XFRA:CFK Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

 


 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.    20549

_________________

 

Form 10-Q

(Mark One)

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

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 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 or organization)

(I.R.S. Employer 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 July 31, 2012, there were 157,592,937 shares of Capitol Federal Financial, Inc. common stock outstanding.

 

 

 


 

 

 

 

 

 

 

 

PART 1 – FINANCIAL INFORMATION 

Page Number

Item 1.  Financial Statements (Unaudited): 

 

            Consolidated Balance Sheets at June 30, 2012 and September 30, 2011

3

            Consolidated Statements of Operations for the three and nine months ended

 

                 June 30, 2012 and 2011

4

            Consolidated Statement of Stockholders’ Equity for the nine months ended

 

                 June 30, 2012

6

           Consolidated Statements of Cash Flows for the nine months ended

 

                 June 30, 2012 and 2011

7

            Notes to Consolidated Financial Statements

9

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

 

                 Results of Operations

33

Financial Condition – Loans 

38

Financial Condition – Asset Quality 

45

Financial Condition – Liabilities 

53

Financial Condition – Stockholders’ Equity 

57

Results of Operations for the nine months ended June 30, 2012 and 2011 

58

Results of Operations for the three months ended June 30, 2012 and 2011 

65

Results of Operations for the three months ended June 30, 2012 and 

 

March 31, 2012 

69

 

 

 

 

Item 3.  Quantitative and Qualitative Disclosure about Market Risk 

80

Item 4.  Controls and Procedures 

84

 

 

PART II -- OTHER INFORMATION 

 

Item 1.    Legal Proceedings 

84

Item 1A. Risk Factors 

84

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

85

Item 3.    Defaults Upon Senior Securities 

85

Item 4.    Mine Safety Disclosures 

85

Item 5.    Other Information 

85

Item 6.    Exhibits 

85

 

 

Signature Page 

86

 

 

INDEX TO EXHIBITS 

87

 

 

 

 

2

 


 

 

PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

September 30,

 

2012

 

2011

ASSETS:

 

 

 

 

 

Cash and cash equivalents (includes interest-earning deposits of $153,606 and $105,292)

$

172,948 

 

$

121,070 

Securities:

 

 

 

 

 

Available-for-sale (“AFS”) at estimated fair value (amortized cost of $1,593,725 and $1,443,529)

 

1,632,297 

 

 

1,486,439 

Held-to-maturity (“HTM”) at amortized cost (estimated fair value of $2,143,961 and $2,434,392)

 

2,073,951 

 

 

2,370,117 

Loans receivable, net (of allowance for credit losses (“ACL”) of $11,777 and $15,465)

 

5,209,990 

 

 

5,149,734 

Bank-owned life insurance (“BOLI”)

 

57,667 

 

 

56,534 

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

 

131,437 

 

 

126,877 

Accrued interest receivable

 

27,416 

 

 

29,316 

Premises and equipment, net

 

54,707 

 

 

48,423 

Other real estate owned (“OREO”), net

 

9,913 

 

 

11,321 

Other assets

 

50,288 

 

 

50,968 

TOTAL ASSETS

$

9,420,614 

 

$

9,450,799 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Deposits

$

4,592,437 

 

$

4,495,173 

Advances from FHLB, net

 

2,527,903 

 

 

2,379,462 

Other borrowings

 

365,000 

 

 

515,000 

Advance payments by borrowers for taxes and insurance

 

32,231 

 

 

55,138 

Income taxes payable

 

2,763 

 

 

2,289 

Deferred income tax liabilities, net

 

22,584 

 

 

20,447 

Accounts payable and accrued expenses

 

44,838 

 

 

43,761 

Total liabilities

 

7,587,756 

 

 

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;

 

 

 

 

 

158,203,649 and 167,498,133 shares issued and outstanding

 

 

 

 

 

as of June 30, 2012 and September 30, 2011, respectively

 

1,582 

 

 

1,675 

Additional paid-in capital

 

1,315,352 

 

 

1,392,567 

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

 

(48,318)

 

 

(50,547)

Retained earnings

 

540,253 

 

 

569,127 

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

 

23,989 

 

 

26,707 

Total stockholders’ equity

 

1,832,858 

 

 

1,939,529 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

9,420,614 

 

$

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 Nine Months Ended

 

June 30,

 

June 30,

 

2012

 

2011

 

2012

 

2011

INTEREST AND DIVIDEND INCOME:

 

 

 

 

 

 

 

 

 

 

 

Loans receivable

$

57,547 

 

$

62,393 

 

$

178,007 

 

$

189,890 

Mortgage-backed securities (“MBS”)

 

18,144 

 

 

19,619 

 

 

54,686 

 

 

52,379 

Investment securities

 

3,783 

 

 

5,103 

 

 

12,535 

 

 

14,621 

Capital stock of FHLB

 

1,111 

 

 

925 

 

 

3,313 

 

 

2,710 

Cash and cash equivalents

 

60 

 

 

43 

 

 

205 

 

 

671 

Total interest and dividend income

 

80,645 

 

 

88,083 

 

 

248,746 

 

 

260,271 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

FHLB advances

 

19,859 

 

 

22,539 

 

 

62,641 

 

 

67,638 

Deposits

 

11,068 

 

 

15,516 

 

 

35,690 

 

 

48,966 

Other borrowings

 

3,530 

 

 

5,720 

 

 

11,387 

 

 

18,798 

Total interest expense

 

34,457 

 

 

43,775 

 

 

109,718 

 

 

135,402 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

46,188 

 

 

44,308 

 

 

139,028 

 

 

124,869 

 

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR CREDIT LOSSES

 

-- 

 

 

1,240 

 

 

2,040 

 

 

2,410 

NET INTEREST INCOME AFTER

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR CREDIT LOSSES

 

46,188 

 

 

43,068 

 

 

136,988 

 

 

122,459 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME:

 

 

 

 

 

 

 

 

 

 

 

Retail fees and charges

 

3,940 

 

 

3,961 

 

 

11,958 

 

 

11,465 

Insurance commissions

 

870 

 

 

548 

 

 

2,213 

 

 

2,254 

Loan fees

 

499 

 

 

589 

 

 

1,634 

 

 

1,865 

Income from BOLI

 

334 

 

 

512 

 

 

1,133 

 

 

1,348 

Other income, net

 

437 

 

 

490 

 

 

1,466 

 

 

1,629 

Total other income

 

6,080 

 

 

6,100 

 

 

18,404 

 

 

18,561 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

11,517 

 

 

12,046 

 

 

32,690 

 

 

33,104 

Communications, information technology, and occupancy

 

4,093 

 

 

4,168 

 

 

11,927 

 

 

12,021 

Regulatory and outside services

 

1,148 

 

 

1,243 

 

 

3,696 

 

 

3,571 

Deposit and loan transaction costs

 

1,357 

 

 

1,033 

 

 

3,862 

 

 

3,659 

Federal insurance premium

 

1,133 

 

 

1,158 

 

 

3,309 

 

 

4,144 

Advertising and promotional

 

923 

 

 

1,110 

 

 

2,674 

 

 

2,634 

Contribution to Capitol Federal Foundation (“Foundation”)

 

-- 

 

 

-- 

 

 

-- 

 

 

40,000 

Other expenses, net

 

2,734 

 

 

2,344 

 

 

8,783 

 

 

10,162 

Total other expenses

 

22,905 

 

 

23,102 

 

 

66,941 

 

 

109,295 

INCOME BEFORE INCOME TAX EXPENSE

 

29,363 

 

 

26,066 

 

 

88,451 

 

 

31,725 

INCOME TAX EXPENSE

 

10,690 

 

 

8,807 

 

 

31,674 

 

 

10,088 

NET INCOME

$

18,673 

 

$

17,259 

 

$

56,777 

 

$

21,637 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Continued)

4

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

$

0.12 

 

$

0.10 

 

$

0.35 

 

$

0.13 

Diluted earnings per common share

$

0.12 

 

$

0.10 

 

$

0.35 

 

$

0.13 

Dividends declared per public share

$

0.08 

 

$

0.08 

 

$

0.33 

 

$

1.55 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares

 

156,962,024 

 

 

161,641,630 

 

 

160,208,370 

 

 

162,908,873 

Diluted weighted average common shares

 

156,966,036 

 

 

161,647,914 

 

 

160,212,276 

 

 

162,916,379 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

 

 

Earnings

 

 

(Loss)

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at October 1, 2011

$

1,675 

 

$

1,392,567 

 

$

(50,547)

 

$

569,127 

 

$

26,707 

 

$

1,939,529 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

56,777 

 

 

 

 

 

56,777 

Changes in unrealized gain/losses on 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities AFS, net of deferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income taxes of $1,620

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,718)

 

 

(2,718)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54,059 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ESOP activity, net

 

 

 

 

2,541 

 

 

2,229 

 

 

 

 

 

 

 

 

4,770 

Restricted stock activity, net

 

 

 

(14)

 

 

 

 

 

 

 

 

 

 

 

(10)

Stock-based compensation

 

 

 

 

569 

 

 

 

 

 

 

 

 

 

 

 

569 

Repurchase of common stock

 

(97)

 

 

(80,311)

 

 

 

 

 

(33,285)

 

 

 

 

 

(113,693)

Dividends on common stock to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

stockholders ($0.33 per share)

 

 

 

 

 

 

 

 

 

 

(52,366)

 

 

 

 

 

(52,366)

Balance at June 30, 2012

$

1,582 

 

$

1,315,352 

 

$

(48,318)

 

$

540,253 

 

$

23,989 

 

$

1,832,858 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

6

 


 

 

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

June 30,

 

2012

 

2011

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

$

56,777 

 

$

21,637 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

operating activities:

 

 

 

 

 

FHLB stock dividends

 

(3,313)

 

 

(2,710)

Provision for credit losses

 

2,040 

 

 

2,410 

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

 

(4,410)

 

 

(9,611)

Proceeds from sales of LHFS

 

5,084 

 

 

11,590 

Amortization and accretion of premiums and discounts on securities

 

6,456 

 

 

5,548 

Depreciation and amortization of premises and equipment

 

3,584 

 

 

3,297 

Amortization of deferred amounts related to FHLB advances, net

 

6,378 

 

 

5,271 

Common stock committed to be released for allocation - ESOP

 

4,770 

 

 

4,490 

Stock-based compensation

 

569 

 

 

189 

Changes in:

 

 

 

 

 

Prepaid federal insurance premium

 

2,923 

 

 

3,774 

Accrued interest receivable

 

1,900 

 

 

(1,131)

Other assets, net

 

2,481 

 

 

1,228 

Income taxes payable/receivable

 

4,221 

 

 

(296)

Accounts payable and accrued expenses

 

(12,499)

 

 

(5,763)

Net cash provided by operating activities

 

76,961 

 

 

39,923 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchase of AFS securities

 

(613,330)

 

 

(480,815)

Purchase of HTM securities

 

(560,024)

 

 

(1,775,436)

Proceeds from calls, maturities and principal reductions of AFS securities

 

460,930 

 

 

261,366 

Proceeds from calls, maturities and principal reductions of HTM securities

 

851,938 

 

 

959,066 

Proceeds from the redemption of capital stock of FHLB

 

2,405 

 

 

4,941 

Purchases of capital stock of FHLB

 

(3,652)

 

 

(7,162)

Net increase in loans receivable

 

(71,184)

 

 

(7,705)

Purchases of premises and equipment

 

(9,119)

 

 

(8,360)

Proceeds from sales of OREO

 

9,753 

 

 

10,060 

Net cash provided by (used in) investing activities

 

67,717 

 

 

(1,044,045)

 

 

 

 

 

 

 

 

 

(Continued)

7

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

June 30,

 

 

2012

 

 

2011

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Dividends paid

 

(52,366)

 

 

(138,004)

Deposits, net of withdrawals

 

97,264 

 

 

189,954 

Deferred FHLB prepayment penalty

 

(7,937)

 

 

-- 

Proceeds from borrowings

 

657,414 

 

 

644,062 

Repayments of borrowings

 

(657,414)

 

 

(647,671)

Change in advance payments by borrowers for taxes and insurance

 

(22,907)

 

 

(24,017)

Repurchase of common stock

 

(106,854)

 

 

-- 

Net proceeds from common stock offering

 

-- 

 

 

1,076,411 

Stock options exercised

 

-- 

 

 

34 

Excess tax benefits from stock options

 

-- 

 

 

Net cash (used in) provided by financing activities

 

(92,800)

 

 

1,100,777 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

51,878 

 

 

96,655 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

Beginning of period

 

121,070 

 

 

65,217 

End of period

$

172,948 

 

$

161,872 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Income tax payments

$

27,500 

 

$

10,371 

Interest payments

$

104,807 

 

$

131,371 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH

 

 

 

 

 

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 OREO

$

9,429 

 

$

11,186 

 

 

 

 

 

 

 

(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 ACL of Capitol Federal Savings Bank (the “Bank”).  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, charge-offs, 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. 

 

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.  Each such concession is considered a troubled debt restructuring (“TDR”).  The Bank does not forgive principal or interest nor does it commit to lend additional funds, except for the capitalization of delinquent principal, interest and/or escrow balances not to exceed the original loan balance, to debtors whose terms have been modified in TDRs.  A restructured loan will be reported as a TDR and an impaired loan until it pays off, unless it has been restructured to an interest rate equal to or greater than the rate the Bank was willing to accept at the time of the restructuring for a new loan with comparable risk, and has performed under the new terms of the restructuring agreement for at least 12 consecutive months.  TDRs are reported as nonaccrual if the loan was either 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.

 

Existing loan customers, whose loans have not been sold to third parties, who have not been delinquent on their contractual loan payments during the previous 12 months and who are not currently in bankruptcy, 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 and/or costs continue to be deferred.  Endorsed loans are classified as TDRs

9

 


 

 

when certain guidelines for soft credit scores and/or estimated loan-to-value (“LTV”) ratios are not met.  As a result of these changes since origination, the borrower could be experiencing financial difficulties even though the borrower has not been delinquent on their contractual loan payment in the previous 12 months.

 

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. 

 

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.  The following types of loans are reported as impaired loans: all nonaccrual loans, loans classified as substandard, loans partially charged-off, and certain TDRs.  However, all TDRs are accounted for as impaired loans in regards to evaluating the ACL.

 

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 an analysis (“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 appraisals or broker price opinions (“BPOs”), 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, a 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 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. 

 

10

 


 

 

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.

 

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 repurchased shares as going back into authorized but unissued shares.

 

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 restricted stock benefit plans in accordance with Accounting Standards Codification (“ASC”) 260, which requires that unvested restricted stock 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 Nine Months Ended

 

June 30,

   

June 30,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

 

(Dollars in thousands, except per share data)

Net income

$

18,673 

 

$

17,259 

 

$

56,777 

 

$

21,637 

Income allocated to participating securities (unvested restricted stock)(1)

 

(23)

 

 

--

 

 

(25)

 

 

--

Net income available to common stockholders

 

18,650 

 

 

17,259 

 

 

56,752 

 

 

21,637 

 

 

 

 

 

 

 

 

 

 

 

 

Average common shares outstanding

 

156,684,512 

 

 

161,385,084 

 

 

160,069,365 

 

 

162,783,841 

Average committed ESOP shares outstanding

 

277,512 

 

 

256,546 

 

 

139,005 

 

 

125,032 

Total basic average common shares outstanding

 

156,962,024 

 

 

161,641,630 

 

 

160,208,370 

 

 

162,908,873 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive restricted stock

 

--

 

 

1,313 

 

 

--

 

 

2,516 

Effect of dilutive stock options

 

4,012 

 

 

4,971 

 

 

3,906 

 

 

4,990 

 

 

 

 

 

 

 

 

 

 

 

 

Total diluted average common shares outstanding

 

156,966,036 

 

 

161,647,914 

 

 

160,212,276 

 

 

162,916,379 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.12 

 

$

0.10 

 

$

0.35 

 

$

0.13 

Diluted

$

0.12 

 

$

0.10 

 

$

0.35 

 

$

0.13 

 

 

 

 

 

 

 

 

 

 

 

 

Antidilutive stock options and restricted stock, excluded

 

 

 

 

 

 

 

 

 

 

 

from the diluted average common shares

 

 

 

 

 

 

 

 

 

 

 

outstanding calculation

 

1,458,510 

 

 

901,816 

 

 

1,074,543 

 

 

895,025 

 

 

 

 

 

 

 

 

 

 

 

 

(1)Income allocated to participating securities (unvested restricted stock) was inconsequential for the three and nine month periods ended June 30, 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 June 30, 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”).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

 

 

Gross

 

Gross

 

Estimated

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Cost

 

Gains

 

Losses

 

Value

 

 

(Dollars in thousands)

AFS:

 

 

 

 

 

 

 

 

 

 

 

GSE debentures

$

1,035,981 

 

$

4,137 

 

$

16 

 

$

1,040,102 

Municipal bonds

 

2,439 

 

 

94 

 

 

--

 

 

2,533 

Trust preferred securities

 

2,932 

 

 

--

 

 

847 

 

 

2,085 

MBS

 

552,373 

 

 

35,204 

 

 

--

 

 

587,577 

 

 

1,593,725 

 

 

39,435 

 

 

863 

 

 

1,632,297 

HTM:

 

 

 

 

 

 

 

 

 

 

 

GSE debentures

 

99,962 

 

 

521 

 

 

--

 

 

100,483 

Municipal bonds

 

50,907 

 

 

1,876 

 

 

 

 

52,776 

MBS

 

1,923,082 

 

 

67,676 

 

 

56 

 

 

1,990,702 

 

 

2,073,951 

 

 

70,073 

 

 

63 

 

 

2,143,961 

 

$

3,667,676 

 

$

109,508 

 

$

926 

 

$

3,776,258 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 

 

 

 

 

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 

 

 

 

 

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 June 30, 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 June 30, 2012 and September 30, 2011. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 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

 

$

42,729 

 

$

16 

 

--

 

$

--

 

$

--

Trust preferred securities

--

 

 

--

 

 

--

 

 

 

2,085 

 

 

847 

MBS

--

 

 

--

 

 

--

 

--

 

 

--

 

 

--

 

 

$

42,729 

 

$

16 

 

 

$

2,085 

 

$

847 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HTM:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GSE debentures

--

 

$

--

 

$

--

 

--

 

$

--

 

$

--

Municipal bonds

 

 

1,924 

 

 

 

--

 

 

--

 

 

--

MBS

 

 

42,987 

 

 

56 

 

--

 

 

--

 

 

--

 

 

$

44,911 

 

$

63 

 

--

 

$

--

 

$

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

230,848 

 

$

233 

 

--

 

$

--

 

$

--

Trust preferred securities

--

 

 

--

 

 

--

 

 

 

2,941 

 

 

740 

MBS

 

 

1,189 

 

 

 

--

 

 

--

 

 

--

 

12 

 

$

232,037 

 

$

236 

 

 

$

2,941 

 

$

740 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HTM:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GSE debentures

--

 

$

--

 

$

--

 

--

 

$

--

 

$

--

Municipal bonds

 

 

615 

 

 

 

--

 

 

--

 

 

--

MBS

 

 

25,142 

 

 

153 

 

--

 

 

--

 

 

--

 

 

$

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 June 30, 2012 and September 30, 2011 were 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 June 30, 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 June 30, 2012, the amortized cost of the securities in our portfolio which are callable or have pre-refunding dates within one year totaled $737.8 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

$

120,276 

 

$

120,437 

 

$

3,132 

 

$

3,145 

One year through five years

 

893,287 

 

 

897,321 

 

 

130,442 

 

 

132,201 

Five years through ten years

 

163,825 

 

 

174,995 

 

 

396,470 

 

 

414,194 

Ten years and thereafter

 

416,337 

 

 

439,544 

 

 

1,543,907 

 

 

1,594,421 

 

$

1,593,725 

 

$

1,632,297 

 

$

2,073,951 

 

$

2,143,961 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,  2012

 

September 30, 2011

 

 

(Dollars in thousands)

Federal National Mortgage Association (“FNMA”)

$

1,428,447 

 

$

1,384,396 

Federal Home Loan Mortgage Corporation (“FHLMC”)

 

891,748 

 

 

823,728 

Government National Mortgage Association

 

189,529 

 

 

202,340 

Private Issuer

 

935 

 

 

1,612 

 

$

2,510,659 

 

$

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 Nine Months Ended

 

June 30,

 

June 30,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

 

 

(Dollars in thousands)

Taxable

$

3,390 

 

$

4,639 

 

$

11,274 

 

$

13,176 

Non-taxable

 

393 

 

 

464 

 

 

1,261 

 

 

1,445 

 

$

3,783 

 

$

5,103 

 

$

12,535 

 

$

14,621 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,  2012

 

 

September 30, 2011

 

 

 

 

Estimated

 

 

 

 

Estimated

 

Amortized

 

Fair

 

Amortized

 

Fair

 

Cost

 

Value

 

Cost

 

Value

 

 

(Dollars in thousands)

Repurchase agreements

$

403,286 

 

$

426,636 

 

$

571,016 

 

$

597,286 

Retail deposits

 

--

 

 

--

 

 

44,429 

 

 

44,991 

Public unit deposits

 

198,497 

 

 

208,704 

 

 

116,472 

 

 

124,785 

Federal Reserve Bank

 

53,679 

 

 

56,165 

 

 

26,666 

 

 

27,939 

 

$

655,462 

 

$

691,505 

 

$

758,583 

 

$

795,001 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.   Loans Receivable and Allowance for Credit Losses

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,  2012

 

September 30, 2011

 

 

(Dollars in thousands)

Real estate loans:

 

 

 

 

 

One- to four-family

$

4,995,840 

 

$

4,918,778 

Multi-family and commercial

 

49,755 

 

 

57,965 

Construction

 

52,163 

 

 

47,368 

Total real estate loans

 

5,097,758 

 

 

5,024,111 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

Home equity

 

152,301 

 

 

164,541 

Other

 

6,744 

 

 

7,224 

Total consumer loans

 

159,045 

 

 

171,765 

 

 

 

 

 

 

Total loans receivable

 

5,256,803 

 

 

5,195,876 

 

 

 

 

 

 

Less:

 

 

 

 

 

Undisbursed loan funds

 

25,451 

 

 

22,531 

ACL

 

11,777 

 

 

15,465 

Discounts/unearned loan fees

 

21,246 

 

 

19,093 

Premiums/deferred costs

 

(11,661)

 

 

(10,947)

 

$

5,209,990 

 

$

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. 

 

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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 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

17

 


 

 

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 and charge-offs) 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 June 30, 2012 and September 30, 2011 by class.  In the formula analysis model, delinquent loans not individually evaluated for impairment are assigned a higher loss factor than corresponding performing loans.  At June 30, 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 $4.2 million of originated one- to four-family TDRs classified as nonaccrual at June 30, 2012, as the borrowers had not yet made six consecutive payments per the restructured loan terms.  At June 30, 2012 and September 30, 2011, there were no loans 90 or more days delinquent that were still accruing interest.