 
 
 
(after provision for credit losses)
47,306

 
48,482

 
47,930

 
48,538

 
47,982

 
 
 
 
 
 
 
 
 
 
Non-interest income
5,268

 
5,691

 
5,429

 
6,626

 
5,566

Non-interest expense
21,597

 
23,962

 
23,327

 
23,426

 
23,590

Income tax expense
10,399

 
9,513

 
9,481

 
10,211

 
9,240

Net income
$
20,578

 
$
20,698

 
$
20,551

 
$
21,527

 
$
20,718

 
 
 
 
 
 
 
 
 
 
Efficiency ratio
41.08
%
 
44.85
%
 
43.72
%
 
42.46
%
 
44.05
%
 
 
 
 
 
 
 
 
 
 
Basic EPS
$
0.15

 
$
0.16

 
$
0.15

 
$
0.16

 
$
0.16

Diluted EPS
0.15

 
0.16

 
0.15

 
0.16

 
0.16


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 December 31, 2016. As previously discussed, the leverage strategy was not in place at December 31, 2016, so the end of period yields/rates presented at December 31, 2016 in the table below do not reflect the effects of this strategy. Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.


49


 
At
 
For the Three Months Ended
 
December 31,
 
December 31, 2016
 
September 30, 2016
 
December 31, 2015
 
2016
 
Average
 
Interest
 
 
 
Average
 
Interest
 
 
 
Average
 
Interest
 
 
 
Yield/
 
Outstanding
 
Earned/
 
Yield/
 
Outstanding
 
Earned/
 
Yield/
 
Outstanding
 
Earned/
 
Yield/
 
Rate
 
Amount
 
Paid
 
Rate
 
Amount
 
Paid
 
Rate
 
Amount
 
Paid
 
Rate
Assets:
 
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans receivable(1)
3.55%
 
$
7,015,151

 
$
61,945

 
3.53
%
 
$
6,898,769

 
$
61,516

 
3.57
%
 
$
6,651,531

 
$
60,223

 
3.62
%
MBS(2)
2.18
 
1,200,425

 
6,362

 
2.12

 
1,292,636

 
6,860

 
2.12

 
1,412,702

 
7,831

 
2.22

Investment securities(2)(3)
1.27
 
356,623

 
1,107

 
1.24

 
431,871

 
1,401

 
1.30

 
503,075

 
1,533

 
1.22

FHLB stock
5.98
 
195,801

 
2,939

 
5.97

 
203,285

 
3,044

 
5.96

 
209,382

 
3,152

 
5.97

Cash and cash equivalents(4)
0.73
 
2,152,621

 
2,969

 
0.54

 
2,172,519

 
2,774

 
0.50

 
2,200,345

 
1,620

 
0.29

Total interest-earning assets(1)(2)
3.27
 
10,920,621

 
75,322

 
2.76

 
10,999,080

 
75,595

 
2.75

 
10,977,035

 
74,359

 
2.71

Other non-interest-earning assets
 
 
296,084

 
 
 
 
 
302,142

 
 
 
 
 
286,920

 
 
 
 
Total assets
 
 
$
11,216,705

 
 
 
 
 
$
11,301,222

 
 
 
 
 
$
11,263,955

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Checking
0.04
 
$
800,342

 
74

 
0.04

 
$
792,622

 
73

 
0.04

 
$
757,857

 
72

 
0.04

Savings
0.21
 
335,192

 
155

 
0.18

 
337,002

 
139

 
0.16

 
313,372

 
140

 
0.18

Money market
0.24
 
1,191,175

 
708

 
0.24

 
1,191,544

 
708

 
0.24

 
1,159,201

 
685

 
0.23

Retail certificates
1.44
 
2,444,812

 
8,768

 
1.43

 
2,411,150

 
8,553

 
1.41

 
2,311,424

 
7,536

 
1.29

Wholesale certificates
0.74
 
385,224

 
691

 
0.71

 
370,477

 
625

 
0.67

 
360,156

 
366

 
0.40

Total deposits
0.80
 
5,156,745

 
10,396

 
0.80

 
5,102,795

 
10,098

 
0.79

 
4,902,010

 
8,799

 
0.71

FHLB borrowings(5)
2.30
 
4,329,037

 
16,117

 
1.48

 
4,479,760

 
16,262

 
1.44

 
4,615,404

 
16,074

 
1.38

Repurchase agreements
2.94
 
200,000

 
1,503

 
2.94

 
200,000

 
1,503

 
2.94

 
200,000

 
1,504

 
2.94

Total borrowings
2.35
 
4,529,037

 
17,620

 
1.54

 
4,679,760

 
17,765

 
1.50

 
4,815,404

 
17,578

 
1.44

Total interest-bearing liabilities
1.30
 
9,685,782

 
28,016

 
1.15

 
9,782,555

 
27,863

 
1.13

 
9,717,414

 
26,377

 
1.08

Other non-interest-bearing liabilities
 
138,767

 
 
 
 
 
127,952

 
 
 
 
 
132,368

 
 
 
 
Stockholders' equity
 
 
1,392,156

 
 
 
 
 
1,390,715

 
 
 
 
 
1,414,173

 
 
 
 
Total liabilities and stockholders' equity
 
$
11,216,705

 
 
 
 
 
$
11,301,222

 
 
 
 
 
$
11,263,955

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income(6)
 
 
 
 
$
47,306

 
 
 
 
 
$
47,732

 
 
 
 
 
$
47,982

 
 
Net interest rate spread(7)(9)
1.97
 
 
 
 
 
1.61

 
 
 
 
 
1.62

 
 
 
 
 
1.63

Net interest-earning assets
 
 
$
1,234,839

 
 
 
 
 
$
1,216,525

 
 
 
 
 
$
1,259,621

 
 
 
 
Net interest margin(8)(9)
 
 
 
 
 
 
1.73

 
 
 
 
 
1.74

 
 
 
 
 
1.75

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

 
 
 
 
 
1.12x

 
 
 
 
 
1.13x

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selected performance ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized)(9)
 
 
 
 
 
0.73
%
 
 
 
 
 
0.73
%
 
 
 
 
 
0.74
%
Return on average equity (annualized)(9)
 
 
 
 
 
5.91

 
 
 
 
 
5.95

 
 
 
 
 
5.86

Average equity to average assets
 
 
 
 
 
 
12.41

 
 
 
 
 
12.31

 
 
 
 
 
12.55

Operating expense ratio(10)
 
 
 
 
 
 
0.77

 
 
 
 
 
0.85

 
 
 
 
 
0.84

Efficiency ratio(11)
 
 
 
 
 
 
41.08

 
 
 
 
 
44.85

 
 
 
 
 
44.05

Pre-tax yield on leverage strategy(12)
 
 
 
 
 
 
0.19

 
 
 
 
 
0.17

 
 
 
 
 
0.16


50


(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 $33.3 million, $35.1 million, and $38.2 million for the quarters ended December 31, 2016, September 30, 2016, and December 31, 2015, respectively.
(4)
The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $1.92 billion, $1.98 billion, and $1.98 billion for the quarters ended December 31, 2016, September 30, 2016, and December 31, 2015, respectively.
(5)
Included in this line are FHLB borrowings related to the leverage strategy with an average outstanding amount of $2.01 billion, $2.08 billion and $2.08 billion, interest paid of $2.9 million, $2.9 million, and $1.7 million, at a rate of 0.56%, 0.54%, and 0.33% for the quarters ended December 31, 2016, September 30, 2016, and December 31, 2015, respectively. The FHLB advance amounts and rates included in this line are net of deferred gains and deferred prepayment penalties.
(6)
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.
(7)
Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(8)
Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.
(9)
The table below provides a reconciliation between certain performance ratios presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the performance ratios excluding the effects of the leverage strategy, which are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide the performance ratios without the leverage strategy because of the unique nature of the leverage strategy. The leverage strategy reduces some of our performance ratios due to the amount of earnings associated with the transaction in comparison to the size of the transaction, while increasing our net income.
 
For the Three Months Ended
 
December 31, 2016
 
September 30, 2016
 
December 31, 2015
 
Actual
 
Leverage
 
Adjusted
 
Actual
 
Leverage
 
Adjusted
 
Actual
 
Leverage
 
Adjusted
 
(GAAP)
 
Strategy
 
(Non-GAAP)
 
(GAAP)
 
Strategy
 
(Non-GAAP)
 
(GAAP)
 
Strategy
 
(Non-GAAP)
Return on average assets (annualized)
0.73
%
 
(0.14
)%
 
0.87
%
 
0.73
%
 
(0.14
)%
 
0.87
%
 
0.74
%
 
(0.14
)%
 
0.88
%
Return on average equity (annualized)
5.91

 
0.18

 
5.73

 
5.95

 
0.17

 
5.78

 
5.86

 
0.16

 
5.70

Net interest margin
1.73

 
(0.34
)
 
2.07

 
1.74

 
(0.35
)
 
2.09

 
1.75

 
(0.36
)
 
2.11

Average net interest rate spread
1.61

 
(0.29
)
 
1.90

 
1.62

 
(0.30
)
 
1.92

 
1.63

 
(0.30
)
 
1.93

(10)
The operating expense ratio represents annualized non-interest expense as a percentage of average assets.
(11)
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.
(12)
The pre-tax yield on the leverage strategy represents annualized pre-tax income resulting from the transaction as a percentage of the average interest-earning assets associated with the transaction.


51


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 December 31, 2016 to the three months ended December 31, 2015 and September 30, 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 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
 
December 31, 2016 vs. December 31, 2015
 
December 31, 2016 vs. September 30, 2016
 
Increase (Decrease) Due to
 
Increase (Decrease) Due to
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans receivable
$
3,198

 
$
(1,476
)
 
$
1,722

 
$
1,022

 
$
(593
)
 
$
429

MBS
(1,137
)
 
(332
)
 
(1,469
)
 
(489
)
 
(9
)
 
(498
)
Investment securities
(454
)
 
28

 
(426
)
 
(236
)
 
(58
)
 
(294
)
FHLB stock
(204
)
 
(9
)
 
(213
)
 
(112
)
 
7

 
(105
)
Cash and cash equivalents
(36
)
 
1,385

 
1,349

 
(25
)
 
220

 
195

Total interest-earning assets
1,367

 
(404
)
 
963

 
160

 
(433
)
 
(273
)
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Checking
4

 
(1
)
 
3

 
1

 

 
1

Savings
10

 
5

 
15

 
(1
)
 
17

 
16

Money market
19

 
4

 
23

 

 
1

 
1

Certificates of deposit
488

 
1,068

 
1,556

 
161

 
119

 
280

FHLB borrowings
(1,272
)
 
1,315

 
43

 
(551
)
 
406

 
(145
)
Repurchase agreements
(1
)
 

 
(1
)
 

 

 

Total interest-bearing liabilities
(752
)
 
2,391

 
1,639

 
(390
)
 
543

 
153

 
 
 
 
 
 
 
 
 
 
 
 
Net change in net interest income
$
2,119

 
$
(2,795
)
 
$
(676
)
 
$
550

 
$
(976
)
 
$
(426
)


52


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

The Company recognized net income of $20.6 million, or $0.15 per share, for the quarter ended December 31, 2016, a decrease of $140 thousand, or 0.7%, from the quarter ended December 31, 2015. Net income attributable to the leverage strategy was $642 thousand during the current quarter, compared to $583 thousand for the prior year quarter. The increase was due primarily to a decrease in the Federal Deposit Insurance Corporation ("FDIC") base assessment rate, as a portion of federal insurance premiums are attributable to the leverage strategy due to the increase in average assets resulting from the strategy. The decrease in the FDIC base assessment rate was effective July 1, 2016 and was the result of the FDIC Deposit Insurance Fund reaching 1.15% of total estimated insured deposits of the banking system on June 30, 2016.

The Company's efficiency ratio was 41.08% for the current quarter compared to 44.05% for the prior year quarter. The improvement in the efficiency ratio was due primarily to a decrease in non-interest expense. See "Non-interest Expense" section below for additional information regarding the decrease in expense. 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.

The net interest margin decreased two basis points, from 1.75% for the prior year quarter to 1.73% for the current year quarter. Excluding the effects of the leverage strategy, the net interest margin would have decreased four basis points, from 2.11% for the prior year quarter to 2.07% for the current year quarter. The decrease in the net interest margin was due mainly to an increase in interest expense on deposits and a decrease in the yield on the MBS portfolio, partially offset by a decrease in interest expense on borrowings not related to the leverage strategy. The positive impact on the net interest margin resulting from the shift in the mix of interest-earning assets from relatively lower yielding securities to higher yielding loans was offset by a decrease in the loan portfolio yield.

Interest and Dividend Income
The weighted average yield on total interest-earning assets increased five basis points, from 2.71% for the prior year quarter to 2.76% for the current quarter, and the average balance of interest-earning assets decreased $56.4 million from the prior year quarter. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have decreased one basis point, from 3.21% for the prior year quarter to 3.20% for the current quarter, while the average balance would have increased $12.1 million. The following table presents the components of interest and dividend income for the time periods presented along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
December 31,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
61,945

 
$
60,223

 
$
1,722

 
2.9
 %
MBS
6,362

 
7,831

 
(1,469
)
 
(18.8
)
Cash and cash equivalents
2,969

 
1,620

 
1,349

 
83.3

FHLB stock
2,939

 
3,152

 
(213
)
 
(6.8
)
Investment securities
1,107

 
1,533

 
(426
)
 
(27.8
)
Total interest and dividend income
$
75,322

 
$
74,359

 
$
963

 
1.3


The increase in interest income on loans receivable was due to a $363.6 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 3.53% for the current quarter. Loan growth was primarily funded through cash flows from the securities portfolio. The decrease in the weighted average yield was due primarily to an increase in the amortization of premiums related to correspondent loans due mainly to repayment activity, along with loans repricing to lower market rates and the origination and purchase of loans between periods at rates less than the existing portfolio rate.

The decrease in interest income on the MBS portfolio was due primarily to a $212.3 million decrease in the average balance of the portfolio as cash flows not reinvested were used to fund loan growth and pay off maturing FHLB advances. Additionally, the weighted average yield on the MBS portfolio decreased 10 basis points, from 2.22% during the prior year quarter to 2.12% for the current quarter. The decrease in the weighted average yield was due to an increase in the impact of net premium amortization. Net premium amortization of $1.3 million during the current quarter decreased the weighted average yield on the portfolio by 43 basis points. During the prior year quarter, $1.2 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 33 basis points.

53


The increase in interest income on cash and cash equivalents was due to a 25 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 to a $146.5 million decrease in the average balance. Cash flows not reinvested in the portfolio were used to fund loan growth and pay off maturing FHLB advances.

Interest Expense
The weighted average rate paid on total interest-bearing liabilities increased seven basis points, from 1.08% for the prior year quarter to 1.15% for the current quarter, while the average balance of interest-bearing liabilities decreased $31.6 million from the prior year quarter. Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased two basis points from the prior year quarter, to 1.30% for the current quarter, while the average balance of interest-bearing liabilities would have increased $36.8 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
 
 
 
 
 
December 31,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB Borrowings
$
16,117

 
$
16,074

 
$
43

 
0.3
 %
Deposits
10,396

 
8,799

 
1,597

 
18.1

Repurchase agreements
1,503

 
1,504

 
(1
)
 
(0.1
)
Total interest expense
$
28,016

 
$
26,377

 
$
1,639

 
6.2


FHLB borrowings in the table above includes interest expense on long-term FHLB advances and interest expense on FHLB borrowings associated with the leverage strategy. Interest expense on long-term FHLB advances decreased $1.1 million from the prior year quarter due largely to a $217.9 million decrease in the average balance of the portfolio as a result of not replacing all of the advances that matured between periods, partially offset by a three basis point increase in the weighted average rate paid on the portfolio, to 2.27% for the current quarter. Funds generated from deposit growth and cash flows from the securities portfolio were used to pay off the maturing advances. The increase in the weighted average rate paid was due to the maturing advances having a lower rate than the overall advance portfolio rate. Interest expense on FHLB borrowings associated with the leverage strategy increased $1.1 million from the prior year quarter due to a 23 basis point increase in the weighted average rate paid due to an increase in interest rates between periods.

The increase in interest expense on deposits was due primarily to a nine basis point increase in the weighted average rate, to 0.80% for the current quarter, along with growth in the portfolio. The increase in weighted average rate was primarily related to the retail certificate of deposit portfolio. The average balance of the deposit portfolio increased $254.7 million for the current quarter, with the majority of the increase in the retail deposit portfolio.

Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.
 
For the Three Months Ended
 
 
 
 
 
December 31,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
$
3,709

 
$
3,814

 
$
(105
)
 
(2.8
)%
Income from BOLI
523

 
703

 
(180
)
 
(25.6
)
Other non-interest income
1,036

 
1,049

 
(13
)
 
(1.2
)
Total non-interest income
$
5,268

 
$
5,566

 
$
(298
)
 
(5.4
)

The decrease in income from BOLI was due mainly to a decrease in the yield on the Bank's BOLI policies.



54


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
 
 
 
 
 
December 31,
 
Change Expressed in:
 
2016
 
2015
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
10,634

 
$
10,487

 
$
147

 
1.4
 %
Information technology and communications
2,834

 
2,558

 
276

 
10.8

Occupancy, net
2,675

 
2,672

 
3

 
0.1

Deposit and loan transaction costs
1,386

 
1,274

 
112

 
8.8

Regulatory and outside services
1,346

 
1,486

 
(140
)
 
(9.4
)
Federal insurance premium
894

 
1,382

 
(488
)
 
(35.3
)
Advertising and promotional
690

 
1,154

 
(464
)
 
(40.2
)
Office supplies and related expense
437

 
887

 
(450
)
 
(50.7
)
Low income housing partnerships

 
773

 
(773
)
 
(100.0
)
Other non-interest expense
701

 
917

 
(216
)
 
(23.6
)
Total non-interest expense
$
21,597

 
$
23,590

 
$
(1,993
)
 
(8.4
)

The increase in information technology and communications was due largely to software licensing and communication network expenses. The decrease in federal insurance premiums was due primarily to a decrease in the FDIC base assessment rate. The decrease in advertising and promotional expense was due mainly to the timing of media campaigns and sponsorships. The decrease in office supplies and related expense was due primarily to the purchase of cards enabled with chip card technology during the prior year quarter and no such expenses in the current quarter. The decrease in low income housing partnerships expense was due to a change in the Bank's method of accounting for those investments. The Bank had been accounting for these partnerships using the equity method of accounting as two of the Bank's officers were involved in the operational management of the low income housing partnership investment group. Effective September 30, 2016, those two Bank officers discontinued their involvement in the operational management of the investment group. On October 1, 2016, the Bank began using the proportional method of accounting for those investments rather than the equity method. As a result, the Bank no longer reports low income housing partnership expenses in non-interest expense; rather, the pretax operating losses and related tax benefits from the investments are reported as a component of income tax expense. The decrease in other non-interest expense was due mainly to lower deposit account charge-offs related to debit card fraud in the current year quarter, along with a decrease in OREO operations expense.

Income Tax Expense
Income tax expense was $10.4 million for the current quarter compared to $9.2 million for the prior year quarter. The effective tax rate for the current quarter was 33.6% compared to 30.8% for the prior year quarter. The increase in effective tax rate was due mainly to the change in accounting method for low income housing partnerships as previously discussed. Management anticipates the effective tax rate for fiscal year 2017 will be approximately 34%, based on fiscal year 2017 estimates as of December 31, 2016.

Comparison of Operating Results for the Three Months Ended December 31, 2016 and September 30, 2016

For the quarter ended December 31, 2016, the Company recognized net income of $20.6 million, or $0.15 per share, compared to net income of $20.7 million, or $0.16 per share, for the quarter ended September 30, 2016. The decrease in earnings per share was due to the decrease in net income between quarters along with an increase in average shares outstanding during the current quarter. Net income attributable to the leverage strategy was $642 thousand during the current quarter, compared to $616 thousand for the prior quarter.

The Company's efficiency ratio was 41.08% for the current quarter compared to 44.85% for the prior quarter. The change in the efficiency ratio was due primarily to a decrease in non-interest expense, mainly a result of the change in the method of accounting for low income housing partnerships.

Net interest income decreased $426 thousand, or 0.9%, from the prior quarter to $47.3 million for the current quarter. The net interest margin decreased one basis point from 1.74% for the prior quarter to 1.73% for the current quarter. Excluding the effects of the leverage strategy, the net interest margin would have decreased two basis points from 2.09% for the prior quarter to 2.07% for the

55


current quarter. The decrease in the net interest margin was due mainly to an increase in interest expense on deposits and an increase in the average balance of operating cash which excludes funds related to the leverage strategy, partially offset by a decrease in interest expense on term borrowings. The positive impact on the net interest margin resulting from the shift in the mix of interest-earning assets from relatively lower yielding securities to higher yielding loans was offset by a decrease in the loan portfolio yield.

Interest and Dividend Income
The weighted average yield on total interest-earning assets for the current quarter increased one basis point from the prior quarter, to 2.76%, while the average balance of interest-earning assets decreased $78.5 million between the two periods. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have decreased one basis point from the prior quarter, to 3.20%, while the average balance would have decreased $10.0 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 Three Months Ended
 
 
 
 
 
December 31,
 
September 30,
 
Change Expressed in:
 
2016
 
2016
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans receivable
$
61,945

 
$
61,516

 
$
429

 
0.7
 %
MBS
6,362

 
6,860

 
(498
)
 
(7.3
)
Cash and cash equivalents
2,969

 
2,774

 
195

 
7.0

FHLB stock
2,939

 
3,044

 
(105
)
 
(3.4
)
Investment securities
1,107

 
1,401

 
(294
)
 
(21.0
)
Total interest and dividend income
$
75,322

 
$
75,595

 
$
(273
)
 
(0.4
)

The increase in interest income on loans receivable was due to a $116.4 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 3.53% for the current quarter. The loan growth was funded with cash flows from the securities portfolio and excess operating cash. The decrease in the weighted average yield was due primarily to loans repricing to lower market rates and the origination and purchase of loans at rates less than the existing portfolio rate, along with an increase in premium amortization related to correspondent loans due to both the increase in the size of the correspondent loan portfolio and repayment activity.

The decrease in interest income on MBS was due mainly to a $92.2 million decrease in the average balance of the portfolio as cash flows were used to fund loan growth and pay off a maturing FHLB advance. During the current quarter, $1.3 million of net premiums on MBS were amortized, which decreased the weighted average yield on the portfolio by 43 basis points. During the prior quarter, $1.3 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 42 basis points. As of December 31, 2016, the remaining net balance of premiums on our portfolio of MBS was $11.9 million.

The decrease in interest income on investment securities was due primarily to a $75.2 million decrease in the average balance of the portfolio, as cash flows were used to fund loan growth and pay off a maturing FHLB advance, along with a six basis point decrease in the weighted average yield on the portfolio, to 1.24% for the current quarter. The decrease in the weighted average yield was due to the prior quarter including more discount accretion than the current quarter due to the call of securities in the prior quarter.


56


Interest Expense
The weighted average rate paid on total interest-bearing liabilities for the current quarter increased two basis points from the prior quarter, to 1.15%, while the average balance of interest-bearing liabilities decreased $96.8 million between the two periods. Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities for the current quarter would have increased one basis point from the prior quarter, to 1.30%, while the average balance would have decreased $28.3 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
 
 
 
 
 
December 31,
 
September 30,
 
Change Expressed in:
 
2016
 
2016
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
FHLB Borrowings
$
16,117

 
$
16,262

 
$
(145
)
 
(0.9
)%
Deposits
10,396

 
10,098

 
298

 
3.0

Repurchase agreements
1,503

 
1,503

 

 

Total interest expense
$
28,016

 
$
27,863

 
$
153

 
0.5


FHLB borrowings in the table above includes interest expense on long-term FHLB advances and interest expense on FHLB borrowings associated with the leverage strategy. Interest expense related to long-term FHLB advances decreased $164 thousand from the prior quarter due to an $82.2 million decrease in the average balance of the portfolio, partially offset by a five basis point increase in the weighted average rate paid during the current quarter, to 2.27%. During the current quarter, a $100.0 million advance with an effective rate of 0.78%, which was lower than the existing portfolio rate, matured and was not renewed or replaced, thereby increasing the weighted average rate paid on the portfolio.

The increase in interest expense on deposits was due primarily to a $53.9 million increase in the average balance of the deposit portfolio, along with a one basis point increase in the weighted average rate paid on the deposit portfolio, to 0.80% for the current quarter. The increase between quarters in the average balance and the weighted average rate paid was due largely to changes in the certificate of deposit portfolio.

Provision for Credit Losses
The Bank did not record a provision for credit losses during the current quarter compared to a negative provision for credit losses during the prior quarter of $750 thousand. Based on management's assessment of the ACL formula analysis model and several other factors, management determined that no provision for credit losses was necessary in the current quarter. Net loan charge-offs were $19 thousand during the current quarter compared to $22 thousand in the prior quarter. At December 31, 2016, loans 30 to 89 days delinquent were 0.35% of total loans and loans 90 or more days delinquent or in foreclosure were 0.22% 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
 
 
 
 
 
December 31,
 
September 30,
 
Change Expressed in:
 
2016
 
2016
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST INCOME:
 
 
 
 
 
 
 
Retail fees and charges
$
3,709

 
$
3,738

 
$
(29
)
 
(0.8
)%
Income from BOLI
523

 
610

 
(87
)
 
(14.3
)
Other non-interest income
1,036

 
1,343

 
(307
)
 
(22.9
)
Total non-interest income
$
5,268

 
$
5,691

 
$
(423
)
 
(7.4
)

The decrease in other non-interest income was due primarily to a decrease in insurance commissions resulting from the receipt of annual commissions from certain insurance providers during the prior quarter and no such commissions being received in the current quarter.


57


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
 
 
 
 
 
December 31,
 
September 30,
 
Change Expressed in:
 
2016
 
2016
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
$
10,634

 
$
10,774

 
$
(140
)
 
(1.3
)%
Information technology and communications
2,834

 
2,657

 
177

 
6.7

Occupancy, net
2,675

 
2,682

 
(7
)
 
(0.3
)
Deposit and loan transaction costs
1,386

 
1,466

 
(80
)
 
(5.5
)
Regulatory and outside services
1,346

 
1,645

 
(299
)
 
(18.2
)
Federal insurance premium
894

 
918

 
(24
)
 
(2.6
)
Advertising and promotional
690

 
1,419

 
(729
)
 
(51.4
)
Office supplies and related expense
437

 
624

 
(187
)
 
(30.0
)
Low income housing partnerships

 
1,057

 
(1,057
)
 
(100.0
)
Other non-interest expense
701

 
720

 
(19
)
 
(2.6
)
Total non-interest expense
$
21,597

 
$
23,962

 
$
(2,365
)
 
(9.9
)

The decrease in regulatory and outside services was due primarily to the timing of external audit fees. The decrease in advertising and promotional expense was due mainly to the timing of media campaigns and sponsorships. The decrease in office supplies and related expense was due mainly to the timing of certain expenses. The decrease in low income housing partnerships expense was due to the change in accounting method previously discussed.

Income Tax Expense
Income tax expense was $10.4 million for the current quarter, compared to $9.5 million for the prior quarter. The effective tax rate for the current quarter was 33.6% compared to 31.5% for the prior quarter. The increase in effective tax rate was due primarily to the change in accounting for low income housing partnerships previously discussed.





58


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 long-term borrowings primarily have been used 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 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. 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. When the leverage strategy is in place, the Bank maintains the resulting excess cash reserves from the FHLB borrowings at the Federal Reserve Bank, which can be used to meet any short-term liquidity needs. 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 and/or short-term borrowings that is not in conjunction with a planned strategy, such as the leverage strategy, the Bank will likely utilize long-term wholesale borrowing sources such as FHLB advances and/or repurchase agreements to provide long-term, fixed-rate funding. The maturities of these long-term 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 December 31, 2016, the Bank had term borrowings, at par, of $2.48 billion, or approximately 27% of total assets.

The amount of FHLB long-term advances outstanding at December 31, 2016 was $2.28 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 December 31, 2016, the Bank's ratio of the par value of FHLB borrowings to Call Report total assets was 25%. When the full 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 leverage strategy and FHLB senior management continue to approve the Bank's borrowing limit being in excess of 40% of Call Report total assets. All or a portion of the FHLB borrowings in conjunction with the 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 December 31, 2016, the Bank had $751.9 million of securities that were eligible but unused as collateral for borrowing or other liquidity needs. 

At December 31, 2016, the Bank had repurchase agreements of $200.0 million, or approximately 2% of total assets, of which $100.0 million was scheduled to mature in the next 12 months. The Bank may enter into additional repurchase agreements as management deems appropriate, not to exceed 15% of total assets, and subject to a total borrowings limit of 55% discussed above. The Bank has pledged securities with an estimated fair value of $221.9 million as collateral for repurchase agreements as of December 31, 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 December 31, 2016, the Bank's policy allowed for combined brokered and public unit deposits up to 15% of total deposits. At December 31, 2016, the Bank had public unit deposits totaling $370.7 million, which had an average remaining term to maturity of seven 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 $425.7 million as collateral for public unit deposits at December 31, 2016. The securities pledged as collateral for public unit deposits are held under joint custody by FHLB and generally will be released upon deposit maturity.


59


At December 31, 2016, $1.21 billion of the Bank's $2.79 billion of certificates of deposit was scheduled to mature within one year. Included in the $1.21 billion was $323.8 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 $323.8 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 December 31, 2016, cash and cash equivalents totaled $150.6 million, compared to $281.8 million at September 30, 2016. The decrease in cash was due primarily to paying off a maturing FHLB advance and funding loan growth.



60


The following table presents the contractual maturities of our loan, MBS, and investment securities portfolios at December 31, 2016, along with associated weighted average yields. Loans and securities which have adjustable interest rates are shown as maturing in the period during which the contract is due. The table does not reflect the effects of possible prepayments or enforcement of due on sale clauses. As of December 31, 2016, the amortized cost of investment securities in our portfolio which are callable or have pre-refunding dates within one year was $201.6 million.
 
Loans(1)
 
MBS
 
Investment Securities
 
Total
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
(Dollars in thousands)
Amounts due:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Within one year
$
86,174

 
3.84
%
 
$
254

 
4.41
%
 
$
32,608

 
1.13
%
 
$
119,036

 
3.10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
After one year:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over one to two years
37,935

 
4.19

 
6,592

 
4.13

 
151,712

 
1.15

 
196,239

 
1.84

Over two to three years
28,086

 
4.20

 
12,236

 
4.36

 
27,589

 
1.36

 
67,911

 
3.08

Over three to five years
39,886

 
4.36

 
61,456

 
2.82

 
136,970

 
1.39

 
238,312

 
2.26

Over five to ten years
524,817

 
3.82

 
441,703

 
2.13

 
4,928

 
1.65

 
971,448

 
3.04

Over ten to fifteen years
1,426,476

 
3.20

 
260,055

 
1.79

 

 

 
1,686,531

 
2.98

After fifteen years
4,918,183

 
3.61

 
384,030

 
2.30

 
1,874

 
2.22

 
5,304,087

 
3.51

Total due after one year
6,975,383

 
3.55

 
1,166,072

 
2.18

 
323,073

 
1.29

 
8,464,528

 
3.27

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
7,061,557

 
3.55

 
$
1,166,326

 
2.18

 
$
355,681

 
1.27

 
$
8,583,564

 
3.27


(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.

61


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, 2016. 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, 2016. 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 three months ended December 31, 2016 was $2.60 billion, and the average balance of short-term FHLB borrowings outstanding during this period was $2.51 billion at a weighted average contractual rate of 1.03%. The majority of the short-term FHLB borrowings amount related to borrowings associated with the leverage strategy. This compares to a balance of short-term FHLB borrowings outstanding at December 31, 2016 of $500.0 million at a weighted average contractual rate of 3.04%.

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 December 31, 2016, or future periods.

Capital

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank per the regulatory framework for prompt corrective action ("PCA"). As of December 31, 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 December 31, 2016.
 
 
 
 
 
 
 
Regulatory
 
 
 
 
 
 
 
Requirement For
 
 
 
 
 
Minimum
 
Well-Capitalized
 
Bank
 
Company
 
Regulatory
 
Status of Bank
 
Ratios
 
Ratios
 
Requirement
 
under PCA provisions
Tier 1 leverage ratio
11.0
%
 
12.1
%
 
4.0
%
 
5.0
%
Common Equity Tier 1 capital ratio
28.3

 
31.2

 
4.5

 
6.5

Tier 1 capital ratio
28.3

 
31.2

 
6.0

 
8.0

Total capital ratio
28.5

 
31.4

 
8.0

 
10.0



62


The following table presents a reconciliation of equity under GAAP to regulatory capital amounts, as of December 31, 2016, for the Bank and the Company (dollars in thousands):
 
Bank
 
Company
Total equity as reported under GAAP
$
1,240,252

 
$
1,368,175

Unrealized gains on AFS securities
(4,601
)
 
(4,601
)
Total tier 1 capital
1,235,651

 
1,363,574

ACL
8,521

 
8,521

Total capital
$
1,244,172

 
$
1,372,095


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, 2016. 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.

At December 31, 2016, the Bank's one-year gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice was $234.2 million, or 2.56% of total assets, compared to $1.07 billion, or 11.54% of total assets, at September 30, 2016. The decrease in the one-year gap amount at December 31, 2016 compared to September 30, 2016 was due primarily to an increase in interest rates between the two periods. As interest rates rise, borrowers have less economic incentive to refinance their mortgages and agency debt issuers have less economic incentive to exercise their call options in order to issue new debt at lower interest rates. This resulted in lower projected cash flows on these assets over the next year compared to the previous quarter. In addition, lower cash balances and an increase in borrowings repricing reduced the one-year gap compared to the prior quarter.

The majority of interest-earning assets anticipated to reprice in the coming year are repayments and prepayments on mortgage loans and MBS, both of which include the option to prepay without a fee being paid by the contract holder. The amount of interest-bearing liabilities expected to reprice in a given period is not typically impacted significantly by changes in interest rates because the Bank's borrowings and certificate of deposit portfolios have contractual maturities and generally cannot be terminated early without a prepayment penalty. As interest rates rise, the amount of interest-earning assets expected to reprice is likely to decrease from estimated levels as borrowers have less economic incentive to modify their cost of borrowings. If interest rates were to increase 200 basis points, as of December 31, 2016, the Bank's one-year gap is projected to be $(254.3) million, or (2.78)% of total assets. That compares to a one-year gap of $208.7 million, or 2.25% of total assets, if interest rates were to have increased 200 basis points as of September 30, 2016.

63



During the current quarter, loan repayments totaled $326.8 million and cash flows from the securities portfolio totaled $138.6 million. Total cash flows from fixed-rate liabilities that repriced during the current quarter were approximately $468.2 million. The asset cash flows of $465.4 million were reinvested into new assets at current market interest rates or were used to repay borrowings. While not every quarter has asset and liability cash flows matching so closely, these offsetting cash flows allow the Bank to manage its interest rate risk and gap position more precisely than if the Bank did not have offsetting cash flows due to its mix of assets or maturity structure of liabilities.

Other strategies include managing the Bank's wholesale assets and liabilities. The Bank uses long-term fixed-rate borrowings with no embedded options to lengthen the average life of the Bank's liabilities. The fixed-rate characteristics of these borrowings lock in the cost until maturity and thus decrease the amount of liabilities repricing as interest rates move higher compared to funding with lower-cost short-term borrowings. These borrowings are laddered in order to prevent large amounts of liabilities repricing in any one period. The WAL of the Bank's term borrowings as of December 31, 2016 was 2.7 years.

The Bank uses the securities portfolio to shorten the overall duration of the Bank's assets. Purchases in the securities portfolio over the past couple of years have primarily been focused on callable agency debentures with maturities no longer than five years, shorter duration MBS, and adjustable-rate MBS. These shorter duration securities provide a steady source of cash flow that can be reinvested as interest rates rise or used to purchase higher-yielding assets. The WAL of the Bank's securities portfolio as of December 31, 2016 was 3.1 years.

In addition to the wholesale strategies, the Bank has sought to increase core deposits and long-term certificates of deposit. Core deposits are expected to reduce the risk of higher interest rates because their interest rates are not expected to increase significantly as market interest rates rise. Specifically, checking accounts and savings accounts have had minimal interest rate fluctuations throughout historical interest rate cycles, though no assurance can be given that this will be the case in future interest rate cycles. The balances and rates of these accounts have historically tended to remain very stable over time, giving them the characteristic of long-term liabilities. The Bank uses historical data pertaining to these accounts to estimate their future balances. At December 31, 2016 the WAL of the Bank's transaction accounts was 7.8 years.

Over the last couple years, the Bank has priced long-term certificates of deposit more aggressively than short-term certificates of deposit with the goal of giving customers incentive to move funds into longer-term certificates of deposit when interest rates were lower. Long-term certificates of deposit reduce the amount of liabilities repricing as interest rates rise. The WAL of the Bank's retail certificate of deposit portfolio as of December 31, 2016 was 1.9 years, up from 1.6 years at December 31, 2014.

Because of the on-balance sheet strategies implemented over the past several years, management believes the Bank is well-positioned to move into a market rate environment where interest rates are higher.


64


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 in part on prepayment assumptions at current and projected 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. A positive gap indicates more cash flows from assets are expected to reprice than cash flows from liabilities and would indicate, in a rising rate environment, that earnings should increase. A negative gap indicates more cash flows from liabilities are expected to reprice than cash flows from assets and would indicate, in a rising rate environment, that earnings should decrease. For additional information regarding the impact of changes in interest rates, see the following 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)
$
1,773,256

 
$
1,839,049

 
$
1,158,065

 
$
2,504,426

 
$
7,274,796

Securities(2)
579,662

 
505,515

 
267,779

 
161,654

 
1,514,610

Other interest-earning assets
122,387

 

 

 

 
122,387

Total interest-earning assets
2,475,305

 
2,344,564

 
1,425,844

 
2,666,080

 
8,911,793

 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
Non-maturity deposits(3)
423,885

 
429,350

 
307,866

 
1,329,992

 
2,491,093

Certificates of deposit
1,217,265

 
974,488

 
592,268

 
1,172

 
2,785,193

Borrowings(4)
600,000

 
825,000

 
750,000

 
343,790

 
2,518,790

Total interest-bearing liabilities
2,241,150

 
2,228,838

 
1,650,134

 
1,674,954

 
7,795,076

 
 
 
 
 
 
 
 
 
 
Excess (deficiency) of interest-earning assets over
 
 
 
 
 
 
 
 
interest-bearing liabilities
$
234,155

 
$
115,726

 
$
(224,290
)
 
$
991,126

 
$
1,116,717

 
 
 
 
 
 
 
 
 
 
Cumulative excess of interest-earning assets over
 
 
 
 
 
 
 
 
interest-bearing liabilities
$
234,155

 
$
349,881

 
$
125,591

 
$
1,116,717

 
 
 
 
 
 
 
 
 
 
 
 
Cumulative excess of interest-earning assets over interest-bearing
 
 
 
 
 
 
liabilities as a percent of total Bank assets at:
 
 
 
 
 
 
 
 
December 31, 2016
2.56
 %
 
3.83
%
 
1.37
%
 
12.22
%
 
 
September 30, 2016
11.54

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative one-year gap - interest rates +200 bps at:
 
 
 
 
 
 
 
 
December 31, 2016
(2.78
)
 
 
 
 
 
 
 
 
September 30, 2016
2.25

 
 
 
 
 
 
 
 

(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 December 31, 2016, at amortized cost.
(3)
Although the Bank's checking, savings, and money market accounts are subject to immediate withdrawal, management considers a substantial amount of these accounts to be core deposits having significantly longer effective maturities. The decay rates (the assumed rates at which the balances of existing accounts decline) used on these accounts is based on assumptions developed from our actual experiences with these accounts. If all of the Bank's checking, savings, and money market accounts had been assumed to be subject to repricing within one year, interest-bearing liabilities which were estimated to mature or reprice within one year would have exceeded interest-earning assets with comparable characteristics by $1.83 billion, for a cumulative one-year gap of -20.1% of total assets.
(4)
Borrowings exclude deferred prepayment penalty costs.

65


 

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). Projected cash flows for each scenario are based upon varying prepayment assumptions to model likely customer behavior changes as market rates change. At all dates presented, the three-month Treasury bill yield was less than one percent, so the -100 basis points scenario was not applicable. Estimations of net interest income used in preparing the table below were based upon the assumptions that the total composition of interest-earning assets and interest-bearing liabilities does not change materially and that any repricing of assets or liabilities occurs at anticipated product and market rates for the alternative rate environments as of the dates presented. The estimation of net interest income does not include any projected gains or losses related to the sale of loans or securities, or income derived from non-interest income sources, but does include the use of different prepayment assumptions in the alternative interest rate environments. It is important to consider that estimated changes in net interest income are for a cumulative four-quarter period. These do not reflect the earnings expectations of management.
Change
 
Net Interest Income At
(in Basis Points)
 
December 31, 2016
 
September 30, 2016
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
 
$
194,383

 
$

 
 %
 
$
188,696

 
$

 
%
+100 bp
 
194,892

 
509

 
0.26

 
192,921

 
4,225

 
2.24

+200 bp
 
193,781

 
(602
)
 
(0.31
)
 
194,919

 
6,223

 
3.30

+300 bp
 
191,481

 
(2,902
)
 
(1.49
)
 
195,187

 
6,491

 
3.44


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

The increase in net interest income projection in the base case scenario at December 31, 2016 as compared to September 30, 2016 was due to the increase in market interest rates, specifically long-term interest rates, during the quarter. The Bank's one-year gap amount was positive for both periods. Therefore, as market interest rates rise, the Bank's assets are projected to reprice higher at a faster pace than liabilities. The net interest income projections were negative in the +200 and +300 basis point scenarios at December 31, 2016 compared to being positive at September 30, 2016. This change was due primarily to higher market interest rates at December 31, 2016, which resulted in a decrease in the Bank's one-year gap. As interest rates rise, the one-year gap will eventually become negative due to a reduction in cash flows from the Bank's mortgage-related assets and callable agency debentures. At December 31, 2016, as interest rates move higher in the +200 and +300 basis point scenarios, liabilities would reprice to higher interest rates at a faster pace than assets and have a negative impact to the Bank's net interest income projection.


66


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 the dates presented, the three-month Treasury bill yield was less than one percent, so the -100 basis points scenario was not applicable. Projected cash flows for each scenario are based upon varying prepayment assumptions to model likely customer behavior changes as market rates change. 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)
 
December 31, 2016
 
September 30, 2016
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
 
$
1,380,415

 
$

 
 %
 
$
1,448,758

 
$

 
 %
+100 bp
 
1,205,628

 
(174,787
)
 
(12.66
)
 
1,364,879

 
(83,879
)
 
(5.79
)
+200 bp
 
992,814

 
(387,601
)
 
(28.08
)
 
1,208,130

 
(240,628
)
 
(16.61
)
+300 bp
 
772,036

 
(608,379
)
 
(44.07
)
 
1,014,446

 
(434,312
)
 
(29.98
)

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

The percentage change in the Bank's MVPE at December 31, 2016 was more adversely impacted in the increasing interest rate scenarios than at September 30, 2016 due primarily to market interest rates being higher at December 31, 2016. As interest rates increase, repayments on mortgage-related assets are more likely to decrease and only be realized through significant changes in borrowers' lives such as divorce, death, job-related relocations, or other events as there is less economic incentive for borrowers to prepay their debt. This results in an increase in the average life of mortgage-related assets. Similarly, call projections for the Bank's callable agency debentures decrease as interest rates rise, which results in cash flows related to these assets moving closer to the contractual maturity dates. The higher expected average lives of these assets, relative to the assumptions in the base case interest rate environment, increases the sensitivity of their market value to changes in interest rates. As a result, the projected decrease in the market value of the Bank's financial assets was more significant than the projected decrease in the market value of its financial liabilities, which resulted in a projected decrease in MVPE in all of the rising interest rate scenarios presented.



 


67


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.
 
December 31, 2016
 
Amount
 
Yield/Rate
 
WAL
 
% of Category
 
% of Total
 
(Dollars in thousands)
Investment securities
$
355,681

 
1.27
%
 
2.0

 
23.4
%
 
4.0
%
MBS - fixed
787,001

 
2.14

 
2.8

 
51.7

 
8.9

MBS - adjustable
379,325

 
2.26

 
4.8

 
24.9

 
4.3

Total securities
1,522,007

 
1.97

 
3.1

 
100.0
%
 
17.2

Loans receivable:
 
 
 
 
 
 
 
 
 
Fixed-rate one- to four-family:
 
 
 
 
 
 
 
 
 
<= 15 years
1,271,717

 
3.11

 
4.1

 
18.0
%
 
14.4

> 15 years
4,287,349

 
3.86

 
6.3

 
60.7

 
48.5

All other fixed-rate loans
204,035

 
4.26

 
3.2

 
2.9

 
2.3

Total fixed-rate loans
5,763,101

 
3.71

 
5.7

 
81.6

 
65.2

Adjustable-rate one- to four-family:
 
 
 
 
 
 
 
 
 
<= 36 months
285,458

 
1.76

 
3.8

 
4.0

 
3.2

> 36 months
872,341

 
2.97

 
2.8

 
12.4

 
9.9

All other adjustable-rate loans
140,657

 
4.50

 
2.0

 
2.0

 
1.6

Total adjustable-rate loans
1,298,456

 
2.87

 
3.0

 
18.4

 
14.7

Total loans receivable
7,061,557

 
3.55

 
5.2

 
100.0
%
 
79.9

FHLB stock
105,364

 
5.98

 
2.7

 
 
 
1.2

Cash and cash equivalents
150,560

 
0.73

 

 
 
 
1.7

Total interest-earning assets
$
8,839,488

 
3.27

 
4.7

 
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
Non-maturity deposits
$
2,407,481

 
0.16

 
7.8

 
46.4
%
 
31.4
%
Retail certificates of deposit
2,414,489

 
1.44

 
1.9

 
46.5

 
31.5

Public units
370,704

 
0.74

 
0.6

 
7.1

 
4.8

Total deposits
5,192,674

 
0.80

 
4.5

 
100.0
%
 
67.7

Term borrowings
2,475,000

 
2.35

 
2.7

 
 
 
32.3

Total interest-bearing liabilities
$
7,667,674

 
1.30

 
3.9

 
 
 
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 December 31, 2016. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of December 31, 2016, such disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Act is accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms.


68


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 December 31, 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, 2016.

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

 
$

 

 
$
70,000,000

November 1, 2016 through
 
 
 
 
 
 
 
November 30, 2016

 

 

 
70,000,000

December 1, 2016 through
 
 
 
 
 
 
 
December 31, 2016

 

 

 
70,000,000

Total

 

 

 
70,000,000


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

69


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: February 9, 2017
By:
/s/ John B. Dicus
 
 
 
John B. Dicus, Chairman, President and Chief Executive Officer
 
 
 
 
 
Date: February 9, 2017
By:
/s/ Kent G. Townsend
 
 
 
Kent G. Townsend, Executive Vice President,
 
 
 
Chief Financial Officer and Treasurer
 


70


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 amended, filed on September 30, 2016, as Exhibit 3.2 to Form 8-K for Capitol Federal Financial Inc. 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 Daniel L. Lehman filed on November 29, 2016 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

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101
 
The following information from the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2016, filed with the Securities and Exchange Commission on February 9, 2017, has been formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets at December 31, 2016 and September 30, 2016, (ii) Consolidated Statements of Income for the three months ended December 31, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income for the three months ended December 31, 2016 and 2015, (iv) Consolidated Statement of Stockholders' Equity for the three months ended December 31, 2016, (v) Consolidated Statements of Cash Flows for the three months ended December 31, 2016 and 2015, and (vi) Notes to the Unaudited Consolidated Financial Statements

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