XFRA:CFK Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

Form 10-Q

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________

 

Form 10-Q

(Mark One)

þ          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

 

                                                                                                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                                                                (I.R.S. Employer

  or organization)                                                                                            Identification No.)

 

700 Kansas Avenue, Topeka, Kansas                                             66603

   (Address of principal executive offices)                                                                 (Zip Code)

 

Registrant’s telephone number, including area code:

(785) 235-1341

 

 

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 definition of “accelerated filer, large accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer       þ      Accelerated filer    ¨        Non-accelerated filer    ¨     Smaller Reporting Company   ¨

                                                                                             (do not check if a smaller

                                                                                                  reporting company)

      

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ¨ No þ     

                                                                                                                                 

As of April 30, 2012, there were 164,000,593 shares of Capitol Federal Financial, Inc. common stock outstanding.

 

 

 

 

 

 

1

 


 

 

 

PART I -- FINANCIAL INFORMATION

Page

Number

Item 1.  Financial Statements (Unaudited):

 

            Consolidated Balance Sheets at March 31, 2012 and September 30, 2011

3

            Consolidated Statements of Operations for the three and six months ended

 

                 March 31, 2012 and 2011

4

            Consolidated Statement of Stockholders’ Equity for the six months ended

 

                 March 31, 2012

6

            Consolidated Statements of Cash Flows for the six months ended

 

                 March 31, 2012 and 2011

7

            Notes to Consolidated Financial Statements

9

Item 2.  Management’s Discussion and Analysis of Financial Condition and

 

                 Results of Operations

31

Financial Condition – Loans

36

Financial Condition – Asset Quality

44

Financial Condition – Liabilities

52

Financial Condition – Stockholders’ Equity

56

Results of Operations for the six months ended March 31, 2012 and 2011

57

Results of Operations for the three months ended March 31, 2012 and 2011

63

Results of Operations for the three months ended March 31, 2012 and

 

December 31, 2011

67

 

 

 

 

Item 3.  Quantitative and Qualitative Disclosure about Market Risk

77

Item 4.  Controls and Procedures

81

 

 

PART II -- OTHER INFORMATION

 

Item 1.    Legal Proceedings

81

Item 1A. Risk Factors

81

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

82

Item 3.    Defaults Upon Senior Securities

82

Item 4.    Mine Safety Disclosures

82

Item 5.    Other Information

82

Item 6.    Exhibits

82

 

 

Signature Page

83

 

 

INDEX TO EXHIBITS

84

 

 

 

 

2

 


PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

March 31,

 

September 30,

 

2012

 

2011

ASSETS:

 

 

 

 

 

Cash and cash equivalents (includes interest-earning deposits of $127,154 and $105,292)

$

143,707

 

$

121,070

Securities:

 

 

 

 

 

Available-for-sale (“AFS”) at estimated fair value (amortized cost of $1,675,479 and $1,443,529)

 

1,715,445

 

 

1,486,439

Held-to-maturity (“HTM”) at amortized cost (estimated fair value of $2,227,621 and $2,434,392)

 

2,165,036

 

 

2,370,117

Loans receivable, net (of allowance for credit losses (“ACL”) of $12,559 and $15,465)

 

5,224,178

 

 

5,149,734

Bank-owned life insurance (“BOLI”)

 

57,333

 

 

56,534

Capital stock of Federal Home Loan Bank (“FHLB”), at cost

 

130,614

 

 

126,877

Accrued interest receivable

 

27,424

 

 

29,316

Premises and equipment, net

 

51,746

 

 

48,423

Real estate owned (“REO”), net

 

11,799

 

 

11,321

Other assets

 

45,862

 

 

50,968

TOTAL ASSETS

$

9,573,144

 

$

9,450,799

 

 

 

 

 

 

LIABILITIES:

 

 

 

Deposits

$

4,657,010

 

$

4,495,173

Advances from FHLB, net

 

2,525,535

 

 

2,379,462

Other borrowings

 

365,000

 

 

515,000

Advance payments by borrowers for taxes and insurance

 

49,643

 

 

55,138

Income taxes payable

 

1,881

 

 

2,289

Deferred income tax liabilities, net

 

22,259

 

 

20,447

Accounts payable and accrued expenses

 

39,344

 

 

43,761

Total liabilities

 

7,660,672

 

 

7,511,270

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Preferred stock ($0.01 par value) 100,000,000 shares authorized; none issued

 

-- 

 

 

-- 

Common stock ($0.01 par value) 1,400,000,000 shares authorized;

 

 

 

 

 

165,299,033 and 167,498,133 shares issued and outstanding

 

 

 

 

 

as of March 31, 2012 and September 30, 2011, respectively

 

1,653

 

 

1,675

Additional paid-in capital

 

1,376,093

 

 

1,392,691

Unearned compensation, Employee Stock Ownership Plan (“ESOP”)

 

(49,061)

 

 

(50,547)

Unearned compensation, Recognition and Retention Plan (“RRP”)

 

(81)

 

 

(124)

Retained earnings

 

559,014

 

 

569,127

Accumulated other comprehensive income (“AOCI”), net of tax

 

24,854

 

 

26,707

Total stockholders' equity

 

1,912,472

 

 

1,939,529

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

9,573,144

 

$

9,450,799

 

See accompanying notes to consolidated financial statements.

3

 


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

March 31,

 

 

March 31,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

INTEREST AND DIVIDEND INCOME:

 

 

 

 

 

 

 

 

 

 

 

Loans receivable

$

59,785

 

$

61,554

 

$

120,460

 

$

127,497

Mortgage-backed securities (“MBS”)

 

18,169

 

 

17,320

 

 

36,542

 

 

32,760

Investment securities

 

4,115

 

 

4,743

 

 

8,752

 

 

9,518

Capital stock of FHLB

 

1,111

 

 

883

 

 

2,202

 

 

1,785

Cash and cash equivalents

 

94

 

 

441

 

 

145

 

 

628

Total interest and dividend income

 

83,274

 

 

84,941

 

 

168,101

 

 

172,188

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

FHLB advances

 

20,443

 

 

21,968

 

 

42,782

 

 

45,099

Deposits

 

11,835

 

 

16,069

 

 

24,622

 

 

33,450

Other borrowings

 

3,530

 

 

6,348

 

 

7,857

 

 

13,078

Total interest expense

 

35,808

 

 

44,385

 

 

75,261

 

 

91,627

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

47,466

 

 

40,556

 

 

92,840

 

 

80,561

 

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR CREDIT LOSSES

 

1,500

 

 

520

 

 

2,040

 

 

1,170

NET INTEREST INCOME AFTER

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR CREDIT LOSSES

 

45,966

 

 

40,036

 

 

90,800

 

 

79,391

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME:

 

 

 

 

 

 

 

 

 

 

 

Retail fees and charges

 

3,854

 

 

3,561

 

 

8,018

 

 

7,504

Insurance commissions

 

774

 

 

888

 

 

1,343

 

 

1,706

Loan fees

 

560

 

 

621

 

 

1,135

 

 

1,276

Income from BOLI

 

387

 

 

504

 

 

799

 

 

836

Other income, net

 

597

 

 

570

 

 

1,029

 

 

1,139

Total other income

 

6,172

 

 

6,144

 

 

12,324

 

 

12,461

 

 

 

 

 

 

 

 

 

 

 

 

OTHER EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

10,586

 

 

11,067

 

 

21,173

 

 

21,058

Communications, information technology, and occupancy

 

3,925

 

 

3,977

 

 

7,834

 

 

7,853

Regulatory and outside services

 

1,113

 

 

1,139

 

 

2,548

 

 

2,328

Deposit and loan transaction costs

 

1,245

 

 

1,274

 

 

2,505

 

 

2,626

Federal insurance premium

 

1,084

 

 

1,128

 

 

2,176

 

 

2,986

Advertising and promotional

 

841

 

 

693

 

 

1,751

 

 

1,524

Contribution to Capitol Federal Foundation (“Foundation”)

 

-- 

 

 

-- 

 

 

-- 

 

 

40,000

Other expenses, net

 

3,175

 

 

3,577

 

 

6,049

 

 

7,818

Total other expenses

 

21,969

 

 

22,855

 

 

44,036

 

 

86,193

INCOME BEFORE INCOME TAX EXPENSE

 

30,169

 

 

23,325

 

 

59,088

 

 

5,659

INCOME TAX EXPENSE

 

10,854

 

 

7,689

 

 

20,984

 

 

1,281

NET INCOME

$

19,315

 

$

15,636

 

$

38,104

 

$

4,378

(Continued)

4

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

$

0.12

 

$

0.10

 

$

0.24

 

$

0.03

 

Diluted earnings per common share

$

0.12

 

$

0.10

 

$

0.24

 

$

0.03

 

Dividends declared per public share

$

0.08

 

$

0.68

 

$

0.25

 

$

1.48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares

 

161,721,616

 

 

161,499,795

 

 

161,822,674

 

 

163,542,495

 

Diluted weighted average common shares

 

161,727,618

 

 

161,507,374

 

 

161,829,691

 

 

163,550,750

 

 

 

 

 

 

 

(Concluded)

 

See accompanying notes to consolidated financial statements.

5

 


 

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Unearned

 

 

 

 

 

 

Total

 

 

Common

 

Paid-In

 

Compensation -

 

Retained

 

 

AOCI

 

Stockholders'

 

 

Stock

 

Capital

 

ESOP

 

RRP

 

Earnings

 

 

(Loss)

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at October 1, 2011

$

1,675

$

1,392,691

$

(50,547)

$

(124)

$

569,127

 

$

26,707

$

1,939,529

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

38,104

 

 

 

 

38,104

Changes in unrealized gain/losses on 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities AFS, net of deferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income taxes of $1,091

 

 

 

 

 

 

 

 

 

 

 

 

(1,853)

 

(1,853)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36,251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ESOP activity, net

 

 

 

1,665

 

1,486

 

 

 

 

 

 

 

 

3,151

RRP activity, net

 

 

 

(6)

 

 

 

 

 

 

 

 

 

 

(6)

Stock based compensation - stock options and RRP

 

 

 

40

 

 

 

43

 

 

 

 

 

 

83

Repurchase of common stock

 

(22)

 

(18,297)

 

 

 

 

 

(7,734)

 

 

 

 

(26,053)

Dividends on common stock to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

stockholders ($0.25 per share)

 

 

 

 

 

 

 

 

 

(40,483)

 

 

 

 

(40,483)

Balance at March 31, 2012

$

1,653

$

1,376,093

$

(49,061)

$

(81)

$

559,014

 

$

24,854

$

1,912,472

 

 

See accompanying notes to consolidated financial statements.

6

 


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

March 31,

 

 

2012

 

 

2011

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

$

38,104

 

$

4,378

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

operating activities:

 

 

 

 

 

FHLB stock dividends

 

(2,202)

 

 

(1,785)

Provision for credit losses

 

2,040

 

 

1,170

Originations of loans receivable held-for-sale (“LHFS”)

 

(2,491)

 

 

(8,106)

Proceeds from sales of LHFS

 

3,207

 

 

9,597

Amortization and accretion of premiums and discounts on securities

 

4,279

 

 

3,375

Depreciation and amortization of premises and equipment

 

2,400

 

 

2,218

Amortization of deferred amounts related to FHLB advances, net

 

4,010

 

 

3,492

Common stock committed to be released for allocation - ESOP

 

3,151

 

 

2,902

Stock based compensation - stock options and RRP

 

83

 

 

134

Changes in:

 

 

 

 

 

Prepaid federal insurance premium

 

1,921

 

 

2,743

Accrued interest receivable

 

1,892

 

 

(558)

Other assets, net

 

1,934

 

 

2,478

Income taxes payable/receivable

 

2,489

 

 

(7,458)

Accounts payable and accrued expenses

 

(10,094)

 

 

(8,245)

Net cash provided by operating activities

 

50,723

 

 

6,335

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchase of AFS securities

 

(563,330)

 

 

(405,815)

Purchase of HTM securities

 

(516,374)

 

 

(1,658,451)

Proceeds from calls, maturities and principal reductions of AFS securities

 

329,721

 

 

206,371

Proceeds from calls, maturities and principal reductions of HTM securities

 

718,835

 

 

582,910

Proceeds from the redemption of capital stock of FHLB

 

2,117

 

 

-- 

Purchases of capital stock of FHLB

 

(3,652)

 

 

-- 

Net (increase) decrease in loans receivable

 

(81,808)

 

 

62,530

Purchases of premises and equipment

 

(4,348)

 

 

(4,011)

Proceeds from sales of REO

 

4,583

 

 

5,774

Net cash used in investing activities

 

(114,256)

 

 

(1,210,692)

 

 

 

(Continued)

7

 


 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

March 31,

 

 

2012

 

 

2011

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Dividends paid

 

(40,483)

 

 

(125,899)

Deposits, net of withdrawals

 

161,837

 

 

342,569

Deferred FHLB prepayment penalty

 

(7,937)

 

 

-- 

Proceeds from borrowings

 

600,100

 

 

300,000

Repayments of borrowings

 

(600,100)

 

 

(325,000)

Change in advance payments by borrowers for taxes and insurance

 

(5,495)

 

 

(6,941)

Repurchase of common stock

 

(21,752)

 

 

-- 

Net proceeds from common stock offering

 

-- 

 

 

1,076,412

Excess tax benefits from stock options

 

-- 

 

 

1

Net cash provided by financing activities

 

86,170

 

 

1,261,142

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

22,637

 

 

56,785

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

Beginning of period

 

121,070

 

 

65,217

End of period

$

143,707

 

$

122,002

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Income tax payments

$

18,560

 

$

8,738

Interest payments

$

72,177

 

$

88,477

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH 

INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

   INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Note received from ESOP in exchange for common stock

$

-- 

 

$

47,260

 

 

 

 

 

 

Customer deposit holds related to common stock offering

$

-- 

 

$

17,690

 

 

 

 

 

 

Loans transferred to REO

$

5,865

 

$

8,355

 

 

 

 

 

 

 

 

 

 

 

 

 

(Concluded)

See accompanying notes to consolidated financial statements.

8

 


Notes to Consolidated Financial Statements (Unaudited)

 

1.   Summary of Significant Accounting Policies

 

Basis of Presentation - The accompanying consolidated financial statements of the Company 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, 2011, filed with the Securities and Exchange Commission (SEC). Interim results are not necessarily indicative of results for a full year.

 

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting periods.  The ACL is a significant estimate that involves a high degree of complexity and requires management to make difficult and subjective judgments and assumptions about highly uncertain matters.  The use of different judgments and assumptions could cause reported results to differ significantly.  In addition, bank regulators periodically review the Bank’s ACL.  The bank regulators have the authority to require the Bank, as they can require all banks, to increase the ACL or recognize additional charge-offs based upon their judgments, which may differ from management’s judgments.  Any increases in the ACL or recognition of additional charge-offs required by bank regulators could adversely affect the Company’s financial condition and results of operations.

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, 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.

 

Loans Receivable - Loans receivable that management has the intent and ability to hold for the foreseeable future are carried at the amount of unpaid principal, net of ACL, undisbursed loan funds, unamortized premiums and discounts, and deferred loan origination fees and costs.  Net loan origination fees and costs and premiums and discounts are amortized as yield adjustments to interest income using the level-yield method, adjusted for the estimated prepayment speeds of the related loans when applicable.  Interest on loans is credited to income as earned and accrued only if deemed collectible. 

 

Existing loan customers, whose loans have not been sold to third parties and who have not been delinquent on their contractual loan payments during the previous 12 months have the opportunity, for a fee, to endorse their original loan terms to current loan terms being offered.  The fee assessed for endorsing the mortgage loan is deferred and amortized over the remaining life of the endorsed loan using the level-yield method and is reflected as an adjustment to interest income.  Each endorsement is examined on a loan-by-loan basis and if the new loan terms represent more than a minor change to the loan, then the unamortized balance of the pre-endorsement deferred fees and/or costs associated with the mortgage loan are recognized in interest income at the time of the endorsement.  If the endorsement of terms does not represent more than a minor change to the loan, then the unamortized balance of the pre-endorsement deferred fees or costs continue to be deferred.

 

For borrowers experiencing financial difficulties, the Bank may grant a concession to the borrower.  Generally, the Bank grants a short-term payment accommodation to borrowers who are experiencing a temporary cash flow problem.  The most frequently used accommodation is to reduce the monthly payment amount for a period of six to 12 months, often by requiring payments of only interest and escrow during this period. These restructurings result in an extension of the maturity date of the loan. For more severe situations requiring long-term solutions, the Bank also offers interest rate reductions to currently-offered rates and more lengthy extensions of the maturity date.  All such concessions are considered a troubled debt restructuring (“TDR”).  The Bank does not forgive principal or interest nor does it commit to lend additional funds to debtors whose terms have been modified in TDRs.  Restructured loans are reported as nonaccrual if the loan was nonaccrual at the time of restructuring or if the borrower(s) did not receive a credit evaluation prior to the restructuring, and have not made six consecutive monthly payments per the restructured loan terms.

 

A loan is considered delinquent when payment has not been received within 30 days of its contractual due date.  The accrual of income on loans is discontinued when interest or principal payments are 90 days in arrears or, until a nonaccrual TDR has made six consecutive monthly payments per the restructured loan terms.  Loans on which the accrual of income has been discontinued are designated as nonaccrual and outstanding interest previously credited beyond 90 days delinquent is reversed.  A nonaccrual loan is returned to accrual status once the contractual payments have been made to bring the loan less than 90 days past due or in the case of a TDR, the borrower has made six consecutive payments under the restructured terms.

9

 


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.  Interest income on impaired loans is recognized in the period collected unless the ultimate collection of principal is considered doubtful.  Management considers the following loans to be impaired loans: all nonaccrual loans, loans classified as substandard, loans with charge-offs and TDRs that have not yet been performing under the new terms for 12 consecutive months or are required by the accounting literature to be classified as a TDR for the life of the loan due to a reduction in the stated interest rate to a rate lower than the current market rate for new debt with similar risk.

 

Allowance for Credit Losses - The ACL represents management’s best estimate of the amount of inherent losses in the loan portfolio as of the balance sheet date.  Management’s methodology for assessing the appropriateness of the ACL consists of a formula analysis model, along with analyzing several other factors.  Management maintains the ACL through provisions for credit losses that are charged to income. 

 

For one- to four-family secured loans, losses are charged-off when the loan is generally 180 days delinquent.  Losses are based on new collateral values obtained through broker price opinions (“BPOs”) or appraisals, less estimated costs to sell.  Anticipated private mortgage insurance (“PMI”) proceeds are taken into consideration when calculating the loss amount. An updated fair value is requested, at a minimum, every 12 months thereafter.  If the Bank holds the first and second mortgage, both loans are combined when evaluating whether there is a potential loss on the loan.  However, charge-offs for real estate-secured loans may also occur at any time if the Bank has knowledge of the existence of a potential loss.  For all other real estate loans that are not secured by one- to four-family property, losses are charged-off when the collection of such amounts is unlikely.  When a non-real estate secured loan is 120 days delinquent, any identified losses are charged-off. 

 

The Bank’s primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans on residential properties and, to a lesser extent, second mortgage loans on one- to four-family residential properties, resulting in a loan concentration in residential mortgage loans.  The Bank has a concentration of loans secured by residential property located in Kansas and Missouri.  Based on the composition of the Bank’s loan portfolio, the primary risks inherent in the one- to four-family and consumer loan portfolios are the continued weakened economic conditions, continued high levels of unemployment or underemployment, and a continuing decline in residential real estate values.  Any one or a combination of these events may adversely affect borrowers’ ability to repay their loans, resulting in increased delinquencies, non-performing assets, loan losses, and future loan loss provisions.  Although the multi-family and commercial loan portfolio is subject to the same risk of continued weakened economic conditions, the primary risks for this portfolio include the ability of the borrower to sustain sufficient cash flows from leases and to control expenses to satisfy their contractual debt payments, and/or the ability to utilize personal and/or business resources to pay their contractual debt payments if the cash flows are not sufficient.  Additionally, if the Bank were to repossess the secured collateral of a multi-family or commercial loan, the pool of potential buyers is limited more than that for a residential property.  Therefore, the Bank could hold the property for an extended period of time and/or potentially be forced to sell at a discounted price, resulting in additional losses.

 

Each quarter, an analysis (“formula analysis”) is prepared which segregates the loan portfolio into categories based on certain risk characteristics. The categories include the following: one- to four-family loans; multi-family and commercial loans; consumer home equity loans; and other consumer loans.  Home equity loans with the same underlying collateral as a one- to four-family loan are combined with the one- to four-family loan in the formula analysis model to calculate a combined loan-to-value (“LTV”) ratio.  Loans individually evaluated for loss are excluded from the formula analysis model.  The one- to four-family loan portfolio and related home equity loans are segregated into additional categories based on the following risk characteristics:  originated or bulk purchased; interest payments (fixed-rate, adjustable-rate, and interest-only); LTV ratios; borrower’s credit scores; and geographic location.  The categories were derived by management based on reviewing the historical performance of the one- to four-family loan portfolio and taking into consideration current economic conditions, such as trends in residential real estate values in certain areas of the U.S. and unemployment rates.  The geographic location category pertains primarily to certain states in which the Bank has experienced measurable loan losses. 

 

Quantitative loss factors are applied to each loan category in the formula analysis model based on the historical loss experience for each respective loan category.  Each quarter, management reviews the historical loss time periods and utilizes the historical loss time periods believed to be the most reflective of the current economic conditions and recent charge-off experience for each respective loan category.

 

Qualitative loss factors are applied to each loan category in the formula analysis model.  The qualitative factors for the one- to four-family and consumer loan portfolios are:  unemployment rate trends; collateral value trends; credit score trends; and delinquent loan trends.  The qualitative factors for the multi-family and commercial loan portfolio are:  unemployment rate trends; collateral value trends; and delinquent loan trends.  As loans are classified as special mention or become delinquent, the qualitative loss factors increase.  The qualitative factors were derived by management based on a review of the historical performance of the respective loan portfolios and consideration of current economic conditions and their likely impact to the loan portfolio.

10

 


Management utilizes the formula analysis, along with analyzing several other factors, when evaluating the adequacy of the ACL.  Such factors include the trend and composition of delinquent loans, results of foreclosed property and short sale transactions, the current status and trends of local and national economies, particularly levels of unemployment, trends and current conditions in the real estate and housing markets, and loan portfolio growth and concentrations. Since the Bank’s loan portfolio is primarily concentrated in one- to four-family real estate, management monitors residential real estate market value trends in the Bank’s local market areas and geographic sections of the U.S. by reference to various industry and market reports, economic releases and surveys, and management’s general and specific knowledge of the real estate markets in which the Bank lends, in order to determine what impact, if any, such trends may have on the level of ACL.   Reviewing these factors assists management in evaluating the overall credit quality of the loan portfolio and the reasonableness of the ACL on an ongoing basis, and whether changes need to be made to the Bank’s ACL methodology.  Management seeks to apply the ACL methodology in a consistent manner; however, the methodology can be modified in response to changing conditions. 

 

Assessing the adequacy of the ACL is inherently subjective.  Actual results could differ from estimates as a result of changes in economic or market conditions.  Changes in estimates could result in a material change in the ACL.  In the opinion of management, the ACL, when taken as a whole, is adequate to absorb estimated losses inherent in the loan portfolio.  However, future adjustments may be necessary if loan portfolio performance or economic or market conditions differ substantially from the conditions that existed at the time of the initial determinations.

 

Repurchase of Common Stock - Prior to the second-step stock offering in December 2010 (the “corporate reorganization”), common stock that was repurchased was classified as treasury stock and recorded at cost.  Effective with the corporate reorganization, the Company became a Maryland corporation which does not recognize treasury shares but considers common stock repurchases as the retirement of stock.

 

Recent Accounting Pronouncements - In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers certain provisions of ASU 2011-05, Presentation of Comprehensive Income. One of ASU 2011-05’s provisions requires entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented (for both interim and annual financial statements). Accordingly, this requirement is indefinitely deferred by ASU 2011-12 and will be further deliberated by the FASB at a future date. ASUs 2011-05 and 2011-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, which is October 1, 2012 for the Company, and should be applied retrospectively for all periods presented in the financial statements.  The Company has not yet decided which statement format it will adopt.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.  The ASU requires new disclosures regarding the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The new disclosures are designed to make GAAP financial statements more comparable to those prepared under International Financial Reporting Standards.  The new disclosures entail presenting information about both gross and net exposures.  The new disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, which is October 1, 2013 for the Company, and interim periods therein; retrospective application is required.  The Company has not yet completed its evaluation of this ASU; however, since the provisions of ASU 2011-11 are disclosure-related, the Company’s adoption of this ASU is not expected to have an impact to its financial condition or results of operations.

11

 


2.   Earnings Per Share

 

The Company accounts for the shares acquired by its ESOP and the shares awarded pursuant to its RRP in accordance with Accounting Standards Codification (“ASC”) 260, which requires that unvested RRP awards that contain nonforfeitable rights to dividends be treated as participating securities in the computation of earnings per share pursuant to the two-class method. The two-class method is an earnings allocation that determines earnings per share for each class of common stock and participating security. 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. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

March 31,

 

March 31,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

 

(Dollars in thousands, except per share data)

Net income (1)

$

19,315

 

$

15,636

 

$

38,104

 

$

4,378

 

 

 

 

 

 

 

 

 

 

 

 

Average common shares outstanding

 

161,582,102

 

 

161,381,230

 

 

161,752,544

 

 

163,483,221

Average committed ESOP shares outstanding

 

139,514

 

 

118,565

 

 

70,130

 

 

59,274

Total basic average common shares outstanding

 

161,721,616

 

 

161,499,795

 

 

161,822,674

 

 

163,542,495

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive RRP shares

 

1,982

 

 

2,104

 

 

3,169

 

 

3,250

Effect of dilutive stock options

 

4,020

 

 

5,475

 

 

3,848

 

 

5,005

 

 

 

 

 

 

 

 

 

 

 

 

Total diluted average common shares outstanding

 

161,727,618

 

 

161,507,374

 

 

161,829,691

 

 

163,550,750

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.12

 

$

0.10

 

$

0.24

 

$

0.03

Diluted

$

0.12

 

$

0.10

 

$

0.24

 

$

0.03

 

 

 

 

 

 

 

 

 

 

 

 

Antidilutive stock options and RRP shares, excluded

 

 

 

 

 

 

 

 

 

 

 

from the diluted average common shares

 

 

 

 

 

 

 

 

 

 

 

outstanding calculation

 

881,128

 

 

902,945

 

 

883,608

 

 

902,939

 

 

(1)    Net income available to participating securities (unvested RRP shares) was inconsequential for the three and six months ended March 31, 2012 and 2011.

 

12

 


3.   Securities  

 

The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of AFS and HTM securities at March 31, 2012 and September 30, 2011.  The majority of the MBS and investment portfolios are composed of securities issued by U.S. government-sponsored enterprises (“GSEs”).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

 

 

Gross

 

 

Estimated

 

 

Estimated

 

Amortized

 

Unrealized

 

 

Unrealized

 

 

Fair

 

Cost

 

Gains

 

 

Losses

 

 

Value

(Dollars in thousands)

AFS:

 

 

 

 

 

 

 

 

 

 

 

GSE debentures

$

1,071,472

 

$

2,922

 

$

1,018

 

$

1,073,376

Municipal bonds

 

2,444

 

 

113

 

 

-- 

 

 

2,557

Trust preferred securities

 

2,954

 

 

-- 

 

 

863

 

 

2,091

MBS

 

598,609

 

 

38,812

 

 

-- 

 

 

637,421

 

 

1,675,479

 

 

41,847

 

 

1,881

 

 

1,715,445

HTM:

 

 

 

 

 

 

 

 

 

 

 

GSE debentures

 

124,936

 

 

861

 

 

-- 

 

 

125,797

Municipal bonds

 

50,977

 

 

2,015

 

 

-- 

 

 

52,992

MBS

 

1,989,123

 

 

61,837

 

 

2,128

 

 

2,048,832

 

 

2,165,036

 

 

64,713

 

 

2,128

 

 

2,227,621

 

$

3,840,515

 

$

106,560

 

$

4,009

 

$

3,943,066

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2011

 

 

 

 

Gross

 

 

Gross

 

 

Estimated

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

(Dollars in thousands)

AFS:

 

 

 

 

 

 

 

 

 

 

 

GSE debentures

$

746,545

 

$

1,996

 

$

233

 

$

748,308

Municipal bonds

 

2,628

 

 

126

 

 

-- 

 

 

2,754

Trust preferred securities

 

3,681

 

 

-- 

 

 

740

 

 

2,941

MBS

 

690,675

 

 

41,764

 

 

3

 

 

732,436

 

 

1,443,529

 

 

43,886

 

 

976

 

 

1,486,439

HTM:

 

 

 

 

 

 

 

 

 

 

 

GSE debentures

 

633,483

 

 

3,171

 

 

-- 

 

 

636,654

Municipal bonds

 

56,994

 

 

2,190

 

 

4

 

 

59,180

MBS

 

1,679,640

 

 

59,071

 

 

153

 

 

1,738,558

 

 

2,370,117

 

 

64,432

 

 

157

 

 

2,434,392

 

$

3,813,646

 

$

108,318

 

$

1,133

 

$

3,920,831

 

13

 


The following tables summarize the estimated fair value and gross unrealized losses of those securities on which an unrealized loss at March 31, 2012 and September 30, 2011 was reported and the continuous unrealized loss position for at least 12 months or less than 12 months as of March 31, 2012 and September 30, 2011. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

Less Than

 

Equal to or Greater

 

12 Months

 

Than 12 Months

 

 

 

 

Estimated

 

 

Unrealized

 

 

 

 

Estimated

 

 

Unrealized

 

Count

 

 

Fair Value

 

 

Losses

 

Count

 

 

Fair Value

 

 

Losses

 

(Dollars in thousands)

AFS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GSE debentures

11

 

$

258,683

 

$

1,018

 

-- 

 

$

-- 

 

$

-- 

Trust preferred securities

-- 

 

 

-- 

 

 

-- 

 

1

 

 

2,091

 

 

863

MBS

-- 

 

 

-- 

 

 

-- 

 

-- 

 

 

-- 

 

 

-- 

 

11

 

$

258,683

 

$

1,018

 

1

 

$

2,091

 

$

863

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HTM:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GSE debentures

-- 

 

$

-- 

 

$

-- 

 

-- 

 

$

-- 

 

$

-- 

Municipal bonds

-- 

 

 

-- 

 

 

-- 

 

-- 

 

 

-- 

 

 

-- 

MBS

14

 

 

318,068

 

 

2,128

 

-- 

 

 

-- 

 

 

-- 

 

14

 

$

318,068

 

$

2,128

 

-- 

 

$

-- 

 

$

-- 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,  2011

 

Less Than

 

Equal to or Greater

 

12 Months

 

Than 12 Months

 

 

 

 

Estimated

 

 

Unrealized

 

 

 

 

Estimated

 

 

Unrealized

 

Count

 

 

Fair Value

 

 

Losses

 

Count

 

 

Fair Value

 

 

Losses

 

(Dollars in thousands)

AFS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GSE debentures

7

 

$

230,848

 

$

233

 

-- 

 

$

-- 

 

$

-- 

Trust preferred securities

-- 

 

 

-- 

 

 

-- 

 

1

 

 

2,941

 

 

740

MBS

5

 

 

1,189

 

 

3

 

-- 

 

 

-- 

 

 

-- 

 

12

 

$

232,037

 

$

236

 

1

 

$

2,941

 

$

740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HTM:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GSE debentures

-- 

 

$

-- 

 

$

-- 

 

-- 

 

$

-- 

 

$

-- 

Municipal bonds

2

 

 

615

 

 

4

 

-- 

 

 

-- 

 

 

-- 

MBS

1

 

 

25,142

 

 

153

 

-- 

 

 

-- 

 

 

-- 

 

3

 

$

25,757

 

$

157

 

-- 

 

$

-- 

 

$

-- 

 

On a quarterly basis, management conducts a formal review of securities for the presence of an other-than-temporary impairment.  Management assesses whether an other-than-temporary impairment is present when the fair value of a security is less than its amortized cost basis at the balance sheet date.  For such securities, other-than-temporary impairment is considered to have occurred if the Company intends to sell the security, if it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis, or if the present value of expected cash flows is not sufficient to recover the entire amortized cost.

 

14

 


The unrealized losses at March 31, 2012 and September 30, 2011 are primarily a result of increases in market yields from the time of purchase.  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.  Additionally, 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.

The amortized cost and estimated fair value of securities by remaining contractual maturity without consideration for call features or pre-refunding dates as of March 31, 2012 are shown below.  Actual maturities of MBS may differ from contractual maturities because borrowers have the right to prepay obligations, generally without penalties.  As of March 31, 2012, the amortized cost of the securities in our portfolio which are callable or have pre-refunding dates within one year totaled $715.0 millionMaturities of MBS depend on the repayment characteristics and experience of the underlying financial instruments. Issuers of certain investment securities have the right to call and prepay obligations with or without prepayment penalties. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AFS

 

HTM

 

 

 

 

 

Estimated

 

 

 

 

 

Estimated

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

One year or less

$

180,677

 

$

180,993

 

$

3,139

 

$

3,164

One year through five years

 

868,556

 

 

870,266

 

 

156,110

 

 

158,292

Five years through ten years

 

166,141

 

 

177,920

 

 

428,868

 

 

445,260

Ten years and thereafter

 

460,105

 

 

486,266

 

 

1,576,919

 

 

1,620,905

 

$

1,675,479

 

$

1,715,445

 

$

2,165,036

 

$

2,227,621

 

The following table presents the carrying value of the MBS in our portfolio by issuer as of the dates indicated.

 

 

 

 

 

 

 

 

 

March 31, 2012

 

 

September 30, 2011

 

 

(Dollars in thousands)

Federal National Mortgage Association (“FNMA”)

$

1,519,902

 

$

1,384,396

Federal Home Loan Mortgage Corporation (“FHLMC”)

 

910,520

 

 

823,728

Government National Mortgage Association

 

194,981

 

 

202,340

Private Issuer

 

1,141

 

 

1,612

 

$

2,626,544

 

$

2,412,076

 

The following table presents the taxable and non-taxable components of interest income on investment securities for the time periods indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

March 31,

 

 

March 31,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

 

 

(Dollars in thousands)

Taxable

$

3,688

 

$

4,266

 

$

7,885

 

$

8,537

Non-taxable

 

427

 

 

477

 

 

867

 

 

981

 

$

4,115

 

$

4,743

 

$

8,752

 

$

9,518

 

15

 


The following table summarizes the amortized cost and estimated fair value of securities pledged as collateral as of the dates indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

September 30, 2011

 

 

 

 

Estimated

 

 

 

 

Estimated

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

 

(Dollars in thousands)

Repurchase agreements

$

408,898

 

$

430,453

 

$

571,016

 

$

597,286

Retail deposits

 

-- 

 

 

-- 

 

 

44,429

 

 

44,991

Public unit deposits

 

213,028

 

 

224,448

 

 

116,472

 

 

124,785

Federal Reserve Bank

 

56,873

 

 

59,062

 

 

26,666

 

 

27,939

 

$

678,799

 

$

713,963

 

$

758,583

 

$

795,001

 

 

 

4.   Loans Receivable and Allowance for Credit Losses

Loans receivable, net at March 31, 2012 and September 30, 2011 is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

 

September 30, 2011

 

(Dollars in thousands)

Real estate loans:

 

 

 

 

 

One- to four-family

$

5,010,076

 

$

4,918,778

Multi-family and commercial

 

52,421

 

 

57,965

Construction

 

52,390

 

 

47,368

Total real estate loans

 

5,114,887

 

 

5,024,111

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

Home equity

 

153,345

 

 

164,541

Other

 

7,064

 

 

7,224

Total consumer loans

 

160,409

 

 

171,765

 

 

 

 

 

 

Total loans receivable

 

5,275,296

 

 

5,195,876

 

 

 

 

 

 

Less:

 

 

 

 

 

Undisbursed loan funds

 

29,425

 

 

22,531

ACL

 

12,559

 

 

15,465

Discounts/unearned loan fees

 

20,844

 

 

19,093

Premiums/deferred costs

 

(11,710)

 

 

(10,947)

 

$

5,224,178

 

$

5,149,734

 

Lending Practices and Underwriting Standards - Originating and purchasing loans secured by one- to four-family residential properties is the Bank’s primary 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 located throughout the central United States.  As a result of originating loans in our branches, along with the correspondent lenders in our local markets, the Bank has a concentration of loans secured by real property located in Kansas and Missouri.  Additionally, the Bank periodically purchases whole one- to four-family loans in bulk packages from nationwide and correspondent lenders.  The Bank also makes consumer loans, construction loans secured by residential or commercial properties, and real estate loans secured by multi-family dwellings. 

 

One- to four-family loans - One- to four-family loans are underwritten manually or by an automated underwriting system developed by a third party.  The system’s components closely resemble the Bank’s manual underwriting standards which are generally in accordance with FHLMC and FNMA manual underwriting guidelines.  The automated underwriting system analyzes the applicant’s

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data, with emphasis on credit history, employment and income history, qualifying ratios reflecting the applicant’s ability to repay, asset reserves, and LTV ratio.  Full documentation to support the applicant’s credit, income, and sufficient funds to cover all applicable fees and reserves at closing is required on all loans.  Loans that do not meet the automated underwriting standards are referred to a staff underwriter for manual underwriting.  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.

 

The underwriting standards for loans purchased from correspondent and nationwide lenders are generally similar to the Bank’s internal underwriting standards.  The underwriting of correspondent loans is generally performed by the Bank’s underwriters.  Before committing to a bulk loan purchase, the Bank’s Chief Lending Officer or Secondary Marketing Manager reviews specific criteria such as loan amount, credit scores, LTV ratios, geographic location, and debt ratios of each loan in the pool.  If the specific criteria do not meet the Bank’s underwriting standards and compensating factors are not sufficient, then a loan will be removed from the population.  Before the bulk loan purchase is funded, an internal Bank underwriter or a third party reviews at least 25% of the loan files to confirm loan terms, credit scores, debt service ratios, property appraisals, and other underwriting related documentation.  For the tables within this footnote, correspondent loans are included with originated loans, and bulk loan purchases are reported as purchased loans. 

 

The Bank also originates construction-to-permanent loans secured by one- to four-family residential real estate.  The majority of the one- to four-family construction loans are secured by property located within the Bank’s Kansas City market area. 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.  The application process includes submission of complete plans, specifications, and costs of the project to be constructed.  All construction loans are manually underwritten using the Bank’s internal underwriting standards.  Construction draw requests and the supporting documentation are reviewed and approved by management.  The Bank also performs regular documented inspections of the construction project to ensure the funds are being used for the intended purpose and the project is being completed according to the plans and specifications provided. 

 

Multi-family and commercial loans - The Bank’s multi-family and commercial real estate loans are secured primarily by properties generally located in the Bank’s market areas or surrounding areas.  These loans are granted based on the income producing potential of the property and the financial strength of the borrower.  At the time of origination, LTV ratios on multi-family and commercial real estate loans cannot exceed 80% of the appraised value of the property securing the loans.  The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt at the time of origination.  The Bank generally requires personal guarantees of the borrowers covering a portion of the debt in addition to the security property as collateral for these loans.  Appraisals on properties securing these loans are performed by independent state certified fee appraisers.  Bank policy permits a limited amount of construction-to-permanent loans secured by multi-family dwellings and commercial real estate.

 

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.

 

The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan.  Although creditworthiness of the 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:  one- to four-family loans, consumer loans, and multi-family and commercial loans.  The one- to four-family and consumer segments are further grouped into classes for purposes of providing disaggregated information about the credit quality of the loan portfolio.  The classes are:  one- to four-family loans – originated, one- to four-family loans – purchased, consumer loans – home equity, and consumer loans – other. 

 

The Bank’s primary credit quality indicators for the one- to four-family loan and consumer - home equity loan portfolios are delinquency status, asset classifications in accordance with applicable regulations, LTV ratios and borrower credit scores.  The Bank’s primary credit quality indicators for the multi-family and commercial loan and consumer – other loan portfolios are delinquency status and asset classifications in accordance with applicable regulations.

 

The following table presents the recorded investment of loans, defined as the unpaid loan principal balance (net of unadvanced funds related to loans in process) inclusive of unearned loan fees and deferred costs, of the Company's loans 30 to 89 days delinquent, loans 90 or more days delinquent, total delinquent loans, total current loans, and the total loans receivable balance at March 31, 2012 and September 30, 2011 by class.  In the formula analysis model, delinquent loans not individually evaluated for impairment are assigned

17

 


a higher loss factor than corresponding performing loans.  At March 31, 2012 and September 30, 2011, all loans in the 90 or more days delinquent category were on nonaccrual status.  In addition to loans 90 or more days delinquent, the Bank also had $5.1 million of TDRs classified as nonaccrual at March 31, 2012, as the borrowers had not yet made six consecutive payments per the restructured loan terms.  At March 31, 2012 and September 30, 2011, there were no loans 90 or more days delinquent that were still accruing interest.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

 

 

 

 

 

Total

 

 

 

Total

 

 

30 to 89 Days

 

90 or More Days

 

Delinquent

 

Current

 

Recorded

 

 

Delinquent

 

Delinquent

 

Loans

 

Loans

 

Investment

 

 

(Dollars in thousands)

One- to four-family loans - originated

$

13,396

$

12,437

$

25,833

$

4,484,374

$

4,510,207

One- to four-family loans - purchased

 

7,405

 

12,618

 

20,023

 

491,169

 

511,192

Multi-family and commercial loans

 

-- 

 

-- 

 

-- 

 

54,929

 

54,929

Consumer - home equity

 

616

 

327

 

943

 

152,402

 

153,345

Consumer - other

 

342

 

10