Capitol Federal Financial, Inc.
Annual Report 2017

Plain-text annual report

Dear Stockholders, Dear Stockholders, Capitol Federal® Financial, Inc. (the “Company”) continued in fiscal year 2017 with solid earnings performance, high asset quality and a strong balance sheet that allows us to return to stockholders additional value through dividends in excess of our earnings. Capitol Federal continued is core business model of funding single family loan originations while acquiring retail deposits. Capitol Federal® Financial, Inc. (the “Company”) continued in fiscal year 2017 with solid earnings performance, high asset quality and a strong balance sheet that allows us to return to stockholders additional value through dividends in excess of our earnings. Capitol Federal continued is core business model of funding single family loan originations while acquiring retail deposits. Sedgwick County 7 branches Sedgwick County 7 branches Saline County 1 branch Saline County 1 branch ® ® Branch Locations by County Branch Locations by County Over the past several years, the Company has worked to reduce its securities portfolio and reinvesting Over the past several years, the Company has worked to reduce its securities portfolio and reinvesting repayments into loans. The Company was able to continue that during the 2017 fiscal year as the balance of repayments into loans. The Company was able to continue that during the 2017 fiscal year as the balance of higher yielding loans increased $237 million to $7.2 biri i decreased $385 million. higher yielding loans increased $237 million to $7.2 billion In addition to growing the loan portfolio, the Company was able to increase deposits by $146 million. In addition to growing the loan portfolio, the Company was able to increase deposits by $146 million. This deposit growth, combined with securities repayments not used to increase the loan portfolio, allowed us to This deposit growth, combined with securities repayments not used to increase the loan portfolio, allowed us to reduce the balance of higher costing FHLB advances by $199 million. These actions allowed us to maintain our reduce the balance of higher costing FHLB advances by $199 million. These actions allowed us to maintain our net interest margin. We have continued our efforts to grow our commercial real estate portfolio by closing on net interest margin. We have continued our efforts to grow our commercial real estate portfolio by closing on $68 million of participation loans and increasing the balance by $116 million. $68 million of participation loans and increasing the balance by $116 million. while securities decreased $385 million. The growth in the loan portfolio in the most recent fiscal year compared to the prior fiscal year slowed as we The growth in the loan portfolio in the most recent fiscal year compared to the prior fiscal year slowed as we began to manage the amount of cash and securities we need to maintain as part of our liquidity risk management began to manage the amount of cash and securities we need to maintain as part of our liquidity risk management strategy. The amount we will try to maintain is generally measured as the ratio of securities and cash to total strategy. The amount we will try to maintain is generally measured as the ratio of securities and cash to total assets and we will be managing this ratio to approximately 15%. In order to manage the size of the loan assets and we will be managing this ratio to approximately 15%. In order to manage the size of the loan portfolio, we are able to control loan volume primarily through the rates offered to correspondent lenders for portfolio, we are able to control loan volume primarily through the rates offered to correspondent lenders for loans that we are buying. loans that we are buying. Our ability to grow deposits while paying down FHLB advances has allowed us to reduce the size of the balance Our ability to grow deposits while paying down FHLB advances has allowed us to reduce the size of the balance sheet. Management considers a ten percent ratio of stockholders’ equity to total assets, at our subsidiary sheet. Management considers a ten percent ratio of stockholders’ equity to total assets, at our subsidiary Capitol Federal® Savings Bank, as an appropriate level of capital. At September 30, 2017, this ratio was 13%. Capitol Federal® Savings Bank, as an appropriate level of capital. At September 30, 2017, this ratio was 13%. These combined strategies have, we believe, made our balance sheet more effective at generating earnings. For These combined strategies have, we believe, made our balance sheet more effective at generating earnings. For fiscal year 2017, earnings were slightly higher than fiscal year 2016 earnings resulting in earnings per share of fiscal year 2017, earnings were slightly higher than fiscal year 2016 earnings resulting in earnings per share of $0.63 per share, of which we paid out 100% to our stockholders. We also continued our True Blue® Dividend in $0.63 per share, of which we paid out 100% to our stockholders. We also continued our True Blue® Dividend in the most recent fiscal year, paying out $0.25 per share in cash dividends in June 2017. the most recent fiscal year, paying out $0.25 per share in cash dividends in June 2017. As we look to fiscal year 2018, it is board and management’s intention to continue to pay 100% of our earnings in As we look to fiscal year 2018, it is board and management’s intention to continue to pay 100% of our earnings in cash dividends. There is much to consider and be prepared for regarding rising interest rates as well as potential cash dividends. There is much to consider and be prepared for regarding rising interest rates as well as potential tax and regulatory changes. While we do not know how these topics will play out, management stands ready tax and regulatory changes. While we do not know how these topics will play out, management stands ready to respond to these and other changes that could influence our operations with the objective of continuing our to respond to these and other changes that could influence our operations with the objective of continuing our tradition of strong and stable earnings and returning value to our stockholders through cash dividends. tradition of strong and stable earnings and returning value to our stockholders through cash dividends. The Capitol Federal® Foundation continued to support areas of need in our markets by funding grants totaling almost $5 million during fiscal year 2017. This brings total giving back to our communities since 1999 to $60 million. At September 30, 2017 the Foundation had assets totaling $109 million. The Capitol Federal® Foundation continued to support areas of need in our markets by funding grants totaling almost $5 million during fiscal year 2017. This brings total giving back to our communities since 1999 to $60 million. At September 30, 2017 the Foundation had assets totaling $109 million. The Company’s board and management wish to thank our stockholders for their continued support of our efforts to bring consistency in earnings while maintaining a strong balance sheet that allows us to return value through our dividend strategy. We want to thank all of our employees for their commitment to keep Capitol Federal® Savings Bank on a proven path of success. The Company’s board and management wish to thank our stockholders for their continued support of our efforts to bring consistency in earnings while maintaining a strong balance sheet that allows us to return value through our dividend strategy. We want to thank all of our employees for their commitment to keep Capitol Federal® Savings Bank on a proven path of success. Sincerely, Sincerely, John B. Dicus Chairman, President & CEO John B. Dicus Chairman, President & CEO Butler County 1 branch Butler County 1 branch Riley County 2 branches Riley County 2 branches Lyon County 1 branch Lyon County 1 branch Shawnee County 7 branches Shawnee County 7 branches Douglas County 4 branches Douglas County 4 branches Wyandotte County 1 branch Wyandotte County 1 branch Platte County 1 branch Platte County 1 branch Clay County 2 branches Clay County 2 branches Jackson County 1 branch Jackson County 1 branch Johnson County 19 branches Johnson County 19 branches S A S N A K S A S N A K I R U O S S I M I R U O S S I M Home Office, Topeka, KS Home Office, Topeka, KS JULY 2010 JULY 2010 Financial Highlights Selected Balance Sheet Data: Total assets Loans receivable, net Securities At September 30, 2017 2016 2015 2014 2013 (Dollars in thousands) $ 9,192,916 $ 9,267,247 $ 9,844,161 $ 9,865,028 $ 9,186,449 5,958,868 7,195,071 6,958,024 6,625,027 1,243,569 1,628,175 2,029,293 6,233,170 2,393,489 213,054 4,655,272 3,369,677 220,000 1,492,882 2,787,990 128,530 4,611,446 2,513,538 320,000 1,632,126 2013 Federal Home Loan Bank stock 100,954 109,970 150,543 Deposits 5,309,868 5,164,018 4,832,520 Federal Home Loan Bank borrowings 2,173,808 2,372,389 3,270,521 Repurchase agreements Stockholders' equity 200,000 200,000 200,000 1,368,313 1,392,964 1,416,226 For the Year Ended September 30, 2017 2016 2014 (Dollars and counts in thousands, except per share amounts) 2015 Selected Operations Data: Total interest and dividend income $ 313,186 $ 301,113 $ 297,362 $ Total interest expense Net interest and dividend income Provision for credit losses Net interest and dividend income after 117,804 195,382 — 108,931 192,182 (750) 107,594 189,768 771 provision for credit losses 195,382 192,932 188,997 Total non-interest income Total non-interest expense 22,196 89,658 23,312 94,305 21,140 94,369 Income before income tax expense 127,920 121,939 115,768 Income tax expense Net income Basic earnings per share Diluted earnings per share 43,783 38,445 37,675 84,137 $ 83,494 $ 78,093 $ 0.63 $ 0.63 $ 0.63 $ 0.63 $ 0.58 $ 0.58 $ $ $ $ Average diluted shares outstanding 134,244 133,176 135,409 290,246 $ 106,103 184,143 1,409 298,554 120,394 178,160 (1,067) 182,734 22,955 90,537 115,152 37,458 77,694 $ 179,227 23,289 96,947 105,569 36,229 69,340 0.56 $ 0.56 $ 0.48 0.48 139,442 144,848 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, 2017 2016 2015 2014 2013 0.75% (1) (1) 6.09 0.74% (1) (1) 5.95 0.70% (1) (1) 5.32 $ 0.88 $ 0.84 $ 0.84 $ 140.20% 133.86% 146.19% 0.80 41.21 0.84 43.76 0.84 44.74 1.79 (1) 1.75 (1) 1.73 (1) $ 0.82% (1) 5.00 (1) 0.98 177.84% 0.96 43.72 2.00 (1) 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 0.20 0.23 50.58 0.12 14.9 12.3 10.8 47 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 0.75% 4.14 1.00 211.75% 1.05 48.13 1.97 0.33 0.44 33.36 0.15 17.8 N/A 14.8 46 (1) The table below provides a reconciliation between certain performance ratios presented in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the performance ratios excluding the effects of the leverage strategy, which are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide the performance ratios without the leverage strategy because of its unique nature. The leverage strategy reduces some of our performance ratios due to the amount of earnings associated with the transaction in comparison to the size of the transaction, while increasing our net income. Management can discontinue the leverage strategy at any point in time. 2017 Leverage Strategy (0.14)% 0.21 (0.36) 2015 Leverage Strategy (0.13)% 0.19 (0.34) For the Year Ended September 30, Adjusted (Non-GAAP) Actual (GAAP) 0.89% 5.88 2.15 0.74% 5.95 1.75 For the Year Ended September 30, Adjusted (Non-GAAP) 0.83% 5.13 2.07 Actual (GAAP) 0.82% 5.00 2.00 2016 Leverage Strategy (0.14)% 0.17 (0.35) 2014 Leverage Strategy (0.03)% 0.03 (0.07) Adjusted (Non-GAAP) 0.88% 5.78 2.10 Adjusted (Non-GAAP) 0.85% 4.97 2.07 Actual (GAAP) 0.75% 6.09 1.79 Actual (GAAP) 0.70% 5.32 1.73 Return on average assets Return on average equity Net interest margin Return on average assets Return on average equity Net interest margin (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. Beginning 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, 2017 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, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer Smaller Reporting Company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Non-accelerated filer Emerging Growth Company (Do not check if a 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, 2017, was $1.99 billion. As of November 22, 2017, there were issued and outstanding 138,230,735 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, 2017. 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 Accounting Fees and Services PART IV Item 15. Exhibits and Financial Statement Schedules INDEX TO EXHIBITS SIGNATURES Page No. 2 32 37 37 37 37 38 40 42 77 84 129 129 129 130 130 130 131 131 131 132 134 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 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 interpretations of, and 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. See "Part I, Item 1A. Risk Factors" for a discussion of risks and uncertainties related to our business that could adversely impact our operations and/or financial results. 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"). 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, public unit deposits, repurchase agreements, and Federal Home Loan Bank Topeka ("FHLB") borrowings. 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 primary revenues are derived from interest on loans, MBS, investment securities, and dividends on 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 services through our call center which operates on extended hours, mobile banking, telephone banking, and online banking and bill payment services. The Bank ranked second in deposit market share, at 7.29%, in the state of Kansas as reported in the June 30, 2017 FDIC "Summary of Deposits - Market Share Report." 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 2017 and 2016, the Bank originated and refinanced $619.0 million and $663.3 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, 2017, the Bank had correspondent lending relationships in 28 states and the District of Columbia. During fiscal years 2017 and 2016, the Bank purchased $563.2 million and $662.8 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 In the past, 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. The servicing rights associated with bulk purchased loans were generally retained by the lender/seller for the loans purchased from nationwide lenders. The servicing by 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. At September 30, 2017, $214.5 million, or 61% of the Bank's bulk purchased loan portfolio, are loans guaranteed by one seller. Based on the historical performance of these loans and 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. 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 currently 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 $3.0 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 2017. 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 remaining 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 one- to four-family loan 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 construction-to-permanent loans secured by one- to four-family residential real estate. The majority of these loans are secured by property located within the Bank's Kansas City market area. At September 30, 2017, we had $30.6 million in construction-to-permanent one- to four-family loans outstanding representing 0.4% of our total loan portfolio. Construction loans are obtained by homeowners who will occupy the property when construction is complete. The Bank does not originate construction loans to builders for speculative purposes. 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. 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 2017 and 2016, the Bank endorsed $53.1 million and $160.0 million of one- to four-family loans, respectively. 5Loan Sales One- to four-family loans may be sold on a bulk basis or on a flow basis as loans are originated. Loans originated by the Bank and purchased from correspondent lenders are generally eligible for sale in the secondary market. Loans are generally sold for portfolio restructuring purposes, to reduce interest rate risk and/or to maintain a certain liquidity position. 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. The Bank sold $6.7 million of one- to four-family loans during fiscal year 2017 and did not sell any one- to four-family loans during fiscal year 2016. 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, 2017, our consumer loan portfolio totaled $125.9 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 40%, or $42.9 million, of our home equity lines at September 30, 2017 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 credit limit of the loan. Approximately 59%, or $62.2 million, of our home equity lines at September 30, 2017 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, 2017, approximately 1%, or $1.2 million, of our home equity lines were interest-only. Closed-end home equity loans, which totaled $15.7 million at September 30, 2017, 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. Generally, loan terms are more limiting and rates are higher for a loan in the second lien position. Home equity loans, including lines of credit and closed-end loans, comprised approximately 97% of our consumer loan portfolio, or $122.1 million, at September 30, 2017; of that amount, 87% 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, 2017, the Bank's commercial real estate loans totaled $270.0 million, or approximately 4% of our total loan portfolio. Of this amount, $217.8 million were participation loans. Total undisbursed loan amounts related to commercial real estate loans were $105.9 million, resulting in a total commercial real estate loan concentration of $375.9 million at September 30, 2017. 6During fiscal year 2017 and 2016, the Bank entered into commercial real estate loan participations of $67.7 million and $201.1 million, respectively. The Bank intends to continue to grow its commercial real estate loan portfolio through participations with correspondent lenders and other select lead banks. 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, Nebraska, Colorado, Arkansas, California, and Montana. Our largest commercial real estate loan was $50.0 million at September 30, 2017, of which $35.9 million had been disbursed at September 30, 2017. This loan was current according to its terms at September 30, 2017. 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 $5.0 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. Generally, the Bank allows interest-only payments during the construction phase of a project and for a stabilization period of 6 to 12 months after occupancy. The Bank requires amortizing payments at the conclusion of the stabilization period. 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. 7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. 8Loan Portfolio. The following table presents the composition of our loan portfolio as of the dates indicated. 2017 2016 Amount Percent Amount Percent September 30, 2015 Amount (Dollars in thousands) Percent 2014 2013 Amount Percent Amount Percent Real estate loans: One- to four-family: Originated Correspondent purchased Bulk purchased Construction Total Commercial: Permanent Construction Total $ 3,959,232 55.1% $ 4,005,615 57.6% $ 4,010,424 60.6% $ 3,978,342 63.8% $ 4,054,395 67.9% 2,445,311 351,705 30,647 6,786,895 183,030 86,952 269,982 34.0 4.9 0.4 94.4 2.6 1.2 3.8 2,206,072 416,653 39,430 6,667,770 110,768 43,375 154,143 31.7 6.0 0.6 95.9 1.6 0.6 2.2 1,846,210 485,682 29,552 6,371,868 109,314 11,523 120,837 27.9 7.3 0.4 96.2 1.6 0.2 1.8 1,431,745 561,890 33,378 6,005,355 75,677 21,465 97,142 23.0 9.0 0.5 96.3 1.2 0.3 1.5 1,044,127 644,484 27,649 5,770,655 50,358 7,328 57,686 17.5 10.8 0.5 96.7 0.8 0.1 0.9 Total real estate loans 7,056,877 98.2 6,821,913 98.1 6,492,705 98.0 6,102,497 97.8 5,828,341 97.6 Consumer loans: Home equity Other Total consumer loans 122,066 3,808 125,874 1.7 0.1 1.8 123,345 4,264 127,609 1.8 0.1 1.9 125,844 4,179 130,023 1.9 0.1 2.0 130,484 4,537 135,021 2.1 0.1 2.2 135,028 5,623 140,651 2.3 0.1 2.4 Total loans receivable 7,182,751 100.0% 6,949,522 100.0% 6,622,728 100.0% 6,237,518 100.0% 5,968,992 100.0% Less: ACL Discounts/unearned loan fees Premiums/deferred costs 8,398 24,962 (45,680) Total loans receivable, net $ 7,195,071 8,540 24,933 (41,975) $ 6,958,024 9,443 24,213 (35,955) $ 6,625,027 9,227 23,687 (28,566) 8,822 23,057 (21,755) $ 6,233,170 $ 5,958,868 9The following table presents the contractual maturity of our loan portfolio, along with associated weighted average yields, at September 30, 2017. Loans which have adjustable interest rates are shown as maturing in the period during which the contract is due. The table does not reflect the effects of possible prepayments or enforcement of due on sale clauses. Real Estate Consumer One- to Four-Family Commercial Construction(2) Home Equity(3) Other Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield (Dollars in thousands) $ 2,888 4.63% $ 10,541 3.26% $ 42,352 3.61% $ 2,404 6.29% $ 406 3.77% $ 58,591 3.71% 5,296 6,439 25,062 489,718 1,294,619 4,932,226 6,753,360 4.63 4.28 4.11 3.62 3.17 3.62 3.53 2,969 4,802 11,950 60,468 43,981 48,319 172,489 5.25 3.53 4.49 4.17 4.51 4.40 4.34 73,837 1,410 3.93 4.27 — — — — — — — — 188 668 1,368 10,149 46,485 60,804 75,247 3.94 119,662 6.12 6.51 5.49 5.96 5.36 5.26 5.37 460 1,029 1,887 26 — — 6.55 3.81 3.61 4.86 — — 3,402 4.08 82,750 14,348 40,267 560,361 1,385,085 5,041,349 7,124,160 4.04 4.10 4.25 3.73 3.28 3.64 3.59 Amounts due: Within one year(1) After one year: Over one to two Over two to three Over three to five Over five to ten Over ten to fifteen After fifteen years Total due after one year Totals loans $ 6,756,248 3.53 $ 183,030 4.28 $ 117,599 3.82 $ 122,066 5.39 $ 3,808 4.04 7,182,751 3.59 Less: ACL Discounts/unearned loan fees Premiums/deferred costs Total loans receivable, net 8,398 24,962 (45,680) $7,195,071 Includes demand loans, loans having no stated maturity, and overdraft loans. (1) (2) Construction loans are presented based upon the estimated term to complete construction. See "One- to Four-Family Residential Real Estate Lending - Construction Lending" above for more information regarding our construction-to-permanent loan program. (3) For home equity loans, the maturity date calculated assumes the customer always makes the required minimum payment. The majority of interest-only home equity lines of credit assume a balloon payment of unpaid principal at 120 months. All other home equity lines of credit generally assume a term of 240 months. 10The following table presents, as of September 30, 2017, the amount of loans due after September 30, 2018, and whether these loans have fixed or adjustable interest rates. Fixed Adjustable (Dollars in thousands) Total $ $ 5,636,563 127,795 74,708 15,340 741 5,855,147 $ $ 1,116,797 44,694 539 104,322 2,661 1,269,013 $ $ 6,753,360 172,489 75,247 119,662 3,402 7,124,160 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 currently 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. 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. The information from the sub-servicer of our correspondent loans is generally received during the first week of the month while the information from the servicers of our bulk loans is received later in the month. Management also utilizes information from the servicers to monitor property valuations and identify the need to charge-off loan balances. 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, 2017, 2016, and 2015, approximately 67%, 75%, and 75%, 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, 2015 2016 2017 Number Amount Number Amount Number Amount (Dollars in thousands) 129 $ 13,257 143 $ 13,593 158 $ 16,955 8 22 30 5 1,827 3,194 467 33 9 21 36 5 3,329 5,008 635 62 8 32 32 11 2,344 7,259 703 17 194 $ 18,778 214 $ 22,627 241 $ 27,278 Loans 30 to 89 days delinquent to total loans receivable, net 0.26% 0.33% 0.41% 12The table below presents the Company's non-performing loans and OREO at the dates indicated. Non-performing loans are loans that are 90 or more days delinquent or in foreclosure and other loans required to be reported as nonaccrual pursuant to regulatory reporting requirements, even if the loans are current. At all dates presented, there were no loans 90 or more days delinquent that were still accruing interest. Non-performing assets include non-performing loans and OREO. OREO primarily includes assets acquired in settlement of loans. Over the past 12 months, OREO properties acquired in settlement of loans were owned by the Bank, on average, for approximately seven months before the properties were sold. 2017 2016 September 30, 2015 2014 2013 Number Amount Number Amount Number Amount Number Amount Number Amount (Dollars in thousands) Loans 90 or More Days Delinquent or in Foreclosure: One- to four-family: Originated Correspondent purchased Bulk purchased Consumer: Home equity Other 67 1 13 $ 5,515 91 3,371 21 1 103 406 4 9,387 73 3 28 $ 8,190 985 7,323 26 5 135 520 9 17,027 66 1 36 $ 6,728 394 8,898 24 4 131 497 12 16,529 82 2 28 $ 7,880 709 7,120 25 4 141 397 13 16,119 101 5 34 29 4 173 $ 8,579 812 9,608 485 5 19,489 Loans 90 or more days delinquent or in foreclosure as a percentage of total loans 0.13% 0.24% 0.25% 0.26% 0.33% Nonaccrual loans less than 90 Days Delinquent:(1) One- to four-family: Originated Correspondent purchased Bulk purchased Consumer: Home equity Other Total non-performing loans 50 8 4 $ 4,567 1,690 846 7 — 69 172 113 — 7,216 16,603 70 9 1 $ 8,956 2,786 31 12 — 92 227 328 — 12,101 29,128 77 1 1 $ 9,004 25 82 12 — 91 222 295 — 9,406 25,935 67 4 5 $ 7,473 553 724 2 — 78 219 45 — 8,795 24,914 57 2 2 $ 5,833 740 280 6 — 67 240 101 — 6,954 26,443 Non-performing loans as a percentage of total loans 0.23% 0.42% 0.39% 0.40% 0.44% 132017 September 30, 2015 Number Amount Number Amount Number Amount Number Amount Number Amount (Dollars in thousands) 2016 2013 2014 OREO: One- to four-family: Originated(2) Correspondent purchased Bulk purchased Consumer: Home equity Other(3) Total non-performing assets 4 — 5 $ 58 — 1,279 1 — 10 182 67 — 1,404 $ 18,007 12 1 4 $ 692 499 1,265 — 1 18 245 — 1,278 3,734 $ 32,862 29 1 2 $ 1,752 499 796 1 1 34 256 8 1,278 4,333 $ 30,268 25 1 2 $ 2,040 179 575 — 1 29 248 — 1,300 4,094 $ 29,008 28 2 4 $ 2,074 71 380 2 1 37 277 57 1,300 3,882 $ 30,325 Non-performing assets as a percentage of total assets 0.20% 0.35% 0.31% 0.29% 0.33% (1) Represents loans required to be reported as nonaccrual pursuant to regulatory reporting requirements, even if the loans are current. The decrease in the balance of these loans at September 30, 2017 compared to September 30, 2016 was due to fewer loans being classified as troubled debt restructurings ("TDRs") as a result of management refining its methodology for assessing whether a loan modification qualifies as a TDR. At September 30, 2017, 2016, 2015, 2014, and 2013, this amount was comprised of $1.8 million, $2.3 million, $2.2 million, $1.1 million, and $1.1 million, respectively, of loans that were 30 to 89 days delinquent and were reported as such, and $5.4 million, $9.8 million, $7.2 million, $7.7 million, and $5.9 million, respectively, of loans that were current. (2) Real estate-related consumer loans where we also hold the first mortgage are included in the one- to four-family category as the underlying collateral is one- to four-family property. (3) Represents a single property the Bank purchased for a potential branch site. The Bank sold the property during fiscal year 2017. The amount of interest income on nonaccrual loans and TDRs as of September 30, 2017 included in interest income was $1.6 million for the year ended September 30, 2017. The amount of additional interest income that would have been recorded on nonaccrual loans and TDRs as of September 30, 2017, if they had performed in accordance with their original terms, was $165 thousand for the year ended September 30, 2017. 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, 2017. 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, 2017, 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 Kansas Missouri Texas Tennessee California Alabama Pennsylvania Georgia Oklahoma North Carolina Other states $ 3,670,347 54.3% $ 10,673 58.4% $ (Dollars in thousands) 1,242,818 18.4 671,460 217,594 216,558 105,854 100,587 88,710 67,462 66,515 308,343 9.9 3.2 3.2 1.6 1.5 1.3 1.0 1.0 4.6 $ 6,756,248 100.0% $ 3,721 1,134 — — 155 — 409 — 37 20.4 6.2 — — 0.8 — 2.2 — 0.2 2,149 18,278 11.8 100.0% $ 5,297 827 59.0% 9.2 — — — — — — — 122 2,731 8,977 — — — — — — — 1.4 30.4 100.0% 66% 51 n/a n/a n/a n/a n/a n/a n/a 87 65 65 Troubled Debt Restructurings. For borrowers experiencing financial difficulties, the Bank may grant a concession to the borrower, resulting in a TDR. Such concessions generally involve extensions of loan maturity dates, the granting of periods during which the payment of only interest and escrow is required, reductions in interest rates, and loans that have been discharged under Chapter 7 bankruptcy proceedings where the borrower has not reaffirmed the debt. 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. September 30, 2017 2016 2015 2014 2013 (Dollars in thousands) Accruing TDRs Nonaccrual TDRs(1) $ 27,383 $ 23,177 $ 24,331 $ 24,636 $ 37,074 11,742 18,725 15,511 13,370 12,426 Total TDRs $ 39,125 $ 41,902 $ 39,842 $ 38,006 $ 49,500 (1) Nonaccrual TDRs are included in the non-performing loan table above. 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 original 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, 2017, 2016, and 2015 was $44.4 million, $58.9 million, and $57.2 million, respectively. See "Part II, Item 8. Financial Statements and 15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. 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 asset classification definitions. The following table sets forth the recorded investment in assets, classified as either special mention or substandard, as of September 30, 2017. 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 information regarding asset classification definitions. At September 30, 2017, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off. 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") Total classified assets Special Mention Substandard Number Amount Number Amount (Dollars in thousands) 50 2 — 2 — 54 — — — — — — 54 $ 7,031 261 — 9 — 7,301 — — — — — — $ 314 19 33 62 1 429 5 — 5 — 10 1 $ 7,301 440 $ 30,059 3,800 8,005 1,032 4 42,900 125 — 1,279 — 1,404 2,051 46,355 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. 16The Bank did not record a provision for credit losses during the current fiscal year, compared to a negative provision for credit losses of $750 thousand during the prior fiscal year. Based on management's assessment of the ACL formula analysis model and several other factors, management determined that no provision for credit losses was necessary in the current fiscal year. Net charge-offs were $142 thousand during the current fiscal year and $153 thousand during the prior fiscal year. At September 30, 2017, loans 30 to 89 days delinquent were 0.26% of total loans and loans 90 or more days delinquent or in foreclosure were 0.13% of total loans. The following table presents ACL activity and related ratios at the dates and for the periods indicated. Using the Bank's annualized net historical loan losses from the Bank's ACL formula analysis model over the past five years, the Bank would have approximately 12 years of net loan loss coverage based on the ACL balance at September 30, 2017. 2017 Year Ended September 30, 2016 2015 2014 2013 Balance at beginning of period 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 $ 8,540 $ 9,443 (Dollars in thousands) $ 9,227 $ 8,822 $ 11,100 (72) — (216) (288) (51) (9) (60) (348) 4 — 165 169 (200) — (342) (542) (83) (5) (88) (630) 77 — 374 451 (424) (11) (228) (663) (29) (43) (72) (735) 56 — 58 114 (284) (96) (653) (1,033) (103) (6) (109) (1,142) 1 — 64 65 (624) (13) (761) (1,398) (252) (7) (259) (1,657) 14 — 398 412 26 11 37 206 (142) — $ 8,398 25 1 26 477 (153) (750) $ 8,540 64 2 66 180 (555) 771 $ 9,443 72 1 73 138 (1,004) 1,409 $ 9,227 33 1 34 446 (1,211) (1,067) $ 8,822 Ratio of net charge-offs during the period to average loans outstanding during the period 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 —% —% 0.01% 0.02% 0.02% 0.56 50.58 0.12 0.48 29.32 0.12 1.87 36.41 0.14 3.38 37.04 0.15 3.45 33.36 0.15 ACL to net charge-offs 58.9x 55.8x 17.0x 9.2x 7.3x 17The distribution of our ACL at the dates indicated is summarized below. Included in bulk purchased loans are $214.5 million of loans, or 61% of the total bulk purchased loan portfolio, at September 30, 2017, for which the seller of the loans has guaranteed to repurchase or replace any delinquent loans. The Bank has not experienced any losses on loans acquired from this seller as all delinquent loans have been repurchased by this seller since the loan package was purchased in fiscal year 2012. For the $137.2 million of bulk purchased loans at September 30, 2017 that do not have the above noted guarantee, the Bank has continued to experience a reduction in loan losses due to an improvement in collateral values. A large portion of these loans were originally interest-only loans with interest-only terms up to 10 years. All of the interest-only loans are now fully amortizing loans. Our correspondent purchased loans are purchased on a loan-by-loan basis from a select group of correspondent lenders and are underwritten by the Bank's underwriters based on underwriting standards that are generally the same as for our originated loans. The decrease in one- to four-family ACL from September 30, 2016 was due to improvements in collateral value and historical loss factors within our ACL formula analysis model, as well as to the continued low level of net loan charge-offs and delinquent loan ratios. The increase in the commercial real estate ACL was due primarily to growth in the loan portfolio during the current fiscal year. 2017 % of 2016 % of September 30, 2015 % of 2014 % of 2013 % of Amount Loans to Amount Loans to Amount Loans to Amount Loans to Amount Loans to of ACL Total Loans of ACL Total Loans of ACL Total Loans (Dollars in thousands) of ACL Total Loans of ACL Total Loans $ 3,149 55.1% $ 3,892 57.6% $ 4,833 60.6% $ 6,228 86.0% $ 5,748 84.8% 1,922 1,000 24 6,095 1,242 870 2,112 8,207 159 32 191 34.0 4.9 0.4 94.4 2.6 1.2 3.8 98.2 1.7 0.1 1.8 2,102 1,065 36 7,095 774 434 1,208 8,303 187 50 237 31.7 6.0 0.6 95.9 1.6 0.6 2.2 2,115 1,434 32 8,414 604 138 742 27.9 7.3 0.4 96.2 1.6 0.2 1.8 N/A 2,323 35 8,586 312 88 400 N/A 8.9 1.1 96.0 1.2 0.6 1.8 N/A 2,486 23 8,257 172 13 185 98.1 9,156 98.0 8,986 97.8 8,442 1.8 0.1 1.9 222 65 287 1.9 0.1 2.0 211 30 241 2.1 0.1 2.2 342 38 380 N/A 10.7 1.1 96.6 0.8 0.2 1.0 97.6 2.3 0.1 2.4 $ 8,398 100.0% $ 8,540 100.0% $ 9,443 100.0% $ 9,227 100.0% $ 8,822 100.0% Real estate loans: One- to four-family: Originated Correspondent purchased(1) Bulk purchased Construction Total Commercial: Permanent Construction Total Total real estate loans Consumer loans: Home equity Other consumer Total consumer loans (1) The disaggregation of data related to correspondent purchased loans is not available for years prior to fiscal year 2015. For these years, correspondent purchased amounts were combined with originated loans in the ACL formula analysis model. 18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. ALCO considers various factors when making investment decisions, including the liquidity, credit, interest rate risk, and tax consequences of the proposed investment options. 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, 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. 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 (loss) ("AOCI") 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. The process involves monitoring market events and other items that could impact issuers. 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. Management does not believe any other-than-temporary impairments existed at September 30, 2017. 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, 2017, our investment securities portfolio totaled $301.1 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. Mortgage-Backed Securities. At September 30, 2017, our MBS portfolio totaled $942.4 million. 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 GSEs. 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. 19 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 retained by the GSEs 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, 2017, the MBS portfolio included $133.8 million of collateralized mortgage obligations ("CMOs"). CMOs are special types of MBS 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, 2017 was $9.0 million. 20The following table sets forth the composition of our investment and MBS portfolios as of the dates indicated. At September 30, 2017, our investment securities portfolio did not contain securities of any issuer with an aggregate book value in excess of 10% of our stockholders' equity, excluding those issued by GSEs. Carrying Value 2017 % of Total Fair Value September 30, Carrying 2016 % of Value Total (Dollars in thousands) Fair Value Carrying Value 2015 % of Total Fair Value AFS: GSE debentures $ 270,729 65.1% $ 270,729 $ 347,038 65.8% $ 347,038 $ 526,620 69.4% $ 526,620 MBS TRUPs Municipal bonds 141,516 2,051 1,535 34.0 0.5 0.4 141,516 178,507 2,051 1,535 1,756 — 33.9 0.3 — 178,507 229,491 1,756 — 1,916 144 30.3 0.3 — 229,491 1,916 144 415,831 100.0% 415,831 527,301 100.0% 527,301 758,171 100.0% 758,171 HTM: MBS Municipal bonds 800,931 26,807 827,738 96.8% 806,096 1,067,571 97.0% 1,089,214 1,233,048 97.0% 1,256,783 3.2 26,913 33,303 3.0 33,653 38,074 3.0 38,491 100.0% 833,009 1,100,874 100.0% 1,122,867 1,271,122 100.0% 1,295,274 $ 1,243,569 $ 1,248,840 $ 1,628,175 $ 1,650,168 $ 2,029,293 $ 2,053,445 21The composition and maturities of the investment and MBS portfolio at September 30, 2017 are indicated in the following table by remaining contractual maturity, without consideration of call features or pre-refunding dates, along with associated weighted average yields. Yields on tax-exempt investments are not calculated on a fully taxable equivalent basis. 1 year or less Carrying More than 1 to 5 years More than 5 to 10 years Carrying Carrying Over 10 years Total Securities Carrying Carrying Value Yield Value Yield Value Yield Value Yield Value Yield Fair Value (Dollars in thousands) AFS: GSE debentures $ 121,253 1.13% $ 149,476 1.41% $ MBS TRUPs Municipal bonds 175 3.75 — — — — 17,413 — 1,535 121,428 1.13 168,424 HTM: MBS Municipal bonds 2,709 6,141 8,850 $ 130,278 3.93 2.22 2.74 1.24 41,355 20,448 61,803 $ 230,227 4.79 — 1.30 1.76 2.42 1.50 2.12 1.86 — 21,079 — — 21,079 426,341 218 426,559 $ 447,638 —% $ — —% $ 270,729 1.29% $ 270,729 3.15 — — 3.15 2.01 2.00 2.01 2.07 102,849 2,051 — 104,900 330,526 — 330,526 $ 435,426 3.22 2.58 — 3.20 2.12 — 2.12 2.38 141,516 2,051 1,535 415,831 800,931 26,807 827,738 $ 1,243,569 3.40 2.58 1.30 1.99 2.09 1.67 2.07 2.05 141,516 2,051 1,535 415,831 806,096 26,913 833,009 $ 1,248,840 22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 2017 and there were no brokered deposits outstanding at September 30, 2017 or 2016. 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, 2017 and 2016, the balance of public unit deposits was $460.0 million and $370.0 million, respectively. As of September 30, 2017, the Bank's policy allows for combined brokered and public unit deposits up to 15% of total deposits. At September 30, 2017, that amount was approximately 9% 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. At September 30, 2017, $1.98 billion of our FHLB advances were fixed-rate advances with no embedded options and $200.0 million of our FHLB advances were variable-rate, also 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. 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 Bank's internal policy limits total borrowings to 55% of total assets. During fiscal year 2017, the Bank continued to utilize a leverage strategy (the "leverage strategy") to increase earnings. The leverage strategy during the current fiscal year involved borrowing up to $2.10 billion either on the Bank's FHLB line of credit or by entering into short-term FHLB advances, depending on the rates offered by FHLB. The borrowings were repaid prior to each quarter end for regulatory purposes. The proceeds of the borrowings, net of the required FHLB stock holdings, were deposited at the Federal Reserve Bank of Kansas City ("FRB of Kansas City"). Management can discontinue the use of the leverage strategy at any point in time. At September 30, 2017, we had $2.18 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 July 2017, 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 2018. This approval was also in place throughout fiscal year 2017 as FHLB borrowings were in excess of 40% of Call Report total assets at certain points in time during the period due to the leverage strategy. 23At September 30, 2017, 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, 2017, we had securities with a fair value of $218.5 million pledged as collateral on repurchase agreements. 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 2017 2016 2015 (Dollars in thousands) $ 475,000 $ 500,000 $ 1,100,000 2,675,000 2,520,217 2,600,000 2,436,749 2,700,000 2,558,676 1.27% 1.91 0.70% 2.69 0.60% 0.69 At September 30, 2017, 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, 2017, the Bank had one wholly-owned subsidiary, Capitol Funds, Inc. At September 30, 2017, Capitol Funds, Inc. had one wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company ("CFMRC"), which serves as a reinsurance company for certain 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. 24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. 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 QTL test is a statutory violation subject to enforcement action. As of September 30, 2017, the Bank met the QTL 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, 2017, the Bank had less than 1% of its assets in non-real estate consumer loans, commercial paper, corporate debt securities and 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, 2017, the Bank's lending limit under this restriction was $181.5 million. The Bank has no loans or loan relationships in excess of its lending limit. Total loan commitments and loans outstanding to the Bank's largest borrowing relationship totaled $50.0 million at September 30, 2017, all of which was current according to its terms. 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. 25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. Effective July 1, 2016, the assessment rates for established small institutions, such as the Bank, are based on an institution's weighted average CAMELS component ratings and certain financial ratios. Total base assessment rates range from 1.5 to 16 basis points based on Call Report total assets 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. For the fiscal year ended September 30, 2017, the Bank paid $3.0 million in FDIC premiums. An institution that has reported on its Call Reports total assets at the end of the quarter 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. For all institutions, the base assessment rates will decrease when the reserve ratio increases to specified thresholds of 2% and 2.5%. The Dodd-Frank Act requires large institutions to bear the burden of raising the reserve ratio from 1.15% to 1.35%. 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 credit 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, 2017, the Bank paid $546 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. 26 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. Under the Basel III rules, the minimum capital ratios are as follows: • • • • 4.5% Common Equity Tier 1 ("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"). 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, 2017, the Bank had $8.4 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). 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. The capital conservation buffer was 0.625% at September 30, 2016 and 1.25% at September 30, 2017. At September 30, 2017 and 2016, the Bank and Company had capital greater than necessary to meet the capital conservation buffer requirement. Once fully phased-in, which will be January 1, 2019 for the Bank and Company, the organization must maintain a balance of 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%. With respect to the Bank, the Basel III rules revised the "prompt corrective action" regulations, by (1) introducing a 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, 2017, the Bank had $2.9 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, 2017, the Bank and the Company each had risk- weighted assets of $4.43 billion. For the quarter ended September 30, 2017, the Bank reported in its Call Report quarterly average assets of $11.12 billion and the Company reported to the FRB quarterly average assets of $11.12 billion. These average asset amounts are significantly higher than total assets at September 30, 2017 due the leverage strategy being in place during the quarter but not at September 30, 2017. At September 30, 2017, 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. 27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. 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 recently completed CRA evaluation five years ago. 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. 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. 28 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, 2017, 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, 2017, 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, 2017, the Bank had a balance of $101.0 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, 2017, 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. 29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 2014. 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, 2017, 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, 2017, we had a total of 708 employees, including 126 part-time employees. The full-time equivalent of our total employees at September 30, 2017 was 666. Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good. 30Executive Officers of the Registrant John B. Dicus. Age 56 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 56 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 52 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 58 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 60 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 52 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 44 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. 31Item 1A. Risk Factors There are risks inherent in the Bank's and Company's business. The following is a summary of material risks and uncertainties relating to the operations of the Bank and the Company. Adverse experiences with these could have a material impact on the Company's financial condition and results of operations. Some of these risks and uncertainties are interrelated, and the occurrence of one or more of them may exacerbate the effect of others. These material risks and uncertainties are not necessarily presented in order of significance. In addition to the risks set forth below and the other risks described in this Annual Report, there may also be additional risks and uncertainties that are not currently known to us or that we currently deem to be immaterial that could materially and adversely affect our business, financial condition or operating results. 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. As was announced in July 2017, LIBOR is anticipated to be phased out and replaced by a new index by the end of 2021. As of September 30, 2017, the Bank's loan portfolio included $812.8 million of ARM loans for which the repricing index was tied to LIBOR. Additionally, the Bank has interest rate swaps with a notional amount of $200.0 million tied to LIBOR. Our loan agreements generally allow the Bank to choose a new index based upon comparable information if the current index is no longer available. The use of a new index could reduce our interest income and therefore have an adverse effect on our results of operations. Management continues to monitor the status and discussions regarding LIBOR. 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 32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. The occurrence of any information system failure or interruption, breach of security or cyber-attack, at the Company, at its third-party service providers or counterparties may have an adverse effect on our business, reputation, financial condition or results of operations. 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, data processing operations, remote network monitoring, engineering and managed security services 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. 33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 certain products and services, which could have a material adverse effect on our business, financial condition or results of operations. Our customers are also the target of cyber-attacks and identity theft. There have been several recent instances involving financial services and consumer-based companies reporting the unauthorized disclosure of client or customer information or the destruction or theft of corporate data. Large scale identity theft could result in customers' accounts being compromised and fraudulent activities being performed in their name. We have implemented certain safeguards against these types of activities but they may not fully protect us from fraudulent financial losses. The occurrence of a breach of security involving our customers' information, regardless of its origin, could damage our reputation and result in a loss of customers and business and subject us to additional regulatory scrutiny, and could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations. An economic downturn, especially one affecting our geographic market area and certain regions of the country where we have correspondent loans, could adversely impact our business 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, along with changes in the levels of unemployment or underemployment. 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 and certain areas where we have correspondent loans. Adverse conditions in our local economies and in certain areas where we have correspondent loans, such as inflation, unemployment, recession, natural disasters, or other factors beyond our control, could impact the ability of our borrowers to repay their loans. 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. 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. 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, natural disasters, and/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 four fiscal years, which makes it difficult to assess the future performance of these loans because of the borrowers' 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, 2017, of which $35.9 million had been disbursed at September 30, 2017. 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. 34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. The properties securing our commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce our exposure to adverse economic events, environmental factors and natural disasters that may affect any single market or industry. 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." 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 an 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. Even though the Bank can contractually pursue the originating company, 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 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. 35We operate in a highly regulated environment which limits the manner and scope of our business activities and we may be adversely affected by new and/or changes in laws and regulations or interpretation of existing laws and regulations. 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 general the ability to enforce federal consumer protection laws. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation, interpretation or application, could have a material adverse impact on our operations. 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 is also directly subject to the requirements of entities that set and interpret the accounting standards such as the Financial Accounting Standards Board, and indirectly subject to the actions and interpretations of the Public Company Accounting Oversight Board, which establishes auditing and related professional practice standards for registered public accounting firms and inspects registered firms to assess their compliance with certain laws, rules, and professional standards in public company audits. These regulations, along with the currently existing tax, accounting, securities, and monetary laws, regulations, rules, standards, policies and interpretations, control the methods by which financial institutions and their holding companies conduct business, engage in strategic and tax planning, implement strategic initiatives, and govern financial reporting. The Company's failure to comply with laws, regulations or policies could result in civil or criminal sanctions and money penalties by state and federal agencies, and/or reputation damage, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Part I, Item 1. Business - Regulation and Supervision" for more information about the regulations to which the Company is subject. 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. Under certain circumstances, capital distributions from the Bank to the Company may be subject to regulatory approvals. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Limitations on Dividends and Other Capital Distributions" for additional information. 36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. The Company may not attract and retain skilled employees. The Company's success depends, in large part, on its ability to attract and retain key people. Competition for the best people can be intense, and the Company spends considerable time and resources attracting and hiring qualified people for its operations. The unexpected loss of the services of one or more of the Company's key personnel could have a material adverse impact on the Company's business because of their skills, knowledge of the Company's market, and years of industry experience, as well as the difficulty of promptly finding qualified replacement personnel. Item 1B. Unresolved Staff Comments None. Item 2. Properties At September 30, 2017, 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, 2017, there were approximately 9,624 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 2017 First Quarter Second Quarter Third Quarter Fourth Quarter FISCAL YEAR 2016 First Quarter Second Quarter Third Quarter Fourth Quarter HIGH LOW DIVIDENDS $ $ $ $ 17.04 16.98 15.07 14.94 HIGH 13.36 13.47 13.95 14.49 $ $ 13.82 14.17 13.55 13.21 LOW 11.82 11.39 12.70 13.52 0.375 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, 2017 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, 2017 through July 31, 2017 August 1, 2017 through August 31, 2017 September 1, 2017 through September 30, 2017 Total Stockholders and General Inquiries Copies of our Annual Report on Form 10-K for the fiscal year ended September 30, 2017 are available to stockholders at no charge in the Investor Relations section of our website, www.capfed.com. 38Stockholder Return Performance Presentation The information presented below assumes $100 invested on September 30, 2012 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. Period Ending Index 9/30/2012 9/30/2013 9/30/2014 9/30/2015 9/30/2016 9/30/2017 Capitol Federal Financial, Inc. NASDAQ Composite Index SNL U.S. Bank & Thrift Index Source: S&P Global Market Intelligence 100.00 100.00 100.00 113.03 122.77 130.10 116.48 148.08 153.33 127.84 153.99 156.54 158.20 179.29 161.85 175.20 221.75 227.64 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 "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – 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, 2017 2016 2015 2014 2013 (Dollars in thousands) $ 9,192,916 7,195,071 $ 9,267,247 6,958,024 $ 9,844,161 6,625,027 $ 9,865,028 6,233,170 $ 9,186,449 5,958,868 415,831 827,738 100,954 5,309,868 2,173,808 200,000 1,368,313 527,301 1,100,874 109,970 5,164,018 2,372,389 200,000 1,392,964 758,171 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 For the Year Ended September 30, 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 $ $ $ $ 2017 313,186 117,804 195,382 — 195,382 15,053 7,143 22,196 43,437 46,221 89,658 127,920 43,783 84,137 0.63 134,082 0.63 134,244 2016 2014 (Dollars and counts in thousands, except per share amounts) 2015 $ $ 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 1,069,967 1,718,023 128,530 4,611,446 2,513,538 320,000 1,632,126 2013 $ 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 $ $ $ 402017 2016 2015 2014 2013 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 $ 0.75% 6.09 0.88 140.20% 0.80 41.21 1.12x 1.79% 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 1.66 2.04 0.20 0.23 50.58 0.12 14.9 12.4 12.3 10.8 37 10 (1) (1) $ (1) (1) (1) (1) $ (1) (1) 0.74% 5.95 0.84 133.86% 0.84 43.76 1.13x 1.75% 1.63 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) 0.70% 5.32 0.84 146.19% 0.84 44.74 1.14x 1.73% 1.59 1.85 0.31 0.39 36.41 0.14 14.4 13.1 12.6 11.3 37 10 0.82% 5.00 0.98 177.84% 0.96 43.72 1.18x 2.00% 1.79 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% 1.70 1.72 0.33 0.44 33.36 0.15 17.8 18.1 N/A 14.8 36 10 (1) The table below provides a reconciliation between certain performance ratios presented in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the performance ratios excluding the effects of the leverage strategy, which are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide the performance ratios without the leverage strategy because of its unique nature. The leverage strategy reduces some of our performance ratios due to the amount of earnings associated with the transaction in comparison to the size of the transaction, while increasing our net income. Management can discontinue the leverage strategy at any point in time. 2017 Leverage Strategy (0.14)% 0.21 (0.36) (0.32) 2015 Leverage Strategy (0.13)% 0.19 (0.34) (0.28) For the Year Ended September 30, Adjusted (Non-GAAP) Actual (GAAP) 2016 Leverage Strategy Adjusted (Non-GAAP) 0.89% 5.88 2.15 1.98 0.74% 5.95 1.75 1.63 (0.14)% 0.17 (0.35) (0.30) 0.88% 5.78 2.10 1.93 For the Year Ended September 30, Adjusted (Non-GAAP) Actual (GAAP) 2014 Leverage Strategy Adjusted (Non-GAAP) 0.83% 5.13 2.07 1.87 0.82% 5.00 2.00 1.79 (0.03)% 0.03 (0.07) (0.05) 0.85% 4.97 2.07 1.84 Actual (GAAP) 0.75% 6.09 1.79 1.66 Actual (GAAP) 0.70% 5.32 1.73 1.59 Return on average assets Return on average equity Net interest margin Average interest rate spread Return on average assets Return on average equity Net interest margin Average interest rate spread (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. Beginning 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 following summary should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section in its entirety. 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, 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 competitor pricing for our local lending markets, and secondary market prices and 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. 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. Local economic conditions have a significant impact on the ability of borrowers to repay loans and the value of the collateral securing these loans. The industries in the Bank's local market areas, where the properties securing approximately 67% of the Bank's one- to four-family loans are located, 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 2017, the unemployment rate was 3.6% for Kansas and 3.5% for Missouri, compared to the national average of 4.1% based on information from the Bureau of Labor Statistics. The Kansas City market area has an average household income of approximately $80 thousand per annum, based on 2017 estimates from Claritas Pop-Facts Premier. The average household income in our combined local market areas is approximately $76 thousand per annum, with 91% of the population at or above the poverty level, also based on the 2017 estimates from Claritas Pop-Facts Premier. The FHFA price index for Kansas and Missouri continues to indicate relative stability in property values in our local market areas. Management also monitors broad industry and economic indicators and trends in the states and/or metropolitan statistical areas with the highest concentrations of correspondent purchased loans. For fiscal year 2017, the Company recognized net income of $84.1 million, or $0.63 per share, compared to net income of $83.5 million, or $0.63 per share, for fiscal year 2016. The increase in net income was due primarily to a $3.2 million increase in net interest income, partially offset by a $1.1 million decrease in non-interest income. Additionally, no provision for credit losses was recorded in fiscal year 2017, compared to a negative provision for credit losses of $750 thousand in fiscal year 2016. 42During fiscal year 2017, the Bank continued to utilize a leverage strategy to increase earnings. The leverage strategy during the current fiscal year involved borrowing up to $2.10 billion either on the Bank's FHLB line of credit or by entering into short-term FHLB advances, depending on the rates offered by FHLB. The borrowings were repaid prior to each quarter end for regulatory purposes. The proceeds from the borrowings, net of the required FHLB stock holdings, which yielded approximately 6.4% during the current fiscal year, were deposited at the FRB of Kansas City. Net income attributable to the leverage strategy is largely derived from the dividends received on FHLB stock holdings, net of the interest rate spread between the yield on the cash at the FRB of Kansas City and the rate paid on the related FHLB borrowings, less applicable federal insurance premiums and estimated taxes. Net income attributable to the leverage strategy was $2.8 million during the current fiscal year, compared to $2.3 million for the prior fiscal year. The increase was due primarily to a more positive interest rate spread between the yield earned on the cash held at the FRB of Kansas City and the rate paid on the related FHLB borrowings than in the prior fiscal year, as well as to a decrease in federal insurance premiums attributed to the strategy and an increase in the yield on the FHLB stock attributed to the strategy. Management expects to continue this strategy in fiscal year 2018. The net interest margin increased four basis points, from 1.75% for the prior fiscal year to 1.79% for the current fiscal year. Excluding the effects of the leverage strategy, the net interest margin would have increased five basis points, from 2.10% for the prior fiscal year to 2.15% for the current fiscal year. The increase in the net interest margin was due mainly to a shift in the mix of interest-earning assets from relatively lower yielding securities to higher yielding loans, partially offset by a decrease in the weighted average yield on loans. The positive impact of the decrease in interest expense on borrowings not related to the leverage strategy was offset by an increase in interest expense on deposits. Total assets were $9.19 billion at September 30, 2017 compared to $9.27 billion at September 30, 2016. The $74.3 million decrease was due primarily to a $384.6 million decrease in the securities portfolio, partially offset by an increase in the loan portfolio. The loans receivable portfolio, net, increased $237.0 million to $7.20 billion at September 30, 2017, from $6.96 billion at September 30, 2016. During the current fiscal year, the Bank originated and refinanced $698.5 million of loans with a weighted average rate of 3.68% and purchased $563.2 million of one- to four-family loans from correspondent lenders with a weighted average rate of 3.60%. The Bank also entered into participations of $67.7 million of commercial real estate loans with a weighted average rate of 3.98%, of which $43.2 million had not yet been funded as of September 30, 2017. Loan activity in the current fiscal year decreased compared to the prior fiscal year due to the Bank managing the size of the loan portfolio as it manages its liquidity levels. Loan volume has primarily been maintained through the rates offered to correspondent lenders. Generally, over the past couple years, cash flows from the securities portfolio have been used primarily to purchase loans and in part to pay down FHLB advances. By moving cash from lower yielding assets to higher yielding assets and repaying higher cost liabilities, we have been able to maintain our net interest margin. In addition to the repayment of securities, the Bank has emphasized growth in the deposit portfolio in part to pay down FHLB advances. The ratio of securities and cash to total assets was 17.4% at September 30, 2017, and we will be managing this ratio to approximately 15%. In the long run, management considers a ten percent ratio of stockholders' equity to total assets at the Bank as an appropriate level of capital. At September 30, 2017, this ratio was 13.1%. Total liabilities were $7.82 billion at September 30, 2017 compared to $7.87 billion at September 30, 2016. FHLB borrowings decreased $198.6 million, to $2.17 billion at September 30, 2017, as certain maturing FHLB advances were not replaced. Deposits increased $145.9 million, to $5.31 billion at September 30, 2017, due mainly to increases in wholesale certificates and non-maturity retail deposits. Stockholders' equity was $1.37 billion at September 30, 2017 compared to $1.39 billion at September 30, 2016. The $24.7 million decrease was due primarily to the payment of $118.0 million in cash dividends, partially offset by net income of $84.1 million. The cash dividends paid during the current fiscal year totaled $0.88 per share and consisted of a $0.29 per share cash true-up dividend related to fiscal year 2016 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. 43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. 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. 44 Management utilizes the formula analysis model, along with analyzing and considering several other relevant internal and external data elements, when evaluating the adequacy of the ACL. Such data elements include the trend and composition of delinquent and non-performing 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 housing markets, loan growth and concentrations, industry and peer charge-off and ACL information, and certain ACL ratios such as ACL to loans receivable, net and annualized historical losses. Since our loan portfolio is primarily concentrated in one- to four-family real estate, management monitors residential real estate market value trends in the Bank's local market areas and geographic sections of the U.S. by reference to various industry and market reports, economic releases and surveys, and management's general and specific knowledge of the real estate markets in which we lend, in order to determine what impact, if any, such trends may have on the level of ACL. Reviewing these data elements assists management in evaluating the overall credit quality of the loan portfolio and the reasonableness of the ACL on an ongoing basis, and whether changes need to be made to our ACL methodology. In addition, the adequacy of the Company's ACL is reviewed during bank regulatory examinations. We consider any comments from our regulators when assessing the appropriateness of our ACL. We seek to apply ACL methodology in a consistent manner; however, the methodology can be modified in response to changing conditions. Fair Value Measurements. The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with Accounting Standard Codification ("ASC") 820 and ASC 825. The Company groups its financial instruments at fair value in three levels based on the markets in which the instruments 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's AFS securities are 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 AFS 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 $2.1 million at September 30, 2017, 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. The Company's interest rate swaps are measured at fair value on a recurring basis. The Company uses a discounted cash flow analysis using observable market-based inputs to determine the fair value of is interest rate swaps. Changes in the fair value of the interest rate swaps are recorded, net of tax, as AOCI in stockholders' equity. The Company did not have any other liabilities that were measured at fair value at September 30, 2017. Loans individually evaluated for impairment and OREO are 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. 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 "Part II, 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, telephone 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, 2017 was approximately $123.1 million. This large average deposit base per branch helps to control costs. Our one- to four-family lending strategy and our effective management of credit risk allows us to service a large portfolio of loans at efficient levels because it costs less to service a portfolio of performing loans. • Asset Quality. We utilize underwriting standards for our lending products that are designed to limit our exposure to credit risk. We require complete documentation for both originated and purchased loans, and make credit decisions based on our assessment of the borrower's ability to repay the loan in accordance with its terms. • 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 2017 were $118.0 million, including a $0.25 per share, or $33.6 million, True Blue® Capitol Dividend paid in June 2017. 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. For fiscal year 2018, it is the intent of the Board of Directors and management to continue with the payout of 100% of the Company's earnings to its stockholders through regular quarterly dividends and a true-up dividend. 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 $9.19 billion at September 30, 2017 compared to $9.27 billion at September 30, 2016. The $74.3 million decrease was due primarily to a $384.6 million decrease in the securities portfolio, partially offset by an increase in the loan portfolio. Loans Receivable. Loans receivable, net, increased $237.0 million to $7.20 billion at September 30, 2017 from $6.96 billion at September 30, 2016. The one- to four-family loan portfolio increased $119.1 million and the commercial real estate loan portfolio increased $115.8 million. 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, 2017, 58% of this amount had a balance at origination of less than $424 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, 2017 September 30, 2016 Amount Rate (Dollars in thousands) Amount Rate $ 3,959,232 3.70% $ 4,005,615 3.74% 3.53 2.29 3.45 3.56 4.24 3.80 4.10 3.58 5.40 4.05 5.36 3.61 2,445,311 351,705 30,647 6,786,895 183,030 86,952 269,982 7,056,877 122,066 3,808 125,874 7,182,751 8,398 24,962 (45,680) 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) 6,958,024 Total loans receivable, net $ 7,195,071 $ 47Loan Activity - The following tables summarize activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, discounts/unearned loan fees, and premiums/deferred costs. Loans that were paid-off as a result of refinances are included in repayments. Loan endorsements are not included in the activity in the following tables because a new loan is not generated at the time of the endorsement. The endorsed balance and rate are included in the ending loan portfolio balance and rate. During the fiscal years ended September 30, 2017 and 2016, the Bank endorsed $53.1 million and $160.0 million of one- to four-family loans, respectively, reducing the average rate on those loans by 71 and 91 basis points, respectively. Beginning balance Originated and refinanced: Fixed Adjustable Purchased and participations: Fixed Adjustable Change in undisbursed loan funds Repayments Principal recoveries (charge-offs), net Other Ending balance $ September 30, 2017 Rate Amount For the Three Months Ended June 30, 2017 March 31, 2017 Amount Rate (Dollars in thousands) Amount Rate December 31, 2016 Rate Amount $ 7,228,425 3.60% $ 7,182,346 3.59% $ 7,061,557 3.58% $ 6,949,522 3.60% 102,687 44,900 76,906 17,046 21,823 (307,909) (88) (1,039) 7,182,751 3.82 4.10 3.92 3.33 3.61 $ 116,422 59,372 135,041 17,930 13,648 (295,988) 39 (385) 7,228,425 3.94 3.87 3.97 3.24 3.60 $ 115,560 36,417 143,852 27,158 37,862 (239,072) (74) (914) 7,182,346 3.66 3.82 3.69 2.98 3.59 $ 176,554 46,566 187,674 25,262 3,696 (326,839) (19) (859) 7,061,557 3.26 3.54 3.52 2.73 3.58 Beginning balance Originations and refinances: Fixed Adjustable Purchases and participations: Fixed Adjustable Change in undisbursed loan funds Repayments Principal charge-offs, net Other Ending balance For the Year Ended September 30, 2017 Amount 2016 Rate (Dollars in thousands) Amount Rate $ 6,949,522 3.60% $ 6,622,728 3.66% 511,223 187,255 543,473 87,396 77,029 (1,169,808) (142) (3,197) 7,182,751 $ 3.62 3.83 3.73 3.03 3.61 $ 606,365 166,539 720,253 143,679 (142,027) (1,164,000) (153) (3,862) 6,949,522 3.52 3.65 3.64 3.36 3.60 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, 2017 September 30, 2016 Amount Rate % of Total Amount Rate % of Total (Dollars in thousands) $ 212,477 3.04% 16.0% $ 265,721 2.97% 16.2% 772,549 65,696 3,510 464 1,054,696 7,554 189,576 2,992 72,245 2,284 274,651 3.81 4.03 5.87 9.87 3.68 2.88 3.06 3.25 5.03 3.40 3.58 58.1 4.9 0.3 — 871,669 184,153 4,247 828 79.3 1,326,618 0.6 14.3 0.2 5.4 0.2 4,980 183,697 47,876 71,013 2,652 20.7 310,218 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 81.1 0.3 11.2 2.9 4.3 0.2 18.9 Total originated, refinanced and purchased $1,329,347 3.66 100.0% $1,636,836 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 $ 478,772 64,701 543,473 Adjustable-rate: Correspondent - one- to four-family Participations - commercial real estate Total adjustable-rate purchased/participations 84,404 2,992 87,396 Total purchased/participation loans $ 630,869 3.70 4.01 3.73 3.02 3.25 3.03 3.64 $ 567,014 153,239 720,253 95,803 47,876 143,679 $ 863,932 3.56 3.94 3.64 2.90 4.29 3.36 3.60 49One- to Four-Family Loans - The following table presents, for our portfolio of one- to four-family loans, the amount, percent 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 2017, 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, 2017 % of Total Credit Score (Dollars in thousands) Average LTV Balance Originated $ 3,959,232 58.6% Correspondent purchased Bulk purchased 2,445,311 351,705 36.2 5.2 $ 6,756,248 100.0% 767 764 757 765 63% $ 68 63 65 135 375 305 182 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 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 during the current year, $115.4 million were refinanced from another lender. Of the loans originated and refinanced during the current year, 72% had loan values of $424 thousand or less. Of the correspondent loans purchased during the current year, 12% had loan values of $424 thousand or less. For the Year Ended September 30, 2017 September 30, 2016 Amount LTV Credit Score (Dollars in thousands) Amount Credit Score LTV $ 498,145 77% 120,835 563,176 $ 1,182,156 66 74 74 766 760 765 765 $ 515,395 78% 147,855 662,817 $ 1,326,067 66 74 75 770 765 763 766 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, 2017. State Kansas Texas Missouri Other states Amount % of Total (Dollars in thousands) Rate $ 554,282 223,289 180,426 224,159 46.9% 3.51% 18.9 15.3 18.9 3.58 3.59 3.58 3.55 $ 1,182,156 100.0% 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, 2017, 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. It is expected that some of the loan commitments will expire unfunded, so the amounts reflected in the table below are not necessarily indicative of future cash needs. Fixed-Rate 15 years or less More than Adjustable- Total 15 years Rate Amount Rate (Dollars in thousands) Originate/refinance Correspondent $ $ 9,185 5,555 14,740 $ $ 27,814 68,930 96,744 $ $ 9,790 7,100 81,585 16,890 $ 128,374 3.88 3.77 $ 46,789 3.58% Rate 3.21% 3.94% 3.28% Commercial Real Estate Loans - During the current fiscal year, the Bank entered into commercial real estate loan participations of $67.7 million, which included $54.0 million of commercial real estate construction loans. The majority of the $54.0 million of commercial real estate construction loans had not yet been funded as of September 30, 2017. As of September 30, 2017, $87.0 million of the Bank's $270.0 million outstanding commercial real estate portfolio were construction loans, with an additional $105.9 million of undisbursed amounts. The Bank intends to continue to grow its commercial real estate loan portfolio through participations with correspondent lenders and other select lead banks. 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, 2017. Included in the table are fixed-rate loans totaling $294.8 million at a weighted average rate of 4.05% and adjustable-rate loans totaling $128.4 million at a weighted average rate of 4.46%. The weighted average rate of fixed-rate loans is lower than that of adjustable-rate loans due to the majority of the fixed-rate loans in the portfolio at September 30, 2017 having shorter terms. Based on the terms of the construction loans as of September 30, 2017, of the $105.9 million of undisbursed amounts in the table, approximately $31.0 million is projected to be disbursed by December 31, 2017, and an additional $55.7 million is projected to be disbursed by September 30, 2018. It is possible that not all of the funds will be disbursed due to the nature of the funding of construction projects. For outstanding commitments, in certain cases, the weighted average rate presented represents our best estimate. Unpaid Undisbursed Gross Loan Outstanding Principal Amount Amount Commitments Total % of Total Accommodation and food services $123,839 $ Health care and social assistance Real estate rental and leasing Arts, entertainment, and recreation Multi-family Retail trade Other 38,273 23,420 33,944 10,322 25,480 14,704 16,664 49,563 37,835 — — 1,822 — (Dollars in thousands) $ 140,503 $ 24,700 $ 165,203 39.0% 87,836 61,255 33,944 10,322 27,302 14,704 — 1,650 — 20,950 — — 87,836 62,905 33,944 31,272 27,302 14,704 20.8 14.9 8.0 7.4 6.4 3.5 $269,982 $ 105,884 $ 375,866 $ 47,300 $ 423,166 100.0% Weighted average rate 4.10% 4.34% 4.17% 4.22% 4.17% The following table summarizes the Bank's commercial real estate loans by state as of September 30, 2017. Unpaid Undisbursed Gross Loan Outstanding Principal Amount Amount Commitments Total % of Total Texas Missouri Kansas Nebraska Colorado Arkansas California Montana $ 89,647 $ 54,280 $ 143,927 $ 24,700 $ (Dollars in thousands) 74,297 75,381 — 14,731 8,006 6,471 1,449 50,104 — — — — — 1,500 124,401 75,381 — 14,731 8,006 6,471 2,949 — — 20,950 1,650 — — — 168,627 124,401 75,381 20,950 16,381 8,006 6,471 2,949 39.8% 29.4 17.8 5.0 3.9 1.9 1.5 0.7 $ 269,982 $ 105,884 $ 375,866 $ 47,300 $ 423,166 100.0% 52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, 2017. 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 6 2 3 23 16 54 $ 157,180 142,530 25,855 24,350 66,119 7,132 $ 423,166 Securities. The following table presents the distribution of our securities portfolio, at amortized cost, at the dates indicated. Overall, fixed-rate securities comprised 75% of our securities portfolio at September 30, 2017. The weighted average life ("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, 2017 September 30, 2016 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 $ 632,422 2.14% 271,300 28,337 932,059 304,153 2,067 306,220 1.29 1.65 1.88 2.55 2.58 2.55 2.05 2.9 1.3 2.0 2.4 4.6 19.7 4.7 3.0 $ 836,852 2.16% 346,226 33,303 1,216,381 400,161 2,123 402,284 $ 1,618,665 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 Total securities portfolio $ 1,238,279 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, 2017 2016 (Dollars in thousands) 575,142 $ 306,196 61,109 752,141 413,458 80,479 942,447 $ 1,246,078 $ $ 53Mortgage-Backed Securities - The balance of MBS, which primarily consists of securities of U.S. GSEs, decreased $303.6 million from $1.25 billion at September 30, 2016 to $942.4 million at September 30, 2017. The following tables summarize the activity in our portfolio of MBS for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yields for the ending balances are as of the last day of the period presented and are generally derived from recent prepayment activity on the securities in the portfolio as of the dates presented. The beginning and ending WAL is the estimated remaining principal repayment term (in years) after three-month historical prepayment speeds have been applied. September 30, 2017 June 30, 2017 March 31, 2017 December 31, 2016 Amount Yield WAL Amount Yield WAL Amount Yield WAL Amount Yield WAL For the Three Months Ended Beginning balance - carrying value $1,017,145 2.26% 3.6 Maturities and repayments Net amortization of (premiums)/discounts (72,966) (937) (Dollars in thousands) 2.25% 3.9 $1,090,870 (71,763) (992) $1,166,326 (73,801) (1,015) Purchases: Fixed Adjustable — — — — — — — — — — — — — — — — — — 2.18% 3.5 $1,246,078 2.19% 3.5 (88,564) (1,290) 10,890 1.99 — — (788) 3.8 — 3.5 2.25 3.9 $1,166,326 2.18 Change in valuation on AFS securities (795) Ending balance - carrying value $ 942,447 2.28 3.5 (970) $1,017,145 2.26 3.6 (640) $1,090,870 For the Year Ended September 30, 2017 2016 Amount Yield WAL Amount Yield WAL (Dollars in thousands) Beginning balance - carrying value $1,246,078 2.19% 3.5 Maturities and repayments Net amortization of (premiums)/discounts (307,094) (4,234) 2.24% 3.8 $1,462,539 (350,990) (5,011) Purchases: Fixed Adjustable 10,890 1.99 — — Change in valuation on AFS securities (3,193) Ending balance - carrying value $ 942,447 2.28 3.8 — 3.5 42,827 100,133 (3,420) $1,246,078 1.83 2.02 2.19 4.1 5.4 3.5 54Investment Securities - Investment securities, which consist of U.S. GSE debentures (primarily issued by FNMA, FHLMC, or Federal Home Loan Banks) and municipal investments, decreased $81.0 million, from $382.1 million at September 30, 2016 to $301.1 million at September 30, 2017. The following tables summarize the activity of investment securities for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yields for the ending balances are as of the last day of the period presented. The beginning and ending WALs represent the estimated remaining principal repayment terms (in years) of the securities after projected call dates have been considered, based upon market rates at each date presented. For the Three Months Ended September 30, 2017 June 30, 2017 March 31, 2017 December 31, 2016 Amount Yield WAL Amount Yield WAL Amount Yield WAL Amount Yield WAL (Dollars in thousands) Beginning balance - carrying value $ 326,786 1.29% 1.6 Maturities and calls Net amortization of (premiums)/discounts (25,818) (55) 1.29% 1.9 $ 328,323 (1,538) (57) $ 355,681 (28,863) (61) 1.27% 2.0 $ 382,097 1.20% 1.2 (50,019) (72) Purchases: Fixed — — — — — — 1,535 1.30 3.4 25,000 1.70 Change in valuation on AFS securities 209 58 31 (1,325) Ending balance - carrying value $ 301,122 1.33 1.5 $ 326,786 1.29 1.6 $ 328,323 1.29 1.9 $ 355,681 1.27 4.0 2.0 For the Year Ended September 30, 2017 2016 Amount Yield WAL Amount Yield WAL (Dollars in thousands) Beginning balance - carrying value $ 382,097 1.20% 1.2 Maturities and calls Net amortization of (premiums)/discounts (106,238) (245) 1.19% 1.8 $ 566,754 (285,152) (331) Purchases: Fixed Change in valuation on AFS securities Ending balance - carrying value 26,535 1.68 (1,027) $ 301,122 1.33 4.0 1.5 101,359 (533) $ 382,097 1.09 1.20 0.8 1.2 55Liabilities. Total liabilities were $7.82 billion at September 30, 2017 compared to $7.87 billion at September 30, 2016. The decrease in total liabilities was due primarily to not replacing certain maturing FHLB advances, partially offset by an increase in deposits. Deposits - Deposits were $5.31 billion at September 30, 2017 compared to $5.16 billion at September 30, 2016. The increase was due mainly to increases in wholesale certificates and non-maturity retail deposits. 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. Offering competitive rates 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 percent of total for the components of our deposit portfolio at the dates presented. 2017 Amount Rate At September 30, % of Total (Dollars in thousands) Amount 2016 Rate % of Total Non-interest-bearing checking $ 243,670 —% 4.6% $ 217,009 —% 4.2% Interest-bearing checking Savings Money market Retail certificates of deposit Public units 615,615 349,977 1,190,185 2,450,418 460,003 $ 5,309,868 0.05 0.24 0.24 1.52 1.28 0.89 11.6 6.6 22.4 46.1 8.7 597,319 335,426 1,186,132 2,458,160 369,972 100.0% $ 5,164,018 0.05 0.17 0.24 1.43 0.70 0.80 11.6 6.5 23.0 47.6 7.1 100.0% The following tables set forth scheduled maturity information for our certificates of deposit, including public units, along with associated weighted average rates, at September 30, 2017. Rate range 0.00 – 0.99% 1.00 – 1.99% 2.00 – 2.99% 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) $ 469,691 $ 78,910 $ 84 $ — $ 548,685 0.74% 645,723 1,001 619,783 49,844 478,619 113,263 422,071 31,432 2,166,196 195,540 $1,116,415 $ 748,537 $ 591,966 $ 453,503 $ 2,910,421 1.60 2.24 1.48 Percent of total Weighted average rate Weighted average maturity (in years) 38.4% 1.08 0.4 25.7% 1.52 1.5 20.3% 1.86 2.5 15.6% 1.93 3.9 Weighted average maturity for the retail certificate of deposit portfolio (in years) 1.7 1.8 56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 $ 173,572 $ 151,496 $ 244,242 $ 942,200 $ 1,511,510 Retail certificates of deposit of $100,000 or more Public unit deposits of $100,000 or more 77,341 149,081 66,645 82,462 114,642 56,934 680,280 171,526 938,908 460,003 $ 399,994 $ 300,603 $ 415,818 $ 1,794,006 $ 2,910,421 57Borrowings - The following tables present borrowing activity for the periods shown. The borrowings presented in the table have original contractual terms of one year or longer. FHLB advances are presented at par. The weighted average effective rate includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. The weighted average maturity ("WAM") is the remaining weighted average contractual term in years. The beginning and ending WAMs represent the remaining maturity at each date presented. For new borrowings, the WAMs presented are as of the date of issue. For the Three Months Ended September 30, 2017 Effective June 30, 2017 Effective March 31, 2017 Effective December 31, 2016 Effective Amount Rate WAM Amount Rate WAM Amount Rate WAM Amount Rate WAM (Dollars in thousands) Beginning balance $2,175,000 2.23% 2.5 $2,475,000 2.35% 2.5 $2,475,000 2.35% 2.7 $2,575,000 2.29% 2.9 Maturities: FHLB advances (100,000) 3.12 (300,000) 3.24 New FHLB borrowings: Fixed-rate Interest rate swaps(1) 100,000 200,000 Ending balance $2,375,000 1.85 2.05 2.16 3.0 6.0 2.7 — — — — — — — — — — — — (100,000) 0.78 — — — — — — $2,175,000 2.23 2.5 $2,475,000 2.35 2.5 $2,475,000 2.35 — — 2.7 For the Year Ended September 30, 2017 Effective 2016 Effective Amount Rate WAM Amount Rate WAM (Dollars in thousands) Beginning balance $2,575,000 2.29% 2.9 $2,775,000 2.29% 3.3 Maturities: FHLB advances (500,000) 2.72 (400,000) 1.97 New FHLB borrowings: Fixed-rate Interest rate swaps(1) 100,000 200,000 Ending balance $2,375,000 1.85 2.05 2.16 3.0 6.0 2.7 200,000 — $2,575,000 1.64 — 2.29 5.0 — 2.9 (1) Represents adjustable-rate FHLB advances for which the Bank has entered into interest rate swaps with a notional amount of $200.0 million to hedge the variability in cash flows associated with the advances. The effective rate and WAM presented include the effect of the interest rate swaps. Excluding the effect of the interest rate swaps, the weighted average effective rate of the adjustable-rate FHLB advances was 1.30% and the WAM as of the date of issue was one year. 58Maturities - The following table presents the maturity of term borrowings (including FHLB advances, at par, and repurchase agreements), along with associated weighted average contractual and effective rates as of September 30, 2017. During the current fiscal year, the Bank entered into interest rate swaps with a notional amount of $200.0 million in order to hedge the variability of cash flows associated with 12-month adjustable-rate FHLB advances. The combination of the swaps with the advances creates synthetic long-term liabilities with an expected WAL of approximately six years at September 30, 2017. The 12-month adjustable-rate FHLB advances are presented in the table below based on the contractual maturity date of the advance. FHLB Repurchase Maturity by Advances Agreements Fiscal Year Amount Amount Total Amount Contractual Rate Effective Rate(1) 2018 2019 2020 2021 2022 2023 (Dollars in thousands) $ 475,000 $ 100,000 $ 500,000 350,000 550,000 200,000 100,000 — 100,000 — — — 575,000 500,000 450,000 550,000 200,000 100,000 $ 2,175,000 $ 200,000 $ 2,375,000 2.16% 2.55% 1.56 2.11 2.27 2.23 1.82 2.04 1.69 2.11 2.27 2.23 1.82 2.16 (1) The effective rate includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. The following table presents the maturity and weighted average repricing rate, which is also the weighted average effective rate, of certificates of deposit, split between retail and public unit amounts, and term borrowings for the next four quarters as of September 30, 2017. Retail Maturity by Quarter End Certificate Repricing Amount Rate Public Unit Deposit Amount Term Repricing Borrowings Repricing Repricing Rate (Dollars in thousands) Amount Rate Total Rate December 31, 2017 $ March 31, 2018 June 30, 2018 September 30, 2018 $ 250,913 218,141 208,676 150,208 827,938 1.01% $ 149,081 1.11% $ 200,000 2.94% $ 1.09 1.04 1.09 1.05 82,462 35,721 21,213 $ 288,477 1.19 1.24 1.22 1.16 $ — 100,000 275,000 575,000 — 2.82 2.17 2.55 599,994 300,603 344,397 446,421 $ 1,691,415 1.68% 1.12 1.57 1.76 1.58 59Stockholders' Equity. Stockholders' equity was $1.37 billion at September 30, 2017 compared to $1.39 billion at September 30, 2016. The $24.7 million decrease was due primarily to the payment of $118.0 million in cash dividends, partially offset by net income of $84.1 million. The cash dividends paid during the current fiscal year totaled $0.88 per share and consisted of a $0.29 per share cash true-up dividend related to fiscal year 2016 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 18, 2017, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.4 million, payable on November 17, 2017 to stockholders of record as of the close of business on November 3, 2017. On October 27, 2017, the Company announced a fiscal year 2017 cash true-up dividend of $0.29 per share, or approximately $39.0 million, related to fiscal year 2017 earnings. The $0.29 per share cash true-up dividend was determined by taking the difference between total earnings for fiscal year 2017 and total regular quarterly cash dividends paid during fiscal year 2017, divided by the number of shares outstanding as of October 24, 2017. The cash true-up dividend is payable on December 1, 2017 to stockholders of record as of the close of business on November 17, 2017, 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 2017. At September 30, 2017, Capitol Federal Financial, Inc., at the holding company level, had $120.8 million on deposit at the Bank. For fiscal year 2018, 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 2018 earnings in excess of the amount paid as regular quarterly cash dividends during fiscal year 2018. It is anticipated that the fiscal year 2018 cash true- up dividend will be paid in December 2018. 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. Capitol Federal Financial, Inc. works to find multiple ways to provide stockholder value. Primarily this has been through stock buybacks and the payment of cash dividends. The Company has maintained a dividend policy of paying out 100% of its earnings to stockholders in the form of quarterly cash dividends and an annual true-up dividend in December of each year. In addition, due to the excess capital levels at the Company and the Bank, the Company has paid out a True Blue dividend of $0.25 cash per share in June of each of the past four years and in December prior to that. The Company considers various business strategies and their impact on capital and asset measures on both a current and future basis, as well as regulatory considerations, including capital levels and requirements, in determining the amount, if any, and timing of the True Blue dividend. The following table presents regular quarterly dividends and special dividends paid in calendar years 2017, 2016, and 2015. The amounts represent cash dividends paid during each period. The 2017 true-up dividend amount presented represents the dividend payable on December 1, 2017 to stockholders of record as of November 17, 2017. 2017 Calendar Year 2016 2015 Amount Per Share Amount Per Share Amount Per Share (Dollars in thousands, except per share amounts) Regular quarterly dividends paid Quarter ended March 31 $ 11,386 $ 0.085 $ 11,305 $ 0.085 $ 11,592 $ Quarter ended June 30 Quarter ended September 30 Quarter ended December 31 True-up dividends paid True Blue dividends paid 11,409 11,411 11,427 38,985 33,559 0.085 0.085 0.085 0.290 0.250 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 Calendar year-to-date dividends paid $ 118,177 $ 0.880 $ 117,414 $ 0.880 $ 113,037 $ 0.085 0.085 0.085 0.085 0.250 0.250 0.840 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 and no shares have been repurchased under this repurchase plan. 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 leverage strategy was not in place at September 30, 2017 and 2016, so the end of period yields/rates presented at September 30, 2017 and 2016 in the table below do not reflect the effects of this strategy. At September 30, 2015, $700.0 million of the 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. The weighted average rate on FHLB borrowings includes the impact of interest rate swaps. 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 borrowings Repurchase agreements Total borrowings Combined rate paid on interest-bearing liabilities Net interest rate spread At September 30, 2017 2016 2015 3.59% 3.58% 3.65% 2.28 1.33 6.47 1.25 3.32 0.04 0.24 0.24 1.52 1.28 0.89 2.09 2.94 2.16 1.28 2.04 2.19 1.20 5.98 0.49 3.22 0.04 0.17 0.24 1.43 0.70 0.80 2.24 2.94 2.29 1.30 1.92 2.24 1.19 5.98 0.25 3.06 0.04 0.16 0.23 1.29 0.40 0.72 1.82 2.94 1.89 1.21 1.85 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. 61Average Outstanding Amount 2017 Interest Earned/ Paid Yield/ Rate For the Year Ended September 30, 2016 Interest Earned/ Paid Average Outstanding Amount Yield/ Rate Average Outstanding Amount 2015 Interest Earned/ Paid Yield/ Rate Assets: Interest-earning assets: Loans receivable(1) MBS(2) Investment securities(2)(3) FHLB stock Cash and cash equivalents(4) Total interest-earning assets(1)(2) Other non-interest-earning assets Total assets Liabilities and stockholders' equity: Interest-bearing liabilities: Checking Savings Money market Retail certificates Wholesale certificates Total deposits FHLB borrowings(5) Repurchase agreements Total borrowings Total interest-bearing liabilities Other non-interest-bearing liabilities Stockholders' equity Total liabilities and stockholders' equity $ 7,150,686 1,088,495 341,149 192,896 2,114,722 10,887,948 299,338 $ 11,187,286 $ 827,677 346,495 1,210,644 2,434,470 391,902 5,211,188 4,269,494 200,000 4,469,494 9,680,682 124,443 1,382,161 $ 11,187,286 Net interest income(6) Net interest rate spread(7)(8) Net interest-earning assets Net interest margin(8)(9) Ratio of interest-earning assets to interest-bearing liabilities $ 1,207,266 (Dollars in thousands) $ 253,393 23,809 4,362 12,233 19,389 313,186 3.54% $ 6,766,317 1,366,605 2.19 481,223 1.28 204,894 6.34 2,168,896 0.90 10,987,935 2.87 293,692 $ 11,281,627 $ 243,311 29,794 5,925 12,252 9,831 301,113 3.60% $ 6,389,964 1,632,117 2.18 604,999 1.23 5.98 209,743 2,125,693 0.45 10,962,516 2.74 232,234 $ 11,194,750 $ 235,500 36,647 7,182 12,556 5,477 297,362 3.69% 2.25 1.19 5.99 0.25 2.71 302 783 2,868 35,449 3,566 42,968 68,871 5,965 74,836 117,804 0.04 0.23 0.24 1.46 0.91 0.82 1.61 2.94 1.67 1.21 $ 784,303 326,744 1,173,983 2,370,286 370,707 5,026,023 4,530,835 200,000 4,730,835 9,756,858 120,636 1,404,133 $ 11,281,627 291 603 2,762 32,181 2,022 37,859 65,091 5,981 71,072 108,931 0.04 0.18 0.24 1.36 0.55 0.75 1.43 2.94 1.50 1.11 274 462 2,679 28,085 1,619 33,119 67,797 6,678 74,475 107,594 $ 727,533 306,456 1,149,203 2,259,645 312,857 4,755,694 4,646,782 215,835 4,862,617 9,618,311 108,522 1,467,917 $ 11,194,750 $ 195,382 $ 192,182 $ 189,768 $ 1,231,077 1.66 1.79 1.12x $ 1,344,205 1.63 1.75 1.13x 0.04 0.15 0.23 1.24 0.52 0.70 1.46 3.05 1.53 1.12 1.59 1.73 1.14x 62(1) Calculated net of unearned loan fees and deferred costs. Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent. Balances include loans receivable held-for-sale. (2) MBS and investment securities classified as AFS are stated at amortized cost, adjusted for unamortized purchase premiums or discounts. (3) The average balance of investment securities includes an average balance of nontaxable securities of $30.7 million, $37.0 million, and $37.2 million for the years ended September 30, 2017, 2016, and 2015, respectively. (4) The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $1.93 billion, $1.97 billion, and $1.98 billion for the years ended September 30, (5) 2017, 2016, and 2015, respectively. Included in this line are FHLB borrowings related to the leverage strategy with an average outstanding amount of $2.02 billion, $2.06 billion, and $2.08 billion, interest paid of $18.5 million, $10.1 million, and $5.4 million, at a rate of 0.91%, 0.48%, and 0.25% for the years ended September 30, 2017, 2016, and 2015, respectively. The FHLB advance amounts and rates included in this line include the effect of interest rate swaps and are net of deferred prepayment penalties. (6) Net interest income represents the difference between interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income depends on the balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them. (7) Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (8) The table below provides a reconciliation between certain performance ratios presented in accordance with GAAP and the performance ratios excluding the effects of the leverage strategy, which are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide the performance ratios without the leverage strategy because of the unique nature of the leverage strategy. The leverage strategy reduces some of our performance ratios due to the amount of earnings associated with the transaction in comparison to the size of the transaction, while increasing our net income. Actual (GAAP) 2017 Leverage Strategy Adjusted (Non-GAAP) Actual (GAAP) 2016 Leverage Strategy Adjusted (Non-GAAP) Actual (GAAP) 2015 Leverage Strategy Adjusted (Non-GAAP) For the Year Ended September 30, Net interest margin Net interest rate spread 1.79% 1.66 (0.36)% (0.32) 2.15% 1.98 1.75% 1.63 (0.35)% (0.30) 2.10% 1.93 1.73% 1.59 (0.34)% (0.28) 2.07% 1.87 (9) Net interest margin represents net interest income as a percentage of average interest-earning assets. 63Rate/Volume Analysis. The table below presents the amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing fiscal years 2017 to 2016 and fiscal years 2016 to 2015. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate, and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. For the Year Ended September 30, 2017 vs. 2016 Increase (Decrease) Due to Rate Total Volume 2016 vs. 2015 Increase (Decrease) Due to Rate Total Volume Interest-earning assets: Loans receivable MBS Investment securities FHLB stock Cash and cash equivalents Total interest-earning assets Interest-bearing liabilities: Checking Savings Money market Certificates of deposit FHLB borrowings Repurchase agreements Total interest-bearing liabilities (Dollars in thousands) $ $ 13,480 (6,083) (1,783) (753) (252) 4,609 (3,398) $ 98 220 734 9,810 7,464 10,082 (5,985) (1,563) (19) 9,558 12,073 $ $ 13,496 (5,815) (1,515) (261) 114 6,019 (5,685) $ (1,038) 258 (43) 4,240 (2,268) 15 38 81 1,067 (5,262) (8) (4,069) (5) 143 25 3,745 9,042 (8) 12,942 10 181 106 4,812 3,780 (16) 8,873 22 33 64 2,057 (2,280) (467) (571) (4) 108 18 2,442 (426) (230) 1,908 7,811 (6,853) (1,257) (304) 4,354 3,751 18 141 82 4,499 (2,706) (697) 1,337 Net change in net interest income $ 8,678 $ (5,478) $ 3,200 $ 6,590 $ (4,176) $ 2,414 64Comparison of Operating Results for the Years Ended September 30, 2017 and 2016 For fiscal year 2017, the Company recognized net income of $84.1 million, or $0.63 per share, compared to net income of $83.5 million, or $0.63 per share, for fiscal year 2016. The increase in net income was due primarily to a $3.2 million increase in net interest income, partially offset by a $1.1 million decrease in non-interest income. Partially offsetting this increase, no provision for credit losses was recorded in fiscal year 2017, compared to a negative provision for credit losses of $750 thousand in fiscal year 2016. The net interest margin increased four basis points, from 1.75% for the prior fiscal year to 1.79% for the current fiscal year. Excluding the effects of the leverage strategy, the net interest margin would have increased five basis points, from 2.10% for the prior fiscal year to 2.15% for the current fiscal year. The increase in the net interest margin was due mainly to a shift in the mix of interest-earning assets from relatively lower yielding securities to higher yielding loans, partially offset by a decrease in the weighted average yield on loans. The positive impact of the decrease in interest expense on borrowings not related to the leverage strategy was offset by an increase in interest expense on deposits. Interest and Dividend Income The weighted average yield on total interest-earning assets increased 13 basis points, from 2.74% for the prior fiscal year to 2.87% for the current fiscal year, while the average balance of interest-earning assets decreased $100.0 million from the prior fiscal year. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have increased six basis points, from 3.21% for the prior fiscal year to 3.27% for the current fiscal year, while the average balance would have decreased $59.6 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: 2017 2016 Dollars Percent (Dollars in thousands) INTEREST AND DIVIDEND INCOME: Loans receivable MBS Cash and cash equivalents FHLB Stock Investment securities $ 253,393 $ 243,311 $ 23,809 19,389 12,233 4,362 29,794 9,831 12,252 5,925 Total interest and dividend income $ 313,186 $ 301,113 $ 10,082 (5,985) 9,558 (19) (1,563) 12,073 4.1% (20.1) 97.2 (0.2) (26.4) 4.0 The increase in interest income on loans receivable was due to a $384.4 million increase in the average balance of the portfolio, partially offset by a six basis point decrease in the weighted average yield on the portfolio to 3.54% for the current fiscal year. Loan growth was funded through cash flows from the securities portfolio. The decrease in the weighted average yield was due primarily to endorsements and refinances repricing loans to lower market rates, the origination and purchase of loans at rates lower than the overall loan portfolio rate at certain points during each year, and an increase in the amortization of premiums related to correspondent loans. The decrease in interest income on the MBS portfolio was due to a $278.1 million decrease in the average balance of the portfolio as cash flows not reinvested were used primarily to fund loan growth and pay off maturing FHLB borrowings. The weighted average yield on the MBS portfolio increased one basis point, from 2.18% during the prior fiscal year to 2.19% for the current fiscal year. Net premium amortization of $4.2 million during the current fiscal year decreased the weighted average yield on the portfolio by 39 basis points. During the prior fiscal year, $5.0 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 37 basis points. As of September 30, 2017, the remaining net balance of premiums on our portfolio of MBS was $9.0 million. The increase in interest income on cash and cash equivalents was due to a 45 basis point increase in the weighted average yield resulting from an increase in the yield earned on balances held at the FRB of Kansas City. 65The decrease in interest income on investment securities was due to a $140.1 million decrease in the average balance. Cash flows not reinvested in the portfolio were used primarily to fund loan growth and pay off maturing FHLB borrowings. Interest Expense The weighted average rate paid on total interest-bearing liabilities increased 10 basis points, from 1.11% for the prior fiscal year to 1.21% for the current fiscal year, while the average balance of interest-bearing liabilities decreased $76.2 million from the prior year fiscal year. Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased one basis point, from 1.28% for the prior fiscal year to 1.29% for the current fiscal year, while the average balance of interest-bearing liabilities would have decreased $35.8 million. 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: 2017 2016 Dollars Percent (Dollars in thousands) INTEREST EXPENSE: FHLB borrowings $ 68,871 $ 65,091 $ Deposits Repurchase agreements 42,968 5,965 37,859 5,981 Total interest expense $ 117,804 $ 108,931 $ 3,780 5,109 (16) 8,873 5.8% 13.5 (0.3) 8.1 The table above includes interest expense on FHLB borrowings both associated and not associated with the leverage strategy. Interest expense on FHLB borrowings not related to the leverage strategy decreased $4.6 million from the prior fiscal year due to a $221.0 million decrease in the average balance of the portfolio as a result of not replacing all of the advances that matured between periods. Funds generated from deposit growth were primarily used to pay off the maturing advances, along with some cash flows from the securities portfolio. The weighted average rate paid on FHLB borrowings not related to the leverage strategy increased one basis point, to 2.24% for the current fiscal year. Interest expense on FHLB borrowings associated with the leverage strategy increased $8.4 million from the prior fiscal year due to a 43 basis point increase in the weighted average rate paid as a result of an increase in interest rates between periods. The increase in interest expense on deposits was due primarily to a seven basis point increase in the weighted average rate, to 0.82% for the current fiscal year, along with growth in the portfolio. The increase in the weighted average rate was primarily related to the retail certificate of deposit portfolio, which increased 10 basis points to 1.46% for the current fiscal year. The average balance of the deposit portfolio increased $185.2 million during the current fiscal year, with the majority of the increase in retail deposits. Provision for Credit Losses The Bank did not record a provision for credit losses during the current fiscal year, compared to a negative provision for credit losses of $750 thousand during the prior fiscal year. Based on management's assessment of the ACL formula analysis model and several other factors, it was determined that no provision for credit losses was necessary for the current fiscal year. Net loan charge-offs were $142 thousand during the current fiscal year compared to $153 thousand in the prior fiscal year. At September 30, 2017, loans 30 to 89 days delinquent were 0.26% of total loans and loans 90 or more days delinquent or in foreclosure were 0.13% of total loans. 66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: 2017 2016 Dollars Percent (Dollars in thousands) NON-INTEREST INCOME: Retail fees and charges Income from bank-owned life insurance ("BOLI") Other non-interest income Total non-interest income $ $ 15,053 $ 14,835 $ 2,233 4,910 3,420 5,057 22,196 $ 23,312 $ 218 (1,187) (147) (1,116) 1.5% (34.7) (2.9) (4.8) The decrease in income from BOLI was due mainly to the receipt of a death benefit during the prior fiscal year with no such death benefit in the current 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: 2017 2016 Dollars Percent (Dollars in thousands) NON-INTEREST EXPENSE: Salaries and employee benefits Information technology and communications Occupancy, net Regulatory and outside services Deposit and loan transaction costs Advertising and promotional Federal insurance premium Office supplies and related expense Low income housing partnerships Other non-interest expense Total non-interest expense $ 43,437 $ 42,378 $ 1,059 11,282 10,814 5,821 5,284 4,673 3,539 1,981 — 2,827 10,540 10,576 5,645 5,585 4,609 5,076 2,640 3,872 3,384 $ 89,658 $ 94,305 $ 742 238 176 (301) 64 (1,537) (659) (3,872) (557) (4,647) 2.5% 7.0 2.3 3.1 (5.4) 1.4 (30.3) (25.0) (100.0) (16.5) (4.9) The increase in salaries and employee benefits was due primarily to an increase in employee health care costs. The increase in information technology and communications was due largely to software licensing expenses, website hosting expenses, and communication network expenses. The decrease in federal insurance premiums was due primarily to a decrease in the FDIC base assessment rate effective July 1, 2016. The decrease in office supplies and related expense was due primarily to lower debit card expenses compared to the prior fiscal year, during which time the Bank began issuing debit cards enabled with chip card technology. The decrease in low income housing partnerships expense was due to a change in the Bank's method of accounting for those investments. The Bank had 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 those investments rather than the equity method. As a result, the Bank no longer reports low income housing partnership expenses in non-interest expense; rather, the pretax operating losses and related tax benefits from the investments 67are reported as a component of income tax expense. The decrease in other non-interest expense was due mainly to a decrease in OREO operations expense, along with lower deposit account charge-offs related to debit card fraud in the current fiscal year. The Company's efficiency ratio was 41.21% for the current fiscal year compared to 43.76% for the prior fiscal year. The improvement in the efficiency ratio was due primarily to lower non-interest expense in the current year compared to the prior year period. 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 proportionally lower level of expense. Income Tax Expense Income tax expense was $43.8 million for the current fiscal year compared to $38.4 million for the prior year fiscal year. The effective tax rate for the current fiscal year was 34.2% compared to 31.5% for the prior year fiscal year. The increase in effective tax rate was due mainly to the change in accounting method for low income housing partnerships as previously discussed. Management anticipates the effective tax rate for fiscal year 2018 will be approximately 34%. Congress is considering legislation that would reduce the effective corporate tax rate. No prediction can be made as to whether or when any such legislation may be enacted or the estimated impact on the Company. 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 fiscal year 2015 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 leverage strategy was $2.3 million during fiscal year 2016, compared to $2.8 million for fiscal year 2015. 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 fiscal year 2015 to 1.75% for fiscal year 2016. Excluding the effects of the leverage strategy, the net interest margin would have increased three basis points, from 2.07% for fiscal year 2015 to 2.10% for fiscal year 2016. 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. The Company's efficiency ratio was 43.76% for fiscal year 2016 compared to 44.74% for fiscal year 2015. The change in the efficiency ratio was due primarily to an increase in both net interest income and non-interest income. 68Interest and Dividend Income The weighted average yield on total interest-earning assets increased three basis points, from 2.71% for fiscal year 2015 to 2.74% for fiscal year 2016, and the average balance of interest-earning assets increased $25.4 million from fiscal year 2015. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have decreased one basis point, from 3.22% for fiscal year 2015 to 3.21% for fiscal year 2016, 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 Total interest and dividend income $ 243,311 $ 235,500 $ 29,794 12,252 9,831 36,647 12,556 5,477 5,925 301,113 $ 7,182 297,362 $ $ 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 fiscal year 2016. 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 fiscal year 2015 to 2.18% for fiscal year 2016. 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 fiscal year 2016 decreased the weighted average yield on the portfolio by 37 basis points. During fiscal year 2015, $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. 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. 69Interest Expense The weighted average rate paid on total interest-bearing liabilities decreased one basis point, from 1.12% for fiscal year 2015 to 1.11% for fiscal year 2016, while the average balance of interest-bearing liabilities increased $138.5 million from fiscal year 2015. Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have decreased seven basis points from fiscal year 2015, to 1.28% for fiscal year 2016, 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 borrowings $ 65,091 $ 67,797 $ Deposits Repurchase agreements 37,859 5,981 33,119 6,678 Total interest expense $ 108,931 $ 107,594 $ (2,706) 4,740 (697) 1,337 (4.0)% 14.3 (10.4) 1.2 The table above includes interest expense on FHLB borrowings both associated and not associated with the leverage strategy. Interest expense on FHLB borrowings not related to the leverage strategy decreased $7.5 million from fiscal year 2015 due mainly to a 20 basis point decrease in the weighted average rate paid on the portfolio, to 2.23% for fiscal year 2016, along with a $102.4 million decrease in the average balance due to not replacing all of the FHLB advances that matured during fiscal year 2016 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 fiscal year 2015 with an effective rate of 5.08%, which was replaced with a $175.0 million advance with an effective rate of 2.18%. Interest expense on FHLB borrowings associated with the leverage strategy increased $4.8 million from fiscal year 2015 due primarily to a 23 basis point increase in the weighted average rate paid on the borrowings. 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 fiscal year 2016, 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 fiscal year 2016, 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 fiscal year 2015 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 fiscal year 2016 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 fiscal year 2016 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 fiscal year 2016 due to the improvement in real estate values and reduction in net loan charge-offs. Net loan charge-offs were $153 thousand for fiscal year 2016, composed of charge-offs totaling $630 thousand, partially offset by recoveries of $477 thousand. Net loan charge-offs were $555 thousand for fiscal year 2015. 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. 70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 fiscal year 2015, as well as to the receipt of death benefits in fiscal year 2016 and no such proceeds in fiscal year 2015. 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 fiscal year 2016 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 DIF reaching 1.15% of total estimated insured deposits of the banking system on June 30, 2016. The decrease in low income housing partnerships expense was due primarily to lower impairments in fiscal year 2016 as compared to fiscal year 2015. The increase in office supplies and related expense was due primarily to the purchase of cards enabled with chip card technology. 71Income Tax Expense Income tax expense was $38.4 million for fiscal year 2016 compared to $37.7 million for fiscal year 2015. The effective tax rate for fiscal year 2016 was 31.5% compared to 32.5% for fiscal year 2015. 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 fiscal year 2016. 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 long-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 FRB of Kansas City's discount window. Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40% of regulatory total assets without the pre-approval of FHLB senior management. In July 2017, the president of FHLB approved an increase, through July 2018, in the Bank's borrowing limit to 55% of Bank Call Report total assets. When the leverage strategy is in place, the Bank maintains the resulting excess cash reserves from the FHLB borrowings at the FRB of Kansas City, which can be used to meet any short-term liquidity needs. The amount that can be borrowed from the FRB of Kansas City's 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 FRB of Kansas City's discount window annually with a nominal, overnight borrowing. If management observes a trend in the amount and frequency of line of credit utilization and/or short-term borrowings that is not in conjunction with a planned strategy, such as the leverage strategy, the Bank will likely utilize long-term wholesale borrowing sources such as FHLB advances and/or repurchase agreements to provide long-term, fixed-rate funding. The maturities of these long-term 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, 2017, the Bank had total borrowings, at par, of $2.38 billion, or approximately 26% of total assets. The amount of FHLB advances outstanding at September 30, 2017 was $2.18 billion, of which $475.0 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, 2017, the Bank's ratio of the par value of FHLB borrowings to Call Report total assets was 24%. When the full 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 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 FHLB borrowings in conjunction with the leverage strategy could be repaid at any point in time while the strategy is in effect, if necessary. 72At September 30, 2017, the Bank had repurchase agreements of $200.0 million, or approximately 2% of total assets, of which $100.0 million 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 the total borrowings limit of 55% as discussed above. The Bank had pledged securities with an estimated fair value of $218.5 million as collateral for repurchase agreements as of September 30, 2017. The securities pledged for the repurchase agreements will be delivered back to the Bank when the repurchase agreements mature. 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, 2017, the Bank had $430.7 million of securities that were eligible but unused as collateral for borrowing or other liquidity needs. The Bank has access to other sources of funds for liquidity purposes, such as brokered and public unit deposits. As of September 30, 2017, the Bank's policy allowed for combined brokered and public unit deposits up to 15% of total deposits. At September 30, 2017, the Bank had public unit deposits totaling $460.0 million, which had an average remaining term to maturity of 10 months, or approximately 9% 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 $500.7 million as collateral for public unit deposits at September 30, 2017. The securities pledged as collateral for public unit deposits are held under joint custody with FHLB and generally will be released upon deposit maturity. At September 30, 2017, $1.12 billion of the Bank's certificate of deposit portfolio was scheduled to mature within one year, including $288.5 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 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. 73The following table presents the contractual maturities of our loan, MBS, and investment securities portfolios at September 30, 2017, along with associated weighted average yields. Loans and securities which have adjustable interest rates are shown as maturing in the period during which the contract is due. The table does not reflect the effects of possible prepayments or enforcement of due on sale clauses. As of September 30, 2017, the amortized cost of investment securities in our portfolio which are callable or have pre-refunding dates within one year was $126.6 million. Amounts due: Within one year After one year: Over one to two years Over two to three years Over three to five years Over five to ten years Over ten to fifteen years After fifteen years Total due after one year Loans(1) MBS Investment Securities Total Amount Yield Amount Yield Amount Yield Amount Yield (Dollars in thousands) $ 58,591 3.71% $ 2,884 3.92% $ 127,394 1.18% $ 188,869 2.01% 82,750 14,348 40,267 560,361 1,385,085 5,041,349 7,124,160 4.04 4.10 4.25 3.73 3.28 3.64 3.59 6,156 3,168 49,444 447,420 124,498 308,877 939,563 4.29 4.69 2.85 2.07 1.83 2.59 2.27 54,123 57,196 60,140 218 — 2,051 173,728 1.24 1.52 1.50 2.00 — 2.58 1.44 143,029 74,712 149,851 1,007,999 1,509,583 5,352,277 8,237,451 2.99 2.15 2.68 2.99 3.16 3.58 3.39 $ 7,182,751 3.59 $ 942,447 2.28 $ 301,122 1.33 $ 8,426,320 3.36 (1) Demand loans, loans having no stated maturity, and overdraft loans are included in the amounts due within one year. Construction loans are presented based on the estimated term to complete construction. The maturity date for home equity loans assumes the customer always makes the required minimum payment. 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 per the regulatory framework for prompt corrective action. As of September 30, 2017, 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, 2017, for the Bank and the Company (dollars in thousands): Total equity as reported under GAAP $ AOCI-related adjustments Total tier 1 capital ACL Total capital Bank Company $ 1,204,781 (2,918) 1,201,863 8,398 1,368,313 (2,918) 1,365,395 8,398 $ 1,210,261 $ 1,373,793 Off-Balance Sheet Arrangements, Commitments and Contractual Obligations The Company, in the normal course of business, makes commitments to buy or sell assets, extend credit, or to incur or fund liabilities. Such commitments may include, but are not limited to: • • • • • the origination, purchase, participation, or sale of loans; the purchase or sale of securities; 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 contractual rates as of September 30, 2017. Maturity Range Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years (Dollars in thousands) Operating leases $ 6,272 $ 1,170 $ 1,870 Certificates of deposit $ 2,910,421 $ 1,116,415 $ 1,340,503 $ $ 1,326 452,113 $ $ Rate 1.48% 1.08% 1.67% 1.93% 1,906 1,390 1.98% FHLB advances Rate $ 2,175,000 $ 475,000 $ 850,000 $ 750,000 $ 100,000 1.96% 1.91% 1.73% 2.26% 1.82% Repurchase agreements $ 200,000 $ 100,000 $ 100,000 $ Rate 2.94% 3.35% 2.53% — $ —% Commitments to originate and purchase/participate in loans $ 169,946 $ 169,946 $ Rate 3.92% 3.92% — $ —% — $ —% Commitments to fund unused home equity lines of credit $ 239,950 $ 239,950 $ Rate 5.05% 5.05% — $ —% — $ —% — —% — —% — —% It is expected that some of the commitments to originate and purchase/participate in loans will 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. 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, 2017, 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. 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. Interest rate risk is our most significant market risk, and our ability to adapt to changes in interest rates is known as interest rate risk management. The 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. 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, 2017. 77Qualitative Disclosure about Market Risk At September 30, 2017, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $641.6 million, or 6.98% of total assets, compared to $1.07 billion, or 11.54% of total assets, at September 30, 2016. The decrease in the one-year gap amount from September 30, 2016 to September 30, 2017 was due to lower projected cash flows on mortgage-related assets. Market rates of interest increased between September 30, 2016 and September 30, 2017. As interest rates rise, borrowers have less economic incentive to refinance their mortgages and agency debt issuers have less economic incentive or opportunity to exercise their call options in order to issue new debt at lower interest rates. This increase in interest rates resulted in lower projected cash flows on these assets over the next year compared to September 30, 2016. The majority of interest-earning assets anticipated to reprice in the coming year are repayments and prepayments on mortgage loans and MBS, both of which include the option to prepay without a fee being paid by the contract holder. The amount of interest-bearing liabilities expected to reprice in a given period is not typically impacted significantly by changes in interest rates because the Bank's borrowings and certificate of deposit portfolios have contractual maturities and generally cannot be terminated early without a prepayment penalty. If interest rates were to increase 200 basis points, as of September 30, 2017, the Bank's one-year gap is projected to be $81.3 million, or 0.88% of total assets. This compares to a one-year gap of $208.7 million, or 2.25% of total assets, if interest rates were to have increased 200 basis points as of September 30, 2016. During the current fiscal year, loan repayments totaled $1.17 billion and cash flows from the securities portfolio totaled $413.3 million. The asset cash flows of $1.58 billion were reinvested into new assets at current market interest rates. Total cash flows from fixed-rate liabilities that matured or repriced during the current fiscal year were approximately $2.19 billion, including $500.0 million of FHLB advances that were renewed. These offsetting cash flows allow the Bank to manage its interest rate risk and gap position more precisely than if the Bank did not have offsetting cash flows due to its mix of assets or maturity structure of liabilities. Other strategies include managing the Bank's wholesale assets and liabilities. The Bank primarily uses long-term fixed-rate borrowings with no embedded options to lengthen the average life of the Bank's liabilities. The fixed-rate characteristics of these borrowings lock-in the cost until maturity and thus decrease the amount of liabilities repricing as interest rates move higher compared to funding with lower-cost short-term borrowings. These borrowings are laddered in order to prevent large amounts of liabilities repricing in any one period. The WAL of the Bank's term borrowings as of September 30, 2017 was 2.3 years. However, including the impact of interest rate swaps related to $200.0 million of adjustable-rate FHLB advances, the WAL of the Bank's term borrowings as of September 30, 2017 was 2.7 years. The interest rate swaps effectively convert the adjustable-rate borrowings into long-term, fixed-rate liabilities. The Bank uses the securities portfolio to shorten the average life of the Bank's assets. Purchases in the securities portfolio over the past couple of years have primarily been focused on callable agency debentures with maturities no longer than five years, shorter duration MBS, and adjustable-rate MBS. These securities have a shorter average life and provide a steady source of cash flow that can be reinvested as interest rates rise or used to purchase higher-yielding assets. The WAL of the Bank's securities portfolio as of September 30, 2017 was 2.5 years. In addition to the wholesale strategies, the Bank has sought to increase core deposits and long-term certificates of deposit. Core deposits are expected to reduce the risk of higher interest rates because their interest rates are not expected to increase significantly as market interest rates rise and because customers with these accounts tend to be less sensitive to changes in rates, maintaining their accounts for long periods of time. Specifically, checking accounts and savings accounts have had minimal interest rate fluctuations throughout historical interest rate cycles, though no assurance can be given that this will be the case in future interest rate cycles. The balances and rates of these accounts have historically tended to remain very stable over time, giving them the characteristic of long-term liabilities. The Bank uses historical data pertaining to these accounts to estimate their future balances. At September 30, 2017 the WAL of the Bank's non-maturity deposits was 13.5 years, compared to 8.3 years at September 30, 2016. The increase in the WAL of the Bank's non-maturity deposits was due to a change in the deposit model during the fourth quarter of fiscal year 2017. The Bank uses a deposit model that was developed from the results of a Bank-specific deposit study. The deposit study analyzed the historical behavior of the Bank's non- maturity deposits to predict the future balances of these accounts. The change was made due to model validation testing which indicated that the model was not predicting deposit behavior as well as management expected. The change resulted in 78an increase in the WAL of these liabilities, which resulted in our MVPE measure of interest rate risk sensitivity not being materially lower than results with the previous model. Over the last couple years, the Bank has priced long-term certificates of deposit more aggressively than short-term certificates of deposit with the goal of giving customers incentive to move funds into longer-term certificates of deposit when interest rates were lower. The balance of our retail certificates of deposit with terms of 36 months or longer increased $288.6 million, or 20%, since September 30, 2015. Long-term certificates of deposit reduce the amount of liabilities repricing as interest rates rise in a given time period. Because of the on-balance sheet strategies implemented over the past several years, management believes the Bank is well- positioned to move into a market rate environment where interest rates are higher. 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 in part on prepayment assumptions at current and projected 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. A positive gap indicates more cash flows from assets are expected to reprice than cash flows from liabilities and would indicate, in a rising rate environment, that earnings should increase. A negative gap indicates more cash flows from liabilities are expected to reprice than cash flows from assets and would indicate, in a rising rate environment, that earnings should decrease. For additional information regarding the impact of changes in interest rates, see the following Change in Net Interest Income and Change in MVPE discussions and tables. 79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 $1,800,294 $ 1,883,720 $ 1,110,248 $2,379,102 $7,173,364 576,389 334,985 379,421 174,270 108,199 1,238,279 — — — 334,985 Total interest-earning assets 2,711,668 2,263,141 1,284,518 2,487,301 8,746,628 Interest-bearing liabilities: Non-maturity deposits(3) Certificates of deposit Borrowings(4) 265,483 309,445 1,129,543 1,328,294 675,000 850,000 241,396 451,238 750,000 1,703,908 1,346 142,557 Total interest-bearing liabilities 2,070,026 2,487,739 1,442,634 1,847,811 2,520,232 2,910,421 2,417,557 7,848,210 Excess (deficiency) of interest-earning assets over interest-bearing liabilities $ 641,642 $ (224,598) $ (158,116) $ 639,490 $ 898,418 Cumulative excess of interest-earning assets over interest-bearing liabilities $ 641,642 $ 417,044 $ 258,928 $ 898,418 Cumulative excess of interest-earning assets over interest-bearing liabilities as a percent of total Bank assets at: September 30, 2017 September 30, 2016 Cumulative one-year gap - interest rates +200 bps at: September 30, 2017 September 30, 2016 6.98% 11.54 0.88 2.25 4.54% 2.82% 9.77% (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 undisbursed amounts and 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, 2017, at amortized cost. (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 $1.61 billion, for a cumulative one-year gap of (17.5)% of total assets. (4) Borrowings exclude deferred prepayment penalty costs. 80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 date presented in the following table, the estimated change in the Bank's net interest income is 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). Projected cash flows for each scenario are based upon varying prepayment assumptions to model likely customer behavior changes as market rates change. 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, 2017 2016 Amount ($) Change ($) Change (%) Amount ($) Change ($) Change (%) -100 bp 000 bp +100 bp +200 bp +300 bp N/A $ 187,823 $ 189,259 188,508 186,299 N/A — 1,436 685 (1,524) (Dollars in thousands) N/A N/A —% $ 188,696 $ 0.76 0.36 (0.81) 192,921 194,919 195,187 N/A — 4,225 6,223 6,491 N/A —% 2.24 3.30 3.44 (1) Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities. The Bank's projected net interest income is more adversely impacted in the rising rate scenarios at September 30, 2017 than at September 30, 2016. The Bank's one-year gap amount was positive for both periods. Therefore, as market interest rates rise, the Bank's assets are projected to reprice higher at a faster pace than liabilities. The net interest income projections were negative in the +300 basis point scenario at September 30, 2017 compared to being positive at September 30, 2016. This change was due primarily to higher market interest rates at September 30, 2017, which resulted in a decrease in the Bank's one-year gap. As interest rates rise, the one-year gap eventually becomes negative due to a reduction in cash flows from the Bank's mortgage-related assets and callable agency debentures. See below for additional discussion of the reasons for this result. At September 30, 2017, modeled in the +300 basis point scenario, liabilities would reprice to higher interest rates at a faster pace than assets and have a negative impact on the Bank's net interest income projection. 81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 the dates presented, the three-month Treasury bill yield was less than one percent, so the -100 basis points scenario was not applicable. Projected cash flows for each scenario are based upon varying prepayment assumptions to model likely customer behavior changes as market rates change. 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, 2017 2016 Amount ($) Change ($) Change (%) Amount ($) Change ($) Change (%) -100 bp 000 bp +100 bp +200 bp +300 bp N/A $ 1,460,428 $ 1,352,558 1,173,891 969,747 N/A — (107,870) (286,537) (490,681) (Dollars in thousands) N/A N/A —% $ 1,448,758 $ (7.39) (19.62) (33.60) 1,364,879 1,208,130 1,014,446 N/A — (83,879) (240,628) (434,312) N/A —% (5.79) (16.61) (29.98) (1) Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities. The percentage change in the Bank's MVPE at September 30, 2017 was more adversely impacted in the increasing interest rate scenarios than at September 30, 2016 due primarily to market interest rates being higher at September 30, 2017. As interest rates increase, repayments on mortgage-related assets are more likely to decrease and only be realized through significant changes in borrowers' lives such as divorce, death, job-related relocations, or other events as there is less economic incentive for borrowers to prepay their debt. This results in an increase in the average life of mortgage-related assets. Similarly, call projections for the Bank's callable agency debentures decrease as interest rates rise, which results in cash flows related to these assets moving closer to the contractual maturity dates. The higher expected average lives of these assets, relative to the assumptions in the base case interest rate environment, increases the sensitivity of their market value to changes in interest rates. As a result, the projected decrease in the market value of the Bank's financial assets was more significant than the projected decrease in the market value of its financial liabilities, which resulted in a projected decrease in MVPE in all of the rising interest rate scenarios presented. The impact of higher interest rates at September 30, 2017 was partially offset by the changes in the deposit model discussed above. 82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, 2017. 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 impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. The WAL presented for term borrowings includes the effect of interest rate swaps. 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 Total securities 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 $ $ 301,122 633,874 308,573 1,243,569 1,211,167 4,428,085 268,472 5,907,724 264,387 852,609 158,031 1,275,027 7,182,751 100,954 351,659 8,878,933 2,399,447 2,450,418 460,003 5,309,868 2,375,000 Total interest-bearing liabilities $ 7,684,868 1.33% 2.14 2.55 2.05 3.09 3.85 4.20 3.71 1.77 3.09 4.92 3.04 3.59 6.47 1.25 3.32 0.17 1.52 1.28 0.89 2.16 1.28 24.2% 51.0 24.8 100.0% 16.9% 61.6 3.7 82.2 3.7 11.9 2.2 17.8 100.0% 1.5 2.9 4.6 3.0 4.0 6.0 4.0 5.5 3.2 2.7 3.1 2.8 5.0 2.3 — 4.5 3.4% 7.1 3.5 14.0 13.6 49.9 3.0 66.5 3.0 9.6 1.8 14.4 80.9 1.1 4.0 100.0% 13.5 45.2% 31.2% 46.1 8.7 100.0% 1.8 0.8 7.0 2.7 5.7 31.9 6.0 69.1 30.9 100.0% 83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, 2017, 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 Controls 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, 2017, 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, 2017 of the Company and our report dated November 29, 2017 expressed an unqualified opinion on those consolidated financial statements. Kansas City, Missouri November 29, 2017 84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, 2017 and 2016, 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, 2017. 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, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2017, 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, 2017, 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, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting. Kansas City, Missouri November 29, 2017 85CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2017 and 2016 (Dollars in thousands, except per share amounts) ASSETS: Cash and cash equivalents (includes interest-earning deposits of $340,748 and $267,829) $ 351,659 $ 281,764 Securities: Available-for-sale ("AFS"), at estimated fair value (amortized cost of $410,541 and $517,791) 415,831 527,301 2017 2016 Held-to-maturity ("HTM"), at amortized cost (estimated fair value of $833,009 and $1,122,867) Loans receivable, net (allowance for credit losses ("ACL") of $8,398 and $8,540) Federal Home Loan Bank Topeka ("FHLB") stock, at cost Premises and equipment, 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: 827,738 1,100,874 7,195,071 6,958,024 100,954 84,818 216,845 109,970 83,221 206,093 $9,192,916 $9,267,247 $5,309,868 $5,164,018 2,173,808 2,372,389 200,000 63,749 530 24,458 52,190 200,000 62,643 310 25,374 49,549 7,824,603 7,874,283 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, 138,223,835 and 137,486,172 shares issued and outstanding as of September 30, 2017 and 2016, 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. 1,382 1,375 1,167,368 (37,995) 234,640 1,156,855 (39,647) 268,466 2,918 5,915 1,368,313 1,392,964 $9,192,916 $9,267,247 86CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 2017, 2016, and 2015 (Dollars in thousands, except per share amounts) INTEREST AND DIVIDEND INCOME: Loans receivable Mortgage-backed securities ("MBS") Cash and cash equivalents FHLB stock 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 Information technology and communications Occupancy, net Regulatory and outside services Deposit and loan transaction costs Advertising and promotional Federal insurance premium Office supplies and related expense Low income housing partnerships 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. 2017 2016 2015 $ $ $ $ $ 253,393 23,809 19,389 12,233 4,362 313,186 68,871 42,968 5,965 117,804 195,382 — 195,382 15,053 2,233 4,910 22,196 43,437 11,282 10,814 5,821 5,284 4,673 3,539 1,981 — 2,827 89,658 127,920 43,783 84,137 0.63 0.63 0.88 $ $ $ $ $ 243,311 29,794 9,831 12,252 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 10,540 10,576 5,645 5,585 4,609 5,076 2,640 3,872 3,384 94,305 121,939 38,445 83,494 0.63 0.63 0.84 $ $ $ $ $ 235,500 36,647 5,477 12,556 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 10,360 9,944 5,347 5,417 4,547 5,495 2,088 4,572 3,290 94,369 115,768 37,675 78,093 0.58 0.58 0.84 87CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED SEPTEMBER 30, 2017, 2016, and 2015 (Dollars in thousands) Net income Other comprehensive income (loss), net of tax: Changes in unrealized gains (losses) on AFS securities, 2017 2016 2015 $ 84,137 $ 83,494 $ 78,093 net of taxes of $1,595, $1,494, and $(843) (2,625) (2,459) 1,388 Changes in unrealized losses on cash flow hedges, net of taxes of $226, $0, and $0 Comprehensive income (372) 81,140 $ — — $ 81,035 $ 79,481 See accompanying notes to consolidated financial statements. 88CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 2017, 2016, and 2015 (Dollars in thousands, except per share amounts) Balance at October 1, 2014 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) Additional Unearned Total Common Paid-In Compensation Retained Stockholders' Stock Capital ESOP Earnings AOCI Equity $ 1,410 $ 1,180,732 $ (42,951) $ 346,705 $ 6,986 $ 1,492,882 384 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 Net income, fiscal year 2017 Other comprehensive loss, net of tax ESOP activity, net Restricted stock activity, net Stock-based compensation Stock options exercised 784 57 506 7 9,166 84,137 (2,997) 1,652 84,137 (2,997) 2,436 57 506 9,173 Cash dividends to stockholders ($0.88 per share) (117,963) (117,963) Balance at September 30, 2017 $ 1,382 $ 1,167,368 $ (37,995) $ 234,640 $ 2,918 $ 1,368,313 See accompanying notes to consolidated financial statements. 89CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2017, 2016, and 2015 (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 84,137 $ 83,494 $ 78,093 Adjustments to reconcile net income to net cash provided by operating activities: 2017 2016 2015 FHLB stock dividends Provision for credit losses Proceeds from sales of loans receivable held-for-sale 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 (12,233) — 6,816 4,479 7,796 1,419 2,436 506 922 (680) 590 (10,743) 85,445 (37,425) — 144,643 268,689 386,900 (365,651) (246,882) (9,128) 5,138 — — (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 Net cash provided by (used in) investing activities 146,284 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) (Continued) 90CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2017, 2016, and 2015 (Dollars in thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Cash 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 financing activities 2017 2016 2015 (117,963) 145,850 2,700,100 (2,900,100) 1,106 — — 8,843 330 (161,834) (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) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 69,895 (490,868) (38,208) CASH AND CASH EQUIVALENTS: Beginning of year End of year 281,764 772,632 810,840 $ 351,659 $ 281,764 $ 772,632 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Income tax payments Interest payments $ $ 37,875 117,308 $ $ 36,483 106,182 $ $ 35,849 103,784 See accompanying notes to consolidated financial statements. (Concluded) 91CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2017, 2016, and 2015 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 ("FRB of Kansas City") as of September 30, 2017 and 2016 was $337.5 million and $264.4 million, respectively. The Bank is in compliance with the FRB requirements. For the years ended September 30, 2017 and 2016, the average daily balance of required reserves at the FRB of Kansas City was $9.1 million and $8.8 million, respectively. Net Presentation of Cash Flows Related to Borrowings - During the current fiscal year, the Bank entered into certain FHLB advances with contractual maturities of 90 days or less. Cash flows related to these advances are reported on a net basis in the consolidated statements of cash flows. 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. 92Securities that management may sell if necessary for liquidity or asset management purposes are classified as AFS and reported at fair value, with unrealized gains and losses reported as a component of AOCI within stockholders' equity, net of deferred income taxes. The amortization of premiums and discounts are recognized as adjustments to interest income over the life of the securities using the level-yield method. Gains or losses on the disposition of AFS securities are recognized using the specific identification method. The Company primarily uses prices obtained from third party pricing services 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, 2017 and 2016, neither the Company nor the Bank maintained a trading securities portfolio. Management monitors securities in the investment 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, resulting in a TDR. Such concessions generally involve extensions of loan maturity dates, the granting of periods during which the payment of only interest and escrow is required, reductions in interest rates, and loans that have been discharged under Chapter 7 bankruptcy proceedings where the borrower has not reaffirmed the debt. 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. Delinquent loans - A loan is considered delinquent when payment has not been received within 30 days of its contractual due date. The number of days delinquent is determined by the number of scheduled payments that remain unpaid, assuming a period of 30 days between each scheduled payment. 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 original 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. Loans reported as impaired loans include loans partially charged-off and TDRs. 93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 and considering several other relevant internal and external data elements. 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. 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. 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 loan-to- value ("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: loan source (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. Impaired loans are not included in the formula analysis as they are individually evaluated for loss. 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 and certain ACL ratios. 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. 94Management utilizes the formula analysis model, along with analyzing and considering several other relevant internal and external data elements when evaluating the adequacy of the ACL. Such data elements include the trend and composition of delinquent loans and non-performing 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 housing markets, loan growth and concentrations, industry and peer charge-off and ACL information, and certain ACL ratios such as ACL to loans receivable, net and annualized historical losses. 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, 2017, 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. 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, interest rate swaps 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. 95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." The Company uses interest rate swaps as part of its interest rate risk management strategy to hedge the variable cash outflows associated with certain borrowings. Interest rate swaps are carried at fair value in the Company's consolidated financial statements. For interest rate swaps that are designated and qualify as cash flow hedges, the effective portion of changes in the fair value of such agreements are recorded in AOCI and are subsequently reclassified into interest expense in the period that interest on the borrowings affects earnings. The ineffective portion of the change in fair value of the interest rate swap is recognized directly in earnings. Effectiveness is assessed using regression analysis. At the inception of a hedge, the Company documents certain items, including the relationship between the hedging instrument and the hedged item, the risk management objective and the nature of the risk being hedged, a description of how effectiveness will be measured and an evaluation of hedged transaction effectiveness. 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. Previously, 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. The Bank started using the proportional method of accounting for its low income housing partnership investments on October 1, 2016. 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. 96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. Comprehensive Income - Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on AFS securities and changes in the accumulated gains/losses on effective cash flow hedging instruments, net of taxes. 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, implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of the amended guidance is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the amended guidance identifies specific steps an entity should apply in order to achieve this principle. The amended guidance requires entities to disclose both quantitative and qualitative information regarding contracts with customers. ASU 2014-09 will become effective for the Company on October 1, 2018. The majority of the Company's revenue is composed of interest income from loans and securities which are explicitly excluded from the amended ASU; therefore the amended ASU will likely not have a material impact to the Company's consolidated financial condition and results of operations, but it will likely result in expanded disclosures. The Company's evaluation of the amended ASU and its impact on components of non-interest income is ongoing. 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 will become effective for the Company on October 1, 2018. The Company is currently evaluating the impact that this ASU may have on the Company's consolidated financial condition, results of operations and disclosures. 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 will become effective for the Company on October 1, 2019. The Company is currently in the process of accumulating lease data and developing an inventory of leases. The Company expects to recognize right-of-use assets and lease liabilities for substantially all of its operating lease commitments based on the present value of unpaid lease payments as of the date of adoption. The Company is continuing to evaluate the impact this ASU may have on the Company's consolidated financial condition, results of operations and disclosures. 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 became effective for the Company on October 1, 2017. Upon adoption, the Company elected to account for forfeitures of stock-based compensation awards when they occur. The Company will recognize excess tax benefits and tax deficiencies in income tax expense on the consolidated statements of income and present them within operating activities on the consolidated statements of cash flows. This ASU did not have a material impact on the Company's consolidated financial condition or results of operations at the time of adoption. However, the impact of tax benefits and the timing of their recognition within income tax expense is unpredictable, as these benefits are recognized primarily as a result of stock options being exercised. 97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 will become effective for the Company on October 1, 2020. The Company has developed an implementation plan and is in the process of reviewing and assessing its processes and systems and identifying the necessary data to implement the ASU. In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Target Improvements to Accounting for Hedging Activities. The ASU amends the hedge accounting recognition and presentation requirements in current GAAP. The purpose of the ASU was to improve transparency of hedging relationships in the financial statements and to reduce the complexity of applying hedge accounting for preparers. The ASU will become effective for the Company on October 1, 2019. The Company is currently evaluating the effect of the ASU on the Company's consolidated financial condition, results of operations and disclosures. 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, 2017 2016 2015 (Dollars in thousands, except per share amounts) Net income Income allocated to participating securities Net income available to common stockholders $ $ 84,137 (44) 84,093 $ $ 83,494 (66) 83,428 $ $ 78,093 (116) 77,977 Average common shares outstanding Average committed ESOP shares outstanding Total basic average common shares outstanding 134,019,962 62,458 134,082,420 132,982,815 62,400 133,045,215 135,321,235 62,458 135,383,693 Effect of dilutive stock options 161,442 131,161 24,810 Total diluted average common shares outstanding 134,243,862 133,176,376 135,408,503 Net EPS: Basic Diluted $ $ 0.63 0.63 $ $ 0.63 0.63 $ $ 0.58 0.58 Antidilutive stock options, excluded from the diluted average common shares outstanding calculation 200,800 886,417 1,248,744 98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. September 30, 2017 Gross Gross Estimated Amortized Unrealized Unrealized Cost Gains Losses Fair Value (Dollars in thousands) AFS: GSE debentures $ 271,300 $ 16 $ 587 $ MBS Trust preferred securities Municipal bonds HTM: MBS Municipal bonds AFS: GSE debentures MBS Trust preferred securities HTM: MBS Municipal bonds $ $ $ $ $ $ $ 135,644 2,067 1,530 410,541 800,931 26,807 827,738 $ $ $ 5,923 — 5 5,944 10,460 119 10,579 $ $ $ 51 16 — 654 5,295 13 5,308 $ $ $ 270,729 141,516 2,051 1,535 415,831 806,096 26,913 833,009 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 99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, 2017 Less Than 12 Months Equal to or Greater Than 12 Months Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses (Dollars in thousands) 224,421 $ 539 $ 24,952 $ 9,648 — 46 — 673 2,051 234,069 $ 585 $ 27,676 $ 259,200 5,638 264,838 $ $ 1,582 8 1,590 $ $ 201,094 1,460 202,554 $ $ 48 5 16 69 3,713 5 3,718 September 30, 2016 Less Than 12 Months Equal to or Greater Than 12 Months Estimated Fair Value Unrealized Losses Estimated Fair Value (Dollars in thousands) Unrealized Losses 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 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, 2017 and 2016 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, 2017 or 2016. See "Note 1. Summary of Significant Accounting Policies - Securities" for additional information regarding our impairment review and classification process for securities. 100The amortized cost and estimated fair value of debt securities as of September 30, 2017, 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 $ 121,340 $ 121,253 $ 6,141 $ One year through five years 151,490 151,011 20,448 Five years through ten years Ten years and thereafter MBS — 2,067 274,897 135,644 — 2,051 274,315 141,516 218 — 26,807 800,931 $ 410,541 $ 415,831 $ 827,738 $ 6,156 20,534 223 — 26,913 806,096 833,009 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, 2017 2016 (Dollars in thousands) Taxable Non-taxable $ $ 3,847 515 4,362 $ $ 5,255 670 5,925 $ $ 2015 6,431 751 7,182 The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of the dates presented. September 30, 2017 2016 Public unit deposits Repurchase agreements FRB of Kansas City $ $ $ (Dollars in thousands) 499,993 214,298 11,769 726,060 $ 419,282 217,374 15,938 652,594 All dispositions of securities during fiscal years 2017, 2016, and 2015 were the result of principal repayments, calls, or maturities. 1014. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES Loans receivable, net at September 30, 2017 and 2016 is summarized as follows: 2017 2016 (Dollars in thousands) 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 $ 3,959,232 $ 2,445,311 351,705 30,647 6,786,895 183,030 86,952 269,982 7,056,877 122,066 3,808 125,874 4,005,615 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 Total loans receivable 7,182,751 6,949,522 Less: ACL Discounts/unearned loan fees Premiums/deferred costs 8,398 24,962 (45,680) $ 7,195,071 $ 8,540 24,933 (41,975) 6,958,024 As of September 30, 2017 and 2016, the Bank serviced loans for others aggregating approximately $101.2 million and $120.0 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 $2.1 million and $2.4 million as of September 30, 2017 and 2016, 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 originates and 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. 102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 currently underwritten according to the "ability to repay" and "qualified mortgage" standards, as issued by the Consumer Financial Protection Bureau. 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. 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. The Bank does not originate construction loans to builders for speculative purposes. 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 - correspondent purchased, one- to four-family - bulk purchased, consumer - home equity, and consumer - other. The one- to four-family - correspondent purchased class was segregated from the one- to four-family originated class in the current fiscal year due to the size of the portfolio along with the loan product composition, geographic locations and inherent credit risks within the portfolio. The prior period information presented within this note has been conformed to the new loan class presentation. 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. 103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, less charge-offs and inclusive of unearned loan fees and deferred costs. At September 30, 2017 and 2016, all loans 90 or more days delinquent were on nonaccrual status. 30 to 89 Days Delinquent September 30, 2017 90 or More Days Delinquent or in Foreclosure Total Delinquent Loans (Dollars in thousands) Current Loans Total Recorded Investment One- to four-family - originated $ 13,216 $ 5,500 $ 18,716 $ 3,956,598 $ 3,975,314 One- to four-family - correspondent One- to four-family - bulk purchased Commercial real estate Consumer - home equity Consumer - other 1,855 3,233 — 467 33 92 3,399 — 406 4 1,947 6,632 — 873 37 2,477,916 2,479,863 346,807 268,979 121,193 3,771 353,439 268,979 122,066 3,808 $ 18,804 $ 9,401 $ 28,205 $ 7,175,264 $ 7,203,469 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 $ 13,545 $ 8,153 $ 21,698 $ 4,007,012 $ 4,028,710 One- to four-family - correspondent One- to four-family - bulk purchased Commercial real estate Consumer - home equity Consumer - other 3,389 5,082 — 635 62 992 7,380 — 520 9 4,381 12,462 — 1,155 71 2,233,941 2,238,322 406,379 153,082 122,190 4,193 418,841 153,082 123,345 4,264 $ 22,713 $ 17,054 $ 39,767 $ 6,926,797 $ 6,966,564 The recorded investment of mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of September 30, 2017 and 2016 was $4.3 million and $5.7 million, respectively, 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 $1.4 million at September 30, 2017 and $2.5 million at September 30, 2016. 104The following table presents the recorded investment, by class, in loans classified as nonaccrual at the dates presented. The decrease in nonaccrual loans at September 30, 2017 compared to the prior year was due mainly to a decrease in loans 90 or more days delinquent, along with a decrease in loans reported as nonaccrual pursuant to regulatory reporting requirements. September 30, 2017 2016 (Dollars in thousands) One- to four-family - originated $ 10,054 $ One- to four-family - correspondent One- to four-family - bulk purchased Commercial real estate Consumer - home equity Consumer - other 1,804 4,264 — 519 4 17,086 3,788 7,411 — 848 10 $ 16,645 $ 29,143 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, 2017 2016 Special Mention Substandard Special Mention Substandard (Dollars in thousands) One- to four-family - originated $ 7,031 $ 30,059 $ 10,242 $ One- to four-family - correspondent One- to four-family - bulk purchased Commercial real estate Consumer - home equity Consumer - other 261 — — 9 — 3,800 8,005 — 1,032 4 2,496 1,156 — 54 8 $ 7,301 $ 42,900 $ 13,956 $ 27,818 5,168 11,480 — 1,431 16 45,913 105The following table shows the weighted average credit score and weighted average LTV for one- to four-family loans and 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 2017, 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 - correspondent One- to four-family - bulk purchased Consumer - home equity September 30, 2017 2016 Credit Score LTV Credit Score LTV 767 764 757 755 765 63% 68 63 19 64 766 764 753 755 764 63% 68 64 20 64 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. During the fourth quarter of fiscal year 2017, management refined its methodology for assessing whether a loan modification qualifies as a TDR which, though not being material, resulted in fewer loans being classified as TDRs. Number of Contracts For the Year Ended September 30, 2017 Post- Restructured Outstanding Pre- Restructured Outstanding (Dollars in thousands) One- to four-family - originated 112 $ 11,940 $ One- to four-family - correspondent One- to four-family - bulk purchased Commercial real estate Consumer - home equity Consumer - other 12 3 — 17 — 2,443 1,031 — 368 — 12,402 2,459 1,048 — 380 — 144 $ 15,782 $ 16,289 106Number of Contracts For the Year Ended September 30, 2016 Post- Restructured Outstanding Pre- Restructured Outstanding (Dollars in thousands) One- to four-family - originated 122 $ 17,201 $ One- to four-family - correspondent One- to four-family - bulk purchased Commercial real estate Consumer - home equity Consumer - other 12 3 — 19 1 2,592 596 — 427 8 17,557 2,619 594 — 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 141 $ 17,265 $ One- to four-family - correspondent One- to four-family - bulk purchased Commercial real estate Consumer - home equity Consumer - other 2 4 — 22 3 546 1,140 — 479 12 17,468 542 1,144 — 485 12 172 $ 19,442 $ 19,651 The following table provides information on TDRs that became delinquent during the periods presented within 12 months after being restructured. September 30, 2017 For the Years Ended September 30, 2016 Number of Recorded Number of Recorded Number of Recorded Investment Contracts Investment Contracts Investment Contracts September 30, 2015 One- to four-family - originated 46 $ 4,561 One- to four-family - correspondent One- to four-family - bulk purchased Commercial real estate Consumer - home equity Consumer - other 2 2 — 16 — 66 148 698 — 440 — $ 5,847 (Dollars in thousands) 48 3 — — 6 — 57 $ 5,330 548 — — 174 — 49 $ 5,311 3 4 — 4 1 432 890 — 33 5 $ 6,052 61 $ 6,671 107Impaired loans - The following information pertains to impaired loans, by class, as of the dates presented. During the fourth quarter of fiscal year 2017, management refined its methodology for classifying loans as impaired. The change resulting from this refinement was immaterial. Impaired loans include loans partially charged-off and TDRs. All impaired loans are individually evaluated for loss and all losses are charged-off, resulting in no related ACL for these loans. September 30, 2017 Unpaid Principal Balance Recorded Investment September 30, 2016 Unpaid Principal Balance Related ACL Related ACL (Dollars in thousands) Recorded Investment With no related allowance recorded One- to four-family - originated $ 30,251 $ 30,953 $ — $ 22,982 $ 23,640 $ One- to four-family - correspondent One- to four-family - bulk purchased Commercial real estate Consumer - home equity Consumer - other With an allowance recorded One- to four-family - originated One- to four-family - correspondent One- to four-family - bulk purchased Commercial real estate Consumer - home equity Consumer - other Total 3,800 7,403 — 775 — 3,771 8,606 — 997 24 42,229 44,351 — — — — — — — — — — — — — — One- to four-family - originated 30,251 30,953 One- to four-family - correspondent One- to four-family - bulk purchased Commercial real estate Consumer - home equity Consumer - other 3,800 7,403 — 775 — 3,771 8,606 — 997 24 — — — — — — — — — — — — — — — — — — — 2,963 10,985 — 1,014 10 2,950 12,684 — 1,230 42 37,954 40,546 — — — — — — — 13,430 13,476 125 2,662 1,650 — 548 6 2,664 1,627 — 548 6 18,296 18,321 36,412 5,625 12,635 — 1,562 16 37,116 5,614 14,311 — 1,778 48 4 49 — 38 1 217 125 4 49 — 38 1 $ 42,229 $ 44,351 $ — $ 56,250 $ 58,867 $ 217 108September 30, 2017 Average Recorded Investment Interest Income Recognized For the Years Ended September 30, 2016 Average Recorded Investment Interest Income Recognized (Dollars in thousands) September 30, 2015 Average Recorded Investment Interest Income Recognized $ 12,063 $ 470 $ 11,744 $ With no related allowance recorded One- to four-family - originated $ 24,122 $ One- to four-family - correspondent One- to four-family - bulk purchased Commercial real estate Consumer - home equity Consumer - other With an allowance recorded One- to four-family - originated One- to four-family - correspondent One- to four-family - bulk purchased Commercial real estate Consumer - home equity Consumer - other Total One- to four-family - originated One- to four-family - correspondent One- to four-family - bulk purchased Commercial real estate Consumer - home equity Consumer - other 3,346 9,852 — 988 7 38,315 11,469 2,018 1,160 — 457 10 15,114 35,591 5,364 11,012 — 1,445 17 917 118 194 — 86 — 495 11,022 — 628 13 1,315 24,221 434 65 20 — 36 1 24,199 2,669 2,219 — 895 13 18 196 — 93 1 778 983 50 27 — 64 1 471 11,153 — 485 12 23,865 25,465 1,759 2,960 — 795 15 451 10 196 — 29 — 686 1,026 53 40 — 34 2 556 29,995 1,125 30,994 1,155 1,351 183 214 — 122 1 36,262 3,164 13,241 — 1,523 26 1,453 68 223 — 157 2 37,209 2,230 14,113 — 1,280 27 1,477 63 236 — 63 2 $ 53,429 $ 1,871 $ 54,216 $ 1,903 $ 54,859 $ 1,841 109Allowance for Credit Losses - The following is a summary of ACL activity, by loan portfolio segment, for the periods presented, and the ending balance of ACL based on the Company's impairment methodology. For the Year Ended September 30, 2017 One- to Four-Family Correspondent Purchased Bulk Purchased Originated Total Commercial Real Estate Consumer Total Beginning balance Charge-offs Recoveries Provision for credit losses Ending balance Beginning balance Charge-offs Recoveries Provision for credit losses Ending balance Beginning balance Charge-offs Recoveries Provision for credit losses Ending balance $ $ $ $ $ $ 3,928 (72) 4 (687) 3,173 $ $ 2,102 — — (180) 1,922 $ $ $ (Dollars in thousands) 7,095 (288) 169 (881) 6,095 1,065 (216) 165 (14) 1,000 $ $ $ 1,208 — — 904 2,112 For the Year Ended September 30, 2016 One- to Four-Family Correspondent Purchased Bulk Purchased Originated Total Commercial Real Estate 4,865 (200) 77 (814) 3,928 $ $ 2,115 — — (13) 2,102 $ $ $ (Dollars in thousands) 8,414 (542) 451 (1,228) 7,095 1,434 (342) 374 (401) 1,065 $ $ $ 742 — — 466 1,208 $ $ $ $ 237 (60) 37 (23) 191 $ $ 8,540 (348) 206 — 8,398 Consumer Total 287 (88) 26 12 237 $ $ 9,443 (630) 477 (750) 8,540 For the Year Ended September 30, 2015 One- to Four-Family Correspondent Purchased Bulk Purchased Originated Total Commercial Real Estate Consumer Total 4,460 (424) 56 773 4,865 $ $ 1,803 (11) — 323 2,115 $ $ $ (Dollars in thousands) 8,586 (663) 114 377 8,414 2,323 (228) 58 (719) 1,434 $ $ $ 400 — — 342 742 $ $ 241 (72) 66 52 287 $ $ 9,227 (735) 180 771 9,443 110The following is a summary of the loan portfolio and related ACL balances, at the dates presented, by loan portfolio segment disaggregated by the Company's impairment method. There was no ACL for loans individually evaluated for impairment at either date as all losses were charged-off. One- to Four-Family September 30, 2017 Originated Correspondent Purchased Bulk Purchased Total Commercial Real Estate Consumer Total (Dollars in thousands) Recorded investment in loans collectively evaluated for impairment $ 3,945,063 $ 2,476,063 $ 346,035 $ 6,767,161 $ 268,979 $ 125,100 $ 7,161,240 Recorded investment in loans individually evaluated for impairment 30,251 3,800 7,404 41,455 — 774 42,229 $ 3,975,314 $ 2,479,863 $ 353,439 $ 6,808,616 $ 268,979 $ 125,874 $ 7,203,469 ACL for loans collectively evaluated for impairment $ 3,173 $ 1,922 $ 1,000 $ 6,095 $ 2,112 $ 191 $ 8,398 One- to Four-Family September 30, 2016 Originated Correspondent Purchased Bulk Purchased Total Commercial Real Estate Consumer Total (Dollars in thousands) Recorded investment in loans collectively evaluated for impairment $ 4,003,750 $ 2,233,347 $ 407,833 $ 6,644,930 $ 153,082 $ 126,504 $ 6,924,516 Recorded investment in loans individually evaluated for impairment 24,960 4,975 11,008 40,943 — 1,105 42,048 $ 4,028,710 $ 2,238,322 $ 418,841 $ 6,685,873 $ 153,082 $ 127,609 $ 6,966,564 ACL for loans collectively evaluated for impairment $ 3,928 $ 2,102 $ 1,065 $ 7,095 $ 1,208 $ 237 $ 8,540 1115. PREMISES AND EQUIPMENT A summary of the net carrying value of premises and equipment at September 30, 2017 and 2016 was as follows: Land Building and improvements Furniture, fixtures and equipment Less accumulated depreciation 2017 2016 (Dollars in thousands) $ $ 11,670 96,401 43,410 151,481 66,663 84,818 $ $ 11,065 91,700 42,590 145,355 62,134 83,221 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 $1.1 million, $1.2 million, and $1.1 million for the years ended September 30, 2017, 2016, and 2015, respectively. As of September 30, 2017, 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: 2018 2019 2020 2021 2022 Thereafter $ $ 1,170 1,057 813 703 623 1,906 6,272 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 $66.1 million and $58.0 million at September 30, 2017 and 2016, respectively. The Bank's obligations related to unfunded commitments, which are included in accounts payable and accrued expenses in the consolidated balance sheets, were $29.4 million and $27.2 million at September 30, 2017 and 2016, respectively. The majority of the commitments at September 30, 2017 are projected to be funded through the end of calendar year 2020. For fiscal year 2017, the net income tax benefit associated with these investments, which consists of proportional amortization expense and affordable housing tax credits and other related tax benefits, was reported in income tax expense in the consolidated statements of income. The amount of proportional amortization expense recognized during fiscal year 2017 was $4.4 million and the amount of affordable housing tax credits and other related tax benefits was $6.9 million, resulting in a net income tax benefit of $2.5 million. For fiscal years 2016 and 2015, the expenses were reported in the low income housing partnerships line of the consolidated statements of income, and the amount of affordable housing tax credits and other related tax benefits was $6.0 million and $5.3 million, respectively. There were no impairment losses during fiscal years 2017, 2016, or 2015 resulting from the forfeiture or ineligibility of tax credits or other circumstances. 1127. DEPOSITS AND BORROWED FUNDS Deposits - Non-interest-bearing deposits totaled $243.7 million and $217.0 million as of September 30, 2017 and 2016, respectively. Certificates of deposit with a minimum denomination of $250 thousand were $676.1 million and $576.4 million as of September 30, 2017 and 2016, 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, 2017 consisted of $2.17 billion in FHLB advances, of which $1.98 billion were fixed-rate advances and $200.0 million were variable-rate advances. FHLB borrowings at September 30, 2016 consisted of $2.37 billion in fixed-rate FHLB advances. There were no borrowings against the variable-rate FHLB line of credit at September 30, 2017 and 2016. The line of credit is set to expire on November 16, 2018, at which time it is expected to be renewed automatically by FHLB for a one year period. FHLB advances at September 30, 2017 and 2016 were comprised of the following: FHLB advances Deferred prepayment penalty 2017 2016 (Dollars in thousands) $ $ 2,175,000 (1,192) 2,173,808 $ $ 2,375,000 (2,611) 2,372,389 Weighted average contractual interest rate on FHLB advances Weighted average effective interest rate on FHLB advances(1) 1.96% 2.09 2.17% 2.24 (1) The effective interest rate includes the net impact of deferred amounts and interest rate swaps related to the variable-rate FHLB advances. During fiscal years 2017, 2016 and 2015, the Bank utilized a leverage strategy (the "leverage strategy") to increase earnings. The leverage strategy involves borrowing up to $2.10 billion either on the Bank's FHLB line of credit or by entering into short-term FHLB advances, depending on the rates offered by FHLB, with all of the balance being paid down at each quarter end. The proceeds of the borrowings, net of the required FHLB stock holdings, are deposited at the FRB of Kansas City. Management can discontinue the use of the leverage strategy at any point in time. During fiscal year 2017, the Bank entered into interest rate swap agreements with a total notional amount of $200.0 million in order to hedge the variable cash flows associated with the $200.0 million of variable-rate FHLB advances. At September 30, 2017, the interest rate swap agreements had an average remaining term to maturity of 5.9 years. The interest rate swaps were designated as cash flow hedges and involve the receipt of variable amounts from a counterparty in exchange for the Bank making fixed-rate payments over the life of the interest rate swap agreements. At September 30, 2017, the total fair value of the interest rate swaps was $598 thousand and was reported in accounts payable and accrued expenses on the consolidated balance sheet. During fiscal year 2017, $134 thousand was reclassified from AOCI to interest expense and no hedge ineffectiveness was recognized in the consolidated statements of income. During the next 12 months, the Company estimates that $1.1 million will be reclassified as an increase to interest expense. The Bank has minimum collateral posting thresholds with its derivative counterparty and posts collateral on a daily basis. The Bank posted cash collateral of $731 thousand at September 30, 2017. 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. 113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 July 2017, the president of FHLB approved an increase, through July 2018, in the Bank's borrowing limit to 55% of Bank Call Report total assets. At September 30, 2017, the ratio of the par value of the Bank's FHLB borrowings to the Bank's Call Report total assets was 24%. During fiscal year 2017, the Bank's FHLB borrowings to the Bank's Call Report total assets was in excess of 40% due to the leverage strategy. Repurchase Agreements - At September 30, 2017 and 2016, 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, 2017 and 2016 were fixed-rate. See Note 3 for information regarding the amount of securities 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, 2017: FHLB Advances Amount Repurchase Agreements Amount (Dollars in thousands) Certificates of Deposit Amount $ 475,000 $ 100,000 $ 1,116,415 500,000 350,000 550,000 200,000 100,000 — 100,000 — — — 748,537 591,966 274,805 177,308 1,390 $ 2,175,000 $ 200,000 $ 2,910,421 2018 2019 2020 2021 2022 Thereafter 8. INCOME TAXES Income tax expense for the years ended September 30, 2017, 2016, and 2015 consisted of the following: Current: Federal State Deferred: Federal State 2017 2016 2015 (Dollars in thousands) $ 38,127 $ 33,298 $ 4,734 42,861 712 210 4,677 37,975 286 184 922 43,783 $ 470 38,445 $ $ 30,079 4,395 34,474 2,869 332 3,201 37,675 114The Company's effective tax rates were 34.2%, 31.5%, and 32.5% for the years ended September 30, 2017, 2016, and 2015, respectively. The increase in the effective tax rate for the year ended September 30, 2017 was due primarily to the accounting method change for low income housing partnership investments. See "Note 1. Summary of Significant Accounting Policies" for further discussion regarding the accounting method change and "Note 6. Low Income Housing Partnerships" for additional information regarding the income tax expense components of the low income housing partnership investments. The differences between such effective rates and the statutory Federal income tax rate computed on income before income tax expense resulted from the following: 2017 2016 2015 Amount % % Amount (Dollars in thousands) Amount % Federal income tax expense computed at statutory Federal rate $ 44,772 35.0% $ 42,679 35.0% $ 40,519 35.0% Increases (decreases) in taxes resulting from: State taxes, net of Federal tax effect Low income housing tax credits, presented net of proportional amortization in 2017 ESOP related expenses, net Other 3,452 2.7 3,308 2.7 3,257 2.8 (2,468) (1,052) (921) $ 43,783 (4,815) (2.0) (1,127) (0.8) (1,600) (0.7) 34.2% $ 38,445 (4,316) (4.0) (1,222) (0.9) (563) (1.3) 31.5% $ 37,675 (3.7) (1.1) (0.5) 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, interest rate swaps 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, 2017, 2016, and 2015 were as follows: Salaries, deferred compensation and employee benefits $ Low income housing partnerships ACL Premises and equipment FHLB stock dividends Capitol Federal Foundation contribution Other, net $ 2017 2016 2015 (Dollars in thousands) 437 285 185 14 4 — (3) 922 $ $ (143) $ (318) 480 1,593 (1,357) — 215 470 $ (12) (763) (75) (129) 4,083 418 (321) 3,201 115The components of the net deferred income tax liabilities as of September 30, 2017 and 2016 were as follows: 2017 2016 (Dollars in thousands) Deferred income tax assets: Salaries, deferred compensation and employee benefits $ 2,583 $ Low income housing partnerships ESOP compensation ACL Other Gross deferred income tax assets 1,478 1,724 711 2,621 9,117 3,020 1,763 1,566 896 2,528 9,773 Valuation allowance Gross deferred income tax asset, net of valuation allowance (1,795) 7,322 (1,804) 7,969 Deferred income tax liabilities: FHLB stock dividends Premises and equipment Unrealized gain on AFS securities Other Gross deferred income tax liabilities 23,242 6,105 2,000 433 31,780 23,238 6,091 3,595 419 33,343 Net deferred tax liabilities $ 24,458 $ 25,374 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, 2017 and 2016, 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, 2017 and 2016. 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, 2017 and 2016, the Company had no unrecognized tax benefits. For the year ended September 30, 2015, 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 2014. 1169. EMPLOYEE STOCK OWNERSHIP PLAN 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, 2017, 165,198 shares were released from collateral. On September 30, 2018, 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 $3.3 million for the year ended September 30, 2017, $3.0 million for the year ended September 30, 2016, and $3.0 million for the year ended September 30, 2015. Of these amounts, $784 thousand, $522 thousand, and $384 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, 2017, 2016, and 2015, respectively. The amount included in compensation expense for dividends on unallocated ESOP shares in excess of the debt service payments was $833 thousand, $813 thousand, and $952 thousand for the years ended September 30, 2017, 2016, and 2015, respectively. 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, 2017 and 2016: Allocated ESOP shares Unreleased ESOP shares Total ESOP shares 2017 2016 (Dollars in thousands) 4,369,840 3,799,554 8,169,394 4,392,371 3,964,752 8,357,123 Fair value of unreleased ESOP shares $ 55,853 $ 55,784 117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 508,719 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, 2017, the Company had 4,184,316 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, 2017, the Company had 1,236,798 stock options outstanding with a weighted average exercise price of $13.31 per option and a weighted average contractual life of 5.3 years, and 1,144,798 options exercisable with a weighted average exercise price of $13.38 per option and a weighted average contractual life of 5.1 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, 2017, 2016, and 2015 totaled $118 thousand, $335 thousand, and $618 thousand, respectively. The fair value of stock options vested during the years ended September 30, 2017, 2016, and 2015 was $174 thousand, $652 thousand, and $615 thousand, respectively. As of September 30, 2017, the total future compensation cost related to non-vested stock options not yet recognized in the consolidated statements of income was $128 thousand, net of estimated forfeitures, and the weighted average period over which these awards are expected to be recognized was 2.0 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, 2017, the Company had 1,757,650 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, 2017, the Company had 56,600 unvested restricted stock shares with a weighted average grant date fair value of $13.38 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, 2017, 2016, and 2015 totaled $388 thousand, $787 thousand, and $1.5 million, respectively. The fair value of restricted stock that vested during the years ended September 30, 2017, 2016, and 2015 totaled $563 thousand, $1.6 million, and $1.5 million, respectively. As of September 30, 2017 there was $635 thousand of unrecognized compensation cost related to unvested restricted stock to be recognized over a weighted average period of 2.7 years. 11811. COMMITMENTS AND CONTINGENCIES The following table summarizes the Bank's loan commitments as of September 30, 2017 and 2016: Originate fixed-rate Originate adjustable-rate Purchase/participate fixed-rate Purchase/participate adjustable-rate 2017 2016 (Dollars in thousands) 33,528 9,861 74,104 52,453 169,946 $ $ 68,047 12,257 138,792 18,653 237,749 $ $ 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, 2017 and 2016, there were no significant loan-related commitments that met the definition of derivatives or commitments to sell mortgage loans. As of September 30, 2017 and 2016, the Bank had approved but unadvanced home equity lines of credit of $240.0 million and $262.8 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, 2017, 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, 2017, the balance of this liquidation account was $167.2 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. 119The Bank and the Company must maintain certain minimum capital ratios as set forth in the table below for capital adequacy purposes. Effective 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 required capital conservation buffer is being phased in over a four year period by increasing the required buffer amount by 0.625% each year. The capital conservation buffer was 0.625% at September 30, 2016 and 1.25% at September 30, 2017. At September 30, 2017 and 2016, the Bank and Company exceeded the capital conservation buffer requirement. Once fully phased-in, which will be on January 1, 2019 for the Company and Bank, the organization must maintain a balance of capital that exceeds by more than 2.5% each of the minimum risk-based capital ratios in order to satisfy the requirement. Management believes, as of September 30, 2017, 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, 2017 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 $1,201,863 10.8% $ 444,877 4.0% $ 556,097 5.0% 1,201,863 1,201,863 1,210,261 1,234,912 1,234,912 1,234,912 1,243,452 1,365,395 1,365,395 1,365,395 1,373,793 1,387,049 1,387,049 1,387,049 1,395,589 27.2 27.2 27.3 10.9 28.5 28.5 28.7 12.3 30.8 30.8 31.0 12.3 32.0 32.0 32.2 199,181 265,575 354,100 452,339 195,080 260,107 346,809 444,785 199,195 265,594 354,125 452,248 195,094 260,126 346,835 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 8.0 287,706 354,100 442,625 565,424 281,783 346,809 433,512 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 Bank As of September 30, 2017 Tier 1 leverage ratio Common Equity Tier 1 ("CET1") capital ratio Tier 1 capital ratio Total capital ratio As of September 30, 2016 Tier 1 leverage ratio CET1 capital ratio Tier 1 capital ratio Total capital ratio Company As of September 30, 2017 Tier 1 leverage ratio CET1 capital ratio Tier 1 capital ratio Total capital ratio As of September 30, 2016 Tier 1 leverage ratio CET1 capital ratio Tier 1 capital ratio Total capital ratio 12013. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair Value Measurements – The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with ASC 820 and ASC 825. The Company's AFS securities and interest rate swaps 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 financial instruments 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 financial instruments. The Company groups its financial instruments at fair value in three levels based on the markets in which the financial instruments 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 financial instrument. 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 financial instrument. The Company bases its fair values on the price that would be received from the sale of a financial instrument 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 financial instruments 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, 2017 and 2016. 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) 121Interest Rate Swaps - The Company's interest rate swaps are designated as cash flow hedges and are reported at fair value in accounts payable and accrued expenses on the consolidated balance sheet, with any unrealized gains and losses, net of taxes, reported as AOCI in stockholders' equity. See "Note 7. Deposits and Borrowed Funds" for additional information. The estimated fair value of the interest rates swaps are obtained from a third party and are determined using a discounted cash flow analysis using observable market-based inputs. On a quarterly basis, management corroborates the estimated fair values obtained from the third party by internally calculating the estimated fair value using a discounted cash flow analysis using independent observable market-based inputs. The Company did not make any adjustments to the estimated fair value received from the third party during the year ended September 30, 2017. (Level 2) The following tables provide the level of valuation assumption used to determine the carrying value of the Company's financial instruments measured at fair value on a recurring basis at the dates presented. The Company did not have any liabilities that were measured at fair value at September 30, 2016. September 30, 2017 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) Assets: AFS Securities: GSE debentures MBS Municipal bonds Trust preferred securities Liabilities: Interest Rate Swaps Assets: AFS Securities: GSE debentures MBS Trust preferred securities $ $ $ $ $ 270,729 $ — $ 141,516 1,535 2,051 — — — 270,729 $ 141,516 1,535 — 415,831 $ — $ 413,780 $ — — — 2,051 2,051 598 $ — $ 598 $ — 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 The Company's Level 3 AFS securities had no activity during fiscal years 2017, 2016, and 2015 except for principal repayments of $88 thousand, $97 thousand, and $400 thousand, respectively, and (decreases)/increases in net unrealized losses included in other comprehensive income of $(218) thousand, $61 thousand, and $45 thousand, respectively. 122The following is a description of valuation methodologies used for significant financial instruments measured at fair value on a non-recurring basis. Loans Receivable – The balance of loans individually evaluated for impairment at September 30, 2017 and 2016 was $18.4 million and $42.0 million, respectively. 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%. 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 cost 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, 2017 and 2016; therefore, the fair value was equal to the carrying value and there was no ACL related to these loans. OREO – OREO primarily represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at lower of cost or fair value. Fair value is estimated through current appraisals or listing prices, less estimated selling costs 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 was equal to the carrying value at September 30, 2017 and 2016 and was $1.4 million and $3.7 million, respectively. Fair Value Disclosures – The Company determined estimated fair value amounts using available market information and a variety of valuation methodologies 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. The carrying amounts and estimated fair values of the Company's financial instruments, at the dates presented, were as follows: 2017 2016 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value (Dollars in thousands) Assets: Cash and cash equivalents AFS securities $ HTM securities Loans receivable FHLB stock Liabilities: Deposits FHLB borrowings Repurchase agreements Interest rate swaps $ 351,659 415,831 827,738 351,659 415,831 833,009 7,195,071 7,354,100 100,954 100,954 5,309,868 2,173,808 200,000 598 5,318,249 2,182,841 202,004 598 $ $ 281,764 527,301 1,100,874 6,958,024 109,970 5,164,018 2,372,389 200,000 — 281,764 527,301 1,122,867 7,292,971 109,970 5,204,251 2,434,151 207,303 — 123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, 2017 and 2016 was $2.40 billion and $2.34 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, 2017 and 2016 was $2.92 billion and $2.87 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) Interest rate swaps - The fair value of the interest rate swaps was determined using discounted cash flow analysis using observable market-based inputs. (Level 2) 14. OTHER COMPREHENSIVE INCOME The following table presents the changes in the components of AOCI, net of tax, for the year ended September 30, 2017. During the years ended September 30, 2016 and 2015, the only changes in AOCI, net of tax, were related to unrealized gains (losses) on AFS securities and there were no amounts reclassified from AOCI. For the Year Ended September 30, 2017 Unrealized Unrealized Gains (Losses) Gains (Losses) on Cash Flow on AFS Securities Hedges (dollars in thousands) Total AOCI $ $ 5,915 (2,625) — (2,625) 3,290 $ $ — $ (506) 134 (372) (372) $ 5,915 (3,131) 134 (2,997) 2,918 Balance at October 1, 2016 Other comprehensive income (loss), before reclassifications Amount reclassified from AOCI Other comprehensive income (loss) Balance at September 30, 2017 124 15. 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 2017 Total interest and dividend income $ 75,322 $ 77,660 $ 79,630 $ 80,574 $ 313,186 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 2016 47,306 49,054 49,364 49,658 195,382 — — — — — 20,578 21,587 21,370 20,602 84,137 0.15 0.15 0.375 133,697 133,950 0.16 0.16 0.085 134,066 134,259 0.16 0.16 0.335 134,254 134,360 0.15 0.15 0.085 134,314 134,404 0.63 0.63 0.88 134,082 134,244 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 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 0.84 133,296 133,493 133,045 133,176 12516. 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, 2017 and 2016 (Dollars in thousands, except per share amounts) ASSETS: Cash and cash equivalents Investment in the Bank Note receivable - ESOP Other assets TOTAL ASSETS LIABILITIES: Income taxes payable, net Accounts payable and accrued expenses Deferred income tax liabilities, net Total liabilities STOCKHOLDERS' EQUITY: 2017 2016 $ 120,785 $ 108,197 1,204,781 1,240,827 42,557 365 43,790 389 $1,368,488 $1,393,203 $ $ 88 52 35 175 128 74 37 239 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, 138,223,835 and 137,486,172 shares issued and outstanding as of September 30, 2017 and 2016, respectively Additional paid-in capital Unearned compensation - ESOP Retained earnings AOCI, net of tax Total stockholders' equity TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 1,382 1,375 1,167,368 (37,995) 234,640 1,156,855 (39,647) 268,466 2,918 5,915 1,368,313 1,392,964 $1,368,488 $1,393,203 126STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 2017, 2016, and 2015 (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 2017 2016 2015 $ 120,215 $ 117,513 $ 115,359 1,715 1,725 1,835 121,930 119,238 117,194 896 247 561 827 261 558 835 243 517 1,704 1,646 1,595 120,226 4 117,592 28 115,599 84 120,222 (36,085) $ 84,137 117,564 (34,070) $ 83,494 115,515 (37,422) $ 78,093 127STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2017, 2016, and 2015 (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 84,137 $ 83,494 $ 78,093 2017 2016 2015 Adjustments to reconcile net income to net cash provided by operating activities: Equity in excess of distribution over earnings of subsidiary 36,085 34,070 37,422 Depreciation of equipment Provision for deferred income taxes Changes in: Other assets Income taxes receivable/payable Accounts payable and accrued expenses Net cash flows provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Principal collected on notes receivable from ESOP 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 29 (2) (5) (40) (22) 120,182 30 2 1 445 14 30 428 35 3,300 1 118,056 119,309 1,233 1,233 1,194 1,194 1,156 1,156 293 (117,963) — 8,843 (108,827) 473 (111,767) — 4,070 (107,224) 95 (114,162) (50,034) 267 (163,834) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,588 12,026 (43,369) CASH AND CASH EQUIVALENTS: Beginning of year End of year 108,197 96,171 139,540 $ 120,785 $ 108,197 $ 96,171 128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, 2017. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of September 30, 2017, 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 Control Over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under 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, 2017. 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, 2017. 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, 2017 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, 2017 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Item 9B. Other Information None. 129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 2018, 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 2018, 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 in the Investor Relations section of our 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 2018, 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 2018, 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, 2017 with respect to compensation plans under which shares of our common stock may be issued. Equity Compensation Plan Information Number of Shares Number of Shares Remaining Available for Future Issuance Under Equity to be issued upon Weighted Average 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 1,236,798 $ N/A 1,236,798 $ 13.31 N/A 13.31 5,941,966 (1) N/A 5,941,966 (1) This amount includes 1,757,650 shares available for future grants of restricted stock under the Equity Incentive Plan. 130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 2018, a copy of which will be filed not later than 120 days after the close of the fiscal year. Item 14. Principal Accounting Fees and Services Information required by this item concerning principal accounting fees and services is incorporated herein by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held in January 2018, a copy of which will be filed not later than 120 days after the close of the fiscal year. 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, 2017 and 2016. Consolidated Statements of Income for the Years Ended September 30, 2017, 2016, and 2015. Consolidated Statements of Comprehensive Income for the Years Ended September 30, 2017, 2016, and 2015. Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 2017, 2016, and 2015. Consolidated Statements of Cash Flows for the Years Ended September 30, 2017, 2016, and 2015. Notes to Consolidated Financial Statements for the Years Ended September 30, 2017, 2016, and 2015. (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." 131 Exhibit Number 3(i) 3(ii) 10.1(i) 10.1(ii) 10.1(iii) 10.1(iv) 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 11 14 21 23 31.1 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 Daniel L. Lehman filed on November 29, 2016 as Exhibit 10.1(v) to the Registrant's Annual Report on Form 10-K and incorporated herein by reference 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 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 Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by John B. Dicus, Chairman, President and Chief Executive Officer 13231.2 32 101 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, 2017, filed with the SEC on November 29, 2017, has been formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets at September 30, 2017 and 2016, (ii) Consolidated Statements of Income for the fiscal years ended September 30, 2017, 2016, and 2015, (iii) Consolidated Statements of Comprehensive Income for the fiscal years ended September 30, 2017, 2016, and 2015, (iv) Consolidated Statement of Stockholders' Equity for the fiscal years ended September 30, 2017, 2016, and 2015, (v) Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2017, 2016, and 2015, and (vi) Notes to the Consolidated Financial Statements *May be obtained free of charge in the Investor Relations section of our website, www.capfed.com. 133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, 2017 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, 2017 By: /s/ Kent G. Townsend Kent G. Townsend, Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) Date: November 29, 2017 By: /s/ Jeffrey R. Thompson Jeffrey R. Thompson, Director Date: November 29, 2017 By: /s/ Jeffrey M. Johnson Jeffrey M. Johnson, Director Date: November 29, 2017 By: /s/ Morris J. Huey II Morris J. Huey II, Director Date: November 29, 2017 By: /s/ Reginald L. Robinson Reginald L. Robinson, Director Date: November 29, 2017 By: /s/ Michael T. McCoy, M.D. Michael T. McCoy, M.D., Director Date: November 29, 2017 By: /s/ James G. Morris James G. Morris, Director Date: November 29, 2017 By: /s/ Michel' P. Cole Michel' P. Cole, Director Date: November 29, 2017 By: /s/ Tara D. Van Houweling Tara D. Van Houweling, First Vice President and Reporting Director (Principal Accounting Officer) Date: November 29, 2017 134 Dear Stockholders, Dear Stockholders, Capitol Federal® Financial, Inc. (the “Company”) continued in fiscal year 2017 with solid earnings performance, Capitol Federal® Financial, Inc. (the “Company”) continued in fiscal year 2017 with solid earnings performance, high asset quality and a strong balance sheet that allows us to return to stockholders additional value through high asset quality and a strong balance sheet that allows us to return to stockholders additional value through dividends in excess of our earnings. Capitol Federal continued is core business model of funding single family dividends in excess of our earnings. Capitol Federal continued is core business model of funding single family loan originations while acquiring retail deposits. loan originations while acquiring retail deposits. Sedgwick County 7 branches Sedgwick County 7 branches Saline County 1 branch Saline County 1 branch ® ® Branch Locations by County Branch Locations by County Over the past several years, the Company has worked to reduce its securities portfolio and reinvesting Over the past several years, the Company has worked to reduce its securities portfolio and reinvesting repayments into loans. The Company was able to continue that during the 2017 fiscal year as the balance of repayments into loans. The Company was able to continue that during the 2017 fiscal year as the balance of higher yielding loans increased $237 million to $7.2 billion higher yielding loans increased $237 million to $7.2 biri i decreased $385 million. while securities decreased $385 million. In addition to growing the loan portfolio, the Company was able to increase deposits by $146 million. In addition to growing the loan portfolio, the Company was able to increase deposits by $146 million. This deposit growth, combined with securities repayments not used to increase the loan portfolio, allowed us to This deposit growth, combined with securities repayments not used to increase the loan portfolio, allowed us to reduce the balance of higher costing FHLB advances by $199 million. These actions allowed us to maintain our reduce the balance of higher costing FHLB advances by $199 million. These actions allowed us to maintain our net interest margin. We have continued our efforts to grow our commercial real estate portfolio by closing on net interest margin. We have continued our efforts to grow our commercial real estate portfolio by closing on $68 million of participation loans and increasing the balance by $116 million. $68 million of participation loans and increasing the balance by $116 million. The growth in the loan portfolio in the most recent fiscal year compared to the prior fiscal year slowed as we The growth in the loan portfolio in the most recent fiscal year compared to the prior fiscal year slowed as we began to manage the amount of cash and securities we need to maintain as part of our liquidity risk management began to manage the amount of cash and securities we need to maintain as part of our liquidity risk management strategy. The amount we will try to maintain is generally measured as the ratio of securities and cash to total strategy. The amount we will try to maintain is generally measured as the ratio of securities and cash to total assets and we will be managing this ratio to approximately 15%. In order to manage the size of the loan assets and we will be managing this ratio to approximately 15%. In order to manage the size of the loan portfolio, we are able to control loan volume primarily through the rates offered to correspondent lenders for portfolio, we are able to control loan volume primarily through the rates offered to correspondent lenders for loans that we are buying. loans that we are buying. Our ability to grow deposits while paying down FHLB advances has allowed us to reduce the size of the balance Our ability to grow deposits while paying down FHLB advances has allowed us to reduce the size of the balance sheet. Management considers a ten percent ratio of stockholders’ equity to total assets, at our subsidiary sheet. Management considers a ten percent ratio of stockholders’ equity to total assets, at our subsidiary Capitol Federal® Savings Bank, as an appropriate level of capital. At September 30, 2017, this ratio was 13%. Capitol Federal® Savings Bank, as an appropriate level of capital. At September 30, 2017, this ratio was 13%. These combined strategies have, we believe, made our balance sheet more effective at generating earnings. For These combined strategies have, we believe, made our balance sheet more effective at generating earnings. For fiscal year 2017, earnings were slightly higher than fiscal year 2016 earnings resulting in earnings per share of fiscal year 2017, earnings were slightly higher than fiscal year 2016 earnings resulting in earnings per share of $0.63 per share, of which we paid out 100% to our stockholders. We also continued our True Blue® Dividend in $0.63 per share, of which we paid out 100% to our stockholders. We also continued our True Blue® Dividend in the most recent fiscal year, paying out $0.25 per share in cash dividends in June 2017. the most recent fiscal year, paying out $0.25 per share in cash dividends in June 2017. As we look to fiscal year 2018, it is board and management’s intention to continue to pay 100% of our earnings in As we look to fiscal year 2018, it is board and management’s intention to continue to pay 100% of our earnings in cash dividends. There is much to consider and be prepared for regarding rising interest rates as well as potential cash dividends. There is much to consider and be prepared for regarding rising interest rates as well as potential tax and regulatory changes. While we do not know how these topics will play out, management stands ready tax and regulatory changes. While we do not know how these topics will play out, management stands ready to respond to these and other changes that could influence our operations with the objective of continuing our to respond to these and other changes that could influence our operations with the objective of continuing our tradition of strong and stable earnings and returning value to our stockholders through cash dividends. tradition of strong and stable earnings and returning value to our stockholders through cash dividends. The Capitol Federal® Foundation continued to support areas of need in our markets by funding grants totaling The Capitol Federal® Foundation continued to support areas of need in our markets by funding grants totaling almost $5 million during fiscal year 2017. This brings total giving back to our communities since 1999 to almost $5 million during fiscal year 2017. This brings total giving back to our communities since 1999 to $60 million. At September 30, 2017 the Foundation had assets totaling $109 million. $60 million. At September 30, 2017 the Foundation had assets totaling $109 million. The Company’s board and management wish to thank our stockholders for their continued support of our efforts The Company’s board and management wish to thank our stockholders for their continued support of our efforts to bring consistency in earnings while maintaining a strong balance sheet that allows us to return value through to bring consistency in earnings while maintaining a strong balance sheet that allows us to return value through our dividend strategy. We want to thank all of our employees for their commitment to keep our dividend strategy. We want to thank all of our employees for their commitment to keep Capitol Federal® Savings Bank on a proven path of success. Capitol Federal® Savings Bank on a proven path of success. Sincerely, Sincerely, John B. Dicus John B. Dicus Chairman, President & CEO Chairman, President & CEO Butler County 1 branch Butler County 1 branch Riley County 2 branches Riley County 2 branches Lyon County 1 branch Lyon County 1 branch Shawnee County 7 branches Shawnee County 7 branches Douglas County 4 branches Douglas County 4 branches Wyandotte County 1 branch Wyandotte County 1 branch Platte County 1 branch Platte County 1 branch Clay County 2 branches Clay County 2 branches Jackson County 1 branch Jackson County 1 branch Johnson County 19 branches Johnson County 19 branches S A S N A K S A S N A K I R U O S S M I I R U O S S M I Home Office, Topeka, KS Home Office, Topeka, KS JULY 2010 JULY 2010 

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