“We've served generations of customers for over a
century and investors for over a decade. Being true to our word, combined with the
strength of our history and conservative management practice, we continue to be solid, stable and sound.”
– John B. Dicus
Topeka: 785-235-1341
Home Office
700 S Kansas Avenue, Topeka, KS 66603
1201 S Topeka Blvd
2100 SW Fairlawn Rd
2901 S Kansas Ave
2865 SW Wanamaker Rd
3540 NW 46th St
3310 SE 29th St
12th St & Wanamaker, ATM only
29th & California, ATM only
Greater Kansas City: 913-381-5400
5501 Johnson Dr
9500 Nall Ave
1900 W 75th St
9000 W 87th St
5700 Nieman Rd
1408 E Santa Fe St
10101 College Blvd
2100 E 151st St
15525 W 87th St Pkwy
13500 Metcalf Ave
22400 Midland Dr
15081 Nall Ave
13100 State Line Rd
5821 NW Barry Rd, Kansas City, MO
15345 W 119th St, SuperTarget
12200 Blue Valley Pkwy, SuperTarget
15700 Shawnee Mission Pkwy, SuperTarget
7734 State Ave, Price Chopper
11700 W 135th St, Price Chopper
4050 W 83rd St, Hen House
830 E Main St, Gardner, Price Chopper
500 NE Barry Rd, Kansas City, MO, Price Chopper
75th & Quivira, ATM only
Santa Fe & Hwy 7, ATM only
19601 W 101st, Price Chopper, ATM only
13351 Mission Road, Price Chopper, ATM only
Lawrence: 785-749-9000
1046 Vermont St
1025 Iowa St
3201 S Iowa St, SuperTarget
4701 W 6th St, Dillon’s
1026 Westdale Rd, Loan Production Office Only
1321 Oread, KU Student Union, ATM only
Wichita: 316-689-0200
8301 E 21st St North
8040 E Douglas Ave
4020 W Maple St
10404 W Central Ave
4000 E Harry St
4616 E 13th St
1636 North Rock Rd, Suite 900, Derby, KS
114 E Cloud Ave, Andover, KS
Emporia: 620-342-0125
602 Commercial St
Manhattan: 785-537-4226
1401 Poyntz Ave
705A Commons Place
K-State Student Union, ATM only
Salina: 785-825-7121
2550 S 9th St
“
“
Capitol Federal is proud to report that we have followed through
with everything we said we would do in our prospectus and
investor meetings prior to completing the second-step
conversion. We have remained ‘true blue’.
“
Financial Highlights
Letter To The Stockholders
Directors and Management
Financial Information
1
2
4
5
Stockholder Information
101
InFORMATIOn
Annual Meeting
The Annual Meeting of Stockholders will be held at 10:00 a.m. local time on January 24, 2012 at the Bradbury Thompson Center,
1700 SW Jewell St on the Washburn University campus in Topeka, Kansas.
Stock Listing
Capitol Federal Financial, Inc. common stock is traded on the Global Select tier of the NASDAQ Stock Market under the symbol “CFFN”.
Price Range of Common Stock
The high and low sales prices for the common stock as reported on the NASDAQ Stock Market, as well as dividends declared per share,
are reflected in the table below. Such information reflects inter-dealer prices, without retail markup, markdown or commission and may
not represent actual transactions. All sales prices for common stock prior to the corporate reorganization have been revised to reflect the
2.2637 exchange ratio.
FISCAL YEAR 2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
FISCAL YEAR 2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
HIGH
$11.94
$12.70
$12.08
$11.94
HIGH
$14.74
$16.88
$17.00
$15.06
LOW
$10.16
$11.17
$10.93
$10.28
LOW
$12.45
$13.59
$13.77
$10.59
DIVIDENDS
$0.800
$0.675
$0.075
$0.075
DIVIDENDS
$0.790
$0.500
$0.500
$0.500
In total, during calendar year 2011, we paid $1.00 per share to our stockholders, or $161.5 million.
During calendar year 2011, the Company paid $161.5 million in cash dividends, which consisted of $48.5 million of regular quarterly
dividends, a one-time special dividend (“welcome” dividend) of $96.8 million and a special year-end dividend of $16.2 million. The special
year-end dividend is the result of the Board of Directors’ commitment to distribute to stockholders 100% of the fiscal year 2011 earnings
of Capitol Federal Financial, Inc., excluding the impact of the contribution to the Foundation.
Our cash dividend payout policy is continually reviewed by management and the Board of Directors. Dividend payments depend upon
a number of factors including the Company’s financial condition and results of operations, the Bank’s regulatory capital requirements,
regulatory limitations on the Bank’s ability to make capital distributions to the Company, and the amount of cash at the holding
company. The Company relies significantly upon dividends from the Bank to accumulate cash for the payment of dividends to Company
stockholders. See Notes 1 and 13 in the Notes to Consolidated Financial Statements for a discussion of restrictions on the Bank’s ability
to pay dividends.
At November 18, 2011, there were 167,498,133 shares of Capitol Federal Financial, Inc. common stock issued and outstanding and
approximately 12,492 stockholders of record.
Stockholders and General Inquiries
James D. Wempe, Vice President
Capitol Federal Financial, Inc., 700 South Kansas Avenue, Topeka, KS 66603
(785) 270-6055
e-mail: jwempe@capfed.com
Copies of our Annual Report on Form 10-K for the fiscal year ended September 30, 2011 are available at no charge to stockholders upon
request.
“
See capfed.com for complete list of participating Walgreen’s ATMs
in the Greater Kansas City Metro area and across the State of
Kansas, providing Capitol Federal cardholders ATM access, with
no transaction fees.
Transfer Agent
American Stock Transfer & Trust Company
6201 15th Avenue, Brooklyn, NY 11219
(800) 937-5449
101
COnTEnTSLOCATIOnSSTOCKHOLDER
s
r
o
t
c
e
r
i
D
B.B. Andersen
Real Estate Developer
John B. Dicus
Chairman, President and CEO of Capitol Federal Financial, Inc.
and Capitol Federal Savings Bank
Morris J. Huey II
Retired Executive Vice President and Chief Lending Offi cer for
Capitol Federal Savings Bank
Jeffrey M. Johnson
President, Flint Hills National Golf Club
Michael T. McCoy, M.D.
Orthopedic surgeon in a Multi-Special Clinic and Co-Director of
the Joint Center of Stormont-Vail HealthCare
Jeffrey R. Thompson
Chief Executive Offi cer, Salina Vortex Corporation
Marilyn S. Ward
Retired Executive Director of ERC/Resource & Referral
FInAnCIAL HIGHLIGHTS
2011 2010 2009 2008 2007
(dollars in thousands)
Total Assets
Loans Receivable, net
Securities
Available-for-Sale
Held-to-Maturity
Deposits
Borrowings
Equity
Net Income
Effi ciency Ratio
Equity to Assets
$9,450,799
5,149,734
$8,487,130
5,168,202
$8,403,680
5,603,965
$8,055,249
5,320,780
$7,675,886
5,290,071
1,486,439
2,370,117
4,495,173
2,894,462
1,939,529
38,403
(2)
(2)
68.30%
20.52%
1,060,366
1,880,154
4,386,310
3,016,980
961,950
67,840
43.99%
11.33%
1,623,995
849,176
1,533,641
843,057
505,110
1,433,329
4,228,609
3,106,179
941,298
66,298
3,923,883
3,160,710
871,216
50,954
3,922,782
2,785,707
867,631
32,296
45.62%
11.20%
49.93%
10.82%
59.60%
11.30%
For fi scal year 2012, your board, management and employees are prepared to continue to provide
the best service we can to our retail customers, while continuing our focus on creating value for
“
our stockholders.
“
John B. Dicus
Chairman, President and CEO
R. Joe Aleshire
Executive Vice President of Retail Operations for
Capitol Federal Savings Bank
Larry K. Brubaker
Executive Vice President of Corporate Services for
Capitol Federal Savings Bank
Rick C. Jackson
Executive Vice President and Chief Lending Offi cer for
Capitol Federal Savings Bank
Kent G. Townsend
Executive Vice President, Chief Financial Offi cer
and Treasurer
Tara D. Van Houweling
First Vice President and Reporting Director
Mary R. Culver
Corporate Secretary
4
Special Counsel
Silver, Freedman & Taff, L.L.P. , 3299 K Street, N.W. , Suite 100, Washington, DC 20007
Independent Auditors
Deloitte & Touche L.L.P. , 1100 Walnut, Suite 3300, Kansas City, MO 64106
During fi scal year 2011, we continued to operate at a high level.
“
“
amount of dividends paid (in millions)
shares outstanding
(1)
basic earnings per share
(2) (3)
167.5
167.5
167.7
167.7
168.1
161.5
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
48.7
48.0
43.7
41.4
s
e
r
a
h
s
f
o
s
n
o
i
l
l
i
m
200
150
100
50
0
0.40
0.41
0.40
0.31
0.20
$0.60
$0.40
$0.20
$0.00
11 10 09 08 07
11 10 09 08 07
Calendar Year
Fiscal Year
11 10 09 08 07
Fiscal Year
In association with the corporate reorganization in December 2010, all publicly held shares of Capitol Federal Financial were exchanged for new shares of
(1)
Capitol Federal Financial, Inc. All share counts prior to the corporate reorganization have been revised to refl ect the exchange ratio, which was 2.2637.
(2) Excluding the $40.0 million ($26.0 million, net of income tax benefi t) contribution to Capitol Federal Foundation (the “Foundation”) in connection with the corporate
reorganization in December 2010, net income would have been $64.4 million and the effi ciency ratio would have been 47.65%. Basic earnings per share for the year,
in accordance with accounting principles generally accepted in the United States of America (“GAAP”), was $0.24. Non-GAAP basic earnings per share, which excludes
the contribution to the Foundation, was $0.40 and is being presented to allow for comparability. For additional information, see “Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Comparison of Results of Operations for the Years Ended September 30, 2011 and 2010 – Non-GAAP Presentation.”
(3) All earnings per share information prior to the corporate reorganization in December 2010 has been revised to refl ect the 2.2637 exchange ratio.
1
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a
n
a
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e
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n
t
letter
to the stockholders
Dear Stockholders,
In many ways, fi scal year 2011 has been one full of change for Capitol Federal (the “Company”). In many other ways,
fi scal year 2011 has been a year in which we continued to be the Capitol Federal you have always known. We’ve served
generations of customers for over a century, and investors for over a decade. Being true to our word, combined with the
strength of our history and conservative management practice, we continue to be solid, stable, and sound.
We began the fi scal year working to fi nish our second-step conversion from a mutual holding company to a fully public
stock company, which we began in fi scal year 2010. The conversion was completed in the fi rst quarter of fi scal year 2011,
and the shares sold in the offering raised $1.18 billion in additional capital. Shares held by stockholders of the Company,
were exchanged for each share held previously. During calendar year 2011 we continued to pay all quarterly cash
dividends, the “welcome” dividend in March and the special cash dividend in December 2011 representing the fulfi llment
of our commitment to pay out 100% of our earnings during fi scal year 2011, excluding the impact of the contribution
to the Capitol Federal Foundation (“Foundation”). Fiscal year 2011 total earnings per share, excluding the contribution to
the Foundation, for the Company was $0.40 and we paid out $0.60 per share in the welcome dividend. In total, during
calendar year 2011, we paid $1.00 per share to our stockholders, or $161.5 million.
As a part of the conversion, we stated that half of the proceeds would be retained by the Company and half would be
down-streamed to Capitol Federal Savings Bank (“Bank”). From the proceeds retained by the holding company, we said
that we would fund an employee stock ownership plan, make a charitable contribution to the Foundation, and repay our
outstanding trust-preferred securities. We stated that we would expand the number of correspondent lenders to have the
infrastructure in place to grow the loan portfolio beyond what we can generate in our local markets. We assured investors
that we would not take undue risks with the capital entrusted to us, and that we would not change who we are and what
our business model has been. Capitol Federal is proud to report that we have followed through with everything we said
we would do in our prospectus and investor meetings prior to completing the second-step conversion.
We have remained “true blue.”
Following the one-year anniversary of the closing of our second-step conversion, we will commence a stock repurchase
program. This program provides us another way to return value to our stockholders and to support our stock.
Our primary focus of capital management will continue to be the payment of dividends and the repurchase of stock.
The principal reason for the conversion from the mutual holding company structure to the fully public structure was the
changing regulatory environment, which resulted in the elimination of the Offi ce of Thrift Supervision (“OTS”) as required
by the Dodd-Frank Act and eliminated most of the benefi ts of being a mutual holding company. The OTS was consolidated
into our new regulator, the Offi ce of the Comptroller of the Currency (“OCC”). The OTS regulated both the Bank
and the Company. Now, however, the OCC will regulate the Bank and the Federal Reserve (“Fed”) will regulate the
2
trueblue®
Company. This likely means increased regulatory oversight and the potential for a change in regulatory emphasis.
Nevertheless, we believe that we will be able to continue to operate Capitol Federal in every way that you have
come to know and expect from us.
During fi scal year 2011, we continued to operate at a high level. We grew deposits by $108.9 million.
We generated $64.4 million of net income, excluding the contribution to the Foundation. We closed $930.0 million
of loans, including $92.8 million of loans from correspondents. Our asset quality continued to be strong this year
and improved over the previous year. Our non-performing loans decreased to 0.51% of total loans, from 0.62% at
the end of fi scal year 2010. Total non-performing assets decreased to 0.40% of total assets, from 0.49% at the end
of fi scal year 2010. Our effi ciency ratio, a measure of how well fi nancial institutions manage costs, stood at 47.6%,
excluding the contribution to the Foundation-- well below the industry average of 60.5%. Capitol Federal has
always been, and continues to be, well-capitalized as a core strategy.
The economic recovery that we, and many others, believed had started a year ago seems to have stalled, and
our national economy appears to be running at a low growth but stable level. As a result of uncertainty with our
recovery, uncertainty with the sovereign debt issues in Europe, Fed actions and policies to keep rates low and fi scal
uncertainty coming out of Washington, D.C., interest rates fell to new lows during this fi scal year. As a portfolio
lender and a retail deposit institution, this low interest rate environment presents us with unique challenges in the
long-term management of the Bank’s interest rate risk exposure. The Bank does not currently use derivatives to
manage its interest rate risk, rather, we manage it through portfolios of loans, investments, deposits and borrowings.
We have worked to maintain the long-term nature of our borrowings to offset the exposure of holding long-term
loans in portfolio, while shortening the average maturity of our investments to mitigate repricing risk in our deposit
portfolio and provide cash fl ows if interest rates increase. While this rate environment has put our net interest
margin under pressure--it decreased from 2.06% for fi scal year 2010 to 1.84% for fi scal year 2011--we believe
that we are well-positioned to mitigate the downward pressure we will likely experience in fi scal year 2012.
The Foundation, with the contribution following the completion of the second-step
conversion, now has approximately $88 million in assets. During fi scal year 2011,
the Foundation contributed over $2.9 million to local charities and has donated
more than $33.7 million since its inception in 1999.
For fi scal year 2012, your board, management and employees are prepared to
continue to provide the best service we can to our retail customers, while continuing
our focus on creating value for our stockholders. We are appreciative of the trust
you, our stockholders, have placed in us. We will continue to do what we have told
you we would do.
Sincerely,
John B. Dicus
John B. Dicus
Chairman, President and CEO
3
letter
to the stockholders
Dear Stockholders,
In many ways, fi scal year 2011 has been one full of change for Capitol Federal (the “Company”). In many other ways,
fi scal year 2011 has been a year in which we continued to be the Capitol Federal you have always known. We’ve served
generations of customers for over a century, and investors for over a decade. Being true to our word, combined with the
strength of our history and conservative management practice, we continue to be solid, stable, and sound.
We began the fi scal year working to fi nish our second-step conversion from a mutual holding company to a fully public
stock company, which we began in fi scal year 2010. The conversion was completed in the fi rst quarter of fi scal year 2011,
and the shares sold in the offering raised $1.18 billion in additional capital. Shares held by stockholders of the Company,
were exchanged for each share held previously. During calendar year 2011 we continued to pay all quarterly cash
dividends, the “welcome” dividend in March and the special cash dividend in December 2011 representing the fulfi llment
of our commitment to pay out 100% of our earnings during fi scal year 2011, excluding the impact of the contribution
to the Capitol Federal Foundation (“Foundation”). Fiscal year 2011 total earnings per share, excluding the contribution to
the Foundation, for the Company was $0.40 and we paid out $0.60 per share in the welcome dividend. In total, during
calendar year 2011, we paid $1.00 per share to our stockholders, or $161.5 million.
As a part of the conversion, we stated that half of the proceeds would be retained by the Company and half would be
down-streamed to Capitol Federal Savings Bank (“Bank”). From the proceeds retained by the holding company, we said
that we would fund an employee stock ownership plan, make a charitable contribution to the Foundation, and repay our
outstanding trust-preferred securities. We stated that we would expand the number of correspondent lenders to have the
infrastructure in place to grow the loan portfolio beyond what we can generate in our local markets. We assured investors
that we would not take undue risks with the capital entrusted to us, and that we would not change who we are and what
our business model has been. Capitol Federal is proud to report that we have followed through with everything we said
we would do in our prospectus and investor meetings prior to completing the second-step conversion.
We have remained “true blue.”
Following the one-year anniversary of the closing of our second-step conversion, we will commence a stock repurchase
program. This program provides us another way to return value to our stockholders and to support our stock.
Our primary focus of capital management will continue to be the payment of dividends and the repurchase of stock.
The principal reason for the conversion from the mutual holding company structure to the fully public structure was the
changing regulatory environment, which resulted in the elimination of the Offi ce of Thrift Supervision (“OTS”) as required
by the Dodd-Frank Act and eliminated most of the benefi ts of being a mutual holding company. The OTS was consolidated
into our new regulator, the Offi ce of the Comptroller of the Currency (“OCC”). The OTS regulated both the Bank
and the Company. Now, however, the OCC will regulate the Bank and the Federal Reserve (“Fed”) will regulate the
2
trueblue®
Company. This likely means increased regulatory oversight and the potential for a change in regulatory emphasis.
Nevertheless, we believe that we will be able to continue to operate Capitol Federal in every way that you have
come to know and expect from us.
During fi scal year 2011, we continued to operate at a high level. We grew deposits by $108.9 million.
We generated $64.4 million of net income, excluding the contribution to the Foundation. We closed $930.0 million
of loans, including $92.8 million of loans from correspondents. Our asset quality continued to be strong this year
and improved over the previous year. Our non-performing loans decreased to 0.51% of total loans, from 0.62% at
the end of fi scal year 2010. Total non-performing assets decreased to 0.40% of total assets, from 0.49% at the end
of fi scal year 2010. Our effi ciency ratio, a measure of how well fi nancial institutions manage costs, stood at 47.6%,
excluding the contribution to the Foundation-- well below the industry average of 60.5%. Capitol Federal has
always been, and continues to be, well-capitalized as a core strategy.
The economic recovery that we, and many others, believed had started a year ago seems to have stalled, and
our national economy appears to be running at a low growth but stable level. As a result of uncertainty with our
recovery, uncertainty with the sovereign debt issues in Europe, Fed actions and policies to keep rates low and fi scal
uncertainty coming out of Washington, D.C., interest rates fell to new lows during this fi scal year. As a portfolio
lender and a retail deposit institution, this low interest rate environment presents us with unique challenges in the
long-term management of the Bank’s interest rate risk exposure. The Bank does not currently use derivatives to
manage its interest rate risk, rather, we manage it through portfolios of loans, investments, deposits and borrowings.
We have worked to maintain the long-term nature of our borrowings to offset the exposure of holding long-term
loans in portfolio, while shortening the average maturity of our investments to mitigate repricing risk in our deposit
portfolio and provide cash fl ows if interest rates increase. While this rate environment has put our net interest
margin under pressure--it decreased from 2.06% for fi scal year 2010 to 1.84% for fi scal year 2011--we believe
that we are well-positioned to mitigate the downward pressure we will likely experience in fi scal year 2012.
The Foundation, with the contribution following the completion of the second-step
conversion, now has approximately $88 million in assets. During fi scal year 2011,
the Foundation contributed over $2.9 million to local charities and has donated
more than $33.7 million since its inception in 1999.
For fi scal year 2012, your board, management and employees are prepared to
continue to provide the best service we can to our retail customers, while continuing
our focus on creating value for our stockholders. We are appreciative of the trust
you, our stockholders, have placed in us. We will continue to do what we have told
you we would do.
Sincerely,
John B. Dicus
John B. Dicus
Chairman, President and CEO
3
s
r
o
t
c
e
r
i
D
B.B. Andersen
Real Estate Developer
John B. Dicus
Chairman, President and CEO of Capitol Federal Financial, Inc.
and Capitol Federal Savings Bank
Morris J. Huey II
Retired Executive Vice President and Chief Lending Offi cer for
Capitol Federal Savings Bank
Jeffrey M. Johnson
President, Flint Hills National Golf Club
Michael T. McCoy, M.D.
Orthopedic surgeon in a Multi-Special Clinic and Co-Director of
the Joint Center of Stormont-Vail HealthCare
Jeffrey R. Thompson
Chief Executive Offi cer, Salina Vortex Corporation
Marilyn S. Ward
Retired Executive Director of ERC/Resource & Referral
FInAnCIAL HIGHLIGHTS
2011 2010 2009 2008 2007
(dollars in thousands)
$9,450,799
5,149,734
$8,487,130
5,168,202
$8,403,680
5,603,965
$8,055,249
5,320,780
$7,675,886
5,290,071
Total Assets
Loans Receivable, net
Securities
Available-for-Sale
Held-to-Maturity
Deposits
Borrowings
Equity
Net Income
Effi ciency Ratio
Equity to Assets
1,486,439
2,370,117
4,495,173
2,894,462
1,939,529
38,403
(2)
(2)
68.30%
20.52%
1,060,366
1,880,154
4,386,310
3,016,980
961,950
67,840
43.99%
11.33%
1,623,995
849,176
1,533,641
843,057
505,110
1,433,329
4,228,609
3,106,179
941,298
66,298
3,923,883
3,160,710
871,216
50,954
3,922,782
2,785,707
867,631
32,296
45.62%
11.20%
49.93%
10.82%
59.60%
11.30%
“
For fi scal year 2012, your board, management and employees are prepared to continue to provide
the best service we can to our retail customers, while continuing our focus on creating value for
our stockholders.
“
John B. Dicus
Chairman, President and CEO
R. Joe Aleshire
Larry K. Brubaker
Rick C. Jackson
Executive Vice President of Retail Operations for
Capitol Federal Savings Bank
Executive Vice President of Corporate Services for
Capitol Federal Savings Bank
Executive Vice President and Chief Lending Offi cer for
Capitol Federal Savings Bank
Kent G. Townsend
Executive Vice President, Chief Financial Offi cer
and Treasurer
Tara D. Van Houweling
First Vice President and Reporting Director
Mary R. Culver
Corporate Secretary
4
Special Counsel
Independent Auditors
Silver, Freedman & Taff, L.L.P. , 3299 K Street, N.W. , Suite 100, Washington, DC 20007
Deloitte & Touche L.L.P. , 1100 Walnut, Suite 3300, Kansas City, MO 64106
During fi scal year 2011, we continued to operate at a high level.
“
“
amount of dividends paid (in millions)
shares outstanding
(1)
basic earnings per share
(2) (3)
161.5
167.5
167.5
167.7
167.7
168.1
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
s
e
r
a
h
s
f
o
s
n
o
i
l
l
i
m
200
150
100
50
0
48.7
48.0
43.7
41.4
0.40
0.41
0.40
0.31
0.20
$0.60
$0.40
$0.20
$0.00
11 10 09 08 07
11 10 09 08 07
11 10 09 08 07
Calendar Year
Fiscal Year
Fiscal Year
(1)
In association with the corporate reorganization in December 2010, all publicly held shares of Capitol Federal Financial were exchanged for new shares of
Capitol Federal Financial, Inc. All share counts prior to the corporate reorganization have been revised to refl ect the exchange ratio, which was 2.2637.
(2) Excluding the $40.0 million ($26.0 million, net of income tax benefi t) contribution to Capitol Federal Foundation (the “Foundation”) in connection with the corporate
reorganization in December 2010, net income would have been $64.4 million and the effi ciency ratio would have been 47.65%. Basic earnings per share for the year,
in accordance with accounting principles generally accepted in the United States of America (“GAAP”), was $0.24. Non-GAAP basic earnings per share, which excludes
the contribution to the Foundation, was $0.40 and is being presented to allow for comparability. For additional information, see “Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Comparison of Results of Operations for the Years Ended September 30, 2011 and 2010 – Non-GAAP Presentation.”
(3) All earnings per share information prior to the corporate reorganization in December 2010 has been revised to refl ect the 2.2637 exchange ratio.
1
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Financial Information
Selected Consolidated Financial Data
Management’s Discussion and
Analysis of Financial Condition and
Results of Operations
Management’s Report on Internal Control
Over Financial Reporting
Reports of Independent Registered
Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of
September 30, 2011 and 2010
Consolidated Statements of Income for the Years Ended
September 30, 2011, 2010 and 2009
Consolidated Statements of Stockholders’ Equity for the Years Ended
September 30, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2011, 2010 and 2009
Notes to Consolidated Financial Statements for the Years Ended
September 30, 2011, 2010 and 2009
6
9
48
49
52
54
56
58
60
5
SELECTED CONSOLIDATED FINANCIAL DATA
The summary information presented below under “Selected Balance Sheet Data” and “Selected Operations Data” for,
and as of the end of, each of the years ended September 30 is derived from our audited consolidated financial
statements. The following information is only a summary and you should read it in conjunction with our consolidated
financial statements and notes beginning on page 52. All share information prior to the corporate reorganization in
December 2010 has been revised to reflect the 2.2637 exchange ratio.
2011
2008
(Dollars in thousands, except per share amounts)
2010
September 30,
2009
2007
Selected Balance Sheet Data:
Total assets
Loans receivable, net
Securities:
Available-for-sale (“AFS”)
Held-to-maturity (“HTM”)
Capital stock of Federal Home Loan Bank (“FHLB”)
Deposits
Advances from FHLB
Other borrowings
Stockholders’ equity
$ 9,450,799 $ 8,487,130 $ 8,403,680 $ 8,055,249
5,149,734 5,168,202 5,603,965 5,320,780
$ 7,675,886
5,290,071
1,486,439 1,060,366 1,623,995 1,533,641 505,110
2,370,117 1,880,154 849,176 843,057
1,433,329
126,877 120,866 133,064 124,406 139,661
3,922,782
4,495,173 4,386,310 4,228,609 3,923,883
2,379,462 2,348,371 2,392,570 2,447,129
2,732,183
515,000 668,609 713,609 713,581 53,524
1,939,529 961,950 941,298 871,216 867,631
Year Ended September 30,
2011
(Dollars and counts in thousands, except per share amounts)
2009
2008
2010
2007
$ 346,865 $ 374,051 $ 412,786 $ 410,806 $ 411,550
178,131 204,486 236,144 276,638 305,110
168,734 169,565 176,642 134,168 106,440
4,060 8,881 6,391 2,051 (225)
164,674 160,684 170,251 132,117 106,665
15,509 17,789 18,023 17,805 16,120
9,486 16,622 10,571 12,222 7,846
24,995 34,411 28,594 30,027 23,966
132,317 89,730 93,621 81,989 77,725
57,352 105,365 105,224 80,155 52,906
18,949 37,525 38,926 29,201 20,610
38,403 67,840 66,298 50,954 32,296
$ 0.24(1)
162,625 165,862 165,576
$ 0.41 $ 0.40 $ 0.31 $ 0.20
164,908
$ 0.41 $ 0.40 $ 0.31 $ 0.20
165,183
$ 0.24(1)
162,633 165,899 165,721
165,112
165,279
Selected Operations Data:
Total interest and dividend income
Total interest expense
Net interest and dividend income
Provision (recovery) for credit losses
Net interest and dividend income after provision
for credit losses
Retail fees and charges
Other income
Total other income
Total other expenses
Income before income tax expense
Income tax expense
Net income
Basic earnings per share
Average shares outstanding
Diluted earnings per share
Average diluted shares outstanding
6
Selected Performance and Financial Ratios
and Other Data:
Performance Ratios:
Return on average assets
Return on average equity
Dividends paid per public share (2)
Dividend payout ratio
Ratio of operating expense to
average total assets
Efficiency ratio
Ratio of average interest-earning assets
to average interest-bearing liabilities
Interest rate spread information:
Average during period
End of period
Net interest margin
Asset Quality Ratios:
Non-performing assets to total assets
Non-performing loans to total loans
Allowance for credit losses (“ACL”) to
non-performing loans
ACL to loans receivable, net
Capital Ratios:
Equity to total assets at end of period
Average equity to average assets
Regulatory Capital Ratios of Capitol
Federal Savings Bank (the “Bank”)
Tangible equity
Tier 1 (core) capital
Tier 1 (core) risk-based capital
Total risk-based capital
Other Data:
Number of traditional offices
Number of in-store offices
2011
2010
2009
2008
2007
0.41%(1)
2.20(1)
$ 1.63
390.88%
1.40(1)
68.30(1)
0.80 %
7.09
0.81 %
7.27
0.65 %
5.86
0.41 %
3.72
$ 2.29
$ 2.11
$ 2.00
$ 2.09
71.34 %
66.47 %
81.30 %
133.14%
1.06
43.99
1.14
45.62
1.04
49.93
0.98
59.60
1.22x
1.11 x
1.12 x
1.12 x
1.12 x
1.42%
1.60
1.84
0.40
0.51
58.34
0.30
20.52
18.50
15.1
15.1
37.9
38.3
35
10
1.78 %
1.76
2.06
1.86 %
1.89
2.20
1.35 %
1.70
1.75
0.93 %
0.89
1.36
0.49
0.62
46.60
0.29
11.33
11.30
9.8
9.8
23.5
23.8
35
11
0.46
0.55
32.83
0.18
11.20
11.08
10.0
10.0
23.2
23.3
33
9
0.23
0.26
42.37
0.11
10.82
11.05
10.0
10.0
23.1
23.0
30
9
0.12
0.14
56.87
0.08
11.30
10.91
10.3
10.3
22.9
22.8
29
9
(1) Excluding the $40.0 million ($26.0 million, net of income tax benefit) contribution to the Capitol Federal Foundation in
connection with the corporate reorganization in December 2010, basic and diluted earnings per share would have been $0.40,
return on average assets would have been 0.68%, return on average equity would have been 3.69%, ratio of operating
expense to average total assets would have been 0.98%, and the efficiency ratio would have been 47.65%. This adjusted
financial data is not presented in accordance with accounting principles generally accepted in the United States of America
(“GAAP”). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Comparison of
Results of Operations for the Years Ended September 30, 2011 and 2010 – Non-GAAP Presentation.”
(2)
For fiscal years 2007 through 2010, Capitol Federal Savings Bank MHC (“MHC”) owned a majority of the outstanding shares
of Capitol Federal Financial common stock and waived its right to receive dividends paid on the common stock with the
exception of the $0.50 per share dividend paid on 500,000 shares in February 2010. Public shares exclude shares held by
MHC, as well as unallocated shares held in the Capitol Federal Financial Employee Stock Ownership Plan (“ESOP”). In
December 2010, Capitol Federal Financial completed its conversion from a mutual holding company form of organization to a
stock form of organization and all shares owned by MHC were sold in a public offering. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Executive Summary” for additional information.
7
Sedgwick County 7 branches
Saline County 1 branch
Butler County 1 branch
Riley County 2 branches
Lyon County 1 branch
Branch Locations by County
Shawnee County 7 branches
Douglas County 4 branches
Platte County 1 branch
Clay County 1 branch
Wyandotte County 1 branch
Johnson County 19 branches
S
A
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N
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K
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O
S
S
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Home Office, Topeka, KS
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General Overview
Capitol Federal Financial, Inc. (the “Company”) is the holding company and the sole shareholder of Capitol
Federal Savings Bank (the “Bank”). The Company’s common stock is traded on the NASDAQ Global Select Market
under the symbol “CFFN.” The Bank comprises almost all of the consolidated assets and liabilities of the Company
and the Company is dependent primarily upon the performance of the Bank for the results of its operations. Because
of this relationship, references to management actions, strategies and results of actions apply to both the Bank and
the Company.
Private Securities Litigation Reform Act—Safe Harbor Statement
We may from time to time make written or oral “forward-looking statements”, including statements contained in
our filings with the Securities and Exchange Commission (“SEC”). These forward-looking statements may be
included in this annual report to stockholders and in other communications by the Company, which are made in good
faith by us pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations,
anticipations, estimates and intentions that are subject to significant risks and uncertainties, and are subject to
change based on various factors, some of which are beyond our control. The words “may”, “could”, “should”, “would”,
“believe”, “anticipate”, “estimate”, “expect”, “intend”, “plan” and similar expressions are intended to identify forward-
looking statements. The following factors, among others, could cause our future results to differ materially from the
plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in the forward-looking
statements:
our ability to continue to maintain overhead costs at reasonable levels;
our ability to continue to originate a significant volume of one- to four-family mortgage loans in our market
areas or to purchase loans through correspondents;
our ability to acquire funds from or invest funds in wholesale or secondary markets;
the future earnings and capital levels of the Bank and the continued non-objection by our primary federal
banking regulators, to the extent required, to distribute capital from the Bank to the Company, which could
affect the ability of the Company to pay dividends in accordance with its dividend policies;
fluctuations in deposit flows, loan demand, and/or real estate values, as well as unemployment levels, which
may adversely affect our business;
the credit risks of lending and investing activities, including changes in the level and direction of loan
delinquencies and write-offs, changes in property values, and changes in estimates of the adequacy of the
ACL;
results of examinations of the Bank and the Company by their respective primary federal banking regulators,
including the possibility that the regulators may, among other things, require us to increase our ACL;
the strength of the U.S. economy in general and the strength of the local economies in which we conduct
operations;
the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of
the Board of Governors of the Federal Reserve System (“FRB”);
the effects of, and changes in, foreign and military policies of the United States government;
inflation, interest rate, market and monetary fluctuations;
our ability to access cost-effective funding;
the timely development and acceptance of our new products and services and the perceived overall value of
these products and services by users, including the features, pricing and quality compared to competitors’
products and services;
the willingness of users to substitute competitors’ products and services for our products and services;
our success in gaining regulatory approval of our products and services and branching locations, when
required;
the impact of changes in financial services laws and regulations, including laws concerning taxes, banking,
securities and insurance and the impact of other governmental initiatives affecting the financial services
industry;
implementing business initiatives may be more difficult or expensive than anticipated;
technological changes;
acquisitions and dispositions;
changes in consumer spending and saving habits; and
our success at managing the risks involved in our business.
9
This list of important factors is not exclusive. We do not undertake to update any forward-looking statement,
whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank.
The following discussion is intended to assist in understanding the financial condition and results of operations
of the Company. The discussion includes comments relating to the Bank, since the Bank is wholly owned by the
Company and comprises the majority of assets and is the principal source of income for the Company.
Executive Summary
The following summary should be read in conjunction with our Management’s Discussion and Analysis of
Financial Condition and Results of Operations in its entirety.
In December 2010, Capitol Federal Financial completed its conversion from a mutual holding company form of
organization to a stock form of organization (the “corporate reorganization”). Capitol Federal Financial, which owned
100% of the Bank, was succeeded by Capitol Federal Financial, Inc, a new Maryland corporation. As part of the
corporate reorganization, MHC’s ownership interest of Capitol Federal Financial was sold in a public stock offering.
Capitol Federal Financial, Inc. sold 118,150,000 shares of common stock at $10.00 per share in the stock offering.
The publicly held shares of Capitol Federal Financial were exchanged for new shares of common stock of Capitol
Federal Financial, Inc. The exchange ratio was 2.2637 and ensured that immediately after the corporate
reorganization the public stockholders of Capitol Federal Financial owned the same aggregate percentage of Capitol
Federal Financial, Inc. common stock that they owned of Capitol Federal Financial common stock immediately prior
to that time. In lieu of fractional shares, Capitol Federal Financial stockholders were paid in cash. Gross proceeds
from the offering were $1.18 billion and related offering expenses were $46.7 million. The net proceeds from the
stock offering were $1.13 billion, of which 50%, or $567.4 million, was contributed to the Bank as a capital
contribution, as required by Office of the Comptroller of the Currency (the “OCC”) regulations. The other 50%, or
$567.4 million, remained at Capitol Federal Financial, Inc., of which $40.0 million was contributed to the Bank’s
charitable foundation, Capitol Federal Foundation (the “Foundation”), and $47.3 million was loaned to the ESOP for
its purchase of Capitol Federal Financial, Inc. shares in the stock offering. In April 2011, the Company redeemed the
outstanding Junior Subordinated Deferrable Interest Debentures (the “Debentures”) of $53.6 million using a portion of
the offering proceeds from the corporate reorganization.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was
signed into law. The Dodd-Frank Act, among other things, required the Office of Thrift Supervision (the “OTS”) to be
merged into the OCC. On July 21, 2011, the OCC assumed all functions and authority from the OTS relating to
federally charted savings banks, and the FRB assumed all functions and authority from the OTS relating to savings
and loan holding companies. Accordingly, effective July 21, 2011, the Bank became regulated by the OCC and the
Company was regulated by the FRB. Prior to that date, the Bank and Company were regulated by the OTS. All
references to the OTS in this filing on or after that date will refer to the successor regulator (i.e., the OCC for the Bank
and the FRB for the Company), as appropriate.
We have been, and intend to continue to be, a community-oriented financial institution offering a variety of
financial services to meet the needs of the communities we serve. We generally attract retail deposits from the
general public and invest those funds primarily in permanent loans secured by first mortgages on owner-occupied,
one- to four-family residences. To a much lesser extent, we also originate consumer loans, loans secured by first
mortgages on non-owner-occupied one- to four-family residences, multi-family and commercial real estate loans, and
construction loans. While our primary business is the origination of one- to four-family mortgage loans funded
through retail deposits, we also purchase whole one- to four-family mortgage loans from correspondent and
nationwide lenders, and invest in certain investment securities and mortgage-backed securities (“MBS”) funded
through retail deposits, advances from FHLB, and repurchase agreements. The Company is significantly affected by
prevailing economic conditions including federal monetary and fiscal policies and federal regulation of financial
institutions. Retail deposit balances are influenced by a number of factors including interest rates paid on competing
personal investment products, the level of personal income, and the personal rate of savings within our market areas.
Lending activities are influenced by the demand for housing and other loans, changing loan underwriting guidelines,
as well as interest rate pricing competition from other lending institutions. The primary sources of funds for lending
activities include deposits, loan repayments, investment income, borrowings, and funds provided from operations.
The Company’s results of operations are primarily dependent on net interest income, which is the difference
between the interest earned on loans, MBS, investment securities and cash, and the interest paid on deposits and
borrowings. On a weekly basis, management reviews deposit flows, loan demand, cash levels, and changes in
several market rates to assess all pricing strategies. The Bank generally prices its first mortgage loan products
based on secondary market and competitor pricing. Generally, deposit pricing is based upon a survey of competitors
in the Bank’s market areas, and the need to attract funding and retain maturing deposits. The majority of our loans
are fixed-rate products with maturities up to 30 years, while the majority of our deposits have maturity or repricing
dates of less than two years.
The Federal Open Market Committee of the Federal Reserve (the “FOMC”) noted in their November 2011
meeting minutes that the economic recovery was continuing at a moderate pace, but was hampered by a weak job
market, a high unemployment rate, and persistent depression in the housing sector. The FOMC continued to
maintain the target range for federal funds rate at zero to 25 basis points, which has been the range since December
10
2008. Additionally, the FOMC committed to maintain its existing policy of reinvesting principal payments from
securities holdings, and intends to extend the average maturity of its securities holdings. These actions are intended
to lower long-term rates and increase economic activity. These actions, along with previous FOMC actions, have
effectively increased the amount of excess reserves in the banking system, which is intended to reduce long-term
interest rates and increase liquidity in an effort to stimulate borrowing and investment. The FOMC has also indicated
that other methods of quantitative easing are a possibility, while simultaneously revealing a potential exit strategy
from the accommodative monetary policies should the economic outlook and financial developments warrant it.
The historically low interest rate environment during fiscal year 2011 and the past two fiscal years has spurred
an increased demand for our loan endorsement program and mortgage refinances. Our loan endorsement program
allows existing loan customers, whose loans have not been sold to third parties and who have not been delinquent on
their contractual loan payments for the previous 12 months, the opportunity to modify, for a fee, their original loan
terms to current loan terms being offered. During fiscal year 2011, the Bank endorsed $965.1 million loans, with a
weighted average rate decrease of 101 basis points, compared to $545.1 million during fiscal year 2010, with a
weighted average rate decrease of 87 basis points. Additionally, the Bank refinanced $292.8 million of its customers’
loans during fiscal year 2011, compared to $153.6 million during fiscal year 2010.
Total assets increased $963.7 million, from $8.49 billion at September 30, 2010 to $9.45 billion at September
30, 2011, due primarily to the stock offering proceeds from the corporate reorganization in December 2010, which
were primarily used to purchase securities. Capitol Federal Financial, Inc., the holding company, used the net stock
offering proceeds to purchase laddered short-term securities in order to provide cash flows that can be used to pay
dividends, repurchase stock when permitted by federal banking regulations, reinvest into higher yielding assets if
interest rates rise, or pursue other corporate strategies, as deemed appropriate. The yields on these securities are
less than the yields on the Bank’s current investment portfolio due to the short-term nature of the securities. The net
stock offering proceeds received by the Bank were primarily used to purchase securities according to the Bank’s
current investment strategy. The intent of the Bank’s investment portfolio is to create a stream of cash flows that can
be redeployed into other assets as the Bank grows the loan portfolio, or reinvested into higher yielding assets should
interest rates rise. These securities have a lower interest rate risk profile than the Bank’s long-term fixed-rate
mortgage portfolio and were purchased to help shorten the overall duration of the Bank’s total assets.
The one- to four-family loan portfolio remained relatively flat, at $4.92 billion for both September 30, 2011 and
2010. During fiscal year 2011, the Bank expanded its network of correspondent lenders and also purchased $89.2
million from a nationwide lender; however, those activities were offset by an increase in refinancing activity due to low
market rates, strong competition for high quality loans, as well as weak loan demand due to the slow economic
recovery.
The principal balance of loans 30 to 89 days delinquent increased $2.1 million, from $24.7 million at September
30, 2010 to $26.8 million at September 30, 2011. Non-performing loans decreased $5.5 million, from $32.0 million at
September 30, 2010 to $26.5 million at September 30, 2011. The balance of loans 30 to 89 days delinquent and
non-performing loans continue to remain at historically high levels for the Bank due to persistently elevated levels of
unemployment coupled with declines in real estate activity and property values, particularly in some of the states in
which we have purchased loans. Our ratio of non-performing loans to total loans decreased from 0.62% at
September 30, 2010 to 0.51% at September 30, 2011. Our ratio of non-performing assets to total assets decreased
from 0.49% at September 30, 2010 to 0.40% at September 30, 2011.
Total liabilities decreased $13.9 million, from $7.53 billion at September 30, 2010 to $7.51 billion at September
30, 2011, due primarily to a decrease of $153.6 million in other borrowings, partially offset by an increase in deposits
of $108.9 million and an increase in FHLB advances of $31.1 million. The decrease in other borrowings was due to
the repayment of the Debentures of $53.6 million and the maturity of $100.0 million of repurchase agreements that
were not replaced. The increase in deposits was primarily in the money market and checking portfolios.
Stockholders’ equity increased $977.6 million, from $962.0 million at September 30, 2010 to $1.94 billion at
September 30, 2011. The increase was due primarily to the net stock offering proceeds of $1.13 billion from the
corporate reorganization in December 2010 and net income during the fiscal year, partially offset by dividends paid of
$150.1 million.
Net income for fiscal year 2011 was $38.4 million, compared to $67.8 million for fiscal year 2010. The $29.4
million, or 43.4%, decrease for the current year was due primarily to the $40.0 million ($26.0 million, net of income tax
benefit) contribution to the Foundation in connection with the corporate reorganization. Additionally, other income
decreased $9.4 million, or 27.4%, from $34.4 million for the prior year to $25.0 million for the current year. These
reductions to income were partially offset by a $4.8 million decrease in the provision for credit losses between fiscal
years. Interest income for fiscal year 2011 decreased by $27.2 million, or 7.3%, compared to fiscal year 2010, but
was almost entirely offset by a decrease in interest expense of $26.4 million, or 12.9%, between fiscal years. The net
interest margin decreased 22 basis points, from 2.06% for fiscal year 2010 to 1.84% for fiscal year 2011, largely due
to the decrease in interest income on loans receivable.
The Bank has two branches scheduled to open in fiscal year 2012 in our Kansas City market area. An in-store
branch in the Kansas City market area closed in late fiscal year 2011 due to the opening of a traditional branch
nearby. Management continues to consider expansion opportunities in all of our market areas.
11
Critical Accounting Policies
Our most critical accounting policies are the methodologies used to determine the ACL and fair value
measurements. These policies are important to the presentation of our financial condition and results of operations,
involve a high degree of complexity, and require management to make difficult and subjective judgments that may
require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and
estimates could cause reported results to differ materially. These critical accounting policies and their application are
reviewed at least annually by our audit committee. The following is a description of our critical accounting policies
and an explanation of the methods and assumptions underlying their application.
Allowance for Credit Losses. Management maintains an ACL to absorb known and inherent losses in the
loan portfolio based upon ongoing quarterly assessments of the loan portfolio. Our methodology for assessing the
appropriateness of the ACL consists of a formula analysis for general valuation allowances and specific valuation
allowances (“SVAs”) for identified problem and impaired loans. The ACL is maintained through provisions for credit
losses which are charged to income.
The methodology for determining the ACL is considered a critical accounting policy by management because of
the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the
economic environment that could result in changes to the amount of the recorded ACL. Additionally, bank regulators
have the ability 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. Although management
believes that the Bank has established and maintained the ACL at appropriate levels, additions may be necessary if
economic and other conditions continue or worsen substantially from the current operating environment, and/or if
bank regulators require the Bank to increase the ACL and/or recognize additional charge-offs.
Our primary lending emphasis is the origination and purchase of one- to four-family mortgage loans on
residential properties, and, to a lesser extent, home equity and second mortgages on one- to four-family residential
properties, resulting in a loan concentration in residential first mortgage loans. As a result of our lending practices,
we also have a concentration of loans secured by real property located in Kansas and Missouri. At September 30,
2011, approximately 75% and 15% of the Bank’s loans were secured by real property located in Kansas and
Missouri, respectively. We believe the primary risks inherent in our one- to four-family and consumer portfolios are
the continued weakened economic conditions, continued high levels of unemployment or underemployment, and a
continuing decline in real estate values. Any one or a combination of these events may adversely affect borrowers’
ability or desire to repay their loans, resulting in increased delinquencies, non-performing assets, loan losses, and
future levels of loan loss provisions. Although the multi-family and commercial loan portfolio also shares the risk of
continued weakened economic conditions, the primary risks for the portfolio include the ability of the borrower to
sustain sufficient cash flows from leases and to control expenses to satisfy their contractual debt payments, or the
ability to utilize personal and/or business resources to pay their contractual debt payments if the cash flows are not
sufficient.
Management considers quantitative and qualitative factors when determining the appropriateness of the
ACL. Such factors include the trend and composition of delinquent and non-performing loans, results of foreclosed
property and short sale transactions (historical losses and net charge-offs), increases in and establishment of SVAs,
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 our loan
portfolio is primarily concentrated in one- to four-family real estate, we monitor one- to four-family real estate market
value trends in our local market areas and geographic sections of the U.S. by reference to various industry and
market reports, economic releases and surveys, and our general and specific knowledge of the real estate markets in
which we lend, in order to determine what impact, if any, such trends may have on the level of our ACL. In addition,
the adequacy of the Company’s ACL is reviewed during bank regulatory examinations. We consider any comments
from our regulator when assessing the appropriateness of our ACL. Reviewing these quantitative and qualitative
factors assists management in evaluating the overall reasonableness of the ACL and whether changes need to be
made to our assumptions. We seek to apply ACL methodology in a consistent manner; however, the methodology
can be modified in response to changing conditions.
Our loan portfolio is segregated into categories in the formula analysis based on certain risk characteristics such
as loan type (one- to four-family, multi-family, etc.), interest payments (fixed-rate, adjustable-rate), loan source
(originated or purchased), loan-to-value (“LTV”) ratios, borrower’s credit score and payment status (i.e. current or
number of days delinquent). Consumer loans, such as second mortgages and home equity lines of credit, 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 to calculate a combined LTV ratio. All loans that are not impaired are included in a formula analysis.
Impaired loans are defined as non-accrual loans, loans classified as substandard, loans with SVAs, and troubled debt
restructurings (“TDRs”) that have not yet performed under the restructured 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. Quantitative loss factors are
applied to each loan category in the formula analysis based on the historical net loss experience and current SVAs,
adjusted for such factors as loan delinquency trends, for each respective loan category. Additionally, qualitative loss
factors that management believes impact the collectability of the loan portfolio as of the evaluation date are applied to
12
certain loan categories. Such qualitative factors include changes in collateral values, unemployment rates, credit
scores and delinquent loan trends. Loss factors increase as loans become classified or delinquent.
The qualitative and quantitative factors applied in the formula analysis are reviewed quarterly by management to
assess whether the factors adequately cover probable and estimable losses inherent in the loan portfolio. Our ACL
methodology permits modifications to the formula analysis in the event that, in management’s judgment, significant
factors which affect the collectability of the portfolio or any category of the loan portfolio, as of the evaluation date, are
not reflected in the current formula analysis. Management’s evaluation of the qualitative factors with respect to these
conditions is subject to a higher degree of uncertainty because they are not identified with a specific problem loan or
portfolio segments. There were no significant modifications to the general valuation allowance model during fiscal
year 2011.
SVAs are established in connection with individual loan reviews of specifically identified problem and impaired
loans. Since the majority of our loan portfolio is composed of one- to four-family real estate, determining the
estimated fair value of the underlying collateral is important in evaluating the amount of SVAs required for problem
and impaired loans. If the estimated fair value of the collateral, less estimated costs to sell, is less than the current
loan balance, an SVA is established for the difference. Generally, once a purchased loan is 90 days delinquent new
collateral values are obtained through automated valuation models (“AVMs”) or broker price opinions (“BPOs”). An
updated AVM or BPO is requested every 6 months while the loan is greater than 90 days delinquent. Due to the
relatively stable home values in Kansas and Missouri, we do not obtain new collateral values on originated loans until
they enter foreclosure. For originated one- to four-family loans and home equity loans that are impaired and the most
recent appraisal is more than one year old, management estimates the fair value of the collateral using the most
recently published Federal Housing Finance Agency (“FHFA”) index. For those loans where the FHFA fair value
estimate results in a value less than the outstanding loan balance, an updated appraisal is obtained and is used to
establish the SVA. If the Bank holds the first and second mortgage, both loans are combined when evaluating the
need for an SVA.
Loans with an outstanding balance of $1.5 million or more are individually reviewed annually if secured by
property in one of the following categories: multi-family (five or more units) property, unimproved land, other
improved commercial property, acquisition and development of land projects, developed building lots, office building,
single-use building, or retail building. SVAs are established if the individual loan review determines a quantifiable
impairment.
Fair Value Measurements. The Company uses fair value measurements to record fair value adjustments to
certain assets and to determine fair value disclosures, per the provisions of Accounting Standards Codification
(“ASC”) 820, Fair Value Measurements and Disclosures. In accordance with ASC 820, the Company groups its
assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the
underlying assumptions used to determine fair value, with Level 1 (quoted prices for identical assets in an active
market) being considered the most reliable, and Level 3 having the most unobservable inputs and therefore being
considered the least reliable. The Company bases its fair values on the price that would be received to sell an asset
in an orderly transaction between market participants at the measurement date. As required by ASC 820, the
Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair
value. The Company did not have any liabilities that were measured at fair value at September 30, 2011.
The Company’s AFS securities are our most significant assets measured at fair value on a recurring
basis. Changes in the fair value of AFS securities are recorded, net of tax, in accumulated other comprehensive
income, which is a component of stockholders’ equity. As part of determining fair value, the Company obtains fair
values for all AFS securities from independent nationally recognized pricing services. Various modeling techniques
are used to determine pricing for the Company’s securities, including option pricing and discounted cash flow models.
The inputs to these models may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads,
benchmark securities, bids, offers and reference data. There are some securities in the AFS portfolio that have
significant unobservable inputs requiring the independent pricing services to use some judgment in pricing the related
securities. These AFS securities are classified as Level 3. All other AFS securities are classified as Level 2.
Loans receivable and real estate owned (“REO”) are the Company’s significant assets measured at fair value on
a non-recurring basis. These non-recurring fair value adjustments involve the application of lower-of-cost-or-fair
value accounting or write-downs of individual assets. Fair value for these assets is estimated using current
appraisals, AVMs, BPOs, or listing prices. Fair values may be adjusted by management to reflect current economic
and market conditions and, as such, are classified as Level 3.
Recent Accounting Pronouncements. For a discussion of Recent Accounting Pronouncements, see “Notes
to Financial Statements - Note 1 - Summary of Significant Accounting Policies.”
13
Management Strategy
We are a retail-oriented financial institution dedicated to serving the needs of customers in our market areas.
Our commitment is to provide qualified borrowers the broadest possible access to home ownership through our
mortgage lending programs and to offer a complete set of personal banking products and services to our
customers. We strive to enhance stockholder value while maintaining a strong capital position. To achieve these
goals, we focus on the following strategies:
Residential Portfolio Lending. We are one of the leading originators of one- to four-family loans in the state of
Kansas. We originate these loans primarily for our own portfolio, and we service the loans we originate. We
originate a small amount of loans held-for-sale (“LHFS”). We also purchase one- to four-family loans from
correspondent and nationwide lenders. We have increased the number of correspondent lenders during fiscal
year 2011 to provide an infrastructure to support growth in the residential loan portfolio. We offer both fixed-
and adjustable-rate products with various terms to maturity and pricing options. We also offer government-
sponsored programs directed towards first time home buyers, low or moderate income borrowers, or borrowers
with certain credit risk concerns. We maintain strong relationships with local real estate agents to attract
mortgage loan business. We rely on our marketing efforts and reputation to attract mortgage business from
walk-in customers, customers that apply online, and existing customers.
Retail Financial Services. We offer a wide array of deposit products and retail services for our customers.
These products include checking, savings, money market, certificates of deposit, and retirement accounts.
These products and services are provided through a branch network of 45 locations, including traditional
branches and retail in-store locations, our call center which operates on extended hours, mobile banking,
telephone banking and bill payment services, and online banking and bill payment services.
Cost Control. We generally are very effective at controlling our costs of operations. By using technology, we
are able to centralize our lending and deposit support functions for efficient processing. We have located our
branches to serve a broad range of customers through relatively few branch locations. Our average deposit
base per traditional branch at September 30, 2011 was approximately $117.1 million. This large average
deposit base per branch helps to control costs. Our one- to four-family lending strategy and our effective
management of credit risk allows us to service a large portfolio of loans at efficient levels because it costs less
to service a portfolio of performing loans.
Asset Quality. We utilize underwriting standards for our lending products that are designed to limit our
exposure to credit risk. We require complete documentation for both originated and purchased loans, and make
credit decisions based on our assessment of the borrower’s ability to repay the loan in accordance with its
terms. See additional discussion of asset quality in Part I, Item 1 of the Annual Report on Form 10-K.
Capital Position. Our policy has always been to protect the safety and soundness of the Bank through
conservative credit and operational risk management, balance sheet strength, and sound operations. The end
result of these activities is a capital ratio in excess of the well-capitalized standards set by the OCC. We believe
that maintaining a strong capital position safeguards the long-term interests of the Bank, the Company and our
stockholders.
Stockholder Value. We strive to enhance stockholder value while maintaining a strong capital position. One
way that we continue to provide returns to stockholders is through our dividend payments. Total dividends
declared and paid during fiscal year 2011 were $150.1 million. The $150.1 million consisted of cash dividends
of $17.0 million paid prior to the corporate reorganization, and $133.1 million paid since the corporate
reorganization. The Company’s cash dividend payout policy is reviewed quarterly by management and the
Board of Directors, and the ability to pay dividends under the policy depends upon a number of factors,
including the Company’s financial condition and results of operations, the Bank’s regulatory capital
requirements, regulatory limitations on the Bank’s ability to make capital distributions to the Company, and the
amount of cash at the holding company. It is the Board of Directors’ intentions to continue to pay regular
quarterly and special cash dividends each year. For the first two fiscal years after our corporate reorganization
we intend to pay 100% of our net income (exclusive of our contribution to the Foundation) in a combination of
quarterly and special year-end dividends.
Interest Rate Risk Management. Changes in interest rates are our primary market risk as our balance sheet is
almost entirely comprised of interest-earning assets and interest-bearing liabilities. As such, fluctuations in
interest rates have a significant impact not only upon our net income but also upon the cash flows related to
those assets and liabilities and the market value of our assets and liabilities. In order to maintain acceptable
levels of net interest income in varying interest rate environments, we actively manage our interest rate risk and
assume a moderate amount of interest rate risk consistent with board policies.
14
Quantitative and Qualitative Disclosure about Market Risk
Asset and Liability Management and Market Risk
The risk associated with changes in interest rates on the earnings of the Bank and the market value of its
financial assets and liabilities is known as interest rate risk. Interest rate risk is our most significant market risk and
our ability to adapt to changes in interest rates is known as interest rate risk management. The rates of interest the
Bank earns on assets and pays on liabilities generally are established contractually for a period of time. Fluctuations
in interest rates have a significant impact not only upon our net income, but also upon the cash flows of those assets
and liabilities and the market value of our assets and liabilities. Our results of operations, like those of other financial
institutions, are impacted by these changes in interest rates and the interest rate sensitivity of our interest-earning
assets and interest-bearing liabilities. The analysis presented in the tables below reflects the level of market risk at
the Bank and does not include the assets of the Company. Assets of the Company are not managed in accordance
with the interest rate risk objectives of the Bank. A general discussion of the impact of the Company assets is
included for each table.
The general objective of our interest rate risk management program is to determine and manage an appropriate
level of interest rate risk while maximizing net interest income, in a manner consistent with our policy to reduce, to the
extent possible, the exposure of our net interest income to changes in market interest rates. The Asset and Liability
Committee (“ALCO”) regularly reviews the interest rate risk exposure of the Bank by forecasting the impact of
hypothetical, alternative interest rate environments on net interest income and market value of portfolio equity
(“MVPE”) at various dates. The MVPE is defined as the net of the present value of the cash flows of existing assets,
liabilities and off-balance sheet instruments. The present values are determined based upon market conditions as of
the date of the analysis as well as in alternative interest rate environments providing potential changes in MVPE
under those alternative interest rate environments. Net interest income is projected in the same alternative interest
rate environments as well, both with a static balance sheet and with management strategies considered. MVPE and
net interest income analyses are also conducted to estimate our sensitivity to rates for future time horizons based
upon market conditions as of the date of the analysis. In addition to the interest rate environments presented below,
management also reviews the impact of non-parallel rate shock scenarios on a quarterly basis. These scenarios
consist of flattening and steepening the yield curve by changing short-term and long-term interest rates independent
of each other, and simulating cash flows and valuations as a result of the simulated changes in rates. This analysis
helps management quantify the Bank’s exposure to changes in the shape of the yield curve.
Based upon management’s recommendations, the Board of Directors sets the asset and liability management
policies of the Bank. These policies are implemented by ALCO. The purpose of ALCO is to communicate,
coordinate and control asset and liability management consistent with board-approved policies. ALCO’s objectives
are to manage assets and funding sources to produce the highest profitability balanced against liquidity, capital
adequacy and risk management objectives. At each monthly meeting, ALCO recommends appropriate strategy
changes. The Chief Financial Officer, or his designee, is responsible for executing, reviewing and reporting on the
results of the policy recommendations and strategies to the Board of Directors, generally on a monthly basis.
The ability to maximize net interest income is dependent largely upon the achievement of a positive interest rate
spread that can be sustained despite fluctuations in prevailing interest rates. The asset and liability repricing gap is a
measure of the difference between the amount of interest-earning assets and interest-bearing liabilities which either
reprice or mature within a given period of time. The difference provides an indication of the extent to which an
institution's interest rate spread will be affected by changes in interest rates. A gap is considered positive when the
amount of interest-earning assets exceeds the amount of interest-bearing liabilities maturing or repricing during the
same period. A gap is considered negative when the amount of interest-bearing liabilities exceeds the amount of
interest-earning assets maturing or repricing during the same period. Generally, during a period of rising interest
rates, a negative gap within shorter repricing periods adversely affects net interest income, while a positive gap within
shorter repricing periods results in an increase in net interest income. During a period of falling interest rates, the
opposite would generally be true.
Management recognizes that dramatic changes in interest rates within a short period of time can cause an
increase in our interest rate risk relative to the balance sheet. At times, ALCO may recommend increasing our
interest rate risk exposure in an effort to increase our net interest margin, while maintaining compliance with
established board limits for interest rate risk sensitivity. Management believes that maintaining and improving
earnings is the best way to preserve a strong capital position. Management recognizes the need, in certain interest
rate environments, to limit the Bank's exposure to changing interest rates and may implement strategies to reduce
our interest rate risk which could, as a result, reduce earnings in the short-term. To minimize the potential for
adverse effects of material and prolonged changes in interest rates on our results of operations, we have adopted
asset and liability management policies to better balance the maturities and repricing terms of our interest-earning
assets and interest-bearing liabilities based on existing local and national interest rates.
15
During periods of economic uncertainty, rising interest rates, or extreme competition for loans, the Bank’s ability
to originate or purchase loans may be adversely affected. In such situations, the Bank alternatively may invest its
funds into investment securities or MBS. These investments may have rates of interest lower than rates we could
receive on loans, if we were able to originate or purchase them, potentially reducing the Bank’s interest income.
At September 30, 2011, the Bank’s one-year gap between interest-earning assets and interest-bearing liabilities
was $1.69 billion, or 18.60% of total assets. Interest-earning assets repricing to lower rates at a faster pace than
interest-bearing liabilities will generally result in net interest margin compression. Should interest rates rise, the
amount of interest-earning assets that are expected to reprice will likely decrease as borrowers and agency debt
issuers will have less economic incentive to lower their cost. The amount of interest-bearing liabilities expected to
reprice in a given period, however, is not usually impacted by changes in market interest rates because the maturities
within the Bank’s borrowings and certificate of deposit portfolios are contractual and generally cannot be terminated
early. If rates were to increase 200 basis points, the Bank’s one-year gap would be $(127.3) million, or (1.40)% of
total assets. The majority of interest-earning assets anticipated to reprice in fiscal year 2012 are mortgages and
MBS, both of which may prepay and/or be refinanced or endorsed. As interest rates decrease, borrowers have an
economic incentive to refinance or endorse loans to lower market interest rates. This significantly increases the
amount of cash flows anticipated to reprice to lower market interest rates during fiscal year 2012, as evidenced by the
volume of mortgages that were endorsed and refinanced during fiscal year 2011 as a result of the decrease in market
interest rates. In addition, cash flows from the Bank’s callable investment securities are anticipated to increase
during fiscal year 2012 as the issuers of these securities will likely exercise their option to call the securities in order
to issue new debt securities at lower market rates. The decrease in the net interest margin due to interest-earning
assets repricing will likely be partially offset by a decrease in our cost of funds.
The shape of the yield curve also has an impact on net interest income and, therefore, the Bank’s net interest
margin. Historically, the Bank has benefited from a steeper yield curve, as the Bank’s mortgage loans are typically
priced from long-term rates while deposits are priced from short-term rates. A steeper yield curve--one with a greater
difference between short-term rates and long-term rates--allows the Bank to receive a higher rate of interest on our
mortgage-related assets than the rate paid for the funding of those assets, which generally results in a higher net
interest margin. As the yield curve flattens, the spread between rates received on assets and paid on liabilities
becomes compressed, which generally leads to a decrease in net interest margin.
We attempt to mitigate the repricing risk of our fixed-rate one- to four-family loan portfolio by the interest rates
we offer and through the terms of our endorsement program. Management closely monitors competitors’ rates and
also considers interest rate risk and net interest income when setting offered rates. Through our endorsement
program a borrower can modify the rate and/or term of their loan to terms currently offered for fixed-rate products with
an equal or reduced period to maturity than the current remaining period of their existing loan, if they have not been
delinquent on their payments for the previous 12 months and the loan has not been sold to a third party. At
September 30, 2011, the fixed rates offered through our endorsement program were at least 12 basis points higher
than a similar new origination or refinance. This allows the Bank to retain the endorsed loan and achieve a rate
slightly above current market rate.
We manage the reinvestment risk of loan prepayments through our interest rate risk and asset management
strategies. In recent periods, principal repayments in excess of loan originations and purchases have been
reinvested in shorter-term MBS and investment securities at lower market rates than our loan portfolio, which reduces
our interest rate spread. If, however, market rates were to rise, the short-term nature of the securities provides
management with the opportunity to reinvest the maturing funds at a higher rate.
General assumptions used by management to evaluate the sensitivity of our financial performance to changes
in interest rates presented in the tables below are utilized in, and set forth under, the gap table and related notes.
Although management finds these assumptions reasonable given the constraints described above, the interest rate
sensitivity of our assets and liabilities and the estimated effects of changes in interest rates on our net interest income
and MVPE indicated in the below tables could vary substantially if different assumptions were used or actual
experience differs from these assumptions. To illustrate this point, the projected cumulative excess (deficiency) of
interest-earning assets over interest-bearing liabilities within the three to 12 months category as a percent of total
assets (“one-year gap”) is also provided for an up 200 basis point scenario, as of September 30, 2011.
16
Qualitative Disclosure about Market Risk
Percentage Change in Net Interest Income. For each period end presented in the following table, the
estimated percentage change in the Bank’s net interest income based on the indicated instantaneous, parallel and
permanent change in interest rates is presented. The percentage change in each interest rate environment
represents the difference between estimated net interest income in the 0 basis point interest rate environment (“base
case”, assumes the forward market and product interest rates implied by the yield curve are realized) and estimated
net interest income in each alternative interest rate environment (assumes market and product interest rates have a
parallel shift in rates across all maturities by the indicated change in rates). Estimations of net interest income used
in preparing the table below are based upon the assumptions that the total composition of interest-earning assets and
interest-bearing liabilities does not change materially and that any repricing of assets or liabilities occurs at
anticipated product and market rates for the alternative rate environments as of the dates presented. The estimation
of net interest income does not include any projected gain or loss related to the sale of loans or securities, or income
derived from non-interest income sources, but does include the use of different prepayment assumptions in the
alternative interest rate environments. It is important to consider that the estimated changes in net interest income
are for a cumulative four-quarter period. These do not reflect the earnings expectations of management.
Change
(in Basis Points)
in Interest Rates (1)
-100 bp
000 bp
+100 bp
+200 bp
+300 bp
Percentage Change in Net Interest Income
At September 30,
2011
N/A
--
4.46%
3.75%
-0.33%
2010
N/A
--
6.44%
4.56%
0.93%
(1) Assumes an instantaneous, permanent and parallel change in interest rates at all maturities.
At September 30, 2011, the percentage change in the net interest income projections decreased from
September 30, 2010 in all interest rate shock scenarios. For both periods, interest rates levels were historically low.
The low interest rate environments caused the weighted average life (“WAL”) of mortgage-related assets and callable
agency debentures to shorten significantly as borrowers have an economic incentive to refinance their mortgages into
lower interest rate loans, and agency debt issuers have an economic incentive to exercise their call options and issue
lower costing debt. In the rising interest rate scenarios, the cash flows from mortgage-related assets and callable
agency debentures decrease, resulting in those assets remaining on the balance sheet until maturity at their current
yields. In addition, the cash flows that are received are reinvested into higher yielding assets than what was
anticipated in the base case scenario, resulting in the yield on interest-earning assets increasing faster than the
anticipated increase in the cost of interest-bearing liabilities. However, as interest rates rise substantially, the
financial incentive to refinance mortgages or call agency debentures is diminished, resulting in fewer cash flows to be
reinvested at the higher market rates. At September 30, 2011, these cash flows are diminished to such a level that
the benefit of reinvesting cash flows at higher yields is more than offset by the amount of liabilities repricing to higher
levels in the +300 basis point scenario.
The percentage change in the net interest income projections was lower at September 30, 2011, despite lower
interest rates than the previous period. This was primarily caused by fewer cash flows from callable agency
debentures and mortgage loans expected to reprice in fiscal year 2012 due to the lengthening of the expected life of
the Bank’s callable agency debentures and a reduction in the amount of adjustable-rate mortgages expected to
reprice as compared to fiscal year 2011. The change was also due to maturities and calls of investment securities
during fiscal year 2011, the cash flows from which were reinvested at lower rates than during fiscal year 2010.
The securities held at the holding company are short-term bullet agency debentures and are not a component of
the Bank’s interest rate risk management program. The inclusion of these assets in the net interest income projection
would have resulted in a more positive impact to the rising interest rate shock scenarios due to the short-term nature
of the securities. In addition, the cash flows from these assets do not change as interest rates rise. As a result, these
assets would provide cash flows that could be reinvested at higher interest rates.
17
Percentage Change in MVPE. The following table sets forth the estimated percentage change in the MVPE at
each period end presented based on the indicated instantaneous, parallel and permanent change in interest rates.
The percentage change in each interest rate environment represents the difference between MVPE in the base case
and MVPE in each alternative interest rate environment. The estimations of MVPE used in preparing the table below
are based upon the assumptions that the total composition of interest-earning assets and interest-bearing liabilities
does not change, that any repricing of assets or liabilities occurs at current product or market rates for the alternative
rate environments as of the dates presented, and that different prepayment rates are used in each alternative interest
rate environment. The estimated MVPE results from the valuation of cash flows from financial assets and liabilities
over the anticipated lives of each for each interest rate environment. The table presents the effects of the change in
interest rates on our assets and liabilities as they mature, repay or reprice, as shown by the change in the MVPE in
changing interest rate environments.
Change
(in Basis Points)
in Interest Rates (1)
-100 bp
000 bp
+100 bp
+200 bp
+300 bp
Percentage Change in MVPE
At September 30,
2011
N/A
--
0.61%
-5.69%
-14.91%
2010
N/A
--
0.10%
-8.76%
-22.42%
(1) Assumes an instantaneous, permanent and parallel change in interest rates at all maturities.
Changes in the estimated market values of our financial assets and liabilities drive changes in estimates of
MVPE. The market value of shorter term-to-maturity financial instruments are less sensitive to changes in interest
rates than the market value of longer term-to-maturity financial instruments. Because of this, our certificates of
deposit (which have relatively short average lives) tend to display less sensitivity to changes in interest rates than do
our mortgage-related assets (which have relatively long average lives). The average life expected on our mortgage-
related assets varies under different interest rate environments because borrowers have the ability to prepay their
mortgage loans.
The Bank’s MVPE declines in the +200 and +300 interest rate environments. As interest rates increase to these
levels, the estimated fair values of the liabilities with shorter average lives do not respond to interest rates in the same
manner as the longer maturity assets, such as our fixed-rate loans, which have longer average lives. The
Prepayments on fixed-rate loans in particular, and all mortgage-related assets in general, are expected to decrease
significantly as interest rate rise such that projected prepayments would likely only be realized through normal
changes in borrowers lives, such as divorce, death, job-related relocations, and other life changing events. The lower
prepayment expectations extend the expected average lives on these assets, relative to the assumptions in the base
case, thereby increasing their sensitivity to changes in interest rates. As the average lives of assets lengthen, the
Bank’s sensitivity to rising interest rates increases.
The sensitivity of the MVPE decreased from September 30, 2010 to September 30, 2011. This was due to the
decrease in interest rates between periods, as well as the increase in the relative duration of the liability portfolio.
The decrease in interest rates resulted in a decrease in the WAL of all mortgage-related assets, as borrowers have
an increased economic incentive to refinance their mortgages into lower interest rate loans, and agency debt issuers
have an economic incentive to exercise their call options and issue lower costing debt. This caused a decrease in
the price sensitivity of all mortgage-related assets and callable agency debentures, and as a result, of interest-
earning assets as a whole. Since the price sensitivity of all assets is reduced in the base case, the adverse impact to
rising interest rates is thereby reduced in all interest rate scenarios presented.
In an effort to mitigate the impact of rising interest rates, the Bank renewed $400.0 million of borrowings during
fiscal year 2011 into new fixed-rate borrowings with terms of approximately seven years. Additionally, the Bank
structured certificate of deposit interest rates in an effort to increase the average term of the portfolio, as customers
extended the term of their certificates in order to earn a higher rate of return. Both of these actions were taken in an
effort to reduce the Bank’s overall exposure to rising interest rates at September 30, 2011 as compared to September
30, 2010.
The inclusion of the holding company securities in the MVPE analysis would result in a lower level of sensitivity
to the rising interest rate scenarios due to their short-term nature, which would reduce the overall WAL of
assets. This would cause the market value of total assets to be less sensitive to changes in interest rates, thereby
reducing the sensitivity of the MVPE.
18
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19
(1) Adjustable-rate mortgage (“ARM”) loans are included in the period in which the rate is next scheduled to adjust or in the
period in which repayments are expected to occur, or prepayments are expected to be received, prior to their next rate
adjustment, rather than in the period in which the loans are due. Fixed-rate loans are included in the periods in which they
are scheduled to be repaid, based on scheduled amortization and prepayment assumptions. Balances have been reduced for
non-performing loans, which totaled $26.5 million at September 30, 2011.
(2) Based on contractual maturities, terms to call date or pre-refunding dates as of September 30, 2011, and excludes the
unrealized gain adjustment of $545 thousand on AFS investment securities.
(3) Reflects estimated prepayments of MBS in our portfolio, and excludes the unrealized gain adjustment of $41.8 million on AFS
MBS.
(4) Although the Bank’s checking, savings and money market accounts are subject to immediate withdrawal, management
considers a substantial amount of these accounts to be core deposits having significantly longer effective maturities. The
decay rates (the assumed rate at which the balance of existing accounts would decline) used on these accounts are based on
assumptions developed from our actual experience with these accounts. If all of the Bank’s checking, savings and money
market accounts had been assumed to be subject to repricing within one year, interest-earning assets which were estimated
to mature or reprice within one year would have exceeded interest-bearing liabilities with comparable characteristics by
$116.4 million, for a cumulative one-year gap of 1.3% of total assets.
(5) Borrowings exclude $21.0 million of deferred prepayment penalty costs and $457 thousand of deferred gain on the terminated
interest rate swap agreements.
The gap table summarizes the anticipated maturities or repricing of the Bank’s interest-earning assets and
interest-bearing liabilities as of September 30, 2011, based on the information and assumptions set forth in the notes
above. Cash flow projections for mortgage loans and MBS are calculated based on current interest rates.
Prepayment projections are subjective in nature, involve uncertainties and assumptions and, therefore, cannot be
determined with a high degree of accuracy. Although certain assets and liabilities may have similar maturities or
periods to repricing, they may react differently to changes in market interest rates. Assumptions may not reflect how
actual yields and costs respond to market changes. The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities
may lag behind changes in market interest rates. Certain assets, such as ARM loans, have features that restrict
changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the
gap table. For additional information regarding the impact of changes in interest rates, see the Percentage Change in
Net Interest Income and Percentage Change in MVPE discussion and tables within this section.
The decrease in the one-year gap to 18.60% at September 30, 2011 from 20.69% at September 30, 2010
was primarily due to a decrease in the amount of assets expected to reprice in fiscal year 2012. In fiscal year 2011,
the Bank experienced a high volume of calls on the Bank’s callable agency debentures, especially later in the fiscal
year as interest rates decreased and agency debt issuers exercised their option to call existing debentures and
issued new debt at lower interest rates. The Bank reinvested the cash flows from the called agency debentures into
new callable agency debentures with longer expected average lives, thereby reducing the amount of cash flows
expected from this portfolio in fiscal year 2012. In addition, the amount of assets expected to reprice in fiscal year
2012, as of September 30, 2011, was lower as a result of fewer ARM mortgages expected to reprice in fiscal year
2012 than that expected to reprice in fiscal year 2011, as of September 30, 2010.
As noted above, changes in interest rates have a material impact on the amount of cash flows expected to
reprice in a given period, primarily on the asset side of the balance sheet. In the +200 basis point interest rate shock
scenario, the cash flows from mortgage-related assets and callable agency debentures decrease significantly as
borrowers and issuers no longer have a financial incentive to refinance their mortgages or debentures. In this
scenario, the Bank’s liabilities would reprice at a faster pace than the assets.
The inclusion of the holding company securities in the gap analysis would have resulted in an increase in the
one-year gap at September 30, 2011, as a majority of these assets mature in one year or less.
20
Financial Condition
Total assets increased $963.7 million, from $8.49 billion at September 30, 2010 to $9.45 billion at September
30, 2011, due primarily to the stock offering proceeds from the corporate reorganization, which were primarily used to
purchase securities.
Total liabilities decreased $13.9 million, from $7.53 billion at September 30, 2010 to $7.51 billion at September
30, 2011, due primarily to a decrease of $153.6 million in other borrowings, partially offset by an increase in deposits
of $108.9 million and an increase in FHLB advances of $31.1 million. The decrease in other borrowings was due to
the repayment of the Debentures of $53.6 million and the maturity of $100.0 million of repurchase agreements that
were not replaced. The increase in deposits was primarily in the money market and checking portfolios.
Stockholders’ equity increased $977.6 million, from $962.0 million at September 30, 2010 to $1.94 billion at
September 30, 2011. The increase was due primarily to the net stock offering proceeds of $1.13 billion from the
corporate reorganization and net income during the fiscal year, partially offset by dividends paid of $150.1 million.
Loans Receivable. The loans receivable portfolio decreased $18.5 million, or 0.36%, from $5.17 billion at
September 30, 2010 to $5.15 billion at September 30, 2011. The decrease in the portfolio was largely in the home
equity loan portfolio, which decreased $21.8 million from $186.3 million at September 30, 2010 to $164.5 million at
September 30, 2011. The decrease in the home equity loan portfolio was due to some borrowers consolidating their
home equity loans into their first mortgage loan when refinancing. Additionally, borrowers are reducing overall debt
levels and borrowing less than in previous years, in light of economic uncertainty, as evidenced by the increased level
of prepayment activity and the decrease in lending volume in the consumer loan portfolio.
Included in the loan portfolio at September 30, 2011 were $163.7 million of ARM loans that were originated as
interest-only. Of these interest-only loans, $131.4 million were purchased from nationwide lenders, primarily during
fiscal year 2005. Interest-only ARM loans do not typically require principal payments during their initial term, and
have initial interest-only terms of either five or ten years. The $131.4 million of purchased interest-only ARM loans
had a weighted average credit score of 721 and a weighted average LTV ratio of 75% at September 30, 2011. The
credit scores were updated in September 2011. The LTV ratios are based on the current loan balance and either the
lesser of the purchase price or original appraisal, or the most recent bank appraisal, BPO, or AVM, generally if the
loan is or has been nonaccrual. In order to reduce future credit risk, the Bank has not purchased any interest-only
ARM loans since 2006 and discontinued offering the product in its local markets during 2008. At September 30,
2011, $85.7 million, or 52%, of interest-only loans were still in their interest-only payment term. At September 30,
2011, $8.7 million, or 33% of non-performing loans, were interest-only ARMs and $2.1 million was reserved in the
ACL for these loans. Of the $8.7 million non-performing interest-only ARM loans, $5.2 million, or 59%, were still in
the interest-only payment term. Non-performing interest-only ARM loans represented approximately 5% and 10% of
the total interest-only ARM loan portfolio and non-amortizing interest-only ARM loans, respectively, at September 30,
2011.
The Bank generally prices its one- to four-family loan products based upon prices available in the secondary
market and competitor pricing. During fiscal year 2011, the average daily spread between the Bank’s 30-year fixed-
rate one- to four-family loan offer rate, with no points paid by the borrower, and the 10-year Treasury rate was
approximately 160 basis points, while the average daily spread between the Bank’s 15-year fixed-rate one- to four-
family loan offer rate and the 10-year Treasury rate was approximately 90 basis points.
21
The following table presents information concerning the composition of our loan portfolio as of September 30, 2011 and
2010. The one- to four-family loan portfolio remained relatively flat between periods, at $4.92 billion. During fiscal year 2011,
the Bank expanded its network of correspondent lenders and also purchased $89.2 million from a nationwide lender; however,
those activities were offset by an increase in refinancing activity due to low market rates, strong competition for high quality
loans, as well as weak loan demand due to the slow economic recovery. Within the one- to four-family loan portfolio at
September 30, 2011, 75% of the loans had a balance at origination of less than $417 thousand. The weighted average rate of
the loan portfolio decreased 38 basis points from 5.07% at September 30, 2010 to 4.69% at September 30, 2011. The
decrease in the weighted average portfolio rate was due to loan endorsements, loan originations at current market rates below
that of the existing portfolio, refinances, and ARMs repricing down to lower market rates.
September 30, 2011
September 30, 2010
Average
Average
Amount
Rate
Amount
Rate
(Dollars in thousands)
$ 3,986,957
4.82%
$ 3,952,392
5.23%
396,063
535,758
57,965
4.75
3.37
6.13
47,368
4.27
396,956
5.20
566,303
3.54
66,476
6.24
33,168
4.90
Real Estate Loans:
One-to four-family:
Originated
Correspondent purchased
Nationwide purchased
Multi-family and commercial
Construction
Total real estate loans
5,024,111
4.66
5,015,295
5.05
Consumer Loans:
Home equity
Other
164,541
7,224
5.48
5.10
186,347
5.55
7,671
5.66
Total consumer loans
171,765
5.46
194,018
5.55
Total loans receivable
5,195,876
4.69%
5,209,313
5.07%
Less:
Undisbursed loan funds
ACL
Discounts/unearned loan fees
Premiums/deferred costs
22,531
15,465
19,093
(10,947)
15,489
14,892
22,267
(11,537)
Total loans receivable, net
$ 5,149,734
$ 5,168,202
22
The following table presents the weighted average credit score and LTV ratio and the average loan balance for our one-
to four-family loan portfolio as of September 30, 2011. Credit scores were most recently updated in September 2011 and were
obtained from a nationally recognized consumer rating agency. The LTV ratios were based on the current loan balance and
either the lesser of the purchase price or original appraisal, or the most recent bank appraisal, BPO or AVM, generally if the
loan is or has been nonaccrual. In most cases, the most recent appraisal was obtained at the time of origination.
Credit Score
LTV
Average Balance
(Dollars in thousands)
Originated
Correspondent
Nationwide
763 66 %
759
740
760
64
60
65 %
$ 123
290
252
$ 137
The following table presents the WAL, which reflects prepayment assumptions, of our one- to four-family loan portfolio,
excluding construction loans and non-performing loans, as of September 30, 2011.
Original Term
Fixed-Rate:
<= 15 years
> 15 years
Adjustable-Rate:
<= 36 months
> 36 months
Principal
Balance
Average
WAL (years)
(Dollars in thousands)
$ 1,017,207 2.52
3,086,188 4.04
125,334 3.27
663,925 3.16
3.59
$ 4,892,654
Weighted average rate
4.65%
Average remaining contractual term (in years) 21
The following table presents our fixed-rate one- to four-family loan portfolio, including construction loans and non-
performing loans, and the annualized prepayment speeds for the quarter ended September 30, 2011 by interest rate tier.
Loan endorsements and refinances are considered a prepayment and are included in the prepayment speeds presented
below.
Original Term
15 years or less
Prepayment Speed (annualized)
More than 15 years
Prepayment Speed (annualized)
Rate
Principal
Including
Excluding
Principal
Including
Excluding
Range
Balance
Endorsements Endorsements
Balance
Endorsements Endorsements
< =4.50%
4.51 - 4.99%
5.00 - 5.50%
5.51 - 5.99%
6.00 - 6.50%
6.51 - 6.99%
>=7.00%
$ 527,235
218,703
193,663
44,530
21,833
6,083
3,179
$ 1,015,226
29.30%
50.28
32.01
35.20
19.47
12.42
10.76
34.79%
(Dollars in thousands)
8.31% $ 922,221
417,100
1,206,849
289,581
229,681
38,381
29,663
20.68
18.40
19.85
15.21
10.88
10.76
14.10% $ 3,133,476
19.10%
37.44
55.19
42.67
43.53
26.40
23.04
41.00%
4.10%
10.48
15.28
17.98
16.19
11.87
12.03
12.12%
23
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24
The following table presents the activity in our one- to four-family loan portfolio for the fiscal year ended
September 30, 2011, excluding endorsement activity, and the LTV and credit score at origination. Of the $759.7
million of one- to four-family loan originations and refinances in the table for fiscal year 2011, 80% had loan values of
$417 thousand or less. Of the $182.0 million of correspondent and nationwide loan purchases, 59% had loan values
of $417 thousand or less.
Originations
Refinances by Bank customers
Correspondent purchases
Nationwide purchases
LTV
Amount
(Dollars in thousands)
74 %
67
65
69
70 %
$ 466,845
292,819
92,781
89,190
$ 941,635
Credit
Score
770
768
767
740
766
During fiscal year 2011, the Bank entered into correspondent lending relationships with 11 new correspondent
lenders in our local market areas and also in states generally located throughout the central United States. At
September 30, 2011, the Bank had 18 correspondent lending relationships. Additionally, during fiscal year 2011, the
Bank entered into an agreement with a mortgage sub-servicer to provide loan servicing for loans originated by the
Bank’s correspondent lenders in certain states. Management continues its efforts to expand our network of lending
relationships related to our nationwide bulk purchase program that would provide mortgage loans in selected
geographic locations that adhere to the Bank’s underwriting standards.
Historically, the Bank’s underwriting guidelines have generally provided the Bank with loans of high quality and
low delinquencies, and low levels of non-performing assets compared to national levels. Of particular importance is
the complete documentation required for each loan the Bank originates, refinances, and purchases. This allows the
Bank to make an informed credit decision based upon a thorough assessment of the borrower’s ability to repay the
loan, compared to underwriting methodologies that do not require full documentation. Non-performing loans
decreased $5.5 million, from $32.0 million at September 30, 2010 to $26.5 million at September 30, 2011. Our ratio
of non-performing loans to total loans decreased from 0.62% at September 30, 2010 to 0.51% at September 30,
2011. At September 30, 2011, our ACL was $15.5 million or 0.30% of the total loan portfolio and 58% of total non-
performing loans. This compares with an ACL of $14.9 million or 0.29% of the total loan portfolio and 47% of total
non-performing loans as of September 30, 2010. See additional discussion of asset quality in Part I, Item 1 of the
Annual Report on Form 10-K.
25
Securities. The following table presents the distribution of our MBS and investment securities portfolios, at
amortized cost, at the dates indicated. Overall, fixed-rate securities comprised 76% of these portfolios at September
30, 2011. The WAL is the estimated remaining maturity after projected prepayment speeds and projected call option
assumptions have been applied. The increase in the WAL between September 30, 2010 and September 30, 2011
was due primarily to purchases of investment securities and MBS. The decrease in the yield between September 30,
2010 and September 30, 2011 was primarily a result of the purchase of securities with yields lower than that of the
existing portfolios, repayments of MBS with yields higher than that of the existing portfolio, and adjustable-rate MBS
resetting to lower coupons due to a decline in related indices. Yields on tax-exempt securities are not calculated on a
taxable equivalent basis. The WAL amounts represent average lives in terms of years.
Fixed-rate securities:
September 30, 2011
September 30, 2010
Balance
Yield WAL
Balance
Yield WAL
(Dollars in thousands)
U.S. government-sponsored enterprises (“GSE”) debentures $ 1,380,028 1.09% 0.86 $ 1,258,980 1.39% 0.64
Municipal bonds
MBS
Total fixed-rate securities
Adjustable-rate securities:
Trust preferred securities
MBS
Total adjustable-rate securities
59,622 3.02
2.29
70,605 2.95
2.76
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860,798 4.47 3.02
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3,721 1.96 26.73
893,655 2.85
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698,913 3.42 4.41
Total investment portfolio, at amortized cost
$ 3,813,646 2.47% 3.67 $ 2,889,296 2.83% 2.31
26
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The following table presents our fixed-rate MBS portfolio, at amortized cost, based on the underlying weighted
average loan rate, the annualized prepayment speeds for the quarter ended September 30, 2011, and the net
premium/discount by interest rate tier. Our fixed-rate MBS portfolio is somewhat less sensitive than our fixed-rate
one- to four-family loan portfolio to repricing risk due to external refinancing barriers such as unemployment, income
changes, and decreases in property values, which are generally more pronounced outside of our local market areas.
However, we are unable to control the interest rates and/or governmental programs that could impact the loans in our
fixed-rate MBS portfolio, and are therefore more likely to experience reinvestment risk due to principal prepayments.
Additionally, prepayments impact the amortization/accretion of premiums/discounts on our MBS portfolio. As
prepayments increase, the related premiums/discounts are amortized/accreted at a faster rate. The amortization of
premiums decreases interest income while the accretion of discounts increases interest income. As noted in the
table below, the fixed-rate MBS portfolio had a net premium of $11.1 million as of September 30, 2011. Given that
the weighted average coupon on the underlying loans in this portfolio are above current market rates, the Bank could
experience an increase in the premium amortization should prepayment speeds increase significantly, potentially
reducing future interest income.
Original Term
15 years or less
More than 15 years
Rate Range
Amortized
Cost
Prepayment
Speed
(annualized)
Amortized
Cost
(Dollars in thousands)
Prepayment
Speed
(annualized)
Net
Premium/
(Discount)
Total
< =3.99%
4.00 - 4.50%
4.51 - 4.99%
5.00 - 5.50%
5.51 - 5.99%
6.00 - 6.50%
6.51 - 6.99%
>=7.00%
$ 747,002
166,585
207,877
115,995
75,843
13,008
2,438
--
5.89% $ 27,426
25,563
5,921
8,707
47,102
18,909
9,662
4,622
16.09
20.17
21.37
20.34
18.16
18.55
--
2.52% $ 774,428
192,148
2.97
213,798
13.80
124,702
16.45
122,945
24.15
31,917
15.65
12,100
16.00
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16.89
$ 6,689
4,779
(539)
(55)
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8
$ 1,328,748
11.72 % $ 147,912
13.77 % $ 1,476,660 $ 11,107
Average rate
Average remaining contractual
term (months)
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5.29%
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29
Liabilities. Total liabilities decreased $13.9 million, from $7.53 billion at September 30, 2010 to $7.51 billion at
September 30, 2011, due primarily to a decrease of $153.6 million in other borrowings, partially offset by an increase
in deposits of $108.9 million and an increase in FHLB advances of $31.1 million. The decrease in other borrowings
was due to the repayment of the Debentures of $53.6 million and the maturity of $100.0 million of repurchase
agreements that were not replaced. The increase in deposits was primarily in the money market and checking
portfolios.
Deposits. Our money market portfolio increased $123.6 million from $942.4 million at September 30, 2010 to
$1.07 billion at September 30, 2011. Of the $123.6 million increase, $39.0 million relates to the contribution to the
Foundation as a result of the corporate reorganization. It is not anticipated that the Foundation will keep the funds in
the money market account for an extended period of time. The remaining increase in the money market portfolio was
due to customers reinvesting funds from maturing certificates of deposit into the money market portfolio and some
customers maintaining higher cash balances due to the current economic uncertainty and in anticipation of market
rates increasing, which would allow them to reinvest at higher rates. The checking portfolio increased $69.2 million
from $482.4 million at September 30, 2010 to $551.6 million at September 30, 2011. The increase in our checking
portfolio was also due to customers keeping more cash readily available, as reflected by a 15% increase in the
average customer checking account balance between period ends. If interest rates were to rise, it is possible our
money market and checking account customers may move those funds to higher-yielding deposit products inside of
the Bank or withdraw their funds to invest in higher yielding investments outside of the Bank.
Our certificate of deposit portfolio decreased $102.9 million from $2.73 billion at September 30, 2010 to $2.62
billion at September 30, 2011. The $102.9 million decrease consisted primarily of medium- and short-term
certificates, partially offset by an increase in our longer term certificates. Management competitively priced our longer
term certificates in order to lengthen the weighted average maturity of the retail certificate of deposit portfolio. The
following table presents the amount, average rate and percentage of total deposits for checking, savings, money
market and certificates at September 30, 2011 and 2010.
2011
Average
Rate
Amount
At September 30,
% of
Total
(Dollars in thousands)
Amount
2010
Average
Rate
$ 551,632
253,184
1,066,065
2,624,292
$ 4,495,173
0.08%
0.41
0.35
1.87
1.21%
12.3%
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23.7
58.4
100.0%
$ 482,428
234,285
942,428
2,727,169
$ 4,386,310
0.13%
0.54
0.65
2.29
1.61%
% of
Total
11.0%
5.3
21.5
62.2
100.0%
Checking
Savings
Money market
Certificates
At September 30, 2011, $83.7 million in certificates were brokered deposits, unchanged from September 30,
2010. The $83.7 million of brokered deposits at September 30, 2011 had a weighted average rate of 2.58% and a
remaining term to maturity of 2.9 years. The Bank regularly considers brokered deposits as a source of funding,
provided that investment opportunities are balanced with the funding cost. As of September 30, 2011, $106.4 million
in certificates were public unit deposits, compared to $109.9 million in public unit deposits at September 30, 2010.
The $106.4 million of public unit deposits at September 30, 2011 had a weighted average rate of 0.31% and a
remaining term to maturity of six months. Management will continue to monitor the wholesale deposit market for
attractive opportunities relative to the yield received from investing the proceeds.
30
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Stockholders’ Equity. Stockholders’ equity increased $977.6 million, from $962.0 million at September 30,
2010 to $1.94 billion at September 30, 2011. The increase was due primarily to the net stock offering proceeds of
$1.13 billion from the corporate reorganization in December 2010 and net income during the fiscal year, partially
offset by dividends paid of $150.1 million. The $150.1 million consisted of cash dividends of $17.0 million paid prior
to the corporate reorganization, and cash dividends of $133.1 million paid since the corporate reorganization. The
$17.0 million consisted of a quarterly dividend of $10.6 million and a special dividend of $6.4 million related to fiscal
year 2010 earnings, per the Company’s prior dividend policy. The $133.1 million consisted of three quarterly
dividends totaling $36.3 million and the one-time special cash dividend (welcome dividend) of $96.8 million.
On October 20, 2011, the Company declared a quarterly cash dividend of $0.075 per share, which will equate to
approximately $12.1 million, payable on November 18, 2011, and a special year-end dividend of $0.10 per share,
which will equate to approximately $16.2 million, payable on December 2, 2011. The special year-end dividend is the
result of the Board of Directors’ commitment to distribute to stockholders 100% of the annual earnings of Capitol
Federal Financial, Inc. for the first two fiscal years following the second-step stock conversion. The $0.10 per share
special year-end dividend was determined by taking the difference between earnings per share for fiscal year 2011
(after adding back the contribution to the Foundation) of $0.40, and regular quarterly dividends declared for fiscal
year 2011 of $0.30 per share.
There were no stock repurchases during fiscal year 2011. Under current regulatory restrictions, we may not
repurchase our stock during the first year following the corporate reorganization except under very limited
circumstances. This one-year moratorium expires in December 2011. The stock repurchase plan that was in effect
at the time of the corporate reorganization ceased to exist once the reorganization was complete. There is no
repurchase plan currently in place.
32
Weighted Average Yields and Rates. The following table presents the weighted average yields earned on loans,
securities and other interest-earning assets, the weighted average rates paid on deposits and borrowings and the
resultant interest rate spreads at the dates indicated. Yields on tax-exempt securities are not calculated on a tax-
equivalent basis.
Weighted average yield on:
Loans receivable
MBS
Investment securities
Capital stock of FHLB
Cash and cash equivalents
Combined weighted average yield on
interest-earning assets
Weighted average rate paid on:
Checking deposits
Savings deposits
Money market deposits
Certificate of deposit
FHLB advances (1)
Other borrowings
Combined weighted average rate paid on
interest-bearing liabilities
At September 30,
2010
2011
2009
4.87%
3.26
1.17
3.39
0.24
5.23%
4.00
1.47
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0.21
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4.89
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0.35
1.87
3.71
4.00
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0.54
0.65
2.29
3.96
3.97
2.57
0.17
0.66
0.82
3.09
4.13
3.91
3.00
Net interest rate spread
1.60%
1.76%
1.89 %
(1) Rates include the net impact of the deferred prepayment penalties related to the prepayment of certain FHLB advances and
deferred gains associated with the interest rate swap terminations in prior years.
Average Balance Sheet. The following table presents the average balances of our assets, liabilities and
stockholders’ equity and the related annualized yields and rates on our interest-earning assets and interest-bearing
liabilities for the periods indicated. Average yields are derived by dividing annualized income by the average balance
of the related assets and average rates are derived by dividing annualized expense by the average balance of the
related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances,
except for other noninterest-earning assets, other noninterest-earning liabilities and stockholders’ equity which were
calculated based on month-end balances. The yields and rates include amortization of fees, costs, premiums and
discounts which are considered adjustments to yields/rates. Yields on tax-exempt securities were not calculated on a
tax-equivalent basis.
33
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36
Comparison of Results of Operations for the Years Ended September 30, 2011 and 2010
Net income for fiscal year 2011 was $38.4 million, compared to $67.8 million for fiscal year 2010. The $29.4
million, or 43.4%, decrease for the current year was due primarily to the $40.0 million ($26.0 million, net of income tax
benefit) contribution to the Foundation in connection with the corporate reorganization. Additionally, other income
decreased $9.4 million, or 27.4%, from $34.4 million for the prior year to $25.0 million for the current year. These
reductions to income were partially offset by a $4.8 million decrease in the provision for credit losses between fiscal
years. Interest income for fiscal year 2011 decreased by $27.2 million, or 7.3%, compared to fiscal year 2010, but
was almost entirely offset by a decrease in interest expense of $26.4 million, or 12.9%, between fiscal years. The net
interest margin decreased 22 basis points, from 2.06% for fiscal year 2010 to 1.84% for fiscal year 2011, largely due
to the decrease in interest income on loans receivable.
Interest and Dividend Income
Total interest and dividend income for fiscal year 2011 was $346.9 million, compared to $374.1 million for fiscal
year 2010. The $27.2 million decrease was primarily a result of a decrease in interest income on loans receivable of
$30.4 million, partially offset by an increase in interest income on investment securities of $3.4 million. The average
yield on total interest-earning assets decreased 78 basis points year over year, from 4.55% for fiscal year 2010 to
3.77% for fiscal year 2011, primarily as a result of a decrease in the yield on the loans receivable portfolio, but also
partially due to decreases in the yields on the MBS and investment securities portfolios.
Interest income on loans receivable in the current fiscal year was $251.9 million compared to $282.3 million in
the prior fiscal year. The $30.4 million decrease in interest income on loans receivable was the result of a decrease
of 33 basis points in the weighted average yield to 4.90% for fiscal year 2011 and a decrease of $251.5 million in the
average balance of the portfolio. The decrease in the weighted average yield was due to loan endorsements, loan
originations at current market rates below that of the existing portfolio, refinances, and ARMs repricing down to lower
market rates. The decrease in the average balance of the loan portfolio was due to principal repayments exceeding
originations and purchases, especially during the first half of fiscal year 2011.
Interest income on MBS in the current fiscal year was $71.3 million compared to $71.9 million in the prior fiscal
year. The $527 thousand decrease in interest income on MBS was due to a decrease of 71 basis points in the
weighted average yield to 3.49% for fiscal year 2011, partially offset by an increase of $334.8 million in the average
balance of the portfolio. The decrease in the weighted average yield was due to purchases of MBS at a lower
average yield than the existing portfolio between the two periods, repayments on MBS with yields higher than the
existing portfolio, and adjustable-rate securities repricing to lower market rates. The increase in the average balance
of the portfolio was due to purchases of MBS securities, primarily with proceeds from the corporate reorganization.
Interest income on investment securities in the current fiscal year was $19.1 million compared to $15.7 million in
the prior fiscal year. The $3.4 million increase in interest income on investment securities was due to a $679.0 million
increase in the average balance, partially offset by a decrease of 55 basis points in the weighted average yield to
1.22% for fiscal year 2011. The increase in the average balance was primarily a result of purchases funded with
stock offering proceeds from the corporate reorganization. The average yield decreased due to purchases at yields
lower than the overall portfolio yield, and to calls and maturities of higher yielding securities.
Interest Expense
Interest expense decreased $26.4 million to $178.1 million for fiscal year 2011 from $204.5 million for fiscal year
2010. The decrease was due primarily to a decrease in interest expense on deposits of $15.6 million, and partially to
a decrease in FHLB advances of $6.9 million and other borrowings of $3.8 million. The average rate paid on interest-
bearing liabilities decreased 42 basis points between years, from 2.77% for fiscal year 2010 to 2.35% for fiscal year
2011, primarily as a result of repricing in the certificate of deposit portfolio.
Interest expense on deposits for the current fiscal year was $63.6 million compared to $79.2 million in the prior
fiscal year. The $15.6 million decrease was due primarily to a decrease in interest expense on certificates, as the
weighted average rate paid on the certificate of deposit portfolio decreased 61 basis points between the two years,
from 2.65% for fiscal year 2010 to 2.04% fiscal year 2011. The decrease in the rate was a result of the portfolio
continuing to reprice to lower market rates.
Interest expense on FHLB advances for the current fiscal year was $90.3 million compared to $97.2 million in
the prior fiscal year. The $6.9 million decrease was due primarily due to a 28 basis point decrease in the weighted
average rate of the portfolio to 3.79% for fiscal year 2011. The decrease in the weighted average rate was a result of
the renewal of maturing FHLB advances at lower rates, maturing advances that were not renewed, and the refinance
of $200.0 million of advances in the third quarter of fiscal year 2010.
Interest expense on other borrowings for the current fiscal year was $24.3 million compared to $28.1 million in
the prior fiscal year. The $3.8 million decrease was due primarily to a $99.5 million decrease in the average balance
primarily as a result of not replacing all maturing repurchase agreements.
37
Net Interest Margin
The net interest margin, which is calculated as the difference between interest income and interest expense
divided by average interest-earning assets, was 1.84% for fiscal year 2011 compared to 2.06% for fiscal year 2010.
The 22 basis point decrease was due primarily to a decrease in net interest income between fiscal years. The
average balance of interest-earning assets increased $958.9 million, or 11.7%, between years, while net interest
income decreased $831 thousand, or 0.5%, between years. The primary reason for the decrease in net interest
income between years was a decrease in interest income on loans receivable due to loan endorsements, loans
originated at market rates below that of the existing portfolio, refinances, and ARMs repricing down to lower market
rates.
The recent decrease in market interest rates, as reflected by the shape of the yield curve, is anticipated to have
a negative impact to the Company’s net interest margin during fiscal year 2012, especially if market rates remain at
current levels for a sustained period of time. Mortgage endorsements and refinances are expected to continue over
the course of the upcoming year, which could result in margin compression. Interest rates have decreased
significantly during the past year and the yield curve has flattened as a result of continuously weak economic data,
uncertainty about the resolution of the European debt crisis, uncertainty about fiscal actions by the U.S. Congress
and additional monetary policy announcements by the FOMC. In the fourth quarter of fiscal year 2011, the two-year
Treasury yield decreased approximately 20 basis points while the 10-year Treasury yield decreased approximately
125 basis points. Historically, the Bank has benefited from a steeper yield curve as the Bank’s mortgages are
typically priced from long-term rates while deposits are priced from short-term rates. A steeper yield curve, one with
a greater difference between short-term rates and long-term rates, allows the Bank to receive a higher rate of interest
on our mortgage-related assets than the rate paid for the funding for those assets, which generally results in a higher
net interest margin. As the yield curve flattens, the spread between rates received on assets and paid on liabilities
becomes compressed, which generally leads to a decrease in net interest margin.
Provision for Credit Losses
The Bank recorded a provision for credit losses of $4.1 million during fiscal year 2011, compared to a provision
of $8.9 million for fiscal year 2010. The provision recorded in fiscal year 2011 was primarily a result of the increase in
and establishment of SVAs, primarily on purchased loans, and partially due to an increase in the general valuation
allowance due to an increase in historical losses, a decline in the current FHFA home price index, primarily in Kansas
and Missouri, and an increase in the recent unemployment rate trends compared to historical trends, also primarily in
Kansas and Missouri.
Other Income and Expense
Total other income was $25.0 million for fiscal year 2011 compared to $34.4 million for fiscal year 2010. The
$9.4 million, or 27.4%, decrease was due primarily to no gains on the sale of securities in the current fiscal year,
compared to a $6.5 million gain in the prior fiscal year. Additionally, retail fees decreased $2.3 million between fiscal
years as a result of the amendments to Regulation E that prohibit automatic enrollment in overdraft protection
programs without the customer’s consent, and other income, net decreased by $1.8 million due primarily to a
decrease in net gains on loan sales. Management is analyzing the Bank’s deposit account fee structure and plans to
make adjustments to its fee structure to ensure that fees accurately reflect the costs of the Bank to provide services
to customers. It is unlikely, however, that all of the revenue lost as a result of changes to Regulation E will be
recovered.
Total other expenses for fiscal year 2011 were $132.3 million, compared to $89.7 million in fiscal year 2010.
The $42.6 million, or 47.5%, increase was due primarily to a $40.0 million cash contribution to the Foundation in
connection with the corporate reorganization. Additionally, salaries and employee benefits and other expenses, net,
both increased $2.2 million and mortgage servicing activity, net, increased $1.8 million from fiscal year 2010. The
increase in salaries and employee benefits was due to $2.7 million of compensation expense related to the welcome
dividend paid on unallocated ESOP shares, which is not expected to reoccur in fiscal year 2012. The increase in
other expenses, net, was primarily related to REO operations, which increased $1.7 million compared to fiscal year
2010. The increase in mortgage servicing activity, net, was due to impairment and valuation allowances during the
current fiscal year as a result of an increase in prepayment speeds. The increases in the expenses noted above,
were partially offset by decreases of $2.3 million in advertising and promotional expense and $2.2 million in federal
insurance premium expense.
Effective October 31, 2010, the Bank discontinued its debit card rewards program. The discontinuation of the
program resulted in a $1.5 million decrease in advertising and promotional expense for fiscal year 2011 compared to
fiscal year 2010. The remaining decrease in advertising and promotional expense was due to an overall decrease in
advertising in fiscal year 2011 as compared to fiscal year 2010. Advertising expense is expected to increase
approximately $1.0 million in fiscal year 2012 as compared to fiscal year 2011.
In February 2011, the Federal Deposit Insurance Corporation adopted a new assessment structure for insured
institutions effective April 2011. One of the significant changes includes using average total Bank consolidated
assets minus average tangible equity for the assessment base instead of average deposits and secured liabilities for
the period. As a result of the change, the deposit insurance assessment decreased by $2.2 million in fiscal year 2011
compared to fiscal year 2010, and is anticipated to decrease by approximately $700 thousand in fiscal year 2012.
38
A provision of the Dodd-Frank Act, commonly referred to as the “Durbin Amendment,” directed the FRB to
analyze the debit card payments system and fix the interchange rates based upon their measure of actual costs for
institutions with assets greater than $10 billion. Currently this has no direct impact on the Company because total
Bank assets are less than $10 billion. Based upon the FRB’s new interchange rate for issuers exceeding $10 billion
in total assets and the Bank’s debit card transaction volume, it is estimated that the related fee income could
decrease by $3.1 million annually from current levels if the Bank exceeds $10 billion in assets. Although the Bank is
currently exempt from the provisions of the rule on the basis of asset size, there is still some uncertainty about the
potential impact on the interchange rates for issuers below that level.
Income Tax Expense
Income tax expense for fiscal year 2011 was $18.9 million compared to $37.5 million for fiscal year 2010. The
decrease in income tax expense between years was primarily a result of the $40.0 million contribution to the
Foundation, which resulted in $14.0 million of income tax benefit. The effective income tax rate for fiscal year 2011
was 33.0% compared to 35.6% for fiscal year 2010. The decrease in the effective tax rate between periods was due
primarily to a $686 thousand adjustment related to income tax expense recognized in the prior years. Excluding that
adjustment, the effective income tax rate would have been 34.2% for fiscal year 2011. The remaining difference
between the effective income tax rates was due primarily to an increase in low income housing credits in the current
fiscal year and in deductible expenses associated with the ESOP in the current fiscal year as a result of the $0.60 per
share welcome dividend. Due to pre-tax income being lower than the prior year, all of the items impacting the income
tax rate had a larger impact to the overall effective tax rate than in the prior year. Management anticipates the
effective tax rate for fiscal year 2012 to be approximately 36%.
Non-GAAP Presentation
The following table presents the Company’s selected financial results and performance ratios for fiscal year
2011. Because of the magnitude and non-recurring nature of the $40.0 million contribution to the Foundation in
connection with the corporate reorganization, management believes it is important for comparability purposes to
present selected financial results and performance ratios excluding the contribution to the Foundation. The adjusted
financial results and ratios are not presented in accordance with GAAP.
For the Fiscal Year Ended
September 30, 2011
Contribution
to Foundation
(Dollars in thousands, except per share data)
Actual
(GAAP)
Adjusted (1)
(Non-GAAP)
Net income (2)
Operating expenses
Basic earnings per share
Diluted earnings per share
$38,403
132,317
($26,000)
40,000
$64,403
92,317
0.24
0.24
(0.16)
(0.16)
0.40
0.40
Return on average assets (annualized)
Return on average equity (annualized)
Operating expense ratio
Efficiency ratio
0.41 %
2.20
1.40
68.30 %
(0.27)%
(1.49)
0.42
20.65 %
0.68%
3.69
0.98
47.65%
(1)
(2)
The adjusted financial results and ratios are not presented in accordance with GAAP as the amounts and ratios exclude the
effect of the contribution to the Foundation, net of income tax benefit.
The net adjustment for the contribution to the Foundation of $26.0 million reflects the $14.0 million income tax benefit
associated with the $40.0 million contribution.
39
Comparison of Results of Operations for the Years Ended September 30, 2010 and 2009
For fiscal year 2010, the Company recognized net income of $67.8 million compared to net income of $66.3
million in fiscal year 2009. The $1.5 million increase in net income was primarily a result of a $5.8 million increase in
other income, a $3.9 million decrease in other expenses and a $1.4 million decrease in income tax expense, partially
offset by a $7.1 million decrease in net interest income and a $2.5 million increase in provision for credit losses.
Interest and Dividend Income
Total interest and dividend income for fiscal year 2010 was $374.1 million compared to $412.8 million for the
fiscal year 2009. The $38.7 million decrease was a result of a $26.0 million decrease in interest income on MBS and
a $23.5 million decrease in interest income on loans receivable, partially offset by a $10.2 million increase in interest
income on investment securities.
Interest income on loans receivable in fiscal year 2010 was $282.3 million compared to $305.8 million in fiscal
year 2009. The $23.5 million decrease was a result of a 33 basis point decrease in the weighted average yield of the
portfolio to 5.23% for fiscal year 2010, as well as a $107.1 million decrease in the average balance of the loan
portfolio between the two periods. The decrease in the weighted average yield was due to loan endorsements and
refinances, originations and purchases at market rates lower than the existing portfolio, and repayments of loans with
rates higher than the portfolios. The decrease in the average balance was due to the loan swap transaction, where
$194.8 million of originated fixed-rate mortgage loans were swapped for MBS, and principal repayments outpacing
originations and purchases during the fiscal year 2010.
Interest income on MBS in fiscal year 2010 was $71.9 million compared to $97.9 million in fiscal year 2009. The
$26.0 million decrease was due primarily to a decrease of $400.6 million in the average balance, as well as a 44
basis point decrease in the weighted average portfolio yield to 4.20% for fiscal year 2010. The decrease in the
average balance of the portfolio was due to principal repayments which were not replaced in their entirety; rather, the
proceeds were reinvested into the investment securities portfolio. The weighted average yield decreased between
the two periods due to an increase of prepayments on MBS with yields higher than the existing portfolio, repricing of
adjustable-rate securities to lower market rates, and, to a lesser extent, purchases of MBS at lower yields than the
existing portfolio between the two periods.
Interest income on investment securities in fiscal year 2010 was $15.7 million compared to $5.5 million in fiscal
year 2009. The $10.2 million increase was primarily a result of an increase of $658.2 million in the average balance
of the portfolio, partially offset by a 64 basis point decrease in the weighted average portfolio yield to 1.77% for fiscal
year 2010. The average portfolio balance increased as a result of purchases funded with proceeds from the loan
swap transaction, MBS and loan principal repayments and, to a lesser extent, from an increase in retail deposits.
The decrease in the weighted average yield of the portfolio was attributed to maturities and calls of securities with
yields greater than the remaining portfolio, and to investments made at lower market yields than the overall portfolio
yield.
Interest Expense
Total interest expense for fiscal year 2010 was $204.5 million, compared to $236.1 million in fiscal year 2009.
The $31.6 million decrease was primarily due to a decrease in interest expense on deposits of $21.3 million and a
decrease in interest expense on FHLB advances of $9.4 million.
Interest expense on deposits in fiscal year 2010 was $79.2 million compared to $100.5 million in the fiscal year
2009. The $21.3 million decrease was primarily a result of a decrease in the rates on the entire deposit portfolio,
primarily the certificate of deposit and money market portfolios, as these portfolios repriced to lower market rates.
The average rate paid on the deposit portfolio decreased 63 basis points to 1.85% for the current fiscal year. The
decrease in interest expense was partially offset by a $234.5 million increase in the average balance of the deposit
portfolio, particularly the certificate of deposit and money market portfolios.
Interest expense on FHLB advances in fiscal year 2010 was $97.2 million compared to $106.6 million in the
fiscal year 2009. The $9.4 million decrease in interest expense was a result of the refinancing of $875.0 million of
advances during the second and third quarters of fiscal year 2009, and the refinancing of $200.0 million of advances
and the renewal of $100.0 million of advances during the third quarter of fiscal year 2010 at rates lower than the
existing portfolio.
Net Interest Margin
The net interest margin for fiscal year 2010 was 2.06% compared to 2.20% for fiscal year 2009. The 14 basis
point decrease in the net interest margin was primarily a result of a decrease in the average yield of interest-earning
assets compared to fiscal year 2009. The average yield on the loan portfolio decreased 33 basis points between
periods due to loan endorsements and refinances, originations and purchases at market rates which were lower than
the existing portfolio and repayments of loans with rates higher than the portfolio. Additionally, the Bank purchased
investment securities with weighted average lives of approximately three years or less and at yields lower than MBS
as part of our overall interest rate risk management strategy. The decrease in the weighted average yield on interest-
earning assets was partially offset by a decrease in the weighted average rate paid on interest-bearing liabilities,
specifically the certificate of deposit portfolio and FHLB advances.
40
Provision for Credit Losses
During fiscal year 2010, the Company recorded a provision for credit losses of $8.9 million compared to a
provision of $6.4 million in the fiscal year 2009. The $8.9 million provision for credit losses was composed of $5.0
million related to increases in certain loss factors in our general valuation allowance model and $3.9 million related to
establishing or increasing SVAs. The increase in certain loss factors in our general valuation allowance model
reflects the risks inherent in our loan portfolio due to decreases in real estate values in certain geographic regions
where the Bank has purchased loans, the continued elevated level of unemployment, and the increase in non-
performing loans and loan charge-offs. The increase in SVAs was primarily related to our purchased loan portfolio.
Other Income and Expense
Total other income for fiscal year 2010 was $34.4 million compared to $28.6 million in the fiscal year 2009. The
$5.8 million increase was due primarily to the $6.5 million gain on the sale of trading MBS in conjunction with the loan
swap transaction during the first quarter of fiscal year 2010.
Total other expenses for fiscal year 2010 were $89.7 million compared to $93.6 million for the fiscal year 2009.
The $3.9 million decrease was due primarily to an impairment and valuation allowance taken on the mortgage-
servicing rights asset in the fiscal year 2009, compared to a net recovery in the fiscal year 2010.
Income Tax Expense
Income tax expense for fiscal year 2010 was $37.5 million compared to $38.9 million for the fiscal year 2009.
The effective tax rate was 35.6% for fiscal year 2010, compared to 37.0% for the fiscal year 2009. The difference in
the effective tax rate between periods was primarily a result of a net decrease in nondeductible amounts associated
with the ESOP in fiscal year 2010, a reduction of unrecognized tax benefits due to the lapse of the statute of
limitations during the first quarter of fiscal year 2010 and an increase in tax credits related to our low income housing
partnerships.
41
Liquidity and Capital Resources
Liquidity refers to our ability to generate sufficient cash to fund ongoing operations, to pay maturing certificates
of deposit and other deposit withdrawals, to repay maturing borrowings, and to fund loan commitments. Liquidity
management is both a daily and long-term function of our business management. The Company’s most available
liquid assets are represented by cash and cash equivalents, AFS MBS and investment securities, and short-term
investment securities. The Bank’s primary sources of funds are deposits, FHLB advances, other borrowings,
repayments and maturities of outstanding loans and MBS and other short-term investments, and funds provided by
operations. The Bank’s borrowings primarily have been used to invest in U.S. GSE debentures and MBS securities
in an effort to manage the Bank’s interest rate risk with the intent to improve the earnings of the Bank while
maintaining capital ratios in excess of regulatory standards for well-capitalized financial institutions. In addition, the
Bank’s focus on managing risk has provided additional liquidity capacity by remaining below FHLB borrowing limits
and by increasing the balance of MBS and investment securities available as collateral for borrowings.
We generally intend to maintain cash reserves sufficient to meet short-term liquidity needs, which are routinely
forecasted for 10, 30, and 365 days. Additionally, on a monthly basis, we perform a liquidity stress test in accordance
with the Interagency Policy Statement on Funding and Liquidity Risk Management. The liquidity stress test
incorporates both short-term and long-term liquidity scenarios in order to quantify liquidity risk. In the event short-term
liquidity needs exceed available cash, the Bank has access to lines of credit at the FHLB and the Federal Reserve
Bank. The FHLB line of credit, when combined with FHLB advances, may generally not exceed 40% of total assets.
Our excess capacity at the FHLB as of September 30, 2011 was $1.26 billion. The Federal Reserve Bank line of
credit is based upon the fair values of the securities pledged as collateral and certain other characteristics of those
securities, and is used only when other sources of short-term liquidity are unavailable. At September 30, 2011, the
Bank had $1.98 billion of securities that were eligible but unused as collateral for borrowing or other liquidity needs.
This collateral amount is comprised of AFS and HTM securities with individual fair values greater than $10.0 million,
which is then reduced by a collateralization ratio of 10% to account for potential market value fluctuations.
Borrowings on the lines of credit are outstanding until replaced by cash flows from long-term sources of liquidity,
and are generally outstanding no longer than 30 days. If management observes a trend in the amount and frequency
of lines of credit utilization, the Bank will likely utilize long-term wholesale borrowing sources, such as FHLB
advances and/or repurchase agreements, to provide permanent fixed-rate funding. The maturity of these borrowings
is generally structured in such a way as to stagger maturities in order to reduce the risk of a highly negative cash flow
position at maturity. Additionally, the Bank could utilize the repayment and maturity of outstanding loans, MBS and
other investments for liquidity needs rather than reinvesting such funds into the related portfolios.
While scheduled payments from the amortization of loans and MBS and payments on short-term investments
are relatively predictable sources of funds, deposit flows, prepayments on loans and MBS, and calls of investment
securities are greatly influenced by general interest rates, economic conditions and competition, and are less
predictable sources of funds. To the extent possible, the Bank manages the cash flows of its loan and deposit
portfolios by the rates it offers customers.
At September 30, 2011, cash and cash equivalents totaled $121.1 million, an increase of $55.9 million from
September 30, 2010. The increase was due to cash flows received late in the month that were not reinvested by the
end of the month.
During fiscal year 2011, loan originations and purchases were almost completely offset by principal repayments
and related loan activity, compared to a cash inflow of $219.6 million in the same period in the prior year, as principal
repayments exceeded loan originations and purchases in fiscal year 2010. See additional discussion regarding loan
activity in “Financial Condition – Loans Receivable.”
During fiscal year 2011, the Company received principal payments on MBS of $480.1 million and proceeds from
called or matured investment securities of $1.36 billion. These funds were largely reinvested into investment
securities and MBS portfolios, along with the majority of the proceeds from the stock offering in conjunction with the
corporate reorganization. During fiscal year 2011, the Company purchased $1.47 billion of investment securities and
$1.30 billion of MBS.
42
The following table presents the contractual maturity of our loan, MBS, and investment securities portfolios at
September 30, 2011. Loans and securities which have adjustable interest rates are shown as maturing in the period
during which the contract is due. The table does not reflect the effects of possible prepayments or enforcement of
due on sale clauses.
Loans (1)
Weighted
Average
MBS
Investment Securities
Total
Weighted
Average
Weighted
Average
Weighted
Average
Rate
Amount
Rate
Amount
Rate
Amount
Rate
(Dollars in thousands)
Amount
Amounts due:
Within one year
$ 34,830
4.71% $ --
--% $ 304,058
1.84 % $ 338,888
2.14 %
After one year:
Over one to two years
Over two to three years
35,672
9,137
Over three to five years
39,813
Over five to ten years
394,403
Over 10 to 15 years
1,214,895
After 15 years
3,467,126
Total due after one year
5,161,046
4.74
5.41
5.45
5.02
4.39
4.75
4.69
--
--
2,659
644,929
727,708
1,036,780
2,412,076
--
--
6.00
3.85
3.53
3.18
3.47
91,293
295,267
723,888
19,544
3,304
7,126
1,140,422
1.33
1.33
1.36
4.17
5.24
3.20
1.42
126,965
304,404
766,360
1,058,876
1,945,907
4,511,032
8,713,544
2.29
1.46
1.59
4.29
4.07
4.39
3.93
$5,195,876
4.69% $2,412,076
3.47% $1,444,480
1.51 % $9,052,432
3.86 %
(1) Demand loans, loans having no stated maturity, and overdraft loans are included in the amounts due within one year.
Construction loans are reported based on the term to complete construction. The maturity date for home equity loans
assumes the customer always makes the required minimum payment.
The Bank utilizes FHLB advances to provide funds for lending and investment activities. The Bank’s policies
allow advances up to 40% of total Bank assets. At September 30, 2011, the Bank’s ratio of the face amount of
advances to total assets, as reported to the Bank’s regulators, was 26%. The advances are secured by a blanket
pledge of our loan portfolio, as collateral, supported by quarterly reporting to the FHLB. Currently, the blanket pledge
is sufficient collateral for the FHLB advances. It is possible that increases in our borrowings or decreases in our loan
portfolio could require the Bank to pledge securities as collateral on the FHLB advances. The Bank relies on FHLB
advances as a primary source of borrowings. The par value of FHLB advances was $2.40 billion at September 30,
2011, of which $350.0 million is scheduled to mature in fiscal year 2012. $100.0 million is due in the first quarter of
fiscal year 2012, $150.0 million is due in the second quarter of fiscal year 2012, and $100.0 million is due in the fourth
quarter of fiscal year 2012. Maturing advances during fiscal year 2012 will likely be replaced with borrowings with
terms between 36 and 60 months.
In April 2011, the Company redeemed the outstanding Debentures of $53.6 million, using a portion of the
offering proceeds from the corporate reorganization.
The Bank has access to and utilizes other sources for liquidity, such as secondary market repurchase
agreements, brokered deposits, and public unit deposits. The Bank’s policy limits total borrowings to 55% of total
assets. At September 30, 2011, the Bank had repurchase agreements of $515.0 million, of which $150.0 million are
scheduled to mature in the first quarter of 2012 and will likely be replaced with borrowings with terms between 36 and
60 months. The Bank may enter into additional repurchase agreements as management deems appropriate, not to
exceed 15% of total assets. The Bank has pledged securities with an estimated fair value of $597.3 million as
collateral for repurchase agreements at September 30, 2011. The securities pledged for the repurchase agreements
will be delivered back to the Bank when the repurchase agreements mature.
As of September 30, 2011, the Bank’s policy allows for brokered deposits up to 10% of total deposits and public
unit deposits up to 5% of total deposits. At September 30, 2011, the Bank had brokered deposits of $83.7 million, or
approximately 2% of total deposits and public unit deposits of $106.4 million, or approximately 2.5% of total deposits.
Management continuously monitors the wholesale deposit market for opportunities to obtain brokered and public unit
deposits at attractive rates. The Bank has pledged securities with an estimated fair value of $124.8 million as
collateral for public unit deposits. The securities pledged as collateral for public unit deposits are held under joint
custody receipt by the FHLB and generally will be released upon deposit maturity.
43
At September 30, 2011, $1.39 billion of the $2.62 billion in certificates of deposit were scheduled to mature
within one year. Included in the $1.39 billion are $85.9 million in public unit deposits. Based on our deposit retention
experience and our current pricing strategy, we anticipate the majority of the maturing retail certificates of deposit will
renew or transfer to other deposit products at the prevailing rate, although no assurance can be given in this regard.
As of September 30, 2011, the Bank had entered into $8.8 million of agreements, of which $1.7 million are
outstanding, in connection with the remodeling of the Bank’s home office. The existing home office building was
constructed in 1961 and has been fully depreciated since 1997. The project scope includes replacement of all
mechanical and electrical systems, interior finishes, and exterior building components. The completed project will
result in a more energy efficient building which is expected to lower our utility and maintenance expenses. There will
be additional agreements and expenses related to the project through fiscal year 2013, which is when the project is
expected to be completed. Costs related to the project will be capitalized and depreciated according to the estimated
useful life of the assets as they are placed in service.
Limitations on Dividends and Other Capital Distributions
Although savings and loan holding companies are not currently subject to regulatory capital requirements or
specific restrictions on the payment of dividends or other capital distributions, the OCC does prescribe such
restrictions on subsidiary savings associations. The OCC regulations impose restrictions on savings institutions with
respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases,
cash-out mergers and other transactions charged to the capital account. In addition, the financial impact of a holding
company on its subsidiary institution is a matter that is evaluated by the OCC and the agency has authority to order
cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the
institution.
Generally under OCC and FRB regulations, savings institutions, such as the Bank, may make capital
distributions during any calendar year equal to earnings of the previous two calendar years and current year-to-date
earnings. It is generally required under OCC and FRB regulations that the Bank remain well-capitalized before and
after the proposed distribution. However, an institution deemed to be in need of more than normal supervision by the
OCC and FRB may have its dividend authority restricted by the OCC and FRB. Savings institutions proposing to
make any capital distribution within these limits need only submit written notice to the OCC and FRB 30 days prior to
such distribution. The OCC and FRB may object to the distribution during that 30-day period based on safety and
soundness concerns. Savings institutions that desire to make a larger capital distribution, or are under special
restrictions, or are not, or would not be, well-capitalized following a proposed capital distribution, however, must
obtain OCC and FRB approval prior to making such distribution.
The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of
the Bank to make capital distributions to the Company. So long as the Bank continues to remain “well-capitalized”
after each capital distribution, operate in a safe and sound manner, provide the OCC and FRB with updated capital
levels, non-performing asset balances and ACL information as requested, and comply with the interest rate risk
management guidelines of the OCC and FRB, it is management’s belief that the OCC and FRB will continue to allow
the Bank to distribute its net income to the Company, although no assurance can be given in this regard.
In connection with the corporate reorganization, a “liquidation account” was established for the benefit of certain
depositors of the Bank in an amount equal to MHC’s ownership interest in the retained earnings of Capitol Federal
Financial as of June 30, 2010. Under applicable federal banking regulations, neither the Company nor the Bank is
permitted to pay dividends of its capital stock to its stockholders if stockholders’ equity would be reduced below the
amount of the liquidation account at that time.
During fiscal year 2011, the Company paid $150.1 million in cash dividends, which consisted of cash dividends
of $17.0 million paid prior to the corporate reorganization, and $133.1 million paid since the corporate reorganization.
Dividend payments depend upon a number of factors including the Company's financial condition and results of
operations, the Bank’s regulatory capital requirements, regulatory limitations on the Bank's ability to make capital
distributions to the Company, and the amount of cash at the holding company.
At September 30, 2011, Capitol Federal Financial, Inc., at the holding company level, had $113.1 million on
deposit with the Bank and $362.9 million in investment securities. As of September 30, 2011, $90.3 million of these
securities will mature within 90 days. Under current regulatory restrictions, we may not repurchase our stock during
the first year following our corporate reorganization except under very limited circumstances. The Company intends
to begin repurchasing shares at the end of this one-year moratorium, which expires in December 2011, subject to
market conditions and other factors.
44
Contingencies
In the normal course of business, the Company and its subsidiary are named defendants in various lawsuits and
Contingencies
counter claims. In the opinion of management, after consultation with legal counsel, none of the currently pending
suits are expected to have a materially adverse effect on the Company’s consolidated financial statements for the
year ended September 30, 2011 or future periods.
In the normal course of business, the Company and its subsidiary are named defendants in various lawsuits and
counter claims. In the opinion of management, after consultation with legal counsel, none of the currently pending
suits are expected to have a materially adverse effect on the Company’s consolidated financial statements for the
year ended September 30, 2011 or future periods.
Regulatory Capital
Consistent with management’s goals to operate a sound and profitable financial organization, we actively seek
Regulatory Capital
Consistent with management’s goals to operate a sound and profitable financial organization, we actively seek
to maintain a “well capitalized” status in accordance with regulatory standards. Total equity under GAAP for the Bank
was $1.40 billion at September 30, 2011, or 15.4% of total Bank assets on that date. As of September 30, 2011, the
Bank exceeded all capital requirements of the OCC. The Company currently does not have any regulatory capital
to maintain a “well capitalized” status in accordance with regulatory standards. Total equity under GAAP for the Bank
requirements, but under the Dodd-Frank Act will become subject to regulatory capital requirements beginning July 21,
was $1.40 billion at September 30, 2011, or 15.4% of total Bank assets on that date. As of September 30, 2011, the
2015. The following table presents the Bank’s regulatory capital ratios at September 30, 2011 based upon regulatory
Bank exceeded all capital requirements of the OCC. The Company currently does not have any regulatory capital
guidelines.
requirements, but under the Dodd-Frank Act will become subject to regulatory capital requirements beginning July 21,
2015. The following table presents the Bank’s regulatory capital ratios at September 30, 2011 based upon regulatory
guidelines.
Regulatory
Requirement
For “Well-
Regulatory
Requirement
Capitalized” Status
For “Well-
N/A
5.0%
6.0
10.0
Capitalized” Status
N/A
5.0%
6.0
10.0
Bank
Ratios
15.1%
15.1
37.9
38.3
Bank
Ratios
15.1%
15.1
37.9
38.3
Tangible equity
Tier 1 (core) capital
Tangible equity
Tier 1 (core) risk-based capital
Tier 1 (core) capital
Total risk-based capital
Tier 1 (core) risk-based capital
Total risk-based capital
45
Off-Balance Sheet Arrangements, Commitments and Contractual Obligations
The Company, in the normal course of business, makes commitments to buy or sell assets or to incur or fund
liabilities. Commitments may include, but are not limited to:
the origination, purchase, or sale of loans;
the purchase or sale of investment securities and MBS;
extensions of credit on home equity loans, construction loans, and commercial loans;
terms and conditions of operating leases; and
funding withdrawals of certificate of deposits at maturity.
The following table summarizes our contractual obligations and other material commitments as of September
30, 2011.
Total
Less than
one year
Maturity Range
One to
three
years
(Dollars in thousands)
Three to
five
years
More than
five years
Operating leases
$ 11,801
$ 1,279
$ 2,051
$ 1,547
$ 6,924
Certificates of Deposit
Weighted average rate
$ 2,624,292
$ 1,390,231
$ 864,058
$ 366,488
$ 3,515
1.87 % 1.65 % 2.00 % 2.40 % 2.46 %
FHLB Advances
Weighted average rate
$ 2,400,000
$ 350,000
$ 975,000
$ 475,000
$ 600,000
3.37 %
3.35 %
3.45 %
3.67 %
3.01 %
Repurchase Agreements
Weighted average rate
$ 515,000
$ 150,000
$ 245,000
$ 20,000
$ 100,000
4.00 %
4.41 %
3.97 %
4.45 %
3.35 %
Commitments to originate and
purchase loans
Weighted average rate
Commitments to fund unused
home equity lines of credit
and commercial commitments
Weighted average rate
Unadvanced portion of
construction loans
Weighted average rate
$ 170,312
$ 170,312
$ --
$ --
$ --
3.76%
3.76%
--%
--%
--%
$ 265,531 $ 265,531 $ --
$ --
$ --
4.53%
4.53%
--%
--%
--%
$ 22,531
$ 22,531
$ --
$ --
$ --
4.22 % 4.22 %
--%
--%
--%
Excluded from the table above are income tax liabilities of $68 thousand related to uncertain income tax
positions. The amounts are excluded as management is unable to estimate the period of cash settlement as it is
contingent on the statute of limitations expiring without examination by the respective taxing authority.
A percentage of commitments to originate mortgage loans are expected to expire unfunded, so the amounts
reflected in the table above are not necessarily indicative of future liquidity requirements. Additionally, the Bank is not
obligated to honor commitments to fund unused home equity lines of credit if a customer is delinquent or otherwise in
violation of the loan agreement.
We anticipate we will continue to have sufficient funds, through repayments and maturities of loans and
securities, deposits and borrowings, to meet our current commitments.
46
Stockholder Return Performance Presentation
The line graph below compares the cumulative total stockholder return on the Company’s common stock to the
cumulative total return of a broad index of the Nasdaq Stock Market, the Hemscott Savings and Loan index, and the
SNL Midcap Bank and Thrift industry index for the period September 30, 2006 through September 30, 2011. The
information presented below assumes $100 invested on September 30, 2006 in the Company’s common stock and in
each of the indices, and assumes the reinvestment of all dividends. Historical stock price performance is not
necessarily indicative of future stock price performance. The SNL Midcap Bank and Thrift index will replace the
Hemscott Savings and Loan index going forward, as the Hemscott Savings and Loan index was discontinued in May
2011.
Total Return Performance
160
140
120
100
80
60
l
e
u
a
V
x
e
d
n
I
40
20
0
09/30/06
09/30/07
09/30/08
09/30/09
09/30/10
09/30/11
Capitol Federal Financial, Inc.
SNL Midcap Bank and Thrift index
NASDAQ Composite
Hemscott Savings and Loans
Index
2006
2007
2008
2009
2010
2011
Capitol Federal Financial, Inc.
NASDAQ Composite
SNL Midcap Bank and Thrift index
Hemscott Savings and Loans
100.00 101.79 139.57 109.03
100.00 120.52
95.54
100.00
70.86
100.00
94.06
87.77
96.49 108.79 112.05
31.20
38.32
36.42
--
25.62
24.94
94.10
55.77
33.99
47
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Rule 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended, the
“Act”). The Company’s internal control system is a process designed to provide reasonable assurance to the
Company’s management and Board of Directors regarding the preparation and fair presentation of published financial
statements.
The Company’s internal control over financial reporting includes policies and procedures that pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets;
provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the United States of America, and that
receipts and expenditures are being made only in accordance with authorizations of management and the directors of
the Company; and provide reasonable assurance regarding prevention or untimely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial
statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial reporting. Further, because
of changes in conditions, the effectiveness of any system of internal control may vary over time. The design of any
internal control system also factors in resource constraints and consideration for the benefit of the control relative to the
cost of implementing the control. Because of these inherent limitations in any system of internal control, management
cannot provide absolute assurance that all control issues and instances of fraud within the Company have been
detected.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30,
2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control - Integrated Framework. Management has concluded
that the Company maintained an effective system of internal control over financial reporting based on these criteria as
of September 30, 2011.
The Company’s independent registered public accounting firm, Deloitte & Touche LLP, who audited the consolidated
financial statements included in the Company’s annual report, has issued an audit report on the Company’s internal
control over financial reporting as of September 30, 2011 and it is included herein.
John B. Dicus, Chairman, President
and Chief Executive Officer
Kent G. Townsend, Executive Vice President,
Chief Financial Officer and Treasurer
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Capitol Federal Financial, Inc. and subsidiary
Topeka, Kansas
We have audited the internal control over financial reporting of Capitol Federal Financial, Inc. and subsidiary
(the “Company”) as of September 30, 2011, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because
management’s assessment and our audit were conducted to meet the reporting requirements of Section 112
of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment and
our audit of the Company’s internal control over financial reporting included controls over the preparation of
the schedules equivalent to the basic financial statements in accordance with the instructions for the
Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C). The Company's
management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of,
the company's principal executive and principal financial officers, or persons performing similar functions,
and effected by the company's Board of Directors, management, and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may
not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of
the internal control over financial reporting to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of September 30, 2011, based on the criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements as of and for the year ended September 30, 2011 of
the Company and our report dated November 29, 2011 expressed an unqualified opinion on those financial
statements.
Kansas City, Missouri
November 29, 2011
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Capitol Federal Financial, Inc. and subsidiary
Topeka, Kansas
We have audited the accompanying consolidated balance sheets of Capitol Federal Financial, Inc. and subsidiary
(the “Company”) as of September 30, 2011 and 2010, and the related consolidated statements of income,
stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2011. These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
Capitol Federal Financial, Inc. and subsidiary as of September 30, 2011 and 2010, and the results of its operations
and its cash flows for each of the three years in the period ended September 30, 2011, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company's internal control over financial reporting as of September 30, 2011, based on the criteria
established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated November 29, 2011 expressed an unqualified opinion on the
Company's internal control over financial reporting.
Kansas City, Missouri
November 29, 2011
51
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2011 and 2010 (Dollars in thousands)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2011 and 2010 (Dollars in thousands)
ASSETS
ASSETS
CASH AND CASH EQUIVALENTS (includes interest-earning deposits of
$105,292 and $50,771)
CASH AND CASH EQUIVALENTS (includes interest-earning deposits of
$105,292 and $50,771)
SECURITIES:
Available-for-sale (“AFS”), at fair value (amortized cost of $1,443,529 and $1,009,142)
SECURITIES:
Held-to-maturity (“HTM”), at cost (fair value of $2,434,392 and $1,913,454)
Available-for-sale (“AFS”), at fair value (amortized cost of $1,443,529 and $1,009,142)
Held-to-maturity (“HTM”), at cost (fair value of $2,434,392 and $1,913,454)
LOANS RECEIVABLE, net (less allowance for credit losses “ACL” of
$15,465 and $14,892 )
LOANS RECEIVABLE, net (less allowance for credit losses “ACL” of
$15,465 and $14,892 )
BANK-OWNED LIFE INSURANCE (“BOLI”)
2011
2011
2010
2010
$ 121,070 $ 65,217
$ 121,070 $ 65,217
1,486,439 1,060,366
2,370,117 1,880,154
1,486,439 1,060,366
2,370,117 1,880,154
5,149,734 5,168,202
5,149,734 5,168,202
56,534 54,710
BANK-OWNED LIFE INSURANCE (“BOLI”)
CAPITAL STOCK OF FEDERAL HOME LOAN BANK (“FHLB”), at cost
56,534 54,710
126,877 120,866
CAPITAL STOCK OF FEDERAL HOME LOAN BANK (“FHLB”), at cost
ACCRUED INTEREST RECEIVABLE
126,877 120,866
29,316 30,220
ACCRUED INTEREST RECEIVABLE
PREMISES AND EQUIPMENT, net
PREMISES AND EQUIPMENT, net
REAL ESTATE OWNED (“REO”), net
REAL ESTATE OWNED (“REO”), net
INCOME TAXES RECEIVABLE, net
INCOME TAXES RECEIVABLE, net
OTHER ASSETS
OTHER ASSETS
TOTAL ASSETS
TOTAL ASSETS
29,316 30,220
48,423 41,260
48,423 41,260
11,321 9,920
11,321 9,920
-- 716
-- 716
50,968 55,499
50,968 55,499
$ 9,450,799 $ 8,487,130
$ 9,450,799 $ 8,487,130
(Continued)
(Continued)
52
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2011 and 2010 (Dollars in thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
2011
2010
LIABILITIES:
Deposits
Advances from FHLB
Other borrowings
Advance payments by borrowers for taxes and insurance
Income taxes payable
Deferred income tax liabilities, net
Accounts payable and accrued expenses
$ 4,386,310
$ 4,495,173
2,348,371
2,379,462
515,000
668,609
55,138 55,036
2,289 --
20,447 33,244
43,761 33,610
Total liabilities
7,511,270 7,525,180
COMMITMENTS AND CONTINGENCIES (NOTE 12)
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value; 100,000,000 shares authorized,
no shares issued or outstanding
Common stock, $.01 par value; 1,400,000,000 shares authorized,
167,498,133 shares issued; 167,498,133 and 73,992,678 shares
outstanding as of September 30, 2011 and 2010, respectively
Additional paid-in capital
Unearned compensation, Employee Stock Ownership Plan (“ESOP”)
Unearned compensation, Recognition and Retention Plan (“RRP”)
Retained earnings
Accumulated other comprehensive income (“AOCI”), net of tax
--
--
1,675 915
1,392,691 457,795
(50,547) (6,050)
(124) (255)
569,127 801,044
26,707 31,862
1,939,529 1,285,311
Treasury stock, at cost, 0 and 17,519,609 shares as of
September 30, 2011 and 2010, respectively, at cost
-- (323,361)
Total stockholders’ equity
1,939,529 961,950
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 9,450,799
$ 8,487,130
See notes to consolidated financial statements (Concluded)
53
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2011, 2010, and 2009 (Dollars in thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
Loans receivable
Mortgage-backed securities (“MBS”)
Investment securities
Capital stock of FHLB
Cash and cash equivalents
Total interest and dividend income
INTEREST EXPENSE:
FHLB advances
Deposits
Other borrowings
Total interest expense
2011
2010
2009
$ 251,909
71,332
19,077
3,791
756
346,865
$ 282,307
71,859
15,682
3,966
237
374,051
$ 305,782
97,926
5,533
3,344
201
412,786
90,298
63,568
24,265
178,131
97,212
79,216
28,058
204,486
106,551
100,471
29,122
236,144
NET INTEREST INCOME
168,734
169,565
176,642
PROVISION FOR CREDIT LOSSES
4,060
8,881
6,391
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES
164,674
160,684
170,251
OTHER INCOME:
Retail fees and charges
Insurance commissions
Loan fees
Income from BOLI
Gains on securities, net
Other income, net
Total other income
15,509
3,071
2,449
1,824
--
2,142
24,995
17,789
2,476
2,592
1,202
6,454
3,898
34,411
18,023
2,440
2,327
1,158
--
4,646
28,594
(Continued)
54
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2011, 2010, and 2009 (Dollars in thousands, except per share data)
OTHER EXPENSES:
Salaries and employee benefits
2011
2010
2009
44,913 42,666 43,318
Communications, information technology, and occupancy
16,051 15,554 15,226
Regulatory and outside services
Federal insurance premium
Deposit and loan transaction costs
Advertising and promotional
Mortgage servicing activity, net
5,224 4,769 4,318
5,222 7,452 7,558
5,157 5,300 5,434
3,723 6,027 6,918
2,434 600 3,148
Contribution to Capitol Federal Foundation (“Foundation”)
40,000 -- --
Other expenses, net
Total other expenses
9,593 7,362 7,701
132,317 89,730 93,621
INCOME BEFORE INCOME TAX EXPENSE
57,352 105,365 105,224
INCOME TAX EXPENSE
18,949 37,525 38,926
NET INCOME
$ 38,403 $ 67,840 $ 66,298
Basic earnings per share (“EPS”)
Diluted EPS
Dividends declared per public share
$ 0.24 $ 0.41 $ 0.40
$ 0.24 $ 0.41 $ 0.40
$ 1.63 $ 2.29 $ 2.11
Basic weighted average common shares
162,625,274 165,862,176 165,576,334
Diluted weighted average common shares
162,632,665
165,899,445 165,721,176
(Concluded)
See notes to consolidated financial statements
55
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED SEPTEMBER 30, 2011, 2010, and 2009 (Dollars in thousands, except per share data)
Balance at October 1, 2008
Comprehensive Income:
Net income, fiscal year 2009
Changes in unrealized gain/losses on
securities AFS, net of deferred
income tax $24,210
Total comprehensive income
ESOP activity, net
RRP activity, net
Stock based compensation
- stock options and RRP
Acquisition of treasury stock
Stock options exercised
Dividends on common stock to
stockholders ($2.11 per public share)
Common
Stock
$915
Additional
Paid-In
Capital
$ 445,391
Unearned
Compensation - Retained
RRP Earnings
ESOP
($553) $ 759,375
($10,082)
AOCI
(Loss)
($5,968)
Treasury
Stock
($317,862)
Total
Stockholders’
Equity
$ 871,216
66,298
39,838
2,016
(100)
323
5,913
131
281
1,156
(44,069)
24
(2,426)
697
66,298
39,838
106,136
7,929
55
604
(2,426)
1,853
(44,069)
Balance at September 30, 2009
915
452,872
(8,066)
(330)
781,604
33,870
(319,567)
941,298
Comprehensive Income:
Net income, fiscal year 2010
Changes in unrealized gain/losses on
securities AFS, net of deferred
income tax $1,221
Total comprehensive income
ESOP activity, net
RRP activity, net
Stock based compensation
- stock options and RRP
Acquisition of treasury stock
Stock options exercised
Dividends on common stock to
stockholders ($2.29 per public share)
67,840
(2,008)
2,016
(163)
238
4,465
123
214
121
(48,400)
47
(4,019)
178
67,840
(2,008)
65,832
6,481
7
452
(4,019)
299
(48,400)
Balance at September 30, 2010
915
457,795
(6,050)
(255)
801,044
31,862
(323,361)
961,950
(Continued)
56
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED SEPTEMBER 30, 2011, 2010, and 2009 (Dollars in thousands, except per share data)
Additional
Unearned
Total
Common
Paid-In Compensation - Retained
AOCI Treasury Stockholders’
Stock
Capital
ESOP RRP Earnings
(Loss)
Stock
Equity
38,403
38,403
3,259
2,763
(4)
131
42
131
(5,155)
(5,155)
33,248
6,022
(4)
262
--
42
(150,110)
(150,110)
Comprehensive Income:
Net income, fiscal year 2011
Changes in unrealized gain/losses on
securities AFS, net of deferred
income tax $3,159
Total comprehensive income
ESOP activity, net
RRP activity, net
Stock based compensation
- stock options and RRP
Acquisition of treasury stock
Stock options exercised
Dividends on common stock to
stockholders ($1.63 per public share)
Corporate reorganization:
Merger of Capitol Federal
Savings Bank MHC
Retirement of treasury stock
Exchange of common stock
Proceeds from stock offering,
(522)
(175)
276
1,997
(204,199)
(323)
(1,223)
(118,987)
323,361
252
--
(47)
1,135,174
(47,260)
net of offering expenses
1,181
1,133,993
Purchase of common stock by ESOP
(47,260)
Balance at September 30, 2011
$1,675 $1,392,691 ($50,547) ($124) $569,127 $26,707 $ --
$1,939,529
See notes to consolidated financial statements
(Concluded)
57
2011
2010
2009
$ 38,403
$ 67,840 $ 66,298
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2011, 2010, AND 2009 (Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
FHLB stock dividends
Provision for credit losses
Originations of loans receivable held-for-sale (“LHFS”)
Proceeds from sales of LHFS
Amortization and accretion of premiums and discounts on securities
Depreciation and amortization of premises and equipment
Amortization of deferred amounts related to FHLB advances, net
Common stock committed to be released for allocation - ESOP
Stock based compensation - stock options and RRP
Provision for deferred income taxes
Gain on the sale of trading securities received in the loan swap transaction
Changes in:
Prepaid federal insurance premium, net
Accrued interest receivable
Other assets, net
Income taxes payable/receivable
Accounts payable and accrued expenses
Net cash provided by operating activities
(3,791)
4,060
(11,715)
13,483
8,100
4,397
7,091
6,022
262
(9,647)
--
4,718
904
637
3,004
(143)
65,785
(3,966)
8,881
(47,488)
46,140
5,940
4,584
6,676
6,481
452
3,466
(6,454)
(20,447)
2,420
(7,035)
(6,697)
(1,631)
59,162
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of trading securities received in the loan swap transaction
Purchase of AFS securities
Purchase of HTM securities
Proceeds from calls, maturities and principal reductions of AFS securities
Proceeds from calls, maturities and principal reductions of HTM securities
Proceeds from the redemption of capital stock of FHLB
Purchases of capital stock of FHLB
Loan originations and purchases, net of principal collected
and deferred loan fees
Purchases of premises and equipment
Proceeds from sales of REO
Net cash used in investing activities
--
(790,083)
(1,979,789)
351,636
1,485,786
4,942
(7,162)
199,144
--
(1,662,009)
557,141
628,350
16,185
(21)
(105)
(12,751)
14,205
(933,321)
219,628
(8,183)
11,273
(38,492)
58
(3,344)
6,391
(851)
97,838
2,644
5,132
3,829
7,929
604
3,548
--
--
1,064
837
8
(1,209)
190,718
--
(424,498)
(215,263)
396,101
208,591
3,688
(9,002)
(394,785)
(13,053)
7,669
(440,552)
(Continued)
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2011, 2010, AND 2009 (Dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid
Deposits, net of withdrawals
Proceeds from borrowings
Repayments on borrowings
Deferred FHLB prepayment penalty
Change in advance payments by borrowers for taxes and insurance
Net proceeds from common stock offering (deferred offering costs)
Acquisitions of treasury stock
Stock options exercised
Excess tax benefits from stock options
Net cash provided by financing activities
2011
2010
2009
(150,110)
126,553
644,162
(773,771)
--
102
1,076,411
--
35
7
923,389
(48,400)
157,701
300,000
(395,000)
(875)
(331)
(5,982)
(4,019)
210
89
3,393
(44,069)
304,726
1,561,612
(1,581,612)
(38,388)
2,154
--
(2,426)
1,337
516
203,850
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
55,853
24,063
(45,984)
CASH AND CASH EQUIVALENTS:
Beginning of Period
65,217
41,154
87,138
End of Period
$ 121,070 $ 65,217
$ 41,154
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income tax payments
$ 25,517 $ 40,664
$ 35,334
Interest payments
$ 172,332 $ 199,433
$ 236,137
SUPPLEMENTAL DISCLOSURE OF NONCASH 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
$ -- $ --
Commitment to fund low-income housing partnerships
$ 9,618
$ -- $ --
Loans transferred to REO
$ 15,048
$ 13,717
$ 10,730
Transfer of loans receivable to LHFS, net
$ --
$ --
$ 94,672
Swap of loans for trading securities
$ --
$ 193,889 $ --
See notes to consolidated financial statements.
(Concluded)
59
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2011, 2010, and 2009
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Capitol Federal Financial, Inc. (the “Company”) provides a full range of retail banking
services through its wholly-owned subsidiary, Capitol Federal Savings Bank (the “Bank”) which has 35 traditional
and 10 in-store banking offices serving primarily the metropolitan areas of Topeka, Wichita, Lawrence,
Manhattan, Emporia and Salina, Kansas and portions of the metropolitan area of greater Kansas City. The Bank
emphasizes mortgage lending, primarily originating and purchasing one- to four-family mortgage loans and
providing personal retail financial services. The Bank is subject to competition from other financial institutions
and other companies that provide financial services.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was
signed into law. The Dodd-Frank Act, among other things, required the Office of Thrift Supervision (the “OTS”) to
be merged into the Office of the Comptroller of the Currency (the “OCC”). On July 21, 2011, the OCC assumed
all functions and authority from the OTS relating to federally chartered savings banks, and the Board of
Governors of the Federal Reserve System (“FRB”) assumed all functions and authority from the OTS relating to
savings and loan holding companies. Effective July 21, 2011, the Bank is regulated by the OCC and the
Company is regulated by the FRB. Prior to that date, the Bank and Company were regulated by the OTS. The
Bank is also regulated by the Federal Deposit Insurance Corporation (the “FDIC”). The Bank and Company are
subject to periodic examinations by the above noted regulatory authorities.
The Bank has an expense sharing agreement with the Company that covers the reimbursement of certain
expenses that are allocable to the Company. These expenses include compensation, rent for leased office
space, and general overhead expenses.
The Company and its subsidiary have a tax allocation agreement. The Bank is the paying agent to the taxing
authorities for the group for all periods presented. Each company is liable for taxes as if separate tax returns
were filed and reimburses the Bank for its related tax liability. If any entity has a tax benefit due to a taxable loss,
the Bank reimburses the entity for the related tax benefit.
The Company’s ability to pay dividends is dependent, in part, upon its ability to obtain capital distributions from
the Bank. The future dividend policy of the Company is subject to the discretion of the Board of Directors and will
depend upon a number of factors, including the Company’s financial condition and results of operations, the
Bank’s regulatory capital requirements, regulatory limitations on the Bank’s ability to make capital distributions to
the Company, and the amount of cash at the holding company. Holders of common stock will be entitled to
receive dividends as of and when declared by the Board of Directors of the Company out of funds legally
available for that purpose.
Basis of Presentation - In December 2010, Capitol Federal Financial completed its conversion from a mutual
holding company form of organization to a stock form of organization (“corporate reorganization”). Capitol
Federal Financial, which owned 100% of the Bank, was succeeded by the Company, a new Maryland
corporation. As part of the corporate reorganization, Capitol Federal Savings Bank MHC’s (“MHC”) ownership
interest in Capitol Federal Financial was sold in a public offering. Gross proceeds from the offering were $1.18
billion and related offering expenses were $46.7 million, of which $6.0 million were incurred and deferred in fiscal
year 2010. The publicly held shares of Capitol Federal Financial were exchanged for new shares of common
stock of the Company. The exchange ratio was 2.2637 and ensured that immediately after the corporate
reorganization the public stockholders of Capitol Federal Financial owned the same aggregate percentage of the
Company’s common stock that they owned of Capitol Federal Financial’s common stock immediately prior to the
reorganization. All share information used to calculate EPS in the consolidated financial statements prior to the
corporate reorganization has been revised to reflect the 2.2637 exchange ratio. In conjunction with the corporate
reorganization, the Company contributed $40.0 million of cash to the Bank’s charitable foundation, Capitol
Federal Foundation. Additionally, a “liquidation account” has been established for the benefit of certain
depositors of the Bank in an amount equal to MHC’s ownership interest in the retained earnings of Capitol
Federal Financial as of June 30, 2010. As of September 30, 2011, the balance of the liquidation account was
$405.4 million. Under OCC regulations, neither the Company nor the Bank is permitted to pay dividends on its
capital stock to its stockholders if stockholders’ equity would be reduced below the current amount of the
liquidation account at that time.
The consolidated financial statements after the corporate reorganization in December 2010 include the accounts
of the Company and its wholly owned subsidiary, the Bank. The consolidated financial statements prior to the
corporate reorganization include the accounts of Capitol Federal Financial and its wholly owned subsidiary, the
Bank. The Bank has a wholly owned subsidiary, Capitol Funds, Inc. Capitol Funds, Inc. has a wholly owned
60
subsidiary, Capitol Federal Mortgage Reinsurance Company. All intercompany accounts and transactions have
been eliminated.
These consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP”), and require management 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 the reported amounts of 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 ability 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.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand and amounts due from banks.
The Bank has acknowledged informal agreements with other banks where it maintains deposits. Under these
agreements, service fees charged to the Bank are waived provided certain average compensating balances are
maintained throughout each month. FRB regulations require federally chartered savings banks to maintain cash
reserves against their transaction accounts. Required reserves must be maintained in the form of vault cash, an
account at a Federal Reserve Bank, or a pass-through account as defined by the FRB. The Bank is in
compliance with the FRB requirements. For the years ended September 30, 2011 and 2010, the average daily
balance of required reserves at the Federal Reserve Bank was $9.3 million and $9.7 million, respectively.
Securities - Securities include mortgage-backed and agency securities issued primarily by United States
Government-Sponsored Enterprises (“GSE”), including Federal National Mortgage Association (“FNMA”),
Federal Home Loan Mortgage Corporation (“FHLMC”) and FHLB, United States Government agencies, including
Government National Mortgage Association (“GNMA”), and municipal bonds. Securities are classified as HTM,
AFS, or trading based on management’s intention on the date of purchase. Generally, classifications are made
in response to liquidity needs, asset/liability management strategies, and the market interest rate environment at
the time of purchase.
Securities that management has the intent and ability to hold to maturity are classified as HTM and reported at
amortized cost. Such securities are adjusted for the amortization of premiums and discounts which are
recognized as adjustments to interest income over the life of the securities using the level-yield method.
Securities that management may sell if necessary for liquidity or asset management purposes are classified as
AFS and reported at fair value, with unrealized gains and losses reported as a component of accumulated other
comprehensive income (loss) within stockholders’ equity, net of deferred income taxes. The amortization of
premiums and discounts are recognized as adjustments to interest income over the life of the securities using the
level-yield method. Gains or losses on the disposition of AFS securities are recognized using the specific
identification method. Estimated fair values of AFS securities are based on one of three methods: 1) quoted
market prices where available, 2) quoted market prices for similar instruments if quoted market prices are not
available, and 3) unobservable data that represents the Bank’s assumptions about items that market participants
would consider in determining fair value where no market data is available. See additional discussion of fair
value of AFS securities in Note 14.
Securities that are purchased and held principally for resale in the near future are classified as trading securities
and are reported at fair value, with unrealized gains and losses included in other income in the consolidated
statements of income. During fiscal year 2010, the Bank held trading securities for a limited time. The securities
were received in conjunction with the swap of originated fixed-rate mortgage loans with FHLMC for MBS. During
the fiscal year ended September 30, 2011, neither the Company nor the Bank maintained a trading securities
portfolio.
Management monitors the securities portfolio for impairment on an ongoing basis and performs a formal review
quarterly. The process involves monitoring market events and other items that could impact issuers. The
evaluation includes, but is not limited to, such factors as: the nature of the investment, the length of time the
security has had a fair value less than the amortized cost basis, the cause(s) and severity of the loss,
expectation of an anticipated recovery period, recent events specific to the issuer or industry including the
issuer’s financial condition and current ability to make future payments in a timely manner, external credit ratings
and recent downgrades in such ratings, management’s intent to sell and whether it is more likely than not
management would be required to sell prior to recovery for debt securities. Management determines whether
other-than-temporary losses should be recognized for impaired securities by assessing all known facts and
circumstances surrounding the securities. If management intends to sell an impaired security or if it is more
likely than not that management will be required to sell an impaired security before recovery of its amortized cost
basis, an other-than-temporary impairment has occurred and the difference between amortized cost and fair
value will be recognized as a loss in earnings and the security will be written down to fair value. Such losses
would be included in other income in the consolidated statements of income.
61
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.
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.
Loans on which the accrual of income has been discontinued are designated as non-accrual loans and
outstanding interest previously credited beyond 90 days delinquent is reversed. A non-accrual loan is returned
to accrual status once the contractual payments have been made to bring the loan less than 90 days past due.
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 that 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.
The Company adopted Accounting Standards Update (“ASU”) No. 2011-02, Receivables (Topic 310): A
Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring, (ASU 2011-02) on July 1,
2011. ASU No. 2011-02 provides additional guidance to creditors for evaluating whether a restructuring of a loan
is a TDR. In evaluating whether a loan restructuring constitutes a TDR, a creditor must separately conclude that
the restructuring constitutes a concession to the borrower and the borrower is experiencing financial difficulties.
As a result of adopting the ASU, management reassessed all restructurings that occurred on or after October 1,
2010, for identification as TDRs. Management identified certain endorsed loans that are now required to be
reported as TDRs due to decreases in soft credit scores and/or estimated loan-to-value (“LTV”) ratios since the
time the loan was originated. Because of these decreases, the borrower could be experiencing financial
difficulties even though they have not been delinquent in the previous 12 months on their existing loan payments.
These loans had been measured under the general valuation allowance methodology, prior to the adoption of
ASU 2011-02. Upon adoption, management classified the loans as impaired and began measuring the loans
under the specific valuation allowance (“SVA”) methodology. Management will continue to apply the SVA
methodology to these loans as long as they are classified as impaired.
Additionally, management identified certain loan restructurings that occurred on or after October 1, 2010, where
the loan restructurings resulted in an insignificant delay in the timing of the loan principal payments. The deferral
period for these restructured loans was six months or less and any reduction in the principal value of cash flows
as a result of the restructuring was due to the insignificant delay in the timing of principal payments. The Bank
did not forgive any interest or principal in association with these restructurings. Upon adoption, management
began measuring these loans under the general valuation allowance methodology.
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 non-
accrual loans, loans classified as substandard, loans with SVAs, and TDRs that have not 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.
62
Allowance for Credit Losses - The ACL represents management’s best estimate of the amount of known and
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 for general valuation allowances and the
establishment of SVAs for identified problem loans. Management maintains the ACL through provisions for
credit losses that are charged to income.
For one- to four-family loans, losses are charged-off when a loan is transferred to REO or if there is a short-sale
of the collateral. For consumer home equity loans where the Bank holds the first mortgage, if the loan balance is
in excess of the fair value and the loan is in foreclosure, the difference between the loan balances and the fair
value is charged-off. Estimated selling costs and private mortgage insurance (“PMI”) proceeds are also taken
into consideration when calculating the amount to charge-off for home equity loans. For consumer home equity
loans where the Bank does not hold the first mortgage, foreclosure is pursued or the loan balance is charged-off.
Other consumer loans that are unsecured are entirely charged-off once the loan is 120 days past due. For multi-
family and commercial loans, the Bank records an SVA when it is determined that the collection of all or a portion
of a loan may not be collected and the amount of that loss is reasonably estimated.
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 also shares the 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, 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 potentially be forced to sell at a discounted
price, resulting in additional losses.
Management considers several quantitative and qualitative factors quarterly while monitoring the credit quality of
the loan portfolio and evaluating the adequacy of the ACL. Such factors include: the trend and composition of
delinquent and non-performing loans, the results of foreclosed property and short-sale transactions (historical
losses and net charge-offs), increase in and establishment of SVAs, the current status and trends of local and
national economies, the trends and current conditions in the residential real estate 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 quantitative and qualitative 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 allowance for credit loss
methodology. Management seeks to apply the ACL methodology in a consistent manner; however, the
methodology can be modified in response to changing conditions. There were no significant modifications to the
formula analysis methodology during the year ended September 30, 2011.
The formula analysis for general valuation allowances is updated each quarter. Within the formula analysis, the
loan portfolio is segregated into the following categories: 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 to
calculate a combined LTV ratio. Impaired loans are excluded from the formula analysis as they are individually
evaluated for SVAs. 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 purchased from a nationwide
lender, 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
losses on REO and short-sales.
63
Quantitative loss factors are applied to each loan category in the formula analysis based on the historical loss
experience and current SVAs, adjusted for loan delinquency trends, 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. 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 30 to 89 days delinquent, the qualitative loss factors increase based
upon delinquent loan trends. 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.
SVAs are established in connection with individual loan reviews of impaired loans. Since the majority of the
Bank’s loan portfolio is composed of residential real estate, determining the estimated fair value of the underlying
collateral is important in evaluating the amount of SVAs required for impaired one- to four-family loans. If the
estimated fair value of the collateral, less estimated costs to sell and anticipated PMI proceeds, is less than the
current loan balance, an SVA is established for the difference. Once a purchased one- to four-family loan is 90
days delinquent, new collateral values are obtained through automated valuation models (“AVMs”) or broker
price opinions (“BPOs”). An updated AVM or BPO is then requested approximately every six months while the
loan is greater than 90 days delinquent. Due to the relatively stable home values in Kansas and Missouri, new
appraisals on originated one- to four- family loans are not obtained until a loan enters foreclosure. For originated
one- to four-family loans and home equity loans that are impaired and the most recent appraisal is more than
one year old, management estimates the fair value of the collateral using the most recently published Federal
Housing Finance Agency (“FHFA”) index. For those loans where the FHFA fair value estimate results in a value
less than the outstanding loan balance, an updated appraisal is obtained and is used to establish the SVA. If the
Bank holds the first and second mortgage, both loans are combined when evaluating the need for an SVA.
Loans with an outstanding balance of $1.5 million or more are reviewed annually if secured by property in one of
the following categories: multi-family (five or more units) property, unimproved land, other improved commercial
property, acquisition and development of land projects, developed building lots, office building, single-use
building, or retail building. SVAs are established if necessary, or management may charge-off such losses if
deemed appropriate.
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.
Bank-Owned Life Insurance - BOLI is an insurance investment designed to help offset costs associated with
the Bank’s compensation and benefit programs. In the event of the death of an insured individual, the Bank
would receive a death benefit. If the insured individual is employed by the Bank at the time of death, a death
benefit will be paid to the insured individual’s designated beneficiary equal to the insured individual’s base
compensation at the time BOLI was approved by the Bank’s Board of Directors. If the individual is not employed
by the Bank at the time of death, no death benefits will be paid to the insured individual’s designated beneficiary.
The cash surrender value of the policies is reported in BOLI in the consolidated balance sheets. Changes in the
cash surrender value are recorded in Income from BOLI in the consolidated statements of income.
Capital Stock of Federal Home Loan Bank - As a member of FHLB Topeka, the Bank is required to acquire
and hold shares of FHLB stock. The Bank’s holding requirement varies based on the Bank’s activities, primarily
the Bank’s outstanding advances, with FHLB. FHLB stock is carried at cost. Management conducts a periodic
review and evaluation of the Bank’s investment in FHLB stock to determine if any impairment exists. Dividends
received on FHLB stock are reflected as interest and dividend income in the consolidated statements of income.
Premises and Equipment - Land is carried at cost. Buildings, leasehold improvements and furniture, fixtures
and equipment are carried at cost less accumulated depreciation and leasehold amortization. Buildings,
furniture, fixtures and equipment are depreciated over their estimated useful lives using the straight-line method.
Buildings have an estimated useful life of 39 years. Furniture, fixtures and equipment have an estimated useful
life of three to seven years. Leasehold improvements are amortized over the shorter of their estimated useful
lives or the term of the respective leases, which is generally three to 15 years. The costs for major
improvements and renovations are capitalized, while maintenance, repairs and minor improvements are charged
to operating expenses as incurred. Gains and losses on dispositions are recorded as other income or other
expense as incurred.
64
Real Estate Owned - REO primarily represents foreclosed assets held for sale. REO is reported at the lower of
cost or estimated fair value less estimated selling costs (“realizable value.”) At acquisition, write downs to
realizable value are charged to the ACL. After acquisition, any additional write downs are charged to operations
in the period they are identified and are recorded in other expenses on the consolidated statements of income.
Costs and expenses related to major additions and improvements are capitalized while maintenance and repairs
which do not improve or extend the lives of the respective assets are expensed. Gains and losses on the sale of
REO are recognized upon disposition of the property and are recorded in other expenses in the consolidated
statements of income.
Income Taxes - The Company utilizes the asset and liability method of accounting for income taxes. Under this
method, deferred income tax assets and liabilities are recognized for the tax consequences of temporary
differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.
The provision for deferred income taxes represents the change in deferred income tax assets and liabilities
excluding the tax effects of the change in net unrealized gain (loss) on AFS securities and changes in the market
value of vested RRP shares.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. Certain tax benefits attributable to stock options and RRP shares are credited to additional
paid-in capital. The Company will record a valuation allowance to reduce its deferred income tax assets when
there is uncertainty regarding the ability to realize their benefit.
Certain accounting literature prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return.
Accruals of interest and penalties related to unrecognized tax benefits are recognized in income tax expense.
Employee Stock Ownership Plan - The funds borrowed by the ESOP from the Company to purchase the
Company’s common stock are being repaid from the Bank’s contributions and dividends paid on unallocated
ESOP shares. The shares pledged as collateral are reported as a reduction of stockholders’ equity at cost. As
ESOP shares are committed to be released from collateral each quarter, the Company records compensation
expense based on the average market price of the Company’s stock during the quarter. Additionally, the shares
become outstanding for EPS computations once they are committed to be released.
Stock-based Compensation - The Company has a Stock Option and Incentive Plan (the “Option Plan”) and an
RRP which are considered share-based payment awards. Compensation expense is recognized over the
service period of each share-based payment award. The Company applies a fair-value-based measurement
method in accounting for share-based payment transactions with employees, except for equity instruments held
by the ESOP. The Company applies the modified prospective method in which compensation cost is recognized
over the service period for all awards granted.
Borrowed Funds - The Bank enters into sales of securities under agreements to repurchase with selected
brokers (“repurchase agreements”). These agreements are recorded as financing transactions as the Bank
maintains effective control over the transferred securities. The dollar amount of the securities underlying the
agreements continues to be carried in the Bank’s securities portfolio. The obligations to repurchase the securities
are reported as a liability in the consolidated balance sheet. The securities underlying the agreements are
delivered to the party with whom each transaction is executed. They agree to resell to the Bank the same
securities at the maturity of the agreement. The Bank retains the right to substitute similar or like securities
throughout the terms of the agreements. The collateral is subject to valuation at current market levels and the
Bank may ask for the return of excess collateral or be required to post additional collateral due to market value
changes.
The Bank has obtained advances from FHLB. FHLB advances are secured by certain qualifying mortgage loans
pursuant to a blanket collateral agreement with FHLB and all of the capital stock of FHLB owned by the Bank.
Per the FHLB lending guidelines, total FHLB borrowings cannot exceed 40% of total Bank assets, as reported on
the Bank’s Thrift Financial Report to the OCC, without pre-approval from the FHLB president.
Capitol Federal Financial Trust I (the “Trust”) is a Delaware statutory trust established by Capitol Federal
Financial. The Trust was formed for the purpose of issuing Company obligated mandatorily redeemable
preferred securities (“Trust Preferred Securities”). The Trust issued $53.6 million of Trust Preferred Securities.
When the Trust Preferred Securities were issued, the Trust used the proceeds to purchase a like amount of
Junior Subordinated Deferrable Interest Debentures (the “Debentures”) of the Company. The Company
guaranteed the obligations of the Trust. The Debentures were redeemed in April 2011. The Debentures were
the sole assets of the Trust, and were reported in Other Borrowings in the September 30, 2010 consolidated
balance sheet. The Trust was not included in the consolidated financial statements.
The Bank is authorized to borrow from the Federal Reserve Bank’s “discount window.” The Bank had no
outstanding Federal Reserve Bank borrowings at September 30, 2011 or 2010.
65
Comprehensive Income - Comprehensive income is comprised of net income and other comprehensive
income. Other comprehensive income includes changes in unrealized gains and losses on securities AFS, net of
tax. Comprehensive income is presented in the consolidated statements of changes in stockholders’ equity.
Segment Information - As a community-oriented financial institution, substantially all of the Bank’s operations
involve the delivery of loan and deposit products to customers. Management makes operating decisions and
assesses performance based on an ongoing review of these community banking operations, which constitute the
Company’s only operating segment for financial reporting purposes.
Earnings Per Share - Basic EPS is computed by dividing income available to common stockholders by the
weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock (such as stock options) were exercised or
resulted in the issuance of common stock. These potentially dilutive shares would then be included in the
weighted average number of shares outstanding for the period using the treasury stock method. Shares issued
and shares reacquired during any period are weighted for the portion of the period that they were outstanding.
In computing both basic and diluted EPS, the weighted average number of common shares outstanding includes
the ESOP shares previously allocated to participants and shares committed to be released for allocation to
participants and the RRP shares which have vested or have been allocated to participants. ESOP and RRP
shares that have not been committed to be released or have not vested are excluded from the computation of
basic and diluted EPS. Unvested awards that contain nonforfeitable rights to dividends should be treated as
participating securities in the computation of EPS pursuant to the two-class method; however, the Company has
determined the impact of doing so is inconsequential.
Recent Accounting Pronouncements - Effective October 1, 2010, the Company adopted new authoritative
accounting guidance under Accounting Standards Codification (“ASC”) 860, Transfers of Servicing Assets. The
objective of this standard is to improve the relevance, representational faithfulness, and comparability of the
information provided in the financial statements related to the transfer of financial assets; the effects of a transfer
on the Company’s financial position, financial performance, and cash flows; and a transferor’s continuing
involvement in transferred financial assets. The adoption of this standard did not have an impact on the
Company’s financial condition or results of operations.
Effective October 1, 2010, the Company also adopted new authoritative accounting guidance under ASC 810,
Consolidation. The new guidance did not change many of the key principles for determining whether an entity is
a variable interest entity consistent with the ASC on “Consolidation”, but does amend many important provisions
of the existing guidance on “Consolidation.” The adoption of this standard did not have an impact on the
Company’s financial condition, results of operations, or financial statement disclosures.
In July 2010, the Financial Accounting Standards Board (“FASB”) issued ASU 2010-20, Disclosures about Credit
Quality of Financing Receivables and the Allowance for Credit Losses, which amends ASC 310, Receivables, by
requiring more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables
and its ACL. The objective of enhancing these disclosures is to improve financial statement users’ understanding
of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment
of that risk in estimating its ACL as well as changes in the allowance and the reasons for those changes. The
new and amended disclosures that relate to information as of the end of a reporting period were effective for the
Company at March 31, 2011. The disclosures that include information for activity that occurs during a reporting
period were effective beginning January 1, 2011 for the Company. Since the provisions of ASU 2010-20 are
disclosure-related, the Company’s adoption of this guidance did not have an impact to its financial condition or
results of operations.
In January 2011, the FASB issued ASU 2011-01, Deferral of the Effective Date of Disclosures About Troubled
Debt Restructurings in Update No. 2010-20, which temporarily deferred the effective date in ASU 2010-20 for
disclosures about TDRs by creditors until the FASB finalized its project on determining what constitutes a TDR
for a creditor. In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor's Determination
of Whether a Restructuring Is a Troubled Debt Restructuring, which amends the content in ASC 310 related to
identifying TDRs and effectively nullifies ASU 2011-01. ASU 2011-02 removes the deferral of the TDR
disclosure requirements of ASU 2010-20 for public entities and thus establishes the effective date for those
disclosures. ASU 2011-02 is effective for the first interim or annual period beginning on or after June 15, 2011,
which was July 1, 2011 for the Company. 2011-02 is to be applied retrospectively to modifications occurring on
or after the beginning of the fiscal year of adoption, which was October 1, 2010 for the Company. The adoption
of ASU 2011-02 did not have a significant impact on the Company’s financial condition or results of operations.
In April 2011, the FASB issued ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements.
The primary objective of this ASU is to improve the accounting for repurchase agreements and other agreements
that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. This
ASU eliminates the requirement for entities to consider whether a transferor has the ability to repurchase the
financial assets in a repurchase agreement, which may result in more repurchase agreements to be accounted
for as secured borrowings rather than as a sale. ASU 2011-03 is effective for the first interim or annual period
beginning on or after December 15, 2011, which is January 1, 2012 for the Company, and should be applied
66
prospectively. The Company accounts for its repurchase agreements as secured borrowings; therefore, the
adoption of ASU 2011-03 is not expected to have a material impact on its financial condition or results of
operations.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurements and
Disclosure Requirements in U.S. GAAP and IFRSs. This ASU is a result of joint efforts by the FASB and the
International Accounting Standards Board (“IASB”) to develop a single, converged fair value framework for
measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and
International Financial Reporting Standards (“IFRSs”). This ASU is largely consistent with existing fair value
measurement principles in U.S. GAAP; however, some of the components of this ASU could change how fair
value measurement guidance in ASC 820, Fair Value Measurements and Disclosures, is applied. This ASU
does not require additional fair value measurements and is not intended to establish valuation standards or affect
valuation practices outside of financial reporting. ASU 2011-04 is effective during interim and annual periods
beginning after December 15, 2011, which is January 1, 2012 for the Company, and should be applied
retrospectively. The provisions of ASU 2011-04 applicable to the Company are disclosure related. The Company
is currently disclosing its fair value measurements in compliance with the converged guidance; therefore, the
adoption of ASU 2011-04 will not have an impact to the Company’s financial statement disclosures.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which revises how
entities present comprehensive income in their financial statements. The ASU requires entities to report
components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two
separate but consecutive statements. In a continuous statement of comprehensive income, an entity would be
required to present the components of the income statement as presented today, along with the components of
other comprehensive income. In the two-statement approach, an entity would be required to present a statement
that is consistent with the income statement format used today, along with a second statement, which would
immediately follow the income statement, that would include the components of other comprehensive income.
The ASU does not change the items that an entity must report in other comprehensive income. ASU 2011-05 is
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.
67
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 ASC 260, which requires that unvested RRP awards that contain nonforfeitable rights to
dividends be treated as participating securities in the computation of EPS pursuant to the two-class method. The
two-class method is an earnings allocation that determines EPS 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. All share information
prior to the corporate reorganization has been revised to reflect the 2.2637 exchange ratio.
Net income (1)
2011
2010
2009
(Dollars in thousands, except per share data)
$ 38,403 $ 67,840 $ 66,298
Average common shares outstanding
Average committed ESOP shares outstanding
162,432,315
192,959
165,689,601
172,575
165,403,759
172,575
Total basic average common shares outstanding
162,625,274
165,862,176
165,576,334
Effect of dilutive RRP shares
Effect of dilutive stock options
2,747
4,644
6,492
30,777
12,174
132,668
Total diluted average common shares outstanding
162,632,665
165,899,445
165,721,176
Net EPS
Basic
Diluted
Antidilutive stock options and RRP, excluded
from the diluted average common shares
$ 0.24 $ 0.41 $ 0.40
$ 0.24 $ 0.41 $ 0.40
outstanding calculation
898,415
642,777
167,626
(1) Net income available to participating securities (unvested RRP shares) was inconsequential for fiscal years 2011, 2010,
and 2009.
68
3. SECURITIES
The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of
AFS and HTM securities at September 30, 2011 and 2010. The majority of the MBS and investment securities
portfolios are composed of securities issued by GSEs.
AFS:
GSE debentures
Municipal bonds
Trust preferred securities
MBS
HTM:
GSE debentures
Municipal bonds
MBS
Amortized
Cost
September 30, 2011
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in thousands)
Estimated
Fair
Value
$ 746,545
2,628
3,681
690,675
1,443,529
$ 1,996
126
--
41,764
43,886
$ 233
--
740
3
976
$ 748,308
2,754
2,941
732,436
1,486,439
633,483
56,994
1,679,640
2,370,117
$ 3,813,646
3,171
2,190
59,071
64,432
$ 108,318
--
4
153
157
636,654
59,180
1,738,558
2,434,392
$ 1,133 $ 3,920,831
September 30, 2010
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
(Dollars in thousands)
Fair
Value
AFS:
GSE debentures
$ 50,151
$ 104
$ --
$ 50,255
Municipal bonds
2,649
170
--
2,819
Trust preferred securities
3,721
--
925
2,796
MBS
952,621
51,881
6
1,004,496
1,009,142
52,155
931
1,060,366
HTM:
GSE debentures
Municipal bonds
MBS
1,208,829
4,441
--
1,213,270
67,957
2,654
1
70,610
603,368
26,209
3
629,574
1,880,154
33,304
4
1,913,454
$ 2,889,296
$ 85,459 $ 935 $ 2,973,820
69
The following tables summarize the estimated fair value and gross unrealized losses of those securities on which
an unrealized loss at September 30, 2011 and 2010 was reported and the continuous unrealized loss position for
at least 12 months or less than 12 months as of September 30, 2011 and 2010.
Less Than
12 Months
Estimated
Fair
Value
Count
September 30, 2011
Unrealized
Losses
(Dollars in thousands)
Count
Equal to or Greater
Than 12 Months
Estimated
Fair
Value
Unrealized
Losses
7 $ 230,848 $ 233
--
--
--
5
3
1,189
12 $ 232,037 $ 236
$ --
-- $ --
740
2,941
1
--
--
--
1 $ 2,941 $ 740
$ --
--
4
2
1
153
3 $ 25,757 $ 157
$ --
615
25,142
$ --
-- $ --
--
--
--
--
--
--
-- $ -- $ --
AFS:
GSE debentures
Trust preferred securities
MBS
HTM:
GSE debentures
Municipal bonds
MBS
Less Than
12 Months
Estimated
Fair
Value
Count
September 30, 2010
Equal to or Greater
Than 12 Months
Estimated
Unrealized
Losses
(Dollars in thousands)
Count
Fair
Value
Unrealized
Losses
AFS:
GSE debentures
--
$ --
$ --
-- $ --
$ --
Trust preferred securities
--
--
--
1
2,796
925
MBS
4
1,678
5
3
359
1
4 $ 1,678 $ 5
4 $ 3,155 $ 926
HTM:
GSE debentures
--
$ --
$ --
-- $ --
$ --
Municipal bonds
--
--
--
1
878
1
MBS
1
48,392
3
--
--
--
1 $ 48,392
$ 3
1 $ 878 $ 1
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.
70
The unrealized losses at September 30, 2011 and 2010 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 September 30, 2011 are shown below. Actual maturities of MBS
may differ from contractual maturities because borrowers have the right to call or prepay obligations, generally
without penalties. As of September 30, 2011, the amortized cost of the securities in our portfolio which are
callable or have pre-refunding dates within one year totaled $869.2 million. Maturities 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
Total
Amortized
Cost
Estimated
Fair
Value
Estimated
Fair
Value
Amortized
Cost
(Dollars in thousands)
Amortized
Cost
Estimated
Fair
Value
One year or less
$ 303,721 $ 304,074
One year through five years 447,564 449,236 663,871 668,228 1,111,435 1,117,464
Five years through ten years 159,505 172,066 492,407 513,849 651,912 685,915
1,212,110 1,250,570 1,746,578 1,813,378
Ten years and thereafter
$ 301,992 $ 302,329
534,468 562,808
$ 1,729 $ 1,745
$ 1,443,529 $ 1,486,439
$ 2,370,117 $ 2,434,392
$ 3,813,646 $ 3,920,831
The following table presents the carrying value of the MBS in our portfolio by issuer as of the dates indicated.
FNMA
FHLMC
GNMA
Private Issuer
At September 30,
2011
(Dollars in thousands)
2010
$ 1,384,396
823,728
202,340
1,612
$ 890,216
712,253
2,452
2,943
$ 2,412,076
$ 1,607,864
The following table presents the taxable and non-taxable components of interest income on investment securities
for the fiscal years ended September 30, 2011, 2010, and 2009.
For the Year Ended
September 30,
2011
2010
2009
(Dollars in thousands)
Taxable
Non-taxable
$ 17,180
1,897
$ 19,077
$ 13,547
2,135
$ 15,682
$ 3,526
2,007
$ 5,533
71
The following table summarizes the amortized cost and estimated fair value of securities pledged as collateral as
of the dates indicated.
September 30,
2011
2010
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
(Dollars in thousands)
$ 571,016
44,429
116,472
26,666
$ 597,286
44,991
124,785
27,939
$ 671,852
--
120,241
34,720
$ 709,919
--
128,621
36,363
$ 758,583
$ 795,001
$ 826,813
$ 874,903
Repurchase agreements
Retail deposits
Public unit deposits
Federal Reserve Bank
During fiscal year 2010, the Bank swapped originated fixed-rate mortgage loans with the FHLMC for MBS (“loan
swap transaction”). The $192.7 million of MBS received, at amortized cost, in the loan swap transaction were
classified as trading securities prior to their subsequent sale by the Bank. Proceeds from the sale of these
securities were $199.1 million, resulting in a gross realized gain of $6.5 million. The gain is included in gain on
securities, net in the consolidated statements of income for the year ended September 30, 2010. All other
dispositions of securities during 2011, 2010, and 2009 were the result of principal repayments or maturities.
4. LOANS RECEIVABLE and ALLOWANCE FOR CREDIT LOSSES
Loans receivable, net at September 30, 2011 and 2010 is summarized as follows:
Real Estate Loans:
One- to four-family
Multi-family and commercial
Construction
Total real estate loans
Consumer Loans:
Home equity
Other
Total consumer loans
Total loans receivable
Less:
Undisbursed loan funds
ACL
Discounts/unearned loan fees
Premiums/deferred costs
2011
2010
(Dollars in thousands)
$ 4,918,778
57,965
47,368
$ 4,915,651
66,476
33,168
5,024,111
5,015,295
164,541
7,224
186,347
7,671
171,765
194,018
5,195,876
5,209,313
22,531
15,465
15,489
14,892
19,093
22,267
(10,947)
(11,537)
$ 5,149,734
$ 5,168,202
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 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 purchases whole one- to four-family loans in bulk
packages from nationwide lenders. The Bank also makes consumer loans, construction loans secured by
residential or commercial properties, and real estate loans secured by multi-family dwellings.
72
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 loans purchased from correspondent lenders
is generally performed by the Bank’s underwriters. Before committing to purchase a pool of loans from a
nationwide lender, 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 pool. Before the pool 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. The Bank does not service the loans purchased from
nationwide lenders. For the tables within this footnote, loans purchased from correspondent lenders are included
with originated loans, and loans purchased in bulk from nationwide lenders 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 multi-family dwellings and small commercial buildings generally located in the Bank’s market 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. Currently there are no construction-to-permanent loans in the multi-family
and commercial portfolio.
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 divided 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 loan 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.
73
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 30 to 89 day delinquent loans, 90 or more day delinquent loans, total delinquent loans, total current
loans, and the total loans receivable balance at September 30, 2011 by class. In the general valuation
allowance model, loans in the 30 to 89 day delinquent category are assigned a higher loss factor than
corresponding performing loans. Loans 90 or more days delinquent are considered impaired loans and are
individually evaluated for impairment. At September 30, 2011, all loans in the 90 or more days delinquent
category were on nonaccrual status and represented the entire balance of nonaccrual loans. At September 30,
2011, there were no loans 90 or more days delinquent that were still accruing interest.
30 to 89 Days 90 or More Days Delinquent
Delinquent
Delinquent
Loans
(Dollars in thousands)
Total
Current
Loans
Total
Recorded
Investment
One- to four-family loans - originated $ 19,682 $ 12,363 $ 32,045 $ 4,362,498 $ 4,394,543
540,955
One- to four-family loans - purchased
57,936
Multi-family and commercial loans
164,541
Consumer - home equity
7,224
Consumer - other
$ 26,776 $ 26,582 $ 53,358 $ 5,111,841 $ 5,165,199
13,836 20,079
-- -- --
380 1,139
3 95
520,876
57,936
163,402
7,129
759
92
6,243
As of September 30, 2011, 2010, and 2009, loans with unpaid principal amounts totaling approximately $26.5
million, $32.0 million, and $30.9 million, respectively, were on nonaccrual status. Gross interest income would
have increased by $643 thousand, $766 thousand, and $603 thousand for the years ended September 30, 2011,
2010, and 2009, respectively, if these nonaccrual status loans were not classified as such.
In accordance with the Bank’s asset classification policy, management regularly reviews the problem loans in the
Bank's portfolio to determine whether any assets require classification in accordance with applicable regulations.
Loan classifications, other than pass loans, are defined as follows:
Special mention - These loans are performing loans on which known information about the collateral
pledged or the possible credit problems of the borrowers have caused management to have doubts as to the
ability of the borrowers to comply with present loan repayment terms and which may result in the future
inclusion of such loans in the non-performing loan categories.
Substandard - A loan is considered substandard if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those
characterized by the distinct possibility the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified as doubtful have all the weaknesses inherent as those classified as substandard,
with the added characteristic that the weaknesses present make collection or liquidation in full on the basis
of currently existing facts and conditions and values highly questionable and improbable.
Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as
loans without the establishment of specific loss allowance is not warranted.
Special mention loans are included with loans 30 to 89 days delinquent in the general valuation allowance
model, if the loan is not considered impaired. Loans classified as substandard, doubtful, or loss are considered
impaired loans and are individually evaluated for impairment.
The following table sets forth the recorded investment in loans, less SVAs, classified at September 30, 2011 by
class. At September 30, 2011, there were no loans classified as doubtful or loss that were not fully reserved. In
addition to the classified loans below, at September 30, 2011, the Bank had other assets totaling $10.3 million,
comprised of municipal bonds and a trust preferred security, also classified per its asset classification policy and
applicable regulations.
One- to four-family - originated
One- to four-family - purchased
Multi-family and commercial
Consumer - home equity
Consumer - other
Special Mention
Substandard
(Dollars in thousands)
$ 32,673
447
7,683
50
--
$ 40,853
$ 18,419
15,987
--
592
5
$ 35,003
74
The following table shows the weighted average LTV and credit score information for originated and purchased
one- to four-family loans and originated consumer home equity loans at September 30, 2011. Borrower credit
scores are intended to provide an indication as to the likelihood that a borrower will repay their debts. Credit
scores were most recently updated in September 2011 and were obtained from a nationally recognized consumer
rating agency. The LTV ratios provide an estimate of the extent to which the Bank may incur a loss on any given
loan that may go into foreclosure. The LTV ratios were based on the current loan balance and either the lesser of
the purchase price or original appraisal, or the most recent bank appraisal, BPO or AVM, if available. In most
cases, the most recent appraisal was obtained at the time of origination.
One- to four-family - originated
One- to four-family - purchased
Consumer - home equity
Weighted Average Weighted Average
Credit Score
762
740
742
759
LTV
66%
60
20
64%
Troubled Debt Restructurings - The total recorded investment of loans classified as TDRs at September 30,
2011 was $50.3 million, of which $30.7 million represent restructurings granted to borrowers experiencing
financial difficulties and $19.6 million represent restructurings to market interest rates through the Bank’s loan
endorsement program, which are classified as TDRs as a result of the Company adopting ASU No. 2011-02 on
July 1, 2011.
Substantially all of the TDRs at September 30, 2011, are secured by residential real estate. The recorded
investment of TDRs classified as impaired totaled $46.1 million at September 30, 2011. Impaired loans are
individually evaluated for SVAs. TDRs not classified as impaired, which totaled $4.2 million at September 30,
2011, are included in the general valuation allowance model in their appropriate loan category. At September
30, 2011, $960 thousand was recorded in the ACL related to TDRs. The TDRs classified as a result of adopting
ASU No. 2011-02 were individually evaluated for impairment. No SVA was recorded on these loans at
September 30, 2011, as the estimated current values of the collateral were in excess of the recorded loan
balances.
The following table presents the recorded investment of TDRs at September 30, 2011, including restructurings
granted to borrowers that were experiencing financial difficulties and restructurings of loans to market interest
rates through the Bank’s loan endorsement program.
Restructurings
Due to
Loan
Financial
Endorsement
Difficulties
Program
(Dollars in thousands)
Total
One- to four-family loans - originated
$ 23,534
$ 19,624
$ 43,158
One- to four-family loans - purchased
6,155
--
6,155
Multi-family and commercial loans
563
--
563
Consumer - home equity
413
--
413
Consumer - other
2
--
2
$ 30,667
$ 19,624
$ 50,291
75
The following table presents the recorded investment prior to restructuring and immediately after restructuring for
all loans restructured during the year ended September 30, 2011. This table does not reflect the recorded
investment at September 30, 2011.
Number
of
Contracts
Pre-
Restructured
Outstanding
Post-
Restructured
Outstanding
(Dollars in thousands)
One- to four-family loans - originated
158
$ 27,250
$ 26,936
One- to four-family loans - purchased
Multi-family and commercial loans
Consumer - home equity
Consumer - other
4
--
5
--
1,563
1,555
--
--
224
227
--
--
167
$ 29,037
$ 28,718
As of September 30, 2011, the recorded investment of TDRs 30-89 days delinquent and over 90 days delinquent
was $2.6 million and $2.9 million, respectively. The following table provides information on TDRs restructured
within the last 12 months that subsequently defaulted during the year ended September 30, 2011. Of the 13
loans in the table that defaulted during the year, seven loans, with a recorded investment of $812 thousand as of
September 30, 2011, had returned to current status as of September 30, 2011.
One- to four-family loans - originated
One- to four-family loans - purchased
Multi-family and commercial loans
Consumer - home equity
Consumer - other
Number
of
Contracts
13
--
--
--
--
13
Recorded
Investment
(Dollars in thousands)
$ 1,353
--
--
--
--
$ 1,353
Impaired loans - Impaired loans are defined as non-accrual loans, loans classified as substandard, loans with
SVAs, and TDRs that have not yet performed under the restructured 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. Substantially all of
the impaired loans at September 30, 2011 were secured by residential real estate. Impaired loans related to
residential real estate are individually evaluated to ensure that the carrying value of the loan is not in excess of
the fair value of the collateral, less estimated selling costs. Fair values of residential real estate are estimated
through such methods as current appraisals, AVMs, BPOs, or listing prices. Fair values may be adjusted by
management to reflect current economic and market conditions. If the outstanding loan balance is in excess of
the estimated fair value determined by management, less estimated costs to sell, then a SVA is recorded for the
difference.
76
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R
As noted above, the Bank has a loan concentration in residential first mortgage loans. Continued declines in
residential real estate values could adversely impact the property used as collateral for the Bank’s loans.
Adverse changes in the economic conditions and increasing unemployment rates may have a negative effect on
the ability of the Bank’s borrowers to make timely loan payments, which would likely increase delinquencies and
have an adverse impact on the Bank’s earnings. Further increases in delinquencies will decrease interest
income on loans receivable and will likely adversely impact the Bank’s loan loss experience, resulting in an
increase in the Bank’s ACL and provision for credit losses. Although management believes the ACL was at an
adequate level to absorb known and inherent losses in the loan portfolio at September 30, 2011, the level of the
ACL remains an estimate that is subject to significant judgment and short-term changes. Additions to the ACL
may be necessary if future economic and other conditions differ substantially from the current environment.
The Bank originated and refinanced $892 thousand, $13.1 million, and $15.3 million of commercial real estate
and business loans during the years ended September 30, 2011, 2010, and 2009, respectively.
The Bank is subject to numerous lending-related regulations. Under the Financial Institutions Reform, Recovery,
and Enforcement Act, the limit of aggregate loans to one borrower is 15% of the Bank’s unimpaired capital and
surplus, but not less than $500 thousand. As of September 30, 2011, the Bank was in compliance with this
limitation.
Aggregate loans to executive officers, directors and their associates did not exceed 5% of stockholders’ equity as
of September 30, 2011 and 2010. Such loans were made under terms and conditions substantially the same as
loans made to parties not affiliated with the Bank.
The Bank recognized net gains of $298 thousand, $1.8 million, and $2.2 million during fiscal years 2011, 2010,
and 2009, respectively, as a result of selling LHFS. The net gains are included in other income, net in the
consolidated statements of income.
As of September 30, 2011 and 2010, the Bank serviced loans for others aggregating approximately $526.3
million and $681.1 million, respectively. Such loans are not included in the accompanying consolidated balance
sheets. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow
accounts, disbursing payments to investors and foreclosure processing. Loan servicing income includes
servicing fees withheld from investors and certain charges collected from borrowers, such as late payment fees.
The Bank held borrowers’ escrow balances on loans serviced for others of $7.5 million and $9.0 million as of
September 30, 2011 and 2010, respectively.
79
5. PREMISES AND EQUIPMENT, Net
A summary of the net carrying value of banking premises and equipment at September 30, 2011 and 2010 is as
follows:
Land
Building and improvements
Furniture, fixtures and equipment
2011
(Dollars in thousands)
2010
$ 8,684
53,822
38,069
100,575
$ 7,877
45,295
37,289
90,461
Less accumulated depreciation
52,152
49,201
$ 48,423
$ 41,260
Depreciation and amortization expense for the years ended September 30, 2011, 2010, and 2009 was $4.4
million, $4.6 million, and $5.1 million, respectively.
The Bank has entered into non-cancelable operating lease agreements with respect to banking premises and
equipment. It is expected that many agreements will be renewed at expiration in the normal course of business.
Rental expense was $1.3 million for the year ended September 30, 2011 and $1.2 million for each of the years
ended September 30, 2010 and 2009. Future minimum rental commitments, rounded to the nearest thousand,
required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year
are as follows (dollars in thousands):
2012
2013
2014
2015
2016
Thereafter
$ 1,279
1,112
939
817
730
6,924
$ 11,801
80
6. DEPOSITS
Deposits at September 30, 2011 and 2010 are summarized as follows:
2011
Weighted
Average
Rate
Amount
% of
Total
Amount
(Dollars in thousands)
2010
Weighted
Average
Rate
% of
Total
$ 551,632
253,184
1,066,065
1,870,881
0.08% 12.3%
0.41
0.35
0.28
5.6
23.7
41.6
$ 482,428
234,285
942,428
1,659,141
0.13 % 11.0%
0.54
0.65
0.48
5.3
21.5
37.8
339,803
1,106,957
775,235
371,682
30,615
--
2,624,292
$ 4,495,173
0.50
1.27
2.49
3.42
4.40
--
7.6
24.6
17.2
8.3
0.7
--
58.4
1.87
1.21% 100.0%
193,959
1,013,538
777,687
576,595
164,763
627
2,727,169
$ 4,386,310
0.53
1.44
2.53
3.50
4.32
5.29
4.4
23.1
17.7
13.2
3.8
--
2.29
62.2
1.61 % 100.0%
Non-certificates:
Checking
Savings
Money market
Total non-certificates
Certificates of deposit:
0.00 – 0.99%
1.00 – 1.99%
2.00 – 2.99%
3.00 – 3.99%
4.00 – 4.99%
5.00 – 5.99%
Total certificates of deposit
As of September 30, 2011, certificates of deposit mature as follows:
2012
2013
2014
2015
2016
Thereafter
Weighted
Average
Rate
Amount
(Dollars in thousands)
$ 1,390,231
555,043
309,015
317,065
49,423
3,515
$ 2,624,292
1.65 %
1.86
2.27
2.43
2.22
2.46
1.87 %
Interest expense on deposits for the periods presented is as follows:
Checking
Savings
Money market
Certificates
Year Ended September 30,
2011
2010
(Dollars in thousands)
2009
$ 441
1,225
5,307
56,595
$ 63,568
$ 622
1,323
6,522
70,749
$ 79,216
$ 879
1,873
8,512
89,207
$ 100,471
The amount of noninterest-bearing deposits was $97.6 million and $76.4 million as of September 30, 2011 and
2010, respectively. Certificates of deposit with a minimum denomination of $100 thousand were $882.8 million
and $885.6 million as of September 30, 2011 and 2010, respectively. Deposits in excess of $250 thousand may
not be fully insured by the FDIC. The aggregate amount of deposits that were reclassified as loans receivable
due to customer overdrafts was $124 thousand and $175 thousand as of September 30, 2011 and 2010,
respectively.
81
7. BORROWED FUNDS
At September 30, 2011 the Company’s borrowed funds consisted of FHLB advances and repurchase
agreements. At September 30, 2010, the Company’s borrowed funds consisted of FHLB advances, repurchase
agreements, and the Debentures. The Debentures were repaid in April 2011.
FHLB Advances – FHLB advances at September 30, 2011 and 2010 were comprised of the following:
Fixed-rate FHLB advances
Deferred prepayment penalty
Deferred gain on terminated interest rate swaps
2011
2010
(Dollars in thousands)
$ 2,400,000
(20,995)
457
$ 2,376,000
(28,261)
632
$ 2,379,462
$ 2,348,371
Weighted average contractual interest rate on FHLB advances
Weighted average effective interest rate on FHLB advances (1)
3.37%
3.71%
3.61%
3.96%
(1) The effective rate includes the net impact of the amortization of deferred prepayment penalties related to the prepayment
of certain FHLB advances and deferred gains related to the termination of interest rate swaps.
During fiscal year 2010, the Bank prepaid $200.0 million of fixed-rate FHLB advances with a weighted average
interest rate of 4.63% and a weighted average remaining term to maturity of approximately one month. The
prepaid FHLB advances were replaced with $200.0 million of fixed-rate FHLB advances with a weighted average
contractual interest rate of 3.17% and an average term of 84 months. The Bank paid an $875 thousand
prepayment penalty to the FHLB as a result of prepaying the FHLB advances. The present value of the cash
flows under the terms of the new FHLB advance was not more than 10% different from the present value of the
cash flows under the terms of the prepaid FHLB advances (including the prepayment penalty) and there were no
embedded conversion options in the prepaid advances or in the new FHLB advances. The prepayment penalty
effectively increased the interest rate on the new advances seven basis points at the time of the transaction. The
deferred prepayment penalty is being recognized in interest expense over the life of the new FHLB advances.
The benefit of prepaying the advances in fiscal year 2010 was an immediate decrease in interest expense, and a
decrease in interest rate sensitivity, as the maturity of the refinanced advances were extended at a lower rate.
The FHLB advances are secured by certain qualifying mortgage loans pursuant to a blanket collateral agreement
with the FHLB and all of the capital stock of FHLB owned by the Bank. Per the FHLB’s lending guidelines, total
FHLB borrowings cannot exceed 40% of total Bank assets without the pre-approval of the FHLB president. At
September 30, 2011, the Bank’s ratio of FHLB advances to total assets, as reported to the Bank’s regulators,
was 26%.
At September 30, 2011, the Bank had access to a line of credit with the FHLB set to expire on November 25,
2011, at which time the line of credit is expected to be renewed automatically by the FHLB for a one year period.
At September 30, 2011, there were no borrowings on the FHLB line of credit. Any borrowings on the line of
credit would be included in total FHLB borrowings in calculating the ratio of FHLB borrowings to total Bank
assets, which generally could not exceed 40% of total Bank assets at September 30, 2011.
Other Borrowings – The following summarizes the components of other borrowings as of September 30, 2011
and 2010. The Debentures were redeemed in April 2011.
2011
2010
Weighted
Average
Contractual
Rate
(Dollars in thousands)
Amount
Weighted
Average
Contractual
Rate
Amount
Repurchase agreements
Debentures
$ 515,000
--
4.00%
--
$ 615,000 4.03%
53,609
3.28
$ 515,000
4.00%
$ 668,609
3.97%
The Bank has pledged MBS with an estimated fair value of $597.3 million at September 30, 2011 as collateral for
the repurchase agreements.
82
Maturity of Borrowed Funds – At September 30, 2011, the maturities of FHLB advances and repurchase
agreements were as follows:
FHLB
Advances
Amount
Repurchase
Agreements
Amount
Total
Borrowings
Amount
(Dollars in thousands)
Weighted
Average
Contractual
Rate
Weighted
Average
Effective
Rate
2012
2013
2014
2015
2016
Thereafter
$ 350,000
525,000
450,000
200,000
275,000
600,000
$ 150,000
145,000
100,000
20,000
--
100,000
$ 500,000
670,000
550,000
220,000
275,000
700,000
3.67 %
3.74
3.33
3.50
3.86
3.06
3.67 %
4.00
3.96
4.16
4.39
3.08
$ 2,400,000
$ 515,000
$ 2,915,000
3.48 %
3.76 %
Of the $350.0 million FHLB advances maturing in fiscal year 2012, $100.0 million is due in the first quarter of
fiscal year 2012, $150.0 million is due in the second quarter of fiscal year 2012, and $100.0 million is due in the
fourth quarter of fiscal year 2012. All of the $150.0 million of repurchase agreements maturing in fiscal year 2012
is due in the first quarter.
8.
INCOME TAXES
Income tax expense (benefit) for the years ended September 30, 2011, 2010, and 2009 consisted of the
following:
Current
Federal
State
Deferred
Federal
State
2011
2010
(Dollars in thousands)
2009
$ 25,889 $ 31,252 $ 32,590
2,788
2,807
2,707
28,596
34,059
35,378
(8,933)
(714)
3,209
257
3,285
263
(9,647)
3,466
3,548
$ 18,949 $ 37,525 $ 38,926
83
The Company’s effective tax rates were 33.0%, 35.6%, and 37.0% for the years ended September 30, 2011,
2010, and 2009, respectively. The differences between such effective rates and the statutory Federal income tax
rate computed on income before income tax expense result from the following:
Federal income tax expense
computed at statutory Federal rate
Increases (Decreases) in taxes resulting from:
State taxes, net of Federal tax effect
Net tax-exempt interest income
Change in cash surrender value of BOLI
Low income housing tax credits
Other
2011
Amount %
2010
Amount %
(Dollars in thousands)
2009
Amount %
$ 20,073 35.0 % $ 36,878 35.0 % $ 36,828 35.0 %
1,993 3.4
(577) (1.0)
(638) (1.1)
(1,397) (2.4)
(505) (0.9)
$ 18,949 33.0 %
3,064 2.9
(624) (0.6)
(421) (0.4)
(1,209) (1.1)
(163) (0.2)
$ 37,525 35.6 %
3,051 2.9
(579) (0.6)
(406) (0.4)
(1,013) (1.0)
1,045 1.1
$ 38,926 37.0 %
Deferred income tax (benefit) expense results from temporary differences in the recognition of revenue and
expenses for tax and financial statement purposes. The sources of these differences and the tax effect of each
as of September 30, 2011, 2010, and 2009 were as follows:
Foundation contribution
Mortgage servicing rights
ACL
FHLB prepayment penalty
FHLB stock dividends
Other, net
2011
2010
(Dollars in thousands)
2009
$ (12,824)
(885)
(197)
--
1,432
2,827
$ --
774
(1,771)
1,283
2,206
974
$ --
(874)
(1,628)
4,601
694
755
$ (9,647)
$ 3,466
$ 3,548
The components of the net deferred income tax (liabilities) assets as of September 30, 2011 and 2010 are as
follows:
Deferred income tax assets:
Foundation contribution
ACL
Salaries and employee benefits
ESOP compensation
Other
Gross deferred income tax assets
2011
2010
(Dollars in thousands)
$ 12,824
3,863
1,219
836
2,630
21,372
$ --
3,666
1,230
747
2,307
7,950
Valuation allowance
(2,060)
(280)
Gross deferred income tax asset, net of valuation allowance
19,312
7,670
Deferred income tax liabilities:
FHLB stock dividends
Unrealized gain on AFS securities
Other
18,828
16,203
4,728
17,396
19,362
4,156
Gross deferred income tax liabilities
39,759
40,914
Net deferred tax liabilities
$ (20,447)
$ (33,244)
84
The Company assesses the available positive and negative evidence surrounding the recoverability of its
deferred tax assets and applies its judgment in estimating the amount of valuation allowance necessary under
the circumstances. As of September 30, 2011, the Company had a valuation allowance of $2.1 million related to
the Kansas state tax portion of the Foundation contribution and the net operating losses generated by the
Company's consolidated Kansas corporate income tax return. As of September 30, 2010, the Company had a
valuation allowance of $280 thousand related to the net operating losses generated by the Company's
consolidated Kansas corporate income tax return. The Company's consolidated Kansas corporate income tax
return at September 30, 2011 and 2010 does not include the Bank, as the Bank files a Kansas privilege tax
return. Based on the nature of the operations of the companies included in the consolidated Kansas corporate
return, management believes there will not be sufficient taxable income to fully utilize the deferred tax assets
noted above; therefore a valuation allowance was established for the related amounts at September 30, 2011
and 2010.
ASC 740 Income Taxes prescribes a process by which the likelihood of a tax position is gauged based upon the
technical merits of the position, and then a subsequent measurement relates the maximum benefit and the
degree of likelihood to determine the amount of benefit to recognize in the financial statements. A reconciliation
of the beginning and ending amounts of unrecognized tax benefits for the years ended September 30, 2011,
2010, and 2009 is as follows. The amounts have not been reduced by the federal deferred tax effects of
unrecognized tax benefits.
2011
2010
2009
(Dollars in thousands)
Balance at beginning of year
$ 114 $ 2,848 $ 2,409
Additions for tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Reductions relating to settlement with taxing authorities
Lapse of statute of limitations
--
3
(49)
--
--
--
28
(195)
--
(2,567)
109
888
--
(97)
(461)
Balance at end of year
$ 68 $ 114 $ 2,848
If realized, the unrecognized tax benefits at September 30, 2011 would impact the effective tax rate. After the
related deferred tax effects, realization of those benefits would reduce income tax expense by $20 thousand.
Included in the unrecognized tax benefits in the table above were accrued penalties and interest of $20
thousand, $17 thousand, and $763 thousand for the years ended September 30, 2011, 2010, and 2009,
respectively. Estimated penalties and interest for the years ended September 30, 2011 and 2009 was $2
thousand and $87 thousand. The net reversal of penalties and interest expense due to the lapse of statute of
limitations for the years ended September 30, 2010 was $463 thousand. Estimated penalties and interest are
included in income tax expense in the consolidated statements of income. It is reasonably possible that
decreases in gross unrecognized tax benefits totaling less than $10 thousand may occur in fiscal year 2012 as a
result of a lapse in the applicable statute of limitations.
The Company files income tax returns in the U.S. federal jurisdiction and the state of Kansas, as well as other
states where it has nexus. In many cases, uncertain tax positions are related to tax years that remain subject to
examination by the relevant taxing authorities. With few exceptions, the Company is no longer subject to U.S.
federal and state examinations by tax authorities for fiscal years before 2008.
85
9. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan (“PIT”) and an ESOP. The plans cover all employees with a minimum of
one year of service, at least age 21, and at least 1,000 hours of employment in each plan year.
Profit Sharing Plan – The PIT provides for two types of discretionary contributions. The first type is an optional
Bank contribution and may be 0% or any percentage above that, as determined by the Board of Directors, of an
eligible employee’s eligible compensation during the fiscal year. The second contribution may be 0% or any
percentage above that, as determined by the Board of Directors, of an eligible employee’s eligible compensation
during the fiscal year if the employee matches 50.0% (on an after-tax basis) of the Bank’s second contribution.
The PIT qualifies as a thrift and profit sharing plan for purposes of Internal Revenue Codes 401(a), 402, 412, and
417. Total Bank contributions to the PIT amounted to $105 thousand, $101 thousand, and $102 thousand for the
years ended September 30, 2011, 2010, and 2009, respectively.
ESOP – The ESOP Trust acquired 3,024,574 shares (6,846,728 shares post corporate reorganization) of
common stock in the Company’s initial public offering and 4,726,000 shares of common stock in the Company’s
corporate reorganization in December of 2010. Both acquisitions of common stock were made with proceeds
from loans from the Company. The loans are secured by shares of the Company stock purchased in each
offering. The Bank has agreed to make cash contributions to the ESOP on an annual basis sufficient to enable
the ESOP to make the required annual loan payments to the Company on September 30 of each year. Share
information presented below relating to the shares in the ESOP trust acquired prior to the corporate
reorganization has been revised to reflect the 2.2637 exchange ratio.
The loan for the shares acquired in the initial public offering bears interest at a fixed-rate of 5.80%, with future
principal and interest payable annually in two remaining fixed installments of $3.0 million, as of September 30,
2011. Payments of $3.0 million consisting of principal of $2.5 million, $2.4 million, and $2.3 million and interest of
$465 thousand, $604 thousand, and $735 thousand were made on September 30, 2011, 2010, and 2009,
respectively. The loan matures on September 30, 2013.
The loan for the shares acquired in the corporate reorganization bears interest at a fixed-rate of 3.25% and has a
30 year term. The loan requires interest-only payments the first three years. The first interest payment of $1.2
million was paid on September 30, 2011 and the next two interest payments of $1.5 million each are payable on
September 30, 2012 and 2013. Beginning in fiscal year 2014, principal and interest payments of $2.7 million will
be payable annually. The loan matures on September 30, 2040.
As the annual loan payments are made, shares will be released from collateral at September 30 and allocated to
qualified employees based on the proportion of their qualifying compensation to total qualifying compensation.
On September 30, 2011, 531,025 shares were released from collateral, and on September 30, 2012 and
September 30, 2013, 551,988 shares will be released from collateral. As ESOP shares are committed to be
released from collateral, the Company records compensation expense. Dividends on unallocated ESOP shares
are only applied to the debt service payments of the loan secured by the unallocated shares. Dividends on
unallocated ESOP shares in excess of the debt service payment are recorded as compensation expense and
distributed to participants or participants' ESOP accounts. During the years ended September 30, 2011, 2010,
and 2009, the Bank paid $1.4 million, $1.1 million, and $863 thousand, respectively, of the ESOP debt payment
because dividends on unallocated shares were insufficient to pay the scheduled debt payment, specifically on
the loan for the shares acquired in the initial public offering. Compensation expense related to the ESOP was
$8.7 million for the year ended September 30, 2011, $6.5 million for the year ended September 30, 2010, and
$7.9 million for the year ended September 30, 2009. The amount included in compensation expense for
dividends on unallocated ESOP shares in excess of the debt service payments was $2.7 million for the year
ended September 30, 2011, which was related to the loan for the shares acquired in the corporate
reorganization. There were no such amounts for the years ended September 30, 2010 and 2009.
Participants have the option to receive the dividends on allocated shares and unallocated shares in excess of
debt service payments, in cash or leave the dividend in the ESOP. Dividends are reinvested in Company stock
for those participants who choose to leave their dividends in the ESOP or who do not make an election. The
purchase of Company stock for reinvestment of dividends is made in the open market on or about the date of the
cash disbursement to the participants who opt to take dividends in cash.
86
Shares may be withdrawn from the ESOP Trust due to retirement, termination or death of the participant.
Additionally, a participant may begin to diversify at least 25% of their ESOP shares at age 50. Following is a
summary of shares held in the ESOP Trust as of September 30, 2011 and 2010:
Allocated ESOP shares
Unreleased ESOP shares
Total ESOP shares
2011
2010
(Dollars in thousands)
4,393,908 4,028,784
5,564,328 1,369,353
9,958,236 5,398,137
Fair value of unreleased ESOP shares
$ 58,759 $ 14,941
10. STOCK-BASED COMPENSATION
The Company has an Option Plan and an RRP which are considered share-based plans. Compensation
expense is recognized over the service period of the share-based payment award. The Company utilizes a fair-
value-based measurement method in accounting for the share-based payment transactions with employees,
except for equity instruments held by the ESOP. All share information presented below relating to stock options
and RRP shares issued prior to the corporate reorganization has been revised to reflect the 2.2637 exchange
ratio.
Stock Option Plan – The purpose of the Option Plan is to provide additional incentive to certain officers,
directors and key employees by facilitating their purchase of a stock interest in the Company. Pursuant to the
Option Plan, subject to adjustment as described below, 8,558,411 shares of common stock were reserved for
issuance by the Company upon exercise of stock options granted to officers, directors and employees of the
Company and the Bank from time to time under the Option Plan. The Company may issue both incentive and
nonqualified stock options under the Option Plan. The Company may also award stock appreciation rights under
the Option Plan, although to date no stock appreciation rights have been awarded under the Option Plan. The
incentive stock options expire no later than ten years and the nonqualified stock options expire no later than
fifteen years from the date of grant. The date on which the options are first exercisable is determined by the
Stock Benefits Committee (“sub-committee”), a sub-committee of the Compensation Committee (“committee”) of
the Board of Directors. The vesting period of the options generally ranges from three to five years. The option
price is equal to the market value at the date of the grant as defined by the Option Plan.
Under the Option Plan, incentive stock options may not be granted after April 2010 and nonqualified stock
options may not be granted after April 2015. At September 30, 2011, the Company had 2,856,549 shares
available for future grants under the Option Plan. This includes 2,380,866 shares added back to the Option Plan
through the reload feature of the plan, which provides that the maximum number of shares with respect to which
awards may be made under the plan shall be increased by (i) the number of shares of common stock
repurchased by the Company with an aggregate price no greater than the cash proceeds received by the
Company from the exercise of options under the Option Plan; and (ii) the number of shares surrendered to the
Company in payment of the exercise price of options granted under the Option Plan.
The Option Plan is administered by the sub-committee, which selects the employees and non-employee
directors to whom options are to be granted and the number of shares to be granted. The exercise price may be
paid in cash, shares of the common stock, or a combination of both. The option price may not be less than
100% of the fair market value of the shares on the date of the grant. In the case of any employee who is granted
an incentive stock option who owns more than 10% of the outstanding common stock at the time the option is
granted, the option price may not be less than 110% of the fair market value of the shares on the date of the
grant, and the option shall not be exercisable after the expiration of five years from the grant date. Historically,
the Company has issued shares held in treasury upon the exercise of stock options, except for the exercise of
stock options after the corporate reorganization. Shares were issued by the Company for those stock options
exercised after the corporate reorganization.
87
The fair value of stock option grants are estimated on the date of grant using the Black-Scholes option pricing
model. The weighted average grant-date fair value of stock options granted during the fiscal years ended
September 30, 2011, 2010, and 2009 was $0.78, $1.52, and $2.22 per share, respectively. Compensation
expense attributable to stock options awards during the year ended September 30, 2011, 2010, and 2009 totaled
$131 thousand ($122 thousand, net of tax), $214 thousand ($189 thousand, net of tax), and $281 thousand
($240 thousand, net of tax), respectively. The following weighted average assumptions were used for valuing
stock option grants for the years noted:
Risk-free interest rate
Expected life (years)
Expected volatility
Dividend yield
Estimated forfeitures
2011
2010
2009
1.3%
5
25%
8.1%
12.9%
2.1%
4
25%
6.2%
3.3%
2.1%
4
24%
4.8%
10.5%
The risk-free interest rate was determined using the yield available on the option grant date for a zero-coupon
U.S. Treasury security with a term equivalent to the expected life of the option. The expected life for options
granted was based upon historical experience. The expected volatility was determined using historical volatilities
based on historical stock prices. The dividend yield was determined based upon historical quarterly dividends
and the Company’s stock price on the option grant date. Estimated forfeitures were determined based upon
voluntary termination behavior and actual option forfeitures.
A summary of option activity for the years ended September 30, 2011, 2010, and 2009 follows:
2011
2010
2009
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Number
of Options
Number
of Options
Weighted
Average
Exercise
Price
Number
of Options
Options outstanding
at beginning of year
Granted
Forfeited
Exercised
Options outstanding
at end of year
841,991 $ 14. 69
919,639 $ 15.08
14.25
10.86
2,030
119,945
--
16.59 --
(10,180)
4.96
(42,297)
(4,525)
8.23
912,879
94,460
--
(165,348)
$ 13.10
18.57
--
8.08
906,964 $ 15.09
919,639 $ 15.08
841,991 $ 14.69
During the years ended September 30, 2011, 2010, and 2009, the total pretax intrinsic value of stock options
exercised was $19 thousand, $361 thousand, and $1.7 million, respectively, and the tax benefits realized from
the exercise of stock options were $7 thousand, $89 thousand, and $515 thousand, respectively. The fair value
of stock options vested during the year ended September 30, 2011, 2010, and 2009 was $150 thousand, $264
thousand, and $297 thousand, respectively.
88
The following summarizes information about the stock options outstanding and exercisable as of September 30,
2011:
Options Outstanding
Weighted
Average
Remaining
Contractual
Life (in years)
Weighted
Average
Exercise
Price per
Share
Aggregate
Intrinsic
Value
Number
of Options
Outstanding
(Dollars in thousands, except per share amounts)
8,783
--
6,550
839,601
52,030
906,964
3.55
--
4.95
7.52
7.08
7.44
$ 4.07
--
11.42
14.98
19.19
$ 57
--
--
--
--
$ 15.09
$ 57
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (in years)
Weighted
Average
Exercise
Price per
Share
Aggregate
Intrinsic
Value
Number
of Options
Exercisable
(Dollars in thousands, except per share amounts)
8,783
--
4,926
727,349
31,218
772,276
3.55
--
1.93
7.23
7.08
7.14
$ 4.07
--
11.61
15.03
19.19
$ 57
--
--
--
--
$ 15.05
$ 57
Exercise
Price
$4.07
6.19 - 8.69
10.86 - 12.71
13.33 - 17.59
19.19
Exercise
Price
$4.07
6.19 - 8.69
10.86 - 12.71
13.33 - 17.59
19.19
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the
Company’s closing stock price of $10.56 as of September 30, 2011, which would have been received by the
option holders had all option holders exercised their options as of that date. The total number of in-the-money
options exercisable as of September 30, 2011 was 8,783.
As of September 30, 2011, the total future compensation cost related to non-vested stock options not yet
recognized in the consolidated statements of income was $148 thousand and the weighted average period over
which these awards are expected to be recognized was 1.84 years.
Recognition and Retention Plan – The objective of the RRP is to enable the Company and the Bank to retain
personnel of experience and ability in key positions of responsibility. Employees and directors of the Bank are
eligible to receive benefits under the RRP at the sole discretion of the sub-committee. The total number of shares
originally eligible to be granted under the RRP was 3,423,364. At September 30, 2011, the Company had
358,767 shares available for future grants under the RRP. The RRP expires in April 2015. No additional grants
may be made after expiration, but outstanding grants continue until they are individually vested, forfeited, or
expire.
Compensation expense in the amount of the fair market value of the common stock at the date of the grant, as
defined by the RRP, to the employee is recognized over the period during which the shares vest. Compensation
expense attributable to RRP awards during the years ended September 30, 2011, 2010, and 2009 totaled $131
thousand ($88 thousand, net of tax), $238 thousand ($153 thousand, net of tax), and $323 thousand ($204
thousand, net of tax), respectively. A recipient of such restricted stock will be entitled to all voting and other
stockholder rights (including the right to receive dividends on vested and non-vested shares), except that the
shares, while restricted, may not be sold, pledged or otherwise disposed of and are required to be held in escrow
by the Company. If a holder of such restricted stock terminates employment for reasons other than death or
89
disability, the employee forfeits all rights to the non-vested shares under restriction. If the participant’s service
terminates as a result of death, disability, or if a change in control of the Bank occurs, all restrictions expire and
all non-vested shares become unrestricted. A summary of RRP share activity for the years ended September
30, 2011, 2010, and 2009 follows:
2011
2010
2009
Weighted
Average
Grant Date
Fair Value
Number
of Shares
Weighted
Average
Grant Date
Fair Value
Weighted
Average
Grant Date
Fair Value
Number
of Shares
Number
of Shares
Unvested RRP shares
at beginning of year:
Granted
Vested
Forfeited
Unvested RRP shares
at end of year
23,762
--
$ 15.07
--
(10,180) 15.30
--
--
34,177
11,317
(21,732)
--
$ 15.17
14.42
14.88
--
52,509
5,657
(23,989)
--
$ 14.87
17.64
15.10
--
13,582 $ 14.90
23,762
$ 15.07
34,177 $ 15.17
The estimated forfeiture rate for the RRP shares granted during the year ended September 30, 2011, 2010, and
2009 was 0% based upon voluntary termination behavior and actual forfeitures. The fair value of RRP shares
that vested during the years ended September 30, 2011, 2010, and 2009 totaled $120 thousand, $324 thousand,
and $363 thousand, respectively. As of September 30, 2011, there was $124 thousand of unrecognized
compensation cost related to non-vested RRP shares to be recognized over a weighted average period of 1.9
years.
11. PERFORMANCE BASED COMPENSATION
The Company and the Bank have a short-term performance plan for all officers and a deferred incentive bonus
plan for senior and executive officers. The short-term performance plan has a component tied to Company
performance and a component tied to individual participant performance. Individual performance criteria are
established by executive management for eligible non-executive employees of the Bank; individual performance
of executive officers is reviewed by the committee. Company performance criteria are approved by the
committee. Short-term performance plan awards are granted based upon a performance review by the
committee. The committee may exercise its discretion and reduce or not grant awards. The deferred incentive
bonus plan is intended to operate in conjunction with the short-term performance plan. A participant in the
deferred incentive bonus plan can elect to defer into an account between $2 thousand and up to 50% (executive
officers can defer up to 50%, while senior officers can elect to defer up to 35%) of the short-term performance
plan award up to but not exceeding $100 thousand. The amount deferred receives an employer match of up to
50% that is accrued over a three year mandatory deferral period. The amount deferred, plus up to a 50% match,
is deemed to have been invested in Company stock on the last business day of the calendar year preceding the
receipt of the short-term performance plan award, in the form of phantom stock. The number of shares deemed
purchased in phantom stock receives dividend equivalents as if the stock were owned by the officer. At the end
of the mandatory deferral period, the deferred incentive bonus plan award is paid out in cash and is comprised of
the initial amount deferred, the match amount, dividend equivalents on the phantom shares over the deferral
period and the increase in the market value of the Company’s stock over the deferral period, if any, on the
phantom shares. There is no provision for the reduction of the deferred incentive bonus plan award if the market
value of the Company’s stock at the time is lower than the market value at the time of the deemed investment.
The total amount of short-term performance plan awards provided for the years ended September 30, 2011,
2010, and 2009 amounted to $1.8 million, $1.7 million, and $1.1 million, respectively, of which $345 thousand,
$332 thousand, and $137 thousand, respectively, was deferred under the deferred incentive bonus plan. The
deferrals, any earnings on those deferrals and increases in the market value of the phantom shares, if any, will
be paid in 2013, 2014, and 2015. During fiscal years 2011, 2010, and 2009, the amount expensed in conjunction
with the deferred amounts was $153 thousand, $86 thousand, and $51 thousand, respectively.
90
12. COMMITMENTS AND CONTINGENCIES
The Bank had commitments outstanding to originate and purchase loans as of September 30, 2011 and 2010 as
follows:
Originate fixed-rate
Originate adjustable-rate
Purchase/participate fixed-rate
Purchase/participate adjustable-rate
2011
2010
(Dollars in thousands)
$ 89,059
24,047
30,650
26,556
$ 170,312
$ 75,001
20,144
3,526
8,395
$ 107,066
As of September 30, 2011 and 2010, the Bank had approved but unadvanced home equity lines of credit and
outstanding commitments on commercial loans of $265.5 million and $266.5 million, respectively. Approval of
lines of credit is based upon underwriting standards that do not allow total borrowings, including existing
mortgages and lines of credit, to exceed 90% of the estimated market value of the customer’s home. Prior to
June 2010, the limit was 95% of the estimated market value of the customer’s home.
Commitments to originate mortgage and non-mortgage loans are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require the payment of a rate lock fee. Some of the commitments
are expected to expire without being fully drawn upon; therefore the amount of total commitments disclosed
above does not necessarily represent future cash requirements. The Bank evaluates each customer’s
creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by the
Bank, upon extension of credit is based on management’s credit evaluation of the customer. As of September
30, 2011 and 2010, there were no significant loan-related commitments that met the definition of derivatives or
commitments to sell mortgage loans.
As of September 30, 2011, the Bank had $1.7 million of agreements outstanding in connection with the
remodeling of the Bank’s home office.
13. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a material adverse effect on the Company’s
financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s
capital amounts and classifications are also subject to qualitative judgments by regulators about components,
risk weightings, and other factors.
91
The Bank’s primary regulatory agency requires that the Bank maintain minimum ratios of tangible equity of 1.5%,
Tier 1 (core) capital of 4%, and total risk-based capital of 8%. As of September 30, 2011 and 2010, the most
recent regulatory guidelines categorized the Bank as “well capitalized” under the regulatory framework for prompt
corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum Tier 1 (core) capital,
Tier 1 risked based capital and total risk-based capital ratios as set forth in the table below. Management
believes, as of September 30, 2011, that the Bank meets all capital adequacy requirements to which it is subject
and there were no conditions or events subsequent to September 30, 2011 that would change the Bank’s
category. There are currently no regulatory capital requirements at the Company, but under the Dodd-Frank Act,
the Company will become subject to regulatory capital requirements beginning July 21, 2015.
To Be Well
Capitalized
Under Prompt
Actual
Amount Ratio
For Capital
Adequacy Purposes
Amount
(Dollars in thousands)
Ratio
Corrective Action
Provisions
Amount
Ratio
$ 1,369,143 15.1%
1,369,143 15.1
1,369,143 37.9
1,380,853 38.3
$ 135,926
362,469
N/A
288,734
1.5%
4.0
N/A
8.0
N/A N/A
5.0%
$ 453,086
216,551
6.0
360,918 10.0
9.8%
$ 824,768
9.8
824,768
824,768 23.5
835,324 23.8
$ 126,666
337,776
N/A
280,796
1.5%
4.0
N/A
8.0
N/A N/A
5.0%
$ 422,220
210,597
6.0
350,995 10.0
As of September 30, 2011:
Tangible equity
Tier 1 (core) capital
Tier 1 (core) risk-based capital
Total risk-based capital
As of September 30, 2010:
Tangible equity
Tier 1 (core) capital
Tier 1 (core) risk-based capital
Total risk-based capital
A reconciliation of the Bank’s equity under GAAP to regulatory capital amounts as of September 30, 2011 and
2010 is as follows:
Total Bank equity as reported under GAAP
Unrealized gains on AFS securities
Other
Total tangible and core capital
ACL(1)
Total risk based capital
2011
2010
(Dollars in thousands)
$ 1,395,708
(26,314)
(251)
1,369,143
11,710
$ 1,380,853
$ 857,114
(31,862)
(484)
824,768
10,556
$ 835,324
(1) This amount represents the general valuation allowances calculated using the formula analysis. SVA are netted against
the related loan balance on the Thrift Financial Report and are therefore not included in this amount.
Under OCC and FRB regulations, there are limitations on the amount of capital the Bank may distribute to the
Company. Generally, this is limited to the earnings of the previous two calendar years and current year-to-date
earnings. Under OCC and FRB safe harbor regulations, the Bank may distribute to the Company capital not
exceeding net income for the current calendar year and the prior two calendar years. At September 30, 2011,
the Bank was in compliance with the OCC and FRB safe harbor regulations. So long as the Bank continues to
remain “well capitalized” after each capital distribution, operate in a safe and sound manner, provide the OCC
and FRB with updated capital levels, and non-performing asset balances and allowance for credit loss
information as requested, and comply with OCC interest rate risk management guidelines, it is management’s
belief that the OCC and FRB will continue to allow the Bank to distribute its net income to the Company, although
no assurance can be given in this regard.
92
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair Value Measurements - ASC 820, Fair Value Measurements and Disclosures, defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC
820 applies only to fair value measurements already required or permitted by other accounting standards and
does not impose requirements for additional fair value measures. ASC 820 was issued to increase consistency
and comparability in reporting fair values.
The Company uses fair value measurements to record fair value adjustments to certain assets and to determine
fair value disclosures. The Company did not have any liabilities that were measured at fair value at September
30, 2011 and 2010. The Company’s AFS securities are recorded at fair value on a recurring basis. Additionally,
from time to time, the Company may be required to record at fair value other assets or liabilities on a non-
recurring basis, such as REO, LHFS, and impaired loans. These non-recurring fair value adjustments involve
the application of lower-of-cost-or-fair value accounting or write-downs of individual assets.
In accordance with ASC 820, the Company groups its assets at fair value in three levels, based on the markets
in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels
are:
• Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets.
• Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based valuation techniques for which all
significant assumptions are observable in the market.
• Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in
the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market
participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models,
discounted cash flow models, and similar techniques. The results cannot be determined with precision and may not
be realized in an actual sale or immediate settlement of the asset or liability.
The Company bases its fair values on the price that would be received to sell an asset in an orderly transaction
between market participants at the measurement date. As required by ASC 820, the Company maximizes the
use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
The following is a description of valuation methodologies used for assets measured at fair value on a recurring
basis.
AFS Securities - The Company’s AFS securities portfolio is carried at estimated fair value, with any unrealized
gains and losses, net of taxes, reported as AOCI in stockholders' equity. The Company’s major security types
based on the nature and risks of the securities are included in the table below. The majority of the securities
within the AFS portfolio are issued by U.S. GSEs. The fair values for all AFS securities are based on quoted
prices for similar securities. Various modeling techniques are used to determine pricing for the Company’s
securities, including option pricing and discounted cash flow models. The inputs to these models may include
benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and
reference data. There is an AFS security in the AFS portfolio that has significant unobservable inputs requiring
the independent pricing services to use some judgment in determining its fair value. This AFS security is
classified as Level 3. All other AFS securities are classified as Level 2.
93
The following tables provide the level of valuation assumption used to determine the carrying value of the
Company’s AFS securities measured at fair value on a recurring basis at September 30, 2011 and 2010.
September 30, 2011
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Significant
Other Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)(1)
(Dollars in thousands)
Carrying
Value
$ 748,308
2,754
2,941
732,436
$ 1,486,439
$ --
--
--
--
$ --
$ 748,308
2,754
--
732,436
$ 1,483,498
$ --
--
2,941
--
$ 2,941
September 30, 2010
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Significant
Other Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)(2)
(Dollars in thousands)
Carrying
Value
$ 50,255
2,819
2,796
1,004,496
$ 1,060,366
$ --
--
--
--
$ --
$ 50,255
2,819
--
1,004,496
$ 1,057,570
$ --
--
2,796
--
$ 2,796
AFS securities
GSE debentures
Municipal bonds
Trust preferred securities
MBS
AFS securities
GSE debentures
Municipal bonds
Trust preferred securities
MBS
(1) The Company’s Level 3 AFS securities have had no activity from September 30, 2010 to September 30, 2011, except for
principal repayments of $87 thousand and reductions in net unrealized losses recognized in other comprehensive income.
Reductions of net unrealized losses included in other comprehensive income for the year ended September 30, 2011
were $115 thousand.
(2) The Company’s Level 3 AFS securities have had no activity from September 30, 2009 to September 30, 2010, except for
principal repayments of $93 thousand and reductions in net unrealized losses recognized in other comprehensive income.
Reductions of net unrealized losses included in other comprehensive income for the year ended September 30, 2010
were $460 thousand.
The following is a description of valuation methodologies used for significant assets measured at fair value on a
non-recurring basis.
Loans Receivable - Loans which meet certain criteria are evaluated individually for impairment. A loan is
considered impaired when, based upon current information and events, it is probable the Bank will be unable to
collect all amounts due, including principal and interest, according to the contractual terms of the loan
agreement. The unpaid principal balance of impaired loans at September 30, 2011 and 2010 was $72.0 million
and $57.1 million, respectively. Substantially all of the Bank’s impaired loans at September 30, 2011 and 2010
were secured by residential real estate. These impaired loans are individually assessed to ensure that the
carrying value of the loan is not in excess of the fair value of the collateral, less estimated selling costs. Fair
value is estimated through current appraisals, AVMs, BPOs, or listing prices in the event of a possible short sale.
Fair values may be adjusted by management to reflect current economic and market conditions and, as such,
are classified as Level 3. Based on this evaluation, the Company maintained an ACL of $3.8 million and $4.3
million at September 30, 2011 and 2010, respectively, for such impaired loans.
REO, net - REO primarily represents residential real estate acquired as a result of foreclosure or by deed in lieu
of foreclosure and is carried at lower-of-cost or fair value. Fair value is estimated through current appraisals,
AVMs, BPOs, or listing prices. As these properties are actively marketed, estimated fair values may be adjusted
by management to reflect current economic and market conditions and, as such, are classified as Level 3. The
fair value of REO at September 30, 2011 and 2010 was $11.3 million and $9.9 million, respectively.
94
The following tables provide the level of valuation assumption used to determine the carrying value of the
Company’s assets measured at fair value on a non-recurring basis at September 30, 2011 and 2010.
September 30, 2011
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
Carrying
Value
Impaired loans
REO, net
$ 72,048
11,321
$ --
--
$ --
--
$ 72,048
11,321
$ 83,369
$ --
$ --
$ 83,369
September 30, 2010
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
Carrying
Value
Impaired loans
REO, net
$ 57,118
9,920
$ --
--
$ --
--
$ 57,118
9,920
$ 67,038
$ --
$ --
$ 67,038
Fair Value Disclosures - The Company determined estimated fair value amounts using available market
information and a selection from a variety of valuation methodologies. However, considerable judgment is
required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented are
not necessarily indicative of the amount the Company could realize in a current market exchange. The use of
different market assumptions and estimation methodologies may have a material impact on the estimated fair
value amounts. The fair value estimates presented herein are based on pertinent information available to
management as of September 30, 2011 and 2010. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements since those dates. The carrying amounts and estimated fair values of the
Company’s financial instruments as of September 30, 2011 and 2010 were as follows:
2011
2010
Carrying
Amount
Estimated
Fair
Value
Carrying
Amount
Estimated
Fair
Value
(Dollars in thousands)
Assets:
Cash and cash equivalents
$ 121,070
$ 121,070
$ 65,217
$ 65,217
AFS securities
HTM securities
Loans receivable
BOLI
1,486,439
1,486,439
2,370,117
2,434,392
1,060,366
1,880,154
1,060,366
1,913,454
5,149,734
5,475,150
5,168,202
5,392,550
56,534
56,534
54,710
54,710
Capital stock of FHLB
126,877
126,877
120,866
120,866
Liabilities:
Deposits
FHLB Advances
Other borrowings
4,495,173
4,553,516
4,386,310
4,459,052
2,379,462
2,569,958
2,348,371
2,557,064
515,000
545,096
668,609
701,099
95
The following methods and assumptions were used to estimate the fair value of the financial instruments:
Cash and Cash Equivalents - The carrying amounts of cash and cash equivalents are considered to approximate
their fair value due to the nature of the financial asset.
AFS and HTM Securities - Estimated fair values of securities are based on one of three methods: 1) quoted
market prices where available, 2) quoted market prices for similar instruments if quoted market prices are not
available, 3) unobservable data that represents the Bank’s assumptions about items that market participants
would consider in determining fair value where no market data is available. AFS securities are carried at
estimated fair value. HTM securities are carried at amortized cost.
Loans Receivable - Fair values are estimated for portfolios with similar financial characteristics. Loans are
segregated by type, such as one- to four-family residential mortgages, multi-family residential mortgages,
nonresidential, and installment loans. Each loan category is further segmented into fixed- and adjustable interest
rate categories. Market pricing sources are used to approximate the estimated fair value of fixed- and
adjustable-rate one- to four-family residential mortgages. For all other loan categories, future cash flows are
discounted using the LIBOR curve plus a margin at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturity.
BOLI - The carrying value of BOLI is considered to approximate its fair value due to the nature of the financial
asset.
Capital Stock of FHLB - The carrying value of FHLB stock equals cost. The fair value is based on redemption at
par value.
Deposits - The estimated fair value of demand deposits, savings, and money market accounts is the amount
payable on demand at the reporting date. The estimated fair value of fixed-maturity certificates of deposit is
estimated by discounting the future cash flows using a margin to the LIBOR curve.
Advances from FHLB - The estimated fair value of advances from FHLB is determined by discounting the future
cash flows of each advance using a margin to the LIBOR curve.
Other Borrowings - The estimated fair value of the repurchase agreements is determined by discounting the
future cash flows of each agreement using a margin to the LIBOR curve. The Debentures had a variable rate
structure, with the ability to redeem at par; therefore, the carrying value of the Debentures approximated their
estimated fair value at September 30, 2010. The Debentures were redeemed in April 2011.
15. SUBSEQUENT EVENTS
In preparing these financial statements, management has evaluated events occurring subsequent to September
30, 2011, for potential recognition and disclosure. There have been no material events or transactions which
would require adjustments to the consolidated financial statements at September 30, 2011.
96
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present summarized quarterly data for each of the years indicated for the Company. In
December 2010, Capitol Federal Financial completed its corporate reorganization. All share information used to
calculate EPS in the consolidated financial statements prior to the corporate reorganization has been revised to
reflect the 2.2637 exchange ratio and is reflected in the following tables.
First
Quarter
Second
Third
Quarter Quarter
Fourth
Quarter
Total
(Dollars and counts in thousands, except per share amounts)
2011
Total interest and dividend income
Net interest and dividend income
Provision for credit losses
Net income (loss)
(0.07)
Basic earnings (loss) per share
(0.07)
Diluted earnings (loss) per share
0.800
Dividends paid per public share
Average number of shares outstanding 165,541
$ 346,865
$ 84,941 $ 88,083 $ 86,594
$ 87,247
40,005
168,734
40,556 44,308 43,865
650 520 1,240 1,650 4,060
(11,258) 15,636 17,259 16,766 38,403
0.24
0.24
1.625
162,625
0.10
0.10
0.075
161,500 161,642 161,784
0.10
0.10
0.675
0.10
0.10
0.075
2010
$ 374,051
$ 93,707 $ 91,485 $ 89,972
$ 98,887
Total interest and dividend income
44,854
169,565
42,683 40,887 41,141
Net interest and dividend income
3,115 3,200 1,816 750 8,881
Provision for credit losses
14,655 16,758 15,447 67,840
20,980
Net income
0.41
0.13
Basic EPS
0.41
0.13
Diluted EPS
Dividends paid per public share
2.290
0.790
165,862
Average number of shares outstanding 165,854
0.09
0.09
0.500
165,734 165,869 165,989
0.10
0.10
0.500
0.09
0.09
0.500
97
17. PARENT COMPANY FINANCIAL INFORMATION (PARENT COMPANY ONLY)
The Company serves as the holding company for the Bank (see Note 1). The Company’s (parent company only)
balance sheets as of September 30, 2011 and 2010, and the related statements of income and cash flows for
each of the three years in the period ended September 30, 2011 are as follows:
BALANCE SHEETS
SEPTEMBER 30, 2011 and 2010
(Dollars in thousands, except share amounts)
ASSETS
Cash and cash equivalents
Investment in the Bank
AFS securities, at fair value (amortized cost of $362,271 and $0)
Investment in certificates of deposit at the Bank
Note receivable - ESOP
Other assets
Accrued interest receivable
Income taxes receivable
Deferred income tax assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Accounts payable and accrued expenses
Other borrowings
Total liabilities
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value; 100,000,000 shares authorized,
no shares issued or outstanding
Common stock, $.01 par value; 1,400,000,000 shares authorized,
167,498,133 shares issued; 167,498,133 and 73,992,678 shares
outstanding as of September 30, 2011 and 2010, respectively
Additional paid-in capital
Unearned compensation - ESOP
Unearned compensation - RRP
Retained earnings
AOCI, net of tax
Treasury stock, at cost, 0 and 17,519,609 shares as of
September 30, 2011 and 2010, respectively
2011
2010
$ 113,101 $ 88,098
857,115
--
55,000
8,024
7,604
--
138
--
$ 1,015,979
1,395,708
362,875
--
52,759
75
1,812
2,855
10,409
$ 1,939,594
$ 65
--
65
$ 420
53,609
54,029
--
1,675
1,392,691
(50,547)
(124)
569,127
26,707
1,939,529
--
915
457,795
(6,050)
(255)
801,044
31,862
1,285,311
--
(323,361)
Total stockholders’ equity
1,939,529
961,950
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 1,939,594
$ 1,015,979
98
STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2011, 2010, and 2009
(Dollars in thousands)
2011
2010
2009
INTEREST AND DIVIDEND INCOME:
Dividend income from the Bank
Interest income from other investments
Interest income from securities
Total interest and dividend income
$ 45,643 $ 84,869 $ 50,056
3,612
--
53,668
3,221
1,093
49,957
2,927
--
87,796
INTEREST EXPENSE
855
1,680
2,573
NET INTEREST AND DIVIDEND INCOME
49,102
86,116
51,095
OTHER INCOME
26
50
76
OTHER EXPENSES:
Contribution to Foundation
Salaries and employee benefits
Regulatory and outside services
Other, net
Total other expenses
40,000
856
337
650
41,843
--
929
493
270
1,692
--
1,108
228
243
1,579
INCOME BEFORE INCOME TAX BENEFIT AND EQUITY
IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY
7,285
84,474
49,592
INCOME TAX BENEFIT
(13,425)
(138)
(162)
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARY
20,710
84,612
49,754
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY
(EXCESS OF DISTRIBUTION OVER)
17,693
(16,772)
16,544
NET INCOME
$ 38,403 $ 67,840 $ 66,298
99
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2011, 2010, and 2009
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in excess of distribution over/(undistributed)
earnings of subsidiary
Amortization/accretion of premiums/discounts
Amortization of deferred debt issuance costs
Other, net
Provision for deferred income taxes
Changes in:
Other assets
Income taxes receivable/payable
Accounts payable and accrued expenses
Net cash flows provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Offering proceeds downstreamed to Bank
Purchase of AFS investment securities
Proceeds from maturities of AFS securities
Proceeds from maturities of Bank certificates
Purchase of Capitol Federal Financial, Inc. stock
Principal collected on notes receivable from ESOP
Net cash flows (used in)/provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock offering (Deferred offering costs)
Payment from subsidiary for sale of treasury stock related to
RRP shares
Dividends paid
Repayment of other borrowings
Acquisition of treasury stock
Stock options exercised
Net cash flows provided by/(used in) financing activities
2011
2010
2009
$ 38,403 $ 67,840
$ 66,298
(17,693)
3,529
--
(1,812)
(10,409)
1,547
(2,927)
(355)
10,283
(567,422)
(405,800)
40,000
55,000
--
2,525
(875,697)
16,772
--
--
1
--
--
24
3
84,640
--
--
--
5,000
(1)
2,387
7,386
(16,544)
--
28
14
--
2,999
(95)
(292)
52,408
--
--
--
--
--
2,256
2,256
1,094,101
(5,982)
--
--
(150,110)
(53,609)
--
35
890,417
162
(48,400)
--
(4,019)
210
(58,029)
87
(44,069)
--
(2,426)
1,337
(45,071)
NET INCREASE IN CASH AND CASH EQUIVALENTS
25,003
33,997
9,593
CASH AND CASH EQUIVALENTS:
Beginning of year
88,098
54,101
44,508
End of year
$ 113,101 $ 88,098 $ 54,101
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest payments
$ 1,274 $ 1,678 $ 2,866
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Note to ESOP in exchange for common stock
$ 47,260 $ -- $ --
100
Topeka: 785-235-1341
Home Office
700 S Kansas Avenue, Topeka, KS 66603
1201 S Topeka Blvd
2100 SW Fairlawn Rd
2901 S Kansas Ave
2865 SW Wanamaker Rd
3540 NW 46th St
3310 SE 29th St
12th St & Wanamaker, ATM only
29th & California, ATM only
Greater Kansas City: 913-381-5400
5501 Johnson Dr
9500 Nall Ave
1900 W 75th St
9000 W 87th St
5700 Nieman Rd
1408 E Santa Fe St
10101 College Blvd
2100 E 151st St
15525 W 87th St Pkwy
13500 Metcalf Ave
22400 Midland Dr
15081 Nall Ave
13100 State Line Rd
5821 NW Barry Rd, Kansas City, MO
15345 W 119th St, SuperTarget
12200 Blue Valley Pkwy, SuperTarget
15700 Shawnee Mission Pkwy, SuperTarget
7734 State Ave, Price Chopper
11700 W 135th St, Price Chopper
4050 W 83rd St, Hen House
830 E Main St, Gardner, Price Chopper
500 NE Barry Rd, Kansas City, MO, Price Chopper
75th & Quivira, ATM only
Santa Fe & Hwy 7, ATM only
19601 W 101st, Price Chopper, ATM only
13351 Mission Road, Price Chopper, ATM only
Lawrence: 785-749-9000
1046 Vermont St
1025 Iowa St
3201 S Iowa St, SuperTarget
4701 W 6th St, Dillon’s
1026 Westdale Rd, Loan Production Office Only
1321 Oread, KU Student Union, ATM only
Wichita: 316-689-0200
8301 E 21st St North
8040 E Douglas Ave
4020 W Maple St
10404 W Central Ave
4000 E Harry St
4616 E 13th St
1636 North Rock Rd, Suite 900, Derby, KS
114 E Cloud Ave, Andover, KS
Emporia: 620-342-0125
602 Commercial St
Manhattan: 785-537-4226
1401 Poyntz Ave
705A Commons Place
K-State Student Union, ATM only
Salina: 785-825-7121
2550 S 9th St
“
“
Capitol Federal is proud to report that we have followed through
with everything we said we would do in our prospectus and
investor meetings prior to completing the second-step
conversion. We have remained ‘true blue’.
“
Financial Highlights
Letter To The Stockholders
Directors and Management
Financial Information
1
2
4
5
Stockholder Information
101
InFORMATIOn
Annual Meeting
The Annual Meeting of Stockholders will be held at 10:00 a.m. local time on January 24, 2012 at the Bradbury Thompson Center,
1700 SW Jewell St on the Washburn University campus in Topeka, Kansas.
Stock Listing
Capitol Federal Financial, Inc. common stock is traded on the Global Select tier of the NASDAQ Stock Market under the symbol “CFFN”.
Price Range of Common Stock
The high and low sales prices for the common stock as reported on the NASDAQ Stock Market, as well as dividends declared per share,
are reflected in the table below. Such information reflects inter-dealer prices, without retail markup, markdown or commission and may
not represent actual transactions. All sales prices for common stock prior to the corporate reorganization have been revised to reflect the
2.2637 exchange ratio.
FISCAL YEAR 2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
FISCAL YEAR 2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
HIGH
$11.94
$12.70
$12.08
$11.94
HIGH
$14.74
$16.88
$17.00
$15.06
LOW
$10.16
$11.17
$10.93
$10.28
LOW
$12.45
$13.59
$13.77
$10.59
DIVIDENDS
$0.800
$0.675
$0.075
$0.075
DIVIDENDS
$0.790
$0.500
$0.500
$0.500
In total, during calendar year 2011, we paid $1.00 per share to our stockholders, or $161.5 million.
During calendar year 2011, the Company paid $161.5 million in cash dividends, which consisted of $48.5 million of regular quarterly
dividends, a one-time special dividend (“welcome” dividend) of $96.8 million and a special year-end dividend of $16.2 million. The special
year-end dividend is the result of the Board of Directors’ commitment to distribute to stockholders 100% of the fiscal year 2011 earnings
of Capitol Federal Financial, Inc., excluding the impact of the contribution to the Foundation.
Our cash dividend payout policy is continually reviewed by management and the Board of Directors. Dividend payments depend upon
a number of factors including the Company’s financial condition and results of operations, the Bank’s regulatory capital requirements,
regulatory limitations on the Bank’s ability to make capital distributions to the Company, and the amount of cash at the holding
company. The Company relies significantly upon dividends from the Bank to accumulate cash for the payment of dividends to Company
stockholders. See Notes 1 and 13 in the Notes to Consolidated Financial Statements for a discussion of restrictions on the Bank’s ability
to pay dividends.
At November 18, 2011, there were 167,498,133 shares of Capitol Federal Financial, Inc. common stock issued and outstanding and
approximately 12,492 stockholders of record.
Stockholders and General Inquiries
James D. Wempe, Vice President
Capitol Federal Financial, Inc., 700 South Kansas Avenue, Topeka, KS 66603
(785) 270-6055
e-mail: jwempe@capfed.com
Copies of our Annual Report on Form 10-K for the fiscal year ended September 30, 2011 are available at no charge to stockholders upon
request.
“
See capfed.com for complete list of participating Walgreen’s ATMs
in the Greater Kansas City Metro area and across the State of
Kansas, providing Capitol Federal cardholders ATM access, with
no transaction fees.
Transfer Agent
American Stock Transfer & Trust Company
6201 15th Avenue, Brooklyn, NY 11219
(800) 937-5449
101
COnTEnTSLOCATIOnSSTOCKHOLDER
“We've served generations of customers for over a
century and investors for over a decade. Being true to our word, combined with the
strength of our history and conservative management practice, we continue to be solid, stable and sound.”
– John B. Dicus