contents
contents
1 Financial Highlights
1 Financial Highlights
2 Letter To Stockholders
2 Letter To Stockholders
4 Directors and Management
4 Directors and Management
5 Financial Information
5 Financial Information
8 Management’s Discussion and Analysis
8 Management’s Discussion and Analysis
52 Consolidated Financial Statements
52 Consolidated Financial Statements
101 Stockholder Information
101 Stockholder Information
Photos provided by McPherson Contractors
Photos provided by McPherson Contractors
locations
locations
See capfed.com for a complete list of all of our branch and ATM locations. The
See capfed.com for a complete list of all of our branch and ATM locations. The
counties in blue below represent the locations where we have branch locations.
counties in blue below represent the locations where we have branch locations.
financial highlights
2013
2012
2011
2010
2009
(dollars in thousands)
Total Assets
Loans Receivable, net
$9,186,449
5,958,868
$9,378,304
5,608,083
$9,450,799
5,149,734
$8,487,130
5,168,202
$8,403,680
5,603,965
Securities:
Available-for-Sale
Held-to-Maturity
Deposits
Borrowings
Equity
Net Income
Efficiency Ratio
Equity to Assets
1,069,967
1,718,023
1,406,844
1,887,947
1,486,439
2,370,117
1,060,366
1,880,154
1,623,995
849,176
4,611,446
2,833,538
1,632,126
69,340
4,550,643
2,895,322
1,806,458
74,513
4,495,173
2,894,462
1,939,529
38,403
(1)
4,386,310
3,016,980
961,950
67,840
4,228,609
3,106,179
941,298
66,298
48.13%
17.77%
43.55%
19.26%
(1)
68.30%
20.52%
43.99%
11.33%
45.62%
11.20%
amount of dividends paid
(in millions)
shares outstanding(3)
basic earnings per share(4)
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
161.5(2)
149.7(2)
69.1
48.7
48.0
r
s
e
a
h
s
f
o
s
n
o
i
l
l
i
m
200
150
100
50
0
167.5
167.5 167.7
155.4
147.8
13 12 11 10 09
Calendar Year
13 12
11 10 09
Fiscal Year
$0.60
$0.40
$0.20
$0.00
0.48
0.47
0.40(1)
0.41
0.40
13 12 11 10 09
Fiscal Year
(1) Excluding the $40.0 million ($26.0 million, net of income tax benefit) contribution to Capitol Federal Foundation (the “Foundation”) in connection with
the corporate reorganization in December 2010, net income for fiscal year 2011 would have been $64.4 million and the efficiency ratio would have
been 47.65%. Basic earnings per share for fiscal year 2011, 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, 2012 and 2011 – Non-GAAP Presentation.”
(2) Included in calendar year 2012 dividends paid is $76.5 million related to the True Blue® dividend paid in December 2012. Included in calendar year
2011 dividends paid is $96.8 million related to a one-time special cash dividend (welcome dividend) associated with the corporate reorganization in
December 2010.
(3) 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 reflect the exchange ratio, which
was 2.2637.
(4) All earnings per share information prior to the corporate reorganization in December 2010 has been revised to reflect the 2.2637 exchange ratio.
1
letter
T O S T O C K H O L D E R S
Dear Stockholders,
During fiscal year 2013 Capitol Federal® Savings (the “Bank”) celebrated its 120th anniversary.
Over the years many events have come and gone leaving a lasting impact on the operations
of the Bank, and this year was no exception. This past year we have seen some unexpected
and erratic changes in interest rates, new mortgage lending regulations were issued that will
impact the way we lend to our customers, new capital requirements are being put into place,
additional stress testing regulations were issued and many more. Just as we have before,
the Bank and Capitol Federal® Financial, Inc. (the “Company”) will meet the challenges
that come our way.
The Company finished fiscal year 2013 strong with $69.3 million in earnings. We continue our
commitment to returning stockholder value through our stock buyback program, paying out
100% of our earnings as dividends, and our True Blue® dividend in December 2012 which
brought our fiscal year 2013 dividends to $1.00 per share.
Management and the Board continued its strategy of making the balance sheet efficient;
increasing the balances of loans and deposits while decreasing the leverage in borrowings
and securities. This strategy resulted in the Company having a consistent net interest margin,
contributing to stability in earnings. Capital, as a percentage of assets, decreased to 17.8%
from 19.3% at the end of fiscal year 2012, primarily the result of the repurchase of stock and the
payment of the $0.52 True Blue dividend in December 2012. We continue to not compromise
on asset quality and have positioned the Bank with appropriate technology and facilities to
deliver the quality of customer service we have provided since our beginning.
Longer term interest rates rose in May and June of 2013 following announcements by Federal
Reserve Bank Chairman Ben Bernanke indicating the intention of tapering the current
quantitative easing program. Customers who had been waiting to purchase or refinance a
home moved to action and applied for loans resulting in the Bank closing more than $1.54
billion in loans. As a result of the increase in mortgage rates at September 30, 2013 we were
closing 30-year fixed-rate mortgages at rates higher than our current loan portfolio yield.
2
The strategy of moving more securities into loans resulted in a $350.8 million, or 6%, increase
in the balance of our loan portfolio during the fiscal year. We maintained the balance of our
portfolio of originated loans and, partnering with 26 correspondents, increased the balance
of our correspondent loans to more than $1.04 billion. Our focus on growing retail deposits
resulted in deposit balances increasing $60.8 million over the previous year. During fiscal
year 2013 we rolled out our mobile banking application which includes the ability to make
deposits remotely.
In addition to better aligning our balance sheet, the shift out of securities and into loans
generally increased the yield on those assets by 1.86%. Additionally, during the year we were
able to reprice borrowings down and reduce our overall borrowings cost by 46 basis points.
These actions allowed the Company to maintain a nearly flat net interest margin while the
net interest margin for many banks decreased.
During the current fiscal year we completed the remodel of our Home Office. As seen on
the cover of this annual report, the building has been modernized on the exterior as well
as the interior. We continued our focus on cost controls, which further levers the strategic
changes made to the balance sheet, ending the year with an efficiency ratio well below
industry averages at 48.13%.
The Capitol Federal Foundation continues to have a major impact on our communities
through its gifts to housing initiatives, education, the United Way and other general charitable
activities in the market areas we serve. The Foundation has given away over $40.0 million in
charitable contributions since its founding in April 1999 and has assets in excess of $99.0 million.
With fiscal year 2013 closed and fiscal year 2014 beginning, the Board and management
continue their commitment to pay out 100% of the earnings of the Company to stockholders.
We thank you for your continued support of management and the Board as we continue to
make your investment in Capitol Federal True Blue.
John B. Dicus, Chairman, President and CEO
3
directors
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, Chief Lending Officer for Capitol
Federal Savings Bank
Jeffrey M. Johnson
President, Flint Hills National Golf Club
Michael T. McCoy, M.D.
Orthopedic Surgeon in Multi-Special Clinic and Co-Director of the
Joint Center of Stormont-Vail Heathcare
James G. Morris
Retired Partner in Charge of the Financial Services Practice of the
Kansas City office of KPMG LLP
Reginald L. Robinson
Professor of Law, Washburn University School of Law, Inaugural Director,
Washburn University School of Law Center for Law and Government
Jeffrey R. Thompson
Chief Executive Officer, Salina Vortex Corporation
Marilyn S. Ward
Retired Executive Director of ERC/Resource & Referral
management
John B. Dicus
Chairman, President and CEO
Natalie G. Haag
Executive Vice President and General Counsel
Rick C. Jackson
Executive Vice President, Chief Lending Officer for Capitol
Federal Savings Bank
Carlton A. Ricketts
Executive Vice President of Corporate Services for
Capitol Federal Savings Bank
Kent G. Townsend
Executive Vice President, Chief Financial Officer and Treasurer
Frank H. Wright IV
Executive Vice President of Retail Operations for
Capitol Federal Savings Bank
Tara D. Van Houweling
First Vice President and Reporting Director
Mary R. Culver
Corporate Secretary
Special Counsel
Independent Auditors Deloitte & Touche L.L.P. , 1100 Walnut, Suite 3300, Kansas City, MO 64106
4
Silver, Freedman & Taff, L.L.P. , 3299 K Street, N.W. , Suite 100, Washington, DC 20007
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, 2013 and 2012
Consolidated Statements of Income for the Years Ended
September 30, 2013, 2012, and 2011
Consolidated Statements of Comprehensive Income for the Years Ended
September 30, 2013, 2012, and 2011
Consolidated Statements of Stockholders’ Equity for the Years Ended
September 30, 2013, 2012, and 2011
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2013, 2012, and 2011
Notes to Consolidated Financial Statements for the Years Ended
September 30, 2013, 2012, and 2011
6
8
48
49
52
54
56
57
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 should be read in conjunction with our consolidated
financial statements and notes beginning on page 52. All share information prior to the second step conversion and
stock offering completed in December 2010 (“the corporate reorganization”) has been revised to reflect the 2.2637
exchange ratio.
2013
September 30,
2011
2010
(Dollars in thousands, except per share amounts)
2012
2009
$ 9,186,449 $ 9,378,304 $ 9,450,799 $ 8,487,130 $ 8,403,680
5,603,965
5,149,734
5,168,202
5,608,083
5,958,868
1,069,967
1,718,023
128,530
4,611,446
2,513,538
320,000
1,632,126
1,406,844
1,887,947
132,971
4,550,643
2,530,322
365,000
1,806,458
1,486,439
2,370,117
126,877
4,495,173
2,379,462
515,000
1,939,529
1,060,366
1,880,154
120,866
4,386,310
2,348,371
668,609
961,950
1,623,995
849,176
133,064
4,228,609
2,392,570
713,609
941,298
For the Year Ended September 30,
2013
2012
2011
2010
2009
(Dollars and counts in thousands, except per share amounts)
$
298,554 $
120,394
178,160
(1,067)
328,051 $
143,170
184,881
2,040
346,865 $
178,131
168,734
4,060
374,051 $
204,486
169,565
8,881
412,786
236,144
176,642
6,391
179,227
15,342
7,947
23,289
96,947
105,569
36,229
69,340
182,841
15,915
8,318
24,233
91,075
115,999
41,486
74,513
164,674
15,509
9,486
24,995
132,317
57,352
18,949
38,403
160,684
17,789
16,622
34,411
89,730
105,365
37,525
67,840
170,251
18,023
10,571
28,594
93,621
105,224
38,926
66,298
$
$
0.48 $
0.47 $
144,847
157,913
0.48 $
0.47 $
144,848
157,916
(1)
(1)
$
$
0.24
162,625
0.24
162,633
0.41 $
165,862
0.41 $
165,899
0.40
165,576
0.40
165,721
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
Deposits
Federal Home Loan Bank (“FHLB”) borrowings
Other borrowings
Stockholders’ equity
Selected Operations Data:
Total interest and dividend income
Total interest expense
Net interest and dividend income
Provision for credit losses
Net interest and dividend income after
provision for credit losses
Retail fees and charges
Other non-interest income
Total non-interest income
Total non-interest expense
Income before income tax expense
Income tax expense
Net income
Basic earnings per share
Average basic 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 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 Bank:
Tier 1 leverage ratio
Tier 1 risk-based capital
Total risk-based capital
Other Data:
Number of traditional offices
Number of in-store offices
2013
2012
2011
2010
2009
0.75%
4.14
1.00
211.75%
$
$
0.79%
3.93
0.40
85.58%
0.41%(1)
2.20(1)
1.63
390.88%
$
0.80 %
7.09
0.81%
7.27
$
2.29
71.34 %
$
2.11
66.47%
1.05
48.13
0.97
43.55
1.40(1)
68.30(1)
1.06
43.99
1.14
45.62
1.21x
1.24x
1.22x
1.11 x
1.12x
1.70%
1.72
1.97
1.64%
1.68
2.01
1.42%
1.60
1.84
0.33
0.44
33.36
0.15
17.77
18.12
14.8
35.6
35.9
36
10
0.43
0.57
34.88
0.20
19.26
20.11
14.6
36.4
36.7
36
10
0.40
0.51
58.34
0.30
20.52
18.50
15.1
37.9
38.3
35
10
1.78 %
1.76
2.06
0.49
0.62
46.60
0.29
11.33
11.30
9.8
23.5
23.8
35
11
1.86%
1.89
2.20
0.46
0.55
32.83
0.18
11.20
11.08
10.0
23.2
23.3
33
9
(1) Excluding the $40.0 million ($26.0 million, net of income tax benefit) contribution to the Capitol Federal Foundation (“the
Foundation”) in connection with Capitol Federal Financial’s conversion from a mutual holding company form of organization to
a stock form of organization, 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%, the 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, 2012 and 2011 – Non-GAAP Presentation.”
(2) For fiscal years 2009 and 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 excluded 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 the ownership portion of MHC was sold in a public offering. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Executive Summary” for additional information.
7
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.”
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 other similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause our future results to differ materially
from the plans, objectives, goals, expectations, anticipations, estimates, and intentions expressed in the forward-
looking statements:
our ability to 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 invest funds in wholesale or secondary markets at favorable yields as compared to the related
funding source;
our ability to access cost-effective funding;
the future earnings and capital levels of the Bank and the continued non-objection by our primary federal
banking regulators, to the extent required, to distribute capital from the Bank to the Company, which could
affect the ability of the Company to pay dividends in accordance with its dividend policy;
fluctuations in deposit flows, loan demand, and/or real estate values, as well as unemployment levels, which
may adversely affect our business;
the credit risks of lending and investing activities, including changes in the level and direction of loan
delinquencies and charge-offs, changes in 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, fiscal policies and laws, and monetary and interest rate policies of the
Board of Governors of the Federal Reserve System (“FRB”);
the effects of, and changes in, foreign and military policies of the United States government;
inflation, interest rate, market and monetary fluctuations;
the timely development and acceptance of our new products and services and the perceived overall value of
these products and services by users, including the features, pricing and quality compared to competitors’
products and services;
the willingness of users to substitute competitors’ products and services for our products and services;
our success in gaining regulatory approval of our products and services and branching locations, when
required;
the impact of changes in financial services laws and regulations, including laws concerning taxes, banking,
securities, consumer protection and insurance and the impact of other governmental initiatives affecting the
financial services industry;
implementing business initiatives may be more difficult or expensive than anticipated;
technological changes;
acquisitions and dispositions;
changes in consumer spending and saving habits; and
our success at managing the risks involved in our business.
This list of important factors is not all inclusive. We do not undertake to update any forward-looking statement,
whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank.
8
The following discussion and analysis is intended to assist in understanding the financial condition, results of
operations, liquidity, and capital resources of the Company. The Bank comprises almost all of the consolidated
assets and liabilities of the Company and the Company is dependent primarily upon the performance of the Bank for
the results of its operations. Because of this relationship, references to management actions, strategies and results
of actions apply to both the Bank and the Company.
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, we completed our 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. As part of the corporate reorganization Capitol Federal Financial, Inc.
sold 118,150,000 shares of common stock (which represented MHC’s ownership interest in Capitol Federal Financial)
at $10.00 per share in a public stock offering. Concurrent with the completion of the offering, shares of Capitol
Federal Financial common stock owned by public stockholders were exchanged for 2.2637 shares of Capitol Federal
Financial, Inc.’s common stock. 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 was required by the Bank’ regulator at the time. The
other 50% of the proceeds remained at Capitol Federal Financial, Inc., of which $40.0 million was contributed to the
Bank’s charitable foundation, Capitol Federal Foundation, and $47.3 million was loaned to the ESOP for its purchase
of Capitol Federal Financial, Inc. shares in the stock offering.
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 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 became regulated by the FRB. Prior to that date, the Bank
and Company were regulated by the OTS. All references to the OTS in this document 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 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 lesser extent, we also originate consumer loans primarily secured by first mortgages on one- to
four-family residences, multi-family and commercial real estate loans, and construction loans for one- to four-family
residences, multi-family, and commercial properties. 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, participate in loans with other lenders that are secured by commercial
real estate and commercial properties, and invest in certain investment securities and mortgage-backed securities
(“MBS”) using funding from retail deposits, FHLB borrowings, 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 investment products, the level of personal income, and the personal rate of savings within
our market areas. Lending activities are influenced by the demand for housing and other loans, our loan underwriting
guidelines compared to those of our competitors, as well as interest rate pricing competition from other lending
institutions. 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’s pricing strategy for first mortgage loan products
includes setting interest rates based on secondary market prices and local competitor pricing for our local lending
markets, and secondary market prices and national competitor pricing for our correspondent lending markets.
Generally, deposit pricing is based upon a survey of competitors in the Bank’s market areas, and the need to attract
funding and retain maturing deposits. The majority of our loans are fixed-rate products with maturities up to 30 years,
while the majority of our retail deposits have maturity or repricing dates of less than two years.
The Federal Open Market Committee of the Federal Reserve (the “FOMC”) noted in their October 2013 statement
that economic activity has continued to expand at a moderate pace. Although the unemployment rate remains
elevated, labor market conditions have shown further signs of improvement. The FOMC stated that household
spending and business fixed investment have advanced, but recovery in the housing sector slowed somewhat in
recent months and fiscal policy is restraining economic growth. Inflation has fluctuated due to changes in energy
prices, but otherwise has been running below the FOMC’s longer-run objective and longer-term inflationary
expectations have remained stable. The FOMC decided to continue its existing policy of reinvesting principal
payments from its holdings of agency debt and agency MBS in agency MBS and will continue to purchase additional
9
longer-term Treasury securities at a pace of $45 billion per month and agency MBS at a pace of $40 billion per
month. The FOMC indicated that it believes that these actions, taken together, should maintain downward pressure
on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more
accommodative. The FOMC stated that it will closely monitor incoming information on economic and financial
developments in coming months and will continue its purchases until the outlook for the labor market improves
substantially in the context of price stability. The FOMC remarked that it will continue to maintain the overnight
lending rate at zero to 0.25% as long as the unemployment rate remains above 6.5%, inflation between one and two
years ahead is projected to be no more than a half percentage point above the FOMC’s 2% longer-run goal, and
longer-term inflation expectations continue to be well anchored. When the FOMC decides to begin to remove policy
accommodation, they will take a balanced approach consistent with their longer-run goals of maximum employment
and inflation of 2%.
Economic conditions in the Bank’s local market areas have a significant impact on the ability of borrowers to repay
loans and the value of the collateral securing these loans. As of October 2013, the unemployment rate was 5.6% for
Kansas and 6.5% for Missouri, compared to the national average of 7.3% based on information from the Bureau of
Economic Analysis. The unemployment rate remains lower in our market areas, relative to the national average, due
to diversified industries within our market areas, primarily in the Kansas City metropolitan statistical area. Our
Kansas City market area, which comprises the largest segment of our loan portfolio and deposit base, has an
average household income of approximately $80 thousand per annum, based on 2013 estimates from the American
Community Survey, which is a statistical survey by the U.S. Census Bureau. The average household income in our
combined market areas is approximately $69 thousand per annum, with 91% of the population at or above the
poverty level, also based on the 2013 estimates from the American Community Survey. The Federal Housing
Finance Agency (“FHFA”) price index for Kansas and Missouri has not experienced significant fluctuations during the
past 10 years, unlike other market areas of the United States, which indicates relative stability in property values in
our local market areas.
Total assets were $9.19 billion at September 30, 2013 compared to $9.38 billion at September 30, 2012. The $191.9
million decrease was due primarily to a $506.8 million decrease in the securities portfolio, partially offset by a $350.8
million, or 6.3%, increase in the loan portfolio. Of the $506.8 million decrease in the securities portfolio, $60.0 million
related to securities at the holding company level, the proceeds from which were used to pay dividends to
stockholders and repurchase stock. The remaining cash flows from the securities portfolio which were not reinvested
were used, in part, to fund loan growth. The net increase in the loan portfolio was due primarily to originations and
correspondent one- to four-family loan purchases outpacing principal repayments between periods.
Total liabilities were $7.55 billion at September 30, 2013 compared to $7.57 billion at September 30, 2012. The
$17.5 million decrease was due primarily to a $45.0 million decrease in repurchase agreements, a $16.8 million
decrease in FHLB borrowings, and a $12.9 million decrease in accounts payable and accrued expenses, partially
offset by a $60.8 million increase in deposits between period ends. The decrease in repurchase agreements and
FHLB borrowings between periods was due primarily to maturities not being replaced in their entirety. The increase
in the deposit portfolio was due primarily to a $49.4 million increase in the checking portfolio, a $22.2 million increase
in the savings portfolio, and a $17.6 million increase in the money market portfolio, partially offset by a $28.5 million
decrease in the certificate of deposit portfolio.
Stockholders’ equity was $1.63 billion at September 30, 2013 compared to $1.81 billion at September 30, 2012. The
$174.3 million decrease was due primarily to the payment of $146.8 million of dividends and the repurchase of $89.4
million of stock, partially offset by net income of $69.3 million. The $146.8 million of dividends paid during the current
fiscal year consisted of a $0.52 per share True Blue® dividend, an $0.18 per share special year-end dividend related
to fiscal year 2012 earnings per the Company’s dividend policy, and four regular quarterly dividends of $0.075 per
share. During fiscal year 2013, the Company repurchased 7,544,796 shares of common stock at an average price of
$11.85 per share, or $89.4 million. As of September 30, 2013, $129.6 million was available for repurchasing shares
under the Company’s current repurchase plan.
Net income for fiscal year 2013 was $69.3 million, compared to net income of $74.5 million for fiscal year 2012. The
$5.2 million, or 6.9%, decrease in net income was due primarily to a $6.7 million decrease in net interest income and
a $5.9 million increase in non-interest expense, partially offset by a $5.3 million decrease in income tax expense and
a $3.1 million decrease in provision for credit losses. The net interest margin was 1.97% for the current fiscal year
compared to 2.01% in the prior fiscal year. Decreases in the cost of funds and a shift in the mix of interest-earning
assets from relatively lower yielding securities to higher yielding loans mitigated the decrease in the net interest
margin during the current fiscal year, but were not enough to fully offset the impact of decreasing asset yields.
The Bank currently expects to open one branch in calendar year 2013. The branch will be located in our Kansas City
market area. Management continues to consider expansion opportunities in all of our market areas.
10
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. The Company maintains an ACL to absorb inherent losses in the loan portfolio based
upon ongoing quarterly assessments of the loan portfolio. The ACL is maintained through provisions for credit losses
which are either charged or credited 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 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 first mortgage loans on residential
properties and, to a lesser extent, home equity and second mortgage loans on one- to four-family residential
properties, resulting in a loan concentration in residential 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, 2013,
approximately 66% and 17% 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 loan portfolios are a
decline in economic conditions, elevated levels of unemployment or underemployment, and declines in residential
real estate values. Any one or a combination of these events may adversely affect borrowers’ ability to repay their
loans, resulting in increased delinquencies, non-performing assets, loan losses, and future loan loss provisions.
Although the multi-family and commercial loan portfolio is subject to the same risk of declines in economic conditions,
the primary risk characteristics inherent in this portfolio include the ability of the borrower to sustain sufficient cash
flows from leases and to control expenses to satisfy their contractual debt payments, and/or the ability to utilize
personal and/or business resources to pay their contractual debt payments if the cash flows are not sufficient.
Generally, when a one- to four-family secured loan is 180 days delinquent or in foreclosure, new collateral values are
obtained through appraisals. If the estimated fair value of the collateral, less estimated costs to sell, is less than the
current loan balance, the difference is charged-off. Anticipated private mortgage insurance proceeds are taken into
consideration when calculating the amount of the charge-off. An updated appraisal is requested, at a minimum,
every 12 months thereafter if the loan remains 180 days or more delinquent or in foreclosure. If the Bank holds the
first and second mortgage, both loans are combined when evaluating whether there is a potential loss on the loan.
Charge-offs for real estate-secured loans may also occur at any time if the Bank has knowledge of the existence of a
potential loss. For all real estate loans that are not secured by one- to four-family property, losses are charged-off
when the collection of such amounts is unlikely. When a non-real estate secured loan is 120 days delinquent, any
identified losses are charged-off.
Each quarter, we prepare a formula analysis which segregates our loan portfolio into categories based on certain risk
characteristics such as loan type (one- to four-family, multi-family, etc.), interest payments (fixed-rate and adjustable-
rate/interest-only), loan source (originated and correspondent purchased, or bulk 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 individually evaluated for loss are included in the formula analysis.
Quantitative loss factors are applied to each loan category in the formula analysis based on the historical net loss
experience 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 certain loan categories. Such qualitative
factors include changes in collateral values, unemployment rates, credit scores and delinquent loan trends. Loss
factors increase as loans are classified or become delinquent. Additionally, troubled debt restructurings (“TDRs”) that
have not been individually evaluated for loss are included in a category within the formula analysis model with an
overall higher qualitative loss factor than corresponding performing loans, for the life of the loan.
11
The 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, have changed from 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
segment.
Management utilizes the formula analysis, along with considering several other data elements, when evaluating the
adequacy of the ACL. Such data elements include the trend and composition of delinquent loans, results of
foreclosed property and short sale transactions, charge-off trends, the current status and trends of local and national
economies (particularly levels of unemployment), trends and current conditions in the real estate and housing
markets, and loan portfolio growth and concentrations. Since our 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 we lend, in order
to determine what impact, if any, such trends may have on the level of ACL. Reviewing these data elements 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 our ACL methodology. In addition, the adequacy of the
Company’s ACL is reviewed during bank regulatory examinations. We consider any comments from our regulators
when assessing the appropriateness of our ACL. We seek to apply ACL methodology in a consistent manner;
however, the methodology can be modified in response to changing conditions.
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. 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 from the sale of an asset in an orderly transaction between market
participants at the measurement date. The Company maximizes the use of observable inputs and minimizes the use
of unobservable inputs when measuring fair value. The Company did not have any liabilities that were measured at
fair value at September 30, 2013.
The Company’s AFS securities are its 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 (“AOCI”)
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, discounted cash flow models, and similar
techniques. 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 one security, with a balance of $2.4 million
at September 30, 2013, in the AFS portfolio that has significant unobservable inputs requiring the independent pricing
services to use some judgment in pricing the related securities. This AFS security is classified as Level 3. All other
AFS securities are classified as Level 2.
Loans individually evaluated for impairment and other real estate owned (“OREO”) 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 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.”
12
Management Strategy
We are a community-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
also purchase one- to four-family loans from correspondent and nationwide lenders. 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. These products
include checking, savings, money market, certificates of deposit, and retirement accounts. These products and
services are provided through a branch network of 46 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, 2013 was approximately $113.4 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. Business – Asset Quality – Loans and Other
Real Estate Owned” 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 credit
and operational risk management, balance sheet strength, and sound operations. The end result of these
activities has been 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 2013 were $146.8 million. 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,
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 level. It is the Board of Directors’ intentions to
continue to pay regular quarterly and special cash dividends each year. For fiscal year 2014, it is the intent of
the Board of Directors and management to continue with the payout of 100% of the Company’s earnings to its
stockholders. Another way we have provided returns to stockholders is through our share repurchase
programs. During fiscal year 2013, the Company repurchased 7,544,796 shares of common stock at an
average price of $11.85 per share, or $89.4 million.
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 what we
believe to be 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.
13
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 its assets and pays on its liabilities are generally established contractually for a period of time. Fluctuations in
interest rates have a significant impact not only upon our net income, but also upon the cash flows and market values
of our assets and liabilities. Our results of operations, like those of other financial institutions, are impacted by
changes in interest rates and the interest rate sensitivity of our interest-earning assets and interest-bearing liabilities.
The analyses presented in the tables within this section reflect the level of market risk at the Bank and does not
include the assets of the Company, at the holding company level, other than cash that was deposited at the Bank as
of the dates reported, which is reflected in the Bank’s tables below.
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 practicable, the exposure of 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 the market value of portfolio equity
(“MVPE”) at various dates. The MVPE is defined as the net of the present value of cash flows from existing assets,
liabilities, and off-balance sheet instruments. The present values are determined based upon market conditions as of
the date of the analysis, as well as in alternative interest rate environments providing potential changes in the MVPE
under those alternative interest rate environments. Net interest income is projected in the same alternative interest
rate environments with both a static balance sheet and with management strategies considered. The 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 determining valuations as a result of these hypothetical changes in
interest rates to identify rate environments that pose the greatest risk to the Bank. This analysis helps management
quantify the Bank’s exposure to changes in the shape of the yield curve.
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 positively affects 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.
14
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
in 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, 2013, the Bank’s one-year gap between interest-earning assets and interest-bearing liabilities was
$371.3 million, or 4.04% 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. Due to the increase in interest rates that
occurred beginning in May of 2013, the amount of cash flows from mortgage-related assets and callable agency
debentures dropped significantly as fewer borrowers and agency debt issuers had an economic incentive to lower
their costs. Should interest rates continue to rise, the amount of interest-earning assets that are expected to reprice
will likely continue to decrease. The majority of the Bank’s interest-bearing liabilities (borrowings and certificate of
deposit portfolios) are contractual and generally cannot be terminated early without penalty; therefore, the amount
expected to reprice in a given period is not usually impacted by changes in market interest rates. If rates were to
increase 200 basis points, the Bank’s one-year gap would be negative $(162.5) million, or (1.77)% of total assets.
The majority of interest-earning assets anticipated to reprice in fiscal year 2014 are mortgages and MBS, both of
which may prepay and/or be refinanced or endorsed. Should interest rates decrease, borrowers would have an
economic incentive to refinance or endorse loans to lower market interest rates. This would significantly increase the
amount of cash flows anticipated to reprice to lower market interest rates, as evidenced by the volume of mortgages
that were endorsed and refinanced during the first three quarters of fiscal year 2013 as a result of low market interest
rates. In addition, as rates fall, cash flows from the Bank’s callable investment securities would be anticipated to
increase 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. Any decrease in the net interest margin due to interest-earning assets repricing
will likely be at least partially offset by a decrease in our cost of funds.
The shape of the yield curve also has an impact on our 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 generally
priced off of long-term rates while deposits are priced off of 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 its mortgage-related assets relative to 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.
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 next 12 months as a percent of total assets (“one-
year gap”) is also provided for an up 200 basis point scenario, as of September 30, 2013.
15
Qualitative Disclosure about Market Risk
Percentage Change in Net Interest Income. For each period 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 the estimated net
interest income in each alternative interest rate environment (assumes market and product interest rates have a
parallel shift in rates across all maturities by the indicated change in rates). 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 gains or losses related to the sale of loans or securities, or
income derived from non-interest income sources, but does include the use of different prepayment assumptions in
the alternative interest rate environments. It is important to consider that estimated changes in net interest income
are for a cumulative four-quarter period. These do not reflect the earnings expectations of management.
Change
(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,
2013
N/A
--
(2.29)%
(4.76)%
(7.89)%
2012
N/A
--
5.00%
3.79%
1.54%
(1) Assumes an instantaneous, permanent and parallel change in interest rates at all maturities.
The Bank’s net interest income projections are directly correlated to the amount of assets and liabilities that are
expected to reprice over the next year. Repricing can occur as a result of variable interest rate characteristics of the
Bank’s assets or liabilities, or as a result of cash flows that are received on assets or due on liabilities and are
replaced at current market interest rates. The Bank’s liabilities generally have stated maturities and the related cash
flows do not generally fluctuate as a result of changes in interest rates. Conversely, on the asset side, cash flows
from mortgage-related assets and callable agency debentures can vary significantly as a result of changes in interest
rates. As interest rates decrease, borrowers have an economic incentive to lower their cost of debt by refinancing or
endorsing their mortgage to a lower interest rate. Similarly, agency debt issuers are more likely to exercise
embedded call options for agency securities and issue new securities at a lower interest rate.
The projected percentage change in net interest income was more adversely impacted by higher interest rates at
September 30, 2013 than at September 30, 2012. This was largely driven by a decrease in mortgage-related assets
projected to reprice in the next 12 months at September 30, 2013, as compared to September 30, 2012. The
decrease in mortgage-related assets projected to reprice was due primarily to market interest rates, particularly
mortgage interest rates, being higher at September 30, 2013 than at September 30, 2012. Since mortgage interest
rates were higher, borrowers had less economic incentive to refinance or endorse their mortgage at September 30,
2013, as compared to the previous year. As interest rates rise, these assets reprice to the higher interest rates faster
than do liabilities, thus increasing net interest income projections compared to the base case. However, the more
interest rates rise, the less economic incentive and ability borrowers and agency debt issuers have to modify their
cost of debt; thus, cash flows available to reprice are significantly reduced. Consequently, the benefit of rising
interest rates to net interest income diminishes as interest rates rise due to a reduction in projected asset cash
flows. At September 30, 2013, in all interest rate environments, cash flows related to assets diminished to such
levels that the benefit of reinvesting those cash flows at higher interest rates was more than offset by the cost of cash
flows from liabilities repricing to a higher interest rate. In addition, as the Bank received cash flows from these
assets throughout fiscal year 2013 and as assets were refinanced, endorsed, or purchased, the cash flows from and
the repricing of these assets were generally priced at current market rates, which were generally less than the
average rates of our existing portfolios. As a result, cash flow projections on these assets lengthen, generally beyond
the one year horizon. See the Gap Table discussion below for additional information.
16
Percentage Change in MVPE. The following table sets forth the estimated percentage change in the MVPE for
each period 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 the MVPE in the base case
and the MVPE in each alternative interest rate environment. The estimations of the 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 below presents
the effects of the changes in interest rates on our assets and liabilities as they mature, repay, or reprice, as shown by
the change in the MVPE for alternative interest rates.
Change
(in Basis Points)
in Interest Rates(1)
-100 bp
000 bp
+100 bp
+200 bp
+300 bp
Percentage Change in MVPE
At September 30,
2013
N/A
--
(11.44)%
(23.86)%
(36.36)%
2012
N/A
--
3.09%
(3.72)%
(13.79)%
(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 an asset or liability reflects the present value of all the projected cash flows over its remaining
life, discounted at current market interest rates. As interest rates rise, generally the market value for both financial
assets and liabilities decrease. The opposite is generally true as interest rates fall. The MVPE represents the
theoretical market value of capital that is calculated by netting the market value of assets, liabilities, and off-balance
sheet instruments. If the market values of financial assets increase at a faster pace than the market values of
financial liabilities, or if the market values of financial liabilities decrease at a faster pace than the market values of
financial assets, the MVPE will increase. The magnitude of the changes in the Bank’s MVPE represents the Bank’s
interest rate risk. The market value of shorter term-to-maturity financial instruments is less sensitive to changes in
interest rates than are longer term-to-maturity financial instruments. Because of this, the market values of our
certificates of deposit (which generally have relatively shorter average lives) tend to display less sensitivity to
changes in interest rates than do our mortgage-related assets (which generally have relatively longer 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. Therefore, as interest rates decrease, the weighted
average life (“WAL”) of mortgage-related assets decrease as well. As interest rates increase, the WAL would be
expected to increase, as well as increasing the sensitivity of these assets in higher rate environments.
At September 30, 2013, the percentage change in the Bank’s MVPE was more adversely impacted by higher interest
rates than at September 30, 2012. This was due primarily to higher interest rates, particularly higher mortgage
interest rates, at September 30, 2013 than at September 30, 2012. As interest rates rise, projected prepayments
decrease as fewer borrowers have an economic incentive to refinance or endorse the mortgage to a lower interest
rate. Prepayments in the higher interest rate environments will likely only be realized through changes in borrowers’
lives such as divorce, death, job-related relocations, or other life changing events, resulting in an increase in the
average life of mortgage-related assets. Also, call projections for the Bank’s callable agency debentures decrease as
interest rates rise, which results in their cash flows moving towards their contractual maturity dates. The longer
expected average lives of these assets, relative to the assumptions in the base case interest rate environment,
increased the sensitivity of their market value to changes in interest rates. As a result, the market value of the Bank’s
financial assets decreased more than the decrease in the market value of its financial liabilities, resulting in a
decrease in the MVPE in all interest rate environments at September 30, 2013.
17
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(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 are net of deferred
fees and exclude loans 90 or more days delinquent or in foreclosure.
(2) Based on contractual maturities, term to call dates or pre-refunding dates as of September 30, 2013, at amortized cost.
(3) Reflects projected prepayments of MBS, at amortized cost.
(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 rates at which the balances of existing accounts would decline) used on these accounts is based
on assumptions developed from our actual experiences with these accounts. If all of the Bank’s checking, savings and money
market accounts had been assumed to be subject to repricing within one year, interest-bearing liabilities which were
estimated to mature or reprice within one year would have exceeded interest-earning assets with comparable characteristics
by $1.30 billion, for a cumulative one-year gap of (14.2)% of total assets.
(5) Borrowings exclude deferred prepayment penalty costs and deferred gains on terminated interest rate swap agreements.
The decrease in the one-year gap from 22.82% at September 30, 2012, to 4.04% at September 30, 2013, was due
primarily to a decrease in the amount of assets expected to reprice over the next 12 months, as compared to the prior
year, due to an increase in interest rates between the two periods. The increase in mortgage interest rates
decreased prepayment expectations and thus decreased the amount of assets expected to reprice over the next 12
months, as compared to the prior year. The higher interest rates also reduced the amount of expected calls in the
Bank’s investment securities portfolio as agency debt issuers have less economic incentive to exercise embedded
call options due to the higher interest rate environment.
If interest rates were to increase 200 basis points, the Bank’s one-year gap would become negative, which indicates
that more liabilities would be expected to reprice than assets in this interest rate environment. The +200 basis point
gap in this scenario would be $(162.5) million, or (1.77)% of total assets at September 30, 2013. The decrease in the
one-year gap amount in the +200 basis point scenario compared to the base case at September 30, 2013 was due to
a decrease in the amount of assets expected to reprice if rates were to increase 200 basis points.
The following table presents the weighted average yields/rates and WALs (in years), after applying prepayment, call
assumptions, and decay rates, for major categories of our assets and liabilities as of the dates presented. Yields
presented for investment securities and MBS include the amortization of fees, costs, premiums and discounts which
are considered adjustments to the yield. For loans receivable, the stated interest rate is presented, which does not
include any adjustments to the yield. The interest rate presented for borrowings is the effective rate, which includes
the net impact of the amortization of deferred prepayment penalties resulting from the prepayment of certain FHLB
advances and deferred gains related to interest rate swaps previously terminated. During fiscal year 2013, the Bank
updated the prepayment information in its proprietary interest rate risk model. The prepayment update resulted in
generally shorter WALs for fixed-rate mortgage loans and longer WALs for ARM loans.
September 30, 2013
September 30, 2012
Amount
Yield/Rate WAL Amount
Yield/Rate WAL
(Dollars in thousands)
Investment securities
MBS
Loans receivable:
Fixed-rate one- to four-family:
<= 15 years
> 15 years
All other fixed-rate loans
Total fixed-rate loans
Adjustable-rate one- to four-family:
<= 36 months
> 36 months
All other adjustable-rate loans
Total adjustable-rate loans
Total loans receivable
Transaction deposits
Certificates of deposit
Borrowings
$
740,282
2,047,708
1.14%
2.40
2.9
3.9
$
961,849
2,332,942
1.23%
2.78
1,177,333
3,446,294
140,994
4,764,621
411,565
707,855
127,758
1,247,178
6,011,799
2,067,706
2,543,740
2,845,000
3.53
4.15
4.95
4.02
2.58
3.03
4.57
3.04
3.82
0.16
1.21
2.75
3.7
5.7
3.3
5.1
6.8
6.6
1.5
6.2
5.3
6.8
1.4
1,059,416
3,157,909
110,496
4,327,821
460,444
714,660
146,231
1,321,335
5,649,156
1,978,399
2,572,244
2.6
2,915,000
4.00
4.53
5.79
4.43
2.73
3.26
4.70
3.23
4.15
0.17
1.44
3.13
1.0
4.0
2.6
3.6
1.4(1)
3.3
3.6
2.7
1.4(1)
2.9
3.2
6.8
1.5
2.7
(1) The 1.4 years presented at September 30, 2012 represents all other fixed-rate and adjustable-rate loans combined as the
individual WAL for each category was not available.
19
Financial Condition
Assets. Total assets were $9.19 billion at September 30, 2013 compared to $9.38 billion at September 30, 2012.
The $191.9 million decrease between years was due largely to a $506.8 million decrease in the securities portfolio,
partially offset by a $350.8 million increase in the loan portfolio.
Loans Receivable. The loans receivable portfolio, net, increased $350.8 million, or 6.3%, to $5.96 billion at
September 30, 2013, from $5.61 billion at September 30, 2012. The increase in the portfolio was due primarily to
originations and correspondent one- to four-family loan purchases outpacing principal repayments between periods.
Correspondent purchased loans increased $468.6 million, or 81.4%, from September 30, 2012 to $1.04 billion at
September 30, 2013. Of the $1.04 billion, $767.9 million are serviced by the Bank and the remaining $276.3 million
are serviced by our mortgage sub-servicer. The mortgage sub-servicer has experience servicing loans in the market
areas in which we purchase loans and services the loans according to the Bank’s servicing standards, which is
intended to allow the Bank greater control over servicing and help maintain a standard of loan performance. When we
purchase a one- to four- family loan from a correspondent lender, we pay a premium of 0.50% to 1.0% of the loan
balance and we pay 1.0% of the loan balance to purchase the servicing of the loan. As of September 30, 2013, the
Bank had 26 active correspondent lending relationships operating in 23 states.
As a portfolio lender focused on delivering outstanding customer service while acquiring quality assets, the ability of
our borrowers to repay has always been paramount in our business model. Although we continue to evaluate the
“qualified mortgage” rules issued by the Consumer Financial Protection Bureau, we currently anticipate that the
impact to our overall book of business will generally be minimal.
The following table presents information related to the composition of our loan portfolio (before deductions for
undisbursed loan funds, unearned loan fees and deferred costs, and ACL) as of the dates indicated. The weighted
average rate of the loan portfolio decreased 33 basis points from 4.15% at September 30, 2012 to 3.82% at
September 30, 2013. The decrease in the rate was due primarily to the endorsement and refinance of loans at
current market rates, as well as to the origination and purchase of loans between periods with rates less than the
average rate of the existing portfolio. Within the one- to four-family loan portfolio at September 30, 2013, 68% of the
loans had a balance at origination of less than $417 thousand.
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
Total loans receivable, net
September 30, 2013
Amount
Rate
September 30, 2012
Amount
Rate
(Dollars in thousands)
4.10%
5.64
4.08
4.11
5.42
4.77
5.39
4.15%
$
5,743,047
50,358
77,743
5,871,148
3.77% $
5.22
3.63
3.78
5,392,429
48,623
52,254
5,493,306
135,028
5,623
140,651
6,011,799
42,807
8,822
23,057
(21,755)
5,958,868
$
5.26
4.41
5.23
3.82%
149,321
6,529
155,850
5,649,156
22,874
11,100
21,468
(14,369)
5,608,083
$
20
The following table presents, for our portfolio of one- to four-family loans, the amount, percentage of total, weighted
average credit score, weighted average LTV ratio, and the average balance per loan at the dates presented. Credit
scores are updated at least semiannually, with the last update in September 2013, 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 or broker price opinion. In most cases, the
most recent appraisal was obtained at the time of origination.
September 30, 2013
Amount
Average
% of Credit
Total Score LTV Balance
Amount
(Dollars in thousands)
September 30, 2012
% of Credit
Average
Total Score LTV Balance
Originated
Correspondent purchased 1,044,127 18.2
644,484 11.2
Bulk purchased
$ 4,054,436 70.6% 763 65% $
761 67
747 67
$ 5,743,047 100.0% 761 65% $
$ 4,032,581 74.8%
575,502 10.7
784,346 14.5
127
341
316
155 $ 5,392,429 100.0%
763 65% $ 124
326
761 65
749 67
316
761 65% $ 147
Included in the loan portfolio at September 30, 2013 were $111.1 million, or 1.9% of the total loan portfolio, of ARM
loans that were originated as interest-only. Of these interest-only loans, $93.4 million were purchased in bulk loan
packages 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 5 or 10 years. The $93.4
million of bulk purchased interest-only ARM loans held as of September 30, 2013, had a weighted average credit
score of 726 and a weighted average LTV ratio of 71% at September 30, 2013. At September 30, 2013, $59.2
million, or 53%, of the interest-only loans were still in their interest-only payment term and $3.9 million, or 15% of non-
performing loans, were interest-only ARMs.
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. The following table presents
delinquent and non-performing loans, OREO, ACL and related ratios as of the dates shown. See additional
discussion of asset quality in “Part I, Item 1. Business – Asset Quality – Loans and Other Real Estate Owned” of the
Annual Report on Form 10-K.
September 30, 2013
September 30, 2012
(Dollars in thousands)
Loans 30 to 89 days delinquent
Loans 90 or more days delinquent or in foreclosure
Nonaccrual loans less than 90 days delinquent(1)
Total non-performing loans
OREO
Total non-performing assets
ACL balance
30 to 89 days delinquent loans to total loans, net
Non-performing loans to total loans, net
Non-performing assets to total assets
ACL as a percentage of total loans, net
ACL as a percentage of total non-performing loans
$
$
$
$
27,550
$
19,489
6,954
26,443
3,882
30,325
$
$
8,822
$
0.46%
0.44
0.33
0.15
33.36
23,270
19,450
12,374
31,824
8,047
39,871
11,100
0.41%
0.57
0.43
0.20
34.88
(1) Represents loans required to be reported as nonaccrual by the OCC regardless of delinquency status. At September 30, 2013
and 2012, this amount was comprised of $1.1 million and $1.2 million, respectively, of loans that were 30 to 89 days delinquent
and are reported as such, and $5.9 million and $11.2 million, respectively, of loans that were current.
21
The balance of loans 30 to 89 days delinquent increased $4.3 million from $23.3 million at September 30, 2012 to
$27.6 million at September 30, 2013. The increase was primarily in the originated one- to four-family loan portfolio,
which increased $4.0 million from $14.2 million at September 30, 2012 to $18.2 million at September 30, 2013. At
September 30, 2013, originated one- to four-family loans 30 to 89 days delinquent had a LTV of 69% at the time of
origination. Additionally, these loans are located in Kansas and Missouri which have not experienced significant
fluctuations in home prices over the past 10 years.
The Bank’s pricing strategy for first mortgage loan products includes setting interest rates based on secondary
market prices and local competitor pricing for our local lending markets, and secondary market prices and national
competitor pricing for our correspondent lending markets. During fiscal year 2013, 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 170 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.
The following table summarizes our one- to four-family loan origination, refinance, and correspondent purchase
commitments as of September 30, 2013, along with associated weighted average rates. Commitments generally
have fixed expiration dates or other termination clauses and may require the payment of a rate lock fee. A
percentage of the commitments are expected to expire unfunded, so the amounts reflected in the table below are not
necessarily indicative of future cash requirements.
Fixed-Rate
15 years
or less
More than
15 years
Adjustable-
Rate
(Dollars in thousands)
Total
Amount
Rate
Originate:
<4.00%
>=4.00%
Correspondent:
<4.00%
>=4.00%
Total:
<4.00%
>=4.00%
$
$
16,008
--
16,008
18,508
--
18,508
$
$
18,671
49,933
68,604
$
18,236
--
18,236
52,915
49,933
102,848
10,371
61,866
72,237
40,528
--
40,528
69,407
61,866
131,273
34,516
--
34,516
$
29,042
111,799
140,841
$
58,764
--
58,764
$
122,322
111,799
234,121
3.41%
4.38
3.88
3.34
4.47
3.87
3.37
4.43
3.88%
Rate
3.40%
4.27%
3.19%
22
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23
The following table presents loan origination, refinance, and purchase activity for the years indicated, excluding
endorsement activity, along with associated weighted average rates and percent of total. Loan originations,
purchases and refinances are reported together. The fixed-rate one- to four-family loans less than or equal to 15
years have an original maturity at origination of less than or equal to 15 years, while fixed-rate one- to four-family
loans greater than 15 years have an original maturity at origination of greater than 15 years. The adjustable-rate one-
to four-family loans less than or equal to 36 months have a term to first reset of less than or equal to 36 months at
origination and adjustable-rate one- to four-family loans greater than 36 months have a term to first reset of greater
than 36 months at origination.
Fixed-Rate:
One- to four-family:
<= 15 years
> 15 years
Multi-family and commercial real estate
Home equity
Other
Total fixed-rate
Adjustable-Rate:
One- to four-family:
<= 36 months
> 36 months
Multi-family and commercial real estate
Home equity
Other
Total adjustable-rate
For the Year Ended
September 30, 2013
September 30, 2012
Amount
Rate % of Total Amount
Rate % of Total
(Dollars in thousands)
$ 405,229 2.86%
860,520 3.62
27,237 4.34
3,179 6.18
1,019 8.97
1,297,184 3.41
26.3% $ 323,357 3.30%
55.8
1.8
0.2
0.1
84.2
566,465 3.96
-- --
2,153 7.00
1,647 7.35
893,622 3.73
21.2%
37.1
0.0
0.1
0.1
58.5
6,560 2.32
162,572 2.75
4,770 3.40
68,660 4.73
1,438 3.02
244,000 3.31
0.4
10.5
0.3
4.5
0.1
15.8
351,881 2.48
194,897 2.97
13,975 5.00
71,400 4.87
2,459 3.35
634,612 2.96
23.0
12.8
0.9
4.7
0.1
41.5
Total originated, refinanced and purchased
$ 1,541,184 3.39% 100.0% $ 1,528,234 3.41%
100.0%
Purchased and participation loans included above:
Fixed-Rate:
Correspondent - one- to four-family
Bulk - one- to four-family
Participations - commercial real estate
Participations - other
Total fixed-rate purchased/participations
$ 484,238 3.38%
--
--
23,740 4.37
--
--
507,978 3.43
Adjustable-Rate:
Correspondent - one- to four-family
Bulk - one- to four-family
Participations - commercial real estate
Total adjustable-rate purchased/participations
Total purchased/participation loans
100,787 2.69
--
--
4,770 3.40
105,557 2.72
$ 613,535 3.31%
$ 200,946 3.87%
392 3.25
-- --
133 2.57
201,471 3.87
66,513 2.95
362,329 2.54
13,975 5.00
442,817 2.68
$ 644,288 3.05%
24
The following table presents originated, refinanced, correspondent purchased, and bulk purchased activity in our one-
to four-family loan portfolio, excluding endorsement activity, along with associated weighted average LTVs and
weighted average credit scores for the periods indicated.
For the Year Ended
September 30, 2013
September 30, 2012
Amount
LTV
Credit
Score
(Dollars in thousands)
Amount
Credit
Score
LTV
Originated
Refinanced by Bank customers
Correspondent purchased
Bulk purchased
$
$
551,265
298,591
585,025
--
1,434,881
77%
67
70
--
72%
$
765
768
765
--
765 $
470,634
335,786
267,459
362,721
1,436,600
75%
67
69
79
72%
765
771
768
757
767
The following table presents the annualized prepayment speeds of our one- to four-family loan portfolio for the
monthly and quarterly periods ended September 30, 2013. The balances represent the unpaid principal balance of
one- to four-family loans, and the terms represent the contractual terms for our fixed-rate loans, and current terms to
repricing for our adjustable-rate loans. Loan refinances are considered a prepayment and are included in the
prepayment speeds presented below. The annualized prepayment speeds are presented with and without
endorsements.
September 30, 2013
Monthly Prepayment
Speeds (annualized)
Quarterly Prepayment
Speeds (annualized)
Term
Unpaid
Principal
Including
Excluding
Including
Excluding
Endorsements Endorsements Endorsements Endorsements
(Dollars in thousands)
Fixed-rate one- to four-family:
15 years or less:
Originated
Correspondent purchased
Bulk purchased
$
More than 15 years:
Originated
Correspondent purchased
Bulk purchased
Total fixed-rate one- to four-
938,321
222,040
16,979
1,177,340
2,844,278
623,505
36,514
3,504,297
9.6%
7.6
96.6
10.6
9.7
8.5
17.9
9.6
9.2%
7.6
96.6
10.3
9.0
8.0
17.9
8.9
12.6 %
7.9
87.9
13.1
13.9
10.0
40.4
13.6
12.3%
7.0
87.9
12.7
12.3
8.8
40.4
12.0
family loans:
$
4,681,637
9.8%
9.2%
13.5 %
12.2%
Adjustable-rate one- to four-family:
36 months or less:
Originated
Correspondent purchased
Bulk purchased
$
More than 36 months:
Originated
Correspondent purchased
Bulk purchased
Total adjustable-rate one- to
153,038
49,188
593,464
795,690
179,579
152,336
415
332,330
18.0%
35.9
22.6
22.5
20.9
2.8
0.6
12.9
15.0%
27.2
22.6
21.4
20.9
2.8
0.6
12.9
26.5 %
48.8
20.9
23.7
21.2
9.6
0.6
16.2
23.4%
39.2
20.9
22.5
21.2
9.6
0.6
16.2
four-family loans:
$
1,128,020
19.8%
19.0%
21.6 %
20.8%
25
Securities. The following table presents the distribution of our MBS and investment securities portfolios, at
amortized cost, at the dates indicated. Included in the $907.4 million of fixed-rate debentures issued by U.S.
government-sponsored enterprises (“GSEs”) at September 30, 2012 was $60.0 million of securities held at the
holding company level. The holding company securities matured during the December 31, 2012 quarter. Overall,
fixed-rate securities comprised 78% of these portfolios at September 30, 2013. The WAL is the estimated remaining
maturity (in years) after three-month historical prepayment speeds and projected call option assumptions have been
applied. The increase in the WAL between September 30, 2012 and 2013 was due primarily to an increase in market
interest rates between periods, which resulted in a decrease in projected call assumptions on GSE debentures. The
decrease in the weighted average yield between September 30, 2012 and 2013 was due primarily to the purchase of
securities with yields less than the weighted average yield on the existing portfolio, as well as to the repayment of
higher yielding MBS between the two periods. Weighted average yields on tax-exempt securities are not calculated
on a fully taxable equivalent basis.
Fixed-rate securities:
MBS
GSE debentures
Municipal bonds
Total fixed-rate securities
Adjustable-rate securities:
MBS
Trust preferred securities
Total adjustable-rate securities
Total securities portfolio
September 30, 2013
September 30, 2012
Amount
Yield WAL
Amount
Yield
WAL
(Dollars in thousands)
$ 1,427,648
709,118
35,587
2,172,353
2.44%
1.04
3.02
1.99
3.5
2.8
1.5
3.3
$ 1,505,480
907,386
47,769
2,460,635
2.85%
1.14
2.94
2.22
3.1
0.8
2.0
2.2
601,359
2,594
603,953
$ 2,776,306
2.32
1.51
2.31
2.06%
4.9
23.7
4.9
3.7
792,325
2,912
795,237
$ 3,255,872
2.65
1.65
2.64
2.33%
5.8
24.7
5.9
3.1
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27
The following table presents the annualized prepayment speeds of our MBS portfolio for the monthly and quarterly
periods ended September 30, 2013, along with associated net premium/(discount) information, weighted average
rates for the portfolio, and weighted average remaining contractual terms (in years) for the portfolio. The annualized
prepayment speeds are based on actual prepayment activity. Our fixed-rate MBS portfolio is somewhat less
sensitive to repricing risk than our fixed-rate one- to four-family loan portfolio 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.
Given that the weighted average coupon on the underlying loans in this portfolio is above current market rates, the
Bank could experience an increase in the premium amortization should prepayment speeds increase significantly,
potentially reducing future interest income. The balances in the following table represent the amortized cost of MBS,
and the terms represent the contractual terms for our fixed-rate MBS and current terms to repricing for our adjustable-
rate MBS.
Term
Amortized
Cost
September 30, 2013
Prepayment
Speed (annualized)
Monthly
Quarterly
(Dollars in thousands)
Net
Premium/
(Discount)
Fixed-rate MBS:
15 years or less
More than 15 years
$
1,333,633
94,015
1,427,648
11.8%
14.3
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$
14.6%
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15.0
16,763
867
17,630
Rate
Remaining contractual term (years)
Adjustable-rate MBS:
36 months or less
More than 36 months
$
Rate
Remaining contractual term (years)
3.70%
10.9
522,160
79,199
601,359
3.01%
24.0
15.4%
2.4
13.6
$
22.0%
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20.3
926
1,444
2,370
Total MBS
$
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12.5%
16.6%
$
20,000
Rate
Remaining contractual term (years)
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Liabilities. Total liabilities were $7.55 billion at September 30, 2013 compared to $7.57 billion at September 30,
2012. The $17.5 million decrease was due primarily to a $45.0 million decrease in repurchase agreements, a $16.8
million decrease in FHLB borrowings, and a $12.9 million decrease in accounts payable and accrued expenses,
partially offset by a $60.8 million increase in deposits between period ends.
Deposits - Deposits were $4.61 billion at September 30, 2013 compared to $4.55 billion at September 30, 2012. The
$60.8 million increase was due primarily to a $49.4 million increase in the checking portfolio, a $22.2 million increase
in the savings portfolio, and a $17.6 million increase in the money market portfolio, partially offset by a $28.5 million
decrease in the certificate of deposit portfolio. The decrease in the certificate of deposit portfolio was due to a
decrease in retail deposits, partially offset by an increase in wholesale deposits, specifically public unit deposits. The
decrease in the retail certificate of deposit portfolio was due primarily to certificates with terms of 36 months or less,
while the balance of certificates with terms greater than 36 months generally increased. If interest rates were to rise,
it is possible that our customers may move the funds from their checking, savings and money market accounts to
higher yielding deposit products within the Bank or withdraw their funds to invest in higher yielding investments
outside of the Bank.
The following table presents the amount, weighted average rate and percentage of total deposits for checking,
savings, money market, retail certificates of deposit, and public units/brokered deposits at the dates presented.
2013
Amount
Rate
At September 30,
% of
Total
(Dollars in thousands)
Amount
2012
Rate
% of
Total
Noninterest-bearing checking $
Interest-bearing checking
Savings
Money market
Retail certificates of deposit
Public units/brokered deposits
$
150,171
505,762
283,169
1,128,604
2,242,909
300,831
4,611,446
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3.2% $
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0.13
0.23
1.27
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473,994
260,933
1,110,962
2,295,941
276,303
4,550,643
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0.89 % 100.0%
At September 30, 2013, brokered deposits were $63.7 million compared to $83.7 million at September 30, 2012, and
had a weighted average rate of 2.78% and a remaining term to maturity of 1.3 years. The Bank monitors the cost of
brokered deposits and considers them as a potential source of funding, provided that investment opportunities are
balanced with the funding cost. At September 30, 2013, public unit deposits were $237.1 million compared to $192.6
million of public unit deposits at September 30, 2012, and had a weighted average rate of 0.27% and an average
remaining term to maturity of nine months. Management will continue to monitor the wholesale deposit market for
attractive opportunities relative to the use of proceeds for investments.
30
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31
The following table presents the maturity of FHLB advances, at par, and repurchase agreements, along with
associated weighted average contractual and weighted average effective rates as of September 30, 2013.
Management will continue to monitor the Bank’s investment opportunities and balance those opportunities with the
cost of FHLB advances and other funding sources.
Maturity by
Fiscal year
FHLB
Advances
Amount
Repurchase
Agreements
Amount
(Dollars in thousands)
2014
2015
2016
2017
2018
2019
2020
$
$
450,000
600,000
575,000
500,000
200,000
100,000
100,000
2,525,000
$
$
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20,000
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320,000
Contractual
Rate
Effective
Rate(1)
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1.73
2.29
2.69
2.90
1.29
2.07
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3.95%
1.96
2.91
2.72
2.90
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2.75%
(1) The effective rate includes the net impact of the amortization of deferred prepayment penalties resulting from the prepayment
of certain FHLB advances and deferred gains related to terminated interest rate swaps.
Maturities - The following table presents the maturity and weighted average repricing rate, which is also the weighted
average effective rate, of borrowings and certificates of deposit, split between retail and public unit/brokered deposits,
for the next four quarters as of September 30, 2013.
Retail
Public Unit/
Brokered
Maturity by
Quarter End
Borrowings Repricing Certificate Repricing Deposit Repricing
Amount
Amount Rate
Amount
Rate
Rate
Repricing
Rate
Total
(Dollars in thousands)
December 31, 2013 $
March 31, 2014
June 30, 2014
September 30, 2014
$
150,000
200,000
100,000
100,000
550,000
3.16%
5.01
2.80
4.20
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$ 221,715
227,329
222,851
338,051
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0.89
1.12
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36,350
28,815
29,011
196,149
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463,679
0.17
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1.95
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467,062
0.47% $ 1,756,095
1.43%
2.67
1.52
1.73
1.86%
Stockholders’ Equity. Stockholders’ equity was $1.63 billion at September 30, 2013 compared to $1.81 billion at
September 30, 2012. The $174.3 million decrease was due primarily to the payment of $146.8 million of dividends
and the repurchase of $89.4 million of stock, partially offset by net income of $69.3 million. Additionally, AOCI
decreased $16.9 million from September 30, 2012 to September 30, 2013 due to a decrease in unrealized gains on
AFS securities as a result of an increase in market yields.
The $146.8 million of dividends paid during the current fiscal year consisted of a $0.52 per share, or $76.5 million,
True Blue dividend, an $0.18 per share, or $26.6 million, special year-end dividend related to fiscal year 2012
earnings per the Company’s dividend policy, and four regular quarterly dividends of $0.075 per share, totaling $0.30
per share, or $43.7 million. On October 18, 2013, the Company declared a regular quarterly cash dividend of $0.075
per share, or approximately $10.8 million, payable on November 15, 2013 to stockholders of record as of the close of
business on November 1, 2013. On October 30, 2013, the Company declared a special year-end dividend of $0.18
per share, or approximately $25.8 million, payable on December 6, 2013 to stockholders of record as of the close of
business on November 22, 2013. The $0.18 per share special year-end dividend was determined by taking the
difference between total earnings for fiscal year 2013 and total regular quarterly dividends paid during fiscal year
2013, divided by the number of shares outstanding as of October 29, 2013. The Board of Directors committed to
distribute to stockholders 100% of the annual earnings of Capitol Federal Financial, Inc. for fiscal year 2013 through
the quarterly and special year-end dividends. For fiscal year 2014, it is the intent of the Board of Directors and
management to continue with the payout of 100% of the Company’s earnings to its stockholders through the quarterly
and special year-end dividends. It is anticipated that the fiscal year 2014 special year-end cash dividend will be paid
in December 2014. Dividend payments depend upon a number of factors including the Company’s financial condition
and results of operations, regulatory capital requirements, regulatory limitations on the Bank’s ability to make capital
distributions to the Company, and the amount of cash at the holding company level. At September 30, 2013, Capitol
Federal Financial, Inc., at the holding company level, had $207.0 million on deposit at the Bank.
32
The Company completed its $193.0 million repurchase plan during the second quarter of fiscal year 2013, having
repurchased 16,360,654 shares at an average price of $11.80 per share under the plan. Upon completion of the
aforementioned plan, the Company began repurchasing stock under a new $175.0 million plan approved by the
Board of Directors in November 2012. As of September 30, 2013, 3,826,644 shares had been repurchased under
the new plan at an average price of $11.85 per share, at a total cost of $45.4 million, leaving $129.6 million available
for repurchase under the new plan. There were no shares repurchased subsequent to September 30, 2013 through
November 18, 2013.
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. The rate presented for FHLB borrowings are effective rates.
Yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.
Yield on:
Loans receivable
MBS
Investment securities
Capital stock of FHLB
Cash and cash equivalents
Combined yield on
interest-earning assets
Rate paid on:
Checking deposits
Savings deposits
Money market deposits
Certificate of deposit
FHLB borrowings
Repurchase agreements
Combined rate paid on
interest-bearing liabilities
At September 30,
2012
2013
2011
3.82%
2.40
1.14
3.46
0.25
4.16%
2.78
1.23
3.40
0.25
4.87%
3.26
1.17
3.39
0.24
3.23
3.44
3.81
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0.23
1.21
2.67
3.43
1.51
0.04
0.11
0.25
1.44
3.03
3.83
1.76
0.08
0.41
0.35
1.87
3.71
4.00
2.21
Net interest rate spread
1.72%
1.68%
1.60%
Average Balance Sheet. The following table presents the average balances of our assets, liabilities and
stockholders’ equity and the related weighted average yields and weighted average rates on our interest-earning
assets and interest-bearing liabilities for the years indicated. Average yields are derived by dividing annual income
by the average balance of the related assets and average rates are derived by dividing annual expense by the
average balance of the related liabilities, for the years shown. Average outstanding balances are derived from
average daily balances. The average yields and rates include amortization of fees, costs, premiums and discounts
which are considered adjustments to yields/rates. Yields on tax-exempt securities were not calculated on a fully
taxable equivalent basis.
33
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35
Comparison of Results of Operations for the Years Ended September 30, 2013 and 2012
For fiscal year 2013, the Company recognized net income of $69.3 million, compared to net income of $74.5 million
for fiscal year 2012. The $5.2 million, or 6.9%, decrease in net income was due primarily to a decrease in net interest
income and an increase in non-interest expense, partially offset by a decrease in income tax expense and provision
for credit losses.
The net interest rate spread, which represents the difference between the average yield on interest-earning assets
and the average cost of interest-bearing liabilities, increased six basis points, from 1.64% for the prior fiscal year to
1.70% for the current fiscal year. The increase in the net interest rate spread was due to cost of funds decreasing
more than the yield on interest-earning assets.
The net interest margin, which is calculated as the difference between interest income and interest expense divided
by average interest-earning assets, decreased four basis points, from 2.01% for the prior fiscal year to 1.97% for the
current fiscal year. Decreases in the cost of funds and a shift in the mix of interest-earning assets from relatively
lower yielding securities to higher yielding loans mitigated the decrease in the net interest margin, but were not
enough to fully offset the impact of decreasing asset yields.
Interest and Dividend Income
The weighted average yield on total interest-earning assets decreased 26 basis points from the prior fiscal year to
3.31% for the current fiscal year and the average balance of interest-earning assets decreased $165.7 million from
the prior fiscal year. The decrease in the weighted average balance between the two periods was primarily in the
lower yielding investment securities and MBS portfolios, while the average balance of the loan portfolio increased
between the two periods.
The following table presents the components of interest and dividend income for the years presented, along with the
change measured in dollars and percent. The decrease in interest income on MBS and loans receivable was due
primarily to a decrease in the weighted average yield of each portfolio, while the decrease in interest income on
investment securities was due primarily to a decrease in the average balance of the portfolio.
For the Year Ended
September 30,
2013
2012
(Dollars in thousands)
Change Expressed in:
Percent
Dollars
INTEREST AND DIVIDEND INCOME:
Loans receivable
MBS
Investment securities
Capital stock of FHLB
Cash and cash equivalents
Total interest and dividend income
$
$
228,455 $
55,424
10,012
4,515
148
298,554 $
236,225 $
71,156
15,944
4,446
280
(7,770)
(15,732)
(5,932)
69
(132)
328,051 $ (29,497)
(3.3)%
(22.1)
(37.2)
1.6
(47.1)
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The average yield on the loans receivable portfolio decreased 51 basis points, from 4.49% for the prior fiscal year to
3.98% for the current fiscal year. The decrease in the weighted average yield was due to the continued downward
repricing of the existing portfolio resulting primarily from endorsements and refinances, as well as to the origination
and purchase of loans at rates less than the weighted average rate of the existing portfolio. The decrease in interest
income on loans receivable resulting from the decrease in the average yield was partially offset by a $481.4 million
increase in the average balance of the portfolio, which was primarily a result of loan purchases between periods.
The average yield on the MBS portfolio decreased 44 basis points, from 2.91% during the prior fiscal year to 2.47%
for the current fiscal year. The decrease in the average yield was due primarily to maturities and principal
repayments of higher yielding securities in the portfolio, with proceeds being reinvested into higher yielding loans or
purchases of MBS with yields less than the average yield on the existing portfolio. The maturities and repayments
also resulted in the average balance of the MBS portfolio decreasing $198.0 million between the two periods.
The decrease in interest income on investment securities was due primarily to a $400.7 million decrease in the
average balance of the portfolio, part of which was related to securities held at the holding company level. The cash
flows from calls and maturities of investment securities that were not reinvested into the portfolio were used largely to
fund loan growth, pay dividends to stockholders, and repurchase stock.
36
Interest Expense
The weighted average rate paid on total interest-bearing liabilities decreased 32 basis points from the prior fiscal year
to 1.61% for the current fiscal year, and the average balance of interest-bearing liabilities increased $49.2 million from
the prior fiscal year. The increase in the average balance of interest-bearing liabilities was largely in lower rate
deposit products while the average balance of certificates of deposit decreased between the two periods.
The following table presents the components of interest expense for the years presented, along with the change
measured in dollars and percent. The decrease in interest expense on FHLB borrowings and deposits was due
primarily to a decrease in the weighted average rate paid on the portfolios, while the decrease in interest expense on
repurchase agreements was due primarily to a decrease in the average balance between the two years.
INTEREST EXPENSE:
FHLB borrowings
Deposits
Repurchase agreements
Total interest expense
For the Year Ended
September 30,
2013
2012
(Dollars in thousands)
Change Expressed in:
Dollars
Percent
$
$
70,816 $
36,816
12,762
120,394 $
82,044 $
46,170
14,956
143,170 $
(11,228)
(9,354)
(2,194)
(22,776)
(13.7)%
(20.3)
(14.7)
(15.9)%
The weighted average rate paid on the FHLB borrowings portfolio decreased 51 basis points, from 3.28% for the prior
fiscal year to 2.77% for the current fiscal year. The decrease in the average rate paid was due largely to the renewal
of maturing advances during the two periods to lower rates.
The weighted average rate paid on the deposit portfolio decreased 22 basis points, from 1.02% for the prior fiscal
year to 0.80% for the current fiscal year. The decrease in the weighted average rate paid on the deposit portfolio was
due largely to a decrease in the weighted average rate paid on the certificate of deposit and money market portfolios.
The weighted average rate paid on the certificate of deposit portfolio decreased 27 basis points, from 1.60% for the
prior fiscal year to 1.33% for the current fiscal year. The weighted average rate paid on the money market portfolio
decreased 11 basis points, from 0.32% for the prior fiscal year to 0.21% for the current fiscal year.
The decrease in interest expense on repurchase agreements was due primarily to a $49.9 million decrease in the
average balance between periods. The decrease in the average balance was due to the maturity of $145.0 million of
agreements during the current fiscal year, some of which were replaced with FHLB borrowings. Decreases in the
average balance resulting from maturities during the current fiscal year were partially offset by a new $100.0 million
agreement during the fourth quarter of fiscal year 2013.
Provision for Credit Losses
The Bank recorded a negative provision for credit losses during the current fiscal year of $1.1 million, compared to a
$2.0 million provision for credit losses for the prior fiscal year. The negative provision in the current fiscal year
reflects the decrease in our net charge-offs from the prior fiscal year, specifically related to our bulk purchased loan
portfolio where the majority of our charge-offs occurred in recent years, coupled with a decline in the historical loss
balances utilized in the formula analysis model as older, larger losses roll off. The decrease in net charge-offs from
the prior fiscal year was due to a stabilization and/or increase in property values, specifically in some of the states
where we have purchased loans, along with a decrease in the number of bulk purchased loans going 180 days
delinquent, which is generally when a loan is evaluated for loss. Net charge-offs during the current fiscal year were
$1.2 million, of which $381 thousand related to loans that were discharged primarily in a prior fiscal year under
Chapter 7 bankruptcy that must be, pursuant to regulatory guidance issued in 2012, evaluated for collateral value
loss, even if they are current. Net charge-offs during the prior fiscal year were $6.4 million, of which $3.5 million was
related to the implementation of a new loan charge-off policy during January 2012 in accordance with regulatory
requirements. The OCC does not permit the use of specific valuation allowances (“SVAs”), which the Bank was
previously utilizing for potential loan losses, as permitted by the Bank’s previous regulator.
37
Non-Interest Income
The following table presents the components of non-interest income for the years presented, along with the change
measured in dollars and percent.
NON-INTEREST INCOME:
Retail fees and charges
Insurance commissions
Loan fees
Bank-owned life insurance
Other non-interest income
Total non-interest income
For the Year Ended
September 30,
2013
2012
(Dollars in thousands)
Change Expressed in:
Percent
Dollars
$
$
15,342 $
2,925
1,727
1,483
1,812
23,289 $
15,915 $
2,772
2,113
1,478
1,955
24,233 $
(573)
153
(386)
5
(143)
(944)
(3.6)%
5.5
(18.3)
0.3
(7.3)
(3.9)%
The decrease in retail fees and charges was primarily a result of changes required by the Dodd-Frank Wall Street
Reform and Consumer Protection Act that reduced debit card interchange fees and established limits to fees for
overdrafts of debit card transactions. The decrease in loan fees was due primarily to a decrease in servicing fees
received from sold loans as a result of a decrease in our sold loan portfolio.
Non-Interest Expense
The following table presents the components of non-interest expense for the years presented, along with the change
measured in dollars and percent.
For the Year Ended
September 30,
2013
Change Expressed in:
Percent
2012 Dollars
NON-INTEREST EXPENSE:
Salaries and employee benefits
Occupancy
Information technology and communications
Regulatory and outside services
Deposit and loan transaction costs
Advertising and promotional
Federal insurance premium
Other non-interest expense
Total non-interest expense
(Dollars in thousands)
$
$
49,152 $
9,871
8,855
5,874
5,547
5,027
4,462
8,159
96,947 $
44,235 $
8,751
7,583
5,291
5,381
3,931
4,444
11,459
91,075 $
4,917
1,120
1,272
583
166
1,096
18
(3,300)
5,872
11.1 %
12.8
16.8
11.0
3.1
27.9
0.4
(28.8)
6.4 %
The increase in salaries and employee benefits expense was due primarily to compensation expense on unallocated
ESOP shares related to the $0.52 True Blue dividend paid in December 2012, stock option and restricted stock
grants in May 2012 and September 2012, and an increase in payroll expense resulting from internal promotions and
salary increases. The increase in information technology and communications expense was primarily related to
continued upgrades and investments in our information technology infrastructure. The increase in occupancy
expense was due largely to an increase in depreciation expense associated with the remodeling of our home office.
The increase in advertising and promotional expense was due primarily to an increase in media campaigns that were
delayed until the current fiscal year. The increase in regulatory and outside services was due largely to the timing of
fees paid for our external audit and an increase in fees associated with tax preparation services and professional
services. The decrease in other non-interest expenses was due primarily to a decrease in OREO operations
expense and to a recovery of valuation allowance expense on the mortgage-servicing rights asset compared to an
impairment expense in the prior year. Over the past 12 months, OREO properties were owned by the Bank, on
average, for approximately four months before they were sold.
38
We currently anticipate salaries and employee benefits expense will decrease by an estimated $4.5 million in fiscal
year 2014 compared to fiscal year 2013 due to a decrease in ESOP compensation. The decrease in ESOP
compensation is primarily a result of a reduction in the number of ESOP shares allocated to participant accounts due
to the final allocation, on September 30, 2013, of ESOP shares acquired in our initial public offering in March
1999. In fiscal year 2014, the only ESOP shares to be allocated to participant accounts will be the shares acquired in
the Company’s corporate reorganization in December 2010. As ESOP shares are committed to be allocated to
participant accounts, the Company records ESOP compensation expense based on the average market price of the
Company’s stock during the quarter. Additionally, advertising and promotion expense is expected to be at a lower
level in fiscal year 2014 compared to fiscal year 2013, as fiscal year 2013 included expenses for media campaigns
that were delayed from fiscal year 2012. The anticipated decrease in salaries and employee benefit expense and
advertising and promotional expense is expected to be partially offset by an increase in payroll expense due to
annual salary increases, along with an increase in information technology and communications expense due to
continued upgrades to our information technology infrastructure.
Income Tax Expense
Income tax expense was $36.2 million for the current fiscal year compared to $41.5 million for the prior fiscal
year. The $5.3 million decrease between periods was due largely to a decrease in pretax income. The effective tax
rate for the current fiscal year was 34.3% compared to 35.8% for the prior fiscal year. The current fiscal year rate is
lower than the prior fiscal year rate due primarily to higher deductible expenses associated with the ESOP in the
current fiscal year, along with higher tax credits related to our low income housing partnerships. Additionally, pre-tax
income is lower than the prior fiscal year, due primarily to the items outlined in the non-interest expense discussion
above, which results in all items impacting the income tax rate having a larger impact on the overall effective tax rate
than in fiscal year 2012.
Comparison of Results of Operations for the Years Ended September 30, 2012 and 2011
Net income for fiscal year 2012 was $74.5 million, compared to $38.4 million for fiscal year 2011. The $36.1 million,
or 94.0%, increase for fiscal year 2012 was due primarily to the $40.0 million ($26.0 million, net of income tax benefit)
contribution in fiscal year 2011 to the Foundation in connection with the corporate reorganization. Additionally, net
interest income increased $16.2 million, or 9.6%, from $168.7 million for fiscal year 2011 to $184.9 million for fiscal
year 2012. The increase in net interest income was due primarily to a decrease in interest expense of $34.9 million,
or 19.6%, partially offset by a decrease in interest income of $18.8 million, or 5.4%.
Non-GAAP Presentation
The following table presents selected financial results and performance ratios for the Company for fiscal years 2012
and 2011. Because of the magnitude and non-recurring nature of the $40.0 million ($26.0 million, net of income tax
benefit) 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 for fiscal year 2011 are not presented
in accordance with GAAP.
For the Fiscal Year Ended
September 30,
2012
Actual
(GAAP)
September 30, 2011
Contribution
to Foundation
Adjusted(1)
(Non-GAAP)
(Dollars in thousands, except per share data)
Net income (loss)
Operating expenses
Basic earnings (loss) per share
Diluted earnings (loss) per share
$
$
74,513
91,075
0.47
0.47
$
38,403
132,317
0.24
0.24
$
(26,000)
40,000
(0.16)
(0.16)
64,403
92,317
0.40
0.40
Return on average assets
Return on average equity
Operating expense ratio
Efficiency ratio
0.79%
3.93
0.97
43.55%
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) 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.
39
Interest and Dividend Income
Total interest and dividend income for fiscal year 2012 was $328.1 million, compared to $346.9 million for fiscal year
2011. The $18.8 million, or 5.4%, decrease was primarily a result of decreases in interest income on loans
receivable of $15.7 million and interest income on investment securities of $3.1 million while interest income on MBS
remained relatively unchanged year-over-year. The average yield on total interest-earning assets decreased 20
basis points, from 3.77% for fiscal year 2011 to 3.57% for fiscal year 2012, primarily as a result of a decrease in the
yield on the loans receivable portfolio.
Interest income on loans receivable decreased $15.7 million, or 6.2%, from $251.9 million for fiscal year 2011 to
$236.2 million for fiscal year 2012. The decrease was the result of a 41 basis point decrease in the weighted average
yield of the portfolio to 4.49% for fiscal year 2012, partially offset by a $113.1 million increase in the average balance
of the portfolio. The decrease in the weighted average yield was due primarily to loan endorsements and refinances
at current market rates, along with originations and purchases at rates lower than the average yield of the existing
portfolio. The increase in the average balance of the portfolio was due primarily to purchases of bulk and
correspondent loans exceeding principal repayments.
Interest income on MBS decreased slightly from $71.3 million for fiscal year 2011 to $71.1 million for fiscal year 2012.
The $176 thousand, or 0.3%, decrease was due to a 58 basis point decrease in the weighted average yield of the
portfolio to 2.91% for fiscal year 2012. The decrease in the weighted average yield between the two periods was due
primarily to the purchase of MBS at market rates which were at a lower average yield than the existing portfolio and
also due to repayments of MBS with yields higher than that of the existing portfolio. The impact of the decrease in the
weighted average yield of the portfolio was almost entirely offset by a $401.1 million increase in the average balance
of the portfolio between periods. The increase in the average balance was a result of purchases, funded primarily by
the proceeds from the corporate reorganization and partially by cash flows from the investment securities portfolio.
Interest income on investment securities decreased $3.2 million, or 16.4%, from $19.1 million for fiscal year 2011 to
$15.9 million for fiscal year 2012. The decrease in interest income on investment securities was a result of a $323.9
million decrease in the average balance of the portfolio between periods, partially offset by an increase in the average
yield of six basis points to 1.28% for fiscal year 2012. The decrease in the average balance was due to calls and
maturities during fiscal year 2012 not being replaced in their entirety; rather, the proceeds were used primarily to fund
loan and MBS purchases and repurchase common stock. The increase in the average yield was due primarily to the
maturity of lower yielding investment securities at the holding-company during fiscal year 2012.
Interest Expense
Interest expense decreased $34.9 million, or 19.6%, from $178.1 million for fiscal year 2011 to $143.2 million for
fiscal year 2012. The decrease in interest expense was due primarily to a $17.4 million decrease in interest expense
on deposits, primarily the certificate of deposit portfolio, as well as to a $9.3 million decrease in interest expense on
other borrowings and an $8.3 million decrease in interest expense on FHLB borrowings. The average rate paid on
interest-bearing liabilities decreased 42 basis points, from 2.35% for fiscal year 2011 to 1.93% for fiscal year 2012.
The decrease was due primarily to a continued decrease in the cost of our certificate of deposit portfolio, as well as to
the renewal/prepayment of FHLB advances to lower rates and repurchase agreements maturing and being replaced
with lower rate FHLB advances.
Interest expense on deposits decreased $17.4 million, or 27.4%, from $63.6 million for fiscal year 2011 to $46.2
million for fiscal year 2012. The decrease was due primarily to a 44 basis point decrease in the average rate paid on
the certificate of deposit portfolio, to 1.60% for fiscal year 2012, as the portfolio continued to reprice to lower market
rates, as well as to a $166.1 million decrease in the average balance of the certificate of deposit portfolio for fiscal
year 2012. The decrease in the average balance of the certificate of deposit portfolio was due primarily to a decrease
in certificates with original terms-to-maturity of 35 months or less, including the maturity and payout of one retail
certificate of deposit related to a legal settlement to which the Bank was not a party, partially offset by an increase in
certificates with original terms-to-maturity of 36 months or greater. Additionally, the average rate paid on our money
market portfolio decreased 20 basis points to 0.32% for fiscal year 2012, and the average rate paid on our savings
portfolio decreased 33 basis points to 0.16% for fiscal year 2012.
Interest expense on FHLB borrowings decreased $8.3 million, or 9.1%, from $90.3 million for fiscal year 2011 to
$82.0 million for fiscal year 2012. The decrease in expense was due to a decrease of 51 basis points in the average
rate paid to 3.28% for fiscal year 2012, partially offset by a $121.3 million increase in the average balance. The
decrease in the average rate paid was due primarily to FHLB advances that were renewed/prepaid during the year.
The increase in the average balance was a result of $150.0 million of maturing repurchase agreements being
replaced with FHLB advances during fiscal year 2012, as rates for FHLB advances were more favorable than rates
for comparable repurchase agreements.
Interest expense on other borrowings decreased $9.3 million, or 38.4%, from $24.3 million for fiscal year 2011 to
$15.0 million for fiscal year 2012. The decrease was primarily the result of a $226.8 million decrease in the average
balance due primarily to maturing repurchase agreements, the majority of which were replaced with FHLB advances.
40
Net Interest Margin
The net interest margin increased 17 basis points to 2.01% for fiscal year 2012, up from 1.84% for fiscal year 2011.
The increase was largely due to a decrease in the cost of the certificate of deposit portfolio, along with a decrease in
costs on FHLB borrowings and other borrowings, partially offset by a decrease in interest income on loans receivable.
Provision for Credit Losses
The Bank recorded a provision for credit losses of $2.0 million for fiscal year 2012, compared to a provision for credit
losses of $4.1 million for fiscal year 2011. The $2.1 million decrease in the provision for credit losses between fiscal
years was due to the continued improvement in the performance of our loan portfolio as evidenced by the decline in
our loans 90 or more days delinquent or in foreclosure, and a continued decline in the level of charge-offs. Loans 90
or more days delinquent or in foreclosure decreased $7.0 million, or 26.6%, from $26.5 million at September 30, 2011
to $19.5 million at September 30, 2012. Net charge-offs during fiscal year 2012 were $2.9 million, excluding the $3.5
million of SVAs charged-off during the second quarter of fiscal year 2012 as a result of implementing a new loan
charge-off policy as regulatory requirements do not permit the use of SVAs, compared to $3.5 million of net charge-
offs during fiscal year 2011.
Non-Interest Expense
Total other expense for fiscal year 2012 was $91.1 million, compared to $132.3 million for fiscal year 2011. The
$41.2 million, or 31.2%, decrease was due primarily to the $40.0 million cash contribution made to the Foundation in
connection with the corporate reorganization in December 2010. OREO operations expense was $3.1 million for
fiscal year 2012, compared to $3.0 million for fiscal year 2011. Over the past 12 months, OREO properties were
owned by the Bank, on average, for approximately six months before they were sold.
Income Tax Expense
Income tax expense for fiscal year 2012 was $41.5 million, compared to $18.9 million for fiscal year 2011. The $22.6
million, or 118.9%, increase in income tax expense during fiscal year 2012 was due primarily to the $40.0 million
contribution made to the Foundation during fiscal year 2011, which resulted in $14.0 million of income tax benefit, as
well as to overall higher pretax income during fiscal year 2012. The effective tax rate for fiscal year 2012 was 35.8%
compared to 33.0% for fiscal year 2011. Excluding a $686 thousand tax return to tax provision adjustment in fiscal
year 2011, the effective tax rate for fiscal year 2011 would have been 34.2%. The additional difference in the
effective tax rate between years was primarily due to fiscal year 2011 having higher deductible expenses associated
with the ESOP, due to the new ESOP loan in December 2010 and the $0.60 per share “welcome” dividend paid in
March 2011.
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 borrowings, repurchase agreements,
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 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 maintaining
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 identify periods of, and to quantify, liquidity
risk. Additionally, management continuously monitors key liquidity statistics related to items such as wholesale
funding gaps, borrowings capacity, and available unpledged collateral, along with various liquidity ratios in an effort to
further mitigate 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,
2013 was $1.52 billion. The amount of 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, 2013, the Bank had $1.46 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.
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, 2013, cash and cash equivalents totaled $113.9 million, a decrease of $27.8 million from
September 30, 2012. During fiscal year 2013, loan originations and purchases, net of principal repayments and
related loan activity, resulted in a cash outflow of $355.7 million, compared to a cash outflow of $471.1 million in fiscal
year 2012. See additional discussion regarding loan activity in “Financial Condition – Loans Receivable.” During
fiscal year 2013, principal payments on MBS were $703.3 million and proceeds from called or matured investment
securities were $619.0 million. During fiscal year 2013, the Company purchased $408.7 million of investment
securities and $442.5 million of MBS. Cash flows from the securities portfolio which were not reinvested were used,
in part, to fund loan growth, pay dividends to stockholders, and repurchase stock.
During fiscal year 2013, the Company paid $146.8 million in cash dividends and repurchased 7,544,796 shares of
common stock at an average price of $11.85 per share, or $89.4 million. See additional discussion regarding
dividends and common stock repurchase plans and activity in “Financial Condition – Stockholders’ Equity.”
42
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43
The Bank has access to and utilizes other sources for liquidity purposes, such as secondary market repurchase
agreements, brokered deposits, and public unit deposits. The Bank’s internal policy limits total borrowings to 55% of
total assets. At September 30, 2013, the Bank had repurchase agreements of $320.0 million, or approximately 3% of
assets, $100.0 million of which were scheduled to mature in the next 12 months. The Bank may enter into additional
repurchase agreements as management deems appropriate, not to exceed 15% of total assets. The Bank has
pledged securities with an estimated fair value of $364.6 million as collateral for repurchase agreements at
September 30, 2013. The securities pledged for the repurchase agreements will be delivered back to the Bank when
the repurchase agreements mature.
As of September 30, 2013, the Bank’s policy allows for combined brokered and public unit deposits up to 15% of total
deposits. At September 30, 2013, the Bank had brokered and public unit deposits totaling $300.8 million, or
approximately 7% 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 $274.9 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.
At September 30, 2013, $1.21 billion of the Bank’s $2.54 billion of certificates of deposit were scheduled to mature
within one year. Included in the $1.21 billion were $196.1 million of public unit and brokered 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.
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.
Generally, 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 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 may have its capital distribution authority restricted. A savings institution,
such as the Bank, that is a subsidiary of a savings and loan holding company and that proposes to make a capital
distribution must submit written notice to the OCC and FRB 30 days prior to such distribution. The OCC and FRB
may object to the distribution during that 30-day period based on safety and soundness or other concerns. Savings
institutions that desire to make a larger capital distribution, or are under special restrictions, or are not, or would not
be, well capitalized following a proposed capital distribution, however, must obtain regulatory 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 and operates in a safe and sound manner, 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 on its capital stock to its stockholders if stockholders’ equity would be reduced below the
amount of the liquidation account at that time.
The Company paid cash dividends of $146.8 million during fiscal year 2013. The $146.8 million of dividends paid
consisted of a $0.52 per share, or $76.5 million, True Blue dividend, an $0.18 per share, or $26.6 million, special
year-end dividend related to fiscal year 2012 earnings, per the Company’s dividend policy, and four regular quarterly
dividends of $0.075 per share each, totaling $0.30 per share, or $43.7 million. Dividend payments depend upon a
number of factors including the Company’s financial condition and results of operations, regulatory capital
requirements, regulatory limitations on the Bank’s ability to make capital distributions to the Company, and the
amount of cash at the holding company level.
44
Contingencies
In the normal course of business, the Company and its subsidiary are named defendants in various lawsuits and
counter claims. In the opinion of management, after consultation with legal counsel, none of the currently pending
suits are expected to have a materially adverse effect on the Company’s consolidated financial statements for the
year ended September 30, 2013, or future periods.
Regulatory Capital
Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a “well-
capitalized” status for the Bank in accordance with regulatory standards. As of September 30, 2013, the Bank
exceeded all regulatory capital requirements. The Company currently does not have any regulatory capital
requirements. The following table presents the Bank’s regulatory capital ratios at September 30, 2013 based upon
regulatory guidelines.
Tier 1 leverage ratio
Tier 1 risk-based capital
Total risk-based capital
Regulatory
Requirement
For “Well-
Capitalized” Status
5.0%
6.0%
10.0%
Bank
Ratios
14.8%
35.6%
35.9%
A reconciliation of the Bank’s equity under GAAP to regulatory capital amounts as of September 30, 2013 is as
follows (dollars in thousands):
Total Bank equity as reported under GAAP
Unrealized gains on AFS securities
Other
Total Tier 1 capital
ACL
Total risk-based capital
$
$
1,370,426
(7,267)
(56)
1,363,103
8,822
1,371,925
In July 2013, the FRB, OCC, and Federal Deposit Insurance Corporation adopted rules that will, on January 1, 2015,
implement the Basel III risk-weighted framework and changes required by the Dodd-Frank Wall Street Reform and
Consumer Protection Act in place of the existing risk-based capital rules and Basel framework that currently apply to
the Bank. The new regulatory capital requirements also will apply to the Company on a consolidated basis. Basel III
is intended to improve both the quality and quantity of banking organizations’ capital, as well as to strengthen various
aspects of the international capital standards for calculating regulatory capital. Although we continue to evaluate the
anticipated impact the new capital rules will have on us, we currently anticipate the Bank will remain well-capitalized
in accordance with the regulatory standards.
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 deposit accounts at maturity.
The following table summarizes our contractual obligations and other material commitments, along with associated
weighted average rates as of September 30, 2013.
Maturity Range
Total
Less than
1 year
1 - 3
years
3 - 5
years
More than
5 years
(Dollars in thousands)
Operating leases
$
8,270 $
978 $
1,512 $
1,373
$
4,407
Certificates of deposit
$ 2,543,740 $ 1,206,095 $ 1,025,006
Rate
1.21 %
0.90 %
1.53 %
$ 311,228
$
1.37 %
1,411
1.92 %
FHLB Advances
Rate
$ 2,525,000
$
450,000
$ 1,175,000
$ 700,000
$ 200,000
2.33 %
3.14 %
1.96 %
2.69 %
1.45 %
Repurchase Agreements
$
320,000
$
100,000
$
20,000
$ 100,000
$ 100,000
Rate
3.43 %
4.20 %
4.45 %
3.35 %
2.53 %
Commitments to originate and
purchase/participate in loans
Rate
Commitments to fund unused
home equity lines of credit and
unadvanced commercial loans
Rate
Unadvanced portion of
construction loans
Rate
$
230,857
$
230,857
$
3.89 %
3.89 %
$
--
-- %
--
$
-- %
--
-- %
$
262,731
$
262,731
$
4.53 %
4.53 %
$
--
-- %
--
$
-- %
$
42,807 $
3.65 %
42,807 $
3.65 %
-- $
-- %
--
$
-- %
--
-- %
--
-- %
Excluded from the table above are immaterial amounts of income tax liabilities 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 and purchase/participate in 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.
We had no material off-balance sheet arrangements as of September 30, 2013.
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 and the SNL Midcap Bank and Thrift industry
index for the period September 30, 2008 through September 30, 2013. The information presented below assumes
$100 invested on September 30, 2008 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.
Total Return Performance
Capitol Federal Financial, Inc.
NASDAQ Composite
SNL Midcap Bank & Thrift Index
225
200
175
150
125
100
75
50
25
0
e
u
l
a
V
x
e
d
n
I
09/30/08
09/30/09
09/30/10
09/30/11
09/30/12
09/30/13
Index
Capitol Federal Financial, Inc.
NASDAQ Composite
SNL Midcap Bank & Thrift Index
9/30/2008
100.00
100.00
100.00
9/30/2009
78.12
102.54
65.31
Period Ending
9/30/2010
62.88
115.60
68.70
9/30/2011
67.40
119.07
55.94
9/30/2012
79.04
155.56
75.22
9/30/2013
89.34
191.34
96.14
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, 2013. 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 (1992). Management has
concluded that the Company maintained an effective system of internal control over financial reporting based on
these criteria as of September 30, 2013.
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, 2013 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, 2013, based on criteria established in Internal Control - Integrated Framework
(1992) 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
consolidated 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 consolidated 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 consolidated 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 consolidated 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, 2013, based on the criteria established in Internal Control - Integrated Framework (1992) 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, 2013 of the Company and
our report dated November 29, 2013 expressed an unqualified opinion on those consolidated financial statements.
Kansas City, Missouri
November 29, 2013
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, 2013 and 2012, and the related consolidated statements of income,
comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended
September 30, 2013. 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
consolidated 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, 2013 and 2012, and the results of its operations
and its cash flows for each of the three years in the period ended September 30, 2013, 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, 2013, based on the criteria
established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations
of the Treadway Commission, and our report dated November 29, 2013 expressed an unqualified opinion on the
Company’s internal control over financial reporting.
Kansas City, Missouri
November 29, 2013
51
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2013 and 2012 (Dollars in thousands, except per share data)
ASSETS
2013
2012
CASH AND CASH EQUIVALENTS (includes interest-earning deposits of
$99,735 and $127,544)
SECURITIES:
$
113,886 $
141,705
Available-for-sale (“AFS”), at estimated fair value (amortized cost of
$1,058,283 and $1,367,925)
1,069,967
1,406,844
Held-to-maturity (“HTM”), at amortized cost (estimated fair value of
$1,741,846 and $1,969,899)
1,718,023
1,887,947
LOANS RECEIVABLE, net (allowance for credit losses (“ACL”) of
$8,822 and $11,100)
5,958,868
5,608,083
BANK-OWNED LIFE INSURANCE (“BOLI”)
59,495
58,012
CAPITAL STOCK OF FEDERAL HOME LOAN BANK (“FHLB”), at cost
128,530
132,971
ACCRUED INTEREST RECEIVABLE
PREMISES AND EQUIPMENT, net
OTHER REAL ESTATE OWNED (“OREO”)
OTHER ASSETS
TOTAL ASSETS
23,596
26,092
70,112
57,766
3,882
8,047
40,090
50,837
$ 9,186,449 $ 9,378,304
(Continued)
52
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2013 and 2012 (Dollars in thousands, except per share data)
LIABILITIES AND STOCKHOLDERS’ EQUITY
2013
2012
LIABILITIES:
Deposits
FHLB borrowings
Repurchase agreements
Advance payments by borrowers for taxes and insurance
Income taxes payable
Deferred income tax liabilities, net
Accounts payable and accrued expenses
Total liabilities
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,
147,840,268 and 155,379,739 shares issued and outstanding
as of September 30, 2013 and 2012, respectively
Additional paid-in capital
Unearned compensation, Employee Stock Ownership Plan (“ESOP”)
Retained earnings
Accumulated other comprehensive income (“AOCI”), net of tax
Total stockholders’ equity
$ 4,611,446 $ 4,550,643
2,530,322
2,513,538
365,000
320,000
55,642
57,392
918
108
25,042
20,437
44,279
31,402
7,554,323
7,571,846
--
--
1,478
1,235,781
(44,603)
432,203
7,267
1,554
1,292,122
(47,575)
536,150
24,207
1,632,126
1,806,458
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 9,186,449 $ 9,378,304
See notes to consolidated financial statements
(Concluded)
53
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2013, 2012, and 2011 (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 borrowings
Deposits
Other borrowings
Total interest expense
$
2013
2012
2011
$
228,455
55,424
10,012
4,515
148
298,554
70,816
36,816
12,762
120,394
$
236,225
71,156
15,944
4,446
280
328,051
82,044
46,170
14,956
143,170
251,909
71,332
19,077
3,791
756
346,865
90,298
63,568
24,265
178,131
NET INTEREST INCOME
178,160
184,881
168,734
PROVISION FOR CREDIT LOSSES
(1,067)
2,040
4,060
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES
179,227
182,841
164,674
NON-INTEREST INCOME:
Retail fees and charges
Insurance commissions
Loan fees
Income from BOLI
Other non-interest income
Total non-interest income
15,342
2,925
1,727
1,483
1,812
23,289
15,915
2,772
2,113
1,478
1,955
24,233
15,509
3,071
2,449
1,824
2,142
24,995
(Continued)
54
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2013, 2012, and 2011 (Dollars in thousands, except per share data)
NON-INTEREST EXPENSE:
Salaries and employee benefits
Occupancy
Information technology and communications
Regulatory and outside services
Deposit and loan transaction costs
Advertising and promotional
Federal insurance premium
Contribution to Capitol Federal Foundation (“Foundation“)
Other non-interest expense
Total non-interest expense
2013
2012
2011
49,152
9,871
8,855
5,874
5,547
5,027
4,462
--
8,159
96,947
44,235
8,751
7,583
5,291
5,381
3,931
4,444
--
11,459
91,075
44,913
8,841
7,210
5,224
5,157
3,723
5,222
40,000
12,027
132,317
INCOME BEFORE INCOME TAX EXPENSE
105,569
115,999
57,352
INCOME TAX EXPENSE
36,229
41,486
18,949
NET INCOME
Basic earnings per share
Diluted earnings per share
Dividends declared per share
$
$
$
$
69,340
$
74,513
$
38,403
0.48
0.48
1.00
$
$
$
0.47
0.47
0.40
$
$
$
0.24
0.24
1.63
Basic weighted average common shares
Diluted weighted average common shares
144,847,156
144,848,009
157,912,978
157,916,400
162,625,274
162,632,665
See notes to consolidated financial statements
(Concluded)
55
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2013, 2012, and 2011 (Dollars in thousands)
Net income
Other comprehensive income, net of tax:
Changes in unrealized gains/losses on AFS securities, net of
deferred income taxes of $10,295, $1,491, and $3,159 for the
years ended September 30, 2013, 2012, and 2011, respectively
Comprehensive income
2013
69,340 $
2012
74,513 $
2011
38,403
$
(16,940)
$
52,400 $
(2,500)
72,013 $
(5,155)
33,248
See notes to consolidated financial statements
56
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED SEPTEMBER 30, 2013, 2012, and 2011 (Dollars in thousands, except per share data)
Balance at October 1, 2010
$
915 $
457,540 $
(6,050) $ 801,044 $
31,862 $ (323,361) $
961,950
Additional
Unearned
Total
Common
Stock
Paid-In
Capital
Compensation
Retained
Treasury Stockholders’
ESOP
Earnings AOCI
Stock
Equity
38,403
(5,155)
2,763
3,259
(4)
262
42
38,403
(5,155)
6,022
(4)
262
42
(150,110)
(150,110)
Net income, fiscal year 2011
Other comprehensive income, net of tax
ESOP activity, net
Restricted stock activity, net
Stock-based compensation
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)
69,340
(16,940)
6,650
172
2,633
(89,375)
12
net of offering expenses
1,181
1,133,993
Purchase of common stock by ESOP
(47,260)
Balance at September 30, 2011
1,675
1,392,567
(50,547)
569,127
26,707
--
1,939,529
Net income, fiscal year 2012
Other comprehensive income, net of tax
ESOP activity, net
Restricted stock activity, net
Stock-based compensation
5
3,434
(5)
1,196
2,972
74,513
(2,500)
Repurchase of common stock
(126)
(105,131)
(43,722)
Stock options exercised
Dividends on common stock to
stockholders ($0.40 per share)
61
(63,768)
74,513
(2,500)
6,406
--
1,196
(148,979)
61
(63,768)
Balance at September 30, 2012
1,554
1,292,122
(47,575)
536,150
24,207
--
1,806,458
Net income, fiscal year 2013
Other comprehensive income, net of tax
ESOP activity, net
Restricted stock activity, net
Stock based compensation
2,972
3,678
172
2,633
69,340
(16,940)
Repurchase of common stock
(76)
(62,836)
(26,463)
Stock options exercised
Dividends on common stock to
stockholders ($1.00 per share)
12
(146,824)
(146,824)
Balance at September 30, 2013
$ 1,478 $ 1,235,781 $
(44,603) $ 432,203 $
7,267 $
-- $
1,632,126
See notes to consolidated financial statements
57
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2013, 2012, and 2011 (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
Provision for deferred income taxes
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
2013
2012
2011
$ 69,340 $
74,513 $
38,403
(4,515)
(1,067)
(7,098)
7,156
8,445
5,447
8,216
6,650
2,633
5,696
11,802
2,496
(3,432)
(644)
(9,403)
101,722
(4,446)
2,040
(6,008)
6,524
8,662
4,951
8,797
6,406
1,196
6,089
3,927
3,224
2,493
(1,398)
(10,732)
106,238
(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
CASH FLOWS FROM INVESTING ACTIVITIES:
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
Net increase in loans receivable
Purchases of premises and equipment
Proceeds from sales of OREO
Net cash provided by (used in) investing activities
(408,497)
(442,747)
717,545
604,820
11,347
(2,391)
(355,694)
(18,769)
10,677
116,291
(790,083)
(688,520)
(560,024) (1,979,789)
351,636
761,535
1,485,786
1,036,121
4,942
4,048
(7,162)
(5,696)
(105)
(471,144)
(12,751)
(12,617)
14,205
13,145
(933,321)
76,848
(Continued)
58
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2013, 2012, and 2011 (Dollars in thousands)
2013
2012
2011
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)
Repurchase of common stock
Stock options exercised
Excess tax benefits from stock options
Net cash (used in) provided by financing activities
(63,768)
(146,824)
55,470
60,803
957,768
1,003,115
(1,073,115) (957,768)
(7,937)
504
--
(91,573) (146,781)
36
25
(245,832) (162,451)
--
1,750
--
12
--
(150,110)
126,553
644,162
(773,771)
--
102
1,076,411
--
35
7
923,389
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(27,819)
20,635
55,853
CASH AND CASH EQUIVALENTS:
Beginning of Period
141,705
121,070
65,217
End of Period
$
113,886 $ 141,705 $
121,070
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income tax payments
Interest payments
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Note received from ESOP in exchange for common stock
Customer deposit holds related to common stock offering
Loans transferred to OREO
$
$
$
$
$
31,175 $
36,791 $
25,517
112,950 $ 135,444 $
172,332
-- $
-- $
47,260
-- $
-- $
17,690
6,705 $
11,296 $
15,048
See notes to consolidated financial statements
(Concluded)
59
CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2013, 2012, and 2011
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 36 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, including the Bank, 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, including the Company. 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 pro rata share of the tax liability. If any entity has a tax benefit, the Bank
reimburses the entity for its tax benefit.
The Company’s ability to pay dividends is dependent, in part, upon its ability to obtain capital distributions from the
Bank. The 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, 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 level. 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 (“the 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. The publicly held shares of Capitol Federal Financial were exchanged
for new shares of common stock of the Company. 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” 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. As of September 30,
2013, the balance of the liquidation account was $287.0 million. Under applicable federal banking 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 amount of the liquidation account at that time.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the
Bank. The Bank has a wholly owned subsidiary, Capitol Funds, Inc. Capitol Funds, Inc. has a wholly owned
subsidiary, Capitol Federal Mortgage Reinsurance Company. All intercompany accounts and transactions have been
eliminated in consolidation.
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. Bank regulators have the authority to require the Bank, as they can require all banks, to increase the
ACL or recognize additional charge-offs based upon their judgments, which may differ from management’s
60
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. 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 amount of interest-earning deposits held at the FRB as of September
30, 2013 and 2012 was $98.7 million and $122.4 million, respectively. The Bank is in compliance with the FRB
requirements. For the years ended September 30, 2013 and 2012, the average daily balance of required reserves at
the Federal Reserve Bank was $9.0 million and $9.2 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 AOCI 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. The Company primarily uses prices obtained from
third party pricing services and recent trades to determine the fair value of securities. See additional discussion of
fair value of AFS securities in “Note 14 – Fair Value of Financial Instruments”.
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 non-interest income in the consolidated
statements of income. During the fiscal years ended September 30, 2013 and 2012, 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 non-interest income in the consolidated statements of
income.
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.
Endorsed loans - Existing loan customers, whose loans have not been sold to third parties, who have not been
delinquent on their contractual loan payments during the previous 12 months and who are not currently in bankruptcy,
have the opportunity, for a cash fee, to endorse their original loan terms to current loan terms being offered. The fee
assessed for endorsing the mortgage loan is deferred and amortized over the remaining life of the endorsed loan
using the level-yield method and is reflected as an adjustment to interest income. Each endorsement is examined on
a loan-by-loan basis and if the new loan terms represent more than a minor change to the loan, then the unamortized
balance of the pre-endorsement deferred fees and/or costs associated with the mortgage loan are recognized in
interest income at the time of the endorsement. If the endorsement of terms does not represent more than a minor
change to the loan, then the unamortized balance of the pre-endorsement deferred fees and/or costs continue to be
deferred.
61
Troubled debt restructurings (“TDRs”) - For borrowers experiencing financial difficulties, the Bank may grant a
concession to the borrower. Generally, the Bank grants a short-term payment concession to borrowers who are
experiencing a temporary cash flow problem. The most frequently used concession is to reduce the monthly
payment amount for a period of 6 to 12 months, often by requiring payments of only interest and escrow during this
period, resulting 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 the capitalization of delinquent
interest and/or escrow resulting in an extension of the maturity date of the loan. The Bank does not forgive principal
or interest nor does it commit to lend additional funds, except for situations generally involving the capitalization of
delinquent interest and/or escrow not to exceed the original loan balance, to these borrowers.
Endorsed loans are classified as TDRs when certain guidelines for soft credit scores and/or estimated loan-to-value
(“LTV”) ratios are not met. These guidelines are intended to identify changes in the borrower’s credit condition since
origination, signifying the borrower could be experiencing financial difficulties even though the borrower has not been
delinquent on his contractual loan payment in the previous 12 months.
The TDRs discussed above will be reported as such until paid-off, unless the loan has been restructured to an
interest rate equal to or greater than the rate the Bank was willing to accept at the time of the restructuring for a new
loan with comparable risk, and has performed under the new terms of the restructuring agreement for at least 12
consecutive months.
During July 2012, the OCC provided guidance to the industry regarding loans that had been discharged under
Chapter 7 bankruptcy proceedings where the borrower has not reaffirmed the debt owed to the lender (“Chapter 7
loans”). The OCC requires that these loans be reported as TDRs, regardless of their delinquency status (“Chapter 7
TDRs”). These loans will be reported as TDRs until the borrower has made 48 consecutive monthly loan payments
after the Chapter 7 discharge date.
Delinquent loans - A loan is considered delinquent when payment has not been received within 30 days of its
contractual due date.
Nonaccrual loans - The accrual of income on loans is discontinued when interest or principal payments are 90 days in
arrears or, for TDR loans, the borrower has not made six consecutive monthly payments per the restructured loan
terms or since the discharge date for Chapter 7 TDRs. Loans on which the accrual of income has been discontinued
are designated as nonaccrual and outstanding interest previously credited beyond 90 days delinquent is reversed. A
nonaccrual loan is returned to accrual status once the contractual payments have been made to bring the loan less
than 90 days past due or, in the case of a TDR loan, the borrower has made six consecutive payments per the
restructured loan terms or the borrower has made six consecutive payments since the discharge date for Chapter 7
TDRs.
Impaired loans - A loan is considered impaired when, based on current information and events, it is probable that the
Bank will be unable to collect all amounts due, including principal and interest, according to the contractual terms of
the loan agreement. Interest income on impaired loans is recognized in the period collected unless the ultimate
collection of principal is considered doubtful. The following types of loans are reported as impaired loans: all
nonaccrual loans, loans classified as substandard, loans partially charged-off, Chapter 7 loans, and all TDRs except
those that have been restructured to an interest rate equal to or greater than the rate the Bank was willing to accept
at the time of the restructuring for a new loan with comparable risk, and has performed under the new terms of the
restructuring agreement for at least 12 consecutive months.
The majority of the Bank’s impaired loans are related to one- to four-family properties. Impaired loans related to one-
to four-family properties are individually evaluated for loss when the loan becomes 180 days delinquent or at any time
management has knowledge of the existence of a potential loss to ensure that the carrying value of the loan is not in
excess of the fair value of the collateral, less estimated selling costs.
Allowance for Credit Losses - The ACL represents management’s best estimate of the amount of inherent losses in
the loan portfolio as of the balance sheet date. Management’s methodology for assessing the appropriateness of the
ACL consists of an analysis (“formula analysis”) model, along with analyzing several other factors. Management
maintains the ACL through provisions for credit losses that are either charged to or credited to income.
For one- to four-family secured loans, losses are charged-off when the loan is generally 180 days delinquent or in
foreclosure. Losses are based on new collateral values obtained through appraisals, less estimated costs to sell.
Anticipated private mortgage insurance proceeds are taken into consideration when calculating the loss amount. An
updated appraisal is requested, at a minimum, every 12 months thereafter if the loan remains 180 days or more
delinquent or in foreclosure. If the Bank holds the first and second mortgage, both loans are combined when
evaluating whether there is a potential loss on the loan. Charge-offs for real estate-secured loans may also occur at
any time if the Bank has knowledge of the existence of a potential loss. For all real estate loans that are not secured
by one- to four-family property, losses are charged-off when the collection of such amounts is unlikely. When a non-
real estate secured loan is 120 days delinquent, any identified losses are charged-off.
The Bank’s primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans on
residential properties and, to a lesser extent, home equity and second mortgage loans on one- to four-family
residential properties, resulting in a loan concentration in residential mortgage loans. The Bank has a concentration
62
of loans secured by residential property located in Kansas and Missouri. Based on the composition of the Bank’s
loan portfolio, the primary risk characteristics inherent in the one- to four-family and consumer loan portfolios are a
decline in economic conditions, elevated levels of unemployment or underemployment, and declines in residential
real estate values. Any one or a combination of these events may adversely affect borrowers’ ability to repay their
loans, resulting in increased delinquencies, non-performing assets, loan losses, and future loan loss provisions.
Although the multi-family and commercial loan portfolio is subject to the same risk of declines in economic conditions,
the primary risk characteristics inherent in this portfolio include the ability of the borrower to sustain sufficient cash
flows from leases and to control expenses to satisfy their contractual debt payments, and/or the ability to utilize
personal and/or business resources to pay their contractual debt payments if the cash flows are not sufficient.
Additionally, if the Bank were to repossess the secured collateral of a multi-family or commercial loan, the pool of
potential buyers is limited more than that for a residential property. Therefore, the Bank could hold the property for an
extended period of time and/or potentially be forced to sell at a discounted price, resulting in additional losses.
Each quarter, a formula analysis is prepared which segregates the loan portfolio into categories based on certain risk
characteristics. The categories include the following: one- to four-family loans; multi-family and commercial loans;
consumer home equity loans; and other consumer loans. Home equity loans with the same underlying collateral as a
one- to four-family loan are combined with the one- to four-family loan in the formula analysis model to calculate a
combined LTV ratio. Loans individually evaluated for loss are excluded from the formula analysis model. The one- to
four-family loan portfolio and related home equity loans are segregated into additional categories based on the
following risk characteristics: originated and correspondent purchased, or bulk purchased; interest payments (fixed-
rate and adjustable-rate/interest-only); LTV ratios; borrower’s credit scores; and certain geographic locations. 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.
Quantitative loss factors are applied to each loan category in the formula analysis model based on the historical loss
experience for each respective loan category. Each quarter, management reviews the historical loss time periods
and utilizes the historical loss time periods believed to be the most reflective of the current economic conditions and
recent charge-off experience.
Qualitative loss factors are applied to each loan category in the formula analysis model. The qualitative loss factors
that are applied in the formula analysis model for one- to four-family and consumer loan portfolios are: unemployment
rate trends; collateral value trends; credit score trends; and delinquent loan trends. The qualitative loss factors that
are applied in the formula analysis model for multi-family and commercial loan portfolio are: unemployment rate
trends; credit score trends for the primary guarantor; delinquent loan trends; and a factor based on management’s
judgment due to the higher risk nature of these loans, as compared to one- to four-family loans. As loans are
classified or become delinquent, the qualitative loss factors increase for each respective loan category. Additionally,
TDRs that have not been individually evaluated for loss are included in a category within the formula analysis model
with an overall higher qualitative loss factor than corresponding performing loans, for the life of the loan. The
qualitative factors were derived by management based on a review of the historical performance of the respective
loan portfolios and consideration of current economic conditions and their likely impact to the loan portfolio.
Management utilizes the formula analysis, along with analyzing several other factors, when evaluating the adequacy
of the ACL. Such factors include the trend and composition of delinquent loans, results of foreclosed property and
short sale transactions, charge-off trends, the current status and trends of local and national economies (particularly
levels of unemployment), trends and current conditions in the real estate and housing markets, and loan portfolio
growth and concentrations. Since the Bank’s loan portfolio is primarily concentrated in one- to four-family real estate,
management monitors residential real estate market value trends in the Bank’s local market areas and geographic
sections of the U.S. by reference to various industry and market reports, economic releases and surveys, and
management’s general and specific knowledge of the real estate markets in which the Bank lends, in order to
determine what impact, if any, such trends may have on the level of ACL. Reviewing these factors assists
management in evaluating the overall credit quality of the loan portfolio and the reasonableness of the ACL on an
ongoing basis, and whether changes need to be made to the Bank’s ACL methodology. Management seeks to apply
the ACL methodology in a consistent manner; however, the methodology can be modified in response to changing
conditions.
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.
63
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 quarterly
evaluation to determine if any FHLB stock impairment exists. The quarterly impairment evaluation focuses primarily
on the capital adequacy and liquidity of FHLB Topeka, while also considering the impact that legislative and
regulatory developments may have on FHLB Topeka. Dividends received on FHLB stock are reflected as 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. Structural components of the buildings generally have an estimated life of 15 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 non-interest income or non-interest expense as incurred.
Other Real Estate Owned - OREO primarily represents foreclosed assets held for sale. OREO 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 non-interest expense 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
OREO are recognized upon disposition of the property and are recorded in non-interest expense 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 basis of existing assets and liabilities. Deferred
income taxes expense (benefit) 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 restricted
stock between the grant date and vesting date. Income tax related penalties and interest are included in income tax
expenses in the consolidated statements of income.
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 restricted stock are credited to additional paid-in capital. A
valuation allowance is recorded to reduce 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 an uncertain 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 earnings per share (“EPS”) computations once they are committed to be released.
Stock-based Compensation - The Company has share-based plans under which stock options and restricted stock
awards have been granted. 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. 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 approved
counterparties (“repurchase agreements”). These agreements are recorded as financing transactions, and thereby
reported as liabilities on the consolidated balance sheet, as the Bank maintains effective control over the transferred
securities and the securities continue to be carried in the Bank’s securities portfolio. The securities are delivered to
the party with whom each transaction is executed and 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 or as a result of principal
payments received.
64
The Bank has obtained advances from FHLB and has access to a FHLB line of credit. Total FHLB borrowings 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 Call Report to the OCC, without pre-approval from the FHLB
president. Additionally, the Bank is authorized to borrow from the Federal Reserve Bank’s “discount window.”
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.
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 restricted stock shares which have vested or have been allocated to participants. ESOP shares that have not
been committed to be released are excluded from the computation of basic and diluted EPS. Unvested restricted
stock awards contain nonforfeitable rights to dividends and are treated as participating securities in the computation
of EPS pursuant to the two-class method for fiscal years 2013 and 2012.
Recent Accounting Pronouncements - In June 2011, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2011-05, Presentation of Comprehensive Income, which revised how entities
present comprehensive income in their financial statements. The ASU requires entities to report components of
comprehensive income in either a continuous statement of comprehensive income or 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 did not change the items
that an entity must report in other comprehensive income. ASU 2011-05 was effective October 1, 2012 for the
Company. The Company elected the two-statement approach upon adoption on October 1, 2012 and applied the
ASU retrospectively for all periods presented in the consolidated financial statements.
In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets
and Liabilities. The ASU requires new disclosures regarding the nature of an entity’s rights of setoff and related
arrangements associated with its financial instruments and derivative instruments. The new disclosures are designed
to make GAAP financial statements more comparable to those prepared under International Financial Reporting
Standards. The new disclosures entail presenting information about both gross and net exposures. The new
disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, which is
October 1, 2013 for the Company, and interim periods therein; retrospective application is required. The adoption of
this ASU is disclosure-related and therefore is not expected to have an impact on the Company’s consolidated
financial condition or results of operations when adopted on October 1, 2013.
In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and
Liabilities. The ASU clarifies the scope of the offsetting disclosure requirements in ASU 2011-11, Disclosures about
Offsetting Assets and Liabilities. These standards are effective for fiscal years beginning on or after January 1, 2013,
which is October 1, 2013 for the Company. The standards are disclosure-related and therefore, their adoption is not
expected to have an impact on the Company’s consolidated financial condition or results of operations when adopted
on October 1, 2013.
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other
Comprehensive Income, which is intended to improve the transparency of changes in other comprehensive income
and items reclassified out of AOCI. The standard requires entities to disaggregate the total change of each
component of other comprehensive income and separately present reclassification adjustments and current period
other comprehensive income. Additionally, the standard requires that significant items reclassified out of AOCI be
presented by component either on the face of the statement where net income is presented or as a separate
disclosure in the notes to the financial statements. ASU 2013-02 is effective for fiscal years beginning after
December 15, 2012, which is October 1, 2013 for the Company, and should be applied prospectively. The adoption
of this ASU is disclosure-related and therefore is not expected to have an impact on the Company’s consolidated
financial condition or results of operations when adopted on October 1, 2013.
65
In February 2013, the FASB issued ASU 2013-04, Obligations Resulting from Joint and Several Liability
Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. The ASU provides
recognition, measurement, and disclosure guidance for certain obligations resulting from joint and several liability
arrangements for which the total amount of the obligation is fixed at the reporting date. ASU 2013-04 is effective for
fiscal years beginning after December 15, 2013, which is October 1, 2014 for the Company, and should be applied
retrospectively. The Company has not yet completed its evaluation of this standard.
2. EARNINGS PER SHARE
Shares acquired by the ESOP are not considered in the basic average shares outstanding until the shares are
committed for allocation or vested to an employee’s individual account. Unvested shares awarded pursuant to the
Company’s restricted stock benefit plans are treated as participating securities in the computation of EPS pursuant to
the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings
allocation that determines EPS for each class of common stock and participating security.
2013
2012
2011
(Dollars in thousands, except per share amounts)
Net income
Income allocated to participating securities
Net income available to common stockholders
$
$
$
69,340
(205)
69,135
$
74,513
(69)
74,444
$
$
38,403
--
38,403
Average common shares outstanding
Average committed ESOP shares outstanding
144,638,458
208,698
157,704,473
208,505
162,432,315
192,959
Total basic average common shares outstanding
144,847,156
157,912,978
162,625,274
Effect of dilutive restricted stock
Effect of dilutive stock options
--
853
--
3,422
2,747
4,644
Total diluted average common shares outstanding
144,848,009
157,916,400
162,632,665
Net EPS:
Basic
Diluted
$
$
0.48 $
0.48 $
0.47 $
0.47 $
0.24
0.24
Antidilutive stock options and restricted stock,
excluded from the diluted average common shares
outstanding calculation
2,430,629
1,308,925
898,415
66
3. SECURITIES
The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of AFS
and HTM securities at the dates presented. The majority of the MBS and investment securities portfolios are
composed of securities issued by GSEs.
AFS:
GSE debentures
MBS
Trust preferred securities
Municipal bonds
HTM:
MBS
Municipal bonds
Amortized
Cost
$
$
709,118
345,263
2,594
1,308
1,058,283
1,683,744
34,279
1,718,023
2,776,306
$
$
September 30, 2013
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(Dollars in thousands)
Estimated
Fair
Value
996
18,701
--
44
19,741
39,878
943
40,821
60,562
$
$
7,886 $
--
171
--
8,057
702,228
363,964
2,423
1,352
1,069,967
16,984
14
16,998
25,055 $
1,706,638
35,208
1,741,846
2,811,813
September 30, 2012
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
(Dollars in thousands)
Fair
Value
AFS:
GSE debentures
$
857,409
$
4,317
$
MBS
Trust preferred securities
Municipal bonds
505,169
2,912
2,435
35,137
--
81
1,367,925
39,535
HTM:
MBS
GSE debentures
Municipal bonds
1,792,636
49,977
45,334
79,883
247
1,822
1,887,947
3,255,872
$
81,952
121,487
$
$
2 $
--
614
--
616
--
--
--
--
616 $
861,724
540,306
2,298
2,516
1,406,844
1,872,519
50,224
47,156
1,969,899
3,376,743
67
The following tables summarize the estimated fair value and gross unrealized losses of those securities on which an
unrealized loss at the dates presented was reported and the continuous unrealized loss position for less than 12
months and equal to or greater than 12 months as of the dates presented.
September 30, 2013
Less Than
12 Months
Estimated
Equal to or Greater
Than 12 Months
Estimated
Count
Fair
Value
Unrealized
Losses
Count
(Dollars in thousands)
Fair
Value
Unrealized
Losses
AFS:
GSE debentures
19 $
426,482 $
7,213
Trust preferred securities
--
--
--
19 $
426,482 $
7,213
HTM:
MBS
Municipal bonds
40 $
3
43 $
710,291 $
1,299
711,590 $
16,984
14
16,998
1
1
2
--
--
--
$
$
$
$
24,327 $
2,423
26,750 $
673
171
844
-- $
--
-- $
--
--
--
September 30, 2012
Less Than
12 Months
Estimated
Count
Fair
Value
Unrealized
Losses
Count
(Dollars in thousands)
Equal to or Greater
Than 12 Months
Estimated
Fair
Value
Unrealized
Losses
AFS:
GSE debentures
Trust preferred securities
2 $
--
2 $
42,733 $
--
42,733 $
2
--
2
--
1
1
$
$
-- $
2,298
2,298 $
--
614
614
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.
The unrealized losses at September 30, 2013, excluding the trust preferred security discussed below, are primarily a
result of an increase in market yields from the time the securities were purchased. In general, as market yields rise,
the fair value of securities will decrease; as market yields fall, the fair value of securities will increase. Management
generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities
have not been classified as other-than-temporarily impaired. 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. As a result of the analysis, management does not believe any other-than-temporary
impairments existed at September 30, 2013 or September 30, 2012.
68
The unrealized losses at September 30, 2012 were primarily a result of a decrease in the credit rating of a trust
preferred security held by the Bank. Management reviews the underlying cash flows of this security on a quarterly
basis. As of September 30, 2013 and September 30, 2012, the cash flow analysis indicated the present value of
future expected cash flows are adequate to recover the entire amortized cost. Management neither intends to sell
this security, nor is it more likely than not that the Company will be required to sell the security before the recovery of
the remaining amortized cost amount, which could be at maturity. As a result of the analysis, management does not
believe any other-than-temporary impairments existed related to the trust preferred security at September 30, 2013 or
September 30, 2012.
Maturities of MBS depend on the repayment characteristics and experience of the underlying financial instruments.
Actual maturities of MBS may differ from contractual maturities because borrowers have the right to prepay
obligations, generally without penalties. Additionally, issuers of callable investment securities have the right to call
and prepay obligations with or without prepayment penalties prior to the maturity dates of the securities. As of
September 30, 2013, the amortized cost of the securities in our portfolio which are callable or have pre-refunding
dates within one year totaled $544.8 million. 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, 2013 are
shown below.
AFS
HTM
Amortized
Cost
$
$
190
637,085
183,130
237,878
1,058,283
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
(Dollars in thousands)
$
$
190
633,101
187,613
249,063
1,069,967
$
$
6,716
60,598
399,618
1,251,091
1,718,023
$
$
6,806
63,804
400,295
1,270,941
1,741,846
One year or less
One year through five years
Five years through ten years
Ten years and thereafter
The following table presents the carrying value of MBS in our portfolio by issuer at the dates presented.
FNMA
FHLMC
GNMA
Private Issuer
$
$
At September 30,
2013
(Dollars in thousands)
1,250,948 $
629,216
167,544
--
2,047,708 $
2012
1,324,293
824,197
183,778
674
2,332,942
The following table presents the taxable and non-taxable components of interest income on investment securities for
the years presented.
For the Year Ended
September 30,
2013
2012
(Dollars in thousands)
Taxable
Non-taxable
$
$
8,796 $
1,216
10,012 $
14,309
1,635
15,944
$
$
2011
17,180
1,897
19,077
69
The following table summarizes the amortized cost and estimated fair value of securities pledged as collateral as of
the dates indicated.
September 30,
2013
2012
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
(Dollars in thousands)
Estimated
Fair
Value
Repurchase agreements
Public unit deposits
Federal Reserve Bank
$
$
353,648
272,016
34,261
659,925
$
$
364,593
274,917
35,477
674,987
$
$
400,827
219,913
49,472
670,212
$
$
427,864
232,514
52,122
712,500
All dispositions of securities during fiscal years 2013, 2012, and 2011 were the result of principal repayments, calls or
maturities.
4. LOANS RECEIVABLE and ALLOWANCE FOR CREDIT LOSSES
Loans receivable, net at September 30, 2013 and 2012 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
2013
(Dollars in thousands)
2012
$
5,743,047
50,358
77,743
5,871,148
135,028
5,623
140,651
5,392,429
48,623
52,254
5,493,306
149,321
6,529
155,850
6,011,799
5,649,156
42,807
8,822
23,057
(21,755)
5,958,868
$
22,874
11,100
21,468
(14,369)
5,608,083
$
$
The Bank is subject to numerous lending-related regulations. The limit of aggregate loans to one borrower is the
greater of 15% of the Bank’s unimpaired capital and surplus, and $500 thousand. As of September 30, 2013, 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, 2013 and 2012. 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 $228 thousand, $248 thousand, and $298 thousand for the years ended
September 30, 2013, 2012, and 2011, respectively, as a result of selling LHFS. The net gains are included in other
non-interest income in the consolidated statements of income.
70
As of September 30, 2013 and 2012, the Bank serviced loans for others aggregating approximately $237.7 million
and $349.7 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 $4.1 million and $5.5 million as of September 30, 2013 and 2012,
respectively.
Lending Practices and Underwriting Standards - Originating and purchasing loans secured by one- to four-family
residential properties is the Bank’s primary lending business, resulting in a loan concentration in residential first
mortgage loans. The Bank purchases one- to four-family loans, on a loan-by-loan basis, from a select group of
correspondent lenders in 23 states. Additionally, the Bank periodically purchases whole one- to four-family loans in
bulk packages from nationwide and correspondent lenders. The Bank also makes consumer loans, construction
loans secured by residential or commercial properties, and real estate loans secured by multi-family dwellings. As a
result of our one- to four-family lending activities, the Bank has a concentration of loans secured by real property
located in Kansas and Missouri.
One- to four-family loans - One- to four-family loans are underwritten generally in accordance with FHLMC and FNMA
underwriting guidelines. Full documentation to support the applicant’s credit, income, and sufficient funds to cover all
applicable fees and reserves at closing are required on all loans. Properties securing one- to four-family loans are
appraised by either staff appraisers or fee appraisers, both of which are independent of the loan origination function
and approved by our Board of Directors.
The underwriting standards for loans purchased from correspondent and nationwide lenders are generally similar to
the Bank’s internal underwriting standards. The underwriting of correspondent loans is performed primarily by the
Bank’s underwriters, but some are underwritten by a third party, independent of the correspondent lender, to ensure
general consistency to the Bank’s underwriting standards. Before committing to a bulk loan purchase, the Bank’s
Chief Lending Officer or Secondary Marketing Manager reviews specific criteria such as loan amount, credit scores,
LTV ratios, geographic location, and debt ratios of each loan in the pool. If the specific criteria do not meet the
Bank’s underwriting standards and compensating factors are not sufficient, then a loan will be removed from the
population. Before the bulk loan purchase is funded, an internal Bank underwriter or a third party reviews at least
25% of the loan files to confirm loan terms, credit scores, debt service ratios, property appraisals, and other
underwriting related documentation. For the tables within this Note, correspondent purchased loans are included with
originated loans, and bulk purchased loans 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, commercial real estate and commercial construction
loans are originated by the Bank or are in participation with a lead bank. 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, commercial real estate and commercial construction 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.
Consumer loans - The Bank offers a variety of secured consumer loans, including home equity loans and lines of
credit, home improvement loans, auto loans, and loans secured by savings deposits. The Bank also originates a very
limited amount of unsecured loans. The Bank does not originate any consumer loans on an indirect basis, such as
contracts purchased from retailers of goods or services which have extended credit to their customers. The majority
of the consumer loan portfolio is comprised of home equity lines of credit for which the Bank also has the first
mortgage or there is no first mortgage.
The underwriting standards for consumer loans include a determination of the applicant’s payment history on other
debts and an assessment of the applicant’s 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.
71
Credit Quality Indicators - Based on the Bank’s lending emphasis and underwriting standards, management has
segmented the loan portfolio into three segments: (1) one- to four-family loans; (2) consumer loans; and (3) multi-
family and commercial loans. The one- to four-family and consumer segments are further grouped into classes for
purposes of providing disaggregated information about the credit quality of the loan portfolio. The classes are: one-
to four-family loans – originated, one- to four-family loans – purchased, consumer loans – home equity, and
consumer loans – other.
The Bank’s primary credit quality indicators for the one- to four-family loan and consumer – home equity loan
portfolios are delinquency status, asset classifications, 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.
The following tables present the recorded investment, by class, of loans 30 to 89 days delinquent, loans 90 or more
days delinquent or in foreclosure, total delinquent loans, total current loans, and total recorded investment at the
dates presented. The recorded investment in loans is defined as the unpaid principal balance of a loan (net of
unadvanced funds related to loans in process), less charge-offs and inclusive of unearned loan fees and deferred
costs. At September 30, 2013 and September 30, 2012, all loans 90 or more days delinquent were on nonaccrual
status. In addition to loans 90 or more days delinquent, the Bank also had $6.7 million and $10.0 million of originated
loan TDRs classified as nonaccrual at September 30, 2013 and 2012, respectively, as well as $280 thousand and
$2.4 million of purchased loan TDRs classified as nonaccrual at September 30, 2013 and 2012, respectively, as
required by the OCC. Of the loans required by the OCC to be classified as nonaccrual, $5.9 million and $11.2 million
were current at September 30, 2013 and 2012, respectively. At September 30, 2013 and 2012, the balance of loans
on nonaccrual status was $26.4 million and $31.8 million, respectively.
September 30, 2013
90 or More Days
Total
30 to 89 Days Delinquent or Delinquent
Delinquent
in Foreclosure
Loans
Current
Loans
Total
Recorded
Investment
(Dollars in thousands)
One- to four-family loans - originated
One- to four-family loans - purchased
Multi-family and commercial loans
Consumer - home equity
Consumer - other
$
18,889
$
7,842
--
848
35
9,379 $
9,695
--
485
5
$
27,614
$
19,564 $
28,268 $ 5,092,581 $ 5,120,849
648,587
631,050
17,537
57,603
57,603
--
135,028
133,695
1,333
5,623
5,583
40
47,178 $ 5,920,512 $ 5,967,690
September 30, 2012
90 or More Days
Total
30 to 89 Days Delinquent or Delinquent
Delinquent
in Foreclosure
Loans
Current
Loans
Total
Recorded
Investment
$
One- to four-family loans - originated
One- to four-family loans - purchased
Multi-family and commercial loans
Consumer - home equity
Consumer - other
$
14,902 $
7,788
--
521
106
23,317 $
(Dollars in thousands)
8,602 $
10,530
--
369
27
19,528 $
23,504 $ 4,590,194 $ 4,613,698
790,073
771,755
18,318
59,562
59,562
--
148,431
890
149,321
6,529
6,396
133
42,845 $ 5,576,338 $ 5,619,183
72
In accordance with the Bank’s asset classification policy, management regularly reviews the problem loans in the
Bank’s portfolio to determine whether any loans require classification. Loan classifications are defined as follows:
Special mention - These loans are performing loans on which known information about the collateral
pledged or the possible credit problems of the borrower(s) have caused management to have doubts as
to the ability of the borrower(s) to comply with present loan repayment terms and which may result in the
future inclusion of such loans in the non-performing loan categories.
Substandard - A loan is considered substandard if it is inadequately protected by the current net worth
and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those
characterized by the distinct possibility the Bank will sustain some loss if the deficiencies are not
corrected.
Doubtful - Loans classified as doubtful have all the weaknesses inherent 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 assets on the books is not warranted.
The following table sets forth the recorded investment in loans classified as special mention or substandard at the
dates presented, by class. Special mention and substandard loans are included in the formula analysis model if the
loan is not individually evaluated for loss. Loans classified as doubtful or loss are individually evaluated for loss. At
the dates presented, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.
The increase in substandard loans between September 30, 2012 and 2013 was due primarily to TDRs, including
Chapter 7 TDRs.
One- to four-family - originated
One- to four-family - purchased
Multi-family and commercial
Consumer - home equity
Consumer - other
September 30,
2013
2012
Special Mention
Substandard Special Mention
(Dollars in thousands)
Substandard
$
$
29,359 $
1,871
1,976
87
--
33,293 $
27,761 $
14,195
--
819
13
42,788 $
36,055 $
2,829
2,578
413
--
41,875 $
23,153
14,538
--
815
39
38,545
The following table shows the weighted average credit score and weighted average LTV for originated and purchased
one- to four-family loans and originated consumer home equity loans at the dates presented. Borrower credit scores
are intended to provide an indication as to the likelihood that a borrower will repay their debts. Credit scores are
updated at least semiannually, with the last update in September 2013, and 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, 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
September 30,
2013
2012
Credit Score
LTV
Credit Score
LTV
762
747
746
760
65%
67
19
64%
763
749
747
761
65%
67
19
64%
73
TDRs – The following tables present the recorded investment prior to restructuring and immediately after
restructuring for all loans restructured during the years ended September 30, 2013, 2012, and 2011. These tables do
not reflect the recorded investment at the end of the periods indicated. The increase in the recorded investment at
the time of the restructuring was generally due to the capitalization of delinquent interest and/or escrow balances.
One- to four-family loans - originated
One- to four-family loans - purchased
Multi-family and commercial loans
Consumer - home equity
Consumer - other
One- to four-family loans - originated
One- to four-family loans - purchased
Multi-family and commercial loans
Consumer - home equity
Consumer - other
One- to four-family loans - originated
One- to four-family loans - purchased
Multi-family and commercial loans
Consumer - home equity
Consumer - other
For the Year Ended September 30, 2013
Number
of
Contracts
Pre-
Restructured
Outstanding
(Dollars in thousands)
Post-
Restructured
Outstanding
178
9
2
14
--
203
$
$
30,707
2,324
82
297
--
33,410
$
$
30,900
2,366
79
305
--
33,650
For the Year Ended September 30, 2012
Number
of
Contracts
Pre-
Restructured
Outstanding
(Dollars in thousands)
Post-
Restructured
Outstanding
232
14
--
23
1
270
$
$
$
33,683
3,878
--
466
12
38,039
$
33,815
3,877
--
475
12
38,179
For the Year Ended September 30, 2011
Number
of
Contracts
Pre-
Restructured
Outstanding
(Dollars in thousands)
Post-
Restructured
Outstanding
158
4
--
5
--
167
$
$
$
27,250
1,563
--
224
--
29,037
$
26,936
1,555
--
227
--
28,718
74
The following table provides information on TDRs restructured within the last 12 months that became delinquent
during the years presented.
September 30, 2013
Number
of
For the Years Ended
September 30, 2012
Number
of
Recorded
Recorded
Contracts Investment Contracts Investment Contracts Investment
(Dollars in thousands)
Recorded
of
September 30, 2011
Number
One- to four-family loans - originated
One- to four-family loans - purchased
Multi-family and commercial loans
Consumer - home equity
Consumer - other
38 $
6
--
3
1
48 $
3,341
1,270
--
22
10
4,643
14 $
--
--
--
--
14 $
2,340
--
--
--
--
2,340
13 $
--
--
--
--
13 $
1,353
--
--
--
--
1,353
Impaired loans - The following is a summary of information pertaining to impaired loans by class as of the dates
presented.
September 30, 2013
Unpaid
Unpaid
Recorded Principal Related Recorded Principal
Investment Balance
Investment Balance ACL
September 30, 2012
With no related allowance recorded
One- to four-family - originated
One- to four-family - purchased
Multi-family and commercial
Consumer - home equity
Consumer - other
With an allowance recorded
One- to four-family - originated
One- to four-family - purchased
Multi-family and commercial
Consumer - home equity
Consumer - other
Total
One- to four-family - originated
One- to four-family - purchased
Multi-family and commercial
Consumer - home equity
Consumer - other
$ 12,950 $ 13,543 $
13,882
--
577
2
27,411
35,520
2,034
73
492
11
38,130
48,470
15,916
73
1,069
13
16,645
--
980
7
31,175
35,619
2,015
74
492
11
38,211
49,162
18,660
74
1,472
18
(Dollars in thousands)
-- $ 10,729 $
--
--
--
--
--
15,340
--
882
27
26,978
10,765 $
15,216
--
881
27
26,889
209
29
2
78
1
319
209
29
2
78
1
41,125
2,028
--
307
12
43,472
51,854
17,368
--
1,189
39
41,293
2,016
--
307
12
43,628
52,058
17,232
--
1,188
39
70,517 $
$ 65,541 $ 69,386 $
319 $ 70,450 $
Related
ACL
--
--
--
--
--
--
268
54
--
52
1
375
268
54
--
52
1
375
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As previously noted, the Bank has a loan concentration in residential first mortgage loans. Declines in residential real
estate values could adversely impact the property used as collateral for the Bank’s loans. Adverse changes in
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 would decrease interest income on loans receivable and
would 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 a level adequate to absorb inherent
losses in the loan portfolio at September 30, 2013, the level of the ACL remains an estimate that is subject to
significant judgment and short-term changes.
5. PREMISES AND EQUIPMENT, Net
A summary of the net carrying value of banking premises and equipment at September 30, 2013 and 2012 is as
follows:
Land
Building and improvements
Furniture, fixtures and equipment
Less accumulated depreciation
2013
(Dollars in thousands)
2012
$
$
11,029
73,199
43,268
127,496
57,384
70,112
$
$
9,337
63,684
41,304
114,325
56,559
57,766
Depreciation and amortization expense for the years ended September 30, 2013, 2012, and 2011 was $5.4 million,
$5.0 million, and $4.4 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 $1.2 million for the year ended September 30, 2013, and $1.3 million for each of the years
ended September 30, 2012 and 2011.
As of September 30, 2013, 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 were as follows
(dollars in thousands):
2014
2015
2016
2017
2018
Thereafter
$
$
978
798
714
683
690
4,407
8,270
79
6. DEPOSITS
Deposits at September 30, 2013 and 2012 are summarized as follows:
2013
Weighted
Average
Rate
% of
Total
Amount
2012
Weighted
Average
Rate
% of
Total
Amount
(Dollars in thousands)
$
655,933
283,169
1,128,604
2,067,706
0.04%
0.13
0.23
0.16
14.2% $
6.1
24.5
44.8
606,504
260,933
1,110,962
1,978,399
0.04%
0.11
0.25
0.17
13.3%
5.8
24.4
43.5
1,179,921
852,258
476,003
35,014
544
2,543,740
4,611,446
$
0.48
1.40
2.54
3.09
4.38
1.21
0.74% 100.0% $
25.6
18.5
10.3
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1,005,724
800,745
663,985
95,765
6,025
2,572,244
4,550,643
0.55
1.44
2.51
3.21
4.50
1.44
0.89% 100.0%
22.1
17.6
14.6
2.1
0.1
56.5
Checking
Savings
Money market
Certificates of deposit:
0.00 – 0.99%
1.00 – 1.99%
2.00 – 2.99%
3.00 – 3.99%
4.00 – 4.99%
Total certificates of deposit
The following table presents scheduled maturities of our certificates of deposit, along with associated weighted
average rates, as of September 30, 2013:
2014
2015
2016
2017
2018
Thereafter
Amount
Rate
(Dollars in thousands)
$
$
1,206,095
676,365
348,641
208,806
102,422
1,411
2,543,740
0.90%
1.61
1.36
1.36
1.39
1.92
1.21%
The following table presents interest expense on deposits for the years presented.
Checking
Savings
Money market
Certificates
Year Ended September 30,
2013
2012
(Dollars in thousands)
$
$
244
284
2,446
33,842
36,816
$
$
421
408
3,457
41,884
46,170
$
$
2011
441
1,225
5,307
56,595
63,568
The amount of noninterest-bearing deposits was $150.2 million and $132.5 million as of September 30, 2013 and
2012, respectively. Certificates of deposit with a minimum denomination of $100 thousand were $928.1 million and
$865.4 million as of September 30, 2013 and 2012, 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 $138 thousand and $123 thousand as of September 30, 2013 and 2012, respectively.
80
7. BORROWED FUNDS
At September 30, 2013 and 2012, the Company’s borrowed funds consisted of FHLB advances and repurchase
agreements.
FHLB Advances – FHLB advances at September 30, 2013 and 2012 were comprised of the following:
Fixed-rate FHLB advances
Deferred prepayment penalty
Deferred gain on terminated interest rate swaps
2013
2012
(Dollars in thousands)
$
$
2,525,000
(11,575)
113
2,513,538
$
$
2,550,000
(19,952)
274
2,530,322
Weighted average contractual interest rate on FHLB advances
Weighted average effective interest rate on FHLB advances(1)
2.33%
2.67%
2.62%
3.03%
(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 2012, the Bank prepaid a $200.0 million fixed-rate FHLB advance with a contractual interest rate of
3.88% and a remaining term-to-maturity of 15 months. The prepaid FHLB advance was replaced with a $200.0
million fixed-rate FHLB advance, with a contractual interest rate of 0.86% and a term of 46 months. The Bank paid a
$7.9 million penalty to the FHLB as a result of prepaying the FHLB advance. The prepayment penalty was deferred
and is being recognized in interest expense over the life of the new advance and thereby effectively increased the
interest rate on the new advance 108 basis points, to 1.94%, at the time of the transaction. The present value of the
cash flows under the terms of the new FHLB advance were not more than 10% different from the present value of the
cash flows under the terms of the prepaid FHLB advance (including the prepayment penalty) and there were no
embedded conversion options in the prepaid advance or in the new FHLB advance so the transaction was accounted
for as a debt modification. The benefit of prepaying the advance was an immediate decrease in interest expense and
a decrease in interest rate sensitivity as the maturity of the refinanced advance was extended at a lower rate.
At September 30, 2013, the Bank had access to, but no outstanding balance on, a line of credit with the FHLB set to
expire on November 22, 2013, at which time the line of credit is expected to be renewed automatically by the FHLB
for a one year period. At September 30, 2013, there were no outstanding borrowings on the FHLB line of credit.
FHLB borrowings 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, 2013, the ratio of the par value of the Bank’s FHLB borrowings to the Bank’s total assets, as reported to the OCC,
was 27%.
Other Borrowings – At September 30, 2013 and 2012, the Company’s other borrowings consisted of repurchase
agreements in the amounts of $320.0 million and $365.0 million, with weighted average contractual rates of 3.43%
and 3.83%, respectively. The Bank has pledged MBS with an estimated fair value of $364.6 million at September 30,
2013 as collateral for the repurchase agreements.
81
Maturity of Borrowed Funds – The following table presents the maturity of FHLB advances, at par, and repurchase
agreements, along with associated weighted average contractual and weighted average effective rates as of
September 30, 2013:
FHLB
Advances
Amount
Repurchase
Agreements
Amount
Total
Borrowings
Amount
(Dollars in thousands)
Contractual
Rate
Effective
Rate(1)
2014
2015
2016
2017
2018
Thereafter
$
$
450,000
600,000
575,000
500,000
200,000
200,000
2,525,000
$
$
100,000
20,000
--
--
100,000
100,000
320,000
$
$
550,000
620,000
575,000
500,000
300,000
300,000
2,845,000
3.33%
1.73
2.29
2.69
2.90
1.81
2.45%
3.95%
1.96
2.91
2.72
2.90
1.81
2.75%
(1) The effective rate includes the net impact of the amortization of deferred prepayment penalties resulting from the prepayment
of certain FHLB advances, and deferred gains related to terminated interest rate swaps.
8. INCOME TAXES
Income tax expense (benefit) for the years ended September 30, 2013, 2012, and 2011 consisted of the following:
Current:
Federal
State
Deferred:
Federal
State
2013
2012
(Dollars in thousands)
$
27,570 $
2,963
30,533
5,586
110
5,696
$
36,229 $
32,353 $
3,044
35,397
5,638
451
6,089
41,486 $
2011
25,889
2,707
28,596
(8,933)
(714)
(9,647)
18,949
The Company’s effective tax rates were 34.3%, 35.8%, and 33.0% for the years ended September 30, 2013, 2012,
and 2011, 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:
2013
Amount %
2012
2011
Amount
%
Amount %
(Dollars in thousands)
Federal income tax expense
computed at statutory Federal rate
$ 36,949
35.0 % $ 40,600
35.0 % $ 20,073
35.0 %
Increases (Decreases) in taxes resulting from:
State taxes, net of Federal tax effect
Low income housing tax credits
ESOP related expenses, net
Other
3,073
(2,675)
(347)
(771)
$ 36,229
3,495
2.9
(2,081)
(2.5)
591
(0.3)
(1,119)
(0.8)
34.3 % $ 41,486
1,993
3.0
(1,397)
(1.8)
(495)
0.5
(0.9)
(1,225)
35.8 % $ 18,949
3.4
(2.4)
(0.9)
(2.1)
33.0 %
82
Deferred income taxes expense (benefit) 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 restricted stock between the grant date and vesting date. The sources of these differences and the tax effect
of each as of September 30, 2013, 2012, and 2011 were as follows:
Foundation contribution
Fixed assets
ACL
FHLB stock dividends
Mortgage servicing rights
Other, net
2013
2012
(Dollars in thousands)
3,216
1,365
982
866
(155)
(578)
5,696
$
$
5,422
629
1,617
1,650
(521)
(2,708)
6,089
$
$
2011
(12,824)
1,006
(197)
1,432
(885)
1,821
(9,647)
$
$
The components of the net deferred income tax liabilities as of September 30, 2013 and 2012 were as follows:
Deferred income tax assets:
Foundation contribution
ACL
Salaries and employee benefits
ESOP compensation
Other
Gross deferred income tax assets
Valuation allowance
$
2013
2012
(Dollars in thousands)
$
4,186
1,264
2,071
1,004
4,179
12,704
(1,824)
7,402
2,246
1,612
949
4,194
16,403
(1,926)
Gross deferred income tax asset, net of valuation allowance
10,880
14,477
Deferred income tax liabilities:
FHLB stock dividends
Fixed assets
Unrealized gain on AFS securities
Other
Gross deferred income tax liabilities
21,344
5,015
4,417
541
31,317
20,478
3,650
14,712
679
39,519
Net deferred tax liabilities
$
20,437
$
25,042
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, 2013 and 2012, the Company had a valuation allowance of $1.8 million and
$1.9 million, respectively, related to the net operating losses generated by the Company’s consolidated Kansas
corporate income tax return. The companies included in the consolidated Kansas corporate income tax return are the
holding company and Capitol Funds, Inc., as the Bank files a Kansas privilege tax return. Based on the nature of the
operations of the holding company and Capitol Funds, Inc., management believes there will not be sufficient taxable
income to fully utilize the deferred tax assets noted above; therefore a valuation allowance has been recorded for the
related amounts at September 30, 2013 and 2012.
83
Accounting Standards Codification (“ASC”) 740 Income Taxes prescribes a process by which a tax position taken, or
expected to be taken, on an income tax return is gauged based upon the technical merits of the position, along with
whether the tax position meets a more-likely-than-not-recognition threshold, to determine the amount, if any, of
unrecognized tax benefits to recognize in the financial statements. Estimated penalties and interest related to
unrecognized tax benefits are included in income tax expense in the consolidated statements of income. For the
years ended September 30, 2013, 2012, and 2011, the Company’s unrecognized tax benefits, estimated penalties
and interest, and related activities were insignificant. The Company does not anticipate the total amount of
unrecognized tax benefits to significantly change within the next 12 months.
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 either established nexus under an economic nexus theory or has exceeded enumerated nexus
thresholds based on the amount of interest income derived from sources within the state. 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 2010.
In September 2013, the Internal Revenue Service enacted final guidance regarding the deduction and capitalization
of expenditures related to tangible property (“tangible property regulations”). The tangible property regulations clarify
and expand sections 162(a) and 263(a) of the Internal Revenue Code which relate to amounts paid to acquire
produce, or improve tangible property. Additionally, the tangible property regulations provide final guidance under
section 167 regarding accounting for and retirement of depreciable property and regulations under section 168
relating to the accounting for property under the Modified Accelerated Cost Recovery System. The tangible property
regulations affect all taxpayers that acquire, produce, or improve tangible property, which includes the Company, and
generally apply to taxable years beginning on or after January 1, 2014, which will impact the fiscal year ending
September 30, 2015 for the Company. The Company has evaluated the tangible property regulations and has
determined the regulations will not have a material impact on the Company’s financial condition or results of
operations.
9. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan (“PIT”) and an ESOP. The eligibility criteria for both plans is 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 $109 thousand for the year ended September 30, 2013, and $105 thousand for
each of the years ended September 30, 2012 and 2011, 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’s stock purchased in each offering. The Bank has
agreed to make cash contributions to the ESOP trust on an annual basis sufficient to enable the ESOP trust to make
the required annual loan payments to the Company on September 30 of each year.
The loan for the shares acquired in the initial public offering bore interest at a fixed-rate of 5.80%, with the final
principal and interest payment of $3.0 million paid on September 30, 2013. Payments of $3.0 million consisting of
principal of $2.8 million, $2.7 million, and $2.5 million and interest of $164 thousand, $319 thousand, and $465
thousand were made on September 30, 2013, 2012, and 2011, respectively.
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 third and final interest-only payment of
$1.5 million was paid on September 30, 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.
84
As the annual loan payments are made on September 30, shares are released from collateral and allocated to
qualified employees based on the proportion of their qualifying compensation to total qualifying compensation. On
September 30, 2013, 551,990 shares were released from collateral. On September 30, 2014, 165,198 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 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, 2013, 2012, and 2011, the Bank paid $2.5 million, $2.6 million, and $1.4 million,
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 $9.7 million for the year ended September 30, 2013, $6.7 million for the year
ended September 30, 2012, and $8.7 million for the year ended September 30, 2011. Of these amounts, $3.7
million, $3.4 million, and $3.3 million related to the difference between the market price of the Company’s stock when
the shares were acquired by the ESOP trust and the average market price of the Company’s stock during the years
ended September 30, 2013, 2012, and 2011, respectively. The amount included in compensation expense for
dividends on unallocated ESOP shares in excess of the debt service payments was $3.0 million, $325 thousand, and
$2.7 million for the years ended September 30, 2013, 2012, and 2011, respectively, which was related to the loan for
the shares acquired in the corporate reorganization.
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.
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. The following is a summary of
shares held in the ESOP trust as of September 30, 2013 and 2012:
Allocated ESOP shares
Unreleased ESOP shares
Total ESOP shares
2013
(Dollars in thousands)
2012
4,892,642
4,460,346
9,352,988
4,723,590
5,012,336
9,735,926
Fair value of unreleased ESOP shares
$
55,442
$
59,948
85
10. STOCK-BASED COMPENSATION
The Company has a Stock Option Plan, a Restricted Stock Plan, and an Equity Incentive Plan, all of which are
considered share-based plans.
Stock Option Plans – The Company currently has two plans outstanding which provide for the granting of stock
option awards, the 2000 Stock Option Plan and the 2012 Equity Incentive Plan. The objective of both plans is to
provide additional incentive to certain officers, directors and key employees by facilitating their purchase of a stock
interest in the Company. The total number of shares originally eligible to be granted as stock options under the 2000
Stock Option Plan was 8,558,411. Prior to stockholder approval of the 2012 Equity Incentive Plan, the 2000 Stock
Option Plan still had 2,867,859 shares available for future grants. The 2000 Stock Option Plan will expire in April
2015 and no additional grants may be made after expiration, but outstanding grants continue until they are
individually vested, forfeited, or expire. The Company will not issue any additional stock option grants from the 2000
Stock Option Plan; instead, all future grants will be awarded from the 2012 Equity Incentive Plan, which had
5,907,500 shares originally eligible to be granted as stock options. The Company may issue incentive and
nonqualified stock options under the 2012 Equity Incentive Plan. The Company may also award stock appreciation
rights, although to date no stock appreciation rights have been awarded. The incentive stock options expire no later
than 10 years and the nonqualified stock options expire no later than 15 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
under the 2012 Equity Incentive Plan generally has ranged from three to five years. The option price cannot be less
than the market value at the date of the grant as defined by each plan.
At September 30, 2013, the Company had 4,323,900 shares still available for future grants of stock options under the
2012 Equity Incentive Plan. This plan will expire in January 2027 and no additional grants may be made after
expiration, but outstanding grants continue until they are individually vested, forfeited, or expire. The following
provisions generally apply: 1) if a holder of such stock options terminates service for reasons other than death,
disability or termination for cause, the holder forfeits all rights to the non-vested stock options and all outstanding
vested options granted to the holder will remain exercisable for three months following the termination date, but not
beyond the expiration date of the options; 2) if the participant’s service terminates as a result of death or disability, all
outstanding stock options vest and all outstanding stock options will remain exercisable for one year following such
event, but not beyond the expiration date of the options; 3) if the participant’s service is terminated for cause, all
outstanding stock options expire immediately; and 4) if a change in control of the Company occurs, all outstanding
unvested stock options vest in full.
The Stock Option Plans are 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. New shares are issued by the Company
upon the exercise of stock options.
86
The fair value of stock option grants is 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,
2013, 2012, and 2011 was $1.45, $1.59, and $0.78 per share, respectively. Compensation expense attributable to
stock option awards during the years ended September 30, 2013, 2012, and 2011 totaled $792 thousand ($714
thousand, net of tax), $369 thousand ($320 thousand, net of tax), and $131 thousand ($122 thousand, net of tax),
respectively. The following weighted average assumptions were used for valuing stock option grants for the years
ended:
Risk-free interest rate
Expected life (years)
Expected volatility
Dividend yield
Estimated forfeitures
September 30,
2013
0.4%
3
23%
2.5%
12.0%
2012
0.5%
4
24%
2.5%
4.5%
2011
1.3%
5
25%
8.1%
12.9%
The risk-free interest rate was determined using the weighted yield available on the option grant date for zero-coupon
U.S. Treasury securities with terms nearest to the equivalent of 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, 2013, 2012, and 2011 follows:
2013
2012
2011
Weighted
Average
Exercise
Price
Number
of Options
Number
of Options
Weighted
Average
Exercise
Price
Number
of Options
Weighted
Average
Exercise
Options outstanding
at beginning of year
Granted
Forfeited
Expired
Exercised
Options outstanding
2,471,825 $
64,000
(81,412)
(29,420)
(1,000)
13.06
12.00
12.05
13.31
11.85
906,964 $
1,594,000
(16,966)
(3,390)
(8,783)
15.09
11.89
16.70
11.33
4.07
919,639 $
2,030
(10,180)
--
(4,525)
Price
15.08
10.86
16.59
--
8.23
at end of year
2,423,993 $
13.06
2,471,825 $
13.06
906,964 $
15.09
During the years ended September 30, 2013, 2012, and 2011, the total pretax intrinsic value of stock options
exercised was $1 thousand, $68 thousand, and $19 thousand, respectively, and the tax benefits realized from the
exercise of stock options was less than $1 thousand, $25 thousand, and $7 thousand, respectively. The fair value of
stock options vested during the years ended September 30, 2013, 2012, and 2011 was $689 thousand, $141
thousand, and $150 thousand, respectively.
87
The following summarizes information about the stock options outstanding and exercisable as of September 30,
2013:
Exercise
Price
$
10.86 - 12.65
13.58 - 17.59
19.19
Number
of Options
Outstanding
1,584,630
791,858
47,505
2,423,993
Options Outstanding
Weighted
Average
Remaining
Contractual
Life (in years)
Weighted
Average
Exercise
Price per
Share
(Dollars in thousands, except per share amounts)
Aggregate
Intrinsic
Value
9.7 $
5.7
5.1
8.3 $
11.89 $
15.04
19.19
13.06 $
851
--
--
851
Exercise
Price
$
10.86 -12.65
13.58 -17.59
19.19
Number
of Options
Exercisable
393,618
769,226
47,505
1,210,349
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (in years)
Weighted
Average
Exercise
Price per
Share
(Dollars in thousands, except per share amounts)
Aggregate
Intrinsic
Value
9.2 $
5.6
5.1
6.7 $
11.89 $
15.06
19.19
14.19 $
212
--
--
212
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the
Company’s closing stock price of $12.43 as of September 30, 2013, 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, 2013 was 393,618.
As of September 30, 2013, the total future compensation cost related to non-vested stock options not yet recognized
in the consolidated statements of income was $1.5 million, net of estimated forfeitures, and the weighted average
period over which these awards are expected to be recognized was 2.6 years.
Restricted Stock Plans – The Company currently has two plans outstanding which provide for the granting of
restricted stock awards, the 2000 Recognition and Retention Plan and the 2012 Equity Incentive Plan. The objective
of both plans is to enable the Company to retain personnel of experience and ability in key positions of responsibility.
Employees and directors are eligible to receive benefits under these plans at the sole discretion of the sub-
committee. The total number of shares originally eligible to be granted as restricted stock under the 2000
Recognition and Retention Plan was 3,423,364. Prior to stockholder approval of the 2012 Equity Incentive Plan, the
2000 Recognition and Retention Plan still had 358,767 shares available for future restricted stock grants. The 2000
Recognition and Retention Plan will expire in April 2015 and no additional grants may be made after expiration, but
outstanding grants continue until they are individually vested or forfeited. The Company will not award any additional
grants from the 2000 Recognition and Retention Plan; instead, all future grants of restricted stock will be awarded
from the 2012 Equity Incentive Plan, which had 2,363,000 shares originally eligible to be granted as restricted stock.
At September 30, 2013, the Company had 1,843,350 shares available for future grants of restricted stock under the
2012 Equity Incentive Plan. This plan will expire in January 2027 and no additional grants may be made after
expiration, but outstanding grants continue until they are individually vested or forfeited. The vesting period of the
restricted stock awards under the 2012 Equity Incentive Plan generally has ranged from three to five years.
88
Compensation expense in the amount of the fair market value of the common stock at the date of the grant, as
defined by the plans, to the employee is recognized over the period during which the shares vest. Compensation
expense attributable to restricted stock awards during the years ended September 30, 2013, 2012, and 2011 totaled
$1.8 million ($1.2 million, net of tax), $827 thousand ($531 thousand, net of tax), and $131 thousand ($88 thousand,
net of tax), respectively. The following provisions generally apply: 1) 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; 2) if a holder of such restricted stock terminates service for reasons other than
death or disability, the holder forfeits all rights to the non-vested shares under restriction; and 3) if a participant’s
service terminates as a result of death or disability, or if a change in control of the Company occurs, all restrictions
expire and recipients fully vest in all non-vested shares.
A summary of restricted stock activity for the years ended September 30, 2013, 2012, and 2011 follows:
2013
2012
2011
Weighted
Weighted
Average
Average
Number Grant Date
Grant Date
of Shares Fair Value of Shares Fair Value of Shares Fair Value
Weighted
Average
Number Grant Date Number
510,861 $
20,000
(129,023)
(15,675)
11.93
11.99
11.99
11.88
13,582 $
515,325
(18,046)
--
14.90
11.89
13.17
--
23,762 $
--
(10,180)
--
15.07
--
15.30
--
Unvested restricted stock
at beginning of year
Granted
Vested
Forfeited
Unvested restricted stock
at end of year
386,163 $
11.91
510,861 $
11.93
13,582 $
14.90
The estimated forfeiture rate for restricted stock granted during the years ended September 30, 2013, 2012, and
2011 was 12.19%, 0.88%, and 0%, respectively, based upon voluntary termination behavior and actual forfeitures.
The fair value of restricted stock that vested during the years ended September 30, 2013, 2012, and 2011 totaled
$1.5 million, $212 thousand, and $120 thousand, respectively. As of September 30, 2013 there was $3.6 million
($3.5 million, net of estimated forfeitures) of unrecognized compensation cost related to non-vested restricted stock to
be recognized over a weighted average period of 2.6 years.
89
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 during the fiscal years ended September 30,
2013, 2012, and 2011 amounted to $1.5 million, $2.0 million and $1.8 million, respectively, of which $300 thousand,
$386 thousand, and $345 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 2015, 2016, and 2017. During fiscal years 2013, 2012, and 2011, the amount expensed in conjunction with
the deferred amounts was $309 thousand, $162 thousand, and $153 thousand, respectively.
90
12. COMMITMENTS AND CONTINGENCIES
The Bank had commitments outstanding to originate, purchase, or participate in loans as of September 30, 2013 and
2012 as follows:
Originate fixed-rate
Originate adjustable-rate
Purchase/participate fixed-rate
Purchase/participate adjustable-rate
2013
(Dollars in thousands)
2012
77,085
17,997
95,247
40,528
230,857
$
$
102,449
18,272
81,107
31,315
233,143
$
$
As of September 30, 2013 and 2012, the Bank had approved but unadvanced home equity lines of credit of $262.7
million and $261.8 million, respectively. As of September 30, 2013 and 2012, the Bank had unadvanced
commitments on commercial loans of $15 thousand and $239 thousand, respectively.
Commitments to originate mortgage and non-mortgage loans are commitments to lend to a customer as long as there
are no underwriting concerns. Commitments to purchase/participate in loans primarily represent commitments to
purchase loans from correspondent lenders on a loan-by-loan basis. 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. As of September 30, 2013 and 2012, there were no significant loan-related commitments that
met the definition of derivatives or commitments to sell mortgage loans.
In the normal course of business, the Company and its subsidiary are named defendants in various lawsuits and
counterclaims. 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, 2013 or future periods.
91
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.
As of September 30, 2013 and 2012, 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 capital ratios as set forth in the table below. Management believes, as of September 30, 2013,
that the Bank meets all capital adequacy requirements to which it is subject and there were no conditions or events
subsequent to September 30, 2013 that would change the Bank’s category. There are currently no regulatory capital
requirements at the Company.
Actual
For Capital
Adequacy Purposes
To Be Well
Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount
Ratio Amount
Ratio
(Dollars in thousands)
1,363,103 14.8% $
1,363,103 35.6
1,371,925 35.9
368,028
153,015
306,030
4.0% $
4.0
8.0
460,034 5.0%
229,523 6.0
382,538 10.0
1,355,105 14.6% $
1,355,105 36.4
1,366,205 36.7
371,747
148,744
297,489
4.0% $
4.0
8.0
464,684 5.0%
223,116 6.0
371,861 10.0
As of September 30, 2013
Tier 1 leverage ratio
Tier 1 risk-based capital
Total risk-based capital
As of September 30, 2012
Tier 1 leverage ratio
Tier 1 risk-based capital
Total risk-based capital
$
$
Generally, 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 that the Bank
remain well capitalized before and after the proposed distribution. So long as the Bank continues to remain “well
capitalized” after each capital distribution and operates in a safe and sound manner, it is management’s belief that
the regulators will continue to allow the Bank to distribute its net income to the Company, although no assurance can
be given in this regard.
In July 2013, the FRB, OCC, and FDIC adopted rules that will, on January 1, 2015, implement the Basel III risk-
weighted framework and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act in
place of the existing risk-based capital rules and Basel framework that currently apply to the Bank. The new
regulatory capital requirements also will apply to the Company on a consolidated basis. Basel III is intended to
improve both the quality and quantity of banking organizations’ capital, as well as to strengthen various aspects of the
international capital standards for calculating regulatory capital. Although we continue to evaluate the anticipated
impact the new capital rules will have on us, we currently anticipate the Bank will remain well-capitalized in
accordance with the regulatory standards.
92
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair Value Measurements – The Company uses fair value measurements to record fair value adjustments to certain
assets and to determine fair value disclosures in accordance with ASC 820 and ASC 825. The Company did not
have any liabilities that were measured at fair value at September 30, 2013 or 2012. The Company’s AFS securities
are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to
record at fair value other assets or liabilities on a non-recurring basis, such as OREO and loans individually evaluated
for impairment. These non-recurring fair value adjustments involve the application of lower-of-cost-or-fair value
accounting or write-downs of individual assets.
The Company groups its assets at fair value in three levels, based on the markets in which the assets are traded and
the reliability of the assumptions used to determine fair value. These levels are:
Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices
for identical or similar instruments in markets that are not active, and model-based valuation techniques
for which all significant assumptions are observable in the market.
Level 3 — Valuation is generated from model-based techniques that use significant assumptions not
observable in the market. These unobservable assumptions reflect the Company’s own estimates of
assumptions that market participants would use in pricing the asset or liability. Valuation techniques
include the use of option pricing models, discounted cash flow models, and similar techniques. The
results cannot be determined with precision and may not be realized in an actual sale or immediate
settlement of the asset or liability.
The Company bases its fair values on the price that would be received from the sale of an asset in an orderly
transaction between market participants at the measurement date. The Company maximizes the use of observable
inputs and minimizes the use of unobservable inputs when measuring fair value.
The following is a description of valuation methodologies used for assets measured at fair value on a recurring basis.
AFS Securities - The Company’s AFS securities portfolio is carried at estimated fair value, with any unrealized gains
and losses, net of taxes, reported as AOCI in stockholders’ equity. The majority of the securities within the AFS
portfolio are issued by U.S. GSEs. The Company primarily uses prices obtained from third party pricing services and
recent trades to determine the fair value of securities. The Company’s major security types based on the nature and
risks of the securities are:
GSE Debentures – Estimated fair values are based on a discounted cash flow method. Cash flows are
determined by taking any embedded options into consideration and are discounted using current market
yields for similar securities. On a quarterly basis, management corroborates a sample of the prices
obtained from the pricing service by comparing them to another independent source. (Level 2)
MBS – Estimated fair values are based on a discounted cash flow method. Cash flows are determined
based on prepayment projections of the underlying mortgages and are discounted using current market
yields for benchmark securities. On a quarterly basis, management corroborates a sample of the prices
obtained from the pricing service by comparing them to another independent source. (Level 2)
Municipal Bonds – Estimated fair values are based on a discounted cash flow method. Cash flows are
determined by taking any embedded options into consideration and are discounted using current market
yields for securities with similar credit profiles. On a quarterly basis, management corroborates a sample
of the prices obtained from the pricing service by comparing them to another independent source. (Level
2)
Trust Preferred Securities – Estimated fair values are based on a discounted cash flow method. Cash
flows are determined by taking prepayment and underlying credit considerations into account. The
discount rates are derived from secondary trades and bid/offer prices. (Level 3)
93
The following tables provide the level of valuation assumption used to determine the carrying value of the Company’s
assets measured at fair value on a recurring basis, which consists of AFS securities, at the dates presented.
September 30, 2013
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)(1)
(Dollars in thousands)
-- $
--
--
--
-- $
702,228 $
363,964
1,352
--
1,067,544 $
--
--
--
2,423
2,423
September 30, 2012
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)(2)
(Dollars in thousands)
-- $
--
--
--
-- $
861,724 $
540,306
2,516
--
1,404,546 $
--
--
--
2,298
2,298
Carrying
Value
$
$
702,228 $
363,964
1,352
2,423
1,069,967 $
Carrying
Value
$
861,724 $
540,306
2,516
2,298
$
1,406,844 $
AFS Securities:
GSE debentures
MBS
Municipal bonds
Trust preferred securities
AFS Securities:
GSE debentures
MBS
Municipal bonds
Trust preferred securities
(1) The Company’s Level 3 AFS securities had no activity from September 30, 2012 to September 30, 2013, except for principal
repayments of $424 thousand and reductions in net unrealized losses recognized in other comprehensive income. Reductions
in net unrealized losses included in other comprehensive income for the year ended September 30, 2013 were $276 thousand.
(2) The Company’s Level 3 AFS securities had no activity from September 30, 2011 to September 30, 2012, except for principal
repayments of $996 thousand and reductions in net unrealized losses recognized in other comprehensive income. Reductions
in net unrealized losses included in other comprehensive income for the year ended September 30, 2012 were $78 thousand.
The following is a description of valuation methodologies used for significant assets measured at fair value on a non-
recurring basis.
Loans Receivable – The balance of loans individually evaluated for impairment at September 30, 2013 and 2012 was
$27.3 million and $26.9 million, respectively. Substantially all of these loans were secured by residential real estate
and were individually evaluated to ensure that the carrying value of the loan was not in excess of the fair value of the
collateral, less estimated selling costs. When no impairment is indicated, the carrying amount is considered to
approximate fair value. Fair values were estimated through current appraisals 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.
Based on this evaluation, the Bank charged-off any loss amounts at September 30, 2013 and 2012; therefore there
was no ACL related to these loans.
OREO – OREO primarily represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure
and is carried at lower-of-cost or fair value. Fair value is estimated through current appraisals or listing prices, less
estimated selling costs. 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 OREO at September 30, 2013 and 2012 was $3.9 million and $8.0 million, respectively.
94
The following tables provide the level of valuation assumptions used to determine the carrying value of the
Company’s assets measured at fair value on a non-recurring basis at the dates presented.
September 30, 2013
Quoted Prices
Significant
in Active Markets Other Observable Unobservable
Significant
Loans individually evaluated for impairment
OREO
Carrying for Identical Assets
Inputs
Value
(Level 1)
(Level 2)
(Dollars in thousands)
Inputs
(Level 3)
$ 27,327 $
3,882
$ 31,209 $
-- $
--
-- $
-- $
--
-- $
27,327
3,882
31,209
September 30, 2012
Quoted Prices
Significant
in Active Markets Other Observable Unobservable
Significant
Loans individually evaluated for impairment
OREO
Carrying for Identical Assets
Value
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
(Dollars in thousands)
$ 26,890 $
8,047
$ 34,937 $
-- $
--
-- $
-- $
--
-- $
26,890
8,047
34,937
Fair Value Disclosures – The Company determined estimated fair value amounts using available market information
and from a variety of valuation methodologies. However, considerable judgment is required to interpret market data
to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the
amount the Company could realize in a current market exchange. The use of different market assumptions and
estimation methodologies may have a material impact on the estimated fair value amounts. The fair value estimates
presented herein were based on pertinent information available to management as of the dates presented.
The carrying amounts and estimated fair values of the Company’s financial instruments at the dates presented were
as follows:
2013
2012
Carrying
Amount
Estimated
Fair
Value
Carrying
Amount
(Dollars in thousands)
Estimated
Fair
Value
$
113,886
1,718,023
5,958,868
59,495
128,530
4,611,446
2,513,538
320,000
$
113,886
1,741,846
6,132,239
59,495
128,530
4,646,263
2,599,749
333,749
$
141,705
1,887,947
5,608,083
58,012
132,971
4,550,643
2,530,322
365,000
$
141,705
1,969,899
5,978,872
58,012
132,971
4,607,732
2,701,142
388,761
Assets:
Cash and cash equivalents
HTM securities
Loans receivable
BOLI
Capital stock of FHLB
Liabilities:
Deposits
FHLB borrowings
Other borrowings
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. (Level 1)
HTM Securities – Estimated fair values of securities are based on one of three methods: 1) quoted market prices
where available, 2) quoted market prices for similar instruments if quoted market prices are not available, 3)
unobservable data that represents the Bank’s assumptions about items that market participants would consider in
determining fair value where no market data is available. HTM securities are carried at amortized cost. (Level 2)
Loans Receivable – The fair value of one- to four-family mortgages and home equity loans are generally estimated
using the present value of expected future cash flows, assuming future prepayments and using discount factors
determined by prices obtained from securitization markets, less a discount for the cost of servicing and lack of
liquidity. The estimated fair value of the Bank’s multi-family and consumer loans are based on the expected future
cash flows assuming future prepayments and discount factors based on current offering rates. (Level 3)
BOLI – The carrying value of BOLI is considered to approximate its fair value due to the nature of the financial asset.
(Level 1)
Capital Stock of FHLB – The carrying value and estimated fair value of FHLB stock equals cost, which is based on
redemption at par value. (Level 1)
Deposits – The estimated fair value of demand deposits, savings and money market accounts is the amount payable
on demand at the reporting date. The estimated fair value of these deposits at September 30, 2013 and 2012 was
$2.07 billion and $1.98 billion, respectively. (Level 1) The fair value of certificates of deposit is estimated by
discounting future cash flows using current LIBOR rates. The estimated fair value of certificates of deposit at
September 30, 2013 and 2012 was $2.58 billion and $2.63 billion, respectively. (Level 2)
FHLB borrowings and Repurchase Agreements – The fair value of fixed-maturity borrowed funds is estimated by
discounting estimated future cash flows using currently offered rates. (Level 2)
15. SUBSEQUENT EVENTS
In preparing these financial statements, management has evaluated events occurring subsequent to September 30,
2013, 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, 2013.
96
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized quarterly data for each of the years indicated for the Company.
$
$
2013
Total interest and dividend income
Net interest and dividend income
Provision for credit losses
Net income
Basic EPS
Diluted EPS
Dividends declared per share
Average number of basic shares outstanding
Average number of diluted shares outstanding
2012
Total interest and dividend income
Net interest and dividend income
Provision for credit losses
Net income
Basic EPS
Diluted EPS
Dividends declared per share
Average number of basic shares outstanding
Average number of diluted shares outstanding
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
(Dollars and counts in thousands, except per share amounts)
77,676 $
45,630
233
17,563
0.12
0.12
0.775
147,883
147,883
74,980 $
44,320
--
17,715
0.12
0.12
0.075
145,382
145,382
73,675 $
44,404
(800)
17,995
0.13
0.13
0.075
143,263
143,263
72,223 $ 298,554
178,160
43,806
(1,067)
(500)
69,340
16,067
0.48
0.11
0.48
0.11
1.00
0.075
144,847
142,856
144,848
142,858
84,827 $
45,374
540
18,789
0.12
0.12
0.175
161,923
161,931
83,274 $
47,466
1,500
19,315
0.12
0.12
0.075
161,722
161,728
80,645 $
46,188
--
18,673
0.12
0.12
0.075
156,962
156,966
79,305 $ 328,051
184,881
45,853
2,040
--
74,513
17,736
0.47
0.11
0.47
0.11
0.40
0.075
157,913
151,077
157,916
151,079
97
17. PARENT COMPANY FINANCIAL INFORMATION (PARENT COMPANY ONLY)
The Company serves as the holding company for the Bank (see “Note 1 – Summary of Significant Accounting
Policies”). The Company’s (parent company only) balance sheets at the dates presented, and the related statements
of income and cash flows for each of the years presented are as follows:
BALANCE SHEETS
September 30, 2013 and 2012
(Dollars in thousands, except share amounts)
ASSETS
Cash and cash equivalents
Investment in the Bank
AFS securities, at fair value (amortized cost of $0 and $60,074)
Note receivable - ESOP
Other assets
Accrued interest
Income tax receivable
Deferred income tax assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Accounts payable and accrued expenses
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,
147,840,268 and 155,379,739 shares issued and outstanding
as of September 30, 2013 and 2012, respectively
Additional paid-in capital
Unearned compensation - ESOP
Retained earnings
AOCI, net of tax
Total stockholders’ equity
2013
2012
$
207,012 $
1,370,426
--
47,260
282
--
3,031
4,186
1,632,197 $
308,648
1,379,357
60,120
50,087
84
263
3,092
7,103
1,808,754
$
$
71 $
2,296
--
--
1,478
1,235,781
(44,603)
432,203
7,267
1,632,126
1,554
1,292,122
(47,575)
536,150
24,207
1,806,458
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
1,632,197 $
1,808,754
98
STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2013, 2012 and 2011
(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Dividend income from the Bank
Interest income from other investments
Interest income from securities
Total interest and dividend income
2013
2012
2011
$ 70,512 $
2,328
62
72,902
88,871 $ 45,643
3,221
1,093
49,957
2,835
1,062
92,768
INTEREST EXPENSE
--
--
855
NET INTEREST AND DIVIDEND INCOME
72,902
92,768
49,102
NON-INTEREST INCOME
--
--
26
NON-INTEREST EXPENSE:
Contribution to Foundation
Salaries and employee benefits
Regulatory and outside services
Other non-interest expense
Total non-interest expense
--
857
473
648
1,978
--
838
276
694
1,808
40,000
856
337
650
41,843
INCOME BEFORE INCOME TAX EXPENSE (BENEFIT) AND EQUITY
IN (EXCESS OF DISTRIBUTION OVER) UNDISTRIBUTED
EARNINGS OF SUBSIDIARY
70,924
90,960
7,285
INCOME TAX EXPENSE (BENEFIT)
144
731
(13,425)
INCOME BEFORE EQUITY IN (EXCESS OF DISTRIBUTION OVER)
UNDISTRIBUTED EARNINGS OF SUBSIDIARY
70,780
90,229
20,710
EQUITY IN (EXCESS OF DISTRIBUTION OVER)
UNDISTRIBUTED EARNINGS OF SUBSIDIARY
(1,440) (15,716)
17,693
NET INCOME
$ 69,340 $
74,513 $ 38,403
99
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2013, 2012 and 2011
(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
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
Principal collected on notes receivable from ESOP
Net cash flows provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock offering (deferred offering costs)
Net payment from subsidiary related to restricted stock awards
Dividends paid
Repayment of other borrowings
Repurchase of common stock
Stock options exercised
Net cash flows (used in) provided by financing activities
2013
2012
2011
$
69,340 $
74,513 $
38,403
1,440
74
263
3,216
(198)
(220)
(27)
73,888
15,716
2,196
1,549
5,422
(9)
(2,160)
33
97,260
(17,693)
3,529
(1,812)
(10,409)
1,547
(2,927)
(355)
10,283
--
--
60,000
--
2,827
62,827
--
--
300,000
--
2,672
302,672
(567,422)
(405,800)
40,000
55,000
2,525
(875,697)
--
34
(146,824)
--
(91,573)
12
(238,351)
--
6,128
(63,768)
--
(146,781)
36
(204,385)
1,094,101
--
(150,110)
(53,609)
--
35
890,417
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(101,636)
195,547
25,003
CASH AND CASH EQUIVALENTS:
Beginning of year
308,648
113,101
88,098
End of year
$ 207,012 $
308,648 $
113,101
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest payments
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Note to ESOP in exchange for common stock
$
$
-- $
-- $
1,274
-- $
-- $
47,260
100
stockholder information
stockholder information
Annual Meeting
Annual Meeting
The Annual Meeting of Stockholders will be held at 10:00 a.m. local time on January 21, 2014 at the Bradbury Thompson
The Annual Meeting of Stockholders will be held at 10:00 a.m. local time on January 21, 2014 at the Bradbury Thompson
Center, 1700 SW Jewell St on the Washburn University campus in Topeka, Kansas.
Center, 1700 SW Jewell St on the Washburn University campus in Topeka, Kansas.
Stock Listing
Stock Listing
Capitol Federal Financial, Inc. common stock is traded on the Global Select tier of the NASDAQ Stock Market under the
Capitol Federal Financial, Inc. common stock is traded on the Global Select tier of the NASDAQ Stock Market under the
symbol “CFFN”.
symbol “CFFN”.
Price Range of Common Stock
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
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,
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.
markdown or commission and may not represent actual transactions.
HIGH
HIGH
FISCAL YEAR 2013
FISCAL YEAR 2013
$12.29
First Quarter
$12.29
First Quarter
$12.17
Second Quarter
$12.17
Second Quarter
Third Quarter
$12.31
Third Quarter
$12.31
Fourth Quarter $12.93
Fourth Quarter $12.93
HIGH
FISCAL YEAR 2012
HIGH
FISCAL YEAR 2012
$11.64
First Quarter
$11.64
First Quarter
$12.13
Second Quarter
$12.13
Second Quarter
Third Quarter
$12.16
$12.16
Third Quarter
Fourth Quarter $12.04
Fourth Quarter $12.04
LOW
LOW
$11.44
$11.44
$11.58
$11.58
$11.67
$11.67
$12.08
$12.08
LOW
LOW
$10.30
$10.30
$11.38
$11.38
$11.16
$11.16
$11.45
$11.45
DIVIDENDS
DIVIDENDS
$0.775
$0.775
$0.075
$0.075
$0.075
$0.075
$0.075
$0.075
DIVIDENDS
DIVIDENDS
$0.175
$0.175
$0.075
$0.075
$0.075
$0.075
$0.075
$0.075
During fiscal year 2013, the Company paid $146.8 million in cash dividends, or $1.00 per share. The cash dividends paid in
During fiscal year 2013, the Company paid $146.8 million in cash dividends, or $1.00 per share. The cash dividends paid in
fiscal year 2013 consisted of $43.7 million of regular quarterly dividends, a special year-end dividend of $26.6 million and
fiscal year 2013 consisted of $43.7 million of regular quarterly dividends, a special year-end dividend of $26.6 million and
$76.5 million from the True Blue dividend, paid in December 2012. In calendar year 2013, the Company paid $69.1 million
$76.5 million from the True Blue dividend, paid in December 2012. In calendar year 2013, the Company paid $69.1 million
of dividends consisting of $43.3 million of regular quarterly dividends and a special year-end dividend of $25.8 million. The
of dividends consisting of $43.3 million of regular quarterly dividends and a special year-end dividend of $25.8 million. The
special year-end dividend is the result of the Board of Directors’ commitment to distribute to stockholders 100% of 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.
annual earnings of Capitol Federal Financial, Inc.
For fiscal year 2014, it is the intent of the Board of Directors and management to continue with the payout of 100% of the
For fiscal year 2014, it is the intent of the Board of Directors and management to continue with the payout of 100% of the
Company’s earnings to its stockholders. Our cash dividend payout policy is continually reviewed by management and the
Company’s earnings to its stockholders. 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
Board of Directors. Dividend payments depend upon a number of factors including the Company’s financial condition
and results of operations, regulatory capital requirements, regulatory limitations on the Bank’s ability to make capital
and results of operations, regulatory capital requirements, regulatory limitations on the Bank’s ability to make capital
distributions to the Company, and the amount of cash at the holding company level. The Company relies significantly
distributions to the Company, and the amount of cash at the holding company level. The Company relies significantly
upon capital distributions from the Bank to accumulate cash for the payment of dividends to Company stockholders. See
upon capital distributions 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
Notes 1 and 13 in the Notes to Consolidated Financial Statements for a discussion of restrictions on the Bank’s ability to
make capital distributions.
make capital distributions.
At November 18, 2013, there were 147,856,568 shares of Capitol Federal Financial, Inc. common stock issued and
At November 18, 2013, there were 147,856,568 shares of Capitol Federal Financial, Inc. common stock issued and
outstanding and approximately 11,424 stockholders of record.
outstanding and approximately 11,424 stockholders of record.
Stockholders and General Inquiries
Stockholders and General Inquiries
James D. Wempe, Vice President
James D. Wempe, Vice President
Capitol Federal Financial, Inc., 700 South Kansas Avenue, Topeka, KS 66603, (785) 270-6055, e-mail: jwempe@capfed.com
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, 2013 are available at no charge to
Copies of our Annual Report on Form 10-K for the fiscal year ended September 30, 2013 are available at no charge to
stockholders upon request.
stockholders upon request.
Transfer Agent
Transfer Agent
American Stock Transfer & Trust Company
American Stock Transfer & Trust Company
6201 15th Avenue, Brooklyn, NY 11219, (800) 937-5449
6201 15th Avenue, Brooklyn, NY 11219, (800) 937-5449
101
101
®