Dear Stockholders,
Capitol Federal® Financial, Inc. (the “Company”) finished fiscal year 2016 with a solid earnings performance,
increased earnings per share, strong balance sheet and high asset quality which allows us to continue our history
of providing solid returns to our stockholders. Capitol Federal continued our True Blue® strategy of single family
lending funded with retail deposits.
The increase in earnings over the previous fiscal year was driven by an increase in net interest income. This
happened primarily as a result of growing our lower cost deposit portfolio and reducing the balance of our higher
costing borrowings and repricing advances to lower rates. Also adding to earnings was an increase in non-interest
income primarily because of higher earnings from an increase in the balance of bank owned life insurance and a
negative provision for loan losses in the current year.
We continued our strategy of reinvesting cash flows from our lower yielding securities portfolio into higher yielding
loans resulting in continued growth in higher yielding, high quality loans. The increase in our loan portfolio was led
by an increase in our correspondent loan portfolio. Our correspondent lending relationships, primarily in one- to
four-family loans, also led to lending opportunities with very strong borrowers in commercial real estate. We expect
to double our commercial real estate loan balances in the coming year. Because we have participated in these
loans, we have been able to grow this portfolio without the investment in full commercial banking operations. We
have underwritten these loans with our qualified internal commercial loan underwriters to our loan standards.
Growth of our loan portfolio has occurred while maintaining our commitment to strong underwriting standards for
all loans. Loans 30 to 89 days delinquent and loans 90 days past due or in foreclosure both decreased as a percent
of total loans. As the markets we originate and purchase loans in continue to improve because of increasing home
market values, our inherent credit risk has been reduced which has been reflected by a negative provision for credit
losses in the current year and a lower balance of allowance for credit losses at the end of the 2016 fiscal year.
Total deposits for the current fiscal year increased in all of our retail deposit product portfolios as well as in the
certificate products that provide short-term investment options for public units in the counties where we have
branches. Our retail certificate of deposit products had the largest increase of all our deposit products in fiscal year
2016 followed by our checking account products. We continue to provide premium retail financial services and
products to all of the markets we serve and that has been reflected by the growth we have seen this year.
The Company was able to take advantage of the opportunities mentioned to increase earnings which we returned
to our stockholders through our payout of 100% of our earnings. The Company paid a True-Up dividend in
December, which continues the payout of 100% of our earnings for our sixth straight year. Our fiscal year 2016
cash dividends attributed to fiscal year 2016 earnings were $0.63 per share, representing a $0.05 per share increase
over the previous fiscal year. In June 2016 the Company paid a Capitol Dividend to stockholders of $0.25 per share,
bringing the total amount of cash dividends to stockholders in calendar year 2016 to $0.88 per share. It is the board
and management’s intent to continue to pay 100% of Company earnings to stockholders in fiscal year 2017.
The Capitol Federal Foundation continued to support areas of need in our markets by funding grants totaling $4.9
million during fiscal year 2016. This brings the total giving back to our communities since 1999 to $55.2 million. At
September 30, 2016 the Foundation had assets totaling $105.0 million.
The Company’s board and management wish to thank our stockholders for their continued support of our efforts
to bring quality retail financial services to our communities. We also wish to thank all of our employees for their
continued efforts to make Capitol Federal Savings Bank our region’s financial institution of choice.
Sincerely,
John B. Dicus
Chairman, President & CEO
Financial Highlights
Selected Balance Sheet Data:
Total assets
Loans receivable, net
Securities
At September 30,
2016
2015
2014
2013
2012
(Dollars in thousands)
$ 9,267,247 $ 9,844,161 $ 9,865,028 $ 9,186,449 $ 9,378,304
5,608,083
6,625,027
6,958,024
6,233,170
1,628,175
2,029,293
2,393,489
Federal Home Loan Bank stock
109,970
150,543
213,054
Deposits
5,164,018
4,832,520
4,655,272
Federal Home Loan Bank borrowings
2,372,389
3,270,521
3,369,677
Repurchase agreements
Stockholders' equity
200,000
200,000
220,000
1,392,964
1,416,226
1,492,882
For the Year Ended September 30,
2016
2015
2013
(Dollars and counts in thousands, except per share amounts)
2014
Selected Operations Data:
Total interest and dividend income
$
301,113 $
297,362 $
290,246 $
Total interest expense
Net interest and dividend income
Provision for credit losses
Net interest and dividend income after
108,931
192,182
(750)
107,594
189,768
771
106,103
184,143
1,409
provision for credit losses
192,932
188,997
182,734
Total non-interest income
Total non-interest expense
23,312
94,305
21,140
94,369
22,955
90,537
Income before income tax expense
121,939
115,768
115,152
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
38,445
37,675
37,458
83,494 $
78,093 $
77,694 $
0.63 $
0.63 $
0.58 $
0.58 $
0.56 $
0.56 $
$
$
$
Average diluted shares outstanding
133,176
135,409
139,442
5,958,868
2,787,990
128,530
4,611,446
2,513,538
320,000
1,632,126
298,554 $
120,394
178,160
(1,067)
179,227
23,289
96,947
105,569
36,229
69,340 $
3,294,791
132,971
4,550,643
2,530,322
365,000
1,806,458
2012
328,051
143,170
184,881
2,040
182,841
24,233
91,075
115,999
41,486
74,513
0.48 $
0.48 $
0.47
0.47
144,848
157,916
Financial Highlights
Performance Ratios:
Return on average assets
Return on average equity
Dividends paid per share
Dividend payout ratio
Operating expense ratio
Efficiency ratio
Net interest margin
At or For the Year Ended September 30,
2016
2015
2014
2013
2012
0.88% (1)
(1)
5.78
0.83% (1)
(1)
5.13
0.85% (1)
(1)
4.97
$
0.84
$
0.84
$
0.98
$
133.86%
146.19%
177.84%
0.84
43.76
0.84
44.74
0.96
43.72
2.10
(1)
2.07
(1)
2.07
(1)
$
0.75%
4.14
1.00
211.75%
1.05
48.13
1.97
0.79%
3.93
0.40
85.58%
0.97
43.55
2.01
Asset Quality Ratios:
Non-performing assets to total assets
Non-performing loans to total loans
ACL to non-performing loans
ACL to loans receivable, net
Capital Ratios:
Equity to total assets at end of period
Company Tier 1 leverage ratio
Bank Tier 1 leverage ratio(2)
Number of branches
0.35
0.42
29.32
0.12
15.0
12.3
10.9
47
0.31
0.39
36.41
0.14
14.4
12.6
11.3
47
0.29
0.40
37.04
0.15
15.1
N/A
13.2
47
0.33
0.44
33.36
0.15
17.8
N/A
14.8
46
0.43
0.57
34.88
0.20
19.3
N/A
14.6
46
(1) These ratios were adjusted to exclude the effects of the daily leverage strategy. This adjusted financial data is not presented in accordance with
accounting principles generally accepted in the United States of America (“GAAP”). Management believes it is important for comparability purposes
to provide these adjusted financial ratios because of the unique nature of the daily leverage strategy. See “Part II, Item 6. Selected Financial Data” of
the accompanying Annual Report on Form 10-K for additional information, including the ratios presented in accordance with GAAP.
(2)
In periods prior to September 30, 2015, this ratio was calculated using end-of-period total assets in the denominator in accordance with regulatory
capital requirements at that point in time. As of September 30, 2015, this ratio is calculated using current quarter average assets in the denominator in
accordance with current regulatory capital requirements.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2016
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-34814
________________
Capitol Federal Financial, Inc.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of incorporation or organization)
700 South Kansas Avenue, Topeka, Kansas
(Address of principal executive offices)
27-2631712
(I.R.S. Employer Identification No.)
66603
(Zip Code)
Registrant's telephone number, including area code:
(785) 235-1341
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
The NASDAQ Stock Market LLC
(Name of Each Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See the definitions
of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Act. (Check one):
Large accelerated filer
(do not check if smaller reporting company)
Non-accelerated filer
Smaller reporting company
Accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to
the average of the closing bid and asked price of such stock on the NASDAQ Stock Market as of March 31, 2016, was $1.79 billion.
As of November 22, 2016, there were issued and outstanding 137,883,847 shares of the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Portions of the proxy statement for the Annual Meeting of Stockholders for the year ended September 30, 2016.
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
Item 9A.
Controls and Procedures
Item 9B. Other Information
PART III
Item 10.
Directors, Executive Officers, and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV Item 15.
Exhibits and Financial Statement Schedules
SIGNATURES
INDEX TO EXHIBITS
Page No.
2
33
37
37
37
37
38
40
42
77
82
126
126
126
127
127
127
128
128
129
130
131
Private Securities Litigation Reform Act-Safe Harbor Statement
Capitol Federal Financial, Inc. (the "Company"), and Capitol Federal Savings Bank ("Capitol Federal Savings" or the
"Bank"), may from time to time make written or oral "forward-looking statements", including statements contained in
documents filed or furnished by the Company with the Securities and Exchange Commission ("SEC"). These forward-
looking statements may be included in this Annual Report on Form 10-K and the exhibits attached to it, in the Company's
reports to stockholders, in the Company's press releases, and in other communications by the Company, which are made in
good faith by us pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various
factors, some of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate,"
"estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. The
following factors, among others, could cause our future results to differ materially from the beliefs, plans, objectives, goals,
expectations, anticipations, estimates and intentions expressed in the forward-looking statements:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our ability to maintain overhead costs at reasonable levels;
our ability to originate and purchase a sufficient volume of one- to four-family loans in order to maintain the balance
of that portfolio at a level desired by management;
our ability to invest funds in wholesale or secondary markets at favorable yields compared to the related funding
source;
our ability to access cost-effective funding;
fluctuations in deposit flows;
the future earnings and capital levels of the Bank and the continued non-objection by our primary federal banking
regulators, to the extent required, to distribute capital from the Bank to the Company, which could affect the ability
of the Company to pay dividends in accordance with its dividend policy;
the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations,
including areas where we have purchased large amounts of correspondent loans;
changes in real estate values, unemployment levels, and the level and direction of loan delinquencies and charge-offs
may require changes in the estimates of the adequacy of the allowance for credit losses ("ACL"), which may
adversely affect our business;
increases in non-performing assets, which may require the Bank to increase the ACL, charge-off loans and incur
elevated collection and carrying costs related to such non-performing assets;
results of examinations of the Bank and the Company by their respective primary federal banking regulators,
including the possibility that the regulators may, among other things, require us to increase our ACL;
changes in accounting principles, policies, or guidelines;
the effects of, and changes in, monetary and interest rate policies of the Board of Governors of the Federal Reserve
System ("FRB");
the effects of, and changes in, trade and fiscal policies and laws of the United States government;
the effects of, and changes in, foreign and military policies of the United States government;
inflation, interest rate, market, monetary, and currency fluctuations;
the timely development and acceptance of our new products and services and the perceived overall value of these
products and services by users, including the features, pricing, and quality compared to competitors' products and
services;
the willingness of users to substitute competitors' products and services for our products and services;
our success in gaining regulatory approval of our products and services and branching locations, when required;
the impact of changes in financial services laws and regulations, including laws concerning taxes, banking,
securities, consumer protection and insurance and the impact of other governmental initiatives affecting the financial
services industry;
implementing business initiatives may be more difficult or expensive than anticipated;
significant litigation;
technological changes;
acquisitions and dispositions;
changes in consumer spending, borrowing and saving habits; and
our success at managing the risks involved in our business.
1 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.
PART I
As used in this Form 10-K, unless we specify otherwise, "the Company," "we," "us," and "our" refer to Capitol Federal
Financial, Inc. a Maryland corporation. "Capitol Federal Savings," and "the Bank," refer to Capitol Federal Savings Bank, a
federal savings bank and the wholly-owned subsidiary of Capitol Federal Financial, Inc.
Item 1. Business
General
The Company is a Maryland corporation that was incorporated in April 2010. The Company's common stock is traded on the
Global Select tier of the NASDAQ Stock Market under the symbol "CFFN."
The Bank is a wholly-owned subsidiary of the Company and is a federally chartered and insured savings bank headquartered
in Topeka, Kansas. The Bank is examined and regulated by the Office of the Comptroller of the Currency (the "OCC"), its
primary regulator, and its deposits are insured up to applicable limits by the Deposit Insurance Fund ("DIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC"). We primarily serve the metropolitan areas of Topeka,
Wichita, Lawrence, Manhattan, Emporia and Salina, Kansas and a portion of the metropolitan area of greater Kansas City
through 37 traditional and 10 in-store branches. The Company, as a savings and loan holding company, is examined and
regulated by the FRB.
We have been, and intend to continue to be, a community-oriented financial institution offering a variety of financial services
to meet the needs of the communities we serve. We attract retail deposits from the general public and invest those funds
primarily in permanent loans secured by first mortgages on owner-occupied, one- to four-family residences. We also
originate consumer loans primarily secured by mortgages on one- to four-family residences, originate and participate in loans
with other lenders that are secured by commercial real estate, and invest in certain investment securities and mortgage-backed
securities ("MBS") using funding from retail deposits, brokered and public unit deposits, Federal Home Loan Bank Topeka
("FHLB") borrowings, and repurchase agreements. We offer a variety of deposit accounts having a wide range of interest
rates and terms, which generally include savings accounts, money market accounts, interest-bearing and non-interest-bearing
checking accounts, and certificates of deposit with terms ranging from 91 days to 96 months. Our revenues are derived
principally from interest on loans, MBS, investment securities, and FHLB stock.
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.
Our executive offices are located at 700 South Kansas Avenue, Topeka, Kansas 66603, and our telephone number at that
address is (785) 235-1341.
Available Information
Our Internet website address is www.capfed.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports can be obtained free of charge from our website. These reports are
available on our website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC.
These reports are also available on the SEC's website at http://www.sec.gov.
2 Market Area and Competition
Our corporate office is located in Topeka, Kansas. We currently have a network of 47 branches (37 traditional branches and
10 in-store branches) located in nine counties throughout Kansas and three counties in Missouri. We primarily serve the
metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia, and Salina, Kansas and a portion of the metropolitan
area of greater Kansas City. In addition to providing full service banking offices, we provide our customers mobile banking,
telephone banking and bill payment services, and online banking and bill payment services. We also have a call center which
operates on extended hours.
The Bank ranked third in deposit market share, at 6.23%, in the state of Kansas as reported in the June 30, 2016 FDIC
"Summary of Deposits - Market Share Report." The first and second ranked institutions had a 15.06% and a 7.00% deposit
market share, respectively. The institution with 15.06% of deposit market share is primarily an Internet-based institution with
only one physical location in Kansas. Deposit market share is measured by total deposits, without consideration for type of
deposit. We do not offer commercial deposit accounts, while many of our competitors have both commercial and retail
deposits in their total deposit base. Some of our competitors also offer products and services that we do not, such as trust
services and private banking, which may add to their total deposits. Consumers also have the ability to utilize online
financial institutions and investment brokerages that are not confined to any specific market area. Management considers our
well-established retail banking network together with our reputation for financial strength and customer service to be major
factors in our success at attracting and retaining customers in our market areas.
The Bank consistently has been one of the top one- to four-family lenders with regard to mortgage loan origination volume in
the state of Kansas. Through our strong relationships with real estate agents and marketing efforts, which reflect our
reputation and pricing, we attract mortgage loan business from walk-in customers, customers that apply online, and existing
customers. Competition in originating one- to four-family loans primarily comes from other savings institutions, commercial
banks, credit unions, and mortgage bankers. Other savings institutions, commercial banks, credit unions, and finance
companies provide vigorous competition in consumer lending.
Lending Practices and Underwriting Standards
General. 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 located in Kansas and Missouri. The
Bank also originates consumer loans and construction loans secured by residential properties, and originates and participates
in commercial real estate loans.
One- to Four-Family Residential Real Estate Lending. The Bank originates and services one- to four-family loans that are
not guaranteed or insured by the federal government, and purchases one- to four-family loans, on a loan-by-loan basis, from a
select group of correspondent lenders.
Originated Loans
While the Bank originates both fixed- and adjustable-rate loans, our origination volume is dependent upon customer demand
for loans in our market areas. Demand is affected by the local housing market, competition, and the interest rate
environment. During fiscal years 2016 and 2015, the Bank originated and refinanced $663.3 million and $697.1 million of
one- to four-family loans, respectively.
Correspondent Purchased Loans
The Bank purchases one- to four-family loans, on a loan-by-loan basis, from a select group of correspondent lenders. Loan
purchases enable the Bank to attain geographic diversification in the loan portfolio. At September 30, 2016, the Bank had
correspondent lending relationships in 28 states and the District of Columbia. During fiscal years 2016 and 2015, the Bank
purchased $662.8 million and $651.0 million, respectively, of one- to four-family loans from correspondent lenders. We
generally pay a premium of 0.50% to 1.0% of the loan balance to purchase these loans, and we pay 1.0% of the loan balance
to purchase the servicing of these loans.
The Bank has an agreement with a third-party mortgage sub-servicer to provide loan servicing for loans originated by the
Bank's correspondent lenders in certain states. The sub-servicer has experience servicing loans in the market areas in which
the Bank purchases loans and services the loans according to the Bank's servicing standards, which is intended to allow the
Bank greater control over servicing and reporting and help maintain a standard of loan performance.
3
Bulk Purchased Loans
The Bank has also purchased one- to four-family loans from correspondent and nationwide lenders in bulk loan packages.
The last bulk loan package purchased by the Bank was in August 2012. The Bank no longer purchases bulk loan packages.
See "Part I, Item 1A. Risk Factors" for additional information regarding why the Bank no longer purchases bulk loan
packages.
At September 30, 2016, $239.1 million, or 57% of the Bank's bulk purchased loan portfolio, are loans guaranteed by the
seller. The Bank believes the seller has the financial ability to repurchase or replace loans if any loans were to become
delinquent. The Bank has not experienced any losses with this group of loans since the loan package was purchased in
August 2012.
The servicing rights associated with bulk purchased loans were generally retained by the lender/seller for the loans purchased
from nationwide lenders. The servicing with nationwide lenders is governed by a servicing agreement, which outlines
collection policies and procedures, as well as oversight requirements, such as servicer certifications attesting to and providing
proof of compliance with the servicing agreement.
Underwriting
Full documentation to support an applicant's credit and income, and sufficient funds to cover all applicable fees and reserves
at closing, are required on all loans. Generally, loans are underwritten according to the "ability to repay" and "qualified
mortgage" standards, as issued by the Consumer Financial Protection Bureau ("CFPB"), with total debt-to-income ratios not
exceeding 43% of a borrower's verified income. Information pertaining to the creditworthiness of the borrower generally
consists of a summary of the borrower's credit history, employment stability, sources of income, assets, net worth, and debt
ratios. The value of the subject property must be supported by an appraisal report prepared in accordance with our appraisal
policy by either a staff appraiser or a fee appraiser, both of which are independent of the loan origination function and who
are approved by our Board of Directors.
Loans over $500 thousand must be underwritten by two senior underwriters. Loans over $750 thousand must be approved by
our Asset and Liability Management Committee ("ALCO"), while loans over $1.5 million must be approved by our Board of
Directors. For loans requiring ALCO and/or Board of Directors' approval, lending management is responsible for presenting
to ALCO and/or the Board of Directors information about the creditworthiness of the borrower and the market value of the
subject property.
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 by the Bank's underwriters.
Our standard contractual agreement with the lender/seller includes recourse options for any breach of representation or
warranty with respect to the loans purchased. The Bank did not request any lenders/sellers to repurchase loans for breach of
representation during fiscal year 2016.
Adjustable-rate Mortgage ("ARM") Loans
ARM loans are offered with a three-year, five-year, or seven-year term to the initial repricing date. After the initial period,
the interest rate for each ARM loan adjusts annually for the remainder of the term of the loan. Currently, the repricing index
for loan originations and correspondent purchases is tied to London Interbank Offered Rates ("LIBOR"); however, other
indices have been used in the past. Current adjustable-rate one- to four-family loans originated by the Bank generally
provide for a specified rate limit or cap on the periodic adjustment to the interest rate, as well as a specified maximum
lifetime cap and minimum rate, or floor. As a consequence of using caps, the interest rates on these loans may not be as rate
sensitive as our cost of funds. Negative amortization of principal is not allowed. For three- and five-year ARM loans,
borrowers are qualified based on the principal, interest, tax, and insurance payments at the initial interest rate plus the life of
loan cap and the initial interest rate plus the first period cap, respectively. For seven-year ARM loans, borrowers are qualified
based on the principal, interest, tax, and insurance payments at the initial rate. After the initial three-, five-, or seven-year
period, the interest rate resets annually and the new principal and interest payment is based on the new interest rate,
remaining unpaid principal balance, and term of the ARM loan. Our ARM loans are not automatically convertible into fixed-
rate loans; however, we do allow borrowers to pay an endorsement fee to convert an ARM loan to a fixed-rate loan. ARM
loans can pose greater credit risks than fixed-rate loans, primarily because as interest rates rise, the borrower's payment also
rises, increasing the potential for default. This specific type of risk is known as repricing risk.
4 Pricing
Our pricing strategy for one- to four-family 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 markets.
Mortgage Insurance
For a mortgage with a loan-to-value ("LTV") ratio in excess of 80% at the time of origination, private mortgage insurance
("PMI") is required in order to reduce the Bank's loss exposure. The Bank will lend up to 97% of the lesser of the appraised
value or purchase price for one- to four-family loans, provided PMI is obtained. Management continuously monitors the
claim-paying ability of our PMI counterparties. We believe our PMI counterparties have the ability to meet potential claim
obligations we may file in the foreseeable future.
Repayment
The Bank's one- to four-family loans are primarily fully amortizing fixed-rate or ARM loans. The contractual maturities for
fixed-rate loans and ARM loans can be up to 30 years; however, there are certain bulk purchased ARM loans that had original
contractual maturities of 40 years. Our one- to four-family loans are generally not assumable and do not contain prepayment
penalties. A "due on sale" clause, allowing the Bank to declare the unpaid principal balance due and payable upon the sale of
the secured property, is generally included in the security instrument.
Construction Lending
The Bank originates and purchases, from correspondent lenders, construction-to-permanent loans secured by one- to four-
family residential real estate. At September 30, 2016, we had $39.4 million in construction-to-permanent one- to four-family
loans outstanding representing approximately 1% of our total loan portfolio.
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. The Bank's one- to four-family construction-to-permanent loan program
combines the construction loan and the permanent loan into one loan allowing the borrower to secure the same interest rate
throughout the construction period and the permanent loan.
Construction draw requests and the supporting documentation are reviewed and approved by authorized management or
experienced construction loan personnel. 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. The Bank charges a 1% fee at closing, based on the loan amount, for these administrative
requirements. Interest is not capitalized during the construction period; it is billed and collected monthly based on the
amount of funds disbursed. Once the construction period is complete, the payment method is changed from interest-only to
an amortized principal and interest payment for the remaining term of the loan.
Loan Endorsement Program
In an effort to offset the impact of repayments and to retain our customers, existing loan customers, including customers
whose loans were purchased from a correspondent lender, have the opportunity, for a cash fee, to endorse their original loan
terms to current loan terms being offered. Customers whose loans have been sold to third parties, or have been delinquent on
their contractual loan payments during the previous 12 months, or are currently in bankruptcy, are not eligible to participate
in this program. The Bank does not solicit customers for this program, but considers it a valuable opportunity to retain
customers who, based on our initial underwriting criteria, could likely obtain similar financing elsewhere. During fiscal years
2016 and 2015, the Bank endorsed $160.0 million and $121.6 million of one- to four-family loans, respectively.
5 Loan Sales
One- to four-family loans may be sold on a bulk basis for portfolio restructuring or on a flow basis as loans are originated to
reduce interest rate risk and/or maintain a certain liquidity position. Loans originated by the Bank and purchased from
correspondent lenders are generally eligible for sale in the secondary market. The Bank generally retains the servicing on
these loans. ALCO determines the criteria upon which one- to four-family loans are to be classified as held-for-sale or held-
for-investment. One- to four-family loans classified as held-for-sale are to be sold in accordance with policies set forth by
ALCO. One- to four-family loans classified as held-for-investment are generally not sold unless a specific segment of the
portfolio is identified for asset restructuring purposes. The Bank did not sell any one- to four-family loans during fiscal years
2016 or 2015.
Consumer Lending. 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. All consumer loans are originated in the Bank's
market areas. At September 30, 2016, our consumer loan portfolio totaled $127.6 million, or approximately 2% of our total
loan portfolio.
The majority of our consumer loan portfolio is comprised of home equity lines of credit which have interest rates that can
adjust monthly based upon changes in the Prime rate, up to a maximum of 18%. For a majority of the home equity lines of
credit, the Bank has the first mortgage or the Bank is in the first lien position. Home equity lines of credit may be originated
up to 90% of the value of the property securing the loan if no first mortgage exists, or up to 90% of the value of the property
securing the loans if taking into consideration an existing first mortgage. Approximately 46%, or $48.8 million, of our home
equity lines at September 30, 2016 require a payment of 1.5% of the outstanding loan balance per month, but have no stated
term-to-maturity and no repayment period. Repaid principal may be re-advanced at any time, not to exceed the original
credit limit of the loan. Approximately 53%, or $56.3 million, of our home equity lines at September 30, 2016 have a 7-year
draw period, a 10-year repayment term, and typically a payment requirement of 1.5% of the outstanding loan balance per
month during the draw period, with an amortizing payment during the repayment period. Repaid principal may be re-
advanced at any time during the draw period, not to exceed the original credit limit of the loan. We also offer interest-only
home equity lines of credit. These loans have a maximum term of 12 months and require monthly payments of accrued
interest, and a balloon payment of unpaid principal at maturity. At September 30, 2016, approximately 1%, or $1.0 million,
of our home equity lines were interest-only. Closed-end home equity loans, which totaled $17.2 million at September 30,
2016, may be originated up to 95% of the value of the property securing the loans if taking into consideration an existing first
mortgage, or the lesser of up to $40 thousand or 25% of the value of the property securing the loan if no first mortgage exists.
The term-to-maturity for closed-end home equity loans in the first lien position may be up to 10 years, or may be up to 20
years for loans in the second lien position. Other consumer loan terms vary according to the type of collateral and the length
of the contract. Home equity loans, including lines of credit and closed-end loans, comprised approximately 97% of our
consumer loan portfolio, or $123.3 million, at September 30, 2016; of that amount, 86% were adjustable-rate.
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.
Consumer loans generally have shorter terms-to-maturity or reprice more frequently, usually without periodic caps, which
reduces our exposure to credit risk and changes in interest rates, and usually carry higher rates of interest than do one- to
four-family loans. However, consumer loans may entail greater credit risk than do one- to four-family loans, particularly in
the case of consumer loans that are secured by rapidly depreciable assets, such as automobiles. Management believes that
offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the
number of customer relationships and providing cross-marketing opportunities.
Commercial Real Estate Lending. At September 30, 2016, the Bank's commercial real estate loans totaled $154.1 million,
or approximately 2% of our total loan portfolio. Of this amount, $99.1 million were participation loans. Total undisbursed
loan amounts related to commercial real estate loans were $193.4 million, resulting in a total commercial real estate loan
concentration of $347.5 million at September 30, 2016.
6
During fiscal year 2016, the Bank entered into commercial real estate loan participations of $201.1 million, of which $34.9
million had been funded as of September 30, 2016. The Bank intends to continue to grow its commercial real estate loan
portfolio through participations with correspondent lenders and other lead banks with which the Bank has commercial real
estate lending relationships.
Our commercial real estate loans include a variety of property types, including hotels, office and retail buildings, senior
housing facilities, and multi-family dwellings located in Texas, Missouri, Kansas, Colorado, Arkansas, California, and
Montana. Our largest commercial real estate loan was $50.0 million at September 30, 2016, but no funds had been disbursed
on this loan at September 30, 2016. The commercial real estate loan with the largest unpaid principal balance at September
30, 2016 was a loan for $24.5 million.
Underwriting
The Bank performs more extensive due diligence in underwriting commercial real estate loans than loans secured by one- to
four-family residential properties due to the larger loan amounts, the more complex sources of repayment and the riskier
nature of such loans. When participating in a commercial real estate loan, the Bank performs the same underwriting
procedures as if the loan was being originated by the Bank. The primary source of repayment is funds from the operation of
the subject property. For secondary sources of repayment, the Bank generally requires personal guarantees and also evaluates
the real estate collateral.
When underwriting a commercial real estate loan, several factors are considered, such as the income producing potential of
the property to support the debt service, cash equity provided by the borrower, the financial strength of the borrower, tenant
and/or guarantor(s), managerial expertise of the borrower or tenant, feasibility studies from the borrower or an independent
third party, the marketability of the property and our lending experience with the borrower. For non-owner occupied
properties, the Bank has a pre-lease requirement, depending on the property type, and overall strength of the credit. Loans
over $750 thousand must be approved by our ALCO while loans over $1.5 million must be approved by our Board of
Directors.
For non-construction properties, the historical net operating income, which is the income derived from the operation of the
property less all operating expenses, generally must be at least 1.25 times the required payments related to the outstanding
debt (debt service coverage ratio) at the time of origination. For construction projects, the minimum debt service coverage
ratio requirement of 1.25 applies to the projected cash flows, and the borrower must have successful experience with the
construction and operation of properties similar to the subject property. As part of the underwriting process, the historical or
projected cash flows are stressed under various scenarios to measure the viability of the project given adverse conditions.
Generally, our maximum LTV ratios conform to supervisory limits, including 65% for raw land, 75% for land development
and 80% for commercial real estate loans. Full appraisals on properties securing these loans are performed by independent
state certified fee appraisers. Additionally, the Bank has an independent third-party perform a review of each appraisal. The
Bank generally requires at least 15% cash equity from the borrower for land acquisition, land development, and commercial
real estate construction loans. For non-acquisition, development or construction loans, the equity may be from a combination
of cash and the appraised value of the secured property.
Loan Terms
Commercial real estate loans generally have amortization terms of 15 to 30 years and maturities ranging from three to 20
years, which generally requires balloon payments of the remaining principal balance. The Bank has participated in a limited
number of short-term loans with a maturity of three years or less. These loans are generally construction-only loans or land
development loans that require interest-only payments for the entire term of the loan.
Commercial real estate loans have either fixed or adjustable interest rates based on prevailing market rates. The interest rate
on ARM loans is based on a variety of indices, but is generally determined through negotiation with the borrower or
determined by the lead bank in the case of a loan participation. The Bank generally allows interest-only payments during the
construction phase of a project before requiring amortizing payments once the loan converts to a permanent loan. For
permanent loans, the Bank generally requires amortizing payments.
7 Additionally, the Bank may include covenants in the loan agreement that allow the Bank to take action when deterioration in
the financial strength of the project is detected to potentially prevent the credit from becoming impaired. The covenants are
specific to each loan agreement, based on factors such as the purpose of funds, the collateral type, and the financial strength
of the project, the borrower and the guarantor, among other factors.
Monitoring of Risk
In order to monitor the adequacy of cash flows on income-producing properties with a principal balance of $1.5 million or
more, the borrower is required to provide financial information annually, including borrower financial statements, subject
property rental rates and income, maintenance costs, an update of real estate property tax and insurance payments, and
personal financial information for the guarantor(s). The annual review process for loans with a principal balance of $1.5
million or more allows the Bank to monitor compliance with loan covenants and review the borrower's performance,
including cash flows from operations, debt service coverage, and comparison of performance to projections and year-over-
year performance trending. Additionally, the Bank performs a site visit, schedules a drive-by site visit or obtains an update
from the lead bank to obtain information regarding the maintenance of the property and surrounding area. Depending on the
financial strength of the project and/or the complexity of the borrower's financials, the Bank may also perform a global
analysis of cash flows to account for all other properties owned by the borrower or guarantor. If signs of weakness are
identified, the Bank may begin performing more frequent financial and/or collateral reviews or will initiate contact with the
borrower, or the lead bank will contact the borrower if the loan is a participation loan, to ensure cash flows from operations
are maintained at a satisfactory level to meet the debt requirements. Both macro-level and loan-level stress-test scenarios
based on existing and forecasted market conditions are part of the on-going portfolio management process for the commercial
real estate portfolio.
Commercial real estate construction lending generally involves a greater degree of risk than commercial real estate lending.
Repayment of a construction loan is, to a great degree, dependent upon the successful and timely completion of the
construction of the subject property. Construction delays, slower than anticipated stabilization or the financial impairment of
the builder may negatively affect the borrower's ability to repay the loan. The Bank takes these risks into consideration
during the underwriting process including the requirement of personal guarantees. The Bank mitigates the risk of
commercial real estate construction lending during the construction period by monitoring inspection reports from an
independent third-party, project budget, percentage of completion, on-site inspections and percentage of advanced funds.
Our commercial real estate loans are generally large dollar loans and involve a greater degree of credit risk than one- to four-
family loans. Because payments on these loans are often dependent on the successful operation or management of the
properties, repayment of such loans may be subject to adverse conditions in the economy or the real estate market. If the
cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower's ability to repay the loan may
become impaired. The Bank regularly monitors the level of risk in the portfolio, including concentrations in such factors as
geographic locations, property types, tenant brand name, borrowing relationships, and lending relationships in the case of
participation loans, among other factors.
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The following table presents, as of September 30, 2016, the amount of loans due after September 30, 2017, and whether these
loans have fixed or adjustable interest rates.
Fixed
Adjustable
(Dollars in thousands)
Total
$
$
5,461,030
94,344
5,946
17,210
1,094
5,579,624
$
$
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12,983
104,402
2,648
1,285,729
$
$
6,626,726
94,344
18,929
121,612
3,742
6,865,353
Real estate loans:
One- to four-family
Commercial
Construction
Consumer loans:
Home equity
Other
Total
Asset Quality
The Bank's traditional underwriting guidelines have provided the Bank with generally low delinquencies and low levels of
non-performing assets compared to national levels. Of particular importance is the complete and full documentation required
for each loan the Bank originates, participates in or purchases. Generally, one- to four-family owner occupied loans are
underwritten according to the "ability to repay" and "qualified mortgage" standards, as issued by the CFPB, with total debt-
to-income ratios not exceeding 43% of the borrower's verified income. This allows the Bank to make an informed credit
decision based upon a thorough assessment of the borrower's ability to repay the loan.
For one- to four-family loans and consumer loans, when a borrower fails to make a loan payment within 15 days after the due
date, a late charge is assessed and a notice is mailed. Collection personnel review all delinquent loan accounts more than 16
days past due. Attempts to contact the borrower occur by personal letter and, if no response is received, by telephone, with
the purpose of establishing repayment arrangements for the borrower to bring the loan current. Repayment arrangements
must be approved by a designated bank employee. For residential mortgage loans serviced by the Bank, beginning at
approximately the 31st day of delinquency, and again at approximately the 50th day of delinquency, information notices are
mailed to borrowers to inform them of the availability of payment assistance programs. Borrowers are encouraged to contact
the Bank to initiate the process of reviewing such opportunities. Once a loan becomes 90 days delinquent, assuming a loss
mitigation solution is not actively in process, a demand letter is issued requiring the loan be brought current or foreclosure
procedures will be implemented. Generally, when a loan becomes 120 days delinquent, and an acceptable repayment plan or
loss mitigation solution has neither been established nor is in the process of being negotiated, the loan is forwarded to legal
counsel to initiate foreclosure. We also monitor whether borrowers who have filed for bankruptcy are meeting their
obligation to pay the mortgage debt in accordance with the terms of the bankruptcy petition.
For purchased loans serviced by a third party, we monitor delinquencies using reports received from the servicers. We
monitor these servicer reports to ensure that the servicer is upholding the terms of the servicing agreement. The reports
generally provide total principal and interest due and length of delinquency, and are used to prepare monthly management
reports and perform delinquent loan trend analysis. Management also utilizes information from the servicers to monitor
property valuations and identify the need to charge-off loan balances. The servicers handle collection efforts per the terms of
the servicing agreement.
11 For commercial real estate loans originated by the Bank, when a borrower fails to make a loan payment within 15 days after
the due date, a late notice is mailed. If the loan becomes 30 days or more past due, the Bank begins collection efforts
including sending legal notices for payment collection and contacting the borrower by telephone. The primary purpose of
such contact is to notify the borrower of the past due payment in case the loan payment was misplaced or lost and to identify
any changes in the project's income flow that may affect future loan performance. If it is determined that future loan
performance may be adversely affected, the Bank initiates discussions with the borrower regarding plans to ensure cash flow
from operations is sufficient to satisfy the debt requirements and meet the loan covenants. Generally, once a loan becomes 90
days delinquent, foreclosure procedures are initiated. For participation loans, the lead bank is responsible for all collection
efforts and contact with the borrower. However, if the Bank does not receive an expected payment on a participation loan,
the Bank contacts the lead bank to determine the cause of the late payment and to initiate discussions with the lead bank of
collection efforts, as necessary. See "Lending Practices and Underwriting Standards – Commercial Real Estate Lending –
Monitoring of Risk" for additional information.
Delinquent and non-performing loans and other real estate owned ("OREO")
The following table presents the Company's 30 to 89 day delinquent loans at the dates indicated. Of the loans 30 to 89 days
delinquent at September 30, 2016, 2015, and 2014, approximately 75%, 75%, and 71%, respectively, were 59 days or less
delinquent.
One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Consumer:
Home equity
Other
Loans Delinquent for 30 to 89 Days at September 30,
2014
2015
2016
Number
Amount
Number
Amount
Number
Amount
(Dollars in thousands)
143
$ 13,593
158
$ 16,955
138
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69
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$ 22,627
241
$ 27,278
235
$ 24,108
Loans 30 to 89 days delinquent
to total loans receivable, net
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14
The following table presents the states where the properties securing one percent or more of the total amount of our one- to
four-family loans are located and the corresponding balance of loans 30 to 89 days delinquent, 90 or more days delinquent or
in foreclosure, and weighted average LTV ratios for loans 90 or more days delinquent or in foreclosure at September 30,
2016. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal,
or the most recent Bank appraisal, if available. At September 30, 2016, potential losses, after taking into consideration
anticipated PMI proceeds and estimated selling costs, have been charged-off.
One- to Four-Family
Loans 30 to 89
Days Delinquent
Loans 90 or More Days Delinquent
or in Foreclosure
State
Amount
% of Total
Amount
% of Total
Amount
% of Total
LTV
(Dollars in thousands)
Kansas
Missouri
Texas
California
Tennessee
Alabama
Oklahoma
Georgia
North Carolina
Other states
$
3,739,675
56.4% $
1,265,287
19.1
11,394
3,976
519,944
241,582
194,241
108,702
72,011
66,030
63,293
357,575
7.8
3.7
2.9
1.6
1.1
1.0
1.0
5.4
$
6,628,340
100.0% $
960
—
317
561
447
1,285
277
2,713
21,930
52.0% $
8,341
50.6%
70%
18.1
4.4
—
1.3
2.6
2.0
5.9
1.3
12.4
834
350
—
—
—
—
361
1,248
5,364
100.0% $
16,498
5.0
2.1
—
—
—
—
2.2
7.6
32.5
100.0%
69
74
n/a
n/a
n/a
n/a
84
39
67
67
Troubled Debt Restructurings. 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. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements
– Note 1. Summary of Significant Accounting Policies and Note 4. Loans Receivable and Allowance for Credit Losses" for
additional information related to TDRs.
The following table presents the Company's TDRs, based on accrual status, at the dates indicated. At September 30, 2016,
$15.5 million of TDRs were included in the ACL formula analysis model and $41 thousand of the ACL was related to these
loans. The remaining $26.4 million of TDRs at September 30, 2016 were individually evaluated for loss and any potential
losses have been charged-off.
September 30,
2016
2015
2014
2013
2012
(Dollars in thousands)
Accruing TDRs
Nonaccrual TDRs(1)
$ 23,177
$ 24,331
$ 24,636
$ 37,074
$ 36,316
18,725
15,511
13,370
12,426
15,857
Total TDRs
$ 41,902
$ 39,842
$ 38,006
$ 49,500
$ 52,173
(1) Nonaccrual TDRs are included in the non-performing loan table above.
15 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 unpaid principal balance of loans reported as impaired at September 30, 2016, 2015, and 2014
was $58.9 million, $57.2 million, and $56.3 million, respectively. See "Part II, Item 8. Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies
and Note 4. Loans Receivable and Allowance for Credit Losses" for additional information related to impaired loans.
Classified Assets. In accordance with the Bank's asset classification policy, management regularly reviews the problem
assets in the Bank's portfolio to determine whether any assets require classification. Asset classifications are defined as
follows:
•
•
Special mention - These assets are performing assets 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 - An asset 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 assets include those characterized by the
distinct possibility the Bank will sustain some loss if the deficiencies are not corrected.
• Doubtful - Assets 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 - Assets 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 assets, classified as either special mention or substandard, as of
September 30, 2016. At September 30, 2016, there were no loans classified as doubtful, and all loans classified as loss were
fully charged-off. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial
Statements – Note 4. Loans Receivable and Allowance for Credit Losses" for additional information related to classified
loans.
Special Mention
Substandard
Number
Amount
Number
Amount
(Dollars in thousands)
One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Consumer Loans:
Home equity
Other
Total loans
OREO:
Originated
Correspondent purchased
Bulk purchased
Other
Total OREO
Trust preferred securities ("TRUPs")
96
$
10,242
254
$
7
6
7
1
2,496
1,156
54
8
17
43
85
6
117
13,956
405
—
—
—
—
—
—
—
—
—
—
—
—
12
1
4
1
18
1
Total classified assets
117
$
13,956
424
$
27,818
5,168
11,480
1,431
16
45,913
692
499
1,265
1,278
3,734
1,756
51,403
16 Allowance for credit losses and Provision for credit losses. Management maintains an ACL to absorb inherent losses in the
loan portfolio based on ongoing quarterly assessments of the loan portfolio. The ACL is maintained through provisions for
credit losses which are either charged to or credited to income. Our ACL methodology considers a number of factors
including the trend and composition of delinquent loans, trends in foreclosed property and short sale transactions and charge-
off activity, the current status and trends of local and national employment levels, trends and current conditions in the real
estate and housing markets, loan portfolio growth and concentrations, industry and peer charge-off information, and certain
ACL ratios. For our commercial real estate portfolio, we also consider qualitative factors such as geographic locations,
property types, tenant brand name, borrowing relationships, and lending relationships in the case of participation loans,
among other factors. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations – Critical Accounting Policies – Allowance for Credit Losses" and "Part II, Item 8. Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies"
for a full discussion of our ACL methodology. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to
Consolidated Financial Statements – Note 4. Loans Receivable and Allowance for Credit Losses" for additional information
on the ACL.
The Bank recorded a negative provision for credit losses during the current fiscal year of $750 thousand, compared to a
provision for credit losses during the prior year fiscal year of $771 thousand. The negative provision for credit losses during
the current fiscal year was due to the continued low level of net loan charge-offs, due partially to improving real estate
values, along with improving delinquent loan ratios. The collateral value and historical loss factors within our ACL formula
analysis model decreased during the current fiscal year due to the improvement in real estate values and reduction in net loan
charge-offs. At September 30, 2016, loans 30 to 89 days delinquent were 0.33% of total loans and loans 90 or more days
delinquent or in foreclosure were 0.24% of total loans. At September 30, 2015, loans 30 to 89 days delinquent were 0.41% of
total loans and loans 90 or more days delinquent or in foreclosure were 0.25% of total loans.
17 The following table presents ACL activity and related ratios at the dates and for the periods indicated.
Balance at beginning of period
$ 9,443
$ 9,227
$ 8,822
$ 11,100
$ 15,465
Year Ended September 30,
2016
2015
2014
2013
2012
(Dollars in thousands)
Charge-offs:
One- to four-family:
Originated
Correspondent
Bulk purchased
Total
Consumer:
Home equity
Other
Total
Total charge-offs
Recoveries:
One- to four-family:
Originated
Correspondent
Bulk purchased
Total
Consumer:
Home equity
Other
Total
Total recoveries
Net charge-offs
Provision for credit losses
Balance at end of period
(200)
—
(342)
(542)
(83)
(5)
(88)
(630)
77
—
374
451
25
1
26
477
(153)
(750)
(424)
(11)
(228)
(663)
(29)
(43)
(72)
(735)
56
—
58
114
64
2
66
180
(555)
771
(284)
(96)
(653)
(624)
(13)
(761)
(1,033)
(1,398)
(103)
(6)
(109)
(1,142)
(252)
(7)
(259)
(1,657)
14
—
398
412
33
1
34
1
—
64
65
72
1
73
138
(1,004)
1,409
(804)
(88)
(5,186)
(6,078)
(330)
(27)
(357)
(6,435)
14
2
8
24
6
—
6
$ 8,540
$ 9,443
$ 9,227
446
(1,211)
(1,067)
$ 8,822
30
(6,405)
2,040
$ 11,100
Ratio of net charge-offs during the period to
average loans outstanding during the period
—%
0.01%
0.02%
0.02%
0.12%
Ratio of net charge-offs during the period to
average non-performing assets
ACL to non-performing loans at end of period
ACL to loans receivable, net at end of period
0.48
29.32
0.12
1.87
3.38
36.41
37.04
0.14
0.15
3.45
33.36
0.15
16.49
34.88
0.20
ACL to net charge-offs
55.8x
17.0x
9.2x
7.3x
1.7x (1)
(1) As a result of the implementation of a new loan charge-off policy in January 2012 in accordance with regulatory requirements, $3.5 million of specific
valuation allowances ("SVAs") were charged-off and are reflected in the year ended September 30, 2012 activity. These charge-offs did not impact the
provision for credit losses, and therefore had no additional income statement impact as the amounts were expensed in previous periods. Excluding the
$3.5 million of SVAs that were charged off in January 2012, ACL to net charge-offs would have been 3.8x for fiscal year 2012. Management believes
it is important to present this ratio excluding the $3.5 million of SVAs charged-off for comparability purposes.
18 .
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19
Investment Activities
Federally chartered savings institutions have the authority to invest in various types of liquid assets, including U.S. Treasury
obligations; securities of various federal agencies; government-sponsored enterprises ("GSEs"), including callable agency
securities; municipal bonds; certain certificates of deposit of insured banks and savings institutions; certain bankers'
acceptances; repurchase agreements; and federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in investment grade commercial paper, corporate debt securities, and mutual funds
whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make
directly. As a member of FHLB, the Bank is required to maintain a specified investment in FHLB stock. See "Regulation
and Supervision – Federal Home Loan Bank System" and "Office of the Comptroller of the Currency" for a discussion of
additional restrictions on our investment activities.
The Chief Investment Officer has the primary responsibility for management of the Bank's investment portfolio, subject to
the direction and guidance of ALCO. The Chief Investment Officer considers various factors when making decisions,
including the liquidity, maturity, and tax consequences of the proposed investment. The composition of the investment
portfolio will be affected by various market conditions, including the slope of the yield curve, the level of interest rates, the
impact on the Bank's interest rate risk, the trend of net deposit flows, the volume of loan sales, the anticipated demand for
funds via withdrawals, repayments of borrowings, and loan originations and purchases.
The general objectives of the Bank's investment portfolio are to provide liquidity when loan demand is high, to assist in
maintaining earnings when loan demand is low, and to maximize earnings while satisfactorily managing liquidity risk,
interest rate risk, reinvestment risk, and credit risk. The portfolio is also intended to create a steady stream of cash flows that
can be redeployed into other assets as the Bank grows the loan portfolio, or reinvested into higher yielding assets should
interest rates rise. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Cash flow projections are reviewed regularly and updated to ensure that
adequate liquidity is maintained.
We classify securities as either trading, available-for-sale ("AFS"), or held-to-maturity ("HTM") at the date of purchase.
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 reported in the consolidated statements of income. AFS securities are
reported at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income
("AOCI") (loss) within stockholders' equity, net of deferred income taxes. HTM securities are reported at cost, adjusted for
amortization of premium and accretion of discount. We have both the ability and intent to hold our HTM securities to
maturity.
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. Management does not believe any other-than-temporary impairments existed
at September 30, 2016.
Investment Securities. Our investment securities portfolio consists primarily of debentures issued by GSEs (primarily
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal
Home Loan Banks) and non-taxable municipal bonds. At September 30, 2016, our investment securities portfolio totaled
$382.1 million. The portfolio consisted of securities classified as either HTM or AFS. See "Part II, Item 8. Financial
Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 3. Securities" and "Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Investment
Securities" for additional information.
20
Our investment securities portfolio decreased $184.7 million from $566.8 million at September 30, 2015 to $382.1 million at
September 30, 2016. The decrease in the balance was primarily a result of maturities and calls of $285.2 million, partially
offset by purchases of $101.4 million. The cash flows from calls and maturities of investment securities that were not
reinvested into the portfolio were used largely to fund loan growth. The purchases during fiscal year 2016 were fixed-rate
and had a weighted average yield of 1.09% and a weighted average life ("WAL") of approximately 0.8 years at the time of
purchase.
Mortgage-Backed Securities. At September 30, 2016, our MBS portfolio totaled $1.25 billion. The portfolio consisted of
securities classified as either HTM or AFS and were primarily issued by GSEs. The principal and interest payments of MBS
issued by GSEs are collateralized by the underlying mortgage assets with principal and interest payments guaranteed by the
agencies. The underlying mortgage assets are conforming mortgages that comply with FNMA and FHLMC underwriting
guidelines, as applicable, and are therefore not considered subprime. See "Part II, Item 8. Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – Note 3. Securities" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations – Financial Condition – Mortgage-Backed Securities" for
additional information.
Our MBS portfolio decreased $216.5 million from $1.46 billion at September 30, 2015 to $1.25 billion at September 30,
2016. During fiscal year 2016, $142.9 million of MBS were purchased, of which $42.8 million were fixed-rate and $100.1
million were adjustable-rate. The cash flows from MBS that were not reinvested into the portfolio were used largely to fund
loan growth.
MBS generally yield less than the loans that underlie such securities because of the servicing fee retained by the servicer and
the cost of payment guarantees or credit enhancements that reduce credit risk. However, MBS are generally more liquid than
individual mortgage loans and may be used to collateralize certain borrowings and public unit deposits of the Bank. In
general, MBS issued or guaranteed by FNMA and FHLMC are weighted at no more than 20% for risk-based capital purposes
compared to the 50% risk-weighting assigned to most non-securitized one- to four-family loans.
When securities are purchased for a price other than par value, the difference between the price paid and par is accreted to or
amortized against the interest earned over the life of the security, depending on whether a discount or premium to par was
paid. Movements in interest rates affect prepayment rates which, in turn, affect the average lives of MBS and the speed at
which the discount or premium is accreted to or amortized against earnings.
At September 30, 2016, the MBS portfolio included $184.8 million of collateralized mortgage obligations ("CMOs"). CMOs
are special types of securities in which the stream of principal and interest payments on the underlying mortgages or MBS are
used to create investment classes with different maturities and, in some cases, different amortization schedules, as well as a
residual interest, with each such class possessing different risk characteristics. We do not purchase residual interest bonds.
While MBS issued by FNMA and FHLMC carry a reduced credit risk compared to whole mortgage loans, these securities
remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate of the underlying mortgage loans and
consequently affect both the prepayment speed and value of the securities. As noted above, the Bank, on some transactions,
pays a premium over par value on MBS purchased. Large premiums could cause significant negative yield adjustments due
to accelerated prepayments on the underlying mortgages. The balance of net premiums on our portfolio of MBS at
September 30, 2016 was $13.0 million.
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23
Sources of Funds
General. Our 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.
Deposits. We offer a variety of retail deposit accounts having a wide range of interest rates and terms. Our deposits consist
of savings accounts, money market deposit accounts, interest-bearing and non-interest-bearing checking accounts, and
certificates of deposit. We rely primarily upon competitive pricing policies, marketing, and customer service to attract and
retain deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market
and prevailing interest rates, and competition. The variety of deposit accounts we offer has allowed us to utilize strategic
pricing to obtain funds and to respond with flexibility to changes in consumer demand. We seek to manage the pricing of our
deposits in keeping with our asset and liability management, liquidity, and profitability objectives. Based on our experience,
we believe that our deposits are stable sources of funds. Despite this stability, our ability to attract and maintain these
deposits and the rates paid on them has been, and will continue to be, significantly affected by market conditions.
The Board of Directors has authorized the utilization of brokers to obtain deposits as a source of funds. Depending on market
conditions, the Bank may use brokered deposits to fund asset growth and gather deposits that may help to manage interest
rate risk. No brokered deposits were acquired during fiscal year 2016 and there were no brokered deposits outstanding at
September 30, 2016 or 2015.
The Board of Directors also has authorized the utilization of public unit deposits as a source of funds. In order to qualify to
obtain such deposits, the Bank must have a branch in each county in which it collects public unit deposits and, by law, must
pledge securities as collateral for all such balances in excess of the FDIC insurance limits. At September 30, 2016 and 2015,
the balance of public unit deposits was $370.0 million and $312.4 million, respectively.
As of September 30, 2016, the Bank's policy allows for combined brokered and public unit deposits up to 15% of total
deposits. At September 30, 2016, that amount was approximately 7% of total deposits.
Borrowings. We utilize borrowings when we desire additional capacity to fund loan demand or when they help us meet our
asset and liability management objectives. Historically, our term borrowings have consisted primarily of FHLB advances.
FHLB advances may be made pursuant to several different credit programs, each of which has its own interest rate, maturity,
repayment, and embedded options, if any. All FHLB advances at September 30, 2016 were fixed-rate advances with no
embedded options. The Bank supplements FHLB borrowings with repurchase agreements, wherein the Bank enters into
agreements with Board approved counterparties to sell securities under agreements to repurchase them. These agreements
are recorded as financing transactions as the Bank maintains effective control over the transferred securities. The Bank's
internal policy limits total borrowings to 55% of total assets.
During fiscal year 2016, the Bank continued to utilize a leverage strategy ("daily leverage strategy") to increase earnings.
The daily leverage strategy during the current fiscal year involved borrowing up to $2.10 billion on the Bank's FHLB line of
credit, which was repaid at each quarter end. The proceeds of the borrowings, net of the required FHLB stock holdings, are
deposited at the Federal Reserve Bank of Kansas City. Management can discontinue the use of the daily leverage strategy at
any point in time.
At September 30, 2016, we had $2.38 billion of FHLB advances, at par, outstanding. Total FHLB borrowings are secured by
certain qualifying loans pursuant to a blanket collateral agreement with FHLB. Per FHLB's lending guidelines, total FHLB
borrowings cannot exceed 40% of Bank Call Report total assets without the pre-approval of FHLB senior management. In
June 2016, the president of the FHLB renewed the approval of the increase in the Bank's borrowing limit to 55% of Bank
Call Report total assets through July 2017. This approval was also in place throughout fiscal year 2016 as FHLB borrowings
were in excess of 40% of Call Report total assets at certain points in time during the period due to the daily leverage strategy.
24 At September 30, 2016, repurchase agreements totaled $200.0 million, or approximately 2% of total assets. The Bank may
enter into additional repurchase agreements as management deems appropriate, not to exceed 15% of total assets and subject
to the internal policy limit on total borrowings of 55%. The securities underlying the agreements continue to be reported in
the Bank's securities portfolio. At September 30, 2016, we had securities with a fair value of $224.1 million pledged as
collateral on repurchase agreements. Repurchase agreements are made at mutually agreed upon terms between counterparties
and the Bank. The use of repurchase agreements allows for the diversification of funding sources and the use of securities
that were not being leveraged as collateral.
The following table sets forth certain information relating to the category of borrowings for which the average short-term
balance outstanding during the period was at least 30% of stockholders' equity at the end of each period shown. The
maximum balance, average balance, and weighted average contractual interest rate during the fiscal years shown reflect
borrowings that were scheduled to mature within one year at any month-end during those years.
FHLB Borrowings:
Balance at end of period
Maximum balance outstanding at any month-end during the period
Average balance
Weighted average contractual interest rate during the period
Weighted average contractual interest rate at end of period
Subsidiary Activities
2016
2015
2014
(Dollars in thousands)
$ 500,000
$ 1,100,000
$ 1,400,000
2,600,000
2,436,749
2,700,000
2,558,676
2,700,000
931,889
0.70%
2.69
0.60%
0.69
1.26%
0.84
At September 30, 2016, the Company had one wholly-owned subsidiary, the Bank. The Bank provides a full range of retail
banking services through 47 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. At September 30,
2016, the Bank had one wholly-owned subsidiary, Capitol Funds, Inc. At September 30, 2016, Capitol Funds, Inc. had one
wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company ("CFMRC"), which serves as a reinsurance
company for the majority of the PMI companies the Bank uses in its normal course of operations. CFMRC stopped writing
new business for the Bank in January 2010. Each wholly-owned subsidiary is reported on a consolidated basis.
Regulation and Supervision
Set forth below is a description of certain laws and regulations that are applicable to Capitol Federal Financial, Inc. and the
Bank.
General. The Bank, as a federally chartered savings bank, is subject to regulation and oversight by the OCC extending to all
aspects of its operations. This regulation of the Bank is intended for the protection of depositors and other customers and not
for the purpose of protecting the Company's stockholders. The Bank is required to maintain minimum levels of regulatory
capital and is subject to some limitations on capital distributions to the Company. The Bank also is subject to regulation and
examination by the FDIC, which insures the deposits of the Bank to the maximum extent permitted by law.
The Company is a unitary savings and loan holding company within the meaning of the Home Owners Loan Act ("HOLA").
As such, the Company is registered with the FRB and subject to the FRB regulations, examinations, supervision, and
reporting requirements. In addition, the FRB has enforcement authority over the Company. Among other things, this
authority permits the FRB to restrict or prohibit activities that are determined to be a serious risk to the Bank.
The OCC and FRB enforcement authority includes, among other things, the ability to assess civil monetary penalties, to issue
cease-and-desist or removal orders, and to initiate injunctive actions. In general, these enforcement actions may be initiated
for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed. Except under certain circumstances, public disclosure of
final enforcement actions by the OCC or the FRB is required by law.
25 Office of the Comptroller of the Currency. The investment and lending authority of the Bank is prescribed by federal laws
and regulations and the Bank is prohibited from engaging in any activities not permitted by such laws and regulations.
As a federally chartered savings bank, the Bank is required to meet a Qualified Thrift Lender ("QTL") test. This test requires
the Bank to have at least 65% of its portfolio assets, as defined by statute, in qualified thrift investments at month-end for 9
out of every 12 months on a rolling basis. Under an alternative test, the Bank's business must consist primarily of acquiring
the savings of the public and investing in loans, while maintaining 60% of its assets in those assets specified in Section 7701
(a)(19) of the Internal Revenue Code. Under either test, the Bank is required to maintain a significant portion of its assets in
residential housing related loans and investments. An institution that fails to qualify as a QTL based upon one of these tests
is immediately subject to certain restrictions on its operations, including a prohibition against capital distributions, except,
with the prior approval of both the OCC and the FRB, as necessary to meet the obligations of a company controlling the
institution. If the Bank fails the QTL test and does not regain QTL status within one year, or fails the test for a second time,
the Company must immediately register as, and become subject to, the restrictions applicable to a bank holding company.
The activities authorized for a bank holding company are more limited than are the activities authorized for a savings and
loan holding company. Three years after failing the test, an institution must divest all investments and cease all activities not
permissible for both a national bank and a savings association. Failure to meet the Qualified Thrift Lender test is a statutory
violation subject to enforcement action. As of September 30, 2016, the Bank met the Qualified Thrift Lender test.
The Bank is subject to a 35% of total assets limit on non-real estate consumer loans, commercial paper and corporate debt
securities, and a 20% limit on commercial non-mortgage loans. At September 30, 2016, the Bank had less than 1% of its
assets in non-real estate consumer loans, commercial paper and corporate debt securities and less than 1% of its assets in
commercial non-mortgage loans.
The Bank's relationship with its depositors and borrowers is regulated to a great extent by federal laws and regulations,
especially in such matters as the ownership of savings accounts and the form and content of mortgage requirements. In
addition, the branching authority of the Bank is regulated by the OCC. The Bank is generally authorized to branch
nationwide.
The Bank is subject to a statutory lending limit on aggregate loans to one person or a group of persons combined because of
certain common interests. That limit is equal to 15% of our unimpaired capital and surplus, plus an additional 10% for loans
fully secured by readily marketable collateral. At September 30, 2016, the Bank's lending limit under this restriction was
$186.5 million. The Bank has no loans or loan relationships in excess of its lending limit.
The Bank is subject to periodic examinations by the OCC. During these examinations, the examiners may require the Bank
to increase its ACL and/or recognize additional charge-offs based on their judgments, which can impact our capital and
earnings. As a federally chartered savings bank, the Bank is subject to a semi-annual assessment, based upon its total assets,
to fund the operations of the OCC.
The OCC has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and
documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure, and
compensation and other employee benefits. Any institution regulated by the OCC that fails to comply with these standards
must submit a compliance plan.
Insurance of Accounts and Regulation by the FDIC. The DIF of the FDIC insures deposit accounts in the Bank up to
applicable limits. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") permanently
increased the maximum amount of deposit insurance for banks, savings institutions, and credit unions to $250 thousand per
depositor.
Prior to July 1, 2016, the FDIC assessed deposit insurance premiums on each FDIC-insured institution quarterly based on
annualized rates for one of four risk categories, applied to its assessment base. An institution's assessment base is equal to
average consolidated total assets minus its average tangible equity (defined as Tier 1 capital). An institution with assets
reported in its Call Report that have not exceeded $10 billion for at least four consecutive quarters and has been federally
insured for at least five years is considered an established small institution and is assigned to one of four risk categories based
on its capital, supervisory ratings, and other factors. The Bank is considered an established small institution. Well-
capitalized institutions that were financially sound with only a few minor weaknesses were assigned to Risk Category I. Risk
26 Categories II, III and IV present progressively greater risks to the DIF. A range of initial base assessment rates applied to
each Risk Category, adjusted downward based on unsecured debt issued by the institution and, except for an institution in
Risk Category I, adjusted upward if the institution's brokered deposits exceed 10% of its domestic deposits, to produce total
base assessment rates. Total base assessment rates ranged from 2.5 to 9 basis points for Risk Category I, 9 to 24 basis points
for Risk Category II, 18 to 33 basis points for Risk Category III, and 30 to 45 basis points for Risk Category IV, all subject to
further adjustment upward if the institution held more than a de minimis amount of unsecured debt issued by another FDIC-
insured institution.
On April 26, 2016, the FDIC adopted a final rule that, effective July 1, 2016, changed the method of calculating assessments
for established small institutions effective the quarter following the DIF reserve ratio reaching 1.15%, which occurred on
June 30, 2016. Under the final rule, the FDIC established assessment rates for established small institutions based on an
institution's weighted average CAMELS component ratings and certain financial ratios. The four risk categories noted above
were eliminated. Total base assessment rates range from 1.5 to 16 basis points for institutions with CAMELS composite
ratings of 1 or 2, 3 to 30 basis points for those with a CAMELS composite score of 3, and 11 to 30 basis points for those with
CAMELS composite scores of 4 or 5, subject to certain adjustments. Assessment rates are expected to decrease in the future
as the reserve ratio increases in specified increments to the 1.35% ratio required by the Dodd-Frank Act. Formerly, the
required reserve ratio was 1.15%. For the fiscal year ended September 30, 2016, the Bank paid $4.5 million in FDIC
premiums.
An institution that has reported on its Call Reports total assets of $10 billion or more for at least four consecutive quarters is
considered a large institution and is assessed under a complex scorecard method employing many factors, including weighted
average CAMELS ratings; a performance score; leverage ratio; ability to withstand asset-related stress; certain measures of
concentration, core earnings, core deposits, credit quality, and liquidity; and a loss severity score and loss severity measure.
Total base assessment rates for these institutions currently range from 1.5 to 40 basis points, subject to certain adjustments,
and are expected to decrease in the future as the reserve ratio increases in specified increments.
The Dodd-Frank Act directs the FDIC to offset the effects of higher assessments due to the increase in the reserve ratio on
established small institutions by charging higher assessments to large institutions. To implement this mandate, large and
highly complex institutions must pay an annual surcharge of 4.5 basis points on their assessment base beginning July 1, 2016.
If the DIF reserve ratio has not reached 1.35% by December 31, 2018, the FDIC plans to impose a shortfall assessment on
large institutions on March 31, 2019. The FDIC may increase or decrease its rates by 2 basis points without further rule-
making. In an emergency, the FDIC may also impose a special assessment.
Since established small institutions will be contributing to the DIF while the reserve ratio remains between 1.15% and 1.35%
and the large institutions are paying a surcharge, the FDIC will provide assessment credits to the established small institutions
for the portion of their assessments that contribute to the increase. When the reserve ratio reaches 1.38%, the FDIC will
automatically apply an established small institution's assessment credits to reduce its regular deposit insurance assessments.
FDIC-insured institutions are required to pay additional quarterly assessments called the FICO assessments in order to fund
the interest on bonds issued to resolve thrift failures in the 1980s. The rate for these assessments is adjusted quarterly and is
applied to the same base as used for the deposit insurance assessment. These assessments are expected to continue until the
bonds mature in the years 2017 through 2019. For the fiscal year ended September 30, 2016, the Bank paid $565 thousand in
FICO assessments.
Transactions with Affiliates. Transactions between the Bank and its affiliates are required to be on terms as favorable to the
institution as transactions with non-affiliates, and certain of these transactions are restricted to a percentage of the Bank's
capital, and, in the case of loans, require eligible collateral in specified amounts. In addition, the Bank may not lend to any
affiliate engaged in activities not permissible for a bank holding company or purchase or invest in the securities of affiliates.
Regulatory Capital Requirements. The Bank and Company are required to maintain specified levels of regulatory capital
under regulations of the OCC and FRB, respectively. The current regulatory capital rules, sometimes referred to as the Basel
III rules, became effective for the Company and Bank in January 2016, with some rules being transitioned into full
effectiveness over two-to-four years.
27
With respect to the Bank, the Basel III rules revised the "prompt corrective action" regulations, by (1) introducing a Common
Equity Tier 1 ("CET1") ratio requirement at each level (other than critically under-capitalized), with the required CET1 ratio
being 6.5% for well-capitalized status; (2) increasing the minimum Tier 1 capital ratio requirement for each category, with the
minimum Tier 1 capital ratio for well-capitalized status being 8% (compared to the previous 6%); and (3) eliminating the
provision that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately
capitalized.
Under the Basel III rules, an institution that is not an advanced approaches institution, such as the Company and the Bank,
was allowed to make a one-time permanent election to continue to exclude certain AOCI items for the purpose of
determining regulatory capital ratios. Management made this election in order to remove any volatility related to AOCI from
the Company's and Bank's capital ratios. At September 30, 2016, the Bank had $5.9 million of AOCI.
Regulatory risk-weighted capital guidelines assign a certain risk weighting to every asset. Certain off-balance sheet items,
such as binding loan commitments, are multiplied by credit conversion factors to translate the amounts into balance sheet
equivalents before assigning them specific risk weightings. The risk weights for the Bank's and Company's assets and off-
balance sheet items generally range from 0% to 150%. At September 30, 2016, the Bank and the Company each had risk-
weighted assets of $4.34 billion.
For the quarter ended September 30, 2016, the Bank reported in its Call Report quarterly average assets of $11.31 billion and
the Company reported to the FRB quarterly average assets of $11.31 billion. These average asset amounts are significantly
higher than total assets at September 30, 2016 due the daily leverage strategy being in place during the quarter but not at
September 30, 2016.
CET1 capital and Tier 1 capital for the Company and the Bank consists of common stock plus related surplus and retained
earnings. Tier 2 capital for the Company and the Bank includes the balance of ACL; however, the amount of includable ACL
in Tier 2 capital may be limited if the amount exceeds 1.25% of risk-weighted assets. At September 30, 2016, the Bank had
$8.5 million of ACL, which was less than the 1.25% risk-weighted assets limit; therefore, the entire amount of ACL was
includable in Tier 2 and total risk-based capital. Total capital for the Company and the Bank consists of common stock, plus
related surplus and retained earnings (Tier 1 capital) plus the amount of includable ACL (Tier 2 capital).
Under the Basel III rules, the minimum capital ratios are as follows:
•
•
•
•
4.5% CET1 to risk-weighted assets.
6.0% Tier 1 capital to risk-weighted assets.
8.0% Total capital to risk-weighted assets.
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the
"leverage ratio").
Basel III requires the Company and the Bank to maintain a capital conservation buffer above certain minimum capital ratios
for capital adequacy purposes in order to avoid certain restrictions on capital distributions and other payments including
dividends, share repurchases, and certain compensation. This requirement became effective January 1, 2016, and is being
phased in over a four year period by increasing the required buffer amount by 0.625% each year. Once fully phased-in, the
organization must maintain a balance of CET1 capital that exceeds by more than 2.5% each of the minimum risk-based
capital ratios in order to satisfy the requirement. This translates into the following for the risk-based capital ratios when the
capital conservation buffer is fully phased in: (1) CET1 capital ratio of more than 7.0%, (2) Tier 1 capital ratio of more than
8.5%, and (3) Total capital (Tier 1 plus Tier 2) ratio of more than 10.5%. At September 30, 2016, the Bank and Company had
capital greater than necessary to meet the capital conservation buffer requirement then in effect.
At September 30, 2016, the Bank was considered well capitalized under OCC regulations. See "Part II, Item 8. Financial
Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 12. Regulatory Capital
Requirements" and "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
– Liquidity and Capital Resources" for additional regulatory capital information
28 The OCC has the ability to establish an individual minimum capital requirement for a particular institution, which varies
from the capital levels that would otherwise be required under the capital regulations, based on such factors as concentrations
of credit risk, levels of interest rate risk, and the risks of non-traditional activities as well as others. The OCC has not
imposed any such requirement on the Bank.
The OCC is authorized and, under certain circumstances, required to take certain actions against savings banks that fail to
meet the minimum ratios for an adequately capitalized institution. Any such institution must submit a capital restoration plan
and, until such plan is approved by the OCC, may not increase its assets, acquire another institution, establish a branch or
engage in any new activities, and generally may not make capital distributions. The plan must include a guaranty by the
institution's holding company limited to the lesser of 5% of the institution's assets when it became undercapitalized, or the
amount necessary to restore the institution to adequately capitalized status. The OCC is authorized to impose the additional
restrictions on institutions that are less than adequately capitalized.
Federal regulations state that any institution that fails to comply with its capital plan or has a CET1 risk-based capital ratio of
less than 4.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a total risk-based capital ratio of less than 6.0%, or a
leverage ratio of less than 3.0% is considered significantly undercapitalized and must be made subject to one or more
additional specified actions and operating restrictions that may cover all aspects of its operations and may include a forced
merger or acquisition of the institution. An institution with tangible equity to total assets of less than 2.0% is critically
undercapitalized and becomes subject to further mandatory restrictions on its operations. The OCC generally is authorized to
reclassify an institution into a lower capital category and impose the restrictions applicable to such category if the institution
is engaged in unsafe or unsound practices or is in an unsafe or unsound condition. The imposition by the OCC of any of
these measures on the Bank may have a substantial adverse effect on its operations and profitability. In general, the FDIC
must be appointed receiver for a critically undercapitalized institution whose capital is not restored within the time provided.
When the FDIC as receiver liquidates an institution, the claims of depositors and the FDIC as their successor (for deposits
covered by FDIC insurance) have priority over other unsecured claims against the institution.
Community Reinvestment and Consumer Protection Laws. In connection with its lending activities, the Bank is subject to a
number of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population.
These include the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real
Estate Settlement Procedures Act, the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 ("SAFE Act"), and
the Community Reinvestment Act ("CRA"). In addition, federal banking regulators, pursuant to the Gramm-Leach-Bliley
Act, have enacted regulations limiting the ability of banks and other financial institutions to disclose nonpublic consumer
information to non-affiliated third parties. The regulations require disclosure of privacy policies and allow consumers to
prevent certain personal information from being shared with non-affiliated parties.
The CRA requires the appropriate federal banking agency, in connection with its examination of an FDIC-insured institution,
to assess its record in meeting the credit needs of the communities served by the bank, including low and moderate income
neighborhoods. The federal banking regulators take into account the institution's record of performance under the CRA when
considering applications for mergers, acquisitions, and branches. Under the CRA, institutions are assigned a rating of
outstanding, satisfactory, needs to improve, or substantial non-compliance. The Bank received a satisfactory rating in its
most recent CRA evaluation.
Bank Secrecy Act /Anti-Money Laundering Laws. The Bank is subject to the Bank Secrecy Act and other anti-money
laundering laws and regulations, including the USA PATRIOT Act of 2001. These laws and regulations require the Bank to
implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to
verify the identity and source of deposits and wealth of its customers. Violations of these requirements can result in
substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial
institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when
reviewing mergers and acquisitions.
Stress Testing. As required by the Dodd-Frank Act and the regulations of the FRB and the OCC, FDIC-insured institutions
and their holding companies with average total consolidated assets greater than $10 billion must conduct annual, company-
run stress tests under the baseline, adverse and severely adverse scenarios provided by the federal banking regulators. For
this purpose, average total consolidated assets means the average, as of the end of the four most recent consecutive quarterly
periods, of total consolidated assets reported in the Call Report or quarterly report to the FRB. The regulators may also
require the use of additional scenarios. The stress test is a process to assess the potential impact of scenarios on the
29
consolidated earnings, losses and capital of an institution over the planning horizon, taking into account the institution's
condition, risks, exposures, strategies and activities. The purpose of the stress tests is to ensure that institutions have robust,
forward-looking capital planning that accounts for their risks and to help ensure that institutions have sufficient capital
throughout times of economic and financial stress. The Company and the Bank are not subject to this requirement as their
average total consolidated assets for this purpose are not greater than $10 billion.
Federal Securities Law. The common stock of the Company is registered with the SEC under the Securities Exchange Act
of 1934, as amended. The Company is subject to the information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Securities Exchange Act of 1934.
The Company stock held by persons who are affiliates of the Company may not be resold without registration or unless sold
in accordance with certain resale restrictions. For this purpose, affiliates are generally considered to be executive officers,
directors and principal stockholders. If the Company meets specified current public information requirements, each affiliate
of the Company will be able to sell in the public market, without registration, a limited number of shares in any three-month
period.
Federal Reserve System. The FRB requires all depository institutions to maintain reserves at specified levels against their
transaction accounts, primarily checking accounts. At September 30, 2016, the Bank was in compliance with these reserve
requirements. The Bank is authorized to borrow from the Federal Reserve Bank "discount window." An eligible institution
need not exhaust other sources of funds before going to the discount window, nor are there restrictions on the purposes for
which the borrower can use primary credit. At September 30, 2016, the Bank had no outstanding borrowings from the
discount window.
Federal Home Loan Bank System. The Bank is a member of FHLB Topeka, which is one of 11 regional Federal Home
Loan Banks. Each FHLB serves as a reserve, or central bank, for its members within its assigned region and is funded
primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans, called
advances, to members and provides access to a line of credit in accordance with policies and procedures, established by the
Board of Directors of FHLB, which are subject to the oversight of the Federal Housing Finance Agency ("FHFA").
As a member, the Bank is required to purchase and maintain capital stock in FHLB. The minimum required FHLB stock
amount is generally 4.5% of the Bank's FHLB advances and outstanding balance against the FHLB line of credit, and 2% of
the outstanding principal of loans sold into the Mortgage Partnership Finance program. At September 30, 2016, the Bank had
a balance of $110.0 million in FHLB stock, which was in compliance with this requirement. In past years, the Bank has
received dividends on its FHLB stock, although no assurance can be given that these dividends will continue. On a quarterly
basis, management conducts a review of FHLB to determine whether an other-than-temporary impairment of the FHLB stock
is present. At September 30, 2016, management concluded there was no such impairment.
Federal Savings and Loan Holding Company Regulation. The purpose and powers of the Company are to pursue any or all
of the lawful objectives of a savings and loan holding company and to exercise any of the powers accorded to a savings and
loan holding company.
The HOLA prohibits a savings and loan holding company (directly or indirectly, or through one or more subsidiaries) from
acquiring another savings association, or holding company thereof, without prior written approval from the FRB; acquiring or
retaining, with certain exceptions, more than 5% of a non-subsidiary savings association, a non-subsidiary holding company,
or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control
of a depository institution that is not federally insured. In evaluating applications by savings and loan holding companies to
acquire savings associations, the FRB must consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs
of the community, competitive factors, and other factors.
The Dodd-Frank Act extended to savings and loan holding companies the FRB's "source of strength" doctrine, which has
long applied to bank holding companies. The FRB has promulgated regulations implementing the "source of strength"
policy, which requires holding companies to act as a source of strength to their subsidiary depository institutions by providing
capital, liquidity and other support in times of financial stress.
30 Taxation
Federal Taxation
General
The Company and the Bank are subject to federal income taxation in the same general manner as other corporations, with
some exceptions discussed below. The Company files a consolidated federal income tax return. The Company is no longer
subject to federal income tax examination for fiscal years prior to 2013.
Method of Accounting
For federal income tax purposes, the Bank currently reports its income and expenses on the accrual method of accounting and
uses a fiscal year ending on September 30 for filing its federal income tax return.
Minimum Tax
The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus
certain tax preferences, called alternative minimum taxable income. The alternative minimum tax is payable to the extent
such alternative minimum taxable income is in excess of the regular tax. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years.
Net Operating Loss Carryovers
For federal income tax purposes, a financial institution may carryback net operating losses to the preceding two taxable years
and forward to the succeeding 20 taxable years. As of September 30, 2016, the Company had no net operating loss
carryovers.
State Taxation
The earnings/losses of Capitol Federal Financial, Inc. and Capitol Funds, Inc. are combined for purposes of filing a
consolidated Kansas corporate tax return. The Kansas corporate tax rate is 4.0%, plus a surcharge of 3.0% on earnings
greater than $50 thousand.
The Bank files a Kansas privilege tax return. For Kansas privilege tax purposes, the minimum tax rate is 4.5% of earnings,
which is calculated based on federal taxable income, subject to certain adjustments. The Bank has not received notification
from the state of any potential tax liability for any years still subject to audit.
Additionally, the Bank files state tax returns in various other states where it has significant purchased loans and/or foreclosure
activities. In these states, the Bank has either established nexus under an economic nexus theory or has exceeded enumerated
nexus thresholds based on the amount of interest derived from sources within the state.
Employees
At September 30, 2016, we had a total of 676 employees, including 120 part-time employees. The full-time equivalent of our
total employees at September 30, 2016 was 639. Our employees are not represented by any collective bargaining group.
Management considers its employee relations to be good.
31 Executive Officers of the Registrant
John B. Dicus. Age 55 years. Mr. Dicus is Chairman of the Board of Directors, Chief Executive Officer, and President of
the Bank and the Company. He has served as Chairman since January 2009 and Chief Executive Officer since January 2003.
He has served as President of the Bank since 1996 and of the Company since its inception in March 1999. Prior to accepting
the responsibilities of Chief Executive Officer, he served as Chief Operating Officer of the Bank and the Company. Prior to
that, he served as the Executive Vice President of Corporate Services for the Bank for four years. He has been with the Bank
in various other positions since 1985.
Kent G. Townsend. Age 55 years. Mr. Townsend serves as Executive Vice President and Chief Financial Officer of the
Bank, its subsidiary, and the Company. Mr. Townsend also serves as Treasurer for the Company, Capitol Funds, Inc. and
CFMRC. Mr. Townsend was promoted to Executive Vice President, Chief Financial Officer and Treasurer on September 1,
2005. Prior to that, he served as Senior Vice President, a position he held since April 1999, and Controller of the Company, a
position he held since March 1999. He has served in similar positions with the Bank since September 1995. He served as the
Financial Planning and Analysis Officer with the Bank for three years and other financial related positions since joining the
Bank in 1984.
Rick C. Jackson. Age 51 years. Mr. Jackson serves as Executive Vice President, Chief Lending Officer and Community
Development Director of the Bank and the Company. He also serves as the President of Capitol Funds, Inc., a subsidiary of
the Bank and President of CFMRC. He has been with the Bank since 1993 and has held the position of Community
Development Director since that time. He has held the position of Chief Lending Officer since February 2010.
Natalie G. Haag. Age 57 years. Ms. Haag serves as Executive Vice President and General Counsel of the Bank and the
Company. Prior to joining the Bank in August of 2012, Ms. Haag was 2nd Vice President, Director of Governmental Affairs
and Assistant General Counsel for Security Benefit Corporation and Security Benefit Life Insurance Company in Topeka,
Kansas. Security Benefit provides retirement products and services, including annuities and mutual funds. Ms. Haag was
employed by Security Benefit since 2003. The Security Benefit companies are not parents, subsidiaries or affiliates of the
Bank or the Company.
Carlton A. Ricketts. Age 59 years. Mr. Ricketts serves as Executive Vice President, Chief Corporate Services Officer of the
Bank and the Company. Prior to accepting those responsibilities in 2012, he served as Chief Strategic Planning Officer of the
Bank, a position held since 2007.
Daniel L. Lehman. Age 51 years. Mr. Lehman serves as Executive Vice President, Chief Retail Operations Officer of the
Bank and Company. Prior to accepting those responsibilities in 2016, he served as First Vice President and Accounting
Director, a position held since 2003 and Controller, a position held since 2005.
Tara D. Van Houweling. Age 43 years. Ms. Van Houweling serves as First Vice President, Principal Accounting Officer and
Reporting Director. She has been with the Bank and Company since 2003, has held the position of First Vice President and
Reporting Director since 2003, and Principal Accounting Officer since 2005.
32 Item 1A. Risk Factors
The following is a summary of risk factors relating to the operations of the Bank and the Company. These risk factors are not
necessarily presented in order of significance.
Changes in interest rates could have an adverse impact on our results of operations and financial condition.
Our results of operations are primarily dependent on net interest income, which is the difference between the interest earned
on loans, securities, cash at the Federal Reserve Bank and dividends received on FHLB stock, and the interest paid on
deposits and borrowings. Changes in interest rates could have an adverse impact on our results of operations and financial
condition because the majority of our interest-earning assets are long-term, fixed-rate loans, while the majority of our
interest-bearing liabilities are shorter term, and therefore subject to a greater degree of interest rate fluctuations. This type of
risk is known as interest rate risk and is affected by prevailing economic and competitive conditions, including monetary
policies of the FRB and fiscal policies of the United States federal government.
The impact of changes in interest rates is generally observed on the income statement. The magnitude of the impact will be
determined by the difference between the amount of interest-earning assets and interest-bearing liabilities, both of which
either reprice or mature within a given period of time. This difference provides an indication of the extent to which our net
interest rate spread will be impacted by changes in interest rates. In addition, changes in interest rates will impact the
expected level of repricing of the Bank's mortgage-related assets and callable debt securities. Generally, as interest rates
decline, the amount of interest-earning assets expected to reprice will increase as borrowers have an economic incentive to
reduce the cost of their mortgage or debt, which would negatively impact the Bank's interest income. Conversely, as interest
rates rise, the amount of interest-earning assets expected to reprice will decline as the economic incentive to refinance the
mortgage or debt is diminished. As this occurs, the amount of interest-earning assets repricing could diminish to the point
where interest-bearing liabilities reprice to a higher interest rate at a faster pace than interest-earning assets, thus negatively
impacting the Bank's net interest income.
Changes in interest rates can also have an adverse effect on our financial condition as AFS securities are reported at estimated
fair value. We increase or decrease our stockholders' equity, specifically AOCI (loss), by the amount of change in the
estimated fair value of our AFS securities, net of deferred taxes. Increases in interest rates generally decrease the fair value of
AFS securities. Decreases in the fair value of AFS securities would, therefore, adversely impact stockholders' equity.
Changes in interest rates, as they relate to customers, can also have an adverse impact on our financial condition and results
of operations. In times of rising interest rates, default risk may increase among borrowers with ARM loans as the rates on
their loans adjust upward and their payments increase. Fluctuations in interest rates also affect customer demand for deposit
products. Local competition could affect our ability to attract deposits, or could result in us paying more than competitors for
deposits.
In addition to general changes in interest rates, changes that affect the shape of the yield curve could negatively impact the
Bank. The Bank's interest-bearing liabilities are generally priced based on short-term interest rates while the majority of the
Bank's interest-earning assets are priced based on long-term interest rates. Income for the Bank is primarily driven by the
spread between these rates. As a result, a steeper yield curve, meaning long-term interest rates are significantly higher than
short-term interest rates, would provide the Bank with a better opportunity to increase net interest income. When the yield
curve is flat, meaning long-term interest rates and short-term interest rates are essentially the same, or when the yield curve is
inverted, meaning long-term interest rates are lower than short-term interest rates, the yield between interest-earning assets
and interest-bearing liabilities that reprice is compressed or diminished and would likely negatively impact the Bank's net
interest income. See "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for additional
information about the Bank's interest rate risk management.
33 The occurrence of any failure, breach or interruption in our information systems or those of our service providers
could damage our reputation, cause losses, increase our expenses and result in a loss of customers, cause an increase in
regulatory scrutiny or expose us to civil litigation and possibly financial liability.
Information systems are essential to the conduct of our business, as we use such systems to manage our customer
relationships, our general ledger, our deposits and our loans. In the normal course of our business, we collect, process, retain
and transmit (by email and other electronic means) sensitive and confidential information regarding our customers,
employees and others. We also outsource certain aspects of our data processing to third-party service providers. In addition to
confidential information regarding our customers, employees and others, we, and in some cases a third party, compile,
process, transmit and store proprietary, non-public information concerning our business, operations, plans and strategies.
Information security risks for financial institutions continue to increase in part because of evolving technologies, the use of
the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business
transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and
others. Cyber criminals use a variety of tactics, such as ransomware, denial of service, and theft of sensitive business and
customer information to extort payment or other concessions from victims. In some cases, these attacks have caused
significant impacts on other businesses' access to data and ability to provide services. We are not able to anticipate or
implement effective preventive measures against all incidents of these types, especially because the techniques used change
frequently and because attacks can originate from a wide variety of sources.
We use a variety of physical, procedural and technological safeguards to prevent or limit the impact of system failures,
interruptions and security breaches and to protect confidential information from mishandling, misuse or loss, including
detection and response mechanisms designed to contain and mitigate security incidents. However, there can be no assurance
that such events will not occur or that they will be promptly detected and adequately addressed if they do, and early detection
of security breaches may be thwarted by sophisticated attacks and malware designed to avoid detection. If there is a failure in
or breach of our information systems, or those of a third-party service provider, the confidential and other information
processed and stored in, and transmitted through, such information systems could potentially be jeopardized, or could
otherwise cause interruptions or malfunctions in our operations or the operations of our customers, employees, or others.
Our business and operations depend on the secure processing, storage and transmission of confidential and other information
in our information systems and those of our third-party service providers. Although we devote significant resources and
management focus to ensuring the integrity of our information systems through information security measures, risk
management practices, relationships with threat intelligence providers and business continuity planning, our facilities,
computer systems, software and networks, and those of our third-party service providers, may be vulnerable to external or
internal security breaches, acts of vandalism, unauthorized access, misuse, computer viruses or other malicious code and
cyber attacks that could have a security impact. In addition, breaches of security may occur through intentional or
unintentional acts by those having authorized or unauthorized access to our confidential or other information or the
confidential or other information of our customers, employees or others. While we regularly conduct security and risk
assessments on our systems and those of our third-party service providers, there can be no assurance that their information
security protocols are sufficient to withstand a cyber attack or other security breach.
The occurrence of any of the foregoing could subject us to litigation or regulatory scrutiny, cause us significant reputational
damage or erode confidence in the security of our information systems, products and services, cause us to lose customers or
have greater difficulty in attracting new customers, have an adverse effect on the value of our common stock or subject us to
financial losses that may not be covered by insurance, any of which could have a material adverse effect on our business,
financial condition or results of operations. As information security risks and cyber threats continue to evolve, we may be
required to expend significant additional resources to further enhance or modify our information security measures and/or to
investigate and remediate any information security vulnerabilities or other exposures arising from operational and security
risks.
Furthermore, there has recently been heightened legislative and regulatory focus on privacy, data protection and information
security. New or revised laws and regulations may significantly impact our current and planned privacy, data protection and
information security-related practices, the collection, use, sharing, retention and safeguarding of consumer and employee
information, and current or planned business activities. Compliance with current or future privacy, data protection and
information security laws could result in higher compliance and technology costs and could restrict our ability to provide
34 certain products and services, which could have a material adverse effect on our business, financial condition or results of
operations.
An economic downturn, especially one affecting our geographic market area, could adversely affect our operations
and financial results.
Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans on residential
properties; therefore, we are particularly exposed to downturns in regional housing markets and, to a lesser extent, the U.S.
housing market. The primary risks inherent in our one- to four-family loan portfolio are declines in economic conditions and
residential real estate value and elevated levels of unemployment or underemployment. Any one or a combination of these
events may have an adverse impact on borrowers' ability to repay their loans, which could result in increased delinquencies,
non-performing assets, loan losses, and future loan loss provisions.
Additionally, we have a concentration of loans secured by property located in Kansas and Missouri due to our lending
practices. Approximately 57% of our loan portfolio is comprised of loans secured by property located in Kansas, and
approximately 19% is comprised of loans secured by property located in Missouri. This makes us vulnerable to a downturn
in local economies and real estate markets. We monitor the current status and trends of local and national employment levels
and trends and current conditions in the real estate and housing markets in our local market areas. Adverse conditions in
these local economies such as inflation, unemployment, recession, natural disasters, or other factors beyond our control,
could impact the ability of our borrowers to repay their loans. Decreases in local real estate values could adversely affect the
value of the property used as collateral for our loans, which could cause us to realize a loss in the event of a foreclosure.
Currently, there is not a single employer or industry in the area on which the majority of our customers are dependent.
Additionally, correspondent loan purchases enable us to attain geographic diversification in our one- to four-family loan
portfolio.
The increase in commercial real estate loans in our loan portfolio exposes us to increased lending and credit risks.
A growing portion of our loan portfolio consists of commercial real estate loans. These loan types tend to be larger than and
in different geographic regions from most of our existing loan portfolio and are generally considered to have different and
greater risks than one- to four-family residential real estate loans. Furthermore, these loan types can expose us to a greater
risk of delinquencies, non-performing assets, loan losses, and future loan loss provisions than one- to four-family residential
real estate loans because repayment of such loans often depends on the successful operations of a business or of the
underlying property. Repayment of such loans may be affected by factors outside the borrower's control, such as adverse
conditions in the real estate market, the economy, environmental factors or changes in government regulation. Also, there are
risks inherent in commercial real estate construction lending as the value of the project is uncertain prior to the completion of
construction and subsequent lease-up. A sudden downturn in the economy or other unforeseen events could result in stalled
projects or collateral shortfalls, thus exposing us to increased credit risk. Additionally, a large portion of our commercial real
estate loans were originated/participated in during the past three fiscal years, which makes it difficult to assess the future
performance of these loans because of the borrower's relatively limited income history and loan payment history.
Our commercial real estate loans generally have significantly larger average loan balances compared to one- to four-family
residential real estate loans and may involve multiple loans to groups of related borrowers. Our largest commercial real
estate loan was $50.0 million at September 30, 2016, but no funds had been disbursed on this loan at September 30, 2016.
The commercial real estate loan with the largest unpaid principal balance at September 30, 2016 was a loan for $24.5 million.
A growing commercial real estate loan portfolio subjects us to greater regulatory scrutiny. Regulatory agencies have
observed that many commercial markets are experiencing substantial growth, and as a result, concentration levels of
commercial loans have been rising at some institutions.
We regularly monitor the risks in our commercial real estate loan portfolio, including concentrations in such factors as
geographic locations, property types, tenant brand name, borrowing relationships, and lending relationships in the case of
participation loans, among other factors. We continually strive to maintain high underwriting standards, including selecting
borrowers and guarantors that are financially sound and experienced in the industry, and selecting projects that meet the
Bank's lending policies and risk appetite. For additional information regarding our commercial real estate underwriting and
monitoring of risk, see "Part 1, Item 1. Business - Lending Practices and Underwriting Standards - Commercial Real Estate
Lending."
35 We are heavily reliant on technology, and a failure to effectively implement technology initiatives or anticipate future
technology needs or demands could adversely affect our business or performance.
Like most financial institutions, the Bank significantly depends on technology to deliver its products and other services and
to otherwise conduct business. To remain technologically competitive and operationally efficient, the Bank invests in system
upgrades, new technological solutions, and other technology initiatives. Many of these solutions and initiatives have a
significant duration, are tied to critical information systems, and require substantial resources. Although the Bank takes steps
to mitigate the risks and uncertainties associated with these solutions and initiatives, there is no guarantee that they will be
implemented on time, within budget, or without negative operational or customer impact. The Bank also may not succeed in
anticipating its future technology needs, the technology demands of its customers, or the competitive landscape for
technology. If the Bank were to falter in any of these areas, it could have a material adverse effect on our business, financial
condition or results of operations.
We may be required to provide remedial consideration to borrowers whose loans we purchase from correspondent
and nationwide lenders if it is discovered that the originating company did not properly comply with lending
regulations during the origination process.
We purchase whole one- to four-family loans from correspondent and nationwide lenders. While loans purchased on a loan-
by-loan basis from correspondent lenders are underwritten by the Bank's underwriters and loans purchased in bulk packages
from correspondent and nationwide lenders are evaluated on a certain set of criteria before being purchased, we are still
subject to some risks associated with the loan origination process itself. By law, loan originators are required to comply with
lending regulations at all times during the origination process. Certain compliance related risks associated with the
origination process itself may shift from the originating company to the Bank once the Bank purchases the loan. Should it be
discovered, at any point, that an instance of noncompliance occurred by the originating company during the origination
process, the Bank may still be held responsible and required to remedy the issue for the loans it purchased from the
originator. Remedial actions can include such actions as refunding interest paid to the borrower and adjusting the contractual
interest rate on the loan to the current market rate if advantageous to the borrower. The Bank no longer purchases loans in
bulk from nationwide lenders due primarily to these risks.
Strong competition may limit growth and profitability.
While we are one of the largest mortgage loan originators in the state of Kansas, we compete in the same market areas as
local, regional, and national banks, credit unions, mortgage brokerage firms, investment banking firms, investment brokerage
firms, and savings institutions. We must also compete with online investment and mortgage brokerages and online banks that
are not confined to any specific market area. Many of these competitors operate on a national or regional level, are a
conglomerate of various financial services providers housed under one corporation, or otherwise have substantially greater
financial or technological resources than the Bank. We compete primarily on the basis of the interest rates offered to
depositors, the terms of loans offered to borrowers, and the benefits afforded to customers as a local institution and portfolio
lender. Our pricing strategy for loan and deposit products includes setting interest rates based on secondary market prices
and local competitor pricing for our local markets, and secondary market prices and national competitor pricing for our
correspondent lending markets. Should we face competitive pressure to increase deposit rates or decrease loan rates, our net
interest income could be adversely affected. Additionally, our competitors may offer products and services that we do not or
cannot provide, as certain deposit and loan products fall outside of our accepted level of risk. Our profitability depends upon
our ability to compete in our local market areas.
We operate in a highly regulated industry, which limits the manner and scope of our business activities and will
continue to increase our operational and compliance costs.
We are subject to extensive regulation, supervision, and examination by the OCC, FRB, and the FDIC. These regulatory
authorities exercise broad discretion in connection with their supervisory and enforcement activities, including the ability to
impose restrictions on a bank's operations, reclassify assets, determine the adequacy of a bank's ACL, and determine the level
of deposit insurance premiums assessed. The Dodd-Frank Act created the CFPB with broad powers to supervise and enforce
consumer protection laws, including a wide range of consumer protection laws that apply to all banks and savings
institutions, like the authority to prohibit "unfair, deceptive or abusive" acts and practices. The CFPB also has examination
and enforcement authority over all banks with regulatory assets exceeding $10 billion at four consecutive quarter-ends. The
Bank has not exceeded $10 billion in regulatory assets at four consecutive quarter-ends, but it may at some point in the
future. Smaller banks, like the Bank, will continue to be examined for compliance with the consumer laws and regulations of
the CFPB by their primary bank regulators (the OCC, in the case of the Bank). The Dodd-Frank Act also weakens the federal
preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys
36 general the ability to enforce federal consumer protection laws. Change in the authority and oversight of any of these
agencies, whether in the form of regulatory policy, new regulations or legislation, or additional deposit insurance premiums,
could have a material impact on our operations.
The potential exists for additional laws and regulations, or changes in policy, affecting lending practices, regulatory capital
limits, interest rate risk management, and liquidity standards. Moreover, bank regulatory agencies have been active in
responding to concerns and trends identified in examinations, and have issued many formal enforcement orders requiring
capital ratios in excess of regulatory requirements and/or assessing monetary penalties. Bank regulatory agencies, such as the
OCC and the FDIC, govern the activities in which we may engage, primarily for the protection of depositors, and not for the
protection or benefit of investors. The CFPB enforces consumer protection laws and regulations for the benefit of the
consumer and not the protection or benefit of investors. In addition, new laws and regulations may continue to increase our
costs of regulatory compliance and of doing business, and otherwise affect our operations. New laws and regulations may
significantly affect the markets in which we do business, the markets for and value of our loans and securities, the products
we offer, the fees we can charge and our ongoing operations, costs, and profitability.
The Company's ability to pay dividends is subject to the ability of the Bank to make capital distributions to the
Company.
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, and also on the availability of cash at the holding company level in the event
earnings are not sufficient to pay dividends.
Our risk-management and compliance programs and functions may not be effective in mitigating risk and loss.
We maintain an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the
risks that we face. These risks include: interest-rate, credit, liquidity, operations, reputation, compliance and litigation. We
also maintain a compliance program to identify, measure, assess, and report on our adherence to applicable laws, policies and
procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk
management or compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in
our business. If conditions or circumstances arise that expose flaws or gaps in our risk management or compliance programs,
or if our controls do not function as designed, the performance and value of our business could be adversely affected.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
At September 30, 2016, we had 37 traditional branch offices and 10 in-store branch offices. The Bank owns the office
building and related land in which its home office and executive offices are located, and 28 of its other branch offices. The
remaining 18 branches are either leased or partially owned.
For additional information regarding our lease obligations, see "Part II, Item 8. Financial Statements and Supplementary Data
– Notes to Consolidated Financial Statements – Note 5. Premises and Equipment, net."
Management believes that our current facilities are adequate to meet our present and immediately foreseeable needs.
However, we will continue to monitor customer growth and expand our branching network, if necessary, to serve our
customers' needs.
Item 3. Legal Proceedings
The Company and the Bank are involved as plaintiff or defendant in various legal actions arising in the normal course of
business. In our opinion, after consultation with legal counsel, we believe it unlikely that such pending legal actions will
have a material adverse effect on our financial condition, results of operations or liquidity.
Item 4. Mine Safety Disclosures
None.
37 PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Stock Listing
Capitol Federal Financial, Inc. common stock is traded on the Global Select tier of the NASDAQ Stock Market under the
symbol "CFFN". At November 22, 2016, there were approximately 9,816 Capitol Federal Financial, Inc. stockholders of
record.
Price Range of Common Stock
The high and low sales prices for the common stock as reported on the NASDAQ Stock Market, as well as dividends
declared per share, are reflected in the table below.
FISCAL YEAR 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
FISCAL YEAR 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
HIGH
LOW
DIVIDENDS
$
$
$
$
13.36
13.47
13.95
14.49
HIGH
13.12
12.92
12.67
12.33
$
$
11.82
11.39
12.70
13.52
LOW
11.78
12.22
11.75
11.61
0.335
0.085
0.335
0.085
DIVIDENDS
0.335
0.085
0.335
0.085
Share Repurchases
On October 28, 2015, the Company announced a stock repurchase plan for up to $70.0 million of common stock. The plan
does not have an expiration date. Since the Company completed its second-step conversion in December 2010, $368.0
million worth of shares have been repurchased.
The following table summarizes our share repurchase activity during the three months ended September 30, 2016 and
additional information regarding our share repurchase program.
Total
Total Number of
Dollar Value of
Number of
Average
Shares Purchased as
Shares that May
Shares
Purchased
Price Paid
per Share
Part of Publicly
Yet Be Purchased
Announced Plans
Under the Plan
Approximate
— $
—
—
—
—
—
—
—
— $
70,000,000
—
—
—
70,000,000
70,000,000
70,000,000
July 1, 2016 through
July 31, 2016
August 1, 2016 through
August 31, 2016
September 1, 2016 through
September 30, 2016
Total
Stockholders and General Inquiries
Copies of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016 are available at no charge to
stockholders upon request. Please direct requests or inquiries to: James D. Wempe, Director, Investor Relations, 700 South
Kansas Avenue, Topeka, KS 66603, (785) 270-6055, or jwempe@capfed.com.
38 Stockholder Return Performance Presentation
The information presented below assumes $100 invested on September 30, 2011 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.
Index
9/30/2011
9/30/2012
9/30/2013
9/30/2014
9/30/2015
9/30/2016
Period Ending
Capitol Federal Financial, Inc.
NASDAQ Composite
SNL U.S. Bank & Thrift
Source: SNL Financial LC
100.00
100.00
100.00
117.28
130.53
141.29
132.56
160.26
183.82
136.61
193.28
216.65
149.93
201.01
221.18
185.54
234.02
228.69
Restrictions on the Payments of Dividends
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. See "Item 1. Business – Regulation and Supervision – Limitations on Dividends and Other Capital Distributions" for
additional information regarding the Company's ability to pay dividends.
39 Item 6. Selected 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.
Selected Balance Sheet Data:
Total assets
Loans receivable, net
Securities:
AFS
HTM
FHLB stock
Deposits
FHLB borrowings
Repurchase agreements
Stockholders' equity
September 30,
2016
2015
2014
2013
2012
(Dollars in thousands)
$ 9,267,247
6,958,024
$ 9,844,161
6,625,027
$ 9,865,028
6,233,170
$ 9,186,449
5,958,868
$ 9,378,304
5,608,083
527,301
1,100,874
109,970
5,164,018
2,372,389
200,000
1,392,964
2016
758,171
1,271,122
150,543
4,832,520
3,270,521
200,000
1,416,226
840,790
1,552,699
213,054
4,655,272
3,369,677
220,000
1,492,882
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
For the Year Ended September 30,
2015
2013
(Dollars and counts in thousands, except per share amounts)
2014
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
Salaries and employee benefits
Other non-interest expense
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
$
$
301,113
108,931
192,182
(750)
192,932
14,835
8,477
23,312
42,378
51,927
94,305
121,939
38,445
83,494
0.63
133,045
0.63
133,176
$
$
$
$
$
$
297,362
107,594
189,768
771
188,997
14,897
6,243
21,140
43,309
51,060
94,369
115,768
37,675
78,093
0.58
135,384
0.58
135,409
$
$
$
$
290,246
106,103
184,143
1,409
182,734
14,937
8,018
22,955
43,757
46,780
90,537
115,152
37,458
77,694
0.56
139,440
0.56
139,442
$
$
298,554
120,394
178,160
(1,067)
179,227
15,342
7,947
23,289
49,152
47,795
96,947
105,569
36,229
69,340
0.48
144,847
0.48
144,848
$
$
$
$
$
$
2012
328,051
143,170
184,881
2,040
182,841
15,915
8,318
24,233
44,235
46,840
91,075
115,999
41,486
74,513
0.47
157,913
0.47
157,916
40 2016
2015
2014
2013
2012
Performance Ratios:
Return on average assets
Return on average equity
Dividends paid per share
Dividend payout ratio
Operating expense ratio
Efficiency ratio
Ratio of average interest-earning assets
to average interest-bearing liabilities
Net interest margin
$
0.88%
5.78
0.84
133.86%
0.84
43.76
1.13x
2.10%
Interest rate spread information:
Average during period
End of period
Asset Quality Ratios:
Non-performing assets to total assets
Non-performing loans to total loans
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
Company Tier 1 leverage ratio
Bank Tier 1 leverage ratio(2)
Other Data:
Number of traditional offices
Number of in-store offices
1.93
1.92
0.35
0.42
29.32
0.12
15.0
12.4
12.3
10.9
37
10
(1)
(1)
$
(1)
(1)
(1)
(1)
$
(1)
(1)
(1)
(1)
$
(1)
(1)
0.83%
5.13
0.84
146.19%
0.84
44.74
1.14x
2.07%
1.87
1.85
0.31
0.39
36.41
0.14
14.4
13.1
12.6
11.3
37
10
0.85%
4.97
0.98
177.84%
0.96
43.72
1.18x
2.07%
1.84
1.84
0.29
0.40
37.04
0.15
15.1
16.4
N/A
13.2
37
10
0.75%
4.14
1.00
211.75%
1.05
48.13
1.21x
1.97%
$
0.79%
3.93
0.40
85.58%
0.97
43.55
1.24x
2.01%
1.70
1.72
0.33
0.44
33.36
0.15
17.8
18.1
N/A
14.8
36
10
1.64
1.68
0.43
0.57
34.88
0.20
19.3
20.1
N/A
14.6
36
10
(1) These ratios were adjusted to exclude the effects of the daily leverage strategy. This adjusted financial data is not presented in accordance with
accounting principles generally accepted in the United States of America ("GAAP"). The table below presents the ratios showing the financial results
of the daily leverage strategy, along with GAAP financial ratios including the effects of the daily leverage strategy. Since the daily leverage strategy
only involves assets and liabilities, there is no direct equity impact of the daily leverage strategy, outside of generating additional earnings. Therefore,
the return on average equity of the daily leverage strategy is not applicable (N/A). Management believes it is important for comparability purposes to
provide the financial ratios without the daily leverage strategy because of the unique nature of the daily leverage strategy. Management can
discontinue the daily leverage strategy at any point in time.
2016
For the Year Ended September 30,
2015
2014
Reported with
Daily Leverage Daily Leverage Daily Leverage Daily Leverage Daily Leverage Daily Leverage
Reported with
Reported with
Return on average assets
Return on average equity
Net interest margin
Average interest rate spread
Strategy
Strategy
Strategy
Strategy
Strategy
Strategy
0.11%
N/A
0.21
0.22
0.74%
5.95
1.75
1.63
0.14%
N/A
0.26
0.26
0.70%
5.32
1.73
1.59
0.14%
N/A
0.27
0.27
0.82%
5.00
2.00
1.79
(2)
In periods prior to September 30, 2015, this ratio was calculated using end-of-period total assets in the denominator in accordance with regulatory
capital requirements at that point in time. As of September 30, 2015, this ratio is calculated using current quarter average assets in the denominator in
accordance with current regulatory capital requirements.
41 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 Company provides a full range of retail banking services through the Bank, which is a wholly-owned subsidiary of the
Company, headquartered in Topeka Kansas. The Bank has 37 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. 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.
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 stated maturities or repricing dates
of less than two years.
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. The industries in our market areas are diversified, especially in the Kansas
City metropolitan statistical area, which comprises the largest segment of our loan portfolio and deposit base. As of October
2016, the unemployment rate was 4.4% for Kansas and 5.1% for Missouri, compared to the national average of 4.9% based
on information from the Bureau of Labor Statistics. The Kansas City market area has an average household income of
approximately $74 thousand per annum, based on 2016 estimates from Nielsen. The average household income in our
combined market areas is approximately $70 thousand per annum, with 90% of the population at or above the poverty level,
also based on the 2016 estimates from Nielsen. The FHFA price index for Kansas and Missouri has not experienced any
significant fluctuations over the past several years which indicates relative stability in property values in our local market
areas.
For fiscal year 2016, the Company recognized net income of $83.5 million, or $0.63 per share, compared to net income of
$78.1 million, or $0.58 per share, for fiscal year 2015. The $5.4 million, or 6.9%, increase in net income was due primarily
to a $2.4 million increase in net interest income and a $2.2 million increase in non-interest income, specifically bank-owned
life insurance ("BOLI") income. The $2.4 million, or 1.3%, increase in net interest income from the prior fiscal year was due
primarily to an $8.2 million decrease in interest expense on term borrowings, partially offset by a $4.7 million increase in
interest expense on deposits. Additionally, the Bank recorded a negative provision for credit losses of $750 thousand in the
current fiscal year compared to a provision for credit losses of $771 thousand in the prior fiscal year.
During fiscal year 2016, the Bank continued to utilize the daily leverage strategy to increase earnings. The daily leverage
strategy during the current fiscal year involved borrowing up to $2.10 billion on the Bank's FHLB line of credit, which was
repaid prior to each quarter end for regulatory purposes. The proceeds from the borrowings, net of the required FHLB stock
holdings which yielded approximately 6% during the current fiscal year, were deposited at the Federal Reserve Bank of
Kansas City. Net income attributable to the daily leverage strategy was $2.3 million during the current fiscal year, compared
to $2.8 million for the prior fiscal year. The decrease was due to the average borrowings rate on the FHLB line of credit
increasing more than the average yield earned on the cash balances held at the Federal Reserve Bank. The pre-tax yield of
the daily leverage strategy, which is defined as the annualized pre-tax income resulting from the transaction as a percentage
of the interest-earning assets associated with the transaction, was 0.16% for the current fiscal year. Management expects to
continue this strategy in fiscal year 2017.
42 The net interest margin increased two basis points, from 1.73% for the prior fiscal year to 1.75% for the current fiscal year.
Excluding the effects of the daily leverage strategy, the net interest margin would have increased three basis points, from
2.07% for the prior fiscal year to 2.10% for the current fiscal year. The increase in the net interest margin was due mainly to
a decrease in interest expense on term borrowings, partially offset by an increase in interest expense on deposits. The
positive impact on the net interest margin resulting from the shift in the mix of interest-earning assets from relatively lower
yielding securities to higher yielding loans was offset by a decrease in the loan portfolio yield.
Total assets were $9.27 billion at September 30, 2016 compared to $9.84 billion at September 30, 2015. The $576.9 million
decrease was due primarily to a $490.9 million decrease in cash and cash equivalents and a $40.6 million decrease in FHLB
stock, both due primarily to the removal of the entire daily leverage strategy at September 30, 2016 compared to $700.0
million of the daily leverage strategy that remained in place at September 30, 2015. The entire $2.10 billion daily leverage
strategy was reinstated on October 3, 2016. During the current fiscal year, management continued the strategy of moving
cash flows from the relatively lower yield securities portfolio to the higher yield loans receivable portfolio resulting in a
$401.1 million decrease in the securities portfolio and a $333.0 million increase in the loans receivable portfolio.
The loans receivable portfolio, net, increased to $6.96 billion at September 30, 2016, from $6.63 billion at September 30,
2015. The loan growth was mainly funded with cash flows from the securities portfolio. During the current fiscal year, the
Bank originated and refinanced $772.9 million of loans with a weighted average rate of 3.55% and purchased $662.8 million
of loans from correspondent lenders with a weighted average rate of 3.47%. During fiscal year 2016, we continued to expand
our commercial real estate portfolio through loan participations with our correspondent lenders and other lead banks. The
Bank entered into participations of $201.1 million of commercial real estate loans with a weighted average rate of 4.02%
during the current fiscal year, of which $34.9 million was funded at September 30, 2016.
Total liabilities were $7.87 billion at September 30, 2016 compared to $8.43 billion at September 30, 2015. The $553.7
million decrease was due primarily to an $898.1 million decrease in FHLB borrowings, largely as a result of the removal of
the entire daily leverage strategy at September 30, 2016, along with a $200.0 million decrease in term FHLB advances,
partially offset by a $331.5 million increase in the deposit portfolio. The growth in deposits was primarily in the retail
certificate of deposit, checking, and wholesale certificate of deposit portfolios, which increased $137.4 million, $75.6 million,
and $57.6 million, respectively. Cash flows received from the deposit portfolio were used to pay off certain maturing FHLB
advances.
Stockholders' equity was $1.39 billion at September 30, 2016 compared to $1.42 billion at September 30, 2015. The $23.3
million decrease was due primarily to the payment of $111.8 million in cash dividends, partially offset by net income of
$83.5 million. Cash dividends paid during the current fiscal year totaled $0.84 per share.
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 economic conditions that could result in changes to the amount of the recorded ACL. Additionally, bank
regulators review the ACL and could have a differing view from management regarding the ACL balance, which could result
in an increase in the ACL and/or the recognition of additional charge-offs. 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 have a differing view from
management regarding the ACL balance.
43 Our primary lending emphasis is the origination and purchase of one- to four-family loans and, to a lesser extent, consumer
loans secured by one- to four-family residential properties, resulting in a loan concentration in residential mortgage
loans. 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. Changes in 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
commercial real estate 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 commercial real estate 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, we prepare a formula analysis model which segregates our loan portfolio into categories based on certain risk
characteristics such as loan type (one- to four-family, commercial real estate, etc.), interest payments (fixed-rate and
adjustable-rate), loan source (originated, correspondent purchased, or bulk purchased), 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 model to calculate a combined LTV ratio.
Historical loss factors are applied to each loan category in the formula analysis model. Additionally, qualitative loss factors
that management believes impact the collectability of the loan portfolio as of the evaluation date are applied to each loan
category. Qualitative loss factors increase as loans are classified or become delinquent. See "Part II, Item 8. Financial
Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant
Accounting Policies" for additional information related to the loss factors utilized in the formula analysis model.
The loss factors applied in the formula analysis model 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 model 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 model. 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 model, 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, trends in foreclosed
property and short sale transactions and charge-off activity, the current status and trends of local and national employment
levels, trends and current conditions in the real estate and housing markets, loan portfolio growth and concentrations, industry
and peer charge-off information, and certain ACL ratios. 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.
44
Fair Value Measurements. The Company uses fair value measurements to record fair value adjustments to certain assets
and to determine fair value disclosures in accordance with Accounting Standard Codification ("ASC") 820 and ASC 825.
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, 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, 2016.
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, as AOCI in stockholders' equity. The Company primarily uses prices
obtained from third party pricing services to determine the fair value of its securities. 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 $1.8 million at September 30,
2016, 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 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 values of loans individually evaluated for impairment are estimated through current
appraisals or analyzed based on market indicators. OREO fair values are 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 "Item 8. Financial Statements and Supplementary Data – Notes
to Financial Statements – Note 1. Summary of Significant Accounting Policies."
45 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 lenders. We offer both fixed- and adjustable-rate products
with various terms to maturity and pricing options. We maintain strong relationships with local real estate agents to
attract mortgage loan business. We rely on our marketing efforts and customer service 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. They are provided through a
branch network of 47 locations, including traditional branches and retail in-store locations, our call center which
operates on extended hours, mobile banking, 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 loan servicing 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, 2016 was approximately $122.0 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.
• 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 2016 were $111.8 million, including a $0.25 per share, or $33.3 million, True Blue® Capitol
Dividend paid in June 2016. 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 intent of the Board of Directors to continue to pay regular quarterly and special cash
dividends each year, and for fiscal year 2017, it is the intent of the Board of Directors and management to continue
with the payout of 100% of the Company's earnings to its stockholders.
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.
46 Financial Condition
Assets. Total assets were $9.27 billion at September 30, 2016 compared to $9.84 billion at September 30, 2015. The $576.9
million decrease was due primarily to a $490.9 million decrease in cash and cash equivalents and a $40.6 million decrease in
FHLB stock, both due primarily to the removal of the entire daily leverage strategy at September 30, 2016 compared to
$700.0 million of the daily leverage strategy that remained in place at September 30, 2015.
Loans Receivable. Loans receivable, net, increased $333.0 million to $6.96 billion at September 30, 2016 from $6.63 billion
at September 30, 2015. The growth in the loan portfolio was mainly funded with cash flows from the securities portfolio and
was primarily in the correspondent one- to four-family purchased loan portfolio.
The following table presents the balance and weighted average rate of our loan portfolio as of the dates indicated. Within the
one- to four-family loan portfolio at September 30, 2016, 60% of the loans had a balance at origination of less than $417
thousand.
Real estate loans:
One- to four-family:
Originated
Correspondent purchased
Bulk purchased
Construction
Total
Commercial:
Permanent
Construction
Total
Total real estate loans
Consumer loans:
Home equity
Other
Total consumer loans
Total loans receivable
Less:
ACL
Discounts/unearned loan fees
Premiums/deferred costs
September 30, 2016
September 30, 2015
Amount
Rate
(Dollars in thousands)
Amount
Rate
$
4,005,615
3.74% $
4,010,424
3.84%
3.50
2.23
3.45
3.56
4.16
4.13
4.15
3.58
5.01
4.21
4.99
3.60
2,206,072
416,653
39,430
6,667,770
110,768
43,375
154,143
6,821,913
123,345
4,264
127,609
6,949,522
8,540
24,933
(41,975)
3.52
2.25
3.64
3.63
4.15
3.82
4.12
3.64
5.00
4.03
4.97
3.66
1,846,210
485,682
29,552
6,371,868
109,314
11,523
120,837
6,492,705
125,844
4,179
130,023
6,622,728
9,443
24,213
(35,955)
6,625,027
Total loans receivable, net
$
6,958,024
$
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48
The following tables present loan origination, refinance, and purchase activity for the periods indicated, excluding
endorsement activity, along with associated weighted average rates and percent of total. Loan originations, purchases, and
refinances are reported together. The fixed-rate one- to four-family loans less than or equal to 15 years have an original
maturity at origination of less than or equal to 15 years, while fixed-rate one- to four-family loans greater than 15 years have
an original maturity at origination of greater than 15 years. The adjustable-rate one- to four-family loans less than or equal to
36 months have a term to first reset of less than or equal to 36 months at origination and adjustable-rate one- to four-family
loans greater than 36 months have a term to first reset of greater than 36 months at origination.
Fixed-rate:
One- to four-family:
<= 15 years
> 15 years
Commercial real estate
Home equity
Other
Total fixed-rate
Adjustable-rate:
One- to four-family:
<= 36 months
> 36 months
Commercial real estate
Home equity
Other
Total adjustable-rate
For the Year Ended
September 30, 2016
September 30, 2015
Amount
Rate % of Total
Amount
Rate % of Total
(Dollars in thousands)
$ 265,721
2.97%
16.2% $ 335,062
2.99%
871,669
184,153
4,247
828
1,326,618
4,980
183,697
47,876
71,013
2,652
310,218
3.67
4.01
5.71
8.73
3.59
2.58
2.90
4.29
4.65
3.36
3.52
53.3
11.2
0.3
0.1
785,290
32,580
3,670
769
81.1
1,157,371
0.3
11.2
2.9
4.3
0.2
6,871
220,886
35,236
69,975
1,537
18.9
334,505
3.83
3.86
6.10
8.07
3.60
2.61
2.98
4.25
4.58
3.11
3.44
22.4%
52.6
2.2
0.2
0.1
77.5
0.5
14.8
2.4
4.7
0.1
22.5
Total originated, refinanced and purchased
$1,636,836
3.57
100.0% $1,491,876
3.57
100.0%
Purchased and participation loans included above:
Fixed-rate:
Correspondent - one- to four-family
Participations - commercial real estate
Total fixed-rate purchased/participations
$ 567,014
153,239
720,253
Adjustable-rate:
Correspondent - one- to four-family
Participations - commercial real estate
Total adjustable-rate purchased/participations
95,803
47,876
143,679
Total purchased/participation loans
$ 863,932
3.56
3.94
3.64
2.90
4.29
3.36
3.60
$ 525,946
25,082
551,028
125,095
35,236
160,331
$ 711,359
3.59
3.79
3.60
2.96
4.25
3.25
3.52
49 One- to Four-Family Loans - The following table presents, for our portfolio of one- to four-family loans, the balance,
percentage of total, weighted average credit score, weighted average LTV ratio, and the average balance per loan as of the
dates presented. Credit scores are updated at least semiannually, with the latest update in September 2016, from a nationally
recognized consumer rating agency. The LTV ratios were based on the current loan balance and either the lesser of the
purchase price or original appraisal, or the most recent Bank appraisal, if available. In most cases, the most recent appraisal
was obtained at the time of origination.
Amount
September 30, 2016
% of
Total
Credit
Score
(Dollars in thousands)
Average
LTV
Balance
Originated
$ 4,005,615
60.4%
Correspondent purchased
Bulk purchased
2,206,072
416,653
33.3
6.3
$ 6,628,340
100.0%
766
764
753
765
63% $
68
64
65
132
360
308
175
Amount
September 30, 2015
% of
Total
Credit
Score
(Dollars in thousands)
Average
LTV
Balance
Originated
$ 4,010,424
63.2%
Correspondent purchased
Bulk purchased
1,846,210
485,682
29.1
7.7
$ 6,342,316
100.0%
765
764
752
764
64% $
68
65
65
129
344
310
167
The following table presents originated, refinanced, and correspondent purchased activity in our one- to four-family loan
portfolio, excluding endorsement activity, along with associated weighted average LTVs and weighted average credit scores
for the periods indicated. Of the loans originated and refinanced during the current year, 75% had loan values of $417
thousand or less. Of the correspondent loans purchased during the current year, 19% had loan values of $417 thousand or
less.
For the Year Ended
September 30, 2016
September 30, 2015
Amount
LTV
Credit
Score
(Dollars in thousands)
Amount
Credit
Score
LTV
$
515,395
78%
147,855
662,817
$ 1,326,067
66
74
75
770
765
763
766
$
563,107
77%
133,961
651,041
$ 1,348,109
68
74
75
770
768
765
768
Originated
Refinanced by Bank customers
Correspondent purchased
50 The following table presents the amount, percent of total, and weighted average rate, by state, of one- to four-family loan
originations and correspondent purchases where originations and purchases in the state exceeded five percent of the total
amount originated and purchased during the year ended September 30, 2016.
State
Kansas
Missouri
Texas
Other states
Amount
% of Total
(Dollars in thousands)
Rate
$
616,783
243,775
213,536
251,973
46.5%
3.39%
18.4
16.1
19.0
3.46
3.43
3.46
3.42
$
1,326,067
100.0%
One- to Four-Family Loan Commitments - The following table summarizes our one- to four-family loan origination and
refinance commitments and one- to four-family correspondent loan purchase commitments as of September 30, 2016, along
with associated weighted average rates. Loan commitments generally have fixed expiration dates or other termination
clauses and may require the payment of a rate lock fee. A percentage of the loan commitments are expected to expire
unfunded, so the amounts reflected in the table below are not necessarily indicative of future cash requirements.
Fixed-Rate
15 years
or less
More than
Adjustable-
Total
15 years
Rate
Amount
Rate
(Dollars in thousands)
Originate/refinance
Correspondent
$
$
26,386
14,355
40,741
$
$
58,000
120,690
178,690
$
$
13,288
19,155
32,443
$
97,674
3.20%
154,200
$ 251,874
3.58
3.43
Rate
2.83%
3.67%
2.90%
Commercial Real Estate Loans - Commercial real estate loans are originated or participated in based on the income
producing potential of the property, the collateral value, and the financial strength of the borrower. Additionally, the Bank
generally requires personal guarantees. The Bank generally requires a minimum debt service coverage ratio of 1.25 and
limits LTV ratios to 80% for commercial real estate loans depending on the property type.
During the current year, the Bank entered into commercial real estate loan participations of $201.1 million, of which $34.9
million was funded as of September 30, 2016. The Bank intends to continue to grow its commercial real estate loan portfolio
through participations with correspondent lenders and other lead banks with which the Bank has commercial real estate
lending relationships.
51 The following table presents the Bank's commercial real estate loans and loan commitments by industry classification, as
defined by the North American Industry Classification System, as of September 30, 2016. Based on the terms of the
construction loans as of September 30, 2016, the majority of the undisbursed amounts in the table are projected to be
disbursed by March 2019. It is possible that not all of the funds will be disbursed due to the nature of the funding of
construction projects.
Unpaid
Undisbursed Gross Loan
Outstanding
Principal
Amount
Amount
Commitments
Total
% of
Total
(Dollars in thousands)
Accommodation and food services
$
63,778
$
79,090
$
142,868
$
— $ 142,868
40.6%
Health care and social assistance
Real estate rental and leasing
Arts, entertainment, and recreation
Multi-family
Retail trade
Other
14,044
16,784
8,053
19,685
19,561
12,238
42,709
37,793
26,422
135
4,023
3,155
56,753
54,577
34,475
19,820
23,584
15,393
—
—
—
—
4,350
—
56,753
54,577
34,475
19,820
27,934
15,393
16.1
15.5
9.8
5.6
8.0
4.4
$ 154,143
$
193,327
$
347,470
$
4,350
$ 351,820
100.0%
The following table summarizes the Bank's commercial real estate loans and loan commitments by state as of September 30,
2016.
Unpaid
Undisbursed
Gross Loan
Outstanding
Principal
Amount
Amount
Commitments
Total
% of
Total
Texas
Missouri
Kansas
Colorado
Arkansas
California
Montana
$
34,945
$
119,034
$
153,979
$
— $
153,979
(Dollars in thousands)
38,265
53,005
14,798
8,284
3,346
1,500
42,709
26,421
508
—
3,155
1,500
80,974
79,426
15,306
8,284
6,501
3,000
4,350
—
—
—
—
—
85,324
79,426
15,306
8,284
6,501
3,000
43.8%
24.2
22.6
4.3
2.4
1.8
0.9
$
154,143
$
193,327
$
347,470
$
4,350
$
351,820
100.0%
The following table presents the Bank's commercial real estate loan portfolio and outstanding loan commitments, categorized
by gross loan amount (unpaid principal plus undisbursed amounts) or outstanding loan commitment amount, as of September
30, 2016.
Greater than $30 million
>$15 to $30 million
>$10 to $15 million
>$5 to $10 million
$1 to $5 million
Less than $1 million
Count
Amount
(Dollars in thousands)
4
2
3
4
23
14
50
$
157,711
54,387
38,280
29,172
67,918
4,352
351,820
$
52 Securities. The following table presents the distribution of our MBS and investment securities portfolios, at amortized cost,
at the dates indicated. Overall, fixed-rate securities comprised 75% of these portfolios at September 30, 2016. The WAL is
the estimated remaining maturity (in years) after three-month historical prepayment speeds and projected call option
assumptions have been applied. Weighted average yields on tax-exempt securities are not calculated on a fully taxable
equivalent basis.
September 30, 2016
September 30, 2015
Amount
Yield
WAL
(Dollars in thousands)
Amount
Yield
WAL
Fixed-rate securities:
MBS
GSE debentures
Municipal bonds
Total fixed-rate securities
Adjustable-rate securities:
MBS
TRUPs
Total adjustable-rate securities
$
836,852
2.16%
346,226
33,303
1,216,381
400,161
2,123
402,284
1.15
1.69
1.86
2.25
2.11
2.24
1.95
2.9
0.9
2.4
2.3
4.7
20.7
4.8
2.9
$ 1,047,637
2.24%
525,376
38,214
1,611,227
402,417
2,186
404,603
$ 2,015,830
1.14
1.87
1.87
2.22
1.59
2.21
1.94
3.2
1.6
2.9
2.7
5.3
21.7
5.4
3.2
Total securities portfolio
$ 1,618,665
The following table presents the carrying value of MBS in our portfolio by issuer at the dates presented.
FNMA
FHLMC
Government National Mortgage Association
At September 30,
2016
2015
(Dollars in thousands)
$
752,141
$
413,458
80,479
880,810
469,290
112,439
$
1,246,078
$
1,462,539
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55
Liabilities. Total liabilities were $7.87 billion at September 30, 2016 compared to $8.43 billion at September 30, 2015. The
$553.7 million decrease was due primarily to an $898.1 million decrease in FHLB borrowings, largely as a result of the
removal of the entire daily leverage strategy at September 30, 2016, along with a $200.0 million decrease in term FHLB
advances, partially offset by a $331.5 million increase in the deposit portfolio. Cash flows received from the deposit
portfolio were used to pay off certain maturing FHLB advances.
Deposits - Deposits were $5.16 billion at September 30, 2016 compared to $4.83 billion at September 30, 2015. The $331.5
million increase was due primarily to a $137.4 million increase in the retail certificate of deposit portfolio, a $75.6 million
increase in the checking portfolio, and a $57.6 million increase in the wholesale certificate of deposit portfolio. We continue
to be competitive on deposit rates and, in some cases, our offer rates for longer-term certificates of deposit have been higher
than peers. Increasing rates offered on longer-term certificates of deposit has been an on-going balance sheet strategy by
management in anticipation of higher interest rates. If short-term interest rates continue to rise, our customers may move
funds from their checking, savings and money market accounts to higher yielding deposit products within the Bank or
withdraw their funds from these accounts, including certificates of deposit, to invest in higher yielding investments outside of
the Bank.
The following table presents the amount, weighted average rate and percentage of total for the components of our deposit
portfolio at the dates presented.
2016
Amount
Rate
At September 30,
% of
Total
(Dollars in thousands)
Amount
2015
Rate
% of
Total
Non-interest-bearing checking
$
217,009
—%
4.2%
$
188,007
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3.9%
Interest-bearing checking
Savings
Money market
Retail certificates of deposit
Public units
597,319
335,426
1,186,132
2,458,160
369,972
$ 5,164,018
0.05
0.17
0.24
1.43
0.70
0.80
11.6
6.5
23.0
47.6
7.1
550,741
311,670
1,148,935
2,320,804
312,363
100.0%
$ 4,832,520
0.05
0.16
0.23
1.29
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0.72
11.4
6.4
23.8
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100.0%
56 The following tables set forth scheduled maturity information for our certificates of deposit, along with associated weighted
average rates, at September 30, 2016.
Rate range
0.00 – 0.99%
1.00 – 1.99%
2.00 – 2.99%
3.00 – 3.99%
Amount Due
More than More than
1 year
or less
1 year to
2 years to 3 More than
Total
2 years
years
3 years
Amount
Rate
(Dollars in thousands)
$ 778,040
$ 153,673
$
605
$
— $
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0.67%
394,039
407,238
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49,816
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112,490
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163,402
319
$1,172,398
$ 562,007
$ 492,691
$ 601,036
$ 2,828,132
1.60
2.24
3.12
1.33
Percent of total
Weighted average rate
41.4%
0.90
19.9%
1.27
17.4%
1.67
Weighted average maturity (in years)
Weighted average maturity for the retail certificate of deposit portfolio (in years)
1.4
0.5
2.6
21.3%
1.97
3.8
1.7
1.9
Amount Due
Over
3 to 6
Over
6 to 12
3 months
or less
months
months
(Dollars in thousands)
Over
12 months
Total
Retail certificates of deposit less than $100,000
$
152,356
$
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$
308,275
$
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$ 1,542,541
Retail certificates of deposit of $100,000 or more
Public unit deposits of $100,000 or more
77,317
138,505
44,660
104,800
165,425
66,048
628,217
60,619
915,619
369,972
$
368,178
$
264,472
$
539,748
$ 1,655,734
$ 2,828,132
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59
Stockholders' Equity. Stockholders' equity was $1.39 billion at September 30, 2016 compared to $1.42 billion at
September 30, 2015. The $23.3 million decrease was due primarily to the payment of $111.8 million in cash dividends,
partially offset by net income of $83.5 million. The cash dividends paid during the current fiscal year totaled $0.84 per share
and consisted of a $0.25 per share cash true-up dividend related to fiscal year 2015 earnings per the Company's dividend
policy, a $0.25 per share True Blue Capitol Dividend, and four regular quarterly cash dividends totaling $0.34 per share.
On October 19, 2016, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.4
million, payable on November 18, 2016 to stockholders of record as of the close of business on November 4, 2016. On
October 27, 2016, the Company announced a fiscal year 2016 cash true-up dividend of $0.29 per share, or approximately
$38.8 million, related to fiscal year 2016 earnings. The $0.29 per share cash true-up dividend was determined by taking the
difference between total earnings for fiscal year 2016 and total regular quarterly cash dividends paid during fiscal year 2016,
divided by the number of shares outstanding as of October 24, 2016. The cash true-up dividend is payable on December 2,
2016 to stockholders of record as of the close of business on November 18, 2016, and is the result of the Board of Directors'
commitment to distribute to stockholders 100% of the annual earnings of Capitol Federal Financial, Inc. for fiscal year 2016.
At September 30, 2016, Capitol Federal Financial, Inc., at the holding company level, had $108.2 million on deposit at the
Bank. For fiscal year 2017, it is the intent of the Board of Directors and management to continue with the payout of 100% of
the Company's earnings to its stockholders. The payout is expected to be in the form of regular quarterly cash dividends of
$0.085 per share, totaling $0.34 for the year, and a cash true-up dividend equal to fiscal year 2017 earnings in excess of the
amount paid as regular quarterly cash dividends during fiscal year 2017. It is anticipated that the fiscal year 2017 cash true-
up dividend will be paid in December 2017. Dividend payments depend upon a number of factors including the Company's
financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to
make capital distributions to the Company, and the amount of cash at the holding company.
The following table presents regular quarterly dividends and special dividends paid in calendar years 2016, 2015, and 2014.
The amounts represent cash dividends paid during each period. The 2016 true-up dividend amount presented represents the
dividend payable on December 2, 2016 to stockholders of record as of November 18, 2016.
2016
Calendar Year
2015
2014
Amount
Per Share
Amount
Per Share
Amount
Per Share
(Dollars in thousands, except per share amounts)
Regular quarterly dividends paid
Quarter ended March 31
$
11,305
$
0.085
$
11,592
$
0.085
$
10,513
$
Quarter ended June 30
Quarter ended September 30
Quarter ended December 31
True-up dividends paid
True Blue dividends paid
11,314
11,323
11,363
38,835
33,274
0.085
0.085
0.085
0.290
0.250
11,585
11,385
11,303
33,248
33,924
0.085
0.085
0.085
0.250
0.250
10,399
10,318
10,226
35,450
34,663
Calendar year-to-date dividends paid $
117,414
$
0.880
$
113,037
$
0.840
$
111,569
$
0.075
0.075
0.075
0.075
0.260
0.250
0.810
In October 2015, the Company announced a stock repurchase plan for up to $70.0 million of common stock. It is anticipated
that shares will be purchased from time to time based upon market conditions and available liquidity. There is no expiration
for this repurchase plan. The Company did not repurchase any shares during fiscal year 2016.
60 Weighted Average Yields and Rates. The following table presents the weighted average yields on interest-earning assets,
the weighted average rates paid on interest-bearing liabilities, and the resultant interest rate spreads at the dates indicated. As
previously discussed, the daily leverage strategy was not in place at September 30, 2016, so the end of period yields/rates
presented at September 30, 2016 in the table below do not reflect the effects of this strategy. At September 30, 2015 and
2014, $700.0 and $800.0 million, respectively, of the daily leverage strategy was in place. The weighted average yields and
rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates.
Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.
Yield on:
Loans receivable
MBS
Investment securities
FHLB stock
Cash and cash equivalents
Combined yield on interest-earning assets
Rate paid on:
Checking deposits
Savings deposits
Money market deposits
Retail certificates
Wholesale certificates
Total deposits
FHLB advances
FHLB line of credit
FHLB borrowings
Repurchase agreements
Total borrowings
Combined rate paid on interest-bearing liabilities
Net interest rate spread
At September 30,
2016
2015
2014
3.58%
3.65%
3.75%
2.19
1.20
5.98
0.49
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1.84
Average Balance Sheets. The following table presents the average balances of our assets, liabilities, and stockholders'
equity, and the related weighted average yields and rates on our interest-earning assets and interest-bearing liabilities for the
periods indicated. Weighted average yields are derived by dividing annual income by the average balance of the related
assets, and weighted average rates are derived by dividing annual expense by the average balance of the related liabilities, for
the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and
rates include amortization of fees, costs, premiums and discounts which are considered adjustments to yields/rates. Weighted
average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.
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64
Comparison of Operating Results for the Years Ended September 30, 2016 and 2015
For fiscal year 2016, the Company recognized net income of $83.5 million, or $0.63 per share, compared to net income of
$78.1 million, or $0.58 per share, for fiscal year 2015. The $5.4 million, or 6.9%, increase in net income was due primarily
to a $2.4 million increase in net interest income and a $2.2 million increase in non-interest income. The $2.4 million, or
1.3%, increase in net interest income from the prior fiscal year was due primarily to an $8.2 million decrease in interest
expense on term borrowings, partially offset by a $4.7 million increase in interest expense on deposits.
Net income attributable to the daily leverage strategy was $2.3 million during the current fiscal year, compared to $2.8
million for the prior fiscal year. The decrease was due to the average borrowings rate on the FHLB line of credit increasing
more than the average yield earned on the cash balances held at the Federal Reserve Bank.
The net interest margin increased two basis points, from 1.73% for the prior fiscal year to 1.75% for the current fiscal year.
Excluding the effects of the daily leverage strategy, the net interest margin would have increased three basis points, from
2.07% for the prior fiscal year to 2.10% for the current fiscal year. The increase in the net interest margin was due mainly to
a decrease in interest expense on term borrowings, partially offset by an increase in interest expense on deposits. The
positive impact on the net interest margin resulting from the shift in the mix of interest-earning assets from relatively lower
yielding securities to higher yielding loans was offset by a decrease in the loan portfolio yield.
Interest and Dividend Income
The weighted average yield on total interest-earning assets increased three basis points, from 2.71% for the prior fiscal year
to 2.74% for the current fiscal year, and the average balance of interest-earning assets increased $25.4 million from the prior
fiscal year. Absent the impact of the daily leverage strategy, the weighted average yield on total interest-earning assets would
have decreased one basis point, from 3.22% for the prior fiscal year to 3.21% for the current fiscal year, while the average
balance would have increased $40.5 million. The following table presents the components of interest and dividend income
for the time periods presented along with the change measured in dollars and percent.
For the Year Ended
September 30,
Change Expressed in:
2016
2015
Dollars
Percent
(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable
MBS
FHLB stock
Cash and cash equivalents
Investment securities
$
243,311
$
235,500
$
29,794
12,252
9,831
5,925
36,647
12,556
5,477
7,182
Total interest and dividend income
$
301,113
$
297,362
$
7,811
(6,853)
(304)
4,354
(1,257)
3,751
3.3%
(18.7)
(2.4)
79.5
(17.5)
1.3
The increase in interest income on loans receivable was due to a $376.4 million increase in the average balance of the
portfolio, partially offset by a nine basis point decrease in the weighted average yield on the portfolio, to 3.60% for the
current fiscal year. Loan growth was primarily funded through cash flows from the MBS and investment securities
portfolios. The decrease in the weighted average yield was due primarily to loans repricing to lower market rates and the
origination and purchase of loans between periods at rates less than the existing portfolio rate, along with an increase in the
amortization of premiums paid for correspondent loans.
The decrease in interest income on the MBS portfolio was due primarily to a $265.5 million decrease in the average balance
of the portfolio as cash flows not reinvested were used to fund loan growth. Additionally, the weighted average yield on the
MBS portfolio decreased seven basis points, from 2.25% during the prior fiscal year to 2.18% for the current fiscal year. The
decrease in the weighted average yield was due primarily to an increase in the impact of net premium amortization. Net
premium amortization of $5.0 million during the current fiscal year decreased the weighted average yield on the portfolio by
37 basis points. During the prior fiscal year, $5.4 million of net premiums were amortized, which decreased the weighted
average yield on the portfolio by 32 basis points. As of September 30, 2016, the remaining net balance of premiums on our
portfolio of MBS was $13.0 million.
65 The increase in interest income on cash and cash equivalents was due primarily to a 20 basis point increase in the weighted
average yield resulting from an increase in the yield earned on balances held at the Federal Reserve Bank.
The decrease in interest income on investment securities was due primarily to a $123.8 million decrease in the average
balance, partially offset by a four basis point increase in the weighted average yield on the portfolio. Cash flows not
reinvested in the portfolio were used to fund loan growth.
Interest Expense
The weighted average rate paid on total interest-bearing liabilities decreased one basis point, from 1.12% for the prior fiscal
year to 1.11% for the current fiscal year, while the average balance of interest-bearing liabilities increased $138.5 million
from the prior year fiscal year. Absent the impact of the daily leverage strategy, the weighted average rate paid on total
interest-bearing liabilities would have decreased seven basis points from the prior year fiscal year, to 1.28% for the current
fiscal year, due primarily to a decrease in the cost of term borrowings, while the average balance of interest-bearing liabilities
would have increased $154.1 million due primarily to growth in deposits. The following table presents the components of
interest expense for the time periods presented, along with the change measured in dollars and percent.
For the Year Ended
September 30,
Change Expressed in:
2016
2015
Dollars
Percent
(Dollars in thousands)
INTEREST EXPENSE:
FHLB advances
$
54,969
$
62,437
$
FHLB line of credit
Deposits
Repurchase agreements
10,122
37,859
5,981
5,360
33,119
6,678
Total interest expense
$
108,931
$
107,594
$
(7,468)
4,762
4,740
(697)
1,337
(12.0)%
88.8
14.3
(10.4)
1.2
The decrease in interest expense on FHLB advances was due mainly to a 20 basis point decrease in the weighted average rate
paid on the portfolio, to 2.23% for the current fiscal year, along with a $102.4 million decrease in the average balance due to
not replacing all of the FHLB advances that matured during the current fiscal year as a result of growth in the deposit
portfolio. The decrease in the weighted average rate paid was due primarily to the prepayment of a $175.0 million advance
late in the prior fiscal year with an effective rate of 5.08%, which was replaced with a $175.0 million advance with an
effective rate of 2.18%. The increase in interest expense on FHLB line of credit borrowings was due primarily to a 23 basis
point increase in the weighted average rate paid on the borrowings used to fund the daily leverage strategy.
The increase in interest expense on deposits was due primarily to a five basis point increase in the weighted average rate, to
0.75% for the current fiscal year, along with growth in the portfolio. The increase in weighted average rate was primarily in
the retail certificate of deposit portfolio. The average balance of the deposit portfolio increased $270.3 million for the current
fiscal year, with the majority of the increase in the retail deposit portfolio, specifically the certificate of deposit and checking
portfolios. The decrease in interest expense on repurchase agreements was due to the maturity late in the prior fiscal year of a
$20.0 million repurchase agreement at a rate of 4.45% that was not replaced.
Provision for Credit Losses
The Bank recorded a negative provision for credit losses during the current fiscal year of $750 thousand, compared to a
provision for credit losses during the prior year fiscal year of $771 thousand. The negative provision for credit losses during
the current fiscal year was due to the continued low level of net loan charge-offs, due partially to improving real estate
values, along with improving delinquent loan ratios. The collateral value and historical loss factors within our ACL formula
analysis model decreased during the current fiscal year due to the improvement in real estate values and reduction in net loan
charge-offs. Net loan charge-offs were $153 thousand for the current fiscal year, composed of charge-offs totaling $630
thousand, partially offset by recoveries of $477 thousand. Net loan charge-offs were $555 thousand for the prior fiscal year.
At September 30, 2016, loans 30 to 89 days delinquent were 0.33% of total loans and loans 90 or more days delinquent or in
66 foreclosure were 0.24% of total loans. At September 30, 2015, loans 30 to 89 days delinquent were 0.41% of total loans and
loans 90 or more days delinquent or in foreclosure were 0.25% of total loans.
Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change
measured in dollars and percent.
NON-INTEREST INCOME:
Retail fees and charges
Income from BOLI
Other non-interest income
Total non-interest income
For the Year Ended
September 30,
Change Expressed in:
2016
2015
Dollars
Percent
(Dollars in thousands)
$
$
14,835
$
14,897
$
3,420
5,057
1,150
5,093
23,312
$
21,140
$
(62)
2,270
(36)
2,172
(0.4)%
197.4
(0.7)
10.3
The increase in income from BOLI was due mainly to the purchase of a new BOLI investment late in the prior fiscal year, as
well as to the receipt of death benefits in the current fiscal year and no such proceeds in the prior fiscal year.
Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change
measured in dollars and percent.
For the Year Ended
September 30,
Change Expressed in:
2016
2015
Dollars
Percent
(Dollars in thousands)
NON-INTEREST EXPENSE:
Salaries and employee benefits
Occupancy, net
Information technology and communications
Federal insurance premium
Deposit and loan transaction costs
Regulatory and outside services
Advertising and promotional
Low income housing partnerships
Office supplies and related expense
Other non-interest expense
Total non-interest expense
$
42,378
$
43,309
$
10,576
10,540
5,076
5,585
5,645
4,609
3,872
2,640
3,384
9,944
10,360
5,495
5,417
5,347
4,547
4,572
2,088
3,290
$
94,305
$
94,369
$
(931)
632
180
(419)
168
298
62
(700)
552
94
(64)
(2.1)%
6.4
1.7
(7.6)
3.1
5.6
1.4
(15.3)
26.4
2.9
(0.1)
The decrease in salaries and employee benefits was due primarily to a decrease in stock compensation resulting from the final
vesting of a large stock grant in the second quarter of the current fiscal year and a decrease in employee benefit expenses.
The increase in occupancy, net expense was due mainly to non-capitalizable costs and depreciation associated with the
remodel of the Bank's Kansas City market area operations center. The decrease in federal insurance premiums was due
primarily to a decrease in the FDIC base assessment rate. The decrease in the FDIC base assessment rate was effective July
1, 2016 and was the result of the FDIC Deposit Insurance Fund reaching 1.15% of total estimated insured deposits of the
banking system on June 30, 2016. We anticipate our federal insurance premium expense will decrease approximately $1.5
million in fiscal year 2017, as compared to the current fiscal year, due to the decrease in the FDIC base assessment rate. The
decrease in low income housing partnerships expense was due primarily to lower impairments in the current fiscal year as
67 compared to the prior fiscal year. The increase in office supplies and related expense was due primarily to the purchase of
cards enabled with chip card technology.
The Company's efficiency ratio was 43.76% for the current fiscal year compared to 44.74% for the prior fiscal year. The
change in the efficiency ratio was due primarily to an increase in both net interest income and non-interest income. The
efficiency ratio is a measure of a financial institution's total non-interest expense as a percentage of the sum of net interest
income (pre-provision for credit losses) and non-interest income. A lower value indicates that the financial institution is
generating revenue with a lower level of expense.
The Bank invests in low income housing partnerships that make equity investments in affordable housing properties and is a
limited partner in these partnerships. The Bank has been accounting for these partnerships using the equity method of
accounting as two of the Bank's officers were involved in the operational management of the low income housing partnership
investment group. Effective September 30, 2016, those two Bank officers discontinued their involvement in the operational
management of the investment group. On October 1, 2016, the Bank began using the proportional method of accounting for
its low income housing partnership investments. In fiscal year 2017, the Bank will no longer report low income housing
partnership expenses in non-interest expense; rather, the pretax operating losses and related tax benefits from the investments
will be reported as a component of income tax expense. Had this change occurred during fiscal year 2016, our efficiency
ratio would have been approximately 180 basis points lower and the change in accounting for low income housing
partnerships would have had a negligible impact on the Company's net income for fiscal year 2016.
Income Tax Expense
Income tax expense was $38.4 million for the current fiscal year compared to $37.7 million for the prior fiscal year. The
effective tax rate for the current fiscal year was 31.5% compared to 32.5% for the prior fiscal year. The decrease in the
effective tax rate was due primarily to an increase in nontaxable income related to BOLI and higher low income housing tax
credits in the current fiscal year. Management anticipates the effective tax rate for fiscal year 2017 will be approximately
34%. The increase in the effective tax rate in fiscal year 2017 over the current fiscal year is due mainly to the change in the
accounting treatment of our low income housing partnerships, which accounts for approximately 250 basis points of the
projected fiscal year 2017 estimated tax rate.
Comparison of Operating Results for the Years Ended September 30, 2015 and 2014
For fiscal year 2015, the Company recognized net income of $78.1 million, or $0.58 per share, compared to net income of
$77.7 million, or $0.56 per share, for fiscal year 2014. The increase in earnings per share was due mainly to the reduced
number of shares outstanding as a result of the repurchase of shares pursuant to the Company's recently completed $175.0
million stock repurchase plan. The $399 thousand, or 0.5%, increase in net income was due primarily to the daily leverage
strategy. Net income attributable to the daily leverage strategy was $2.8 million during fiscal year 2015, compared to $501
thousand during fiscal year 2014.
Net interest income increased $5.6 million, or 3.1%, from fiscal year 2014 to $189.8 million for fiscal year 2015 due
primarily to the daily leverage strategy. The net interest margin decreased 27 basis points, from 2.00% for fiscal year 2014,
to 1.73% for fiscal year 2015 as a result of the daily leverage strategy. Excluding the effects of the daily leverage strategy,
the net interest margin would have been 2.07% for fiscal year 2015 and fiscal year 2014. The positive impact on the net
interest margin resulting from the shift in the mix of interest-earning assets from relatively lower yielding securities to higher
yielding loans was offset by a decrease in market interest rates.
The Company's efficiency ratio was 44.74% for fiscal year 2015 compared to 43.72% for fiscal year 2014. The change in the
efficiency ratio was due primarily to an increase in non-interest expense.
68 Interest and Dividend Income
The weighted average yield on total interest-earning assets decreased 44 basis points, from 3.15% for fiscal year 2014, to
2.71% for fiscal year 2015, while the average balance of interest-earning assets increased $1.74 billion from fiscal year 2014.
The decrease in the weighted average yield and the increase in the average balance were due primarily to the daily leverage
strategy. Absent the impact of the daily leverage strategy, the weighted average yield on total interest-earning assets would
have decreased from 3.25% for fiscal year 2014 to 3.22% for fiscal year 2015, while the average balance would have
increased $18.1 million. The following table presents the components of interest and dividend income for the time periods
presented along with the change measured in dollars and percent.
For the Year Ended
September 30,
Change Expressed in:
2015
2014
Dollars
Percent
(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable
MBS
FHLB stock
Investment securities
Cash and cash equivalents
$
235,500
$
229,944
$
36,647
12,556
7,182
5,477
45,300
6,555
7,385
1,062
Total interest and dividend income
$
297,362
$
290,246
$
5,556
(8,653)
6,001
(203)
4,415
7,116
2.4%
(19.1)
91.5
(2.7)
415.7
2.5
The increase in interest income on loans receivable was due to a $307.5 million increase in the average balance of the
portfolio, partially offset by a nine basis point decrease in the weighted average yield on the portfolio, to 3.69% for fiscal
year 2015. The weighted average yield decrease was due primarily to adjustable-rate loans, endorsements, and refinances
repricing loans to lower market rates, along with an increase in net deferred premium amortization.
The decrease in interest income on the MBS portfolio was due primarily to a $299.4 million decrease in the average balance
of the portfolio as cash flows not reinvested were used largely to fund loan growth. Additionally, the weighted average yield
on the MBS portfolio decreased 10 basis points, from 2.35% during fiscal year 2014, to 2.25% for fiscal year 2015. The
decrease in the weighted average yield was due primarily to repayments of MBS with yields greater than the weighted
average yield on the existing portfolio, as well as to an increase in the impact of net premium amortization. Net premium
amortization of $5.4 million during fiscal year 2015 decreased the weighted average yield on the portfolio by 32 basis points.
During fiscal year 2014, $5.7 million of net premiums were amortized, which decreased the weighted average yield on the
portfolio by 29 basis points. As of September 30, 2015, the remaining net balance of premiums on our portfolio of MBS was
$14.2 million.
The increase in dividends received on FHLB stock was due primarily to a $70.5 million increase in the average balance as a
result of the daily leverage strategy, as well as to an increase in the FHLB dividend rate between the two periods. The
increase in interest income on cash and cash equivalents was due primarily to a $1.71 billion increase in the average balance
resulting mainly from the daily leverage strategy.
69 Interest Expense
The weighted average rate paid on total interest-bearing liabilities decreased 24 basis points, from 1.36% for fiscal year 2014,
to 1.12% for fiscal year 2015, while the average balance of interest-bearing liabilities increased $1.83 billion from fiscal year
2014 due primarily to the daily leverage strategy. Absent the impact of the daily leverage strategy, the weighted average rate
paid on total interest-bearing liabilities would have decreased six basis points from fiscal year 2014, to 1.35%, due primarily
to a decrease in the cost of term borrowings while the average balance of interest-bearing liabilities would have increased
$108.4 million, primarily as a result of deposit growth. The following table presents the components of interest expense for
the time periods presented, along with the change measured in dollars and percent.
For the Year Ended
September 30,
Change Expressed in:
2015
2014
Dollars
Percent
(Dollars in thousands)
INTEREST EXPENSE:
FHLB borrowings
$
67,797
$
63,217
$
Deposits
Repurchase agreements
33,119
6,678
32,604
10,282
Total interest expense
$
107,594
$
106,103
$
4,580
515
(3,604)
1,491
7.2%
1.6
(35.1)
1.4
The increase in interest expense on FHLB borrowings was due primarily to a $1.72 billion increase in the average balance on
the FHLB line of credit as a result of the daily leverage strategy, partially offset by a six basis point decrease in the weighted
average rate paid on FHLB advances, to 2.43% for fiscal year 2015. The decrease in the weighted average rate paid on the
FHLB advance portfolio was primarily a result of renewals of advances to lower market rates during fiscal year 2014.
The decrease in interest expense on repurchase agreements was due primarily to the maturity of a $100.0 million agreement
at 4.20% during fiscal year 2014. The repurchase agreement was replaced with an FHLB advance, which was at a lower rate
than the maturing repurchase agreement.
Provision for Credit Losses
The Bank recorded a provision for credit losses during fiscal year 2015 of $771 thousand compared to a provision for credit
losses during fiscal year 2014 of $1.4 million. The $771 thousand provision for credit losses in fiscal year 2015 takes into
account net charge-offs of $555 thousand and loan growth. Net charge-offs in fiscal year 2014 were $1.0 million.
Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change
measured in dollars and percent.
For the Year Ended
September 30,
Change Expressed in:
2015
2014
Dollars
Percent
(Dollars in thousands)
NON-INTEREST INCOME:
Retail fees and charges
Income from BOLI
Other non-interest income
Total non-interest income
$
$
14,897
$
14,937
$
1,150
5,093
1,993
6,025
21,140
$
22,955
$
(40)
(843)
(932)
(1,815)
(0.3)%
(42.3)
(15.5)
(7.9)
The decrease in income from BOLI was largely due to the receipt of death benefits during fiscal year 2014. The decrease in
other non-interest income was due mainly to a decrease in annual insurance commissions received from certain insurance
providers as a result of less favorable claims experience year-over-year.
70 Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change
measured in dollars and percent.
For the Year Ended
September 30,
Change Expressed in:
2015
2014
Dollars
Percent
(Dollars in thousands)
NON-INTEREST EXPENSE:
Salaries and employee benefits
$
43,309
$
43,757
$
Information technology and communications
10,360
Occupancy, net
Federal insurance premium
Deposit and loan transaction costs
Regulatory and outside services
Low income housing partnerships
Advertising and promotional
Office supplies and related expense
Other non-interest expense
Total non-interest expense
9,944
5,495
5,417
5,347
4,572
4,547
2,088
3,290
9,429
10,268
4,536
5,329
5,572
2,416
4,195
2,096
2,939
(448)
931
(324)
959
88
(225)
2,156
352
(8)
351
(1.0)%
9.9
(3.2)
21.1
1.7
(4.0)
89.2
8.4
(0.4)
11.9
4.2
$
94,369
$
90,537
$
3,832
The decrease in salaries and employee benefits expense was due primarily to fiscal year 2014 including compensation
expense on unallocated Employee Stock Ownership Plan shares related to two True Blue® Capitol dividends paid compared
to one True Blue Capitol dividend paid during fiscal year 2015. The increase in information technology and communications
expense was primarily related to continued upgrades to our information technology infrastructure. The increase in federal
insurance premium was due primarily to the daily leverage strategy. The increase in low income housing partnerships
expense was due mainly to impairments, as well as to an increase in amortization expense due to an increase in the overall
investment balance as a result of funding new partnerships and the general life cycle of the partnership activities.
Income Tax Expense
Income tax expense was $37.7 million for fiscal year 2015 compared to $37.5 million for fiscal year 2014. The effective tax
rate for fiscal year 2015 and fiscal year 2014 was 32.5%.
71 Liquidity and Capital Resources
Liquidity refers to our ability to generate sufficient cash to fund ongoing operations, to repay maturing certificates of deposit
and other deposit withdrawals, to repay maturing borrowings, and to fund loan commitments. Liquidity management is both
a daily and long-term function of our business management. The Company's most available liquid assets are represented by
cash and cash equivalents, AFS securities, and short-term investment securities. The Bank's primary sources of funds are
deposits, FHLB borrowings, repurchase agreements, repayments and maturities of outstanding loans and MBS and other
short-term investments, and funds provided by operations. The Bank's term borrowings primarily have been used to manage
the Bank's interest rate risk with the intent to improve the earnings of the Bank while maintaining capital ratios in excess of
regulatory standards for well-capitalized financial institutions. In addition, the Bank's focus on managing risk has provided
additional liquidity capacity by maintaining a balance of MBS and investment securities available as collateral for
borrowings.
We generally intend to manage cash reserves sufficient to meet short-term liquidity needs, which are routinely forecasted for
10, 30, and 365 days. Additionally, on a monthly basis, we perform a liquidity stress test in accordance with the Interagency
Policy Statement on Funding and Liquidity Risk Management. The liquidity stress test incorporates both short-term and
long-term liquidity scenarios in order to identify and to quantify liquidity risk. Management also monitors key liquidity
statistics related to items such as wholesale funding gaps, borrowings capacity, and available unpledged collateral, as well as
various liquidity ratios.
In the event short-term liquidity needs exceed available cash, the Bank has access to a line of credit at FHLB and the Federal
Reserve Bank discount window. When the daily leverage strategy is in place, the Bank maintains the resulting excess cash
reserves from the borrowings on the FHLB line of credit at the Federal Reserve Bank, which can be used to meet any short-
term liquidity needs. Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40% of regulatory total assets
without the pre-approval of FHLB senior management. In June 2016, the president of FHLB approved an increase, through
July 2017, in the Bank's borrowing limit to 55% of Bank Call Report total assets. The amount that can be borrowed from the
Federal Reserve Bank discount window is based upon the fair value of securities pledged as collateral and certain other
characteristics of those securities, and is used only when other sources of short-term liquidity are unavailable. Management
tests the Bank's access to the Federal Reserve Bank discount window annually with a nominal, overnight borrowing.
If management observes a trend in the amount and frequency of line of credit utilization that is not in conjunction with a
planned strategy, such as the daily leverage strategy, 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 maturities of these
borrowings are generally staggered in order to mitigate the risk of a highly negative cash flow position at maturity.
The Bank's internal policy limits total borrowings to 55% of total assets. At September 30, 2016, the Bank had term
borrowings, at par, of $2.58 billion, or approximately 28% of total assets.
The amount of FHLB advances outstanding at September 30, 2016 was $2.38 billion, of which $500.0 million was scheduled
to mature in the next 12 months. All FHLB borrowings are secured by certain qualifying loans pursuant to a blanket
collateral agreement with FHLB. At September 30, 2016, the Bank's ratio of the par value of FHLB borrowings to Call
Report total assets was 26%. When the full daily leverage strategy is in place, FHLB borrowings are in excess of 40% of the
Bank's Call Report total assets, and are expected to be in excess of 40% as long as the Bank continues its daily leverage
strategy and FHLB senior management continue to approve the Bank's borrowing limit being in excess of 40% of Call Report
total assets. All or a portion of the borrowings against the FHLB line of credit in conjunction with the daily leverage strategy
could be repaid at any point in time while the strategy is in effect, if necessary. Additionally, the Bank could utilize the
repayment and maturity of outstanding loans, MBS, and other investments for liquidity needs rather than reinvesting such
funds into the related portfolios. At September 30, 2016, the Bank had $894.5 million of securities that were eligible but
unused as collateral for borrowing or other liquidity needs.
At September 30, 2016, the Bank had repurchase agreements of $200.0 million, or approximately 2% of total assets, none of
which was scheduled to mature in the next 12 months. The Bank may enter into additional repurchase agreements as
management deems appropriate, not to exceed 15% of total assets, and subject to a total borrowings limit of 55% as discussed
below. The Bank has pledged securities with an estimated fair value of $224.1 million as collateral for repurchase
agreements as of September 30, 2016. The securities pledged for the repurchase agreements will be delivered back to the
Bank when the repurchase agreements mature.
72
The Bank has access to other sources of funds for liquidity purposes, such as brokered and public unit deposits. As of
September 30, 2016, the Bank's policy allowed for combined brokered and public unit deposits up to 15% of total deposits.
At September 30, 2016, the Bank had public unit deposits totaling $370.0 million, which had an average remaining term to
maturity of eight months, or approximately 7% of total deposits, and no brokered deposits. Management continuously
monitors the wholesale deposit market for opportunities to obtain funds at attractive rates. The Bank had pledged securities
with an estimated fair value of $426.3 million as collateral for public unit deposits at September 30, 2016. The securities
pledged as collateral for public unit deposits are held under joint custody by FHLB and generally will be released upon
deposit maturity.
At September 30, 2016, $1.17 billion of the Bank's $2.83 billion of certificates of deposit was scheduled to mature within one
year. Included in the $1.17 billion was $309.4 million of public unit deposits. Based on our deposit retention experience and
our current pricing strategy, we anticipate the majority of the maturing retail certificates of deposit will renew or transfer to
other deposit products at the prevailing rate, although no assurance can be given in this regard. We also anticipate the
majority of the $309.4 million of maturing public unit deposits will be replaced with similar wholesale funding products.
While scheduled payments from the amortization of loans and MBS and payments on short-term investments are relatively
predictable sources of funds, deposit flows, prepayments on loans and MBS, and calls of investment securities are greatly
influenced by general interest rates, economic conditions, and competition, and are less predictable sources of funds. To the
extent possible, the Bank manages the cash flows of its loan and deposit portfolios by the rates it offers customers.
At September 30, 2016, cash and cash equivalents totaled $281.8 million, compared to $105.6 million at September 30, 2015,
excluding cash related to the daily leverage strategy. The increase in operating cash between periods was due primarily to the
Bank maintaining cash to pay-off a maturing FHLB advance subsequent to September 30, 2016, as well as the redemption of
FHLB stock in conjunction with the removal of the daily leverage strategy at September 30, 2016. A majority of the cash
received from the redemption of the FHLB stock was used to reacquire FHLB stock when the full daily leverage strategy was
reinstated on October 3, 2016.
73 d
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74
Limitations on Dividends and Other Capital Distributions
OCC regulations impose restrictions on savings institutions with respect to their ability to make distributions of capital,
which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital
account. Under FRB and OCC safe harbor regulations, savings institutions generally may make capital distributions during
any calendar year equal to earnings of the previous two calendar years and current year-to-date earnings. Savings institutions
must also maintain an applicable capital conservation buffer above minimum risk-based capital requirements in order to
avoid restrictions on capital distributions, including dividends. A savings institution that is a subsidiary of a savings and loan
holding company, such as the Company, that proposes to make a capital distribution must submit written notice to the OCC
and FRB 30 days prior to such distribution. The OCC and FRB may object to the distribution during that 30-day period
based on safety and soundness or other concerns. Savings institutions that desire to make a larger capital distribution, are
under special restrictions, or are not, or would not be, sufficiently capitalized following a proposed capital distribution must
obtain regulatory non-objection prior to making such a distribution.
The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to
make capital distributions to the Company. So long as the Bank remains well capitalized after each capital distribution,
operates in a safe and sound manner, and maintains an applicable capital conservation buffer above its minimum risk-based
capital requirements, it is management's belief that the OCC and FRB will continue to allow the Bank to distribute its
earnings to the Company, although no assurance can be given in this regard.
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, 2016, the Bank and Company
exceeded all regulatory capital requirements. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to
Consolidated Financial Statements – Note 12. Regulatory Capital Requirements" for additional information related to
regulatory capital.
The following table presents a reconciliation of equity under GAAP to regulatory capital amounts, as of September 30, 2016,
for the Bank and the Company (dollars in thousands):
Bank
Company
Total equity as reported under GAAP
$
1,240,827
$
Unrealized gains on AFS securities
Total tier 1 capital
ACL
Total capital
(5,915)
1,234,912
8,540
1,392,964
(5,915)
1,387,049
8,540
$
1,243,452
$
1,395,589
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, participation, 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.
75
The following table summarizes our contractual obligations and other material commitments, along with associated weighted
average rates as of September 30, 2016.
Maturity Range
Total
Less than
1 year
1 to 3
years
3 to 5
years
More than
5 years
(Dollars in thousands)
Operating leases
$
7,137
$
1,106
$
2,100
Certificates of deposit
$ 2,828,132
$ 1,172,398
$ 1,054,698
$
$
1,406
598,752
$
$
Rate
1.33%
0.90%
1.46%
1.97%
2,525
2,284
1.95%
FHLB advances
Rate
$ 2,375,000
$
500,000
$
775,000
$
800,000
$
300,000
2.17%
2.69%
1.84%
2.20%
2.09%
Repurchase agreements
$
200,000
$
— $
100,000
$
100,000
$
Rate
2.94%
—%
3.35%
2.53%
Commitments to originate and
purchase/participate in loans
$
237,749
$
237,749
$
Rate
3.48%
3.48%
— $
—%
— $
—%
Commitments to fund unused
home equity lines of credit
$
262,829
$
262,829
$
Rate
4.59%
4.59%
— $
—%
— $
—%
—
—%
—
—%
—
—%
A percentage of commitments to originate and purchase/participate in loans are expected to expire unfunded; therefore, 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, 2016.
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,
2016, or future periods.
76 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Asset and Liability Management and Market Risk
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 adaptation 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 analysis presented in the tables within this section reflect
the level of market risk at the Bank.
The general objective of our interest rate risk management program is to determine and manage an appropriate level of
interest rate risk while maximizing net interest income in a manner consistent with our policy to manage, to the extent
practicable, the exposure of net interest income to changes in market interest rates. The Board of Directors and ALCO
regularly review the Bank's interest rate risk exposure by forecasting the impact of hypothetical, alternative interest rate
environments on net interest income and the market value of portfolio equity ("MVPE") at various dates. The MVPE is
defined as the net of the present value of cash flows from existing assets, liabilities, and off-balance sheet instruments. The
present values are determined based upon market conditions as of the date of the analysis, as well as in alternative interest
rate environments, providing potential changes in the MVPE under those alternative interest rate environments. Net interest
income is projected in the same alternative interest rate environments with both a static balance sheet and management
strategies considered. The MVPE and net interest income analysis are also conducted to estimate our sensitivity to rates for
future time horizons based upon market conditions as of the date of the analysis. In addition to the interest rate environments
presented below, management also reviews the impact of non-parallel rate shock scenarios on a quarterly basis. These
scenarios consist of flattening and steepening the yield curve by changing short-term and long-term interest rates independent
of each other, and simulating cash flows and determining valuations as a result of these hypothetical changes in interest rates
to identify rate environments that pose the greatest risk to the Bank. This analysis helps management quantify the Bank's
exposure to changes in the shape of the yield curve.
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.
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 new 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.
During fiscal year 2016, management began using the results of a new deposit study that analyzed historical behavior of the
Bank's non-maturity deposits, and also analyzed historical correlation of the Bank's deposit rates to market interest rates.
This information is used in the Bank's interest rate risk model to predict the future balances of non-maturity deposit accounts,
as well as future offering rates on all deposits.
77 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, 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, 2016.
Qualitative Disclosure about Market Risk
Change in Net Interest Income. The Bank's net interest income projections are a reflection of the response to interest rates
of the assets and liabilities that are expected to mature or reprice over the next year. Repricing occurs as a result of cash
flows that are received or paid on assets or due on liabilities which would be replaced at then current market interest rates.
The Bank's borrowings and certificate of deposit portfolios have stated maturities and the cash flows related to the Bank's
liabilities do not generally fluctuate as a result of changes in interest rates. 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.
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 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). At all dates presented, the three-month Treasury bill yield
was less than one percent, so the -100 basis points scenario was not applicable. Estimations of net interest income used in
preparing the table below were based upon the assumptions that the total composition of interest-earning assets and interest-
bearing liabilities does not change materially and that any repricing of assets or liabilities occurs at anticipated product and
market rates for the alternative rate environments as of the dates presented. The estimation of net interest income does not
include any projected gains or losses related to the sale of loans or securities, or income derived from non-interest income
sources, but does include the use of different prepayment assumptions in the alternative interest rate environments. It is
important to consider that estimated changes in net interest income are for a cumulative four-quarter period. These do not
reflect the earnings expectations of management.
Change
(in Basis Points)
in Interest Rates(1)
Net Interest Income At September 30,
2016
2015
Amount ($)
Change ($)
Change (%)
Amount ($)
Change ($)
Change (%)
-100 bp
000 bp
+100 bp
+200 bp
+300 bp
N/A
$
188,696
$
192,921
194,919
195,187
N/A
—
4,225
6,223
6,491
(Dollars in thousands)
N/A
N/A
—% $
190,776
$
2.24
3.30
3.44
189,248
186,443
181,652
N/A
—
(1,528)
(4,333)
(9,124)
N/A
—%
(0.80)
(2.27)
(4.78)
(1) Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities.
The change in net interest income projections at September 30, 2016 compared to September 30, 2015 was due primarily to
the utilization of the new deposit study in the Bank's interest rate risk model, specifically related to certificates of deposit.
The new deposit study indicated a reduction in the correlation of interest rates offered by the Bank on certificates of deposit
to market interest rates, compared to the previous methodology. As a result, the Bank's projected offering rates on certificates
of deposit do not respond as quickly to changes in market interest rates so interest expense on certificates of deposit in the
78 rising interest rate scenarios over the 12-month horizon was significantly lower at September 30, 2016 compared to
September 30, 2015, which increased net interest income projections.
Change in MVPE. 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
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 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.
The following table sets forth the estimated change in the MVPE for each date presented based on the indicated
instantaneous, parallel and permanent change in interest rates. The change in each interest rate environment represents the
difference between the MVPE in the base case (assumes the forward market interest rates implied by the yield curve are
realized) and the MVPE in each alternative interest rate environment (assumes market interest rates have a parallel shift in
rates). At all dates presented, the three-month Treasury bill yield was less than one percent, so the -100 basis points scenario
was not applicable. The estimations of the MVPE used in preparing the table below were based upon the assumptions that
the total composition of interest-earning assets and interest-bearing liabilities does not change, that any repricing of assets or
liabilities occurs at current product or market rates for the alternative rate environments as of the dates presented, and that
different prepayment rates were used in each alternative interest rate environment. The estimated MVPE results from the
valuation of cash flows from financial assets and liabilities over the anticipated lives of each for each interest rate
environment. The table below presents the effects of the changes in interest rates on our assets and liabilities as they mature,
repay, or reprice, as shown by the change in the MVPE for alternative interest rates.
Change
(in Basis Points)
in Interest Rates(1)
Market Value of Portfolio Equity At September 30,
2016
2015
Amount ($)
Change ($)
Change (%)
Amount ($)
Change ($)
Change (%)
-100 bp
000 bp
+100 bp
+200 bp
+300 bp
N/A
$
1,448,758
$
1,364,879
1,208,130
1,014,446
N/A
—
(83,879)
(240,628)
(434,312)
(Dollars in thousands)
N/A
N/A
—% $
1,457,514
$
(5.79)
(16.61)
(29.98)
1,343,864
1,189,194
1,021,380
N/A
—
(113,650)
(268,320)
(436,134)
N/A
—%
(7.80)
(18.41)
(29.92)
(1) Assumes an instantaneous, permanent, and parallel change in interest rates at all maturities.
As interest rates rise, the market value of the Bank's assets decreases at a faster pace than the market value of the Bank's
liabilities, which results in a decrease to the Bank's MVPE. As interest rates decrease, the opposite is true. The new deposit
study discussed above did not have a material impact on the MVPE at September 30, 2016.
79 Gap Table. The following gap table summarizes the anticipated maturities or repricing periods of the Bank's interest-earning
assets and interest-bearing liabilities based on the information and assumptions set forth in the notes below. Cash flow
projections for mortgage-related assets are calculated based on current interest rates. Prepayment projections are subjective
in nature, involve uncertainties and assumptions and, therefore, cannot be determined with a high degree of accuracy.
Although certain assets and liabilities may have similar maturities or periods to repricing, they may react differently to
changes in market interest rates. Assumptions may not reflect how actual yields and costs respond to market interest rate
changes. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain
assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the
asset. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the gap table below. For additional information regarding the impact of changes in interest
rates, see the preceding Percentage Change in Net Interest Income and Percentage Change in MVPE discussions and tables.
Interest-earning assets:
Loans receivable(1)
Securities(2)
Other interest-earning assets
More Than More Than
Within
One Year to
Three Years
Over
One Year
Three Years
to Five Years
(Dollars in thousands)
Five Years
Total
$2,057,584
$ 2,057,651
$ 1,137,623
$1,912,230
$7,165,088
803,035
264,469
472,372
192,328
150,930
1,618,665
—
—
—
264,469
Total interest-earning assets
3,125,088
2,530,023
1,329,951
2,063,160
9,048,222
Interest-bearing liabilities:
Non-maturity deposits(3)
Certificates of deposit
Borrowings(4)
378,978
393,975
1,177,093
1,050,002
500,000
875,000
290,103
599,899
900,000
1,381,027
1,138
343,790
Total interest-bearing liabilities
2,056,071
2,318,977
1,790,002
1,725,955
2,444,083
2,828,132
2,618,790
7,891,005
Excess (deficiency) of interest-earning assets over
interest-bearing liabilities
$1,069,017
$
211,046
$ (460,051)
$ 337,205
$1,157,217
Cumulative excess of interest-earning assets over
interest-bearing liabilities
$1,069,017
$ 1,280,063
$
820,012
$1,157,217
Cumulative excess of interest-earning assets over interest-bearing
liabilities as a percent of total Bank assets at:
September 30, 2016
September 30, 2015
Cumulative one-year gap - interest rates +200 bps at:
September 30, 2016
September 30, 2015
11.54%
7.48
2.25
0.26
13.81%
8.85%
12.49%
(1) ARM loans are included in the period in which the rate is next scheduled to adjust or in the period in which repayments are expected to occur, or
prepayments are expected to be received, prior to their next rate adjustment, rather than in the period in which the loans are due. Fixed-rate loans are
included in the periods in which they are scheduled to be repaid, based on scheduled amortization and prepayment assumptions. Balances are net of
deferred fees and exclude loans 90 or more days delinquent or in foreclosure.
(2) MBS reflect projected prepayments at amortized cost. Investment securities are presented based on contractual maturities, term to call dates or pre-
refunding dates as of September 30, 2016, at amortized cost.
80 (3) Although the Bank's checking, savings, and money market accounts are subject to immediate withdrawal, management considers a substantial amount
of these accounts to be core deposits having significantly longer effective maturities. The decay rates (the assumed rates at which the balances of
existing accounts decline) used on these accounts is based on assumptions developed from our actual experiences with these accounts. If all of the
Bank's checking, savings, and money market accounts had been assumed to be subject to repricing within one year, interest-bearing liabilities which
were estimated to mature or reprice within one year would have exceeded interest-earning assets with comparable characteristics by $996.1 million, for
a cumulative one-year gap of -10.7% of total assets.
(4) Borrowings exclude deferred prepayment penalty costs.
The increase in the one-year gap at September 30, 2016 compared to September 30, 2015 was largely a result of lower long-
term interest rates at September 30, 2016 than at September 30, 2015. In addition, the utilization of the new deposit study
discussed above increased the expected average lives of non-maturity deposits which reduced the amount of deposits
repricing over the 12-month horizon and made more positive the one-year gap at September 30, 2016 compared to September
30, 2015.
The following table presents the weighted average yields/rates and WALs (in years), after applying prepayment, call
assumptions, and decay rates for our interest-earning assets and interest-bearing liabilities as of September 30, 2016. Yields
presented for interest-earning assets include the amortization of fees, costs, premiums and discounts which are considered
adjustments to the yield. The interest rate presented for term borrowings is the effective rate, which includes the net impact
of the amortization of deferred prepayment penalties resulting from FHLB advances previously repaid. The maturity and
repricing terms presented for one- to four-family loans represent the contractual terms of the loan.
Amount
Yield/Rate WAL
Category % of Total
% of
(Dollars in thousands)
Investment securities
MBS - fixed
MBS - adjustable
$
382,097
839,755
406,323
Total investment securities and MBS
1,628,175
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
FHLB stock
Cash and cash equivalents
Total interest-earning assets
Non-maturity deposits
Retail certificates of deposit
Public units
Total deposits
Term borrowings
1,258,122
4,204,430
182,496
5,645,048
293,375
872,414
138,685
1,304,474
6,949,522
109,970
281,764
8,969,431
2,335,886
2,458,160
369,972
5,164,018
2,575,000
$
$
Total interest-bearing liabilities
$
7,739,018
23.5%
51.6
24.9
100.0%
18.1%
60.5
2.6
81.2
4.2
12.6
2.0
18.8
100.0%
45.2%
47.6
7.2
100.0%
1.20%
2.16
2.25
1.95
3.14
3.89
4.32
3.74
1.79
2.96
4.49
2.86
3.58
5.98
0.49
3.22
0.16
1.43
0.70
0.80
2.29
1.30
1.2
2.9
4.7
2.9
3.7
5.3
2.9
4.9
3.4
2.5
2.0
2.7
4.4
2.9
—
4.0
8.3
1.9
0.6
4.7
2.9
4.1
4.3%
9.4
4.5
18.2
14.0
46.9
2.0
62.9
3.3
9.7
1.6
14.6
77.5
1.2
3.1
100.0%
30.2%
31.7
4.8
66.7
33.3
100.0%
81 Item 8. Financial Statements and Supplementary Data
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, 2016, based on criteria established in Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management's Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected
on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to
future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
September 30, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) 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, 2016 of the Company and our report dated
November 29, 2016 expressed an unqualified opinion on those consolidated financial statements.
Kansas City, Missouri
November 29, 2016
82 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, 2016 and 2015, 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, 2016. These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
Capitol Federal Financial, Inc. and subsidiary as of September 30, 2016 and 2015, and the results of their operations and
their cash flows for each of the three years in the period ended September 30, 2016, 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, 2016, based on the criteria established
in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated November 29, 2016 expressed an unqualified opinion on the Company's
internal control over financial reporting.
Kansas City, Missouri
November 29, 2016
83 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2016 and 2015 (Dollars in thousands, except per share amounts)
ASSETS:
Cash and cash equivalents (includes interest-earning deposits of $267,829 and $764,816)
$ 281,764
$ 772,632
Securities:
Available-for-sale ("AFS"), at estimated fair value (amortized cost of $517,791 and $744,708)
527,301
758,171
Held-to-maturity ("HTM"), at amortized cost (estimated fair value of $1,122,867
2016
2015
and $1,295,274)
Loans receivable, net (allowance for credit losses ("ACL") of $8,540 and $9,443)
Federal Home Loan Bank Topeka ("FHLB") stock, at cost
Premises and equipment, net
Income taxes receivable, net
Other assets
TOTAL ASSETS
LIABILITIES:
Deposits
FHLB borrowings
Repurchase agreements
Advance payments by borrowers for taxes and insurance
Income taxes payable, net
Deferred income tax liabilities, net
Accounts payable and accrued expenses
Total liabilities
STOCKHOLDERS' EQUITY:
1,100,874
1,271,122
6,958,024
6,625,027
109,970
83,221
—
150,543
75,810
1,071
206,093
189,785
$9,267,247
$9,844,161
$5,164,018
$4,832,520
2,372,389
3,270,521
200,000
62,643
310
25,374
49,549
200,000
61,818
—
26,391
36,685
7,874,283
8,427,935
Preferred stock, $.01 par value; 100,000,000 shares authorized, no shares issued or outstanding
—
—
Common stock, $.01 par value; 1,400,000,000 shares authorized, 137,486,172 and 137,106,822
shares issued and outstanding as of September 30, 2016 and 2015, 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
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
1,375
1,371
1,156,855
(39,647)
268,466
1,151,041
(41,299)
296,739
5,915
8,374
1,392,964
1,416,226
$9,267,247
$9,844,161
84 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2016, 2015, and 2014 (Dollars in thousands, except per share amounts)
INTEREST AND DIVIDEND INCOME:
Loans receivable
Mortgage-backed securities ("MBS")
FHLB stock
Cash and cash equivalents
Investment securities
Total interest and dividend income
INTEREST EXPENSE:
FHLB borrowings
Deposits
Repurchase agreements
Total interest expense
NET INTEREST INCOME
PROVISION FOR CREDIT LOSSES
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
NON-INTEREST INCOME:
Retail fees and charges
Income from bank-owned life insurance ("BOLI")
Other non-interest income
Total non-interest income
NON-INTEREST EXPENSE:
Salaries and employee benefits
Occupancy, net
Information technology and communications
Regulatory and outside services
Deposit and loan transaction costs
Federal insurance premium
Advertising and promotional
Low income housing partnerships
Office supplies and related expense
Other non-interest expense
Total non-interest expense
INCOME BEFORE INCOME TAX EXPENSE
INCOME TAX EXPENSE
NET INCOME
Basic earnings per share ("EPS")
Diluted EPS
Dividends declared per share
See accompanying notes to consolidated financial statements.
2016
2015
2014
$
$
$
$
$
243,311
29,794
12,252
9,831
5,925
301,113
65,091
37,859
5,981
108,931
192,182
(750)
192,932
14,835
3,420
5,057
23,312
42,378
10,576
10,540
5,645
5,585
5,076
4,609
3,872
2,640
3,384
94,305
121,939
38,445
83,494
0.63
0.63
0.84
$
$
$
$
$
235,500
36,647
12,556
5,477
7,182
297,362
67,797
33,119
6,678
107,594
189,768
771
188,997
14,897
1,150
5,093
21,140
43,309
9,944
10,360
5,347
5,417
5,495
4,547
4,572
2,088
3,290
94,369
115,768
37,675
78,093
0.58
0.58
0.84
$
$
$
$
$
229,944
45,300
6,555
1,062
7,385
290,246
63,217
32,604
10,282
106,103
184,143
1,409
182,734
14,937
1,993
6,025
22,955
43,757
10,268
9,429
5,572
5,329
4,536
4,195
2,416
2,096
2,939
90,537
115,152
37,458
77,694
0.56
0.56
0.98
85 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2016, 2015, and 2014 (Dollars in thousands)
Net income
Other comprehensive income (loss), net of tax:
Changes in unrealized holding gains (losses) on AFS securities,
2016
2015
2014
$
83,494
$
78,093
$
77,694
net of taxes of $1,494, $(843), and $171
Comprehensive income
(2,459)
81,035
$
1,388
$
79,481
$
(281)
77,413
See accompanying notes to consolidated financial statements.
86 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2016, 2015, and 2014 (Dollars in thousands, except per share amounts)
Balance at October 1, 2013
Net income, fiscal year 2014
Other comprehensive loss, net of tax
ESOP activity, net
Restricted stock activity, net
Stock-based compensation
Repurchase of common stock
Stock options exercised
Cash dividends to stockholders ($0.98 per share)
Additional
Unearned
Total
Common
Paid-In
Compensation
Retained
Stockholders'
Stock
Capital
ESOP
Earnings
AOCI
Equity
$
1,478
$ 1,235,781
$
(44,603) $ 432,203
$ 7,267
$
1,632,126
362
127
2,134
(58,129)
457
(69)
1
77,694
(281)
1,652
(25,020)
(138,172)
77,694
(281)
2,014
127
2,134
(83,218)
458
(138,172)
Balance at September 30, 2014
1,410
1,180,732
(42,951)
346,705
6,986
1,492,882
Net income, fiscal year 2015
Other comprehensive income, net of tax
ESOP activity, net
Restricted stock activity, net
Stock-based compensation
Repurchase of common stock
Stock options exercised
Cash dividends to stockholders ($0.84 per share)
384
85
2,086
(39)
(32,513)
267
78,093
1,388
1,652
(13,897)
(114,162)
78,093
1,388
2,036
85
2,086
(46,449)
267
(114,162)
Balance at September 30, 2015
1,371
1,151,041
(41,299)
296,739
8,374
1,416,226
Net income, fiscal year 2016
Other comprehensive loss, net of tax
ESOP activity, net
Restricted stock activity, net
Stock-based compensation
Stock options exercised
522
48
1,121
4,123
1
3
83,494
(2,459)
1,652
83,494
(2,459)
2,174
49
1,121
4,126
Cash dividends to stockholders ($0.84 per share)
(111,767)
(111,767)
Balance at September 30, 2016
$
1,375
$ 1,156,855
$
(39,647) $ 268,466
$ 5,915
$
1,392,964
See accompanying notes to consolidated financial statements.
87 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2016, 2015, and 2014 (Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
83,494
$
78,093
$
77,694
Adjustments to reconcile net income to net cash provided by operating activities:
2016
2015
2014
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:
Other assets, net
Income taxes payable/receivable
Accounts payable and accrued expenses
Net cash provided by operating activities
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 FHLB stock
Purchase of FHLB stock
Net increase in loans receivable
Purchase of premises and equipment
Proceeds from sale of other real estate owned ("OREO")
Purchase of BOLI
Proceeds from BOLI death benefit
Net cash provided by (used in) investing activities
(12,252)
(750)
—
—
5,342
7,141
1,868
2,174
1,121
470
1,807
1,381
(6,840)
84,956
(99,927)
(144,392)
326,814
309,328
382,450
(329,625)
(336,056)
(14,854)
4,973
—
783
99,494
(12,556)
771
—
—
5,649
6,844
4,196
2,036
2,086
3,201
3,878
(1,374)
(6,215)
86,609
(149,937)
(54,133)
234,794
330,054
265,929
(190,862)
(398,307)
(12,022)
5,987
(50,000)
—
(18,497)
(6,555)
1,409
(1,325)
1,998
6,053
6,316
6,139
2,014
2,134
2,106
1,606
382
(8,184)
91,787
(120,817)
(168,830)
349,210
328,433
22,387
(100,356)
(280,105)
(7,227)
4,875
—
405
27,975
(Continued)
88 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2016, 2015, and 2014 (Dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid
Net change in deposits
Proceeds from borrowings
Repayments on borrowings
Change in advance payments by borrowers for taxes and insurance
Payment of FHLB prepayment penalties
Repurchase of common stock
Stock options exercised
Excess tax benefits from stock options
Net cash (used in) provided by financing activities
2016
2015
2014
(111,767)
331,498
8,000,100
(8,900,100)
825
—
—
4,070
56
(675,318)
(114,162)
177,248
7,575,100
(7,695,100)
3,713
(3,352)
(50,034)
267
—
(106,320)
(138,172)
43,826
2,944,577
(2,194,577)
713
—
(79,633)
458
—
577,192
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(490,868)
(38,208)
696,954
CASH AND CASH EQUIVALENTS:
Beginning of year
End of year
772,632
810,840
113,886
$
281,764
$
772,632
$
810,840
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income tax payments
Interest payments
$
$
36,483
106,182
$
$
35,849
103,784
$
$
34,969
100,581
See accompanying notes to consolidated financial statements.
(Concluded)
89 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2016, 2015, and 2014
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"), a federal savings bank, which has 37
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 loans, and providing personal retail financial
services. The Bank is subject to competition from other financial institutions and other companies that provide financial
services.
Basis of Presentation - 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 ("CFMRC"). 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. Actual
results could differ from these estimates and assumptions.
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, the Bank, Capitol Funds, Inc. and CFMRC have a tax allocation agreement. The Bank is the paying agent to
the taxing authorities for the group for all periods presented. Each entity 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.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand and amounts due from banks. Regulations of
the Board of Governors of the Federal Reserve System ("FRB") 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
Federal Reserve Bank of Kansas City as of September 30, 2016 and 2015 was $264.4 million and $762.0 million,
respectively. The Bank is in compliance with the FRB requirements. For the years ended September 30, 2016 and 2015, the
average daily balance of required reserves at the Federal Reserve Bank was $8.8 million and $8.7 million, respectively.
Securities - Securities include MBS and agency debentures issued primarily by United States Government-Sponsored
Enterprises ("GSE"), including Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and the
Federal Home Loan Banks, United States Government agencies, including Government National Mortgage Association, and
municipal bonds. Securities are classified as HTM, AFS, or trading based on management's intention for holding the
securities 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
90 using the specific identification method. The Company primarily uses prices obtained from third party pricing services to
determine the fair value of securities. See additional discussion of fair value of AFS securities in "Note 13. 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, 2016 and 2015, 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.
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. Interest on loans is credited to income as earned and accrued
only if deemed collectible.
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/
her 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.
Additionally, loans that have been discharged under Chapter 7 bankruptcy proceedings where the borrower has not reaffirmed
the debt owed to the lender ("Chapter 7 loans") are reported as TDRs, regardless of their delinquency status, pursuant to
regulatory reporting requirements. 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.
91 Nonaccrual loans - The accrual of income on loans is discontinued when interest or principal payments are 90 days in
arrears. We also report certain TDR loans as nonaccrual loans that are required to be reported as such pursuant to regulatory
reporting requirements. 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 the required consecutive loan payments.
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. It involves a high degree of complexity and requires management to make difficult and
subjective judgments and assumptions about highly uncertain matters. Management's methodology for assessing the
appropriateness of the ACL consists of a formula analysis model, along with analyzing several other factors. The use of
different judgments and assumptions could cause reported results to differ significantly. Management maintains the ACL
through provisions for credit losses that are either charged or credited to income.
One- to four-family loans, including home equity loans, are individually evaluated for loss when the loan is generally 180
days delinquent and any losses are charged-off. 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 is 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. For commercial real estate loans, losses are charged-off when the collection of
such amounts is determined to be unlikely. When a non-real estate secured loan, which includes consumer loans - other, is
120 days delinquent, any identified losses are charged-off. Charge-offs for any loan type may also occur at any time if the
Bank has knowledge of the existence of a potential loss. Loans individually evaluated for loss are excluded from the formula
analysis model.
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 commercial real estate 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
commercial real estate loan, the pool of potential buyers is typically limited more than that for a residential property. This
increases the risk that 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.
92 Each quarter end, 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; commercial real estate 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.
The one- to four-family loan portfolio and related home equity loans are segregated into additional categories based on the
following risk characteristics: originated, correspondent purchased, or bulk purchased; interest payments (fixed-rate and
adjustable-rate); 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.
Historical loss factors are applied to each loan category in the formula analysis model. Each quarter end, management
reviews historical losses over a look-back time period and utilizes the historical loss time periods believed to be the most
appropriate considering the current economic conditions. The historical loss time period is then adjusted for a loss
emergence time period, which represents the estimated time period from the date of a loss event to the date we recognize a
charge-off/loss. Qualitative loss factors are utilized in the formula analysis model to reflect risks inherent in each loan
category that are not captured by the historical loss factors. The qualitative loss factors for one- to four-family and consumer
loan portfolios take into consideration such items as: unemployment rate trends, residential real estate value trends, credit
score trends, delinquent loan trends, and industry and peer charge-off information. The qualitative loss factors for the
commercial real estate loan portfolio take into consideration the composition of the portfolio along with industry and peer
charge-off information. As loans are classified or become delinquent, the qualitative loss factors increase for each respective
loan category. The qualitative loss factors were derived by management based on a review of the historical performance of
the respective loan portfolios and industry and peer information for those loan portfolios with no or limited historical loss
experience, along with consideration of current economic conditions and the likely impact such conditions might have to the
performance of the loan portfolio.
Management utilizes the formula analysis model, 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, trends in foreclosed
property and short sale transactions and charge-off activity, the current status and trends of local and national employment
levels, trends and current conditions in the real estate and housing markets, loan portfolio growth and concentrations, industry
and peer charge-off information, and certain ACL ratios such as ACL to loans receivable, net and annualized historical losses
to ACL. 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 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 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. Although management believes the ACL was at a level adequate to absorb inherent losses
in the loan portfolio at September 30, 2016, the level of the ACL remains an estimate that is subject to significant judgment
and short-term changes.
Federal Home Loan Bank Stock - 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 borrowings,
with FHLB. FHLB stock is carried at cost and is considered a restricted asset because it cannot be pledged as collateral or
bought or sold on the open market and it also has certain redemption restrictions. 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, while also considering the impact that legislative and regulatory developments may
have on FHLB. Stock and cash dividends received on FHLB stock are reflected as dividend income in the consolidated
statements of income.
93 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.
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 tax 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 expense 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. To the extent that management considers it
more likely than not that a deferred tax asset will not be recovered, a valuation allowance is recorded. All positive and
negative evidence is reviewed in determining how much of a valuation allowance is recognized on a quarterly basis.
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. Interest and
penalties related to unrecognized tax benefits are recognized in income tax expense in the consolidated statements of income.
Accrued interest and penalties related to unrecognized tax benefits are included within the related tax liabilities line in the
consolidated balance sheet.
Employee Stock Ownership Plan - The funds borrowed by the ESOP from the Company to purchase the Company's common
stock are being repaid from dividends paid on unallocated ESOP shares and, if necessary, contributions by the Bank. The
shares pledged as collateral are reported as a reduction of stockholders' equity at cost. As ESOP shares are committed to be
released from collateral each quarter, the Company records compensation expense based on the average market price of the
Company's stock during the quarter. Additionally, the shares become outstanding for EPS computations once they are
committed to be released. The eligibility criteria for participation in the Company's ESOP is a minimum of one year of
service, at least age 21, and at least 1,000 hours of employment in each plan year.
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 has entered into repurchase agreements, which are sales of securities under agreements to
repurchase, with approved counterparties. 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 Bank has obtained borrowings from FHLB in the form of advances and a line of credit. Total FHLB borrowings are
secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB and certain securities, as necessary.
Additionally, the Bank is authorized to borrow from the Federal Reserve Bank's "discount window."
94 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.
Low Income Housing Partnerships - As part of the Bank's community reinvestment initiatives, the Bank invests in
affordable housing limited partnerships ("low income housing partnerships") that make equity investments in affordable
housing properties. The Bank is a limited partner in each partnership in which it invests. A separate, unrelated third party is
the general partner. The Bank receives affordable housing tax credits and other tax benefits for these investments. Two of
the Bank's officers are involved in the operational management of the low income housing partnership investment group.
The Bank accounts for substantially all of its investments in these partnerships using the equity method of accounting. See
"Note 6. Low Income Housing Partnerships" for additional information.
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.
Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting
Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers. The ASU, as amended, clarifies principles for
recognizing revenue and provides a common revenue standard for GAAP and International Financial Reporting Standards.
Additionally, the ASU provides implementation guidance on several topics and requires entities to disclose both quantitative
and qualitative information regarding contracts with customers. ASU 2014-09 is effective for fiscal years beginning after
December 15, 2017, including interim reporting periods within that reporting period, which is October 1, 2018 for the
Company. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016. The
Company has not yet completed its evaluation of ASU 2014-09.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments, Recognition and Measurement of Financial Assets
and Liabilities. The ASU supersedes certain accounting guidance related to equity securities with readily determinable fair
values and the related impairment assessment. An entity's equity investments that are accounted for under the equity method
of accounting or result in consolidation of an investee are not included within the scope of this ASU. The ASU requires
public business entities to utilize the exit price notation in determining fair value for financial instruments measured at
amortized cost on the balance sheet. The ASU requires additional reporting in other comprehensive income for financial
liabilities measured at fair value in accordance with the fair value option. The ASU also requires separate presentation of
financial assets and financial liabilities by measurement category and form of financial asset on the balances or in the notes to
the financial statements. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim
periods with those fiscal years, which is October 1, 2018 for the Company. Early adoption is not permitted except in certain
circumstances. The Company has not yet completed its evaluation of ASU 2016-01.
In February 2016, the FASB issued ASU 2016-02, Leases. The ASU amends lease accounting guidance by requiring that
lessees recognize the assets and liabilities arising from leases on the balance sheet. Additionally, the ASU requires entities to
disclose both quantitative and qualitative information regarding their leasing activities. ASU 2016-02 is effective for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years, which is October 1, 2019 for
the Company. Early adoption is permitted. The Company has not yet completed its evaluation of ASU 2016-02.
95 In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-
Based Payment Accounting. The ASU simplifies several aspects of the accounting for employee share-based payment
transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, along with
simplifying the classification in the statement of cash flows. The ASU is effective for annual reporting periods beginning
after December 15, 2016, including interim periods within those annual reporting periods, which is October 1, 2017 for the
Company. The Company has not yet completed its evaluation of ASU 2016-09.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on
Financial Instruments. The ASU replaces the incurred loss impairment methodology in current GAAP, which requires credit
losses to be recognized when it is probable that a loss has incurred, with a new impairment methodology. The new
impairment methodology requires an entity to measure, at each reporting date, the expected credit losses of financial assets
not measured at fair value, such as loans, HTM debt securities, and loan commitments, over their contractual lives. Under
the new impairment methodology, expected credit losses will be measured at each reporting date based on historical
experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU amends the current credit
loss measurements for AFS debt securities. Credit losses related to AFS debt securities will be recorded through the ACL
rather than as a direct write-down as per current GAAP. The ASU also requires enhanced disclosures related to credit quality
and significant estimates and judgments used by management when estimating credit losses. The ASU is effective for annual
reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, which
is October 1, 2020 for the Company. Early adoption is permitted for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. The Company has not yet completed its evaluation of ASU 2016-13.
2. EARNINGS PER SHARE
Shares acquired by the ESOP are not considered in the basic average shares outstanding until the shares are committed for
allocation or vested to an employee's individual account. Unvested shares awarded pursuant to the Company's restricted
stock benefit plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they
contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class
of common stock and participating security.
For the Year Ended September 30,
2016
2015
2014
(Dollars in thousands, except per share amounts)
Net income
Income allocated to participating securities
Net income available to common stockholders
$
$
83,494
(66)
83,428
$
$
78,093
(116)
77,977
$
$
77,694
(176)
77,518
Average common shares outstanding
Average committed ESOP shares outstanding
Total basic average common shares outstanding
132,982,815
62,400
133,045,215
135,321,235
62,458
135,383,693
139,377,615
62,458
139,440,073
Effect of dilutive stock options
131,161
24,810
1,891
Total diluted average common shares outstanding
133,176,376
135,408,503
139,441,964
Net EPS:
Basic
Diluted
$
$
0.63
0.63
$
$
0.58
0.58
$
$
0.56
0.56
Antidilutive stock options, excluded from the diluted average
common shares outstanding calculation
886,417
1,248,744
2,060,748
96 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
HTM:
MBS
Municipal bonds
September 30, 2016
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
(Dollars in thousands)
$
$
$
$
346,226
$
815
$
169,442
2,123
517,791
1,067,571
33,303
1,100,874
$
$
$
9,069
—
9,884
22,862
357
23,219
$
$
$
3
4
367
374
1,219
7
1,226
$
$
$
$
347,038
178,507
1,756
527,301
1,089,214
33,653
1,122,867
September 30, 2015
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
(Dollars in thousands)
AFS:
GSE debentures
$
525,376
$
1,304
$
MBS
Trust preferred securities
Municipal bonds
HTM:
MBS
Municipal bonds
217,006
2,186
140
744,708
1,233,048
38,074
1,271,122
$
$
$
$
$
$
12,489
—
4
13,797
27,325
437
27,762
$
$
$
60
4
270
—
334
3,590
20
3,610
$
$
$
$
526,620
229,491
1,916
144
758,171
1,256,783
38,491
1,295,274
97 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, 2016
Less Than 12 Months
Equal to or Greater Than 12 Months
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
(Dollars in thousands)
24,997
$
—
—
24,997
$
147,930
4,771
152,701
$
$
3
—
—
3
538
6
544
$
$
$
$
— $
654
1,756
2,410
$
66,646
391
67,037
$
$
—
4
367
371
681
1
682
September 30, 2015
Less Than 12 Months
Equal to or Greater Than 12 Months
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
(Dollars in thousands)
39,135
$
—
—
39,135
$
38,604
3,292
41,896
$
$
15
—
—
15
134
12
146
$
$
$
$
49,955
$
687
1,916
52,558
$
302,158
1,128
303,286
$
$
45
4
270
319
3,456
8
3,464
AFS:
GSE debentures
MBS
Trust preferred securities
HTM:
MBS
Municipal bonds
AFS:
GSE debentures
MBS
Trust preferred securities
HTM:
MBS
Municipal bonds
$
$
$
$
$
$
$
$
The unrealized losses at September 30, 2016 and 2015 were primarily a result of an increase in market yields from the time
the securities were purchased. In general, as market yields rise, the fair value of securities will decrease; as market yields
fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in
interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. The
impairment is also considered temporary because scheduled coupon payments have been made, it is anticipated that the entire
principal balance will be collected as scheduled, and management neither intends to sell the securities, nor is it more likely
than not that the Company will be required to sell the securities before the recovery of the remaining amortized cost amount,
which could be at maturity. As a result of the analysis, management has concluded that no other-than-temporary impairments
existed at September 30, 2016 or 2015. See "Note 1 - Summary of Significant Accounting Policies - Securities" for
additional information regarding our impairment review and classification process for securities.
98 The amortized cost and estimated fair value of debt securities as of September 30, 2016, by contractual maturity, are shown
below. Actual principal repayments may differ from contractual maturities due to prepayment or early call privileges by the
issuer. In the case of MBS, borrowers on the underlying loans generally have the right to prepay their loans without
prepayment penalty. For this reason, MBS are not included in the maturity categories.
AFS
HTM
Amortized
Estimated
Amortized
Estimated
Cost
Fair Value
Cost
Fair Value
(Dollars in thousands)
One year or less
$
25,040
$
25,081
$
5,196
$
One year through five years
321,186
321,957
Five years through ten years
Ten years and thereafter
MBS
—
2,123
348,349
169,442
—
1,756
348,794
178,507
22,152
5,955
—
33,303
5,217
22,346
6,090
—
33,653
1,067,571
1,089,214
$
517,791
$
527,301
$ 1,100,874
$ 1,122,867
The following table presents the taxable and non-taxable components of interest income on investment securities for the
periods presented.
For the Year Ended September 30,
2016
2015
(Dollars in thousands)
Taxable
Non-taxable
$
$
5,255
670
5,925
$
$
6,431
751
7,182
$
$
2014
6,440
945
7,385
The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of
the dates presented.
September 30,
2016
2015
Public unit deposits
Repurchase agreements
Federal Reserve Bank
FHLB borrowings
$
$
$
(Dollars in thousands)
419,282
217,374
15,938
—
652,594
$
343,385
218,832
20,600
216,607
799,424
All dispositions of securities during fiscal years 2016, 2015, and 2014 were the result of principal repayments, calls, or
maturities.
99 4. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES
Loans receivable, net at September 30, 2016 and 2015 is summarized as follows:
Real estate loans:
One- to four-family:
Originated
Purchased
Construction
Total
Commercial:
Permanent
Construction
Total
2016
2015
(Dollars in thousands)
$
6,211,687
$
5,856,634
416,653
39,430
6,667,770
110,768
43,375
154,143
485,682
29,552
6,371,868
109,314
11,523
120,837
Total real estate loans
6,821,913
6,492,705
Consumer loans:
Home equity
Other
Total consumer loans
123,345
4,264
127,609
125,844
4,179
130,023
Total loans receivable
6,949,522
6,622,728
Less:
ACL
Discounts/unearned loan fees
Premiums/deferred costs
8,540
24,933
(41,975)
$
6,958,024
$
9,443
24,213
(35,955)
6,625,027
As of September 30, 2016 and 2015, the Bank serviced loans for others aggregating approximately $120.0 million and $153.0
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 $2.4 million and $2.9 million as of September 30, 2016 and 2015, respectively.
Lending Practices and Underwriting Standards - Originating and purchasing one- to four-family loans is the Bank's primary
lending business, resulting in a loan concentration in residential first mortgage loans. The Bank purchases one- to four-
family loans, on a loan-by-loan basis, from a select group of correspondent lenders. The Bank also originates consumer loans
primarily secured by one- to four-family residential properties and commercial real estate loans and also participates in
commercial real estate loans. As a result of our one- to four-family lending activities, the Bank has a concentration of loans
secured by real property located in Kansas and Missouri.
100 One- to four-family loans - Full documentation to support an applicant's credit and income, and sufficient funds to cover all
applicable fees and reserves at closing, are required on all loans. Generally, loans are underwritten according to the "ability
to repay" and "qualified mortgage" standards, as issued by the Consumer Financial Protection Bureau ("CFPB"). Properties
securing one- to four-family loans are appraised by either staff appraisers or fee appraisers, both of which are independent of
the loan origination function and approved by our Board of Directors.
The underwriting standards for loans purchased from correspondent and nationwide lenders are generally similar to the
Bank's internal underwriting standards. The underwriting of loans purchased from correspondent lenders on a loan-by-loan
basis is performed by the Bank's underwriters. For the tables within this Note, correspondent loans purchased on a loan-by-
loan basis are included with originated loans, and loans purchased in loan packages ("bulk loans") are reported as purchased
loans.
The Bank also originates construction-to-permanent loans secured by one- to four-family residential real estate. Construction
loans are obtained by homeowners who will occupy the property when construction is complete. Construction loans to
builders for speculative purposes are not permitted by the Bank's lending policies. Construction draw requests and the
supporting documentation are reviewed and approved by designated personnel. The Bank also performs regular documented
inspections of the construction project to ensure the funds are being used for the intended purpose and the project is being
completed according to the plans and specifications provided.
Commercial real estate loans - The Bank's commercial real estate loans are originated by the Bank or are in participation
with a lead bank. When underwriting a commercial real estate loan, several factors are considered, such as the income
producing potential of the property, cash equity provided by the borrower, the financial strength of the borrower, managerial
expertise of the borrower or tenant, feasibility studies, lending experience with the borrower and the marketability of the
property. For commercial real estate participation loans, the Bank performs the same underwriting procedures as if the loan
was being originated by the Bank. At the time of origination, LTV ratios on commercial real estate loans generally do not
exceed 80% of the appraised value of the property securing the loans and the minimum debt service coverage ratio is
generally 1.25. Appraisals on properties securing these loans are performed by independent state certified fee appraisers.
Consumer loans - The Bank offers a variety of secured consumer loans, including home equity loans and lines of credit,
home improvement loans, auto loans, and loans secured by savings deposits. The Bank also originates a very limited amount
of unsecured loans. The Bank does not originate any consumer loans on an indirect basis, such as contracts purchased from
retailers of goods or services which have extended credit to their customers. The majority of the consumer loan portfolio is
comprised of home equity lines of credit for which the Bank also has the first mortgage or the home equity line of credit is in
the first lien position.
The underwriting standards for consumer loans include a determination of an applicant's payment history on other debts and
an assessment of an applicant's ability to meet existing obligations and payments on the proposed loan. Although
creditworthiness of an applicant is a primary consideration, the underwriting process also includes a comparison of the value
of the security in relation to the proposed loan amount.
Credit Quality Indicators - Based on the Bank's lending emphasis and underwriting standards, management has segmented
the loan portfolio into three segments: (1) one- to four-family; (2) consumer; and (3) commercial real estate. The one- to
four-family and consumer loan portfolios are further segmented into classes for purposes of providing disaggregated
information about the credit quality of the loan portfolio. The classes are: one- to four-family - originated, one- to four-
family - purchased, consumer - home equity, and consumer - other.
The Bank's primary credit quality indicators for the one- to four-family and consumer - home equity loan portfolios are
delinquency status, asset classifications, LTV ratios, and borrower credit scores. The Bank's primary credit quality indicators
for the commercial real estate and consumer - other loan portfolios are delinquency status and asset classifications.
101 The following tables present the recorded investment, by class, in loans 30 to 89 days delinquent, loans 90 or more days
delinquent or in foreclosure, total delinquent loans, current loans, and total recorded investment at the dates presented. The
recorded investment in loans is defined as the unpaid principal balance of a loan (net of unadvanced funds related to loans in
process), less charge-offs and inclusive of unearned loan fees and deferred costs. At September 30, 2016 and 2015, all loans
90 or more days delinquent were on nonaccrual status.
30 to 89 Days
Delinquent
September 30, 2016
90 or More Days
Delinquent or
in Foreclosure
Total
Delinquent
Loans
(Dollars in thousands)
Current
Loans
Total
Recorded
Investment
One- to four-family - originated
$
16,934
$
9,145
$
26,079
$ 6,240,953
$ 6,267,032
One- to four-family - purchased
Commercial real estate
Consumer - home equity
Consumer - other
5,082
—
635
62
7,380
12,462
—
520
9
—
1,155
71
406,379
153,082
122,190
4,193
418,841
153,082
123,345
4,264
$
22,713
$
17,054
$
39,767
$ 6,926,797
$ 6,966,564
30 to 89 Days
Delinquent
September 30, 2015
90 or More Days
Delinquent or
in Foreclosure
Total
Delinquent
Loans
(Dollars in thousands)
Current
Loans
Total
Recorded
Investment
One- to four-family - originated
$
19,285
$
7,093
$
26,378
$ 5,869,289
$ 5,895,667
One- to four-family - purchased
Commercial real estate
Consumer - home equity
Consumer - other
7,305
—
703
17
8,956
16,261
—
497
12
—
1,200
29
472,114
120,405
124,644
4,150
488,375
120,405
125,844
4,179
$
27,310
$
16,558
$
43,868
$ 6,590,602
$ 6,634,470
The recorded investment of mortgage loans secured by residential real estate properties for which formal foreclosure
proceedings were in process as of September 30, 2016 was $5.7 million, which is included in loans 90 or more days
delinquent or in foreclosure in the table above. The carrying value of residential OREO held as a result of obtaining physical
possession upon completion of a foreclosure or through completion of a deed in lieu of foreclosure was $2.5 million at
September 30, 2016.
The following table presents the recorded investment, by class, in loans classified as nonaccrual at the dates presented.
September 30,
2016
2015
(Dollars in thousands)
One- to four-family - originated
$
20,874
$
One- to four-family - purchased
Commercial real estate
Consumer - home equity
Consumer - other
7,411
—
848
10
16,093
9,038
—
792
12
$
29,143
$
25,935
102 In accordance with the Bank's asset classification policy, management regularly reviews the problem loans in the Bank's
portfolio to determine whether any loans require classification. Loan classifications are defined as follows:
•
•
Special mention - These loans are performing loans on which known information about the collateral pledged or
the possible credit problems of the borrower(s) have caused management to have doubts as to the ability of the
borrower(s) to comply with present loan repayment terms and which may result in the future inclusion of such
loans in the non-performing loan categories.
Substandard - A loan is considered substandard if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those characterized
by the distinct possibility the Bank will sustain some loss if the deficiencies are not corrected.
• Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with
the added characteristic that the weaknesses present make collection or liquidation in full on the basis of
currently existing facts and conditions and values highly questionable and improbable.
• Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as
assets on the books is not warranted.
The following table sets forth the recorded investment in loans classified as special mention or substandard, by class, at the
dates presented. Special mention and substandard loans are included in the ACL formula analysis model if the loans are not
individually evaluated for loss. Loans classified as doubtful or loss are individually evaluated for loss. At the dates
presented, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.
September 30,
2016
2015
Special Mention
Substandard
Special Mention
Substandard
(Dollars in thousands)
One- to four-family - originated
$
12,738
$
32,986
$
16,149
$
One- to four-family - purchased
Commercial real estate
Consumer - home equity
Consumer - other
1,156
—
54
8
11,480
—
1,431
16
1,376
—
151
—
$
13,956
$
45,913
$
17,676
$
29,282
13,237
—
1,301
17
43,837
The following table shows the weighted average credit score and weighted average LTV for originated and purchased one- to
four-family loans and originated consumer home equity loans at the dates presented. Borrower credit scores are intended to
provide an indication as to the likelihood that a borrower will repay their debts. Credit scores are updated at least
semiannually, with the last update in September 2016, from a nationally recognized consumer rating agency. The LTV ratios
provide an estimate of the extent to which the Bank may incur a loss on any given loan that may go into foreclosure. The
consumer - home equity LTV does not take into account the first lien position, if applicable. The LTV ratios were based on
the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if
available. In most cases, the most recent appraisal was obtained at the time of origination.
One- to four-family - originated
One- to four-family - purchased
Consumer - home equity
September 30,
2016
2015
Credit Score
LTV
Credit Score
LTV
765
753
755
764
65%
64
20
64
765
752
753
764
65%
65
18
64
103 TDRs - The following tables present the recorded investment prior to restructuring and immediately after restructuring in all
loans restructured during the periods presented. These tables do not reflect the recorded investment at the end of the periods
indicated. Any increase in the recorded investment at the time of the restructuring was generally due to the capitalization of
delinquent interest and/or escrow balances.
Number
of
Contracts
For the Year Ended September 30, 2016
Post-
Restructured
Outstanding
Pre-
Restructured
Outstanding
(Dollars in thousands)
One- to four-family - originated
One- to four-family - purchased
Commercial real estate
Consumer - home equity
Consumer - other
134
$
19,793
$
20,176
3
—
19
1
596
—
427
8
594
—
433
8
157
$
20,824
$
21,211
Number
of
Contracts
For the Year Ended September 30, 2015
Post-
Restructured
Outstanding
Pre-
Restructured
Outstanding
(Dollars in thousands)
One- to four-family - originated
One- to four-family - purchased
Commercial real estate
Consumer - home equity
Consumer - other
143
$
17,811
$
4
—
22
3
1,140
—
479
12
18,010
1,144
—
485
12
172
$
19,442
$
19,651
Number
of
Contracts
For the Year Ended September 30, 2014
Post-
Restructured
Outstanding
Pre-
Restructured
Outstanding
(Dollars in thousands)
One- to four-family - originated
One- to four-family - purchased
Commercial real estate
Consumer - home equity
Consumer - other
145
$
17,721
$
7
—
6
—
1,054
—
100
—
17,785
1,056
—
101
—
158
$
18,875
$
18,942
104 The following table provides information on TDRs that became delinquent during the periods presented within 12 months
after being restructured.
September 30, 2016
For the Years Ended
September 30, 2015
Number of Recorded Number of Recorded Number of Recorded
Investment
Contracts
Investment Contracts
Investment Contracts
September 30, 2014
One- to four-family - originated
One- to four-family - purchased
Commercial real estate
Consumer - home equity
Consumer - other
$
5,878
—
—
174
—
(Dollars in thousands)
52
4
—
4
1
$
5,743
890
—
33
5
$
6,052
61
$
6,671
51
—
—
6
—
57
38
3
—
2
—
43
$
4,112
780
—
56
—
$
4,948
Impaired loans - The following information pertains to impaired loans, by class, as of the dates presented. A loan is
considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all
amounts due, including principal and interest, according to the contractual terms of the loan agreement.
September 30, 2016
Unpaid
Principal
Balance
Recorded
Investment
September 30, 2015
Unpaid
Principal
Balance
Related
ACL
Related
ACL
(Dollars in thousands)
Recorded
Investment
With no related allowance recorded
One- to four-family - originated
$
25,945
$
26,590
$
— $
11,169
$
11,857
$
One- to four-family - purchased
10,985
12,684
Commercial real estate
Consumer - home equity
Consumer - other
With an allowance recorded
One- to four-family - originated
One- to four-family - purchased
Commercial real estate
Consumer - home equity
Consumer - other
Total
One- to four-family - originated
One- to four-family - purchased
Commercial real estate
Consumer - home equity
Consumer - other
—
1,014
10
—
1,230
42
37,954
40,546
16,092
1,650
—
548
6
16,140
1,627
—
548
6
18,296
18,321
42,037
12,635
—
1,562
16
42,730
14,311
—
1,778
48
—
—
—
—
—
129
49
—
38
1
217
129
49
—
38
1
11,035
13,315
—
591
13
—
837
40
22,808
26,049
26,453
3,764
—
869
10
26,547
3,731
—
870
10
31,096
31,158
37,622
14,799
—
1,460
23
38,404
17,046
—
1,707
50
—
—
—
—
—
—
294
110
—
62
1
467
294
110
—
62
1
$
56,250
$
58,867
$
217
$
53,904
$
57,207
$
467
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108
5. PREMISES AND EQUIPMENT, Net
A summary of the net carrying value of premises and equipment at September 30, 2016 and 2015 was as follows:
Land
Building and improvements
Furniture, fixtures and equipment
Less accumulated depreciation
2016
2015
(Dollars in thousands)
$
$
11,065
91,700
42,590
145,355
62,134
83,221
$
$
11,055
82,928
42,731
136,714
60,904
75,810
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, $1.1 million, and $1.1 million for the years ended September 30, 2016, 2015, and 2014, respectively.
As of September 30, 2016, 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:
2017
2018
2019
2020
2021
Thereafter
$
$
1,106
1,107
993
751
655
2,525
7,137
6. LOW INCOME HOUSING PARTNERSHIPS
The Bank's investment in low income housing partnerships, which is included in other assets in the consolidated balance
sheets, was $58.0 million and $41.8 million at September 30, 2016 and 2015, respectively. The Bank's obligations related to
unfunded commitments, which are included in accounts payable and accrued expenses in the consolidated balance sheets,
were $27.2 million and $14.6 million at September 30, 2016 and 2015, respectively. The majority of the commitments are
projected to be funded through the end of calendar year 2018.
Expenses associated with the Bank's investment in the low income housing partnerships are included in low income housing
partnerships in the consolidated statements of income. The low income housing partnership expenses resulted in other tax
benefits of $1.1 million, $963 thousand and $866 thousand for fiscal years 2016, 2015, and 2014, respectively, which are a
component of income tax expense in the consolidated statements of income. Affordable housing tax credits are recognized as
a component of income tax expense in the consolidated statements of income and totaled $4.8 million, $4.3 million, and $3.6
million for fiscal years 2016, 2015, and 2014, respectively. There were no impairment losses during fiscal years 2016, 2015,
or 2014 resulting from the forfeiture or ineligibility of tax credits or other circumstances.
At September 30, 2016, the Bank accounted for low income housing partnerships using the equity method of accounting as
two of the Bank's officers were involved in the operational management of the low income housing partnership investment
group. Effective September 30, 2016, those two Bank officers discontinued their involvement in the operational management
of the investment group. Starting October 1, 2016, the Bank will use the proportional method of accounting for its low
income housing partnership investments. In fiscal year 2017, the Bank will no longer report low income housing partnership
expenses in non-interest expense; rather, the pretax operating losses and related tax benefits of the investments will be
reported as a component of income tax expense.
109 7. DEPOSITS AND BORROWED FUNDS
Deposits - Non-interest-bearing deposits totaled $217.0 million and $188.0 million as of September 30, 2016 and 2015,
respectively. Certificates of deposit with a minimum denomination of $250 thousand were $576.4 million and $490.1 million
as of September 30, 2016 and 2015, respectively. Deposits in excess of $250 thousand may not be fully insured by the
Federal Deposit Insurance Corporation.
FHLB Borrowings - FHLB borrowings at September 30, 2016 consisted of $2.37 billion in fixed-rate FHLB advances and
no borrowings against the variable-rate FHLB line of credit. The line of credit is set to expire on November 17, 2017, at
which time it is expected to be renewed automatically by FHLB for a one year period. FHLB borrowings at September 30,
2015 consisted of $2.57 billion in fixed-rate FHLB advances and $700.0 million against the variable-rate FHLB line of
credit.
During fiscal years 2016 and 2015 and the fourth quarter of fiscal year 2014, the Bank utilized a leverage strategy ("daily
leverage strategy") to increase earnings. The daily leverage strategy involves borrowing up to $2.10 billion against the
Bank's FHLB line of credit with some or all of the balance being paid down at each quarter end. The proceeds of the
borrowings, net of the required FHLB stock holdings, is deposited at the Federal Reserve Bank of Kansas City. Management
can discontinue to the use of the daily leverage strategy at any point in time.
FHLB advances at September 30, 2016 and 2015 were comprised of the following:
Fixed-rate FHLB advances
Deferred prepayment penalty
2016
2015
(Dollars in thousands)
$
$
2,375,000
(2,611)
2,372,389
$
$
2,575,000
(4,479)
2,570,521
Weighted average contractual interest rate on FHLB advances
Weighted average effective interest rate on FHLB advances(1)
2.17%
2.24
2.09%
2.24
(1) The effective interest rate includes the net impact of deferred amounts related to certain FHLB advances.
During fiscal year 2015, the Bank prepaid $325.0 million of fixed-rate FHLB advances with a weighted average contractual
interest rate of 2.61% and a weighted average remaining term to maturity of approximately four months. The prepaid FHLB
advances were replaced with $325.0 million of fixed-rate FHLB advances with a weighted average contractual interest rate of
1.66% and a weighted average term of 53 months. The Bank paid $3.4 million in prepayment penalties to FHLB as a result
of prepaying the FHLB advances. The present value of the cash flows under the terms of the new FHLB advances was not
more than 10% different from the present value of the cash flow under the terms of the prepaid FHLB advances (including
the prepayment penalties) and there were no embedded conversion options in the prepaid advances or in the new FHLB
advances. The prepayment penalties effectively increased the weighted average interest rate on the new advances by 42 basis
points at the time of the transactions. The deferred prepayment penalties are being recognized in interest expense over the
lives of the new FHLB advances.
FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB and certain
securities, when necessary. Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40% of a borrowing
institution's regulatory total assets without the pre-approval of FHLB senior management. In June 2016, the president of
FHLB approved an increase, through July 2017, in the Bank's borrowing limit to 55% of Bank Call Report total assets. At
September 30, 2016, the ratio of the par value of the Bank's FHLB borrowings to the Bank's Call Report total assets was
26%. During fiscal year 2016, the Bank's FHLB borrowings to the Bank's Call Report total assets was in excess of 40% due
to the daily leverage strategy.
Repurchase Agreements - At September 30, 2016 and 2015, the Company had repurchase agreements outstanding in the
amount of $200.0 million, with a weighted average contractual rate of 2.94%. All of the Company's repurchase agreements
at September 30, 2016 and 2015 were fixed-rate. See the Securities Note for information regarding the amount of securities
110 pledged as collateral in conjunction with repurchase agreements. Securities are delivered to the party with whom each
transaction is executed and the party agrees to resell the same securities to the Bank at the maturity of the agreement. The
Bank retains the right to substitute similar or like securities throughout the terms of the agreements. The repurchase
agreements and collateral are subject to valuation at current market levels and the Bank may ask for the return of excess
collateral or be required to post additional collateral due to changes in the market values of these items. The Bank may also
be required to post additional collateral as a result of principal payments received on the securities pledged.
Maturity of Borrowed Funds and Certificates of Deposit - The following table presents the scheduled maturity of FHLB
advances, at par, repurchase agreements, and certificates of deposit as of September 30, 2016:
FHLB
Advances
Amount
Repurchase
Agreements
Amount
(Dollars in thousands)
Certificates
of Deposit
Amount
$
500,000
$
— $
1,172,398
375,000
400,000
250,000
550,000
300,000
100,000
—
100,000
—
—
562,007
492,691
454,991
143,761
2,284
$
2,375,000
$
200,000
$
2,828,132
2017
2018
2019
2020
2021
Thereafter
8. INCOME TAXES
Income tax expense for the years ended September 30, 2016, 2015, and 2014 consisted of the following:
Current:
Federal
State
Deferred:
Federal
State
2016
2015
2014
(Dollars in thousands)
$
33,298
$
30,079
$
4,677
37,975
286
184
470
4,395
34,474
2,869
332
3,201
32,137
3,215
35,352
2,121
(15)
2,106
$
38,445
$
37,675
$
37,458
111 The Company's effective tax rates were 31.5%, 32.5%, and 32.5% for the years ended September 30, 2016, 2015, and 2014,
respectively. The differences between such effective rates and the statutory Federal income tax rate computed on income
before income tax expense resulted from the following:
2016
2015
2014
Amount
%
%
Amount
(Dollars in thousands)
Amount
%
Federal income tax expense
computed at statutory Federal rate
$ 42,679
35.0% $ 40,519
35.0% $ 40,303
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
3,308
(4,815)
(1,127)
(1,600)
$ 38,445
2.7
3,257
(4.0)
(4,316)
(0.9)
(1,222)
(563)
(1.3)
31.5% $ 37,675
2.8
3,200
(3.7)
(3,580)
(1.1)
(1,550)
(915)
(0.5)
32.5% $ 37,458
2.8
(3.1)
(1.4)
(0.8)
32.5%
Deferred income tax expense 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, 2016, 2015, and
2014 were as follows:
2016
2015
2014
(Dollars in thousands)
Premises and equipment
$
1,593
$
ACL
FHLB stock dividends
Low income housing partnerships
Capitol Federal Foundation contribution
Other, net
480
(1,357)
(318)
—
72
$
470
$
(129) $
(75)
4,083
(763)
418
(333)
3,201
$
(388)
(37)
(832)
(50)
3,768
(355)
2,106
112 The components of the net deferred income tax liabilities as of September 30, 2016 and 2015 were as follows:
Deferred income tax assets:
Salaries and employee benefits
Low income housing partnerships
ESOP compensation
ACL
Other
Gross deferred income tax assets
Valuation allowance
Gross deferred income tax asset, net of valuation allowance
Deferred income tax liabilities:
FHLB stock dividends
Premises and equipment
Unrealized gain on AFS securities
Other
Gross deferred income tax liabilities
2016
2015
(Dollars in thousands)
$
2,050
$
1,763
1,566
896
3,498
9,773
(1,804)
7,969
23,238
6,091
3,595
419
33,343
2,194
1,445
1,393
1,376
3,652
10,060
(1,807)
8,253
24,595
4,498
5,089
462
34,644
Net deferred tax liabilities
$
25,374
$
26,391
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. At both
September 30, 2016 and 2015, the Company had a valuation allowance of $1.8 million 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, 2016 and 2015.
Accounting Standard 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 determined 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 year ended September 30, 2016, the Company had no
unrecognized tax benefits. For the years ended September 30, 2015, and 2014, the Company's unrecognized tax benefits,
estimated penalties and interest, and related activities were insignificant.
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 a given state. With few exceptions, the Company is no longer subject
to U.S. federal and state examinations by tax authorities for fiscal years before 2013.
113 9. 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, 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 matured on September 30, 2013.
The loan for the shares acquired in the corporate reorganization matures on September 30, 2040.
As 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, 2016, 165,198
shares were released from collateral. On September 30, 2017, 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. Compensation expense related to the ESOP was $3.0 million for the year ended
September 30, 2016, $3.0 million for the year ended September 30, 2015, and $3.8 million for the year ended September 30,
2014. Of these amounts, $522 thousand, $384 thousand, and $362 thousand 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, 2016, 2015, and 2014, respectively. The amount included in
compensation expense for dividends on unallocated ESOP shares in excess of the debt service payments was $813 thousand,
$952 thousand, and $1.7 million for the years ended September 30, 2016, 2015, and 2014, respectively, which was related to
the loan for the shares acquired in the corporate reorganization.
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, 2016 and 2015:
Allocated ESOP shares
Unreleased ESOP shares
Total ESOP shares
2016
2015
(Dollars in thousands)
4,392,371
3,964,752
8,357,123
4,490,885
4,129,950
8,620,835
Fair value of unreleased ESOP shares
$
55,784
$
50,055
114 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. The Stock Option Plan and Restricted Stock Plan expired in April 2015. No additional grants can be
made from these two plans; however awards granted under these two plans remain outstanding until they are individually
vested, forfeited or expire. The objectives of the Equity Incentive Plan are to provide additional compensation to certain
officers, directors and key employees by facilitating their acquisition of stock interest in the Company and enable the
Company to retain personnel of experience and ability in key positions of responsibility.
Stock Option Plans – There are currently 700,007 stock options outstanding as a result of grants awarded from the Stock
Option Plan. The Equity Incentive Plan had 5,907,500 stock options originally eligible to be granted and, as of September
30, 2016, the Company had 4,172,316 stock options still available for future grants under this plan. This plan will expire in
January 2027 and no additional grants may be made after expiration, but awards granted under this plan remain outstanding
until they are individually vested, forfeited, or expire.
The Company may issue incentive and nonqualified stock options under the Equity Incentive Plan. The Company may also
award stock appreciation rights, although no stock appreciation rights have been awarded to date. The incentive stock
options expire no later than 10 years from the date of grant, and the nonqualified stock options expire no later than 15 years
from the date of grant. The vesting period of the stock options under the Equity Incentive Plan generally has ranged from
three to five years. The stock option price cannot be less than the market value at the date of the grant as defined by each
plan. The fair value of stock option grants is estimated on the date of the grant using the Black-Scholes option pricing model.
At September 30, 2016, the Company had 2,031,211 stock options outstanding with a weighted average exercise price of
$13.08 per option and a weighted average contractual life of 6.0 years, and 1,824,711 options exercisable with a weighted
average exercise price of $13.18 per option and a weighted average contractual life of 5.8 years. The exercise price may be
paid in cash, shares of common stock, or a combination of both. New shares are issued by the Company upon the exercise of
stock options.
Compensation expense attributable to stock option awards during the years ended September 30, 2016, 2015, and 2014
totaled $335 thousand, $618 thousand, and $633 thousand, respectively. The fair value of stock options vested during the
years ended September 30, 2016, 2015, and 2014 was $652 thousand, $615 thousand, and $646 thousand, respectively. As of
September 30, 2016, the total future compensation cost related to non-vested stock options not yet recognized in the
consolidated statements of income was $254 thousand, net of estimated forfeitures, and the weighted average period over
which these awards are expected to be recognized was 2.4 years.
Restricted Stock Plans – The Equity Incentive Plan had 2,363,000 shares originally eligible to be granted as restricted stock
and, as of September 30, 2016, the Company had 1,777,850 shares available for future grants of restricted stock under this
plan. This plan will expire in January 2027 and no additional grants may be made after expiration, but awards granted under
this plan remain outstanding until they are individually vested or forfeited. The vesting period of the restricted stock awards
under the Equity Incentive Plan has generally ranged from three to five years. At September 30, 2016, the Company had
74,525 unvested restricted stock shares with a weighted average grant date fair value of $12.50 per share.
Compensation expense is calculated based on the fair market value of the common stock at the date of the grant, as defined
by the plan, and is recognized over the vesting time period. Compensation expense attributable to restricted stock awards
during the years ended September 30, 2016, 2015, and 2014 totaled $787 thousand, $1.5 million, and $1.5 million,
respectively. The fair value of restricted stock that vested during the years ended September 30, 2016, 2015, and 2014 totaled
$1.6 million, $1.5 million, and $1.5 million, respectively. As of September 30, 2016 there was $724 thousand of
unrecognized compensation cost related to unvested restricted stock to be recognized over a weighted average period of 2.8
years.
115 11. COMMITMENTS AND CONTINGENCIES
The following table summarizes the Bank's loan commitments as of September 30, 2016 and 2015:
Originate fixed-rate
Originate adjustable-rate
Purchase/participate fixed-rate
Purchase/participate adjustable-rate
2016
2015
(Dollars in thousands)
$
$
68,047
12,257
138,792
18,653
237,749
$
$
54,555
16,164
128,334
13,785
212,838
Commitments to originate loans are commitments to lend to a customer. Commitments to purchase/participate in loans
represent commitments to purchase loans from correspondent lenders on a loan-by-loan basis or participate in commercial
real estate loans with a lead bank. The Bank evaluates each borrower's creditworthiness on a case-by-case basis.
Commitments generally have expiration dates or other termination clauses and one-to four-family loan commitments 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 in the table above does not necessarily represent future cash
requirements. As of September 30, 2016 and 2015, there were no significant loan-related commitments that met the
definition of derivatives or commitments to sell mortgage loans. As of September 30, 2016 and 2015, the Bank had approved
but unadvanced home equity lines of credit of $262.8 million and $259.7 million, respectively.
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, 2016, or future periods.
12. REGULATORY CAPITAL REQUIREMENTS
The Bank and the Company are 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
regulatory capital adequacy guidelines, the Company and Bank must meet specific capital guidelines that involve quantitative
measures of the Company's and Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. Additionally, the Bank must meet specific capital guidelines to be considered well capitalized per the
regulatory framework for prompt corrective action. The Company's and Bank's capital amounts and classifications are also
subject to qualitative judgments by regulators about components, risk weightings, and other factors.
Generally, savings institutions, such as the Bank, may make capital distributions during any calendar year equal to the
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. The Company's ability to pay dividends is dependent, in part,
upon its ability to obtain capital distributions from the Bank. 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 conjunction with the Company's corporate reorganization in December 2010, a "liquidation account" was established for
the benefit of certain depositors of the Bank in an amount equal to Capitol Federal Savings Bank MHC's ownership interest
in the retained earnings of Capitol Federal Financial as of June 30, 2010. As of September 30, 2016, the balance of this
liquidation account was $187.0 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.
116 The Bank and the Company must maintain certain minimum capital ratios as set forth in the table below for capital adequacy
purposes. Beginning January 1, 2016, the Company and Bank were required to maintain a capital conservation buffer above
certain minimum capital ratios for capital adequacy purposes in order to avoid certain restrictions on capital distributions and
other payments including dividends, share repurchases, and certain compensation. The capital conservation buffer is being
phased in equally over a four year period by increasing the required buffer percentage by 0.625% each year. Once fully
phased-in, the Bank and Company must maintain a balance of Common Equity Tier 1 ("CET1") capital that exceeds 2.5% of
each of the minimum risk-based capital ratios (CET1 capital ratio, Tier 1 capital ratio, and Total capital ratio) in order to
satisfy the capital conservation buffer requirement. At September 30, 2016, the Bank and Company exceeded the capital
conservation buffer requirement. As of September 30, 2016 and 2015, regulatory guidelines categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. Management believes, as of September 30, 2016,
that the Bank and Company meet all capital adequacy requirements to which they are subject and there were no conditions or
events subsequent to September 30, 2016 that would change the Bank's or Company's category.
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
(Dollars in thousands)
To Be Well
Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Bank
As of September 30, 2016
Tier 1 leverage ratio
$ 1,234,912
10.9% $ 452,339
4.0% $ 565,424
5.0%
CET1 capital ratio
Tier 1 capital ratio
Total capital ratio
As of September 30, 2015
Tier 1 leverage ratio
CET1 capital ratio
Tier 1 capital ratio
Total capital ratio
Company
As of September 30, 2016
Tier 1 leverage ratio
CET1 capital ratio
Tier 1 capital ratio
Total capital ratio
As of September 30, 2015
Tier 1 leverage ratio
CET1 capital ratio
Tier 1 capital ratio
Total capital ratio
1,234,912
1,234,912
1,243,452
1,266,054
1,266,054
1,266,054
1,275,497
1,387,049
1,387,049
1,387,049
1,395,589
1,407,852
1,407,852
1,407,852
1,417,295
28.5
28.5
28.7
11.3
30.0
30.0
30.3
12.3
32.0
32.0
32.2
12.6
33.4
33.4
33.6
195,080
260,107
346,809
447,986
189,663
252,885
337,179
452,248
195,094
260,126
346,835
448,003
189,946
253,262
337,683
4.5
6.0
8.0
4.0
4.5
6.0
8.0
4.0
4.5
6.0
8.0
4.0
4.5
6.0
8.0
281,783
346,809
433,512
559,982
273,958
337,179
421,474
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
6.5
8.0
10.0
5.0
6.5
8.0
10.0
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
117 13. 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, 2016 or 2015. The Company's AFS securities are recorded at fair value on
a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets or
liabilities on a non-recurring basis, such as OREO and loans individually evaluated for impairment. These non-recurring fair
value adjustments involve the application of lower of cost or fair value accounting or write-downs of individual assets.
The Company groups its assets at fair value in three levels based on the markets in which the assets are traded and the
reliability of the assumptions used to determine fair value. These levels are:
• Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
• Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based valuation techniques for which
all significant assumptions are observable in the market.
• Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in
the market. These unobservable assumptions reflect the Company's own estimates of assumptions that market
participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing
models, discounted cash flow models, and similar techniques. The results cannot be determined with precision
and may not be realized in an actual sale or immediate settlement of the asset or liability.
The Company bases its fair values on the price that would be received from the sale of an asset in an orderly transaction
between market participants at the measurement date under current market conditions. The Company maximizes the use of
observable inputs and minimizes the use of unobservable inputs when measuring fair value.
The following is a description of valuation methodologies used for assets measured at fair value on a recurring basis.
AFS Securities - The Company's AFS securities portfolio is carried at estimated fair value, with any unrealized gains and
losses, net of taxes, reported as AOCI in stockholders' equity. The majority of the securities within the AFS portfolio were
issued by GSEs. The Company primarily uses prices obtained from third party pricing services to determine the fair value of
its securities. On a quarterly basis, management corroborates a sample of prices obtained from the third party pricing service
for Level 2 securities by comparing them to an independent source. If the price provided by the independent source varies by
more than a predetermined percentage from the price received from the third party pricing service, then the variance is
researched by management. The Company did not have to adjust prices obtained from the third party pricing service when
determining the fair value of its securities during the years ended September 30, 2016 and 2015. The Company's major
security types, based on the nature and risks of the securities, are:
• GSE Debentures - Estimated fair values are based on a discounted cash flow method. Cash flows are
determined by taking any embedded options into consideration and are discounted using current market yields
for similar securities. (Level 2)
• MBS - Estimated fair values are based on a discounted cash flow method. Cash flows are determined based on
prepayment projections of the underlying mortgages and are discounted using current market yields for
benchmark securities. (Level 2)
• Municipal Bonds - Estimated fair values are based on a discounted cash flow method. Cash flows are
determined by taking any embedded options into consideration and are discounted using current market yields
for securities with similar credit profiles. (Level 2)
• Trust Preferred Securities - Estimated fair values are based on a discounted cash flow method. Cash flows are
determined by taking prepayment and underlying credit considerations into account. The discount rates are
derived from secondary trades and bid/offer prices. (Level 3)
118 The following tables provide the level of valuation assumption used to determine the carrying value of the Company's assets
measured at fair value on a recurring basis at the dates presented.
September 30, 2016
Quoted Prices
Significant
Significant
in Active Markets
Other Observable Unobservable
Carrying
for Identical Assets
Value
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
(Dollars in thousands)
$
$
347,038
$
178,507
1,756
527,301
$
— $
347,038
$
—
—
178,507
—
— $
525,545
$
—
—
1,756
1,756
September 30, 2015
Quoted Prices
Significant
Significant
in Active Markets
Other Observable Unobservable
Carrying
for Identical Assets
Value
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
(Dollars in thousands)
$
526,620
$
— $
229,491
144
1,916
—
—
—
526,620
$
229,491
144
—
$
758,171
$
— $
756,255
$
—
—
—
1,916
1,916
AFS Securities:
GSE debentures
MBS
Trust preferred securities
AFS Securities:
GSE debentures
MBS
Municipal bonds
Trust preferred securities
The Company's Level 3 AFS securities had no activity during fiscal years 2016, 2015, and 2014 except for principal
repayments of $97 thousand, $400 thousand, and $150 thousand, respectively, and increases in net unrealized losses included
in other comprehensive income of $61 thousand, $45 thousand, and $16 thousand, respectively.
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, 2016 and 2015 was $42.0
million and $22.8 million, respectively. The increase in the balance of loans individually evaluated for impairment at
September 30, 2016 compared to September 30, 2015 was due largely to TDR activity. Substantially all of these loans were
secured by residential real estate and were individually evaluated to determine if the carrying value of the loan was in excess
of the fair value of the collateral, less estimated selling costs of 10%. When no impairment is indicated, the carrying amount
is considered to approximate fair value. Fair values were estimated through current appraisals or current Federal Housing
Finance Agency ("FHFA") housing price indices, which is a broad based measure of the movement of single-family house
prices and is a weighted, repeat-sales index. Management does not adjust or apply a discount to the appraised value or FHFA
housing price indices, except for the estimated sales costs noted above. The primary significant unobservable input for loans
individually evaluated for impairment using appraisals to determine the estimated fair value was the appraisal. Fair values of
loans individually evaluated for impairment cannot be determined with precision and may not be realized in an actual sale or
immediate settlement of the loan, and, as such are classified as Level 3. Based on this evaluation, the Bank charged-off all
loss amounts as of September 30, 2016 and 2015; therefore, there was no ACL related to these loans.
119 OREO – OREO primarily represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is
carried at lower of cost or fair value. Fair value is estimated through current appraisals or listing prices, less estimated selling
costs of 10%. Management does not adjust or apply a discount to the appraised value or listing price, except for the
estimated sales costs noted above. The primary significant unobservable input for OREO was the appraisal or listing price.
Fair values of foreclosed property cannot be determined with precision and may not be realized in an actual sale of the
property, and, as such are classified as Level 3. The fair value of OREO at September 30, 2016 and 2015 was $3.7 million
and $4.3 million, respectively.
The following tables provide the level of valuation assumptions used to determine the carrying value of the Company's assets
measured at fair value on a non-recurring basis at the dates presented.
September 30, 2016
Quoted Prices
Significant
Significant
in Active Markets Other Observable Unobservable
Carrying
for Identical Assets
Value
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
Loans individually evaluated for impairment
OREO
$
$
41,995
3,734
45,729
$
$
(Dollars in thousands)
— $
—
— $
— $
—
— $
41,995
3,734
45,729
September 30, 2015
Quoted Prices
Significant
Significant
Carrying
Value
in Active Markets Other Observable Unobservable
for Identical Assets
(Level 1)
Inputs
(Level 3)
Inputs
(Level 2)
Loans individually evaluated for impairment
OREO
$
$
22,762
4,333
27,095
$
$
(Dollars in thousands)
— $
—
— $
— $
—
— $
22,762
4,333
27,095
Fair Value Disclosures – The Company determined estimated fair value amounts using available market information and
from a variety of valuation methodologies based on pertinent information available to management as of the dates presented.
Considerable judgment is required to interpret market data to develop the estimates of fair value. The estimates presented are
not necessarily indicative of amounts the Company would realize from a current market exchange at subsequent dates.
120 The carrying amounts and estimated fair values of the Company's financial instruments at September 30, 2016 and 2015 were
as follows:
2016
2015
Carrying
Amount
Estimated
Fair
Value
Carrying
Amount
Estimated
Fair
Value
(Dollars in thousands)
Assets:
Cash and cash equivalents
$
281,764
$
281,764
$
772,632
$
AFS securities
HTM securities
Loans receivable
FHLB stock
Liabilities:
Deposits
FHLB borrowings
Repurchase agreements
527,301
1,100,874
6,958,024
109,970
5,164,018
2,372,389
200,000
527,301
1,122,867
7,292,971
109,970
5,204,251
2,434,151
207,303
758,171
1,271,122
6,625,027
150,543
4,832,520
3,270,521
200,000
772,632
758,171
1,295,274
6,870,176
150,543
4,869,312
3,339,650
209,807
The following methods and assumptions were used to estimate the fair value of the financial instruments:
Cash and Cash Equivalents - The carrying amounts of cash and cash equivalents are considered to approximate their fair
value due to the nature of the financial assets. (Level 1)
HTM Securities - Estimated fair values of securities are based on one of three methods: (1) quoted market prices where
available; (2) quoted market prices for similar instruments if quoted market prices are not available; (3) unobservable data
that represents the Bank's assumptions about items that market participants would consider in determining fair value where
no market data is available. HTM securities are carried at amortized cost. (Level 2)
Loans Receivable - The fair value of one- to four-family loans and home equity loans are generally estimated using the
present value of expected future cash flows, assuming future prepayments and using discount factors determined by prices
obtained from securitization markets, less a discount for the cost of servicing and lack of liquidity. The estimated fair value of
the Bank's commercial and consumer loans are based on the expected future cash flows assuming future prepayments and
discount factors based on current offering rates. (Level 3)
FHLB stock - The carrying value and estimated fair value of FHLB stock equals cost, which is based on redemption at par
value. (Level 1)
Deposits - The estimated fair value of demand deposits, savings, and money market accounts is the amount payable on
demand at the reporting date. The estimated fair value of these deposits at September 30, 2016 and 2015 was $2.34 billion
and $2.20 billion, respectively. (Level 1) The fair value of certificates of deposit is estimated by discounting future cash
flows using current London Interbank Offered Rates ("LIBOR"). The estimated fair value of certificates of deposit at
September 30, 2016 and 2015 was $2.87 billion and $2.67 billion, respectively. (Level 2)
FHLB borrowings and Repurchase Agreements - The fair value of fixed-maturity borrowed funds is estimated by discounting
estimated future cash flows using current offer rates. (Level 2) The carrying value of FHLB line of credit is considered to
approximate its fair value due to the nature of the financial liability. (Level 1)
121 14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized quarterly data for each of the years indicated for the Company.
First
Second
Third
Fourth
Quarter
Quarter
Quarter
(Dollars and counts in thousands, except per share amounts)
Quarter
Total
2016
Total interest and dividend income
$
74,359
$
75,632
$
75,527
$
75,595
$ 301,113
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
2015
47,982
48,538
47,930
—
—
—
20,718
21,527
20,551
0.16
0.16
0.335
132,822
132,911
0.16
0.16
0.085
132,960
133,031
0.15
0.15
0.335
133,102
133,251
47,732
(750)
20,698
0.16
0.16
0.085
192,182
(750)
83,494
0.63
0.63
0.84
133,296
133,493
133,045
133,176
Total interest and dividend income
$
74,900
$
73,877
$
74,174
$
74,411
$ 297,362
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
48,036
173
20,472
0.15
0.15
0.335
136,088
136,116
46,779
275
19,234
0.14
0.14
0.085
136,208
136,246
47,013
323
19,602
0.14
0.14
0.335
135,746
135,763
47,940
189,768
—
18,785
0.14
0.14
0.085
133,515
133,533
771
78,093
0.58
0.58
0.84
135,384
135,409
122 15. 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, 2016 and 2015
(Dollars in thousands, except per share amounts)
ASSETS:
Cash and cash equivalents
Investment in the Bank
Note receivable - ESOP
Other assets
Income taxes receivable, net
TOTAL ASSETS
LIABILITIES:
Income taxes payable, net
Accounts payable and accrued expenses
Deferred income tax liabilities, net
Total liabilities
STOCKHOLDERS' EQUITY:
2016
2015
$ 108,197
$
96,171
1,240,827
1,274,429
43,790
44,984
389
—
420
318
$1,393,203
$1,416,322
$
128
$
74
37
239
—
60
36
96
—
Preferred stock, $.01 par value; 100,000,000 shares authorized, no shares issued or outstanding
—
Common stock, $.01 par value; 1,400,000,000 shares authorized, 137,486,172 and 137,106,822
shares issued and outstanding as of September 30, 2016 and 2015, respectively
Additional paid-in capital
Unearned compensation - ESOP
Retained earnings
AOCI, net of tax
Total stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
1,375
1,371
1,156,855
(39,647)
268,466
1,151,041
(41,299)
296,739
5,915
8,374
1,392,964
1,416,226
$1,393,203
$1,416,322
123 STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2016, 2015, and 2014
(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Dividend income from the Bank
Interest income from other investments
Total interest and dividend income
NON-INTEREST EXPENSE:
Salaries and employee benefits
Regulatory and outside services
Other non-interest expense
Total non-interest expense
INCOME BEFORE INCOME TAX EXPENSE AND EQUITY IN
EXCESS OF DISTRIBUTION OVER EARNINGS OF SUBSIDIARY
INCOME TAX EXPENSE
INCOME BEFORE EQUITY IN EXCESS OF
DISTRIBUTION OVER EARNINGS OF SUBSIDIARY
EQUITY IN EXCESS OF DISTRIBUTION OVER EARNINGS OF SUBSIDIARY
NET INCOME
2016
2015
2014
$ 117,513
$ 115,359
$ 145,276
1,725
1,835
2,004
119,238
117,194
147,280
827
261
558
835
243
517
774
248
606
1,646
1,595
1,628
117,592
28
115,599
84
145,652
132
117,564
(34,070)
$ 83,494
115,515
(37,422)
$ 78,093
145,520
(67,826)
$ 77,694
124 STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2016, 2015, and 2014
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
83,494
$
78,093
$
77,694
2016
2015
2014
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in excess of distribution over earnings of subsidiary
34,070
37,422
67,826
Depreciation of equipment
Provision for deferred income taxes
Changes in:
Other assets
Income taxes receivable/payable
Accounts payable and accrued expenses
30
2
1
445
14
30
428
35
3,300
1
Net cash flows provided by operating activities
118,056
119,309
2
3,768
166
(562)
(12)
148,882
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on notes receivable from ESOP
Purchase of equipment
Net cash flows provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payment from subsidiary related to restricted stock awards
Dividends paid
Repurchase of common stock
Stock options exercised
Net cash flows used in financing activities
1,194
—
1,194
1,156
—
1,156
1,120
(370)
750
473
(111,767)
—
4,070
(107,224)
95
(114,162)
(50,034)
267
(163,834)
243
(138,172)
(79,633)
458
(217,104)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
12,026
(43,369)
(67,472)
CASH AND CASH EQUIVALENTS:
Beginning of year
End of year
96,171
139,540
207,012
$ 108,197
$
96,171
$ 139,540
125 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended, the "Act") as of September 30, 2016. Based upon this evaluation, our Chief Executive Officer and
our Chief Financial Officer have concluded that, as of September 30, 2016, such disclosure controls and procedures were
effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Act is
accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial
Officer) to allow timely decisions regarding required disclosure, and is recorded, processed, summarized, and reported within
the time periods specified in the SEC's rules and forms.
Internal Controls 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 GAAP,
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, 2016.
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 (2013). Management has concluded that the Company
maintained an effective system of internal control over financial reporting based on these criteria as of September 30, 2016.
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, 2016 and it is included in Item 8.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) and
15d-15(f) under the Act) that occurred during the Company's quarter ended September 30, 2016 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B. Other Information
None.
126 PART III
Item 10. Directors, Executive Officers, and Corporate Governance
Information required by this item concerning the Company's directors and compliance with Section 16(a) of the Act is
incorporated herein by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held in
January 2017, a copy of which will be filed not later than 120 days after the close of the fiscal year. Pursuant to General
Instruction G(3), information concerning executive officers of the Company is included in Part I, under the caption
"Executive Officers of the Registrant" of this Form 10-K.
Information required by this item regarding the audit committee of the Company's Board of Directors, including information
regarding the audit committee financial experts serving on the committee, is incorporated herein by reference from the
definitive proxy statement for the Annual Meeting of Stockholders to be held in January 2017, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
Code of Ethics
We have adopted a written code of ethics within the meaning of Item 406 of SEC Regulation S-K that applies to our principal
executive officer and senior financial officers, and to all of our other employees and our directors, a copy of which is
available free of charge by contacting James Wempe, Director, Investor Relations, at (785) 270-6055, or from our internet
website (www.capfed.com).
Item 11. Executive Compensation
Information required by this item concerning compensation is incorporated herein by reference from the definitive proxy
statement for the Annual Meeting of Stockholders to be held in January 2017, a copy of which will be filed not later than 120
days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this item concerning security ownership of certain beneficial owners and management is
incorporated herein by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held in
January 2017, a copy of which will be filed not later than 120 days after the close of the fiscal year.
The following table sets forth information as of September 30, 2016 with respect to compensation plans under which shares
of our common stock may be issued.
Equity Compensation Plan Information
Number of Shares
to be issued upon
Weighted Average
Number of Shares
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
Exercise of
Exercise Price of
(Excluding Shares
Outstanding Options, Outstanding Options,
Reflected in the
Plan Category
Warrants and Rights Warrants and Rights
First Column)
Equity compensation plans
approved by stockholders
Equity compensation plans not
approved by stockholders
2,031,211
$
N/A
2,031,211
$
13.08
N/A
13.08
5,950,166 (1)
N/A
5,950,166
(1) This amount includes 1,777,850 shares available for future grants of restricted stock under the Equity Incentive Plan.
127 Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this item concerning certain relationships, related transactions and director independence is
incorporated herein by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held in
January 2017, a copy of which will be filed not later than 120 days after the close of the fiscal year.
Item 14. Principal Accountant Fees and Services
Information required by this item concerning principal accountant fees and services is incorporated herein by reference from
the definitive proxy statement for the Annual Meeting of Stockholders to be held in January 2017, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
128 PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following is a list of documents filed as part of this report:
(1) Financial Statements:
The following financial statements are included under Part II, Item 8 of this Form 10-K:
1.
2.
3.
4.
5.
6.
7.
Reports of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of September 30, 2016 and 2015.
Consolidated Statements of Income for the Years Ended September 30, 2016, 2015, and 2014.
Consolidated Statements of Comprehensive Income for the Years Ended September 30, 2016,
2015, and 2014.
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 2016, 2015,
and 2014.
Consolidated Statements of Cash Flows for the Years Ended September 30, 2016, 2015, and 2014.
Notes to Consolidated Financial Statements for the Years Ended September 30, 2016, 2015, and
2014.
(2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information is not required under the related instructions
or is not applicable.
(3) Exhibits:
See "Index to Exhibits."
129
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CAPITOL FEDERAL FINANCIAL, INC.
Date: November 29, 2016
By:
/s/ John B. Dicus
John B. Dicus, Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the date indicated.
By:
/s/ John B. Dicus
John B. Dicus, Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
Date: November 29, 2016
By:
/s/ Kent G. Townsend
Kent G. Townsend, Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: November 29, 2016
By:
/s/ Jeffrey R. Thompson
Jeffrey R. Thompson, Director
Date: November 29, 2016
By:
/s/ Jeffrey M. Johnson
Jeffrey M. Johnson, Director
Date: November 29, 2016
By:
/s/ Morris J. Huey II
Morris J. Huey II, Director
Date: November 29, 2016
By:
/s/ Reginald L. Robinson
Reginald L. Robinson, Director
Date: November 29, 2016
By:
/s/ Michael T. McCoy, M.D.
Michael T. McCoy, M.D., Director
Date: November 29, 2016
By:
/s/ James G. Morris
James G. Morris, Director
Date: November 29, 2016
By:
/s/ Marilyn S. Ward
Marilyn S. Ward, Director
Date: November 29, 2016
By:
/s/ Tara D. Van Houweling
Tara D. Van Houweling, First Vice President
and Reporting Director
(Principal Accounting Officer)
Date: November 29, 2016
130
INDEX TO EXHIBITS
Document
Charter of Capitol Federal Financial, Inc., as filed on May 6, 2010, as Exhibit 3(i) to Capitol Federal
Financial, Inc.'s Registration Statement on Form S-1 (File No. 333-166578) and incorporated herein by
reference
Bylaws of Capitol Federal Financial, Inc., as amended, filed on September 30, 2016, as Exhibit 3.2 to Form
8-K for Capitol Federal Financial Inc. and incorporated herein by reference
Capitol Federal Financial, Inc.'s Employee Stock Ownership Plan, as amended, filed on May 10, 2011 as
Exhibit 10.1(ii) to the March 31, 2011 Form 10-Q for Capitol Federal Financial, Inc., and incorporated
herein by reference
Form of Change of Control Agreement with each of John B. Dicus, Kent G. Townsend, and Rick C. Jackson
filed on January 20, 2011 as Exhibit 10.1 to the Registrant's Current Report on Form 8-K and incorporated
herein by reference
Form of Change of Control Agreement with each of Natalie G. Haag and Carlton A. Ricketts filed on
November 29, 2012 as Exhibit 10.1(iv) to the Registrant's Annual Report on Form 10-K and incorporated
herein by reference
Form of Change of Control Agreement with Frank H. Wright filed on November 29, 2013 as Exhibit 10.1(v)
to the Registrant's Annual Report on Form 10-K and incorporated herein by reference
Form of Change of Control Agreement with Daniel L. Lehman
Capitol Federal Financial's 2000 Stock Option and Incentive Plan (the "Stock Option Plan") filed on April
13, 2000 as Appendix A to Capitol Federal Financial's Revised Proxy Statement (File No. 000-25391) and
incorporated herein by reference
Capitol Federal Financial Deferred Incentive Bonus Plan, as amended, filed on May 5, 2009 as Exhibit 10.4
to the March 31, 2009 Form 10-Q for Capitol Federal Financial and incorporated herein by reference
Form of Incentive Stock Option Agreement under the Stock Option Plan filed on February 4, 2005 as
Exhibit 10.5 to the December 31, 2004 Form 10-Q for Capitol Federal Financial and incorporated herein by
reference
Form of Non-Qualified Stock Option Agreement under the Stock Option Plan filed on February 4, 2005 as
Exhibit 10.6 to the December 31, 2004 Form 10-Q for Capitol Federal Financial and incorporated herein by
reference
Description of Named Executive Officer Salary and Bonus Arrangements
Description of Director Fee Arrangements filed on August 1, 2014 as Exhibit 10.9 to the Registrant's June
30, 2014 Form 10-Q and incorporated herein by reference
Short-term Performance Plan filed on August 4, 2015 as Exhibit 10.10 to the Registrant's June 30, 2015
Form 10-Q and incorporated herein by reference
Capitol Federal Financial, Inc. 2012 Equity Incentive Plan (the "Equity Incentive Plan") filed on December
22, 2011 as Appendix A to Capitol Federal Financial, Inc.'s Proxy Statement (File No. 001-34814) and
incorporated herein by reference
Form of Incentive Stock Option Agreement under the Equity Incentive Plan filed on February 6, 2012 as
Exhibit 10.12 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
Form of Non-Qualified Stock Option Agreement under the Equity Incentive Plan filed on February 6, 2012
as Exhibit 10.13 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
Form of Stock Appreciation Right Agreement under the Equity Incentive Plan filed on February 6, 2012 as
Exhibit 10.14 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
Form of Restricted Stock Agreement under the Equity Incentive Plan filed on February 6, 2012 as Exhibit
10.15 to the Registrant's December 31, 2011 Form 10-Q and incorporated herein by reference
Calculations of Basic and Diluted Earnings Per Share (See "Part II, Item 8. Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – Note 2. Earnings Per Share")
Code of Ethics*
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Exhibit
Number
3(i)
3(ii)
10.1(i)
10.1(ii)
10.1(iii)
10.1(iv)
10.1(v)
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
11
14
21
23
131 31.1
31.2
32
101
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by John B. Dicus, Chairman,
President and Chief Executive Officer
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Kent G. Townsend,
Executive Vice President, Chief Financial Officer and Treasurer
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 made by John B. Dicus, Chairman, President and Chief Executive Officer, and Kent G.
Townsend, Executive Vice President, Chief Financial Officer and Treasurer
The following information from the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2016, filed with the SEC on November 29, 2016, has been formatted in eXtensible Business
Reporting Language: (i) Consolidated Balance Sheets at September 30, 2016 and 2015, (ii) Consolidated
Statements of Income for the fiscal years ended September 30, 2016, 2015, and 2014, (iii) Consolidated
Statements of Comprehensive Income for the fiscal years ended September 30, 2016, 2015, and 2014, (iv)
Consolidated Statement of Stockholders' Equity for the fiscal years ended September 30, 2016, 2015, and
2014, (v) Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2016, 2015, and
2014, and (vi) Notes to the Consolidated Financial Statements
*May be obtained free of charge from the Registrant's Director of Investor Relations by calling (785) 270-6055 or from the
Registrant's internet website at www.capfed.com.
132 Branch Locations by County
Sedgwick County 7 branches
Saline County 1 branch
Butler County 1 branch
Riley County 2 branches
Lyon County 1 branch
Shawnee County 7 branches
Douglas County 4 branches
Wyandotte County 1 branch
Platte County 1 branch
Clay County 2 branches
Jackson County 1 branch
Johnson County 19 branches
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HOME OFFICE, TOPEKA, KS
, Inc.